<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
/_/ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File No. 1-11873
K2 DESIGN, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
13-3886065
(I.R.S. Employer
Identification Number)
30 Broad Street, 16th Floor
New York, New York 10004
(Address of principal executive offices)
Issuer's telephone number: (212) 301-8800
Check whether the issuer (1) filed all reports required by Section 13 or 15(d)
of the Exchange Act during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes /X/ No /_/
Applicable only to Corporate Issuers:
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
CLASS OUTSTANDING AT AUGUST 13, 1999
----- -------------------------------
Common stock, par value $.01 per share 3,490,310
Common stock redeemable purchase warrants 1,000,000
Transitional Small Business Disclosure Format (check one):
Yes /_/ No /X/
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
Page
PART 1 - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated balance sheet - June 30, 1999 (unaudited)...................................................3
Consolidated statements of operations - three months and six months ended
June 30, 1999 (unaudited) and June 30, 1998 (unaudited).............................................4
Consolidated statements of cash flows - six months ended
June 30, 1999 (unaudited) and June 30, 1998 (unaudited).............................................5
Notes to consolidated financial statements...............................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................................................8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.........................................................................11
SIGNATURES.......................................................................................................12
</TABLE>
2
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 1999
(unaudited)
--------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,913,132
Accounts receivable, net of allowance for doubtful accounts of $75,000 508,234
Unbilled revenue 38,747
Prepaid expenses and other current assets 87,579
---------------------
Total current assets 3,547,692
Investment in restricted securities 1,907,300
Fixed assets, net 599,572
Restricted cash 150,711
Other assets 5,231
---------------------
Total assets $ 6,210,506
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 27,250
Accounts payable 328,367
Accrued compensation and payroll taxes 75,186
Deferred revenue 1,594
Other accrued expenses 702,058
Customer advances 91,321
---------------------
Total current liabilities 1,225,776
Long-term capital lease obligations 25,693
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized; --
0 shares issued and outstanding
Common stock, $0.01 par value 9,000,000 shares authorized;
3,734,560 shares issued and 3,488,310 shares outstanding 37,346
Treasury Stock, 246,250 shares at cost (386,781)
Additional paid-in capital 6,563,865
Accumulated deficit (1,255,393)
---------------------
Total stockholders' equity 4,959,037
---------------------
Total liabilities and stockholders' equity $6,210,506
=====================
</TABLE>
3
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- -------------------------------
June 30, June 30,
-------- --------
1999 1998 1999 1998
--------------- -------------- --------------- --------------
(unaudited) (unaudited)
-------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 822,143 $ 1,895,232 $ 2,266,206 $ 4,035,614
Direct salaries and costs 718,456 1,202,492 2,131,347 2,668,093
Selling, general and administrative expenses 719,197 686,894 1,351,741 1,221,114
Depreciation 103,795 88,271 199,805 177,279
--------------- -------------- --------------- --------------
Loss from continuing operations before interest and other (719,305) (82,425) (1,416,687) (30,872)
income, net, income taxes and discontinued operations, net
Interest and other income, net 1,554,856 21,378 1,580,082 58,984
--------------- -------------- --------------- --------------
Income (loss) before income tax provision and discontinued 835,551 (61,047) 163,395 28,112
operations
Provision for income taxes 47,876 -- 57,201 2,437
--------------- -------------- --------------- --------------
Income (loss) from continuing operations 787,675 (61,047) 106,194 25,675
Loss from discontinued operations -- (36,504) -- (85,309)
Gain from sale of discontinued operations -- 3,102,123 -- 3,102,123
--------------- -------------- --------------- --------------
Net income $ 787,675 $ 3,004,572 $ 106,194 $ 3,042,489
=============== ============== =============== ==============
Income (loss) per share from continuing operations
Basic $ 0.23 $ (0.02) $ 0.03 $ 0.01
--------------- -------------- --------------- --------------
Diluted $ 0.21 $ (0.02) $ 0.03 $ 0.01
--------------- -------------- --------------- ---------------
Loss per share from discontinued operations
Basic $ -- $ (0.01) $ -- $ (0.02)
--------------- -------------- --------------- --------------
Diluted $ -- $ (0.01) $ -- $ (0.02)
--------------- ------------- -------------- --------------
Gain from sale of discontinued operations
Basic $ -- $ 0.87 $ -- $ 0.85
--------------- -------------- --------------- --------------
Diluted $ -- $ 0.87 $ -- $ 0.81
--------------- -------------- -------------- --------------
Net income per share
Basic $ 0.23 $ 0.84 $ 0.03 $ 0.84
--------------- -------------- --------------- --------------
Diluted $ 0.21 $ 0.84 $ 0.03 $ 0.80
--------------- -------------- --------------- --------------
Weighted average basic common shares outstanding $ 3,483,620 $ 3,585,671 $ 3,471,480 $ 3,633,171
=============== ============== =============== ==============
Weighted average diluted common shares outstanding $ 3,766,210 $ 3,585,671 $ 3,762,918 $ 3,783,141
=============== ============== =============== ==============
</TABLE>
4
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the six months ended
June 30,
1999 1998
---- ----
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 106,194 $ 3,042,489
Gain from sale of securities (1,522,500) -
Net gain from sale of discontinued operation - (3,102,123)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Recognition of deferred compensation - 51,641
Non-cash compensation expense 130,944 -
Depreciation 199,805 177,279
Changes in -
------------
Accounts receivable (239,061) 2,265,662
Prepaid and other current assets 19,491 46,516
Unbilled revenue (27,519) (77,515)
Other assets 3,941 701
Accounts payable (454,849) (1,090,077)
Accrued compensation and payroll taxes (21,456) (86,274)
Accrued taxes (73,681) -
Other accrued expenses (224,160) 204,668
Deferred revenue 1,594 (539,064)
Customer advances 40,033 6,446
--------------- ---------------
Net cash provided by
Operating activities (2,061,224) 900,349
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of discontinued operation - 1,024,307
Gross proceeds from sale of investment securities 2,173,500 -
Purchase of equipment (16,734) (39,420)
--------------- ---------------
Net cash provided by (used in)
Investing activities 2,156,766 984,887
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital lease obligations (16,413) (40,918)
Options exercised 4,375 -
Purchase of treasury stock - (75,266)
--------------- ---------------
Net cash used in financing
activities (12,038) (116,184)
--------------- ---------------
Net increase in cash and cash equivalents 83,504 1,769,052
CASH AND CASH EQUIVALENTS, beginning of period 2,829,628 2,242,988
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 2,913,132 $ 4,012,040
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for
Interest $ 9,156 $ 37,690
=============== ===============
Income taxes $ 71,001 $ -
=============== ===============
SUPPLEMENTAL DISCLOSURES OF NONCASH
AND FINANCING ACTIVITIES
Assets acquired under capital lease obligations $ 37,255 $ -
=============== ===============
</TABLE>
5
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 1999
1. ORGANIZATION AND BUSINESS
-------------------------
K2 Design, Inc. ("K2" or the "Company") commenced operations on March 1, 1993
as a partnership. In January 1995 the Partnership contributed its capital into
a newly formed corporation and elected S Corporation status.
Effective January 1, 1996, the Company was reorganized as a Delaware C
corporation having a wholly owned operating subsidiary incorporated in New
York. The Company is authorized to issue 9,000,000 shares of common stock, par
value $.01 per share, and 1,000,000 shares of preferred stock, par value $.01
per share.
K2 is a full service interactive communications, design and technology
company, engaged primarily in the business of interactive advertising.
Discontinued Operations
- -----------------------
On June 1, 1998, the Company sold its CLIQNOW! Division to 24/7 Media, Inc.
("TFSM"). As a result of this sale, the Consolidated Statements of Operations
for the three and six months ended June 30, 1998 reflect the CLIQNOW! Division
as a discontinued operation and show income from discontinued operations
separately.
Investment in 24/7 Media, Inc. Stock
- ------------------------------------
As of June 30, 1999, K2 Design, Inc. owned 146,492 shares of common stock of
TFSM. As of that date, the basis of this stock on the books of the Company was
$1,907,300 or approximately $13.02 per share. On May 3, 1999, the Company sold
50,000 shares of common stock of TFSM for proceeds of $2,173,500 resulting in
a gain of $1,522,500. On July 26, 1999, the 146,492 shares of common stock of
TFSM owned by K2 Design, Inc. became freely tradable.
2. BASIS OF PRESENTATION
---------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company and reflect all adjustments, consisting of only
normal recurring adjustments, which are, in the opinion of management,
necessary for a fair presentation of financial results for the three-month and
six-month periods ended June 30, 1999 and 1998, in accordance with generally
accepted accounting principles for interim financial statements and pursuant
to Form 10-QSB and Regulation S-B. Certain information and footnote
disclosures normally included in the Company's annual audited consolidated
financial statements have been condensed or omitted pursuant to such rules and
regulations.
The results of operations for the three and six month periods ended June 30,
1999 and 1998 are not necessarily indicative of the results of operations to
be expected for a full fiscal year. These interim condensed consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements for the fiscal year ended December 31, 1998,
which are included in the Company's Annual Report on Form 10-KSB filed with
the Securities and Exchange Commission.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and revenues and expenses during
the reporting periods. Actual results may differ from those estimates.
6
<PAGE>
3. NET INCOME (LOSS) PER SHARE OF COMMON STOCK
-------------------------------------------
SFAS 128, "Earnings per Share" establishes standards for computing and
presenting earnings per share (EPS). The standard requires the presentation of
basic EPS and diluted EPS. Basic EPS is calculated by dividing income
available to common stockholders by the weighted average number of shares of
common stock outstanding during the period. Diluted EPS is calculated by
dividing income available to common stockholders by the weighted average
number of shares of common stock outstanding adjusted to reflect potentially
dilutive securities.
In accordance with SFAS 128, the following table reconciles net income (loss)
and share amounts used to calculate basic and diluted income (loss) per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator: Net Income $ 787,675 $ 3,004,572 $ 106,194 $ 3,042,489
============ =========== ============ =============
Denominator: Weighted average number
of common shares outstanding - Basic 3,483,620 3,585,671 3,471,480 3,633,171
Incremental shares of outstanding stock
options 282,590 - 291,438 149,970
------------ ----------- ------------ -------------
Weighted average number of common
shares outstanding - Diluted 3,766,210 3,585,671 3,762,918 3,783,141
============ =========== ============ =============
Net income per share
Basic $ 0.23 $ 0.84 $ 0.03 $ 0.84
Diluted $ 0.21 $ 0.84** $ 0.03 $ 0.80
</TABLE>
**Excludes outstanding stock options of 468,700 as of June 30, 1998 as they
are antidilutive. Total outstanding stock options on June 30, 1999 and
June 30, 1998 were 617,450 and 468,700, respectively.
On June 16, 1999, the stockholders of the Company voted on and approved an
amendment increasing to 900,000 the number of shares of common stock subject
to stock options issuable under the Company's 1997 Stock Incentive Plan.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following presentation of management's discussion and analysis of the
Company's financial condition and results of operations should be read in
conjunction with the Company's Consolidated Financial Statements, the
accompanying notes thereto and other financial information appearing elsewhere
in this Report. This section and other parts of this Report contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Readers are encouraged to review "Factors
Affecting Operating Results and Market Price of Stock" commencing on page 14
of the Company's 1998 Annual Report on Form 10-KSB for a discussion of these
risks and uncertainties.
General
The Company is a full-service interactive marketing and communications
company. The Company 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 user characteristics, development and maintenance of
Company-owned Web site advertising networks, live Internet broadcasts and
offline media services.
Revenues are recognized on a percentage of completion basis, and to a lesser
extent on a time and materials basis. Provisions for any estimated losses on
uncompleted projects are made in the period in which such losses are
determinable. Most of the Company's revenues have been generated on a fixed
fee or cap fee basis. The Company also provides ongoing services to certain
customers.
On June 1, 1998, the Company sold its CLIQNOW! Division to 24/7 Media, Inc.
("TFSM"). As a result of this sale, the Consolidated Statements of Operations
reflect the CLIQNOW! Division as a discontinued operation and show loss from
discontinued operations and the gain from the sale of discontinued operations
separately. The Company's operating results from continuing operations for the
periods discussed herein are not necessarily representative of future periods.
<TABLE>
<CAPTION>
Percentage of Revenues
----------------------
For the Three Months Ended For the Six Months Ended
------------------------------ -------------------------------
June 30, June 30,
-------- --------
1999 1998 1999 1998
-------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C>
Revenues: 100.00% 100.00% 100.00% 100.00%
Operating Expenses:
Direct salaries and costs 87.39% 63.45% 94.05% 66.11%
Selling, general and administrative 87.48% 36.24% 59.65% 30.26%
Depreciation 12.62% 4.66% 8.81% 4.39%
Total operating expenses 187.49% 104.35% 162.51% 100.76%
Loss from continuing operations before interest and
other income, net, income taxes and discontinued operations (87.49)% (4.35)% (62.51)% (0.76)%
Interest and other income, net 189.12% 1.13% 69.72% 1.46%
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Income (loss) before income tax provision
and discontinued operations 101.63% (3.22)% 7.21% 0.70%
Provision for income taxes 5.82% -- 2.52% 0.06%
Income (loss) from continuing operations 95.81% (3.22)% 4.69% 0.64%
Loss from discontinued operations - (1.93)% - (2.11)%
Gain from sale of discontinued operations - 163.68% - 76.86%
Net income 95.81% 158.53% 4.69% 75.39%
</TABLE>
RESULTS OF OPERATIONS
Revenues
Revenues for the three months ended June 30, 1999 and 1998 were approximately
$822,000 and $1,895,000, respectively, or a decrease of approximately 56.6%,
due to a decrease in client sales volume in the current period. During the
three months ended June 30, 1999, Standard & Poor's, NCR Corporation and
VarsityBooks.com, Inc. had accounted for approximately 32%, 28% and 15%,
respectively, of the Company's gross revenues. During the three months ended
June 30, 1998, Standard & Poor's had accounted for approximately 18% of the
Company's gross revenues.
Revenues for the six months ended June 30, 1999 and 1998 were approximately
$2,266,000 and $4,035,000, respectively, or a decrease of approximately 43.8%,
due to a decrease in sales volume in the current period. During the six months
ended June 30, 1999, VarsityBooks.com, Inc., Standard & Poor's and NCR
Corporation accounted for approximately 45%, 20% and 18%, respectively, of the
Company's gross revenues. During the six months ended June 30, 1998, Standard
& Poor's, Bell Atlantic and Planet Direct, Inc. accounted for approximately
21%, 10% and 8%, respectively, of the Company's gross revenues.
Although the Company has increased its efforts to maintain and enhance client
relationships, loss of major clients without a comparable replacement could
cause quarterly results to fluctuate and could have a material adverse effect on
the Company's financial condition. See "Fluctuations in Quarterly Operating
Results."
Direct Salaries and Costs
Direct salaries and costs include media costs, 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 for the three
months ended June 30, 1999 as compared to the same period in 1998. Part of the
reason for this increase is due to the 56.6% decrease in sales during the
three months ended June 30, 1999 as compared to the same period in 1998, with
direct salaries remaining approximately the same for both periods. In absolute
dollars, direct salaries and costs decreased by approximately $484,000 from
approximately $1,202,000 for the 1998 quarter to approximately $718,000 for
the 1999 quarter. In the 1999 period, direct salaries and costs consisted
primarily of approximately $127,000 of media placement costs, $422,000 of
direct labor costs and $169,000 in other direct expenses. In the 1998 period,
direct salaries and costs consisted primarily of approximately $500,000 of
media placement costs, $438,000 of direct labor costs and $264,000 in other
direct expenses. The decrease in media placement costs in the 1999 period is
due primarily to reduction in media placement services during that period.
Other direct expenses in the 1999 period were due to reduction in bad debt
expenses during that period.
As a percentage of revenues, direct salaries and costs increased for the six
months ended June 30, 1999 as compared to the same period in 1998. Part of the
reason for this increase is due to the 43.8% decrease in sales during the six
9
<PAGE>
months ended June 30, 1999 as compared to the same period in 1998, with direct
salaries remaining approximately the same for both periods. In absolute
dollars, direct salaries and costs decreased by approximately $537,000 from
approximately $2,668,000 for the six months ended June 30, 1998 to
approximately $2,131,000 for the six months ended June 30, 1999. In the 1999
period, direct salaries and costs consisted primarily of approximately
$1,046,000 of media placement costs, $838,000 of direct labor costs and
$247,000 in other direct expenses. In the 1998 period, direct salaries and
costs consisted primarily of approximately $1,434,000 of media placement
costs, $840,000 of direct labor costs and $394,000 in other direct expenses.
The large decrease in media placement costs during the 1999 period is due
primarily to a reduction in media placement services during that period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of labor costs,
professional fees, occupancy costs, travel, office expenses and supplies and
marketing and advertising, among other things, and for the three months ended
June 30, 1999 and 1998 were approximately $719,000 (87.5% of revenues) and
$687,000 (36.2% of revenues), respectively, and for the six months ended June
30, 1999 and 1998 were approximately $1,352,000 (59.7% of revenues) and
$1,221,000 (30.3% of revenues), respectively. The Company's selling, general
and administrative costs have increased in both periods due to increased
compensation costs as well as increased public and investor relations and new
business printing costs, reflecting the Company's increased new business
efforts.
Depreciation
Depreciation expense was approximately $104,000 (12.6% of revenues) and
$88,000 (4.7% of revenues) in the three months ended June 30, 1999 and 1998,
respectively, and related to depreciation of equipment, furniture and
fixtures, and leasehold improvements. For the six months ended June 30, 1999
and 1998, depreciation expense was approximately $200,000 (8.8% of revenues)
and $177,000 (4.4% of revenues) respectively. The Company's depreciation
expenses in 1999 have increased as a result of recent acquisitions of computer
equipment, office equipment and leasehold improvements.
Income Taxes
As of December 31, 1998, the Company had a net operating loss carry forward of
approximately $1.2 million.
Income From Continuing Operations
Income from continuing operations was approximately $788,000 and $106,000 for
the three and six months ended June 30, 1999. This was due primarily to the
$1,523,000 gain from the sale of 50,000 shares of TFSM common stock on May 3,
1999, offset, in part, by a reduction in internet/intranet development revenues
and banner revenues. In addition, direct salaries have remained high and
selling, general and administrative costs have increased due to increased
compensation costs, public and investor relations costs and printing costs.
During the three and six months ended June 30, 1998, the Company had a loss from
continuing operations of $61,000 and income from continuing operations of
$26,000, respectively.
Fluctuations in Quarterly Operating Results
Quarterly revenues and operating results have fluctuated and will fluctuate as
a result of a variety of factors. These factors, some of which 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
10
<PAGE>
expenditures, operating expenses and other costs relating to the expansion of
operations, general economic conditions and acceptance and use of the
Internet. The Company's quarterly operating margins may also fluctuate from
period to period depending on the relative mix of media placement and
maintenance versus other forms of advertising.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash of $2,900,000, plus the value of its equity position in
TFSM at cost of $1,900,000, or an aggregate of approximately $4,800,000, has
decreased approximately $588,000 or 10.9% as compared to December 31, 1998.
This decrease is due primarily to cash used to finance operations, offset by
the gain from the sale of the TFSM common stock.
The Company is dependent on its current cash and the TFSM stock, together with
cash generated by operations for working capital in order to be competitive,
to meet the increasing demands of service, quality and pricing and for the
expansion of its business. While the Company believes that its cash position
together with cash expected to be generated by operations will be sufficient
to finance its operations for at least one year, the Company may nevertheless
require future financing in order to satisfy its working capital needs, which
may be unavailable or prohibitively expensive.* Accordingly, the Company may
not have the funds to relieve any liquidity problems, should they arise, or to
finance any expansion of its business.
Net cash used in the Company's operating activities for the six months ended
June 30, 1999 was $2,061,000 and related primarily to the loss from continuing
operations before interest and other income, net, accrued taxes payable,
accounts payable and accrued expenses payable, as indicated in the statement
of cash flows.
For the six months ended June 30, 1999, the Company spent approximately
$17,000 on capital expenditures, consisting of computer equipment, furniture,
fixtures and leasehold improvements. Additional capital expenditures of
approximately $150,000 are expected to be made in connection with equipment
and office leasehold improvements during the balance of 1999.
Year 2000 Compliance
There are issues associated with the programming code in existing computer
systems as the year 2000 approaches. The "year 2000 problem" is pervasive and
complex, as virtually every computer operation will be affected in some way by
the rollover of the two digit year value of 00. The issue is whether computer
systems will properly recognize date sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail. The accounting and job
costing software used by the Company is year 2000 compliant, according to a
letter received from the software manufacturer. The Company's router has been
replaced in order to be year 2000 compliant and a special Year 2000 compliant
test software has been run on the Company's hardware to ascertain that the
Company hardware is compliant. The Company's telecommunications system and
accompanying software have been verified by a third party as being Year 2000
compliant. The Company is not aware of any programming created by the Company
on behalf of a client that is not year 2000 compliant. The Company is not
responsible for outside modes of communication, sites or facilities over which
client media campaigns or placements occur; however, the Company is not
currently aware of any such delivery vendors that are not year 2000 compliant.
However, significant uncertainty exists concerning the potential costs and
effects with year 2000 compliance. Any year 2000 compliance problems of either
the Company or its clients or vendors could have a material adverse effect of
the Company's business, results of operations and financial condition.
- -------------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Factors
Affecting Operating results and Market Price of Stock" contained in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1998 for a discussion of the risks and uncertainties which may affect this
statement.
11
<PAGE>
PART II - OTHER INFORMATION
Items 1., 2., 3., 4. & 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - Exhibit 27.1 - Financial Data Schedule
(b) None
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
K2 DESIGN, INC.
Date: August 13, 1999 By: /s/ Lynn Fantom
-------------------------------------------
Lynn Fantom
Chief Executive Officer and President
By: /s/ Seth Bressman
--------------------------------------------
Seth Bressman
Chief Financial Officer
(Principal Financial and Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,913,132
<SECURITIES> 0
<RECEIVABLES> 583,234
<ALLOWANCES> 75,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,457,692
<PP&E> 1,519,192
<DEPRECIATION> 919,620
<TOTAL-ASSETS> 6,210,506
<CURRENT-LIABILITIES> 1,225,776
<BONDS> 0
0
0
<COMMON> 37,346
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,210,506
<SALES> 0
<TOTAL-REVENUES> 2,266,206
<CGS> 1,045,934
<TOTAL-COSTS> 3,682,893
<OTHER-EXPENSES> (798)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,156
<INCOME-PRETAX> 163,395
<INCOME-TAX> 57,201
<INCOME-CONTINUING> 106,194
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 106,194
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
</TABLE>
