<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(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,
2000
| | 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)
(212) 301-8800
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required by Section 13 or 15(d)
of the Exchange Act during the past 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 14, 2000
Common stock, par value $.01 per share 3,460,044
Common stock redeemable purchase warrants 1,000,000
Transitional Small Business Disclosure Format (check one):
Yes / / No /x/
<PAGE> 2
K2 DESIGN, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheet - June 30, 2000 (unaudited)................................ 1
Consolidated statements of operations - three and six months ended
June 30, 2000 (unaudited) and June 30, 1999 (unaudited)........................... 2
Consolidated statements of cash flows - three months ended
June 30, 2000 (unaudited) and June 30, 1999 (unaudited)........................... 3
Notes to consolidated financial statements .......................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations .................................................................................. 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................... 11
SIGNATURES ................................................................................. 12
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
(unaudited)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,362,247
Accounts receivable, net of allowance for doubtful accounts of $100,000 817,545
Unbilled revenue 632,900
Prepaid expenses and other current assets 132,539
Investment in securities available for sale 1,718,750
-----------
Total current assets 5,663,981
FIXED ASSETS, net 640,687
OTHER ASSETS
331,972
-----------
Total assets $ 6,636,640
===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 28,712
Accounts payable 729,867
Accrued compensation and payroll taxes 170,071
Accrued expenses 830,509
Customer advances 63,333
-----------
Total current liabilities 1,822,492
DEFERRED TAX LIABILITY 114,492
LONG-TERM CAPITAL LEASE OBLIGATIONS 26,900
-----------
Total liabilities 1,964,018
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;
3,877,461 shares issued and 3,460,044 shares outstanding 38,775
Treasury Stock, 417,417 shares at cost (819,296)
Additional paid-in capital 7,577,161
Accumulated other comprehensive income 171,949
Deferred compensation (447,350)
Accumulated deficit (1,848,617)
-----------
Total stockholders' equity 4,672,622
-----------
Total liabilities & stockholders' equity $ 6,636,640
===========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements
1
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K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ---------------------------
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
unaudited unaudited unaudited unaudited
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Gross revenues $ 1,641,896 $ 785,534 $ 3,574,906 $ 2,171,603
Less: pass-through costs (993,560) (127,512) (1,437,722) (1,045,934)
----------- ----------- ----------- -----------
Net revenues 648,336 658,022 2,137,184 1,125,669
Direct salaries and costs 768,011 554,335 1,653,089 990,810
Selling, general and administrative expenses 768,458 719,197 1,625,559 1,351,741
Depreciation 86,075 103,795 165,492 199,805
----------- ----------- ----------- -----------
Loss from operations before interest and other, net and
income taxes (974,208) (719,305) (1,306,956) (1,416,687)
Interest and other income, net 39,504 1,554,856 81,139 1,580,082
Provision for income taxes 6,750 47,876 10,870 57,201
----------- ----------- ----------- -----------
Net income (loss) $ (941,454) $ 787,675 $(1,236,687) $ 106,194
=========== =========== =========== ===========
Net Income (loss) per share from operations -
Basic $ (0.28) $ 0.23 $ (0.37) $ 0.03
----------- ----------- ----------- -----------
Diluted $ (0.28) $ 0.21 $ (0.37) $ 0.03
----------- ----------- ----------- -----------
Weighted average common shares outstanding - basic 3,361,779 3,483,620 3,354,327 3,471,480
=========== =========== =========== ===========
Weighted average common shares outstanding - diluted 3,361,779 3,766,210 3,354,327 3,762,918
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
<PAGE> 5
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
2000 1999
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (1,236,687) $ 106,194
Net gain from sale of investment securities -- (1,522,500)
Adjustments to reconcile net income (loss) to net cash used in
operating activities -
Non-cash compensation expense 200,359 130,944
Depreciation 165,492 199,805
Changes in -
Accounts receivable, net 108,019 (239,061)
Prepaid expenses and other current assets (56,544) 19,491
Unbilled revenue 39,690 (27,519)
Other assets 2,882 3,941
Accounts payable 252,720 (454,849)
Accrued compensation and payroll taxes 56,149 (21,456)
Accrued taxes (19) (73,681)
Other accrued expenses 283,260 (224,160)
Deferred revenue and customer advances -- 41,627
----------- -----------
Net cash used in operating activities (184,679) (2,061,224)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Gross proceeds from sale of investment securities -- 2,173,500
Purchase of equipment (218,125) (16,734)
Software development costs (180,011) --
----------- -----------
Net cash provided by (used in) investing activities (398,136) 2,156,766
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (14,356) (16,413)
Options exercised for cash 22,500 4,375
----------- -----------
Net cash provided by (used in) financing activities 8,144 (12,038)
----------- -----------
Net increase (decrease) in cash and cash equivalents (574,671) 83,504
CASH AND CASH EQUIVALENTS, beginning of period 2,936,918 2,829,628
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,362,247 $ 2,913,132
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 1,690 $ 9,156
Income taxes $ 3,820 $ 71,001
Non cash investing activities -
Assets acquired under capital lease obligations $ -- $ 37,255
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
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K2 DESIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2000
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 an Internet business strategy firm specializing in business consulting,
development and design related to digital communications.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company and reflect all adjustments, consisting only of normal
recurring adjustments, which are, in the opinion of management, necessary for a
fair presentation of the financial position as of June 30, 2000 and the
financial results for the three and six months ended June 30, 2000, 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 months ended June 30, 2000 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, 1999, which are included in the Company's
Annual Report on Form 10-KSB filed with the Securities and Exchange Commission.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and revenues and expenses during the
reporting periods. Actual results may differ from those estimates.
3. NET INCOME (LOSS) PER SHARE OF COMMON STOCK
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.
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In accordance with SFAS 128, the following table reconciles net loss and share
amounts used to calculate basic and diluted loss per share:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Numerator: Net income (loss) $ (941,454) $ 787,675 $(1,236,687) $ 106,194
Denominator: Weighted average number of common
shares outstanding
Basic 3,361,779 3,483,620 3,354,327 3,471,480
Diluted 3,361,779 3,766,210 3,354,327 3,762,918
Net income (loss) per share -
Basic $ (0.28) * $ 0.23 $ (0.37) * $ 0.03
Diluted $ (0.28) * $ 0.21 $ (0.37) * $ 0.03
</TABLE>
* Excludes all outstanding stock options as of June 30, 2000, as they are
antidilutive.
4. INVESTMENT IN SECURITIES
As of June 30, 2000, the Company held 110,000 shares of common stock of 24/7
Media Inc. These shares have been classified as "investments in securities
available for sale" as a result of the Company's ability and intent to sell such
shares in the near future. In accordance with SFAS No. 115, the shares are
stated at fair market value on the Company's June 30, 2000 consolidated balance
sheet. The unrealized holding gain is reflected as "other comprehensive income"
in the stockholders' equity section of the balance sheet, net of the related
"deferred tax liability."
The following disclosures are presented in accordance with SFAS No. 115:
<TABLE>
<S> <C>
Equity Securities:
Aggregate fair market value $1,718,750
Gross unrealized holding gain $ 286,575
</TABLE>
The Company did not sell any shares of capital stock of 24/7 Media Inc. during
the quarter ended June 30, 2000.
5. SUBSEQUENT EVENTS
Under an agreement in principle announced July 11, 2000, the Company will
acquire a majority interest in SilverCube, Inc., a professional services firm
specializing in wireless content delivery strategy and development, in a
multi-step, stock-for-stock exchange. Unwired Ventures I, an affiliate of
Emerald Asset Management, headquartered in King of Prussia, Pennsylvania, will
acquire a minority stake in SilverCube, Inc. for cash. The shareholders of
SilverCube, Inc., including the Company and Unwired Ventures I, will then
contribute their respective interests in SilverCube, Inc. to a corporation
established for the purpose of forming a joint venture targeting the wireless
professional services market. The joint venture corporation will assume the
SilverCube, Inc. name. Unwired Ventures I will also make a cash contribution to
provide working capital in return for shares of the joint venture corporation.
The Company will own the largest interest in the joint venture corporation, with
Unwired Ventures I and the current shareholders of SilverCube, Inc. also owning
significant stakes. The formation of the joint venture and consummation of the
transactions summarized above is subject to the execution of definitive
5
<PAGE> 8
agreements and the approval of the shareholders of the Company to the issuance
of its shares, amongst other conditions.
In July 2000, the Company began plans for marketing a rapid customer support
deployment application, which the Company developed and owns. Certain
software development costs relating to the application have been included in the
"Other Assets" section of the Company's balance sheet as of June 30, 2000.
On July 31, 2000, the Company entered into a second amendment to its original
lease of office space at 30 Broad Street, New York, New York. The second
amendment provides for the leasing of additional space on the fifteenth floor,
consisting of 8,700 square feet. It also extends the expiration date of the
lease through and including the day immediately preceding the seven-year
anniversary of the rent commencement date from a right of early termination of
the lease on the fifth anniversary of the rent commencement date upon payment of
an early termination fee of $160,000. The Company currently occupies the entire
sixteenth floor. At present, the space on the fifteenth floor is not ready for
occupancy. The monthly fixed rent payments under the second amendment will be
$56,866.67 per month after depletion of the credit through the fourth
anniversary of the rent commencement date. From and after the fourth anniversary
of the rent commencement date through and including the expiration date, the
fixed rent will be $60,650 per month. The fixed rent is further increased by
2.0% cumulatively on January 1, 2002 and on each January 1 thereafter for the
ensuing one-year period of the rent term, which covers operating cost
escalations for the building.
6. CHIEF OPERATING OFFICER AND EXECUTIVE VICE PRESIDENT
On April 14, 2000, Gary W. Brown joined the Company as Executive Vice President
and Chief Operating Officer. Prior to that, Mr. Brown was, and continues to
serve, as a member of the Company's Board of Directors. Mr. Brown signed an
employment contract with the Company that expires on March 31, 2002. This
employment contract provides for an annual salary of $225,000 and discretionary
annual bonus in the form of stock options up to a maximum of 100,000 shares of
Common Stock per year. Upon joining the Company, Mr. Brown also received 100,000
shares of restricted Common Stock, which vest over two years, 50% on April 14,
2001 and 50% on April 14, 2002. The value of the stock at the close of business
on the grant date of April 14, 2000 was $5.00 per share. As a result of this
transaction, the Company incurred $500,000 of deferred compensation costs, which
are being amortized over the two-year vesting period. Mr. Brown also received
options to purchase up to 263,000 shares of Common Stock. These options also
vest 50% on April 14, 2001 and 50% on April 14, 2002. In addition, all of Mr.
Brown's unvested shares of restricted stock and stock options vest immediately
upon the occurrence of a change of control transaction, as contemplated by his
employment contract and restricted stock agreement, copies of which were filed
as exhibits to the Company's quarterly report of Form 10-QSB for the quarter
ended March 31, 2000.
6
<PAGE> 9
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 (unaudited) 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 11 of the
Company's 1999 Annual Report on Form 10-KSB for a discussion of certain of these
risks and uncertainties.
RESULTS OF OPERATIONS
General
The Company works with clients to develop strategies for using new and emerging
technologies to help the clients build one-to-one relationships with their
customers, employees and vendors. Through the strategic and technical expertise,
media knowledge, and creative talent of the Company's team of employees, the
Company assists its clients in achieving a favorable return-on-investment from
digital channels of e-commerce, information, customer support, advertising and
entertainment. These channels include Web sites, transmission of broadband
content, intranets, extranets, online media, and wireless appliances.
The Company currently provides its clients with a range of services, including:
qualitative and quantitative research, usability labs to test graphical user
interfaces, navigation, functionality and systems, positioning studies for
online branding, strategic planning, e-commerce planning, business process
reengineering, online media planning and buying, proprietary media partnerships,
marketing strategies, Web design, creative services for online advertising
(e.g., banners, rich media, interstitials), technical strategies, requirements
specifications and programming.
Revenues are recognized on a percentage of completion basis. Provisions for any
estimated losses on uncompleted projects are made in the period in which such
losses are determinable. Most of the Company's revenues have been generated on a
fixed fee or cap fee basis. The Company also provides ongoing services to
certain customers.
While the Company considers the presentation of gross revenues to be
appropriate, as a result of the Company assuming the economic risk related to
reimbursable expenses, such as pass-through media costs, the Company has elected
to present net revenues in its statement of operations, because they are
representative of the Company's fee-based strategic and process consulting and
development services, which are at the core of the current business model. Net
revenues represent gross revenues, less reimbursable expenses, such as media
pass-through costs. The Company's operating results discussed herein are not
necessarily representative of future periods.
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<TABLE>
<CAPTION>
Percentage of Net Revenues
Three Months Ended Six Months Ended
------------------------------ --------------------------
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Direct salaries and costs 118.5% 84.2% 77.4% 88.0%
Selling, general and administrative expenses 118.5% 109.3% 76.1% 120.1%
Depreciation 13.3% 15.8% 7.7% 17.8%
Loss from operations before interest & other
income, net and income taxes (150.3)% (109.3)% (61.2)% (125.9)%
Interest and other income, net 6.1% 236.3% 3.8% 140.4%
Provision for income taxes 1.0% 7.3% 0.5% 5.1%
Net income (loss) (145.2)% 119.7% (57.9)% 9.4%
</TABLE>
Revenues
Net revenues consist of gross revenue less pass-through expenses such as media
placement costs. Net revenues for the three months ended June 30, 2000 decreased
by 1.5% compared to the same quarter in 1999. In the 2000 second quarter, net
revenues were approximately $648,000 compared to $658,000 in the 1999 second
quarter. Net revenues for the three months ended June 30, 2000 decreased by
$841,000 or 56.5% compared to net revenues of $1,489,000 for the three months
ended March 31, 2000. This decrease in net revenues was primarily attributable
to the discontinuation of a software development project for one client, as well
as the postponement of certain activities by another client due to merger plans.
During the three months ended June 30, 2000, the three largest net
revenue-producing clients accounted for approximately 24.0%, 15.3% and 14.3%,
respectively, of the Company's net revenues. During the three months ended June
30, 1999, the three largest net revenue-producing clients accounted for
approximately 32.7%, 8.4% and 5.3%, respectively, of the Company's net revenues.
Accordingly, while the Company has sought to decrease business development costs
by establishing relationships with large companies with ongoing needs for
professional Internet services, cancellation or postponement of projects can
cause quarterly results to fluctuate and can have a material adverse effect on
the Company's financial condition. See "Fluctuations in Quarterly Operating
Results."
Net revenues for the six months ended June 30, 2000 increased by approximately
89.8% compared to the six months ended June 30, 1999. In the six months ended
June 30, 2000, net revenues were approximately $2,137,000 compared to
$1,126,000 for the same period in 1999. This $1,011,000 increase in net
revenues was primarily attributable to an increase in the Company's fee-based
strategic and process consulting and development services during the six months
ended June 30, 2000 as compared to the six months ended June 30, 1999. During
the six months ended June 30, 2000, the two largest net revenue-producing
clients accounted for approximately 46.8% and 29.4%, respectively, of the
Company's net revenues. During the six months ended June 30, 1999, the two
largest net revenue-producing clients accounted for approximately 33.7% and
7.5%, respectively, of the Company's net revenues. Accordingly, 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 all direct labor costs and other direct costs
related to project performance, such as independent contractors, supplies, and
printing and equipment costs, less any reimbursed expenses. As a percentage of
net revenues, direct salaries and costs increased for the three months ended
June 30, 2000 as compared to the same period in 1999. This was primarily due to
increases in staff hired to service the increased business during the 2000
second quarter, as compared to the 1999 second quarter. Direct salaries and
costs increased by approximately $214,000 to approximately $768,000 for the 2000
second quarter from approximately $554,000 for the 1999 second quarter. In the
2000 second quarter, direct salaries and costs primarily consisted of
approximately $655,000 paid as direct salary costs and $46,000 paid as
independent contractor costs. In the 1999 second quarter, direct salaries and
costs consisted primarily of
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<PAGE> 11
approximately $422,000 paid as direct salary costs and approximately $122,000
paid as independent contractor costs. Gross profit, which is net revenues less
direct salaries and costs, totaled $(120,000) for the 2000 second quarter as
compared to $104,000 for the 1999 second quarter, resulting in a gross margin of
(18.5)% and 15.8%, respectively. The unfavorable gross profit for the 2000
second quarter was due primarily to the lower than anticipated net revenues
discussed above in the revenues section.
As a percentage of net revenues, direct salaries and costs increased for the
six months ended June 30, 2000 as compared to the same period in 1999. This was
primarily due to increases in direct labor staff and consultant costs during
the six months ended June 30, 2000, as compared to the same period in 1999.
Direct salaries and costs increased by approximately $662,000 to approximately
$1,653,000 for the six months ended June 30, 2000, from approximately $991,000
for the same period in 1999. For the six months ended June 30, 2000, direct
salaries and costs consisted primarily of approximately $1,281,000 paid as
direct salary costs and $253,000 paid as independent contractor costs. For the
six months ended June 30, 1999, direct salaries and costs primarily consisted
of approximately $838,000 paid as direct salary costs and approximately
$157,000 paid as independent contractor costs. Gross profit, which is net
revenues less direct salaries and costs, totaled $484,000 for the six months
ended June 30, 2000 as compared to $135,000 for the same period in 1999,
resulting in a gross margin of 22.6% and 12.0%, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended June 30,
2000 and 1999 were approximately $768,000 and $719,000, respectively, and
consisted primarily of labor costs, professional fees, occupancy costs,
recruitment costs and communications costs. In the 2000 second quarter, the
changes in selling, general and administrative costs were primarily due to an
additional staff member hired for business development and recruitment costs.
Selling, general and administrative expenses for the six months ended June 30,
2000 and 1999 were approximately $1,626,000 and $1,352,000, respectively, and
consisted primarily of labor costs, professional fees, occupancy costs,
recruitment costs and communications costs. For the six months ended June 30,
2000, the changes in selling, general and administrative costs were primarily
due to increased selling, labor costs and recruitment costs.
Depreciation
Depreciation expense was approximately $86,000 and $104,000 for the three months
ended June 30, 2000 and 1999, respectively, and related to depreciation of
equipment, furniture and fixtures, and leasehold improvements. Depreciation
expense was approximately $165,000 and $200,000 for the six months ended June
30, 2000 and 1999, respectively, and related to depreciation of equipment,
furniture and fixtures, and leasehold improvements. The Company's depreciation
expenses in 2000 have decreased as a result of previous purchases of computer
and office equipment becoming fully depreciated.
Operating Loss
The operating loss for the three months ended June 30, 2000 was $974,000 as
compared to an operating loss of $719,000 for the three months ended June 30,
1999. Contributing to the operating loss for the three months ended June 30,
2000 were increases in direct labor and selling, general and administrative
costs as discussed above. The operating loss for the three months ended June 30,
2000 represented an increase of $255,000 or 35.5% over the operating loss of
$719,000 for the three months ended June 30, 1999.
Net revenues for the six months ended June 30, 2000 were $1,011,000 greater than
net revenues for the 1999 period. However, due to increased direct labor and
selling, general and administrative costs during the six months ended June 30,
2000, the operating loss decreased by only $110,000 or 7.8% from $(1,417,000)
for the six months ended June 30, 1999 to $(1,307,000) for the same period in
2000.
Income Taxes
For the six months ended June 30, 2000, the Company had a loss before provision
for income taxes of $(1,226,000). The provision for income taxes consists of
minimum statutory taxes due.
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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 may be managed by
the Company and some of which are beyond the Company's control, include the
timing of the completion, material reduction, postponement or cancellation of
major projects, the loss of a major customer or the termination of a
relationship with a channel source, the timing of the receipt of new business,
the 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.
Liquidity and Capital Resources
The Company's cash balance of $2,362,000 at June 30, 2000, decreased by $575,000
or 19.6% compared to the $2,937,000 cash balance at December 31, 1999. This
decrease is primarily due to lower than anticipated revenues for the period, as
well as purchases of equipment and software development costs.
The Company is dependent on its current cash and investment securities, 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, and such financing 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 was $185,000 for the six
months ended June 30, 2000 and related primarily to the net loss for the period.
For the six months ended June 30, 2000, the Company spent approximately $218,000
on capital expenditures, consisting of computer equipment, furniture, fixtures
and leasehold improvements.
During the second quarter of 2000, the Company amended its lease of office space
at 30 Broad Street, New York, NY, to include part of the fifteenth floor. The
Company currently occupies the entire sixteenth floor. This additional space is
necessary to better accommodate current staff and to ensure adequate space for
future growth. The lease term on the sixteenth floor has been extended through
and including August 21, 2007, which coincides with the lease term on the new
space on the fifteenth floor. The previous lease on the sixteenth floor was to
expire on April 30, 2003. As a result of this lease amendment, new rates per
square foot will apply to the sixteenth floor, as well as other new conditions.
The second amendment to the lease is filed as an exhibit to this report.
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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. 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, 1999 for a discussion
of the risks and uncertainties which may affect this statement.
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<PAGE> 13
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 10.1 - Second Amendment dated as of July 10, 2000 to Agreement of
Lease dated as of April 18, 1997 between 30 Broad Associates, L.P., as landlord,
and the Company, as tenant.
Exhibit 27.1 - Financial Data Schedule (Edgar filing only)
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on July 12, 2000 reporting, pursuant to Item 5, an agreement
in principle whereby the Company will acquire a majority interest in a
professional services firm specializing in wireless content delivery strategy
and development, in a multi-step, stock-for-stock exchange subject to the
execution of definitive agreements and the approval of the shareholders
pursuant to Item 5 of the Company to the issuance of its shares, amongst other
conditions.
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<PAGE> 14
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
K2 DESIGN, INC.
Date: August 14, 2000
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)
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