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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 1-11873
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K2 DESIGN, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3886065
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
30 Broad Street, 16th Fl., New York, NY 10004
- --------------------------------------- ------------
(Address of principal (Zip Code)
executive offices)
Issuer's telephone number: (212) 301-8800
- -----------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock
----------------
(Title of Class)
Redeemable Common Stock Purchase Warrants
-----------------------------------------
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
----------------
(Title of Class)
Redeemable Common Stock Purchase Warrants
-----------------------------------------
(Title of Class)
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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____
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation SB is not contained is this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. Yes____ No X
State issuer's revenues for its most recent fiscal year: $6,419,967.
As of March 26, 1999, there were outstanding 3,469,176, shares (not
including treasury shares) of Common Stock (the "Common Stock") and Redeemable
Common Stock Purchase Warrants to purchase an aggregate of 1,000,000 shares of
Common Stock (the "Warrants"). Based on the closing sales price of the Common
Stock on March 26, 1999 of $3.375 per share, the approximate aggregate market
value of Common Stock held by non-affiliates was $7,506,965.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1999 Definitive Proxy Statement, which
statement will be filed with the Securities and Exchange Commission not later
than 120 days after the end of the fiscal year covered by this Report, are
incorporated by reference in Part III hereof.
Certain exhibits are incorporated by reference to the Registrant's
Registration Statement on Form SB-2 and the amendments thereto, as listed in
response to Item 13(a)(2).
Transitional Small Business Disclosure Format (check one):
Yes ___ No X
[The remainder of this page is intentionally blank.]
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The Business 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. Factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors Affecting
Operating Results and Market Price of Stock" commencing on page 14.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
K2 Design, Inc. (the "Company" or "K2") primarily provides interactive
marketing and communications services to commercial organizations over the
Internet and World Wide Web (the "Web"). Commencing 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
company, largely in response to and in anticipation of demands from its clients
for services complementary to the Company's core Web site design services.
Complementary services the Company now provides include, among others,
development of CD-ROM discs, media placement on Web sites, live Internet
broadcasts and the development of brand and direct response strategies and
offline media services. In 1998 and 1997, approximately 90% of the Company's
revenues were derived from interactive advertising services. Since its
inception, the Company, alone and with others, has designed and created more
than 80 Web sites, including MCI Telecommunications Corporation ("MCI"), a
subsidiary of MCI Communications Corporation, and for Waterhouse Securities
Corporation, Bell Communications Research, Inc., American Express Company, Bayer
Corporation, Wavephore, Inc. and Lexis-Nexis. See "Marketing Channel-Sources."
The Company's core Web site expertise positioned it to effectively
transition into a full service integrated, interactive marketing and
communication company. The Company's services are used by its clients to create
a new medium for advertisement, promotion and technical support of such
customer's products and services. Web sites can provide commercial organizations
benefits in addition to those available through conventional media, including
the ability to enhance a corporate brand, engage and entertain consumers,
provide in-depth information, reduce selling and operating costs, generate leads
and build retail traffic, expand distribution channels (e-commerce), promote
major sporting and entertainment events and monitor popularity of content,
conduct research, and build databases for on-going marketing efforts.
The Company was founded in 1993 and initially operated a traditional
graphic design business. In August 1994 the Company shifted its principal
business to Web site design and creation but did not begin to generate
significant revenues therefrom until 1995. The Company's principal offices are
located at 30 Broad Street, New York, New York 10004 and its telephone number is
(212) 301-8800. The Company's Web site is located at http://www.k2design.com.
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K2 SERVICES
K2 partners with clients to focus on how new and emerging technologies
can help them build one-to-one customer relationships. Tapping into superior
strategic expertise, media know-how, creative talent and technical excellence,
we guide our clients to achieving a favorable return on investment from
Web-based marketing.
The scope of K2's services has ranged from consulting services to
complete marketing-driven design and construction of multi-level Web sites,
including the capture of live video feeds and audio feeds from remote locations.
The Company also offers numerous integrated services in addition to those
discussed above, particularly offline media planning and buying related to
building online businesses. These services are principally comprised of the
identification, negotiation for and purchase of banners, sponsorship and
proprietary partnerships on Web sites and the purchase of key words from search
engines.
The Company currently provides interactive services, including:
qualitative and quantitative research, Web usability labs, positioning studies
for online branding, strategic planning, e-commerce planning, online and
traditional media planning and buying, proprietary media partnerships, marketing
strategies, Web design, creative services for offline and online advertising
(banners, rich media, interstitials), technical strategies, requirements
specifications and programming.
K2 STRENGTHS
Focus on Clients' Business Objectives
The Company has made understanding its clients' business challenges the
primary focus that guides its customer services. The Company often works with
its clients' management to determine how best to integrate Web sites with the
clients' business goals.
Technological Expertise
The Company believes the creative application of leading technologies
is also crucial to the success of its business. The Company's technical
programming personnel are skilled in various computer operating systems, tools
and languages, including, C/C++, Macromedia products, Visual Basic, Relational
Databases, Fortran, Unix, Linux, Perl, PHP, Java, VRML, Real Audio and Video,
Windows NT, Netscape server, Apache server, Director, Enliven, Flash, Quicktime,
Microsoft's streaming video format-ASF, among others. These programmers are
responsible for providing complex computer programming for special features on
CD-ROM products and Web sites as well as periodically assessing new technologies
in order to identify and deploy, directly and through independent contractors,
those that are most promising for enhancing the Company's business and that of
its clients.
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Creative Expertise
The Company believes that, in addition to the creative elements
required in traditional graphic design, superior interactive development
requires that the end product is easy-to-use, contains intuitive interfaces and
seamless integrated technologies and has an engaging look and feel. Management
believes that the Company's creative staff possesses a broad spectrum of
expertise to meet clients' creative needs. In order to maintain high levels of
creativity and quality, the Company intends to recruit the best talent
available.* However, competition for creative personnel is especially intense
and there can be no assurance that the Company will attract or retain adequate
creative talent to accomplish these goals.
Media Planning and Buying
The Company has determined through testing and ongoing results
monitoring that media planning is critical to the success of an online
advertising program. The K2 approach involves classic media research, planning,
negotiation of buys, results audits, and optimization of media plans based on
analysis of those results. K2 media plans have also included television, radio
and print vehicles when these media are the most effective in reaching the
target audience to create awareness of a Web site and to drive traffic to it.
K2 STRATEGY
Capitalize on Accomplishments and Market Opportunities
The Company believes that the proliferation of the Internet will
continue to provide substantial opportunities to the Company and that its
successfully completed projects will continue to enhance its marketing efforts.*
The Company's management does not, however, believe that the Company's primary
business will always be limited to the Internet.* The Company produces digital
content which may be carried over a variety of emerging technologies such as
Vertical Blanking Interval, digital satellite and interactive television.*
Although there is no assurance that any of these technologies will achieve
acceptance in the marketplace, the Company believes its services could be
utilized over these channels as well.
Leverage Development Efforts
In the course of developing customized Web sites for certain clients,
the Company may gain technical know-how that can be applied in other efforts.
The Company believes that its experience has the potential to reduce future
development costs.*
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* 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. Investors are strongly encouraged to review
the section entitled "Factors Affecting Operating Results and Market Price of
Stock" commencing on page 14, for a discussion of factors that could affect
future performance.
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Deploy Leading Technologies
One of the Company's objectives is to apply both proven and emerging
technologies as they become available in order to maximize the effectiveness of
its Web site services. The Company has formed informal non-exclusive
relationships with key technology providers in an effort to gain access to, and
influence the features of, the Company's utilization of their technologies.
Channel Marketing
The Company will continue to focus on developing strategic
relationships with Channel Sources (defined below) that seek to augment their
businesses by making available the Company's services to their own customer
base. See "Marketing-Channel Sources."
MARKETING
General
The Company markets its services directly and seeks to form strategic
marketing relationships with third parties. At December 31, 1998, the Company
had two employees dedicated to business development. Additionally, two of the
Company's executive officers spend a portion of their time marketing the
Company's services. The Company also seeks to attract new clients through other
methods, including referrals from existing clients. The Company seeks to
cross-sell its various services to its clients and prospective clients through
sales presentations that encourage clients to utilize all of the Company's
services.
Channel Sources
The Company's marketing efforts to date have focused in part on
developing strategic relationships with other companies, such as advertising
agencies, hardware and software companies and Internet service providers
("Channel Sources") that seek to augment their businesses by making available
interactive advertising and Web site design and creative services provided by
the Company and other third parties. The Company therefore targets advertising
agencies that do not offer Web site related services, providers of other
Internet services (e.g., access, connectivity and Web site hosting), consultants
and systems integrators, and other businesses whose clients are likely to
require the services that the Company provides.
CLIENTS
K2's client relationships have ranged from Fortune 500 companies to
entrepreneurial Web related start-ups. In fiscal 1998, the Company's four
largest clients, WavePhore (approximately 23.4%), Standard & Poor's
(approximately 18.5%), Bell Atlantic Network Services (approximately 6.0%) and
Lexis-Nexis (approximately 5.8%) accounted for approximately 30.3% of total
revenue. In fiscal 1997, the Company's four largest clients Cox, Interactive
Media (approximately 15.3%), WavePhore (approximately 11.8%), Bell
Communications (approximately 6.0%) and Planet Direct
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(approximately 6.0%) accounted for approximately 39.0% of total revenue.
However, WavePhore terminated its relationship with the Company at the end of
the third quarter of 1998. Although WavePhore accounted for a material portion
of revenue during the past two fiscal years, the Company's revenues are project
oriented and, thus, the Company is dependent on its ability to replace and
attract new clients upon the completion of existing projects. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In the past, Web design businesses have tended to be project-oriented
engagements, with the completion of the project occurring over a 3 to 5 month
period. Although such assignments comprise an important part of K2's consulting
and creative business, our current marketing-driven business model includes a
dedicated effort to continue and cultivate existing relationships with clients,
most of which use media placement as a central part of their strategic activity.
For example, Standard & Poor's initially engaged the Company in 1997, accounted
for approximately 18.5% of revenue in 1998 and has continued to use K2's
services in 1999.
TRADEMARKS
The Company applied to the U.S. Patent and Trademark Office for several
trademarks, which are all in examination but have not yet been published for
opposition. There can be no assurance that any of these trademarks will be
granted. Trademarks for which the Company has applied include K2(TM) and K2
Design(TM).
GOVERNMENT REGULATION
The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally,
and there are currently few laws or regulations directly applicable to Web site
service companies and marketing and communications firms. However, due to the
increasing media attention focused on the Internet, it is possible that a number
of laws and regulations may be adopted with respect to the Internet, covering
issues such as user privacy, pricing and characteristics and quality of products
and services. The adoption of any such laws or regulations may decrease the
growth of the Internet, which could in turn decrease the demand for the
Company's services and products and increase the Company's cost of doing
business or cause the Company to modify its operations, or otherwise have an
adverse effect on the Company's business, operating results or financial
condition. Moreover, the applicability to the Internet of existing laws
governing issues such as property ownership, libel and personal privacy is
uncertain. The Company cannot predict the impact, if any, that future regulation
or regulatory changes may have on its business. In addition, Web site developers
such as the Company face potential liability for the actions of clients and
others using their services, including liability for infringement of
intellectual property rights, rights of publicity, defamation, libel and
criminal activity under the laws of the U.S. and foreign jurisdictions. Although
the Company maintains $1 million of errors and omissions insurance, a $1 million
of general liability insurance, and a $1 million umbrella policy, any imposition
of liability in excess of such policies limits or if not covered by such
policies could have a material adverse effect on the Company.
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COMPETITION
The markets for the Company's services are highly competitive and are
characterized by pressures to incorporate new technologies, accelerate
completion schedules and reduce prices. The Company expects competition for its
services to intensify in the future, partly because there are no substantial
barriers to entry into the Company's business. The Company faces competition
from a number of sources, including potential clients that perform interactive
marketing and communications services and Web site development services
in-house. These sources also include other Web site service boutique firms,
communications, telephone and telecommunications companies, computer hardware
and software companies, established online services companies, advertising
agencies, Internet-services and access providers as well as specialized and
integrated marketing communication companies such as Think New Ideas, Inc., all
of which are entering the Web site design and creation market in varying degrees
and are competing with the Company. Many of the Company's competitors or
potential competitors have significantly greater financial, sales, marketing and
other resources than the Company. The Company's ability to retain relationships
with Channel Sources and its existing clients and generate new clients and
relationships with Channel Sources depends to a significant degree on the
quality of its services and its reputation, as compared with the quality of
services provided by and the reputations of, the Company's competitors. The
Company also competes on the basis of creative reputation, price, reliability of
services and responsiveness. There can be no assurance that the Company will be
able to compete and its inability to do so would have a material adverse impact
on the Company's business, financial condition and operating results.
EMPLOYEES
At December 31, 1998, the Company had 38 employees, of which 34 are
full-time employees. Full-time employees include 4 in strategic planning,
executive management, business development; 4 account managers; 3 media
planning/buying personnel; 13 creative and production personnel; and 4
programmers, in addition to administrative staff.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's offices occupy approximately 13,700 square feet of an
office building in New York City at an annual rent ranging, over the term of the
lease, from approximately $226,100 to $246,600 ($16.50 to $18.00 per square
foot) payable in equal monthly installments, plus the Company's allocable share
of certain real property taxes and building operating expenses in excess of
fixed levels as provided in the lease. The lease has a six-year term and expires
April 18, 2003. The Company believes that its current rental payment per square
foot is significantly below the average rental for comparable office space in
New York City.
The Company leases additional office space in New York City consisting
of 1,976 square feet of office space located at 50 Broad Street, New York, New
York at an annual rent ranging, over the term of the lease, from $34,580 to
$38,532, payable in equal monthly installments, plus the
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Company's allocable share of certain real property taxes and building operating
expenses in excess of fixed levels as provided in the lease. The lease has a
term expiring on January 31, 2002. The Company has sublet the space to a third
party for an annual rent ranging from $27,900 to $35,100 for the remainder of
the lease term.
The Company no longer leases office space in Baltimore, Maryland. The
landlord had executed a lease termination agreement with the Company on December
23, 1998. The Company has no future liability for the office space at that
location.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings as
of the date hereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its stockholders,
through the solicitation of proxies or otherwise, during the fourth quarter of
fiscal 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK-HOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ SmallCap Market
("NASDAQ") under the symbol "KTWO" and on the Boston Stock Exchange under the
symbol "KTOO". The following table sets forth, for the periods indicated, the
range of high and low bid prices of the Common Stock as reported by NASDAQ from
the quarter ended March 31, 1997, through December 31, 1998. These quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not necessarily represent actual transactions.
Fiscal Quarter Ended High Low
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March 31, 1997 7 1/8 5 5/16
June 30, 1997 6 1/4 3
September 30, 1997 5 1/4 3 1/8
December 31, 1997 4 23/32 1 9/16
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March 31, 1998 2 1/16 1 3/8
June 30, 1998 5 1/8 2 1/4
September 30, 1998 4 3/8 1 11/16
December 31, 1998 4 3/8 1 1/4
The approximate number of record holders of the Common Stock at
December 31, 1998 was 43, not including beneficial owners whose shares are held
by banks, brokers and other nominees.
During 1998, the Company repurchased an aggregate of 246,250 shares of
its Common Stock from three of its stockholders for $386,781. These shares are
reflected on the Company's books as treasury stock as of December 31, 1998.
The Company has not paid any dividends. The Company does not expect to
pay cash dividends on its Common Stock in the foreseeable future as any earnings
are expected to be retained to finance the Company's operations. Declaration of
dividends in the future will remain within the discretion of the Company's Board
of Directors.
ITEM 6. 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. Factors that might cause such a difference include,
but are not limited to, those discussed in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Factors
Affecting Operating Results and Market Price of Stock" commencing on page 14.
OVERVIEW
The Company was founded in 1993 as a general partnership and initially
operated 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 IPO on July 26, 1996, the Company began to develop its
vision to become a full-service interactive marketing and communications
company, largely in anticipation of demands from its clients for additional
complementary services. The Company now provides such services as development of
online brand, direct response, communications and technical strategies,
development of CD-ROM discs, media placement on Web sites, consulting services
regarding Web site usage and
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user characteristics, development and maintenance of Company-owned Web site
advertising networks, live Internet broadcasts and offline media services.
As a result of the expansion of the Company's services beyond Web site
design and creation, the Company incurred significant expenses in 1996 in
anticipation of future revenues. The Company implemented several cost-cutting
measures in 1997 in an effort to control expenses and bring them in line with
anticipated revenue levels. The Company remains sensitive to its high ratio of
expenses as compared to revenues and is committed to continuing to control and
reduce costs, salaries and other overhead items.
RESULTS OF OPERATIONS
General
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 or cap fee basis.
On June 1, 1998, the Company sold its CLIQNOW! Division to 24/7 Media
Inc. and received both cash and common stock of 24/7 Media, Inc. At December 31,
1998, the Company owned 196,492 shares of common stock of 24/7 Media, Inc.,
valued on the Company's books at approximately $2.6 million, the value ascribed
to such shares in connection with the sale. As a result of management's decision
to discontinue the CLIQNOW! Division in May 1998 prior to the sale, the 1998 and
1997 statements of operations reflect the CLIQNOW! Division as a discontinued
operation.
<TABLE>
<CAPTION>
Percentage of Revenues
Year Ended December 31,
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1998 1997
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<S> <C> <C>
Revenues 100.0% 100.0%
Operating expenses
Direct salaries and costs 75.5% 75.3%
Selling, general and administrative expenses 46.9% 37.0%
Depreciation 5.5% 4.5%
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Total operating expenses 127.9% 116.8%
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Operating loss
(27.9)% (16.8)%
Interest and other income, net 2.5% 0.5%
------- -------
Loss before income tax provision and discontinued
operations (25.4)% (16.3)%
Provision for income tax 0.6% 0.3%
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</TABLE>
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<TABLE>
<CAPTION>
Percentage of Revenues
Year Ended December 31,
----------------------------
1998 1997
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<S> <C> <C>
Loss from continuing operations (26.0)% (16.6)%
Loss from discontinued operations (1.3)% (6.1)%
Gain from sale of discontinued operations 46.6% --
------- -------
Net income (loss) 19.3% (22.7)%
======= =======
</TABLE>
Revenues
Revenues for the years ended December 31, 1998 and 1997 were $6,420,000
and $7,501,000, respectively, or a decrease of 14.4% in 1998 as compared to
1997. The decrease in revenues was due principally to a decrease in sales
volume, which management believes was primarily a result of changes in
management during the third and fourth quarters of 1998 and the loss of two
large clients, WavePhore, Inc. and Audio Book Club, Inc. in the third quarter,
which were not immediately replaced. In 1998 and 1997, revenues from continuing
operations were primarily generated from interactive advertising services and
traditional graphic services.
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 increased in 1998 as compared to 1997 from
75.3% to 75.5%. In absolute dollars, the Company's direct salaries and costs for
1998 decreased to $4,848,000 from $5,646,000 in 1997, reflecting reduced sales
and direct labor in 1998. In 1998, direct salaries and costs consisted primarily
of $2,596,000 of media costs, $1,735,000 of direct salary costs and $145,000
paid to freelance artists and other independent contractors, $44,000 of bad debt
expenses, and $38,000 paid for printing and photography. The remainder consisted
of various project costs. In 1997, direct salaries and costs consisted primarily
of $2,143,000 of media costs, $2,008,000 of direct salary costs and $574,000
paid to freelance artists and other independent contractors, $351,000 of bad
debt expenses, and $245,000 paid for printing and photography. The remainder
consisted of various project costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 1998 increased to
$3,009,000 (46.9% of revenues) from $2,775,000 in 1997 (37.0% of revenues), and
in each period consisted of salaries, professional fees, occupancy costs,
marketing and advertising and travel and office expenses and supplies, among
other things. The increase in 1998 is also due in part to severance expense in
the amount of $400,000, which amount was expensed in the fourth quarter of 1998,
but will be paid in 1999. As a result of the Company's management
reorganization, overall executive salaries have decreased due to the
restructuring of certain executive positions.
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Depreciation
Depreciation expense was $357,000 and $339,000 for fiscal 1998 and
fiscal 1997, respectively, and related primarily to depreciation of equipment
and leasehold improvements. The depreciation expense in fiscal 1998 was
principally the result of depreciation of the Company's equipment and leasehold
improvements in connection with the acquisition of computer equipment and the
relocation of its offices.
Interest and Other Income, Net
The Company's cash investments earned interest and other income net of
interest expense and other expenses of $161,000 for the year ended December 31,
1998. The Company incurred interest and other income net of interest expense and
other expenses of $37,000 for the year ended December 31, 1997.
Operating Loss
Excluding the gain on sale from discontinued operations, the Company
incurred a net loss from operations in 1998 of $(1,672,000) as compared to a net
loss from operations in 1997 of $(1,241,000). The increased net loss from
operations in 1998 as compared to 1997 is attributable to reduced revenues in
the fourth quarter without a corresponding reduction in labor costs and a
$400,000 severance charge.
Selected Quarterly Operating Results (Unaudited)
The following table presents unaudited quarterly financial information
for the period from January 1, 1997 to December 31, 1998. The information has
been derived from the Company's unaudited Consolidated Financial Statements. The
unaudited quarterly financial information has been prepared on the same basis as
the audited Consolidated Financial Statements and includes all adjustments,
including adjustments to remove discontinued operations from operating results
and normal recurring adjustments, that the Company considers necessary for a
fair presentation of such information when read in conjunction with the
Company's audited Consolidated Financial Statements and the accompanying notes
thereto appearing elsewhere in this Report. These results are not indicative of
results for any future period.
<TABLE>
<CAPTION>
1997 1998
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------ ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 1,650,103 $ 1,097,373 $ 1,636,991 $ 3,116,786 $ 2,140,382 $ 1,895,232 $ 1,901,265 $ 483,088
--------- -------- ------------- ------------ ----------- ----------- ------------- ------------
Operating
Direct salaries
and costs 1,186,774 834,567 1,225,886 2,398,402 1,465,601 1,202,492 1,448,140 731,539
Selling, general
and administrative 645,166 583,331 737,674 808,519 534,220 686,894 655,281 1,132,369
expenses
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Depreciation 55,280 60,426 86,305 136,527 89,008 88,271 86,539 93,061
--------- -------- ----------- ----------- ----------- ----------- ------------- -----------
Total operating
expenses 1,887,220 1,478,324 2,049,865 3,343,448 2,088,829 1,977,657 2,189,960 1,956,969
--------- --------- ----------- ----------- ----------- ----------- ------------- -----------
Operating income
(loss) $ (237,117) $ (380,951) $ (412,874) $ (226,662) $ 51,553 $ (82,425) $ (288,695) $(1,473,881)
--------- -------- ------------- ------------ ----------- ----------- ------------- ------------
</TABLE>
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 lower
cost full time employees versus higher cost independent contractors. Revenues
and operating results are difficult to forecast because of these fluctuations.
The Company may be unable to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall, which event may have a material adverse
effect on the Company's operations for such period.
The trading prices of the Common Stock and the Warrants are subject to
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products or services by the
Company or its competitors, as well as other events or factors. In addition, the
stock market has from time to time experienced price and volume fluctuations
which have particularly affected the market price of technology-oriented and
media companies, which often have been unrelated to the operating performance of
these companies. These broad market fluctuations may adversely affect the market
price of the Common Stock and the Warrants.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash increased by approximately $587,000, or 26%, from
$2,243,000 at December 31, 1997 to $2,830,000 at December 31, 1998. This
increase in cash was principally due to the Company's focus on collecting its
accounts receivables, the receipt of approximately $782,000 of net proceeds from
the sale of the CLIQNOW! Division and the Company's active management of its
accounts payables.
The Company is dependent on its current cash balance of $2,830,000
million (at December 31, 1998), together with cash generated by operations, for
working capital in order to be competitive, to meet the increasing demands for
service, quality and pricing and for 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
12
<PAGE>
available to secure additional financing are accounts receivable and its
ownership of shares of common stock of 24/7 Media, Inc.* See "-- Factors
Affecting Operating Results and Market Price of Stock--Cash Flow Deficit; Need
for Additional Financing." Accounts payable decreased by 59.0% to $783,000 at
December 31, 1998 from $1,910,000 at December 31, 1997, due primarily to
decreased media placement revenues. Deferred revenues at December 31, 1997 were
$643,000. There were no deferred revenues at December 31, 1998 due to lower
sales volume at year end.
Cash provided by the Company's operating activities of $474,000 in the
year ended December 31, 1998 related primarily to a substantial increase in
collection of accounts receivable, which was partially offset by a decrease in
accounts payable and the decrease in deferred revenue.
In 1998, the Company spent $210,000 on capital expenditures, consisting
of computer equipment, as well as furniture, fixtures and leasehold
improvements. The Company presently intends to make capital expenditures of
$275,000 in 1999, consisting of equipment, furniture and fixtures and leasehold
improvements.
The Company's cash position was further impacted in 1998 as a result of
the repurchase of 246,250 shares of the Company's common stock from three
stockholders for an aggregate of approximately $387,000. The Company's cash
position will be impacted in 1999 as a result of severance payments in the
amount of $400,000.
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. Management believes
that after testing all internal hardware and software, it is Year 2000
compliant. 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 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 on 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. Investors are strongly encouraged to review
the section entitled "Factors Affecting Operating Results and Market Price of
Stock" commencing on page 14, for a discussion of factors that could affect
future performance.
13
<PAGE>
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
Cash Flow Deficit; Need for Additional Financing
The Company's focus is on increasing the volume of all of its services.
As a result, the Company has hired and will continue to hire additional
personnel and has incurred and will continue to incur substantial expenses
related to administration, production, technical resources, marketing, customer
support and infrastructure in order to enhance and expand its operations. The
Company had an operating cash flow deficit of $(792,000) in fiscal 1997 and an
operating cash flow of $474,000 in fiscal 1998. The Company may require
substantial additional 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 and its
ownership of shares of common stock of 24/7 Media, Inc. Should such financing be
unavailable or prohibitively expensive when the Company requires it, the Company
would not be able to finance any expansion of its business and may not be able
to satisfy its working capital needs, either of which would have a material
adverse effect on the Company's business, operating results and financial
condition.
Recent Operating Losses; Early Stage of Development
The Company's revenues for the years ended December 31, 1998 and 1997
were $6,420,000 and $7,501,000, respectively, with losses from continuing
operations of $(1,672,000) and $(1,241,000), respectively, and a net income of
$1,237,000 in 1998 and a net loss of $(1,703,000) in 1997. The net income of
$1,237,000 in fiscal 1998 was due to the gain on the sale of discontinued
operations. There can be no assurance that the Company will be profitable in the
future or that revenue growth, if any, can be sustained.
The prospects of the Company must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development, particularly companies in new and rapidly evolving markets
and especially those in Internet and other computer related markets. There can
be no assurance that the Company will be successful in addressing these risks.
Ability to Manage Growth
Prior to November 1997, the Company experienced substantial growth in
the number of the Company's employees, and since the beginning of 1996 there has
been increased (i) responsibility for both existing and new management
personnel, (ii) strain on the Company's existing management, administrative,
operational, financial and technical resources and (iii) increased demands on
its management information systems and controls. There can be no assurance that
the Company will effectively develop and implement systems, procedures or
controls adequate to support the Company's operations or that management will be
able to achieve the rapid execution necessary to fully exploit all opportunities
for the Company's services. To manage its business and any growth, the Company
must continue to implement and improve its operational and financial systems and
continue to expand, train and manage its employees. If the Company is unable to
manage its
14
<PAGE>
business effectively, the Company's business, operating results and financial
condition will be materially adversely affected.
Evolving Marketing Strategy
The Company's marketing efforts have expanded as the range of services
which the Company offers has increased. In addition to developing strategic
relationships with other companies and Channel Sources that seek to augment
their businesses by directly or indirectly offering to their clients Web site
services provided by the Company and other third parties, the Company also
directly markets its core creative services as well as the services of its media
group.
To try to avoid any conflict with a Channel Source, the Company does
not intend to offer services to clients referred by a particular Channel Source
that could be provided to those clients by that Channel Source. Since the
Company does not expect to offer its full range of services to these clients,
projects for them may be less profitable than full-service production projects
for other clients. Should a Channel Source favor other providers of similar
services, fail to effectively market the Company's services as a result of the
Channel Source's competitive position or otherwise, or not utilize the Company's
services to the extent anticipated by the Company, the Company may also be
adversely affected. The inability to recruit, manage or retain additional
Channel Sources, or their inability to market the Company's services effectively
or provide timely and cost-effective customer support and service, could
materially adversely affect the Company's business, operating results and
financial condition.
Project-Oriented Clients; Concentration of Revenues
Since many of the Company's clients engage the Company on a single
project basis, clients from whom the Company generated substantial revenue in
one period have not necessarily been a substantial source of revenue in a
subsequent period. Additionally, costs are significantly higher with respect to
single projects as compared to servicing a client on a multiple project or
continuous basis. For example, during 1998, WavePhore, Inc. and Standard &
Poor's Inc. accounted for approximately 23.4% and 18.5%, respectively, of
revenues. Also in 1998, WavePhore, Inc. and one other large client terminated
their relationships with the Company; however, Standard & Poor's continues to be
an active and significant client of the Company. Due to the Company's limited
operating history and the emerging nature of the Internet, the Company generally
cannot be sure whether its relationships with clients will be on a project basis
or on a longer term relationship basis. To the extent the Company does not
generate repeat or ongoing business from its clients, it will incur the higher
sales and marketing expenses associated with attracting new clients as compared
to those in attracting additional business from existing clients.
Risk of System Failures
The Company's success largely depends on the uninterrupted operation of
its computer and communications hardware systems. The Company's systems and
operations are vulnerable to damage or interruption from fire, flood, power
loss, telecommunications failure, break-ins, earthquake and similar events. The
Company presently has very limited redundant systems. The
15
<PAGE>
Company does not have a formal disaster recovery plan and carries limited
business interruption insurance to compensate for any losses that may occur. The
Company's servers are also vulnerable to computer viruses, physical or
electronic break-ins, and similar disruptions, which could materially and
adversely affect the Company.
Uncertain Adoption of Internet as a Medium of Commerce and Communications;
Dependence on Internet
Demand and market acceptance for recently introduced services and
products like those offered by the Company are subject to a high level of
uncertainty. The use of the Internet in marketing and advertising and otherwise,
particularly by those individuals and enterprises that have historically relied
upon traditional means of marketing and advertising, generally requires the
acceptance of a new way of conducting business and exchanging information.
Enterprises that have already invested substantial resources in other means of
conducting business and exchanging information may be particularly reluctant or
slow to adopt a new strategy that may make their existing resources and
infrastructure less useful. There can be no assurance that the market for the
Company's services will develop and if it fails to develop, develops more slowly
than expected or becomes saturated with competitors, or if the Company's
services do not achieve market acceptance, the Company's business, operating
results and financial condition will be materially adversely affected.
The Company's ability to derive revenues will also depend upon a robust
industry and the infrastructure for providing Internet access and carrying
Internet traffic. The Internet may not prove to be a viable commercial
marketplace because of inadequate development of the necessary infrastructure or
timely development of complementary products, such as high speed modems and
bandwidths. Moreover, other critical issues concerning the commercial use of
the Internet (including security, reliability, cost, ease of use and access, and
quality of service) remain unresolved and may impact the growth of Internet use.
Because global commerce and online exchange of information on the Internet and
other similar open wide area networks are new and evolving, it is difficult to
predict with any assurance whether the Internet will prove to be and remain a
viable commercial marketplace. If the infrastructure necessary to support the
Internet's commercial viability is not developed, or if the Internet does not
become a viable marketplace, the Company's business, operating results and
financial condition would be materially and adversely affected.
Risk of Changing Technology
The services the Company offers, and the services and products the
Company expects to offer in the future, are impacted by rapidly changing
technology, evolving industry standards, emerging competition and frequent new
service, software and other product introductions. There can be no assurance
that the Company can successfully identify new business opportunities and
develop and bring new services or products to market in a timely and
cost-effective manner, or that services, products or technologies developed by
others will not render the Company's services or products noncompetitive or
obsolete. In addition, there can be no assurance that services, products or
enhancements introduced by the Company will achieve or sustain market acceptance
or be able to effectively address compatibility, inoperability or other issues
raised by technological changes or
16
<PAGE>
new industry standards. The Company's pursuit of technological advances may also
require the Company to seek assistance from third parties.
Intellectual Property Rights; Risk of Infringement; Possible Litigation
The Company believes that its success in its core business of
interactive advertising is not dependent upon patents, copyrights or trademarks
and the Company does not currently have any registered patents, copyrights or
trademarks, although applications for various trademarks have been made.
Consequently, the Company relies principally on a combination of common-law and
statutory law to protect its proprietary information and know-how. The Company
also utilizes technology owned by third parties. There can be no assurance that
licenses for any technology developed by third parties that might be required
for the Company's services would be available on reasonable terms, if at all.
See "Business--Trademarks."
Although the Company does not believe that its services infringe the
proprietary rights of any third parties, there can be no assurance that third
parties will not assert claims based on these services against the Company in
the future or that any of those claims would not be successful. In addition,
many of the Company's competitors rely upon trade secret law. Litigation may be
necessary in the future to enforce the Company's intellectual property rights
and to protect its proprietary information, to determine the validity and scope
of the proprietary rights of others, or to defend against claims of infringement
or invalidity. Litigation of this nature, whether or not successful, could
result in substantial costs and diversions of resources, either of which could
have a material adverse effect on the Company's business, financial condition
and operating results. Furthermore, parties making claims against the Company
could secure a judgment awarding substantial damages, as well as injunctive or
other equitable relief which could directly or indirectly prohibit the Company
from providing certain services and products. A judgment of this nature could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Conflicts of Interest; Restrictions
The Company has been precluded and may be precluded in the future from
pursuing opportunities that require it to provide services to direct competitors
of existing clients or Channel Sources. In addition, the Company risks
alienating or straining relationships with clients and Channel Sources each time
the Company agrees to provide services to even indirect competitors of existing
clients or Channel Sources. Conflicts of interest may jeopardize the stability
of revenues generated from existing clients and Channel Sources and preclude
access to business prospects, either of which could have a material adverse
effect on the Company's business, financial condition and operating results.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 13(a)(1) in Part IV.
17
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required for this item is incorporated by reference to
the Company's 1999 Definitive Proxy Statement which the Company will file with
the Securities and Exchange Commission no later than 120 days subsequent to
December 31, 1998.
ITEM 10. EXECUTIVE COMPENSATION
The information required for this item is incorporated by reference to
the Company's 1999 Definitive Proxy Statement which the Company will file with
the Securities and Exchange Commission no later than 120 days subsequent to
December 31, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required for this item is incorporated by reference to
the Company's 1999 Definitive Proxy Statement which the Company will file with
the Securities and Exchange Commission no later than 120 days subsequent to
December 31, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required for this item is incorporated by reference to
the Company's 1999 Definitive Proxy Statement which the Company will file with
the Securities and Exchange Commission no later than 120 days subsequent to
December 31, 1998.
18
<PAGE>
PART IV
<TABLE>
<CAPTION>
ITEM 13. AND REPORTS ON FORM 8-K
Page
<S> <C> <C>
(a) Documents filed as part of this report.
1. Financial Statements and Schedule
Report of Independent Public Accountants......................... F-1
Consolidated Balance Sheet - December 31, 1998................... F-2
Consolidated Statements of Operations - For the years ended
December 31, 1998 and 1997....................................... F-3
Consolidated Statements of Changes in Stockholders' Equity -
For the years ended December 31, 1998 and 1998.................. F-4
Consolidated Statements of Cash Flows - For the years ended
December 31, 1998 and 1997....................................... F-5
Notes to Consolidated Financial Statements....................... F-7
Schedule II...................................................... F-15
2. Exhibits
3.1 Certificate of Incorporation of the Company*
3.1(a) Amendment to Certificate of Incorporation of the
Company*
3.2 By-laws of the Company*
3.2(b) Amendment to By-laws of the Company*
4.1 Common Stock Certificate*
4.2 Warrant Certificate*
4.4 Warrant Agreement by and between Continental Stock
Transfer & Trust Company and the Company*
</TABLE>
19
<PAGE>
4.5 Voting Agreement among Messrs. Centner, de Ganon,
Cleek and Szollose*
10.1 1996 Stock Incentive Plan and Rules Relating thereto*
10.2 1997 Stock Option Plan**
10.3 Consulting Agreement with Harvey Berlent*
10.4 Employment Agreement with Matthew G. de Ganon*
10.7 Employment Agreement with Douglas E. Cleek*
10.8 Agreement of Lease - 55 Broad Street, New York,
New York*
10.9 Agreement of Lease - 50 Broad Street, New York,
New York**
10.10 Lease Agreement of - Baltimore, Maryland**
10.12 Employment Agreement with Lynn Fantom dated
October 22, 1998
10.13 Extension of Employment Agreement with Matthew G.
de Ganon dated November 2, 1998
10.14 Extension of Employment Agreement with Douglas E.
Cleek dated January 15, 1999
10.15 Employment Agreement with Seth Bressman dated
February 11, 1999
10.16 Lease Termination Agreement - Baltimore, Maryland
21.1 Subsidiary List*
27.1 Financial Data Schedule
- --------------
* Incorporated by reference from the Registrant's Registration Statement on
Form SB-2, No. 333-4319.
** Incorporated by reference from the Registrant's Form 10-KSB for its fiscal
year ended 12/31/96.
(b) The Company did not file any Current Reports on Form 8-K during the
last quarter of the period covered by this Report.
20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
K2 DESIGN, INC.
Dated: March 26, 1998
By: /s/ Matthew G. de Ganon
-----------------------------
Matthew G. de Ganon, Chairman
POWER OF ATTORNEY
Each of the undersigned hereby appoints Matthew G. de Ganon, as his
attorneys-in-fact to sign his or her name, in any and all capacities, to any
amendments to this Form 10-KSB and any other documents filed in connection
therewith to be filed with the Securities and Exchange Commission.
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Matthew G. de Ganon Chairman of the Board March 26, 1999
- ---------------------------------
Matthew G. de Ganon
Chief Executive Officer, President and March 26, 1999
/s/ Lynn Fantom Director
- ---------------------------------
Lynn Fantom
Chief Financial Officer (Principal March 26, 1999
/s/ Seth Bressman Financial and Accounting Officer
- ---------------------------------
Seth Bressman
/s/ Douglas E. Cleek Executive Vice President and Director March 26, 1999
- ---------------------------------
Douglas E. Cleek
/s/ James A. Favia Director March 26, 1999
- ---------------------------------
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C>
James A. Favia
/s/ Steven N. Goldstein Director March 26, 1999
- ---------------------------------
Steven N. Goldstein
/s/ Bradley K. Szollose Director March 26, 1999
- ---------------------------------
Bradley K. Szollose
</TABLE>
22
<PAGE>
K2 DESIGN, INC.
AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Financial Statements of K2 Design, Inc. and Subsidiary
Report of Independent Public Accountants........................... F-1
Consolidated Balance Sheet - December 31, 1998..................... F-2
Consolidated Statements of Operations - For the years
ended December 31, 1998 and 1997................................. F-3
Consolidated Statements of Changes in Stockholders'
Equity - For the years ended December 31, 1998 and 1997.......... F-4
Consolidated Statements of Cash Flows - For the years
ended December 31, 1998 and 1997................................. F-5
Notes to Consolidated Financial Statements......................... F-7
Schedule II - Valuation and Qualifying Accounts.................... F-13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To K2 Design, Inc:
We have audited the accompanying consolidated balance sheet of K2 Design, Inc.
(a Delaware corporation) and its subsidiary (a New York corporation) as of
December 31, 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1998 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 K2 Design, Inc. and its
subsidiary as of December 31, 1998, and the results of their operations and
their cash flows for the years ended December 31, 1998 and 1997, in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for the purpose of complying with the
Securities and Exchange Commissions rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
February 19, 1999
F-1
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents (Note 2) $ 2,829,628
Accounts receivable, net of allowance for doubtful accounts of $25,000 269,173
Prepaid expenses and other current assets 118,298
-----------
Total current assets 3,217,099
INVESTMENT IN RESTRICTED SECURITIES, AT COST (Note 8) 2,558,300
FIXED ASSETS, net (Note 3) 745,388
RESTRICTED CASH 150,711
OTHER ASSETS 9,172
-----------
Total assets $ 6,680,670
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations (Note 4) $ 30,379
Accounts payable 783,216
Accrued compensation and payroll taxes 96,642
Accrued expenses 999,899
Customer advances 51,288
-----------
Total current liabilities 1,961,424
LONG-TERM CAPITAL LEASE OBLIGATIONS (Note 4) 1,722
-----------
Total liabilities 1,963,146
-----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY (Notes 2 and 7):
Preferred stock, $.01 par value, 1,000,000 shares authorized; 0 shares
issued and outstanding --
Common stock, $.01 par value, 9,000,000 shares authorized; 3,692,817 36,928
shares issued and 3,446,567 shares outstanding
Treasury Stock, 246,250 shares at cost
(386,781)
Additional paid-in capital 6,428,963
Accumulated deficit (1,361,586)
-----------
Total stockholders' equity 4,717,524
-----------
Total liabilities and stockholders' equity $ 6,680,670
===========
</TABLE>
The accompanying notes are an integral part of this consolidated
balance sheet.
F-2
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
REVENUES $ 6,419,967 $ 7,501,253
DIRECT SALARIES AND COSTS 4,847,772 5,645,629
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,008,764 2,774,690
DEPRECIATION 356,879 338,538
------------ ------------
Loss from continuing operations before interest
and other income, net, income taxes and
discontinued operations (1,793,448) (1,257,604)
INTEREST AND OTHER INCOME, net 160,777 37,087
------------ ------------
Loss before provision for income taxes and
discontinued operations (1,632,671) (1,220,517)
PROVISION FOR INCOME TAXES 39,143 20,570
------------ ------------
Loss from continuing operations (1,671,814) (1,241,087)
Loss from discontinued operations (85,309) (462,163)
GAIN ON SALE FROM DISCONTINUED OPERATIONS,
net of income taxes 2,994,204 --
----------- ------------
Net income (loss) $ 1,237,081 $(1,703,250)
=========== ============
Loss per share from continuing operations -
Basic and diluted $ (0.47) $ (0.34)
Loss per share from discontinued operations -
Basic and diluted (0.02) (0.12)
Income per share from gain on sale of
discontinued operations -
Basic and diluted 0.84 --
----------- ------------
Net income (loss) per share
Basic and diluted $ 0.35 $ (0.46)
=========== ============
WEIGHTED AVERAGE BASIC AND DILUTED COMMON
SHARES OUTSTANDING 3,553,861 3,663,046
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Number of Treasury
Number of Additional Accumulated Treasury Stock
Shares Amount Paid-in Capital Deficit Shares Amount Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997 3,645,421 $ 36,454 $ 6,281,183 $ (895,417) - $ - $ 5,422,220
Stock issued for options 35,250 353 - - - - 353
Compensation expense - - 67,757 - - - 67,757
Net loss - - - (1,703,250) - - (1,703,250)
--------- -------- ------------ ----------- -------- --------- ------------
BALANCE, December 31, 1997 3,680,671 36,807 6,348,940 (2,598,667) - - 3,787,080
Repurchase of Treasury Stock - - - - (246,250) (386,781) (386,781)
Net Income - - - 1,237,081 - - 1,237,081
Compensation expense 12,146 121 80,023 - - - 80,144
BALANCE, December 31, 1998 3,692,817 $ 36,928 $ 6,428,963 $(1,361,586) (246,250) $(386,781) $ 4,717,524
========= ======== ============ =========== ======== ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,237,081 $(1,703,250)
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-
Non cash compensation expense 80,144 67,757
Depreciation 356,879 347,346
Loss from disposal of fixed assets -- 16,438
Changes in-
Accounts receivable, net 3,163,980 (1,365,438)
Prepaid expenses and other current assets 37,893 (358,573)
Unbilled revenue 265,869 --
Other assets 901 549
Accounts payable (1,127,163) 1,165,816
Accrued compensation and payroll taxes (64,107) 35,956
Other accrued expenses 138,396 494,454
Deferred revenue and customer advances (621,871) 506,990
----------- -----------
Net cash provided by (used in) operating activities 473,798 (791,955)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of discontinued operation 782,459 --
Restricted cash -- (120,711)
Proceeds from sale of fixed assets -- 63,200
Purchase of fixed assets (209,914) (711,253)
----------- -----------
Net cash provided by (used in) investing activities 572,545 (768,764)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock -- 353
Purchase of common stock for treasury (386,781) --
Principal payments on capital lease obligations (72,922) (64,076)
----------- -----------
Net cash used in financing activities (459,703) (63,723)
----------- -----------
586,640 (1,624,442)
Net increase (decrease) in cash
CASH AND CASH EQUIVALENTS beginning of year 2,242,988 3,867,430
----------- -----------
CASH AND CASH EQUIVALENTS end of year $ 2,829,628 $ 2,242,988
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 28,575 $ 32,802
Income taxes $ 25,609 $ 20,570
Non cash investing activities-
Investment in restricted securities, at cost $ 2,558,300 $ --
Equipment acquired under capital lease obligations $ - $ 39,212
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 Holding 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. The Company also
provides various other information delivery services. The Company's clients are
primarily U.S.-based corporations operating in a wide variety of industries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
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 liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
Revenues are recognized on the percentage of completion method based upon the
ratio of costs incurred to total estimated costs incurred and anticipated
profits earned on projects in progress in excess of amounts billed. Customer
advances represent amounts billed in excess of costs incurred and estimated
profit earned. Such billings generally occur at the beginning of contract
periods, and are in accordance with contract provisions. Provisions for any
estimated losses on uncompleted contracts are made in the period in which such
losses are determinable. A portion of the Company's revenues has been generated
on a fixed fee for service basis.
Cash and Cash Equivalents
The Company considers all short term investments having a maturity of three
months or less to be cash equivalents.
Fixed Assets
Fixed assets are carried at cost and depreciated using the straight-line method
over their estimated useful lives. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the term
F-6
<PAGE>
of the underlying lease.
Estimated useful lives by class of assets are as follows:
Computers and Equipment 3 years
Furniture and fixtures 5 years
Leasehold improvements Life of lease
Accrued Expenses
Accrued expenses are comprised of the following as of December 31, 1998.
Accrued Severance $400,000
Accrued Media Planning and Ad Servicing 315,664
Accrued Expenses - other 284,235
--------
$999,899
========
Fair Value of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable, and accounts payable approximate fair market value based upon the
relatively short-term nature of these financial instruments.
Concentration of Revenue
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of trade accounts receivable. The Company
performs ongoing credit evaluations of its clients' financial condition and
generally requires no collateral from its clients. Sales to the Company's two
largest clients constituted approximately 23% and 19% of revenue for the year
ended December 31, 1998. The Company had accounts receivable from these clients
amounting to $113,164 at December 31, 1998. Sales to the Company's two largest
clients for the year ended December 31, 1997 constituted approximately 15% and
12% of revenue.
Income Taxes
Effective January 1996, the Company elected to be treated as a C Corporation. As
a result, the Company is subject to Federal, New York State and City income
taxes on the Company's taxable income.
The Company provides Federal, state and city income tax in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). Under SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years on
which those temporary differences are expected to be recovered or settled.
F-7
<PAGE>
Net Income (Loss) per Share of Common Stock
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
establishes new 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 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. Outstanding stock options of 810,200 and
464,950 as of December 31, 1998 and 1997 respectively, have been excluded from
the above calculations as they are antidilutive.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (SFAS 123) establishes financial accounting and reporting
standards for stock-based employee compensation plans. SFAS 123 encourages
entities to adopt a fair value based method of accounting for stock compensation
plans. However, SFAS 123 also permits entities to continue to measure
compensation costs under pre-existing accounting pronouncements with the
requirement that pro forma disclosures of net income and earnings per share be
included in the notes to the financial statements. The Company has elected to
adopt the disclosure requirements of SFAS 123 (see Note 7).
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Reporting on Segments") ("SFAS 131").
SFAS requires companies to disclose certain information related to the various
segments in which it operates. The Company believes that it operates in one
segment.
3. FIXED ASSETS
Fixed assets, at cost, including capital leases (see Note 4), summarized by
major categories at December 31, 1998, consist of the following:
Computers and Equipment $ 936,525
Furniture and fixtures 280,315
Leasehold improvements 248,362
-----------
1,465,202
Less: Accumulated depreciation (719,814)
-----------
Fixed assets, net $ 745,388
===========
4. CAPITAL LEASE OBLIGATIONS
The Company is a lessee in non cancelable leasing agreements for certain
computers and equipment. Included in fixed assets is $32,101 of computers and
equipment held under capital leases.
Future minimum lease payments for fixed assets under capital lease at December
31, 1998, are as follows:
1999 $ 37,085
2000 1,916
-----------
Total minimum lease payments 39,001
Less-Imputed interest (6,900)
-----------
Total capital lease obligation $ 32,101
-----------
F-8
<PAGE>
5. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain office space and automobiles for varying periods. At
December 31, 1998, approximate future minimum rental commitments under all non
cancelable operating leases are as follows:
Fiscal Year:
------------
1999 $ 302,733
2000 294,030
2001 294,031
2002 260,003
2003 76,017
Rental expense under the above leases amounted to $225,893 in 1998 and $254,679
in 1997.
An aggregate of $400,000 of severance payments will be made during 1999, which
amount has already been accrued and reflected in selling, general and
administrative expenses on the consolidated statement of operations for the year
ended December 31, 1998.
Employment contracts
The Company has employment contracts with each of its executives. Two contracts
which were to expire on December 31, 1998 were renewed for an additional three
year period and provide for minimum annual salaries of $153,000 with 20%
increases for each successive year. Such contracts also include bonuses equal to
1.88% of the Company's pre-tax profit. The Company entered into a two year
employment contract with an executive officer providing for an annual salary of
$250,000 and a bonus equal to 10% of the Company's pre-tax profit not to exceed
$75,000, provided that the Company's pre-tax profits for fiscal 1999 are at
least $250,000 and for fiscal 2000 are at least $500,000. The Company also
entered into a one year employment contract with an executive officer expiring
January 31, 2000, subject to automatic renewals, providing for an annual salary
of $125,000 and a bonus equal to $50,000 in the event of a Change of Control
Event (as defined in the contract).
6. INCOME TAXES
As described in Note 2, the Company previously elected "S" corporation status
under the provisions of the Internal Revenue Code. In January, 1996 the Company
reorganized as a Delaware Holding C corporation in contemplation of the initial
public offering.
The provision for income taxes on the net income (loss) for the years ended
December 31, 1998 and 1997 differs from the amount computed by applying the
Federal statutory rate due to the following:
1998 1997
------ ------
Statutory Federal income tax rate 34.0% (34.0)%
State and local taxes, net 4.8 (4.8)
Valuation Allowance (utilization of NOL) (31.4) 40.0
------ ------
Effective Tax Rate 7.4% 1.2%
------ ------
7. STOCK OPTION PLAN
The Company has two stock plans, the 1996 Stock Option Plan (the "1996 Plan"),
and the 1997 Stock Incentive Plan (the "1997 Plan", and together with the 1996
Plan, the "Plans"). Pursuant to the Plans, designated employees, including
officers and directors of the Company and certain outside consultants, will be
entitled to receive
F-9
<PAGE>
nonqualified stock options and qualified stock incentive compensation. As of
December 31, 1998, there were no shares of common stock available for grant
under the Plans.
The 1996 Plan expires on January 1, 2006 and the 1997 Plan expires on June 12,
2007. Under the terms of the Plans, the minimum exercise price of options
granted cannot be less than 100% of the fair market value of the common stock of
the Company on the option grant date. Options granted under the Plan generally
expire ten years after the option grant date. For incentive stock options
granted to such persons who would be deemed to have in excess of a 10% ownership
interest in the Company, the option price shall not be less than 110% of such
fair market value for all options granted, and the options expire five years
after the option grant date.
A summary of the Plans at December 31, 1998 and 1997 is presented in the table
below:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
----------- ----------------
<S> <C> <C>
Outstanding at January 1, 1997 118,500 $4.03
Granted 364,950 1.57
Exercised -- --
Forfeited (18,500) 4.03
--------- -----
Outstanding at December 31, 1997 464,950 2.10
Granted 474,500 1.54
Exercised (56,750) .71
Forfeited (72,500) 1.75
--------- -----
Outstanding at December 31, 1998 810,200 $1.83
========= =====
Shares exercisable at December 31, 1998 217,101 $2.20
========= =====
</TABLE>
The Company accounts for the Plans under APB 25, under which no compensation
cost is recognized for stock options granted with an exercise price at or above
the prevailing market price on the date of the grant. Had compensation cost for
this plan been determined consistent with the fair value approach required by
SFAS 123, the Company's net income (loss) and net income (loss) per common share
would have been increased to the following pro forma amounts:
1998 1997
------------- ---------------
Net income (loss):
As reported $ 1,237,081 $ (1,703,250)
============= ===============
Pro forma $ 885,766 $ (1,748,231)
============= ===============
Net income (loss) per common share
As reported $ 0.35 $ (0.46)
============= ===============
Pro forma $ 0.25 $ (0.48)
============= ===============
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions:
risk-free interest rates of 5.2% and 5.5% in 1998 and 1997, respectively; no
expected dividend yields for options granted; expected lives of 4 and 5 years in
1998 and 1997, respectively; expected stock price volatility of 120% and 157% in
1998 and 1997, respectively. The weighted average fair value of options granted
during 1998 and
F-10
<PAGE>
1997 was $1.22 and $1.09, respectively.
The effects of applying SFAS 123 in this pro forma disclosure may not be
indicative of future amounts because anticipated stock option grants are
anticipated in future years.
8. INVESTMENT IN RESTRICTED SECURITIES
In May 1998, the Company decided to discontinue the CLIQNOW! Division.
Accordingly, this business has been reflected as a discontinued operation for
the years ended December 31, 1998 and 1997. On June 1, 1998, the Company sold
its CLIQNOW! Division 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. The sale resulted in a net gain of approximately
$2,994,000. On August 13, 1998, TFSM's registration statement for its initial
public offering was declared effective by the Securities and Exchange
Commission. As a result, the Convertible Redeemable Preferred Stock of TFSM
automatically converted on that date into shares of common stock of TFSM, of
which the Company retained 196,492 shares. These shares are being carried at a
cost of $2,558,300 (approximately $13.02 per share) on the Company's
consolidated balance sheet at December 31, 1998.
F-11
<PAGE>
SCHEDULE II
K2 DESIGN, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Allowance for doubtful accounts, January 1, 1997 $ 25,000
Add: Increase in allowance for doubtful accounts 188,204
Allowance for doubtful accounts, December 31, 1997 213,204
Less: Decrease to allowance for doubtful accounts (188,204)
-----------
Allowance for doubtful accounts, December 31, 1998 $ 25,000
===========
F-12
<PAGE>
EXHIBIT 10.12
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT dated as of the 22nd day of October, 1998 between K2
DESIGN, INC., a Delaware corporation, with offices at 30 Broad Street,
New York, New York 10004 (the "Corporation"), and Lynn Fantom (the
"Executive");
In consideration of the mutual covenants and promises contained
herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, it is agreed as follows:
1. Duties. The Corporation hereby employs the Executive in the
executive capacity as President and Chief Executive Officer. In
addition, upon the commencement of the Term (as defined below),
Executive shall be elected to the Corporation's Board of Directors, and
Executive agrees that the termination of her employment for any reason
shall be deemed to be her simultaneous resignation from the
Corporation's Board of Directors. The Executive shall report to the
Corporation's Board of Directors and to its Chairman, and shall
perform such reasonable executive, administrative and managerial
services consistent with her position, to the Corporation and each of
its subsidiaries as the Board of Directors of the Corporation (the
"Board") may from time to time prescribe. The Executive accepts such
employment and agrees to devote her full time and effort to the services
of the Corporation. Without Executive's prior written consent,
Executive's base of operations shall not be changed from New York City
(where Executive's duties shall be principally performed), although
Executive may be required to travel outside of the New York tri-state
area for reasonable periods of time to perform her duties.
2. Term. The term of this Agreement shall commence as of
November 16, 1998, and shall end on December 31, 2000, unless otherwise
extended by mutual agreement of the Executive and the Corporation.
3. Compensation and Benefits. (a) During the Term, the
Corporation shall pay to the Executive a base salary of $250,000 in
accordance with the Corporation's normal payroll policies. In addition,
should Executive provide services to the Corporation prior to the
commencement of the Term, the Corporation shall pay to the Executive the
ratable equivalent of her base salary for the days that she provides
such services.
(b) In addition, upon the commencement date of the term,
Executive and the Corporation shall enter into the Stock Option
Agreement attached hereto as Exhibit A, pursuant to which
-1-
<PAGE>
Executive shall be granted options to acquire 400,000 shares of the
Corporation's common stock, par value $.01 per share ("Common Stock") at
an exercise price equal to the closing ask price of the Common Stock on
such date; provided, however, that should the Corporation announce its
sale prior to such date, the exercise price of such options shall not
exceed $1.75 per share.
(c) In addition to the foregoing payments, Executive:
(i) may at her option participate in all fringe benefits,
bonus and any pension and/or profit sharing plans that may be provided
by the Corporation or any subsidiary for its key executive employees in
accordance with the provisions of any such programs or plans;
(ii) may at her option participate in any life or other similar
insurance plans, medical and health plans or other employee welfare
benefit plans that may be provided by the Corporation or any subsidiary
for its key executive employees in accordance with the provisions of any
such plans. The Corporation shall also use its reasonable efforts to
cause its health and its dental insurers to provide health and dental
insurance to Executive commencing on the first day of the Term through
the end of the Term. The Corporation shall bear the cost of all such
health and dental insurance premiums;
(iii) shall be entitled to four weeks paid vacation annually;
that without the consent of the Corporation's Chairman or its Board,
Executive shall not take more than two consecutive vacation weeks;
(iv) shall be entitled to sick leave and sick pay in accordance
with the policy of the Corporation or any subsidiary that may be applicable
to key executive employees;
(v) shall be entitled, for each of the years ending December 31,
1999 and 2000, to a formula bonus equal to 10% of the Corporation's
pre-tax profit; provided, however, that the bonus in either year shall not
exceed $75,000 unless the margin (i.e., pre-tax profit divided by net
revenues (excluding pass-throughs)) is at least 10%. The foregoing
notwithstanding, no bonus shall be payable unless the Corporation's
pre-tax profits for 1999 are at least $250,000 and for 2000 are at least
$500,000. This bonus shall be payable promptly after the completion of
the audit for the relevant period, and in no event more than 30 days
thereafter. For purposes of this Agreement, pre-tax profits shall be the
amount reflected as such in the Corporation's audited financial
statements for the relevant period.
-2-
<PAGE>
(vi) shall be entitled to reimbursement of all ordinary and
necessary business expenses against presentation of invoices or receipts
and otherwise in accordance with the Corporation's policies in effect
from time to time applicable to senior executives of the Corporation.
4. Conflict of Interest. The Executive agrees that during her
employment with the Corporation, the Executive will not, directly or
indirectly, engage in or have a substantial interest in any business
which at the time shall be in whole or substantial part competitive with
any substantial part of the business carried on by the Corporation now
or at the time until this Agreement shall be terminated, either for the
Executive's own benefit or for or with any person, firm or corporation
whatsoever other than the Corporation.
5. Confidentiality. The Executive agrees that the Executive will
not, at any time during or after the termination of employment with the
Corporation, reveal, divulge or make known to any person, firm,
corporation, or other business organization (other than the
Corporation), or use for its account, any information that relates to
the Corporation's existing or reasonably foreseeable business which is
not readily disclosed by inspection of the Corporation's products or
otherwise publicly available (other than as a result of Executive's
unauthorized disclosure), including, but not limited to, ideas,
inventions, discoveries, trade secrets, confidential information, good
will, improvements, information contained in or relating to the
Corporation's product designs, manufacturing processes and techniques,
marketing plans or proposals, sources and prices of inventory, equipment
and all other business related items, financial information, personnel
information and customer information (collectively, "Proprietary
Information"). Proprietary Information includes any such information,
whether or not obtained by the Executive with the knowledge and
permission of the Corporation, whether or not developed, devised or
otherwise created in whole or in part by the Executive's efforts, and
whether or not a matter of public knowledge unless as a result of
authorized disclosure, except as otherwise provided herein. The
Executive further agrees to retain such knowledge and information which
the Executive acquires and develops during the Executive's employment
respecting such Proprietary Information in trust for the sole benefit of
the Corporation and its successors and assigns.
6. Non-Competition. (a) The Executive agrees to not (i) at any
time during employment with the Corporation, and (ii) if Executive's
employment with the Corporation is terminated pursuant to Section 7(a)
or (b) or Executive terminates her employment hereunder other than (x)
for Good Reason or (y) as a result of an "Approved Transaction" (as
provided in the
-3-
<PAGE>
penultimate paragraph of Second 8), then for a one year period after
such termination (the "Prohibited Period"), directly or indirectly enter
into, participate in or engage in any business, or the solicitation of
any business, which is competitive with the business of the Corporation
within the territories in which the Corporation now or during the Term
conducts marketing or operational activities, whether as an individual
on the Executive's own account, as a partner or joint venturer, as the
owner of an interest in, or as a director or officer of, any entity, as
an executive, agent, salesman or consultant of any person or entity, or
otherwise. A business, including without limitation and by way of
example only, a direct marketing advertising agency or consultancy,
shall be deemed to not be competitive with the Corporation if it is not
primarily engaged in Internet advertising; and (b) the Executive further
agrees to not, at any time during or after the termination of the
Executive's employment with the Corporation (i) induce or attempt to
induce any employee of the Corporation to leave the Corporation's
employ, or (ii) interfere with the relationship of the Corporation with
any person or entity who or which at any time during his employment with
the Corporation was an employee or customer of, or in the habit of
dealing with the Corporation.
7. Termination for Cause, Death or Disability. The Corporation
shall have the right to immediately terminate this Agreemeent by written
notice to the Executive (which notice shall specify the effective date of
termination; the "Termination Date"), and this Agreement shall terminate
and the obligations and covenants of the Corporation and the Executive
hereunder (except those pursuant to Sections 5 and 6, which shall
survive termination of this Agreement, and except as otherwise provided
in this Agreement) shall be of no further force and effect upon the
Termination Date if any of the following occur: (a) the willful and,
after notice and an opportunity to cure, continued failure by Executive
to follow the reasonable directives of the Board of Directors of the
Corporation that are not inconsistent with the provisions of this
Agreement or her failure to otherwise substantially perform her duties
hereunder (other than such failure resulting from Executive's incapacity
due to physical or mental illness; (b) the commission by the Executive
of a (i) felony, or (ii) willful and, after notice and an opportunity to
cure, continued misconduct by Executive (which includes a willful breach
of a material term of this Agreement by Executive in the performance of
her duties hereunder); (iii) conviction of a felony or a plea of guilty
or nolo contendere relating thereto in connection with a crime relating
to the performance of Executive's duties to the Corporation or otherwise
impairing or negatively affecting her ability to perform such duties;
(iv) willful theft or fraud against the Corporation or any customer
-4-
<PAGE>
of, supplier to or other person or entity which has regular dealings
with, the Corporation; or (v) a willful violation of any law, rule or
regulation, or the imposition of a final order issued by any regulatory
authority against the Corporation, which in any event, prohibits the
Executive from holding an executive position with the Corporation or any
Subsidiary; and (c) the permanent disability of the Executive
("permanent disability" shall mean the Executive's inability to perform
the duties and responsibilities hereunder by reason of physical or
mental injury or illness for any 6 months in any consecutive 12 month
period). This Agreement shall terminate in the event of Executive's
death effective as of the date of death.
For purposes of this Agreement, no act, nor failure to act, on
Executive's part shall be considered "willful" unless done, or omitted
to be done, by Executive in bad faith and without a reasonable belief
that such action or omission by Executive was in the best interests of
the Corporation, and no termination for "Cause" shall be effective
unless Executive shall have been given written notice of the breaches of
this Section and a period of 30 days within which to cure any such
breach, or if not curable, Executive shall be given, within 10 days
after the giving of such notice by the Corporation, an opportunity to
make a presentation to the Board of Directors at a meeting thereof.
Following such meeting, the Board shall determine whether to terminate
Executive for "Cause" and shall notify Executive of its decision.
8. Other Termination. (a) Except as may otherwise be provided
in the Stock Option Agreements attached hereto as Exhibit A, if
Executive dies, becomes permanently disabled or terminates this
Agreement other than for Good Reason, the Corporation shall have no
further liability to Executive for compensation or benefits, except as
may otherwise be provided in the applicable benefit plan or as may
otherwise be required by law (e.g., COBRA) and that Executive shall
be paid accrued salary upon termination of this Agreement.
(b) In the event Executive's employment is terminated by the
Corporation other than pursuant to Section 7(a) or 7(b), or the
Executive initiates the termination for Good Reason, the Corporation
will pay severance (in addition to the amounts outlined in Section 8(a)
of this Agreement) to the Executive (or to Executive's surviving spouse,
or if Executive has no surviving spouse, then to Executive's estate) as
follows: (i) the greater of the salary for the unexpired Term of this
Agreement or $300,000, in either case in accordance with the
Corporation's normal payroll policy; (ii) if equity-based incentives are
held by the Executive or otherwise accrue to her but the Corporation's
stock is not publicly traded, Executive shall receive in cash the fair
market value of such equity-based incentives, which shall be determined
in good faith by the Corporation on the basis of such
-5-
<PAGE>
considerations as it reasonably deems appropriate; and (iii) all
benefits as described in Section 3(c) (ii) for which Executive would
otherwise have been eligible to receive as of the effective date of
Executive's termination of employment for the unexpired Term of this
Agreement. Notwithstanding the foregoing, if Executive becomes employed
by a third party during the unexpired Term, the Corporation's
obligations pursuant to clause (b) (iii) of this Section 8 shall
terminate, excewpt as may otherwise be provided in the Corporation's
benefit plans or as may otherwise be required by law.
In addition, in the event of an "Approved Transaction" (as defined in
the Stock Option Agreement attached as Exhibit A hereto), Executive
shall have the right to terminate this Agreement, in which case she
shall be entitled to (x) $300,000 lump sum payment in the absence of
Good Reason, or (y) $300,000 lump sum payment plus the severance set
forth in clauses b(i) through (iii) of the Section 8, if Good Reason
also exists; provided, however, that in no event shall any amount
payable to Executive subsequent to an "Approved Transaction" exceed the
threshold set forth in the Internal Revenue Code that triggers
additional excise and income taxes for excessive "golden parachute"
payments.
(c) For purposes of this Agreement, the term (i) "Good
Reason" shall mean and shall be deemed to exist if, without the prior
written consent of Executive, there is a (A) reduction in any component
of compensation below that which is required to be paid hereunder, (B) a
material difference in benefits below the level of other senior
executives, (C) a significant reduction in Executive's duties or
responsibilities, or a material diminution in Executive's status, office
or title, or assignment of inconsistent duties to be performed on a
regular basis, or (D) any material breach by the Corporation of any
material provision of this Agreement.
No termination for "Good Reason" shall be effective unless the
Corporation's Board shall have been given written notice of the breaches
of this Section and a period of 30 days within which to cure any such
breach, or if not curable, the Board shall be given, within 10 days
after the giving of such notice by the Executive, an opportunity to make
a presentation to the Executive at a meeting with her. Following such
meeting, the Executive shall determine whether to terminate her
employment "Good Reason" and shall notify the Board of her decision.
9. Arbitration. Any controversy or claim arising out of, or
relating to this Agreement, or the breach thereof, shall be settled by
arbitration in New York, New York, in accordance with the Rules of the
American Arbitration Association, and judgment upon the award rendered
by the arbitrator or arbitrators may be
<PAGE>
entered in any court having jurisdiction thereof. Notwithstanding the
foregoing, no arbitrator shall have the authority to change any of the
obligations of either party.
10. Miscellaneous. (a) All notices, requests, offers, demands and other
communications hereunder shall be in writing and shall be effectively
given or made when mailed by registered or certified mail, return
receipt requested, and directed to the party at the address given herein
or to such address as either party may hereafter designate in writing;
(b) this Agreement is being delivered and executed in the State of New
York and shall be construed in accordance with and governed by its laws;
(c) this Agreement shall be binding upon and inure to the benefit of the
parties hereto, their heirs, executors, successors and assigns and the
Corporation shall cause its obligations hereunder to be assumed by any
person, corporation or other entity (1) resulting from the
reorganization, merger or consolidation of the Corporation with any
other corporation or entity or (2) any corporation or other entity to
which the Corporation may sell all or substantially all of its stock or
assets, (d) this Agreement shall not be assignable by the Executive, (e)
this Agreement constitutes the entire understanding between the parties
hereto and may not be modified, amended, altered or changed except in
writing signed by the parties. To the extent that any provision of this
Agreement conflicts with the Corporation's employee handbook, the
provisions of this Agreement shall govern; (f) if any provision of this
Agreement or the application thereof to any person(s) or circumstance(s)
shall be invalid or unenforceable to any exent, (1) the remainder of
this Agreement and the application of such provision to other person(s)
or circumstance(s) shall not be affected thereby, and (2) each such
provision shall be enforced to the greatest extent permitted by law; (g)
no waiver of any breach or failure to perform the terms, covenants and
conditions of this Agreement shall be binding upon the parties hereto
unless the same shall be in writing and any such waiver shall be for one
time only and shall not be for any future breach or failure to perform
under the terms of this Agreement; (h) preparation of this Agreement has
been a joint effort of the parties and this Agreement shall not be
construed more severly against either party; and (i) it is understood,
agreed and acknowledged by the Executive and the Corporation that any
threatened or actual breach by the other of any of the agreements
contained in this Agreement may cause irreparable damage to the
non-breaching party and that the remedy at law therefor may be
inadequate and that the non-breaching party shall be entitled to
injunctive and other equitable relief (as well as damages, if
applicable) in the case of any threatened or actual breach thereof. The
Corporation may in its sole discretion apply for specific performance
and/or injunctive relief in order to enforce or prevent any violations
of the provisions of Section 5 and 6 of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
K2 DESIGN, INC.
By: /s/ Matthew de Ganon /s/ Lynn Fantom
---------------------------- ------------------------------
E.C. Lynn Fantom, Executive
-8-
<PAGE>
EXHIBIT 10.13
<PAGE>
K2 DESIGN, INC.
30 Broad Street, 16th Floor
New York, NY 10004
November 2, 1998
Matthew de Ganon
375 South End Ave.
New York, NY 10280
Re: Terms of Employment
Dear Matt,
On behalf of the Compensation Committee of the Board of Directors of K2
Design, Inc. (the "Company"), I am pleased to provide this letter to
confirm the terms of the extension of your Employment Agreement with the
Company, dated as of July 16, 1996 (the "Agreement") as follows:
1. The term is hereby extended for an additional 3 years terminating on
December 31, 2001.
2. Effective upon the hiring of the Company's new President and Chief
Executive Officer, your base salary will increase by 20% from the
current $127,500. In addition, on each of January 1, 2000 and 2001 your
base salary will be increased by an additional 20%. You will retain the
title of Executive Chairman of the Board of Directors.
3. You will receive 4 weeks paid vacation annually, and in addition to
your other benefits and perquisites, the Company will also pay for the
automobile and automobile insurance on one car that you own or lease.
4. The reference to December 31, 1998 in Section 6 of the Agreement is
hereby replaced with December 31, 2001.
5. You will have the right to terminate your employment with the Company
upon not less than 30 days' prior written notice subsequent to a change
in control of the Company, in which case your employment thereafter
shall not be restricted by the non-competition provisions of Section 6
of the Agreement.
At my suggestion, in addition to the foregoing terms which you have
requested, the Compensation Committee has agreed to grant you an
additional $10,000 bonus, which is included with this letter, as an
expression of its gratitude for your efforts on behalf of the Company.
Very truly yours,
/s/ Robert V. Burke
----------------------------
Robert V. Burke
Chief Operating Office
AGREED & ACCEPTED ON THIS 2 DAY
OF NOVEMBER, 1998
/s/ Matthew de Ganon
- ------------------------
Matthew de Ganon
<PAGE>
EXHIBIT 10.14
<PAGE>
K2 Design, Inc.
30 Broad Street, 16th Floor
New York, NY 10280
January 15, 1999
Mr. Douglas Cleek
19 Bedford Road
Mahwah, NJ 07430
Re: Extension of Employment
Dear Douglas:
It is my pleasure to let you know that the compensation committee has approved
the following changes to your employment agreement:
1. The term shall be extended for an additional 3 years terminating on December
31, 2001.
2. Effective upon signing your base salary will increase by 20% from the
current $127,500. In addition, on each of January 1, 2000 and 2001 his
base salary will be increased by an additional 20%.
3. You will receive 4 weeks paid vacation annually, and in addition to your
other benefits, the Company will also continue to pay for the automobile you
own (approximately $225 per month).
4. The reference to December 31, 1998 in Section 6 of the Agreement is hereby
replaced with December 31, 2001.
5. You will have the right to terminate your employment with the Company upon
not less than 30 days' prior written notice subsequent to a change in
control of the Company, in which case your employment thereafter would not
be restricted by the non-competition provisions of Section 6 of the
Agreement.
Sincerely,
Sd/-
Matthew de Ganon
Chairman
Agreed to and accepted:
Sd/-
Douglas Cleek
Date:
<PAGE>
EXHIBIT 10.15
<PAGE>
www.k2design.com K2 Design, Inc. A FULL SERVICE INTERACTIVE AGENCY
February 11, 1999
Mr. Seth Bressman
20 Waterside Plaza
Apartment 13E
New York, N.Y. 10016
EMPLOYMENT AGREEMENT
Employment Agreement ("Agreement") dated as of February 1, 1999 between
K2 Design, Inc., a Delaware corporation (the "Company"), and Seth
Bressman (the "Executive").
ARTICLE
EMPLOYMENT
The Company hereby employs the Executive, and the Executive accepts
employment with the Company, upon the following terms and conditions:
Employment. The Company hereby employs the Executive, and the Executive
agrees to serve, as the Chief Financial Officer of the Company and its
subsidiaries (the "Subsidiaries") during the term of this Agreement. Subject to
the direction of the Board of Directors and senior executive officers of the
Company and the Board of Directors and senior executive officers of each
Subsidiary, the Executive shall actively manage, and have responsibility for and
supervision over, the financial activities and affairs of the Company and the
Subsidiaries, and he shall manage, supervise and direct its and their employees
and agents with respect to the finances of the Company and the Subsidiaries. The
Executive agrees to devote his full business time and attention and best efforts
to the affairs of the Company and the Subsidiaries during the term of this
Agreement.
Term. The Employment of the Executive by the Company under the terms and
conditions of this Agreement will commence as of February 1, 1999 and continue
until January 31, 2000 (the "Term") unless terminated sooner in accordance with
the provisions of Article IV. This Agreement shall automatically renew for
successive one year terms (each a "Renewal Term") unless either party hereto
provides the other with written notice of non-renewal at least 60 days prior to
the expiration of the Term or any Renewal Term. Such notice of non-renewal shall
not give rise to any severance payments pursuant to Article IV herein.
ARTICLE
COMPENSATION
Annual Salary. During the Term the Company shall pay to the
Executive an annual salary of $125,000 (the "Base Salary") payable in
equal installments every two weeks or otherwise in conformity to the
Company's payroll practices for employees generally. The Board of
Directors shall review the performance of the Executive annually and
thereafter, at the sole discretion of the Board of Directors, determine
whether the Executive is entitled to an increase in the Base Salary.
Stock Options. The Executive will be eligible to receive grants of
stock options under the Company's Stock Incentive Plan as the Board of
Directors in its sole discretion shall determine.
Reimbursement of Expenses. The Executive shall be entitled to
receive prompt reimbursement of all reasonable expenses incurred by the
Executive in performing services hereunder, including all expenses of
travel, entertainment and living expenses while away from the Company on
business at the request of, or in the
<PAGE>
service of, the Company or any Subsidiary, provided that such expenses are
incurred and accounted for in accordance with the policies and procedures and
approved operating budget established by the Company.
Benefits. The Executive shall be entitled to participate in and be
covered by all health, insurance, pension and other employee plans and benefits
established by the Company (collectively referred to herein as the "Company
Benefit Plans") for its executive employees generally, subject to meeting
applicable eligibility requirements.
Vacations and Holidays. During the Term and any Renewal Term, the
executive shall be entitled to an annual vacation leave of a minimum of three
weeks at full pay. Such vacation leave shall not be cumulative and Executive
shall have no right to receive cash for unused leave. The Executive shall also
be entitled to such holidays as are established by the Company for all employees
and such other religious holidays as is customary pursuant to the Executive's
religious practice.
ARTICLE
CONFIDENTIALITY AND NONDISCLOSURE
Confidentiality. The Executive will not during his employment by the
Company or thereafter at any time disclose, directly or indirectly, to any
person or entity or use, or permit the use of, any trade secrets or confidential
information relating to the Company or any Subsidiary (the "Confidential
Information") except as required by law. "Confidential Information" shall
include, but shall not be limited to, the existence of or terms of any agreement
involving the Company, the terms of any license, marketing, sales or
distribution agreement relating to the Company or its business, trade secrets,
business plans, customer lists, proposals, budgets, reports, memoranda,
financial information, e-mail messages and all information denominated as
"Confidential" or made available only on a restricted basis; provided however,
that "Confidential Information" shall not include information which comes into
the public domain through no fault of the Executive or which the Executive
obtains after the termination of employment with the Company or otherwise from
a third party who, to the knowledge of the Executive, has the right to disclose
such information.
Return of Company Material. The Executive shall promptly deliver to the
Company on termination of the Executive's employment with the Company, for
whatever the reason, or at any time the Company may so request, all Company or
Subsidiary memoranda, notes, records, reports, manuals, drawings, computer
software, and all documents containing Confidential Information relating to or
belonging to the Company (and all copies of the foregoing), including all copies
of such materials which the Executive may then possess or have under the
Executive's control irrespective of the format of such materials.
Non-Competition. During the Term and any Renewal Term (which shall
include any period of employment whether or not such employment is pursuant to a
written agreement) and for a six-month period thereafter (the "Restricted
Period") the Executive will not, directly or indirectly, without the consent of
the Board of Directors of the Company: own, manage, operate, join, control, or
participate in or be connected with, as an officer, employee, partner,
stockholder, director, adviser, consultant, or agent (whether paid or unpaid),
any business, which is at the time engaged in any activities which compete with
the business or proposed business (interactive marketing and communications
services to commercial organizations over the Internet and World Wide Web) of
the Company or any Subsidiary (a "Competitive Business"); the
<PAGE>
foregoing provision being also intended to prohibit the Executive from
acquiring or holding in excess of 2% of any issue of stock or securities
of any Company which has any securities listed on a national securities
exchange or quoted in the daily listing of over-the-counter market
securities. The provisions of this Section 3.3 shall be automatically
operative and there shall be deemed to have been received by the
Executive valuable consideration under this Agreement; provided,
however, that in the event of termination of the valuable consideration under
this Agreement; provided, however, that in the event of termination of
the Executive's employment by the Company without Cause or by the
Executive for Good Reason (both as hereinafter defined), the provisions
of this Section 3.3 shall only be operative if, and for so long as the
Company, at its option (and without obligation), pays the Executive
monthly in advance an amount equal to one-twelfth of the annual Base
Salary for a maximum period of six months from the date of termination.
Non-Solicitation. During the Term and any Renewal Term (whether or
not the Executive continues to be employed by the Company during the
Term) and any additional period during which the Executive may be
employed by the Company (whether or not such employment shall be
pursuant to written agreement) and for a one year period thereafter,
Executive shall not without the express prior written approval of the
Board of Directors of the Company directly or indirectly, in one or a
series of transactions, recruit, solicit or otherwise induce or
influence any proprietor, partner, stockholder,lender, director,
officer, employee, sales agent, joint venturer, investor, lessor,
supplier, customer, consultant, agent, representative or any other
person which has a business relationship with the Company to
discontinue, reduce or modify such employment, agency or business
relationship with the Company, or induce or solicit to employ or cause
any Competitive Business or any other person or entity to induce or
solicit to employ any person or agent who is then (or was at any time
within one year prior to the date the Executive or the Competitive
Business employs or seeks to employ such person) engaged or retained by
the Company.
Right to Injunctive and Equitable Relief. As a result of the
Executive's position as an executive officer of the Company, the
Executive's obligations not to disclose or use Confidental Information
and to refrain from the activities described in this Article III are of
a special and unique character which gives them a peculiar value, and
which is supported by valuable consideration. The Company cannot be
reasonably or adequately compensated in damages in an action at law in
the event the Executive breaches such obligations. Therefore, the
Executive expressly agrees that the Company shall be entitled to
injunctive and other equitable relief wihtout bond or other security in
the event of such breach in addition to any other rights or remedies
which the Company may possess. Furthermore, the obligations of the
Executive and the rights and remedies of the Company under this Article
III are cumulative and in addition to, and not in lieu of, any
obligations, rights, or remedies created by applicable law relating to
misappropriation or theft of trade secrets or confidential information.
ARTICLE
TERMINATION
Termination by the Company. The Board of Directors may terminate
the Executive's employment hereunder as follows:
Upon the death of the Executive, whereupon this
Agreement shall immediately terminate;
Upon a determination of Permanent Disability; "Permanent
Disability" shall mean a physical or mental incapacity as a
result of which the Executive becomes totally unable to
continue the performance of his duties hereunder for a
period of 90 consecutive days or an aggregate
<PAGE>
of 120 days in any 12 month period. A determination of Permanent Disability
shall be subject to the certification of a qualified medical doctor
agreed to by the Company and the Executive or, in the event of the
Executive's incapacity to designate a doctor, the Executive's legal
representative. In the absence of agreement between the Company and the
Executive, each party shall nominate a qualified medical doctor and the
two doctors so nominated shall select a third doctor, who shall make the
determination as to the occurrence and continuance of a Permanent
Disability; or
For cause. "Cause" shall mean only the following:
the willful failure by the Executive to follow the reasonable
directions of the Board not inconsistent with this Agreement (other
than such failure resulting from the Executive's incapacity due to
physical or mental illness);
willful misconduct by the Executive that adversely affects the
Company; indictment relating to a commission of a felony or the
entry of a guilty plea or plea of nolo contendre to a crime or
offense other than misdemeanors or minor traffic violations;
willful theft from the Company;
a willful violation of any law, rule or regulation, or the
imposition of a final order issued by any regulatory authority
against the Executive or the Company, which, in any event, prohibits
the Executive from holding an executive position with the Company
or any Subsidiary;
the Executive's habitual drunkenness or use of illegal substances;
or
the Executive fails to perform or breaches any term or provision of
this Agreement in any material part.
For purposes of this Agreement, no act, or failure to act, on the
Executive's part shall be considered "willful" unless done, or
omitted to be done, by the Executive in bad faith and without a
reasonable belief that such action or omission by the Executive was
in the best interests of the Company, and no termination by the
Company for "Cause" shall be effective unless the Executive shall
have been given written notice of the breaches of this Section
4.1(c) and a period of 10 days within which to cure any such breach
provided that such curative period shall be permitted only once in any
12 month period, or if not curable, the Executive shall be given,
within 10 days after the giving of such notice of breach of this Section
4.1(c) by the Company, an opportunity to make a presentation to the
Board at a meeting of the Board. Following such meeting, the Board shall
determine whether to terminate the Executive's services for "Cause"
pursuant to this Section 4.1(c) and shall notify the Executive of its
decision.
Termination by Executive for Good Reason. The Executive may terminate
his employment hereunder for Good Reason. For purposes of this
Agreement, the term "Good Reason" shall mean and shall be deemed to
exist if, without the prior written consent or written waiver of the
Executive, the Executive is asked by the Company to take actions that
are inconsistent in any material respect with this Agreement or the
Executive's obligations to the public stockholders or regulatory
agencies or in violation of applicable law, the Company fails to
substantially perform any material term or
<PAGE>
provision of this Agreement, the Executive's office location
is relocated to one that is more than fifty (50) miles from
the location at which the Executive was based immediately
prior to the relocation, or the Company fails to obtain the
full assumption of this Agreement by a successor entity
(whether as a result of merger, reorganization or
otherwise). Termination by the Executive pursuant to this
Section 4.2 shall be effective on the date that is 30 days
after the Executive first provides written notice to the
Board of the events specified in this Section 4.2(i-iv),
unless earlier cured by the Company.
Severance Payments.
Termination for Cause. In the event of termination pursuant
to Section 4.1(c), the Executive shall receive no severance,
and shall be entitled to receive, in lieu of any other
payments or benefits, his accrued but unpaid salary at the
rate provided in Section 2.1 (as increased from time to time
by the Board), plus any amounts earned but unpaid for any
prior completed fiscal or calendar year and any reimbursable
expenses incurred prior to the date of termination
(collectively, the "Accrued Obligations"). In addition, all
stock options, whether or not vested, shall be deemed
terminated as of the date of termination of employment.
Termination as a Result of Death. In the event of
termination pursuant to Section 4.1(a), the Executive's
estate or beneficiaries, as the case may be, shall be
entitled to receive, in addition to any other payments or
benefits hereunder, (i) the proceeds from any insurance
policies paid for by the Company in favor of the Executive's
estate or beneficiaries, and (ii) any Accrued Obligations.
Such amounts shall be paid promptly in a lump sum in cash.
In addition, all options that are unvested at the date of
termination shall vest, and the restriction on any options
or stock held by the Executive shall terminate.
Termination Without Cause or For Good Reason. In the event
of termination by the Company without Cause or by the
Executive for Good Reason, the Executive shall be entitled
to receive (i) any Accrued Obligations plus (ii) an amount
equal to the greater of (A) the remaining annual Base Salary
during the Term or any Renewal Term, as the case may be or
(B) $100,000 (each of the amounts in subclauses (i) and (ii)
payable, at the election of Executive, either (x) in a lump
sum in cash within 30 days after the date of termination)
or (y) over a period of six months in accordance with the
regular payroll practices of the Company, (iii)
continuation, at the Company's expense, if allowable by law,
of any group health plan (which may be provided by payment
of COBRA continuation coverage premiums), in effect on the
Executive's date of termination for a period of twelve
months following such date of termination (unless covered
under any health plan of a spouse or subsequent employer)
and (iv) all options held by the Executive shall
automatically vest, and the restriction on any options or
stock held by the Executive shall terminate.
Voluntary Termination. If the Executive shall voluntarily
resign for other than Good Reason, he shall be entitled only
to Accrued Obligations through the effective date of such
resignation or voluntary termination, and that any such
amounts shall be promptly paid in a lump sum in cash. In
addition, all stock options not vested shall be deemed
terminated as of the date of termination of employment.
Termination due to Permanent Disability. If the Executive's
employment hereunder is terminated as a result of Permanent
Disability, in lieu of any other payments or benefits (other
than any such disability benefits he may receive), he shall
be paid a single lump sum in cash within thirty (30) days of
the date of his termination, an amount equal to (i) all
Accrued Obligations, plus (ii) all unpaid salary, whether or
not accrued, remaining through the Term or Renewal Term, as
the case may be. In addition the unvested
<PAGE>
portion of any options held by the Executive on such date
shall vest, and any restrictions on any options or stock
held by the Executive shall terminate.
General Release. Prior to the Executive's receipt of any
severance payment under this Section 4.3, the Executive (or
his estate or legal representative) shall issue a general
release to the Company in such form as the Company may
reasonably require, which shall extinguish all actual or
potential claims or causes of action he has, may have had,
or thereafter may have against the Company.
Other Payments Upon Termination. If notice of termination of
the Executive is given by the Executive or the Company, the
Executive shall continue to receive his Base Salary (as
increased from time to time by the Board) and benefits as
provided in Article II until the date of termination, and
shall also be entitled to reimbursement for reimbursable
expenses as set forth in Section 2.3.
Company's Option to Terminate Executive after Notice of
Termination. The Company, or, if notice is given by the
Company, the Executive, may, at any time during the period
after notice of termination by the Executive or the Company
and before the date of termination specified in the notice
given in accordance with Section 4.1 or Section 4.2, as the
case may be (the "Notice Period"), elect to terminate this
Agreement and the Executive's employment hereunder
immediately. In such event the Company shall pay the
Executive an amount equal to all Accrued Obligations he
would have received or been entitled to for the duration of
the Notice Period at the rate provided in Article II. Such
amounts shall be paid within thirty (30) days after the
election pursuant to this Section 4.3(h). Nothing contained
in this Section 4.3(h) shall be deemed to reduce in any way
amounts due to the Executive pursuant to any other term or
provision of this Article IV.
ARTICLE
ASSUMPTION OF OBLIGATIONS BY SUCCESSOR TO COMPANY
Merger etc.; Change of Control
In the event of a future disposition of the properties and
business of the Company substantially as an entirety by
merger, consolidation, sale of assets, tender offer,
reorganization or otherwise (each a "Change of Control
Event"), then the Company may elect:
to assign this Agreement and all of its rights and
obligations hereunder to the acquiring, surviving or
reorganized entity; provided that such entity shall assume
in writing all of the obligations of the Company hereunder;
and provided further, that the Company (in the event and so
long as it remains in existence) shall remain liable for the
performance of its obligations hereunder in the event of a
breach of this Agreement by the acquiring, surviving or
reorganized entity; or in addition to its other rights of
termination, to terminate this Agreement upon at least 30
days' written notice and by paying the Executive, upon the
Executive's execution of a general release of claims, an
amount equal to (A) all Accrued Obligations plus (B) the
greater of (1) the remaining annual Base Salary during the
Term or a Renewal term, as the case may be, or (2) $100,000;
all such amounts pursuant to subclauses (A) and (B) shall be
payable, at the option of Executive, either (x) in a single
lump sum within 30 days after the date of termination or (y)
over a period of six months in accordance with the regular
payroll practices of the Company. In addition, upon the date
of termination hereunder, (A) all options which the
Executive then holds which are not vested shall immediately
vest, (B) the restrictions on any stock held by the
Executive shall terminate, (C) the Executive, at the
Company's expense, if allowable by law, shall continue to be
a participant in the Company's group health plan (which may
be provided by payment of the COBRA continuation coverage
premiums) maintained by the Company at the level in effect
on the Executive's date of termination for a period of
twelve months following his date of termination (unless
covered under any health plan of a spouse or subsequent
employer).
Notwithstanding the Company's election pursuant to Section
5.1(a) and in addition to any payments pursuant to such
Section 5.1(a), in the event of a Change of Control Event,
(i) so long as the Executive does not voluntarily resign his
employment with the Company or its successor for other than
Good Reason for a period of 30 days following the Change of
Control Event, the Executive shall receive $25,000 in a
single lump sum immediately following such 30 day period,
and (ii) so long as the Executive does not voluntarily
resign his employment with the Company or its successor for
other than Good Reason for a second period of 30 days
following the Change of Control Event (i.e., a total of 60
days), the Executive shall receive a second $25,000 in a
single lump sum immediately following such second 30 day
period. In the event that the Executive's employment with
the Company or its successor is terminated by the Company or
such successor for any reason or by the Executive for Good
Reason prior to the time either of the two payments set
forth above is made, or for any reason this Agreement is not
assumed by the Company's successor, then the entire amount
of such payments under this Section 5.1(b), to the extent
not already paid, shall be immediately due and payable.
For purposes of this Agreement, a "Change of Control Event"
does not include the sale of up to 50% of the voting equity
of the Company.
ARTICLE
GENERAL PROVISIONS
Notice. For purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be
in writing and shall be deemed to have been duly given when
delivered or mailed by United States registered mail, return
receipt required, postage prepaid, as follows:
If to the Company:
K2 Design, Inc.
30 Broad Street, 16th Floor
New York, New York 10003
Attn: Chairman, Compensation Committee of the Board of
Directors
If to Executive:
Seth Bressman
20 Waterside Plaza, 13E
New York, New York 10010
or such other address as either party may have furnished to
the other in writing in accordance herewith, except that
notices of change of address shall be effective only upon
receipt.
No waivers. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or
discharge is agreed to in writing signed by the Executive
and the Company. No
<PAGE>
waiver by either party hereto at any time or any breach by the
other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party
shall be deemed a waiver or similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
No Mitigation. In the event of the termination of
Executive's employment for any reason, he shall be under no
obligation to seek other employment and there shall be no offset
against any amounts due the Executive hereunder on account of
any remuneration the Executive may obtain from any subsequent
employment.
Governing Law. This Agreement shall be deemed to have been
made a fully performed in the State of New York and shall be
governed by and construed in accordance with the laws of the
State of New York without regard to conflict of law rules
thereof. Any action, suit or proceeding arising out of, or in
connection with, this Agreement shall be adjudicated in a court
of competent jurisdiction located in New York County, state of
New York. The parties hereto unconditionally waive any objection
which either of them may now or hereafter have to the
establishment of venue as aforementioned or that any action, suit
or proceeding has been brought in an inconvenient forum.
Severability or Partial Invalidity. The invalidity or
unenforceability of any provisions of this Agreement shall not
affect the validity or enforceability of any other provision of
this Agreement, which shall remain in full force and effect.
Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but
all of which together will constitute one and the same
instrument.
Entire Agreement. This Agreement constitutes the entire
agreement of the parties and supersedes all prior written or oral
and all contemporaneous oral agreements, understanding, and
negotiations between the parties with respect to the subject
matter hereof. This Agreement is intended by the parties as the
final expression of their agreement with respect of such terms as
are included in this agreement and may not be contradicted by
evidence of any prior as contemporaneous agreement. The parties
further intend that this Agreement constitutes the complete and
exclusive statements of its terms and that no extrinsic evidence
may be introduced in any judicial proceeding involving this
Agreement.
Assignment. Subject to the provisions of Article V hereof,
this Agreement and the rights, duties and obligations hereunder
may not be assigned or delegated by any party without the prior
written consent of the other party. Any such assignment or
delegation without the prior written consent of the other party
shall be void and be of no effect. Notwithstanding the foregoing
provisions of this Section 6.8, the Company may assign or
delegate its rights, duties and obligations hereunder to any
person or entity which succeeds to all or substantially all of
the business of the Company through merger, consolidation,
reorganization, or other business combination or by acquisition
of all or substantially all of the assets of the Company or
otherwise; provided that such person assumes the Company's
obligations under this Agreement in accordance with Section 5.1.
Beneficial Interests. This Agreement shall inure to the
benefit of and be enforceable by the Executive's personal and
legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. If the Executive
should die while any amounts are still payable to him hereunder,
all such amounts, unless otherwise provided herein, shall be paid
in accordance with the terms of this
<PAGE>
Agreement to the Executive's devisee, legatee, or other designee, if there be no
such designee, to the Executive's estate.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
K2 DESIGN, INC.
A Delaware corporation
By: /s/ Matthew de Ganon
-------------------------
Name: M. de Ganon
Title: Chairman
EXECUTIVE
/s/Seth Bressman
-----------------
Seth Bressman
<PAGE>
EXHIBIT 10.16
<PAGE>
LEASE TERMINATION AGREEMENT
THIS AGREEMENT made as of this 23rd day of December, 1998,
by and between Merritt-HA L.L.C. (hereinafter called
"Landlord") and K2 Design, Inc. (hereinafter called
"Tenant".
EXPLANATORY STATEMENT
By Lease Agreement (hereinafter called the "Lease")
dated November 6, 1996, Scarlet Harbor Associates Limited
Partnership leased to Tenant, and the latter rented from the
former, certain premises within the building known as 200 S.
President St., 9th Floor, Baltimore, MD 21202 in Baltimore
City, Maryland for the term ending November 30, 1999.
Subsequently, the interest of Merrit under the Lease was
assigned to Merritt-HA, L.L.C. Tenant has requested that
Landlord terminate the Lease under the terms and conditions
hereinafter set forth, which Landlord has agreed to do.
NOW, THEREFORE, THIS AGREEMENT WITNESSETH that for
and in consideration of the covenants and agreements herein
contained, the parties hereto hereby covenant and agree as
follows:
1. Simultaneously with the execution of this
Agreement Tenant has paid Landlord the sum of Two Thousand
Five hundred and Five Dollars and No Cents ($2,505.00)
(hereinafter called the "termination fee") as consideration
for Landlord's agreement to terminate the Lease as
hereinafter provided.
2. The Lease shall terminate on the thirty-first
day of December 1998, (hereinafter called the "termination
date"). Tenant covenants and agrees to vacate and surrender
the premises on or before the termination date, to leave the
premises in a broom-clean condition, and to surrender all
keys to Landlord on or before the termination date.
<PAGE>
3. Notwithstanding such termination, Tenant shall continue
to be liable for all rentals and other payments required of
Tenant under the Lease up to and including the termination
date. The termination fee referred to in paragraph 1 hereof
shall not be credited against or deducted from any rentals
or other payments due by Tenant under the Lease up to and
including the termination date.
4. All rents and other payments due by Tenant under the
Lease shall be adjusted and apportioned as of the
termination date. If Tenant's liability for any payments due
under the Lease, such as water or other similar payments,
cannot be determined as of the termination date, Tenant
shall remain liable for same and shall make payment thereof
within ten (10) days after written notice from Landlord
specifying the exact amount due.
5. Landlord's agreement to terminate the Lease and to
release Tenant from its obligations thereunder, as set forth
in this Agreement, is specifically contingent upon Tenant's
acknowledgement that it shall remove all of its property
from the Premises prior to the termination date, and that
any personal property remaining in the Premises as of the
termination date shall be deemed abandoned by Tenant, such
that the Landlord shall have the right to dispose of any
such personal property in any manner that it sees fit,
without any liability to Landlord for such disposition.
6. The execution of this agreement is contingent upon Motta
& Associates, Inc. executing a Lease Agreement with
Merrit-HA, LLC for the premises known as 200 S. President
St., 9th Floor, Baltimore, MD 21202.
7. The Provisions of the Lease regarding the security
deposit shall survive this Termination Agreement.
IN WITNESS WHEREOF the parties hereto have executed the
within Agreement as of the day and year first above written.
WITNESS:*
K2 Design Inc.
/s/ Seth Bressman
BY: s/s Steve
(SEAL)
Tenant
*Merrit-HA, LLC
BY: Merrit Management Corporation, AGENT
/s/ Robert Burke
BY: /s/ Scott Dorsey
(SEAL)
Vice President Landlord
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,829,628
<SECURITIES> 0
<RECEIVABLES> 294,173
<ALLOWANCES> 25,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,217,099
<PP&E> 1,465,202
<DEPRECIATION> 719,814
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0
0
<COMMON> 36,928
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<CGS> 2,595,564
<TOTAL-COSTS> 8,213,415
<OTHER-EXPENSES> (25,854)
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<INTEREST-EXPENSE> 28,575
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<INCOME-CONTINUING> (1,671,814)
<DISCONTINUED> (85,309)
<EXTRAORDINARY> 2,994,204
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