<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 September 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:
<TABLE>
<CAPTION>
Class Outstanding at October 31, 2000
----- -------------------------------
<S> <C>
Common stock, par value $.01 per share 3,462,794
Common stock redeemable purchase warrants 1,000,000
</TABLE>
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 - September 30, 2000 (unaudited)...................................... 1
Consolidated statements of operations - three and nine months ended
September 30, 2000 (unaudited) and September 30, 1999 (unaudited)............................ 2
Consolidated statements of cash flows - nine months ended
September 30, 2000 (unaudited) and September 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
SEPTEMBER 30, 2000
(unaudited)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,028,354
Accounts receivable, net of allowance for doubtful accounts of $100,000 1,859,280
Unbilled revenue 638,456
Prepaid expenses and other current assets 340,801
Investment in securities available for sale 1,110,318
-----------
Total current assets 4,977,209
FIXED ASSETS, net 632,644
RESTRICTED CASH 250,000
OTHER ASSETS
172,246
-----------
Total assets $ 6,032,099
===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 28,712
Accounts payable 800,620
Accrued compensation and payroll taxes 88,521
Accrued expenses 905,224
Deferred revenue 377,513
Customer advances 263,333
-----------
Total current liabilities 2,463,923
LONG-TERM CAPITAL LEASE OBLIGATIONS 19,722
-----------
Total liabilities 2,483,645
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;
3,879,961 shares issued and 3,462,544 shares outstanding 38,800
Treasury stock, 417,417 shares at cost (819,296)
Additional paid-in capital 7,581,511
Accumulated other comprehensive loss (321,856)
Deferred Compensation (384,850)
Accumulated deficit (2,545,855)
-----------
Total stockholders' equity 3,548,454
-----------
Total liabilities & stockholders' equity $ 6,032,099
===========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements
1
<PAGE> 4
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ -----------------------------
September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
unaudited unaudited unaudited unaudited
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gross revenues $ 1,968,925 $ 1,705,708 $ 5,543,831 $ 3,971,914
Less: pass-through costs (853,896) (463,535) (2,291,618) (1,604,072)
----------- ----------- ----------- -----------
Net revenues 1,115,029 1,242,173 3,252,213 2,367,842
Direct salaries and costs 869,090 525,826 2,522,179 1,516,636
Selling, general and administrative expenses 894,699 836,467 2,520,258 2,188,208
Depreciation 82,277 101,595 247,769 301,400
----------- ----------- ----------- -----------
Loss from operations before interest and
other income, net and income taxes (731,037) (221,715) (2,037,993) (1,638,402)
Interest and other income, net 54,298 464,170 135,437 2,044,251
Provision for income taxes 20,499 (24,128) 31,369 33,073
----------- ----------- ----------- -----------
Net income (loss) $ (697,238) $ 266,583 $(1,933,925) $ 372,776
=========== =========== =========== ===========
Net Income (loss) per share --
Basic $ (0.21) $ 0.08 $ (0.57) $ 0.11
=========== =========== =========== ===========
Diluted $ (0.21) $ 0.07 $ (0.57) $ 0.10
=========== =========== =========== ===========
Weighted average common shares outstanding -- basic 3,379,854 3,479,687 3,364,079 3,474,286
=========== =========== =========== ===========
Weighted average common shares outstanding -- diluted 3,379,854 3,665,191 3,364,079 3,630,318
=========== =========== =========== ===========
</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 Nine Months Ended
September 30,
2000 1999
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,933,925) $ 372,776
Net gain from sale of investment securities -- (1,938,882)
Adjustments to reconcile net income (loss) to net cash used in operating
activities --
Non-cash compensation expense 262,860 219,759
Depreciation 247,769 301,400
Changes in --
Accounts receivable, net (933,716) (1,129,053)
Prepaid expenses and other current assets (78,852) (5,300)
Unbilled revenue 34,134 (293,512)
Other assets 2,882 4,462
Accounts payable 323,473 (281,777)
Accrued compensation and payroll taxes (25,401) 137,543
Accrued taxes 50 (69,556)
Other accrued expenses 357,906 (399,671)
Deferred revenue and customer advances 577,513 105,075
Restricted Cash (99,289) --
----------- -----------
Net cash used in operating activities (1,264,596) 2,976,736
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Gross proceeds from sale of investment securities -- 2,817,732
Purchase of equipment (283,344) (104,005)
Software development costs (180,011) --
Advances for proposed transaction (185,954) --
----------- -----------
Net cash provided by (used in) investing activities (649,309) (2,713,727)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (21,534) (26,409)
Options exercised for cash 26,875 7,875
Purchase of Treasury Stock -- (199,200)
----------- -----------
Net cash provided by (used in) financing activities 5,341 (217,734)
----------- -----------
Net decrease in cash and cash equivalents (1,908,564) (480,743)
CASH AND CASH EQUIVALENTS, beginning of period 2,936,918 2,829,628
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,028,354 $ 2,348,885
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for --
Interest $ 1,495 $ 11,393
Income taxes $ 31,369 $ 66,873
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
<PAGE> 6
K2 DESIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2000
1. ORGANIZATION AND BUSINESS
K2 Design, Inc., a Delaware corporation ("K2" or the "Company"), is a strategic
digital services company, providing consulting and development services
including analysis, planning, systems design, creative and implementation.
Effective November 9, 2000, the Company changed its name to K2 Digital, Inc. See
Note 5, "Subsequent Events" below.
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 September 30, 2000 and the
financial results for the three and nine months ended September 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 nine months ended September 30, 2000
and September 30, 1999, respectively, 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 liabilities 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.
4
<PAGE> 7
In accordance with SFAS 128, the following table reconciles net income (loss)
and share amounts used to calculate basic and diluted income (loss) per share:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
(unaudited) (unaudited) (unaudited) (unaudited)
------------ ------------- -------------- --------------
<S> <C> <C> <C> <C>
Numerator: Net income (loss) $ (697,238) $ 266,583 $(1,933,925) $ 372,776
Denominator: Weighted average number of common
shares outstanding
Basic 3,379,584 3,479,687 3,364,079 3,474,286
Diluted 3,379,854 3,665,191 3,364,079 3,630,318
Net income (loss) per share --
Basic $ (0.21)* $ 0.08 $ (0.57)* $ 0.11
Diluted $ (0.21)* $ 0.07 $ (0.57)* $ 0.10
</TABLE>
*Excludes all outstanding stock options as of September 30, 2000, as they are
antidilutive.
4. INVESTMENT IN SECURITIES
As of September 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 September 30, 2000 consolidated
balance sheet. The unrealized holding loss is reflected as "other comprehensive
loss" in the stockholders' equity section of the balance sheet.
The following disclosures are presented in accordance with SFAS No. 115:
Equity Securities:
<TABLE>
<S> <C>
Aggregate fair market value $1,110,318
Gross unrealized holding loss $ (321,856)
</TABLE>
The Company did not sell any shares of capital stock of 24/7 Media Inc. during
the quarter ended September 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. Due to
changing market conditions and other factors, the anticipated transaction, which
had been structured as a multi-step joint venture with Unwired Ventures I (an
affiliate of Emerald Asset Management, headquartered in King of Prussia,
Pennsylvania) is now expected to be significantly restructured. Unwired Ventures
I recently informed the Company and SilverCube that, due to market conditions,
it is indefinitely suspending its participation in the transaction. The
transaction is now expected to be completed as a stock for stock exchange
transaction in which the Company will issue shares of its common stock in
exchange for a controlling interest in SilverCube. The consummation of the
transaction is subject to the execution of definitive agreements and the
approval of the shareholders of the Company to the issuance of its shares, among
other conditions. The Company does not expect to seek shareholder approval or to
consummate the transaction before the first quarter of 2001.
Effective November 9, 2000, the Company changed its name to "K2 Digital, Inc."
5
<PAGE> 8
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.
6
<PAGE> 9
<TABLE>
<CAPTION>
Percentage of Net Revenues
Three Months Ended Nine Months Ended
-------------------------- ---------------------
September 30, September 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 77.94% 42.33% 77.55% 64.05%
Selling, general and administrative expenses 80.24% 67.34% 77.49% 92.41%
Depreciation 7.38% 8.18% 7.62% 12.73%
Loss from operations before interest and other
income, net and income taxes (65.56)% (17.85)% (62.66)% (69.19)%
Interest and other income, net 4.87% 37.37% 4.16% 86.33%
Provision for income taxes 1.84% (1.94)% 0.96% 1.40%
Net income (loss) (62.53)% 21.46% (59.46)% 15.74%
</TABLE>
Revenues
Net revenues consist of gross revenues less pass-through expenses such as media
placement costs. Net revenues for the three months ended September 30, 2000
decreased by 10.2% compared to the same quarter in 1999. In the 2000 third
quarter, net revenues were approximately $1,115,000 compared to $1,242,000 in
the 1999 third quarter, or a decrease of approximately $127,000, due to lower
than anticipated revenues in the 2000 third quarter. Net revenues for the three
months ended September 30, 2000 increased by $467,000 or 72.0% as compared to
net revenues of $648,000 for the three months ended June 30, 2000. This increase
in net revenues was due to services performed for new clients in the 2000 third
quarter as compared to the 2000 second quarter. During the three months ended
September 30, 2000, the three largest net revenue-producing clients accounted
for approximately 34.3%, 16.1% and 14.0%, respectively, of the Company's net
revenues. During the three months ended September 30, 1999, the three largest
net revenue-producing clients accounted for approximately 48.4%, 16.9% and
15.1%, 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 comparable replacements 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."
Net revenues for the nine months ended September 30, 2000 increased by
approximately 37.3% compared to the nine months ended September 30, 1999. In the
nine months ended September 30, 2000, net revenues were approximately $3,252,000
compared to $2,368,000 for the same period in 1999. This $884,000 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
nine months ended September 30, 2000 as compared to the nine months ended
September 30, 1999. During the nine months ended September 30, 2000, the two
largest net revenue-producing clients accounted for approximately 31.1% and
30.7%, respectively, of the Company's net revenues. During the nine months ended
September 30, 1999, the two largest net revenue-producing clients accounted for
approximately 24.9% and 26.8%, respectively, of the Company's net revenues.
Direct Salaries and Costs
Direct salaries and costs include all direct labor costs and other direct costs
related to project performance, such as independent contractors, 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
September 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 third quarter, as compared to the 1999 third quarter. Direct salaries and
costs increased by approximately $343,000 to approximately $869,000 for the 2000
third quarter from approximately $526,000 for the 1999 third quarter. In the
2000 third quarter, direct salaries and costs primarily consisted of
approximately $772,000 paid as direct salary costs and $24,000 paid as
independent contractor costs. In the 1999 third quarter, direct salaries and
costs consisted primarily of approximately $457,000 paid as direct salary costs
and approximately $35,000 paid as independent contractor costs. Gross profit,
which is net revenues less direct salaries and costs, totaled $246,000 for
7
<PAGE> 10
the 2000 third quarter as compared to $716,000 for the 1999 third quarter,
resulting in a gross margin of 22.1% and 57.6%, respectively. The unfavorable
gross profit for the 2000 third quarter was due primarily to the lower than
anticipated net revenues recognized during the 2000 third quarter, relative to
increased staff costs.
As a percentage of net revenues, direct salaries and costs increased for the
nine months ended September 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 nine months ended September 30, 2000, as compared to the same period
in 1999. Direct salaries and costs increased by approximately $1,005,000 to
approximately $2,522,000 for the nine months ended September 30, 2000, from
approximately $1,517,000 for the same period in 1999. For the nine months ended
September 30, 2000, direct salaries and costs consisted primarily of
approximately $2,053,000 paid as direct salary costs and $277,000 paid as
independent contractor costs. For the nine months ended September 30, 1999,
direct salaries and costs primarily consisted of approximately $1,295,000 paid
as direct salary costs and approximately $192,000 paid as independent contractor
costs. Gross profit, which is net revenues less direct salaries and costs,
totaled $730,000 for the nine months ended September 30, 2000 as compared to
$851,000 for the same period in 1999, resulting in a gross margin of 22.4% and
35.9%, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended
September 30, 2000 and 1999 were approximately $895,000 and $836,000,
respectively, and consisted primarily of labor costs, professional fees,
occupancy costs, recruitment costs and communications costs. In the 2000 third
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 nine months ended September
30, 2000 and 1999 were approximately $2,520,000 and $2,188,000, respectively,
and consisted primarily of labor costs, professional fees, occupancy costs,
recruitment costs and communications costs. For the nine months ended September
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 $82,000 and $102,000 for the three months
ended September 30, 2000 and 1999, respectively, and related to depreciation of
equipment, furniture and fixtures, and leasehold improvements. Depreciation
expense was approximately $248,000 and $301,000 for the nine months ended
September 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 September 30, 2000 was $731,000 as
compared to an operating loss of $222,000 for the three months ended September
30, 1999. Contributing to the operating loss for the three months ended
September 30, 2000 were increases in direct labor and selling, general and
administrative costs as discussed above. The operating loss for the three months
ended September 30, 2000 represented an increase of $509,000 or 229.3% over the
operating loss of $222,000 for the three months ended September 30, 1999.
The operating loss for the nine months ended September 30, 2000 was $2,038,000
as compared to an operating loss of $1,638,000 for the nine months ended
September 30, 1999. Contributing to the operating loss for the nine months ended
September 30, 2000 were increases in direct labor and selling, general and
administrative costs compared to the same period in 1999. The operating loss for
the nine months ended September 30, 2000 represented an increase of $400,000 or
24.4% over the operating loss of $1,638,000 for the nine months ended September
30, 1999
Income Taxes
For the nine months ended September 30, 2000, the Company had a loss before
provision for income taxes of $1,903,000. The provision for income taxes
consists of minimum statutory taxes due.
8
<PAGE> 11
Net Income (Loss)
Net loss for the three months ended September 30, 2000 was $697,000 as
compared to net income of $267,000 for the three months ended September 30,
1999. Included in net income for the three months ended September 30, 1999 was a
$416,000 gain from the sale of certain shares of common stock of 24/7 Media Inc.
owned by the Company. The Company did not sell any shares of 24/7 Media Inc.
during the three months ended September 30, 2000.
Net loss for the nine months ended September 30, 2000 was $1,934,000 as
compared to net income of $373,000 for the nine months ended September 30, 1999.
Included in net income for the nine months ended September 30, 1999 was a
$1,939,000 gain from the sale of certain shares of common stock of 24/7 Media
Inc. owned by the Company. The Company did not sell any shares of 24/7 Media
Inc. during the nine months ended September 30, 2000. See Note 4, "Investment in
Securities".
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 $1,028,000 at September 30, 2000, decreased by
$1,909,000 or 65% 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 the next twelve months, 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 $1,265,000 for the nine
months ended September 30, 2000 and related primarily to the net loss for the
period.
For the nine months ended September 30, 2000, the Company spent approximately
$283,000 on capital expenditures, consisting of computer equipment, furniture,
fixtures and leasehold improvements.
-----------------
* 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.
9
<PAGE> 12
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 27.1 - Financial Data Schedule (Edgar filing only)
(b) Reports on Form 8-K:
None.
10
<PAGE> 13
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: November 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)
11
