<PAGE>
As filed with the Securities and Exchange Commission on April 9, 1999
Registration No. 333-71043
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
RAZORFISH, INC.
(Exact name of registrant as specified in its charter)
----------------
<TABLE>
<S> <C> <C>
Delaware 7379 13-3804503
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
</TABLE>
107 Grand Street, 3rd Floor
New York, New York 10013
(212) 966-5960
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
----------------
Jeffrey A. Dachis
President and Chief Executive Officer
Razorfish, Inc.
107 Grand Street, 3rd Floor
New York, New York 10013
(212) 966-5960
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
<TABLE>
<S> <C>
Mark L. Mandel, Esq. William J. Whelan, III, Esq.
Morrison & Foerster LLP Cravath, Swaine & Moore
1290 Avenue of the Americas Worldwide Plaza
New York, New York 10104-0012 825 Eighth Avenue
(212) 468-8000 New York, New York 10019-7475
(212) 474-1000
</TABLE>
----------------
Approximate date of commencement of the proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum Proposed Maximum
Securities to Amount to be Offering Price Aggregate Offering Amount of
be Registered Registered(1) Per Share Price(2) Registration Fee
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock,
$.01 par value............ 3,450,000 $12.00 $41,400,000 $11,509.20
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes a maximum of 450,000 shares that may be purchased by the
Underwriter to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
The Registrant hereby amends the Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 9, 1999
3,000,000 Shares
[LOGO]
Razorfish, Inc.
Class A Common Stock
--------
Prior to this offering, there has been no public market for our Class A Common
Stock. The initial public offering price is expected to be between $10.00 and
$12.00 per share. We have applied to list our Class A Common Stock on The
Nasdaq Stock Market's National Market under the symbol "RAZF."
The underwriters have an option to purchase a maximum of 450,000 additional
shares to cover over-allotments of shares.
Investing in the Class A Common Stock involves risks. See "Risk Factors" on
page 5.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Razorfish
------------- ------------- -------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of Class A Common Stock will be made on or about
,1999, against payment in immediately available funds.
Neither the Securities and Exchange Commission nor any other state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
BancBoston Robertson Stephens
BT Alex. Brown
Lehman Brothers
Prospectus dated , 1999.
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................... 2
Risk Factors............................. 5
Use of Proceeds.......................... 13
Dividend Policy.......................... 13
Capitalization........................... 14
Dilution................................. 15
Selected Consolidated Financial
Information of Razorfish................ 17
Selected Consolidated Financial
Information of Spray.................... 18
Examination Report of Independent Public
Accountants............................. 19
Unaudited Pro Forma Condensed Consolidated
Financial Information................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 29
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business................................. 42
Management............................... 57
Principal Stockholders................... 68
Certain Transactions..................... 71
Description of Capital Stock............. 74
Shares Eligible for Future Sale.......... 79
United States Tax Consequences to
Non-United States Holders............... 79
Underwriting............................. 81
Notice to Canadian Residents............. 83
Legal Matters............................ 84
Experts.................................. 84
Where You Can Find More Information...... 85
Index to Financial Statements........... F-1
</TABLE>
------------
You should rely only on the information contained in this prospectus or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This prospectus may be used only where it is
legal to sell these securities. The information in this prospectus may be
accurate only on the date of this prospectus.
------------
Unless otherwise indicated, all references to "Razorfish" and "we" refer to
Razorfish, Inc. and, subsequent to their acquisition or formation, its
subsidiaries, including Spray Network AB ("Spray").
Razorfish, the Razorfish symbol, Webspy and the Blue Dot are trademarks or
service marks and in some jurisdictions (including the United States)
registered trademarks or service marks of Razorfish. Other trademarks appearing
in this prospectus are the property of their respective owners.
------------
Dealer Prospectus Delivery Obligation
Until , 1999 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to their unsold allotments or subscriptions.
1
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all of the information you
should consider before investing in Razorfish's Class A Common Stock. For your
convenience, we refer to the Class A Common Stock as Common Stock throughout
the prospectus. You should read this entire prospectus carefully.
Except as otherwise indicated, all references to the number of outstanding
shares of Razorfish's Common Stock do not include the number of shares that
Razorfish will issue if the underwriters exercise their over-allotment option
in full. In addition, the information in this prospectus assumes that the
initial public offering price will be $11.00 per share, the midpoint of the
range disclosed on the cover of this prospectus.
The Company
Razorfish is a leading-edge international digital communications solutions
provider. Digital communications solutions are business solutions that use
digital technologies to enhance communications and interactions between people
and companies. Examples of our solutions include:
(1) a re-designed on-line trading system for Charles Schwab,
(2) a user-interface for theglobe.com,
(3) an enhanced on-line business identity for IBM's RS/6000 product line
and
(4) a user-interface for Road Runner, the high-speed on-line service that
is owned by ServiceCo, a joint venture among Time Warner, MediaOne,
Microsoft, Compaq and Advance Newhouse.
Our digital communications solutions are designed to help clients increase
sales, improve communications and create and enhance business identities.
We provide an integrated service offering consisting of strategic
consulting, design of information architectures and user-interfaces and
creation and customization of software necessary to implement our digital
communications solutions. Information architecture establishes how content is
organized and accessed while a user-interface refers to the presentation of a
website or software application to the end-user. We primarily use Internet-
based technologies to create digital communications solutions for the World
Wide Web. However, our solutions will increasingly incorporate additional
communications technologies, such as wireless, satellite and broadband
communications, for use with a variety of digital devices and information
appliances, including mobile phones, pagers and personal digital assistants.
With the growth in the use of the Internet, companies are increasingly
seeking to improve their business practices through Internet-based digital
communications solutions. Forrester Research, Inc. projects that the size of
the worldwide Internet professional services market will grow from $2.4 billion
in 1997 to $32.8 billion in 2002, a compound annual growth rate of 68.7%.
As the informational requirements of companies have become more complex,
organizations have required a broader range of information technology services
including strategy, architecture design, application development and systems
integration. As a result, numerous firms are active in the information
technology services market; few, however, offer the creativity, breadth of
services and technical expertise necessary to fully address an organization's
needs. In addition, because the information technology services market is
fragmented by the cultural and language differences among countries, firms that
lack a presence and expertise in local markets are unable to compete
effectively in those markets. The growing demand for creative digital
communications solutions has led to a significant market opportunity for firms,
such as Razorfish, that provide an integrated service offering while combining
an international presence with local expertise.
We have grown rapidly since our inception in 1995. In 1998, we expanded our
geographic presence by acquiring five companies. In January 1999, we acquired
Spray for 50% of our Common Stock on a fully
2
<PAGE>
diluted basis (after giving effect to this acquisition). Spray had $15.4
million in revenues for 1998. We currently have offices in New York, San
Francisco, Los Angeles, London, Stockholm, Oslo, Helsinki and Hamburg.
Our principal executive office is located at 107 Grand Street, 3rd Floor,
New York, New York 10013, and our telephone number is (212) 966-5960. We
maintain a site on the World Wide Web at www.razorfish.com; however, the
information found on our website is not a part of this prospectus. We
originally incorporated in New York, but we reincorporated in Delaware in
February 1999.
Razorfish acquired two United Kingdom companies and also completed certain
transactions with Spray in 1998, and Spray completed certain transactions with
one of its executive officers in 1997. Razorfish has included certain foreign
currency information in the prospectus that relates to these transactions. For
your convenience, Razorfish has also included the U.S. dollar amount
corresponding to the foreign currency amounts included in this prospectus. For
purposes of this disclosure and except as otherwise specified, all assets and
liabilities of foreign subsidiaries of Razorfish were translated into dollars
at fiscal year-end exchange rates, and income and expense items were translated
at average exchange rates prevailing during the applicable fiscal year.
Razorfish makes no representation that the pounds sterling or kroner amounts
have been, could have been or could be converted into dollars at the rates
indicated or at any other rates.
3
<PAGE>
The Offering
Common Stock offered by Razorfish.... 3,000,000 shares.
Common Stock to be outstanding after
this offering....................... 24,087,875 shares or 24,537,875 shares
if the underwriters exercise their
over-allotment option in full. These
shares do not include 1,124,213 options
reserved for issuance or 647,995
options granted and not exercised
pursuant to our two option plans as of
April 1, 1999.
Use of proceeds...................... General corporate purposes, including
expanding our human resources
department and hiring additional
personnel, developing a formal sales
and marketing department, strategic
acquisitions or investments,
international expansion, technical
upgrades of internal systems and
working capital requirements.
Proposed Nasdaq Symbol............... RAZF
Summary Condensed Consolidated and Pro Forma Financial Information
The following table presents summary condensed consolidated and pro forma
financial information with respect to Razorfish and has been derived from (1)
the audited financial statements of Razorfish for the three-year period ended
December 31, 1998 included elsewhere in this prospectus, and for the year ended
December 31, 1995 not included in this prospectus and (2) the unaudited pro
forma condensed consolidated financial statements included elsewhere in
this prospectus that give effect to the acquisitions that Razorfish completed
in 1998 and 1999 and the exercise of an option to purchase 1,976,810 shares (or
10%) of our Common Stock in 1999. The information set forth below should be
read in conjunction with "Unaudited Pro Forma Condensed Consolidated Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Razorfish's consolidated financial statements and
the notes thereto, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Actual Pro forma
-------------------------------------------- ------------
Year ended
Year ended December 31, December 31,
-------------------------------------------- ------------
1995 1996 1997 1998 1998
---------- ---------- ---------- ---------- ------------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Information:
Revenues................ $ 312 $ 1,218 $ 3,618 $ 13,843 $ 30,974
Direct salaries and
costs.................. 107 895 1,906 7,770 22,562
Gross profit............ 205 323 1,712 6,073 8,412
Operating expenses...... 158 629 1,051 3,335 7,289
Amortization of good-
will................... -- -- -- 107 3,091
Non-cash compensation
expense................ -- -- 79 2,278 6,232
Net income (loss)....... 36 (254) 297 (343) (8,154)
Net income (loss) per
share
Basic.................. $0.00 $(0.03) $0.03 $(0.04) $(0.39)
Diluted................ $0.00 $(0.03) $0.03 $(0.04) $(0.38)
Weighted average common
shares outstanding
Basic.................. 9,090,906 9,090,906 9,156,819 9,223,821 21,081,665
Diluted................ 9,537,607 9,537,607 9,886,241 9,670,522 21,528,366
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------
Pro forma
as adjusted
for the
Actual Pro forma offering
-------- ---------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Information:
Cash and cash equivalents....................... $ 599 $17,320 $46,146
Total assets.................................... 12,085 82,506 111,332
Total long-term debt............................ 3,212 3,236 3,236
Total debt...................................... 5,542 5,566 5,566
Stockholders' equity............................ 2,729 67,158 95,984
</TABLE>
4
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus,
including our consolidated financial statements and the related notes, before
you purchase any shares of our Common Stock. Additional risks and
uncertainties, including those generally affecting the market in which we
operate or that we currently deem immaterial, may also impair our business.
The information in this prospectus includes forward-looking statements which
involve risks and uncertainties. Razorfish's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under the "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" sections and elsewhere in this prospectus.
Risks Related to Razorfish
The loss of our professionals would make it difficult to complete existing
projects and bid for new projects, which could adversely affect our business
and results of operations.
Our business is labor intensive, and our success depends on identifying,
hiring, training and retaining professionals. If a significant number of our
current employees or any of our senior managers or key project managers leave,
we may be unable to complete or retain existing projects or bid for new
projects of similar scope and revenue. We have entered into employment
agreements and non-competition agreements with some of our senior managers, but
these key personnel may still leave us or compete with us. In addition, there
is no guarantee that the non-competition provisions of these agreements would
be enforced by a court if Razorfish were to seek to enforce its rights under
these provisions. Even if we retain our current employees, our management must
continually recruit talented professionals in order for our business to grow.
These professionals must have skills in business strategy, marketing, branding,
technology and creative design. There is currently a shortage of qualified
personnel in the information technology services market, and this shortage is
likely to continue. We compete intensely for qualified personnel with our
competitors. If we cannot attract, motivate and retain qualified professionals,
our business and results of operations could be materially and adversely
affected. See "Management--Employment and non-competition agreements" for a
more complete description of the employment and non-competition agreements with
our senior managers.
Our revenues are difficult to predict because they are generated on a project-
by-project basis.
We derive our revenues primarily from fees for services generated on a
project-by-project basis. These projects vary in size and scope. Therefore, a
client that accounts for a significant portion of our revenues in a given
period may not generate a similar amount of revenues, if any, in subsequent
periods. In addition, after we complete a project, we have no assurance that a
client will retain us in the future.
We derive a portion of our revenues from fixed-fee contracts. If the costs
of completing these projects exceed the fixed fees for such projects, our
operating results could be materially and adversely affected.
In general, our clients may terminate the agreements entered into in
connection with a project, whether time and materials or fixed-fee based, upon
30-days' prior written notice. We cannot give any assurances that a client will
not terminate a project before its completion. If our clients terminate
existing agreements or if we are unable to enter into new agreements, our
business, financial condition and results of operations could be materially and
adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Overview" for a more complete description of our sources of
revenues and the impact of the nature of our business on our financial
condition.
5
<PAGE>
We generate a large part of our revenues from a small number of clients.
We derive a significant portion of our revenues from a limited number of
large clients. For example, Charles Schwab accounted for approximately 27.1% of
our actual revenues in 1998 and four clients collectively accounted for
approximately 63.5% of our actual revenues in 1997. The volume of work
performed for these clients may not be sustained from year to year, and there
is a risk that these principal clients may not retain us in the future. Any
cancellation, deferral or significant reduction in work performed for these
principal clients or a significant number of smaller clients could have a
material adverse effect on our business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview" and "Business--Clients" for more
information relating to our clients.
A decrease in the number or size of our projects may adversely impact our
quarter-to-quarter results and the price of our Common Stock.
A high percentage of our expenses, including those related to employee
compensation and equipment, are relatively fixed. If the number or size of our
projects decreases in any quarter, then our revenues and operating results may
also decrease.
If our operating results fall short of investors' expectations, the trading
price of our Common Stock could decrease materially, even if such results do
not signal any longer-term problems. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Quarter-to-quarter
fluctuations in margins" for additional factors that may cause variations in
our quarterly results.
Our recent acquisitions have created financial and other challenges, which, if
not addressed or resolved, could have an adverse effect on our business.
We acquired five businesses during 1998 and acquired Spray in January 1999.
We are experiencing certain financial, operational and managerial challenges in
integrating these acquired companies. To the extent our management must devote
significant time and attention to the integration of technology, operations and
personnel as a result of these acquisitions, our ability to service current
clients and win new clients may suffer. In addition, our management faces the
difficult and potentially time consuming challenge of implementing uniform
standards, controls, procedures and policies throughout our U.S. and European
offices.
We could also experience financial or other setbacks if any of the acquired
businesses experienced problems in the past of which our management is not
presently aware. For example, if an acquired business had dissatisfied
customers or had any performance problems, our reputation could suffer as a
result of our association with that business. Our management is unaware of any
material legal liabilities of the acquired companies. However, to the extent
any customer or other third party asserts any material legal claims against any
of the acquired companies, our business, financial condition and results of
operations could be materially and adversely affected. See "Business--Spray
acquisition" and "Business--Other acquisitions" for descriptions of the
acquisitions we have completed.
We may be unable to implement our acquisition growth strategy, which could have
an adverse effect on our business and competitive position in the industry.
Our business strategy includes increasing our market share and global
presence through strategic acquisitions of other digital communications
solutions providers and web design or consulting firms. Our continued growth
will depend on our ability to identify and acquire companies that complement or
enhance our business on acceptable terms. We may not be able to complete or
identify future acquisitions or realize the anticipated results of future
acquisitions. Some of the risks that we may encounter in implementing our
acquisition growth strategy include:
.expenses and difficulties in identifying potential targets and the costs
associated with incompleted acquisitions;
.expenses, delays and difficulties of integrating the acquired company into
our existing organization;
6
<PAGE>
.diversion of management's attention;
.expenses of amortizing the acquired company's intangible assets;
.impact on our financial condition due to the timing of the acquisition;
and
.expense of any undisclosed or potential legal liabilities of the acquired
company.
If realized, any of these risks could have a material adverse effect on our
business, results of operations and financial condition.
Our continued growth may further strain our resources, which could adversely
affect our business and results of operations.
Our recent growth has strained our managerial and operational resources. A
key part of our strategy is to grow, both by hiring more personnel and by
acquiring companies, which may continue to strain our resources. We cannot
assure you that our managers will be able to manage our growth effectively. To
manage future growth, our management must continue to improve our operational
and financial systems, procedures and controls and expand, train, retain and
manage our employee base. If our systems, procedures and controls are
inadequate to support our operations, our expansion would be halted, and we
could lose our opportunity to gain significant market share. Any inability to
manage growth effectively could have a material adverse effect on our business,
results of operations and financial condition.
We may have difficulty in managing our international operations and expansion,
which could adversely affect our business and results of operations.
A key element of our strategy is to expand our business into international
markets. In addition to our domestic operations, we have operations in five
European cities: London, England; Stockholm, Sweden; Oslo, Norway; Helsinki,
Finland; and Hamburg, Germany. Our management may have difficulty in managing
our international operations because of distance, as well as language and
cultural differences. Our management cannot assure you that they will be able
to market and operate our services successfully in foreign markets.
Other risks related to our international operations include:
. fluctuations in currency exchange rates and the conversion to the euro by
several members of the European Union;
. difficulties arising from staffing and managing foreign operations;
. legal and regulatory requirements of different countries, such as
differing tax or labor laws; and
. potential political and economic instability.
If any of these risks materialize, our international and domestic
businesses, results of operations and financial condition could be materially
and adversely affected.
Our four-year operating history makes it difficult to predict our future
success.
Because we were formed in January 1995, we have a limited operating history
upon which you can evaluate our business. The limited amount of information
about us makes it more difficult for you to predict whether or not we will be
successful. You should evaluate our chances of financial and operational
success in light of the risks, uncertainties, expenses, delays and difficulties
associated with starting a new business, many of which may be beyond our
control. In addition, we compete in a relatively new market known as the
information technology services market. Because this market is new and rapidly
evolving, companies competing in it may face many uncertainties. Our success
will depend on many factors, including those described in the following
paragraphs.
7
<PAGE>
We have a history of losses and may need additional financing.
Razorfish and Spray have experienced operating losses, as well as net
losses, for some of the years during which they have operated. Similarly, in
the future, we may not generate sufficient revenue from operations to pay all
of our operating or other expenses. If we fail to generate sufficient cash from
our operations to pay these expenses, our management will need to identify
other sources of funds. We may not be able to borrow money or issue more shares
of Common Stock to meet our cash needs. Even if we can complete such
transactions, they may not be on terms that are favorable or reasonable from
our perspective. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a more complete description of our
historical financial condition, results of operations and liquidity.
We are controlled by a small number of stockholders.
If the stockholders listed below choose to act or vote in concert, they will
have the power to influence the election of our directors, the appointment of
new management and the approval of any other action requiring the approval of
our stockholders, including any amendments to our Certificate of Incorporation
and mergers or sales of all of our assets. In addition, without the consent of
these stockholders, we could be prevented from entering into certain
transactions that could be beneficial to us. Also, third parties could be
discouraged from making a tender offer or bid to acquire our company at a price
per share that is above the price at which the Common Stock will trade on
Nasdaq.
Immediately following this offering, the following stockholders collectively
will own approximately 84.8% of the outstanding shares of our Common Stock and
will own individually the percentage set forth opposite their respective names:
<TABLE>
<S> <C>
Spray Ventures AB.................................................. 32.8%
Communicade Inc.................................................... 33.0
Jeffrey A. Dachis.................................................. 9.5
Craig M. Kanarick.................................................. 9.5
</TABLE>
Communicade Inc. is a wholly owned subsidiary of Omnicom Group, Inc. Per
Bystedt, Jonas Svensson, Thomas Randerz and Johan Ihrfelt, each of whom is an
officer or director of Razorfish, collectively own more than 50% of the
outstanding voting stock of Spray Ventures AB.
Risks Related to Our Industry
We compete in a new and highly competitive market that has low barriers to
entry.
We compete in the information technology services market which is relatively
new and intensely competitive. We expect competition to intensify as the market
evolves. We compete with:
. Internet service firms;
. technology consulting firms;
. technology integrators;
. strategic consulting firms; and
. in-house information technology, marketing and design departments of our
potential clients.
Many of our competitors have longer operating histories, larger client
bases, longer relationships with clients, greater brand or name recognition and
significantly greater financial, technical, marketing and public relations
resources than we have.
There are relatively few barriers preventing competitors from entering the
information technology services market. As a result, new market entrants pose a
threat to our business. We do not own any patented technology that precludes or
inhibits competitors from entering the information technology services market.
Existing or future competitors may develop or offer services that are
comparable or superior to ours at a lower price, which could have a material
adverse effect on our business, results of operations and financial condition.
See "Business--Industry background" and "Business--Competition" for a more
complete description of the industry in which we compete, a list of our
competitors and the competitive factors within our industry.
8
<PAGE>
We must maintain our reputation and expand our name recognition to remain
competitive.
We believe that establishing and maintaining a good reputation and name
recognition is critical for attracting and expanding our targeted client base.
We also believe that the importance of reputation and name recognition will
increase due to the growing number of information technology service providers.
If our reputation is damaged or if potential clients do not know what services
we provide, we may become less competitive or lose our market share. Promotion
and enhancement of our name will depend largely on our success in continuing to
provide high quality services and digital communications solutions, which
cannot be assured. If clients do not perceive our digital communications
solutions to be effective or of high quality, our brand name and reputation
could be materially and adversely affected.
In addition, we license two trademarks and our design logo to Razorfish
Studios, Inc., a company controlled by Communicade and Messrs. Dachis and
Kanarick. Because the "Razorfish" trademarks and design logo are licensed to
Razorfish Studios, our name and reputation could be materially and adversely
affected by content published or actions taken by Razorfish Studios. See
"Certain Transactions" for a more complete description of the business
relationship between Razorfish and Razorfish Studios.
Misappropriation of our trademarks and other proprietary rights could harm our
reputation, affect our competitive position and cost us money.
We believe our trademarks and other proprietary rights are important to our
success and competitive position. If we are unable to protect our trademarks
and other proprietary rights against unauthorized use by others, our reputation
among existing and potential clients could be damaged and our competitive
position adversely affected. We have registered certain of our trademarks in
the United States and abroad. We use our best efforts to limit access to and
distribution of our proprietary information, as well as proprietary information
licensed from third-parties. We cannot ensure that these strategies will be
adequate to deter misappropriation of our proprietary information and material.
Our strategies to deter misappropriation could be inadequate in light of the
following risks:
. non-recognition or inadequate protection of our proprietary rights in
certain foreign countries;
. undetected misappropriation of our proprietary information or materials;
. development of similar software or applications by our competitors; and
. unenforceablity of the non-competition agreements entered into by our key
employees.
If any of these risks materialize, we could be required to spend significant
amounts to defend our rights and our managerial resources could be diverted. In
addition, our trademarks and other proprietary rights may decline in value or
not be enforceable. See "Business--Intellectual property rights" for more
information concerning our intellectual property.
We need to keep pace with changing communications technologies in order to
provide effective digital communications solutions.
Our success depends on our ability to keep pace with the rapid changes
occurring in communications technologies and the new and improved devices and
services that result from these changes. Our inability to respond quickly and
cost-effectively to changing communications technologies and devices could make
our existing service offering non-competitive and may cause us to lose our
market share. For example, if the Internet is rendered obsolete or less
important by faster, more efficient technologies, we must be prepared to offer
non-Internet-based solutions or risk losing current and potential clients. In
addition, to the extent that mobile phones, pagers, personal digital assistants
or other devices become important aspects of digital communications solutions,
we need to have the technological expertise to incorporate them into our
solutions.
9
<PAGE>
Our business depends on continued growth in the use of the Internet.
Our future success is substantially dependent upon continued growth in the
use of the Internet because we primarily use Internet-based technology to
create our solutions. To the extent that businesses do not consider the
Internet a viable commercial medium, our client base may not grow. The adoption
of the Internet for commerce and communications, particularly by those
individuals and companies that have historically relied upon alternative means
of commerce and communication, generally requires the understanding and
acceptance of a new way of conducting business and exchanging information. In
particular, companies that have already invested substantial resources in other
means of conducting commerce and exchanging information may be particularly
reluctant or slow to adopt a new, Internet-based strategy that may make their
existing personnel and infrastructure obsolete.
In addition, our business may be indirectly impacted if the number of users
on the Internet does not increase or if commerce over the Internet does not
become more accepted and widespread. The use and acceptance of the Internet may
not increase for a number of reasons, including:
. actual or perceived lack of security of information, such as credit card
numbers;
. high cost or lack of availability of access;
. congestion of traffic or other usage delays on the Internet;
. inconsistent quality of service or the lack of availability of cost-
effective, high-speed service;
. possible outages due to Year 2000 difficulties or other damage to the
Internet;
. governmental regulation;
. uncertainty regarding intellectual property ownership; and
. lack of high-speed modems and other communications equipment.
Published reports have also indicated that capacity constraints caused by
growth in the use of the Internet may impede further development of the
Internet to the extent that users experience delays, transmission errors and
other difficulties. If the necessary infrastructure, products, services or
facilities are not developed, or if the Internet does not become a viable and
widespread commercial medium, our business, results of operations and financial
condition could be materially and adversely affected.
Our business is subject to U.S. and foreign government regulation of the
Internet.
Both the U.S., at the state, local and federal government levels, and the
European Union have recently passed legislation relating to the Internet.
Because these laws are still being implemented, we are not certain how our
business will be impacted by them. We may be indirectly affected by this new
legislation to the extent it impacts our clients and potential clients. In
addition, U.S. and foreign governmental bodies are considering, and may
consider in the future, other legislative proposals that would regulate the
Internet. We cannot predict if or how any future legislation would impact our
business, results of operations or financial condition. See "Business--U.S. and
foreign government regulation" for a more complete description of the
regulations that govern our industry.
The Year 2000 problem may adversely affect our business.
The Year 2000 problem is the potential for system and processing failures of
date-related data arising from the use of two digits by computer-controlled
systems, rather than four digits, to define the applicable year. We believe
that our internal software and hardware systems will function properly with
respect to dates in the year 2000 and thereafter, but we can give you no
assurance in this regard until such systems are operational in the year 2000.
In addition, Year 2000 problems of our clients could affect our systems or
operations. Widespread Year 2000 difficulties could also decrease demand for
our services as companies expend resources upgrading their computer systems. As
part of our analysis of the Year 2000 problem, we have analyzed the impact of
the
10
<PAGE>
"worst case scenario" on our business. The "worst case scenario" would occur if
the statements and warranties of our vendors concerning their Year 2000
compliance and upgrade programs were entirely false, our current upgrades were
unsuccessful and our contingency plan failed, resulting in a critical systems
failure throughout Razorfish.
Although, as a general matter, we do not specifically warrant to clients
that our work will be Year 2000 compliant, certain clients have requested and
received such warranties. In such cases, we do not warrant the compliance of
third-party software; rather, we warrant only that software created by us will
be Year 2000 compliant. However, even absent a specific Year 2000 warranty,
there is a risk that clients for whom we have created or implemented software
will attempt to hold us liable for any damages that result in connection with
Year 2000 problems.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for a more complete description of the Year 2000 risks that we
face and the steps we have taken to reduce those risks.
The conversion to the euro may adversely affect our business in Europe.
Due to our operations in the United Kingdom, Sweden, Finland, Norway and
Germany, we may be exposed to certain risks as a result of the conversion by
certain European Union member states of their respective currencies to the
euro. The conversion process commenced on January 1, 1999. The conversion rates
between the member states' currencies and the euro are fixed by the Council of
the European Union. We are unsure as to whether the conversion to the euro will
have an adverse impact on our business, but potential risks include (1) the
costs of modifying our software and information systems and (2) changes in the
conduct of business and in the principal European markets for our products and
services. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Currency fluctuation and the euro conversion" for a more
complete description of the impact of the conversion to the euro on our
financial condition.
Risks Related to this Offering
The volume of trading and price of our Common Stock could fluctuate
significantly, which could adversely affect our stock price.
Currently there is no public market for our Common Stock. We do not know the
extent to which investor interest will lead to the development of a trading
market or how liquid it may be. Although in recent months investors have shown
great interest in technology companies focused on the Internet, many
publications indicate that the stock of these companies trade at overly
inflated prices. If investor interest in these stocks declines, the price for
our Common Stock could drop suddenly and significantly, even if our operating
results are positive. In addition, the trading volume of Internet-related
stocks has been volatile in recent months. If the trading volume of our Common
Stock experiences significant changes, the price of our Common Stock could be
adversely affected.
Wide fluctuations in our trading price or volume could also be caused by:
.quarterly variations in our operating results;
.investor perception of our company and the information technology services
market in general;
.announcements or implementation of technological innovations;
.announcements or implementation by us or our competitors of new products or
services;
.financial estimates by securities analysts; and
.general economic and information technology services market conditions.
Declines in the trading or price of our Common Stock could also materially
and adversely affect employee morale and retention, our access to capital and
other aspects of our business.
11
<PAGE>
The sale of a substantial number of shares of our Common Stock in the public
market could adversely affect the market price, which could negatively impact
your investment in us.
Following this offering, a portion of our shares of Common Stock will be
eligible for sale in the public market. Sales or the expectation of sales of a
large number of shares of our Common Stock in the public market could adversely
affect the prevailing market price of our Common Stock. We, our directors and
executive officers and existing stockholders have agreed, except in limited
circumstances, not to sell any shares of Common Stock for 180 days after the
date of this prospectus without the prior consent of Credit Suisse First Boston
Corporation; however, Credit Suisse First Boston Corporation may release the
shares from these restrictions at any time. In addition, certain individuals
hold warrants that are exercisable during the period from October 22, 1999
through November 22, 1999 and that, if exercised in full, entitle them to
receive up to an aggregate of 1,925,932 shares of our Common Stock. Up to
of the 1,925,932 shares will be held by individuals who are not
subject to the foregoing selling restrictions agreed to with Credit Suisse
First Boston Corporation. See "Shares Eligible for Future Sale" for a more
detailed description of the restrictions on selling shares of our Common Stock
after this offering.
Our management has broad discretion over the use of proceeds from this
offering.
Our management has significant flexibility in applying the proceeds we
receive in this offering. Because the proceeds are not required to be allocated
to any specific investment or transaction, you cannot determine the value or
propriety of our management's application of the proceeds on our behalf. See
"Use of Proceeds" for a more detailed description of how management intends to
apply the proceeds of this offering.
The value of your investment in our Common Stock will be diluted.
If you purchase Common Stock in this offering, you will pay more for your
shares than the amount paid by existing stockholders or individuals or
companies which acquired shares by exercising options granted before this
offering. As a result, the value of your investment based on the value of our
net tangible assets, as recorded on our books, will be less than the amount you
pay for shares of Common Stock in this offering. In addition, the total amount
of our capital will be less than what it would have been had you and all of the
existing stockholders and optionees paid the same amount per share of Common
Stock as you will pay in this offering. See "Dilution" for a more complete
description of how the value of your investment in our Common Stock will be
diluted upon the completion of this offering.
Our charter documents could make it more difficult for a third party to acquire
us.
Our Certificate of Incorporation and By-laws are designed to make it
difficult for a third party to acquire control of us, even if a change in
control would be beneficial to stockholders. For example, our certificate of
incorporation authorizes our Board of Directors to issue up to 10,000,000
shares of "blank check" preferred stock. Without stockholder approval, the
Board of Directors has the authority to attach special rights, including voting
and dividend rights, to this preferred stock. With these rights, preferred
stockholders could make it more difficult for a third party to acquire our
company.
Our By-laws do not permit any person other than the Board of Directors or
certain executive officers to call special meetings of the stockholders. In
addition, a stockholders' proposal for an annual meeting must be received
within a specified period in order to be placed on the agenda. Because
stockholders do not have the power to call meetings and are subject to timing
requirements in submitting stockholder proposals for consideration at an annual
or special meeting, any third-party takeover not supported by the Board of
Directors would be subject to significant delays and difficulties. See
"Description of Capital Stock" for a more detailed description of the terms of
our charter documents that could hinder a third party's attempt to acquire
control of Razorfish.
12
<PAGE>
USE OF PROCEEDS
Razorfish estimates that it will receive net proceeds of approximately,
$28.6 million or approximately $33.2 million if the underwriters' overallotment
option is exercised in full, from the sale of the shares of Common Stock
offered by it, at an assumed initial public offering price of $11.00 per share,
after deducting the estimated underwriting discounts and commissions and
offering expenses payable by Razorfish.
Razorfish expects to use such net proceeds for general corporate purposes,
including:
.expanding its human resources department and hiring additional personnel;
.the development of a formal sales and marketing department;
.strategic acquisitions or investments;
.international expansion;
.technical upgrades of internal systems; and
.working capital requirements.
Razorfish's management continually evaluates potential strategic
acquisitions or investments, but at the present time Razorfish has no
understandings, commitments or agreements with respect to any such acquisition
or investment. Pending such uses, Razorfish intends to invest the net proceeds
from the offering in U.S. government securities and other investment-grade,
interest-bearing instruments.
The foregoing represents Razorfish's present intentions with respect to the
allocation of proceeds of this offering based upon its present plans and
business conditions. The occurrence of certain unforeseen events or changed
business conditions could result in the application of the proceeds of the
offering in a manner other than as described in this prospectus. See "Risk
Factors--Our management has broad discretion over the use of proceeds from this
offering" for discussion of this risk.
DIVIDEND POLICY
Razorfish's Board of Directors has never declared or paid any cash dividends
on its Common Stock and does not expect to do so in the foreseeable future.
Razorfish currently intends to retain any earnings to finance the expansion and
development of its business. Razorfish's Board of Directors will make any
future determination of the payment of dividends based upon conditions then
existing, including Razorfish's earnings, financial condition and capital
requirements, as well as such economic and other conditions as the Board of
Directors may deem relevant. In addition, the payment of dividends may be
limited by financing agreements that Razorfish may enter into in the future.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Razorfish (1) on an
actual basis as of December 31, 1998, (2) on a pro forma basis assuming the
acquisition of Spray and the exercise by Communicade of an option to purchase
1,976,810 shares (or 10%) of Razorfish's Common Stock had been completed as of
December 31, 1998 and (3) pro forma as adjusted to give pro forma effect to the
sale of 3,000,000 shares of Common Stock offered hereby. The non-voting shares
of Class B Common Stock were a portion of the purchase price paid by Razorfish
in connection with the acquisition of Spray, and they were issued to
Communicade and Spray Ventures in February 1999. See "Business--Spray
acquisition" and "Description of Capital Stock--Common stock."
This table should be read in conjunction with "Unaudited Pro Forma Condensed
Consolidated Financial Information," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and each of Razorfish's and
Spray's consolidated financial statements and the notes thereto included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of December 31, 1998
-----------------------------
Pro forma
Actual Pro forma as adjusted
------ --------- -----------
(in thousands)
<S> <C> <C> <C>
Total long-term debt............................. $3,212 $ 3,236 $ 3,236
Stockholders' equity:
Class A Common Stock, $.01 par value:
29,999,950 shares authorized, 9,223,821 shares
issued and outstanding, actual (29,999,950
shares authorized, 21,081,665 issued and
outstanding, pro forma; 24,081,665 issued and
outstanding, pro forma as adjusted)(1)........ 92 211 241
Class B Common Stock, $.01 par value: 50 shares
authorized, no shares issued and outstanding,
actual (50 shares authorized, 50 shares issued
and outstanding, pro forma and pro forma as
adjusted)..................................... -- -- --
Preferred Stock, $.01 par value: no shares
authorized, no shares issued and outstanding,
actual (10,000,000 shares authorized, no
shares issued and outstanding, pro forma and
pro forma as adjusted)........................ -- -- --
Additional paid-in capital(2).................. 2,752 71,016 99,812
Retained earnings (accumulated deficit)........ (119) (4,073) (4,073)
Cumulative foreign currency translation
adjustments................................... 4 4 4
------ ------- -------
Total stockholders' equity(2)................ 2,729 67,158 95,984
------ ------- -------
Total capitalization....................... $5,941 $70,394 $99,220
====== ======= =======
</TABLE>
- --------
(1) Does not include (a) options to purchase 659,955 shares of Common Stock
issued pursuant to Razorfish's 1997 Stock Option Plan and outstanding as of
December 31, 1998 (of which options to purchase 132,161 shares were
exercisable as of December 31, 1998) or the remaining 196,136 shares of
Common Stock reserved for issuance as of December 31, 1998 pursuant to the
1997 Stock Option Plan, all of which will be granted concurrently with the
consummation of this offering or (b) 922,327 shares of Common Stock
reserved for issuance pursuant to Razorfish's 1999 Stock Incentive Plan of
which no options are outstanding but 430,500 options of which will be
granted concurrently with the consummation of this offering. See
"Management--Employee benefit plans."
(2) The purchase price paid by Communicade in connection with the exercise of
the option described in the introduction to the table above was based on a
discount of 20% from an assumed offering price of $10.00 per share (or
$8.00 per share). The purchase price for these shares will be adjusted
based on a discount of 20% from the actual offering price of the shares
sold in this offering. This discount will be reflected as a charge to pro
forma operations of $3,953,620. At the closing of this offering,
Communicade will pay, or Razorfish will refund, the difference between the
amount paid by Communicade and the amount payable based on the actual
offering price, as applicable. An increase or decrease in the offering
price of $1.00 will result in an increase or decrease in the aggregate
purchase price payable by Communicade of $1,581,448. Assuming that the
actual offering price of the shares offered hereby is $11.00 per share (the
midpoint of the range disclosed on the cover of the prospectus), the
purchase price payable by Communicade will increase by $1,581,448 to
$17,395,928.
14
<PAGE>
DILUTION
Assuming that the acquisition of Spray and the exercise by Communicade of an
option to purchase 1,976,810 shares (or 10%) of Razorfish's Common Stock had
been completed as of December 31, 1998, Razorfish's pro forma net tangible book
value as of December 31, 1998 would have been approximately $14.4 million, or
$0.68 per share. Net tangible book value per share is equal to the total
tangible assets of Razorfish minus total liabilities divided by the number of
shares of Common Stock outstanding. Assuming Razorfish had also sold the
3,000,000 shares of Common Stock offered hereby (at an assumed initial public
offering price of $11.00 per share), and after deducting underwriting discounts
and commissions and estimated offering expenses payable by Razorfish,
Razorfish's pro forma net tangible book value at December 31, 1998 would have
been approximately $43.0 million, or $1.78 per share. This represents an
immediate increase in pro forma net tangible book value of $1.10 per share to
existing stockholders (including Spray Ventures and Communicade) and an
immediate dilution of $9.22 per share to new investors. Dilution is determined
by subtracting pro forma net tangible book value per share after the offering
from the amount of cash paid by a new investor for a share of Common Stock. The
following table illustrates the substantial and immediate per share dilution to
new investors:
<TABLE>
<CAPTION>
Per share
------------
<S> <C> <C>
Assumed initial public offering price ........................ $11.00
Pro forma net tangible book value as of December 31, 1998... $0.68
Increase attributable to new investors...................... 1.12
-----
Pro forma net tangible book value after giving effect to the
offering..................................................... 1.80
------
Dilution to new investors..................................... $ 9.20
======
</TABLE>
The following table sets forth as of December 31, 1998 the number of shares
of Common Stock purchased from Razorfish, the total consideration paid and the
average price per share paid by existing stockholders and by new investors at
an assumed offering price of $11.00 per share:
<TABLE>
<CAPTION>
Total
Shares purchased consideration
------------------ --------------- Average price
Number Percent Amount Percent per share
---------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1).. 21,087,875 87.5% $54,659 62.4% $2.59
New investors............. 3,000,000 12.5 33,000 37.6 11.00
---------- ----- ------- -----
Total................... 24,087,875 100.0% $87,659 100.0% $3.64
========== ===== ======= =====
</TABLE>
- --------
(1) Includes 7,904,827 shares acquired by Spray Ventures and 1,976,207 shares
acquired by Communicade at $3.64 per share, pursuant to the Spray
acquisition, and 1,976,810 shares acquired by Communicade at $8.00 per
share pursuant to the exercise of its option to purchase up to 10% of
Razorfish's Common Stock. The purchase price paid by Communicade in
connection with the exercise of the 10% option was based on a discount of
20% from an assumed offering price of $10.00 per share (or $8.00 per
share). The purchase price for these shares will be adjusted based on a
discount of 20% from the actual offering price of the shares sold in this
offering. See "Capitalization."
If the underwriters exercise their over-allotment in full, the pro forma net
tangible book value per share of Common Stock as of December 31, 1998 would
have been $1.94 per share, which would result in dilution to the new investors
of $9.06 per share, and the number of shares held by the new investors will
increase to 3,450,000, or 14.1% of the total number of shares to be outstanding
after this offering, and the number of shares held by the existing stockholders
will be 21,081,665 shares, or 85.9% of the total number of shares to be
outstanding after this offering.
15
<PAGE>
The foregoing tables assume no exercise of any outstanding stock options to
purchase Common Stock. As of December 31, 1998, there were outstanding options
to purchase an aggregate of 659,955 shares of Common Stock, 132,161 of which
were then exercisable, and Razorfish had also reserved for issuance as of
December 31, 1998 an additional 196,136 shares of Common Stock for issuance
upon the exercise of options which had not yet been granted under the 1997
Stock Option Plan but which Razorfish intends to grant concurrently with the
consummation of this offering. Razorfish has reserved a total of 922,327 shares
of Common Stock for issuance under the 1999 Stock Incentive Plan of which no
options are outstanding but 430,500 options of which will be granted
concurrently with the consummation of this offering. To the extent these
options are exercised, the value of the investment of both new and existing
investors will be less diluted. See "Capitalization," "Management--Employee
benefit plans" and note 9 to Razorfish's consolidated financial statements for
a more detailed description of outstanding stock options and Razorfish's stock
option plans.
The following table illustrates the increase in net tangible book value per
share to investors as of December 31, 1998 (assuming that the acquisition of
Spray, the exercise by Communicade of its option to purchase 1,976,810 shares
(or 10%) of Razorfish's Common Stock and the sale of 3,000,000 shares of Common
Stock offered hereby at an assumed offering price of $11.00 had been completed
as of December 31, 1998) after giving pro forma effect to the exercise of all
outstanding nominal issuances of options to purchase Common Stock, including
proceeds received upon exercise of these options:
<TABLE>
<CAPTION>
Per share
---------
<S> <C>
Net tangible book value as of December 31, 1998................. $1.80
Increase attributable to exercise of nominal issuances of
options to purchase Common Stock as of December 31, 1998....... 0.02
-----
Pro forma net tangible book value ................................ $1.82
=====
</TABLE>
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF RAZORFISH
The following selected consolidated financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Razorfish's consolidated financial statements
and the notes thereto included elsewhere in this prospectus. The statement of
operations information for the three-year period ended December 31, 1998 and
the balance sheet information as of December 31, 1997 and 1998 is derived from
the consolidated financial statements of Razorfish, which have been audited by
Arthur Andersen LLP, independent public accountants, and is included elsewhere
in this prospectus. The statement of operations information for the year ended
December 31, 1995 and the balance sheet information as of December 31, 1995 and
1996 is derived from the consolidated financial statements of Razorfish, which
have been audited by Arthur Andersen LLP, independent public accountants, and
is not included in this prospectus.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1995 1996 1997 1998
--------- --------- --------- ---------
(in thousands, except share and per
share data)
<S> <C> <C> <C> <C>
Statement of Operations Information:
Revenues............................ $312 $1,218 $3,618 $13,843
Direct salaries and costs........... 107 895 1,906 7,770
--------- --------- --------- ---------
Gross profit........................ 205 323 1,712 6,073
Sales and marketing................. 16 129 175 438
General and administrative.......... 142 500 877 2,897
Amortization of goodwill............ -- -- -- 107
Non-cash compensation expense....... -- -- 79 2,278
--------- --------- --------- ---------
Income (loss) from operations....... 47 (306) 581 353
Interest expense, net............... -- 5 19 241
--------- --------- --------- ---------
Income (loss) before income taxes... 47 (311) 562 112
Provision (benefit) for income
taxes.............................. 11 (57) 265 455
--------- --------- --------- ---------
Net income (loss)................... $ 36 $ (254) $ 297 $ (343)
========= ========= ========= =========
Net income (loss) per share
Basic.............................. $0.00 $(0.03) $0.03 $(0.04)
Diluted............................ $0.00 $(0.03) $0.03 $(0.04)
Weighted average common shares
outstanding
Basic.............................. 9,090,906 9,090,906 9,156,819 9,223,821
Diluted............................ 9,537,607 9,537,607 9,886,241 9,670,522
<CAPTION>
December 31,
----------------------------------------
1995 1996 1997 1998
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Information:
Cash and cash equivalents........... $ -- $ 63 $1,176 $ 599
Total assets........................ 123 593 4,267 12,085
Total long-term debt................ 17 55 77 3,212
Total debt.......................... 21 91 1,953 5,542
Stockholders' equity................ 36 281 657 2,729
</TABLE>
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF SPRAY
The following selected consolidated financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Spray's consolidated financial statements and
the notes thereto included elsewhere in this prospectus. The statement of
operations information for the three-year period ended December 31, 1998 and
the balance sheet information as of December 31, 1997 and 1998 is derived from
the consolidated financial statements of Spray, which have been audited by
Arthur Andersen LLP, independent public accountants, and is included elsewhere
in this prospectus. The balance sheet information as of December 31, 1996 is
derived from the consolidated financial statements of Spray, which have been
audited by Arthur Andersen LLP, independent public accountants, and is not
included in this prospectus. The statement of operations information for the
two-year period ended December 31, 1995 and the balance sheet information as of
December 31, 1994 and 1995 is unaudited and has been prepared on the same basis
as the audited consolidated financial statements of Spray included elsewhere in
this prospectus. In the opinion of management, this unaudited information
includes all adjustments, consisting of only normally recurring adjustments
necessary for a fair presentation of such information. The historical results
are not necessarily indicative of the operating results to be expected in the
future.
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1994 1995 1996 1997 1998
---- ------ ------ ------ -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Information:
Revenues.................................. $458 $2,192 $5,319 $7,818 $15,402
Direct salaries and costs................. 323 1,734 4,391 7,258 13,111
---- ------ ------ ------ -------
Gross profit.............................. 135 458 928 560 2,291
Sales and marketing....................... 38 97 350 395 757
General and administrative................ -- -- 256 965 2,763
Amortization of goodwill.................. -- -- -- 89 331
---- ------ ------ ------ -------
Income (loss) from operations............. 97 361 322 (889) (1,560)
Interest income (expense), net............ -- 1 -- 84 (235)
---- ------ ------ ------ -------
Income (loss) before minority interest and
income taxes............................. 97 362 322 (805) (1,795)
Minority interest......................... -- -- -- 88 319
---- ------ ------ ------ -------
Income (loss) before income taxes......... 97 362 322 (717) (1,476)
Provision (benefit) for income taxes...... -- 66 241 (24) --
---- ------ ------ ------ -------
Net income (loss)......................... $ 97 $ 296 $ 81 $ (693) $(1,476)
==== ====== ====== ====== =======
<CAPTION>
December 31,
----------------------------------
1994 1995 1996 1997 1998
---- ------ ------ ------ -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Information:
Cash and cash equivalents................. $110 $ 184 $ 240 $ 581 $ 907
Total assets.............................. 325 1,036 1,239 4,664 6,827
Total long-term debt...................... -- -- -- 45 24
Total debt................................ -- -- -- 542 1,623
Stockholders' equity...................... 142 476 269 1,617 836
</TABLE>
18
<PAGE>
EXAMINATION REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Razorfish, Inc.:
We have examined the pro forma adjustments reflecting the transactions
described in Notes (a), (b), (c) and (d) and the application of those
adjustments to the historical amounts in the accompanying pro forma condensed
consolidated balance sheet of Razorfish Inc. as of December 31, 1998, and the
pro forma adjustments reflecting the transactions described in Notes (a), (b),
(c) and (d) and the application of those adjustments to the historical amounts
in the pro forma condensed consolidated statement of operations for the year
then ended. The historical condensed financial statements are derived from the
historical financial statements of Razorfish Inc. and subsidiaries and Spray
Network AB and subsidiaries, which were audited by us, appearing elsewhere
herein. Such pro forma adjustments are based upon management's assumptions
described in Note 2. Our examination was made in accordance with standards
established by the American Institute of Certified Public Accountants and,
accordingly, included such procedures as we considered necessary in the
circumstances.
The objective of this pro forma financial information is to show what the
significant effects on the historical financial information might have been had
the transactions occurred at an earlier date. However, the pro forma condensed
consolidated financial statements are not necessarily indicative of the results
of operations or related effects on financial position that would have been
attained had the above mentioned transactions actually occurred earlier.
In our opinion, management's assumptions provide a reasonable basis for
presenting the significant effects directly attributable to the above mentioned
transactions described in Notes (a), (b), (c) and (d), the related pro forma
adjustments give appropriate effect to those assumptions, and the pro forma
column reflects the proper application of those adjustments to the historical
financial statement amounts in the pro forma condensed consolidated balance
sheet as of December 31, 1998 and the pro forma condensed consolidated
statement of operations for the year then ended.
ARTHUR ANDERSEN LLP
New York, New York
April 8, 1999
19
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
statements as of and for the year ended December 31, 1998 have been derived
from the application of pro forma adjustments to the historical consolidated
financial statements of Razorfish and Spray, which are included elsewhere in
this prospectus. The unaudited pro forma condensed consolidated balance sheet
gives effect to the acquisition of Spray and the exercise by Communicade of an
option to purchase 1,976,810 shares (or 10%) of Razorfish's Common Stock as if
such transactions had occurred on December 31, 1998. The unaudited pro forma
consolidated statement of operations information for the year ended December
31, 1998 gives effect to the acquisitions that Razorfish completed in 1998 and
1999 and Communicade's exercise of the 10% option as if such transactions had
occurred on January 1, 1998.
The unaudited pro forma condensed consolidated financial statements do not
purport to be indicative of what Razorfish's actual results of operations or
financial condition would have been assuming the acquisitions that Razorfish
completed in 1998 and 1999 and the exercise by Communicade of its option to
purchase up to 10% of Razorfish's Common Stock had been completed on such
dates, nor does it purport to be indicative of results of operations or
financial condition that may be achieved in the future.
Each of the acquisitions that Razorfish completed in 1998 and 1999 has been
accounted for using the purchase method of accounting. The purchase method of
accounting allocates the aggregate purchase price to the assets acquired and
liabilities assumed based upon their respective fair values. The excess
purchase price over the fair value of net assets acquired, which equals $47.8
million for Spray, $0.8 million for Avalanche Systems and an aggregate of $2.8
million for the other acquisitions, has been allocated to goodwill, customer
lists and workforce. The estimated fair value of the net assets acquired from
Spray was determined based on an independent third-party valuation and
management's knowledge of current industry trends and transactions. Management
considers such estimates to be reasonable.
20
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of December 31, 1998
<TABLE>
<CAPTION>
Historical Pro forma adjustments
------------------------ -----------------------------
Spray
Razorfish Spray acquisition(a) 10% option(b) Pro forma
----------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 598,720 $ 907,000 $ -- $15,814,476 $17,320,196
Accounts receivable,
net................... 2,373,006 1,725,000 -- -- 4,098,006
Other current assets... 2,602,822 1,246,000 -- -- 3,848,822
----------- ----------- ----------- ----------- -----------
Total current assets.. 5,574,548 3,878,000 -- 15,814,476 25,267,024
Property and equipment,
net.................... 1,185,544 1,436,000 -- -- 2,621,544
Intangibles............. 3,454,582 1,513,000 47,778,687(a) -- 52,746,269
Investments and other
assets................. 1,870,809 -- -- -- 1,870,809
----------- ----------- ----------- ----------- -----------
Total assets........ $12,085,483 $ 6,827,000 $47,778,687 $15,814,476 $82,505,646
=========== =========== =========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Due to Omnicom......... $ 1,782,380 $ -- $ -- $ -- $ 1,782,380(d)
Accounts payable and
accrued expenses...... 1,791,417 2,854,000 -- -- 4,645,417
Related party debt..... 500,000 -- -- -- 500,000
Deferred tax
liabilities........... 1,395,884 -- -- -- 1,395,884
Current portion of
capital lease
obligations........... 47,107 -- -- -- 47,107
Other current
liabilities........... 609,213 2,830,000 -- -- 3,439,213
----------- ----------- ----------- ----------- -----------
Total current
liabilities.......... 6,126,001 5,684,000 -- -- 11,810,001
Long-term debt.......... 3,206,506 24,000 -- -- 3,230,506
Capital lease
obligations............ 5,671 -- -- -- 5,671
Other long-term
liabilities............ 18,655 283,000 -- -- 301,655
----------- ----------- ----------- ----------- -----------
Total liabilities... 9,356,833 5,991,000 -- -- 15,347,833
Stockholders' equity:
Preferred Stock......... -- -- -- -- --
Common stock:
Class A................ 92,238 37,000 61,810(c) 19,768 210,816
Class B................ -- -- 1(c) -- 1
Additional paid-in
capital............... 2,751,863 3,492,000 45,023,876(c) 19,748,327 71,016,066
Retained deficit....... (119,311) (2,581,000) 2,581,000(c) (3,953,619) (4,072,930)
Cumulative foreign
translation
adjustments............ 3,860 (112,000) 112,000(c) -- 3,860
----------- ----------- ----------- ----------- -----------
Total stockholders'
equity............... 2,728,650 836,000 47,778,687 15,814,476 67,157,813
----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders'
equity.............. $12,085,483 $ 6,827,000 $47,778,687 $15,814,476 $82,505,646
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes and management's assumptions to the unaudited pro forma
condensed consolidated financial statements are integral parts of this
statement.
21
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(a) Spray acquisition
On January 5, 1999, Razorfish acquired all of the issued and
outstanding shares of capital stock of Spray from Spray Ventures and
Communicade in exchange for an aggregate of 9,881,034 shares of
Common Stock (representing 50% of Razorfish's outstanding shares of
Common Stock on a fully diluted basis after giving effect to this
acquisition) and 50 shares of non-voting Class B Common Stock.
Set forth below is Razorfish's allocation of the purchase price of
the Spray acquisition:
<TABLE>
<S> <C>
Aggregate purchase price................................. $48,614,687
Less: net book value of assets acquired................ 836,000
-----------
Excess of cost over net book value of assets acquired.... $47,778,687
===========
Allocation of excess of cost over net book value of
assets acquired:
Goodwill............................................... $39,278,687
Customer lists......................................... 7,600,000
Workforce.............................................. 900,000
-----------
Total................................................ $47,778,687
===========
</TABLE>
The allocation of excess cost over net book value of assets
acquired to the intangible assets relating to the Spray acquisition
was determined based upon an independent third-party valuation. The
estimated useful lives are as follows:
<TABLE>
<S> <C>
Goodwill...................................................... 20 years
Customer lists................................................ 16 years
Workforce..................................................... 6 years
</TABLE>
(b) Communicade's 10% option
On February 3, 1999, Communicade exercised its option to purchase
up to 10% of Razorfish's Common Stock and acquired 1,976,810 shares
of Common Stock for total proceeds of $15,814,476 million. The
purchase price paid by Communicade in connection with the exercise
of this option was based on a discount of 20% from an assumed
offering price of $10.00 per share (or $8.00 per share). This
discount has been reflected as a pro forma charge to operations of
$3,953,619 million (determined by multiplying the 1,976,810 shares
by $2.00 per share) and a corresponding offset to additional paid-in
capital. The purchase price for these shares will be adjusted based
on a discount of 20% from the actual offering price of the shares
offered hereby. At the closing of this offering, Communicade will
pay, or Razorfish will refund, the difference between the amount
paid by Communicade and the amount payable based on such actual
offering price, as applicable. Assuming that the actual offering
price of the shares offered hereby is $11.00 per share (the midpoint
of the range disclosed on the cover of this prospectus), the
purchase price payable by Communicade will increase by $1,581,448 to
$17,395,928.
22
<PAGE>
(c) Reflects the adjustments to stockholders' equity as follows:
<TABLE>
<CAPTION>
Acquisitions
------------
<S> <C>
Elimination of Spray common stock....................... $ (37,000)
Issuance of Common Stock in connection with the
acquisition of Spray................................... 98,810
-----------
Subtotal............................................. 61,810
-----------
Issuance of Class B Common Stock in connection with the
acquisition of Spray................................... 1
-----------
Additional paid-in capital:
Elimination of Spray additional paid-in capital........ (3,492,000)
Additional paid-in capital from issuance of Class A and
B Common Stock in connection with the acquisition of
Spray................................................. 48,515,876
-----------
Subtotal............................................. 45,023,876
Retained deficit:
Elimination of Spray historical retained deficit........ 2,581,000
Cumulative foreign translation adjustment:
Elimination of Spray historical cumulative foreign
translation adjustment................................. 112,000
-----------
Total................................................ $47,778,687
===========
</TABLE>
(d) "Due to Omnicom" was reduced subsequent to December 31, 1998 by
$1,103,998 to $678,382 in connection with the exercise of Communicade's 10%
option; however, this adjustment has not been reflected in the Pro Forma
Condensed Consolidated Balance Sheet.
23
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31, 1998
<TABLE>
<CAPTION>
Historical Pro forma adjustments
----------------------------------------- -----------------------------------------
Other Other
Razorfish Spray acquisitions(a) Spray acquisitions 10% option Pro forma
----------- ----------- --------------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $13,843,289 $15,402,000 $1,728,763 $ -- $ -- $ -- $30,974,052
Direct salaries and
costs.................. 7,769,752 13,111,000 1,681,737 -- -- -- 22,562,489
----------- ----------- ---------- ----------- -------- ----------- -----------
Gross profit............ 6,073,537 2,291,000 47,026 -- -- -- 8,411,563
Sales and marketing..... 438,204 757,000 164,222 -- -- -- 1,359,426
General and
administrative......... 2,897,064 2,763,000 269,223 -- -- -- 5,929,287
Amortization of
intangibles............ 106,634 331,000 -- 2,588,934 (b) 64,126 (c) -- 3,090,694
Non-cash compensation
expense................ 2,278,281 -- -- -- -- 3,953,619 6,231,900
----------- ----------- ---------- ----------- -------- ----------- -----------
Income (loss) from
operations............. 353,354 (1,560,000) (386,419) (2,588,934) (64,126) (3,953,619) (8,199,744)
Interest expense
(income), net.......... 241,342 235,000 5,342 -- -- (481,684)(d) --
Minority interests...... -- (319,000) -- -- -- -- (319,000)
----------- ----------- ---------- ----------- -------- ----------- -----------
Income (loss) before
income taxes........... 112,012 (1,476,000) (391,761) (2,588,934) (64,126) (3,471,935) (7,880,744)
Provision (benefit) for
income taxes........... 454,813 -- (181,227) -- -- -- 273,586
----------- ----------- ---------- ----------- -------- ----------- -----------
Net (loss) income....... $ (342,801) $(1,476,000) $ (210,534) $(2,588,934) $(64,126) $(3,471,935) $(8,154,330)
=========== =========== ========== =========== ======== =========== ===========
Per share information:
Net loss per share:
Basic................... $ (0.04) $ (0.39)
=========== ===========
Diluted................. $ (0.04) $ (0.38)
=========== ===========
Weighted average common
shares outstanding:
Basic................... 9,223,821 21,081,665(e)
=========== ===========
Diluted................. 9,670,522 21,528,366(e)
=========== ===========
</TABLE>
The accompanying notes and management's assumptions to the unaudited pro forma
condensed consolidated financial statements are integral parts of this
statement.
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(a) Other acquisitions
Avalanche Systems acquisition
On January 15, 1998, Razorfish purchased a 66 2/3% ownership
interest of a newly formed corporation, Avalanche Solutions, Inc. In
connection with this transaction, Avalanche Solutions acquired
substantially all of the assets of Avalanche Systems, Inc. from
Fleet Bank National Association and Fleet Bank Capital Corporation
in a foreclosure sale. These assets were seized from Avalanche
Systems, whose shareholders were the founders and holders of the
remaining 33 1/3% of the capital stock of Avalanche Solutions. In
April 1998, the founders of Avalanche Solutions surrendered their
aggregate 33 1/3% ownership interest in Avalanche Solutions to
Razorfish. The total cash consideration for all stock and net assets
acquired was approximately $1,294,000.
These acquisitions have been accounted for under the purchase
method of accounting; accordingly, the purchase price has been
allocated to the tangible and intangible assets acquired and
liabilities assumed on the basis of their respective fair values on
their respective acquisition dates. As a result of these
acquisitions, Razorfish has recorded goodwill of approximately
$789,000, which is the excess cost of net assets acquired and is
being amortized over a useful life of 20 years. No pro forma
adjustments have been reflected in the accompanying Unaudited Pro
Forma Condensed Consolidated Statement of Operations for the period
of January 1, 1998 through January 15, 1998 as the effects are
immaterial.
CHBi acquisition
On May 21, 1998, Razorfish acquired all of the outstanding stock
of CHBi Limited for cash consideration of $2,028,000. Razorfish is
required to make certain cash earn-out payments to the former
shareholders of CHBi based upon the achievement of targeted
operating performance of the company through May 2001. No earn-out
payments have been earned to date. Further earn-out payments, if
any, will be recorded as additional purchase price and, as such, a
corresponding adjustment to goodwill. This acquisition was accounted
for as a purchase; accordingly, the operating results of CHBi since
June 1, 1998 have been included in Razorfish's consolidated
financial statements.
Plastic acquisition
On June 26, 1998, Razorfish acquired substantially all of the
assets of Alpha Online, Inc. d/b/a Plastic and Plasticweb for cash
consideration of $686,000. Razorfish is required to make certain
cash earn-out payments to the former shareholders of Plastic based
upon the achievement of targeted operating performance of the
company through December 2001. No earn-out payments have been earned
to date. Further earn-out payments, if any, will be recorded as
additional purchase price and, as such, a corresponding adjustment
to goodwill. This acquisition was accounted for as a purchase;
accordingly, the operating results of Plastic since June 1, 1998
have been included in Razorfish's consolidated financial statements.
<tag> Media acquisition
On July 30, 1998, Razorfish acquired substantially all of the
assets of Titus Anspach Group, LLC d/b/a <tag> Media for cash
consideration of $256,000. Razorfish is required to make certain
cash earn-out payments to the former shareholders of <tag> Media
based upon the achievement of targeted operating performance of the
company through December 2001. No earn-out payments have been earned
to date. Further earn-out payments, if any, will be recorded as
additional purchase price and, as such, a corresponding adjustment
to goodwill. This acquisition was accounted for as a purchase;
accordingly, the operating results of <tag> Media since August 1,
1998 have been included in Razorfish's consolidated financial
statements.
25
<PAGE>
Sunbather acquisition
On October 26, 1998, Razorfish acquired substantially all of the
assets of Sunbather Limited from an administrator appointed for the
company for cash consideration of $289,653. This acquisition was
accounted for as a purchase; the purchase price has been allocated
to the tangible and intangible net assets acquired and liabilities
assumed on the basis of their respective fair values on the
acquisition date. The operating results of Sunbather since October
1, 1998 have been included in Razorfish's consolidated financial
statements.
Set forth below are the unaudited results of operations for the
companies that Razorfish acquired, other than Spray, for the period
of January 1, 1998 through their respective acquisition dates:
<TABLE>
<CAPTION>
Total
other
CHBi Sunbather Plastic <tag> Media acquisitions
-------- --------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................ $785,735 $499,143 $284,320 $159,565 $1,728,763
Direct salaries and
costs.................. 657,982 513,247 347,545 162,963 1,681,737
-------- -------- -------- -------- ----------
Gross profit............ 127,753 (14,104) (63,225) (3,398) 47,026
Sales and marketing..... 125,169 14,327 23,396 1,330 164,222
General and
administrative......... 75,710 131,530 43,803 18,180 269,223
-------- -------- -------- -------- ----------
Loss from operations.... (73,126) (159,961) (130,424) (22,908) (386,419)
Interest (income)
expense, net........... (469) 5,404 (78) 485 5,342
-------- -------- -------- -------- ----------
Loss before income
taxes.................. (72,657) (165,365) (130,346) (23,393) (391,761)
Benefit for income
taxes.................. (45,958) (69,145) (54,235) (11,889) (181,227)
-------- -------- -------- -------- ----------
Net (loss).............. $(26,699) $(96,220) $(76,111) $(11,504) $ (210,534)
======== ======== ======== ======== ==========
</TABLE>
(b) Amortization of intangibles for the year ended December 31, 1998:
<TABLE>
<S> <C>
Amortization of Spray intangibles.......................... $2,588,934
Amortization of other acquisitions' goodwill prior to their
respective acquisition dates.............................. 64,126
----------
Total pro forma goodwill adjustments..................... $2,653,060
==========
</TABLE>
(c) Reflects the charge in connection with the exercise by Communicade
of its 10% option at a 20% discount from the assumed initial public
offering price of $10.00 per share.
(d) Interest expense (income), net
Reflects the elimination of interest expense for Razorfish, Spray
and the other acquisitions for the year ended December 31, 1998, as
if the 10% option had been exercised on January 1, 1998 and,
therefore, no borrowings would have been incurred by each of the
entities due to available cash resources.
(e) Set forth below are the weighted average shares of Common Stock
outstanding during the periods for the basic and diluted
computations for the year ended December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Basic:
Historical Razorfish basic.................................. 9,223,821
Shares issued in acquisition of Spray....................... 9,881,034
Shares issued on exercise of Communicade's 10% option....... 1,976,810
----------
Pro forma basic............................................ 21,081,665
==========
Diluted:
Historical Razorfish diluted................................ 9,670,522
Shares issued in acquisition of Spray....................... 9,881,034
Shares issued on exercise of Communicade's 10% option....... 1,976,810
----------
Pro forma diluted.......................................... 21,528,366
==========
</TABLE>
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
each of Razorfish's and Spray's consolidated financial statements and notes
thereto and "Unaudited Pro Forma Condensed Consolidated Financial Information"
included elsewhere in this prospectus. This prospectus contains forward-looking
statements relating to future events and Razorfish's future financial
performance. Actual results could be significantly different than those
discussed in this prospectus. Factors that could cause or contribute to such
differences include those set forth in the section entitled "Risk Factors," as
well as those discussed elsewhere in this prospectus.
Unless otherwise indicated, all references to Razorfish refer to Razorfish
and, subsequent to their acquisition or formation, its subsidiaries, including
Spray.
Overview
Razorfish is a leading-edge international digital communications solutions
provider. Razorfish's digital communications solutions are designed to help
clients increase sales, improve communications and create and enhance business
identities. Razorfish provides an integrated service offering consisting of
strategic consulting, design of information architectures and user-interfaces
and creation and customization of software necessary to implement its digital
communications solutions. Razorfish primarily uses Internet-based technologies
to create digital communications solutions for the World Wide Web. However,
Razorfish's solutions will increasingly incorporate additional communications
technologies, such as wireless, satellite and broadband communications, for use
with a variety of digital devices and information appliances, including mobile
phones, pagers and personal digital assistants. Prior to its acquisition, Spray
was engaged in the same business, with the same business philosophy and
strategy as Razorfish.
Razorfish's revenues are derived from fees for services generated on a
project-by-project basis. In general, clients are charged for the time,
materials and expenses incurred on a particular project; however, a portion of
Razorfish's revenues is derived from fixed-fee contracts. Historically,
Razorfish has not operated on a retainer basis; however, in the future,
Razorfish may utilize such arrangements.
Razorfish recognizes revenues for time and materials-based arrangements and
fixed-fee arrangements on the percentage-of-completion method of accounting
based on the ratio of costs incurred to total estimated costs. At the beginning
of each fixed-fee engagement, Razorfish estimates the total cost of the
project. Razorfish reassesses its estimated costs for each project on a
quarterly basis, and provisions for estimated losses on unfinished projects are
made over the life of the project in the period in which such losses are
determined.
The agreements entered into in connection with a project, whether time and
materials or fixed-fee based, are generally terminable by the client upon 30-
days' prior written notice. If the client terminates the agreement, it is
required to pay Razorfish for all time, materials and expenses incurred by
Razorfish through the effective date of termination. If clients terminate
existing agreements or if Razorfish is unable to enter into new engagements,
Razorfish's business, financial condition and results of operations could be
materially and adversely affected.
In addition, because a proportion of Razorfish's expenses are relatively
fixed, a variation in the number of client engagements can cause significant
variations in operating results from quarter to quarter.
Razorfish's projects vary in size and scope; therefore, a client that
accounts for a significant portion of Razorfish's revenues in one period may
not generate a similar amount of revenue in subsequent periods. On a pro forma
basis assuming all of the 1998 and 1999 acquisitions had occurred on January 1,
1998, Charles Schwab would have accounted for approximately 12.1% of revenues
for 1998, and no client would have accounted for more than 10.0% of revenues in
1997.
29
<PAGE>
Charles Schwab accounted for approximately 27.1% of Razorfish's actual
revenues in 1998. In 1997, the following clients accounted for the percentage
of Razorfish's actual revenues set forth opposite their respective names:
<TABLE>
<CAPTION>
Percent of
Client 1997 revenues
------ -------------
<S> <C>
CBS......................................................... 19.5%
AT&T........................................................ 16.2
Road Runner................................................. 14.1
Charles Schwab.............................................. 13.7
</TABLE>
Hagstromer & Qviberg accounted for 15.0% of Spray's actual revenues for 1998.
Telia and SAS accounted for approximately 17.0% and 12.0% of Spray's actual
revenues, respectively, during 1997. No other client of Razorfish or Spray
accounted for more than 10% of Razorfish's or Spray's actual revenues in 1998
or 1997.
Razorfish believes that it will continue to derive a significant portion of
its revenues from a limited number of larger clients. Any cancellation,
deferral or significant reduction in work performed for these principal clients
or a significant number of smaller clients could have a material adverse effect
on its business, financial condition and results of operations.
Operating and other expenses
Razorfish's direct salaries and costs are comprised primarily of salaries,
employee benefits and incentive compensation of billable employees and a
proportionate share of all other operating expenses based on the ratio of
billable to total employees.
Razorfish's sales and marketing expenses are comprised of the salaries of
employees who engage in sales and marketing activities and the costs of those
activities.
Razorfish's general and administrative expenses are comprised of the
salaries, employee benefits and incentive compensation of non-billable
employees and a proportionate share of all other operating expenses based on
the ratio of non-billable to total employees.
Razorfish's non-cash compensation expense is comprised of the compensation
cost associated with the difference between the fair market value of options
granted and the exercise price of such options over the vesting period of the
options. Razorfish will incur a maximum of approximately $341,000 in 1999,
$141,000 in 2000 and $28,000 in 2001 in non-cash compensation expense relating
to the grant of certain options to employees in 1997 and 1998. Such amounts may
decrease if employees depart Razorfish before their options are fully vested.
Acquisitions
Razorfish completed five acquisitions during 1998. Razorfish also acquired
Spray and certain of its subsidiaries in the first quarter of 1999. Razorfish
acquired substantially all of the assets of:
(1) Sunbather, a London-based new media company, in October 1998;
(2) <tag> Media, a Los Angeles-based new media entertainment consultant, in
July 1998;
(3) Plastic, a San Francisco-based new media company, in June 1998; and
(4) Avalanche Systems, a New York-based new media company, in January 1998.
In May 1998, Razorfish acquired all of the capital stock of CHBi, a London-
based new media company. In January 1999, Razorfish acquired all of the capital
stock of Spray for 50% of Razorfish's Common Stock on a fully diluted basis
(after giving effect to this acquisition). See "Business--Other
acquisitions"and "Business--Spray acquisition" for a more complete description
of the acquisitions Razorfish completed in 1998 and 1999.
The following table sets forth, for each line item shown, the amounts
attributable to certain of Razorfish's 1998 acquisitions. When Razorfish
acquired Avalanche Systems it combined Avalanche Systems' operations with
Razorfish's existing New York operations; therefore, no separate information
for Avalanche Systems is presented.
30
<PAGE>
In addition, when Razorfish acquired Sunbather, it combined Sunbather's
operations with CHBi's existing operations; therefore, the amounts for those
companies are presented together.
<TABLE>
<CAPTION>
Razorfish Los Angeles Razorfish Limited
(formerly <tag> Razorfish San Francisco (formerly CHBi
Media) (formerly Plastic) and Sunbather)
--------------------- ----------------------- -----------------
(in thousands)
<S> <C> <C> <C>
Revenues................ $398 $1,228 $1,700
Direct salaries and
costs.................. 300 602 1,199
---- ------ ------
Gross profit............ 98 626 501
Sales and marketing..... 27 35 48
General and
administrative......... 123 163 173
Amortization of
goodwill............... 5 6 --
---- ------ ------
(Loss) income from
operations............. (57) 422 280
Interest expense, net... 5 6 2
---- ------ ------
(Loss) income before
income taxes........... (62) 416 278
(Benefit) provision for
income taxes........... (20) 171 94
---- ------ ------
Net (loss) income....... $(42) $ 245 $ 184
==== ====== ======
</TABLE>
Spray Ventures was incorporated in July 1995 and had a total of seven
operating companies by early 1997. In August 1997, Spray Ventures established a
wholly owned subsidiary, Spray Services, and transferred all but one of its
operating subsidiaries to Spray Services. In September 1997, Spray Ventures
transferred all of the common shares of Spray Services to Tetre in
consideration for 1,162 common shares of Tetre, which represented 51% of the
common shares of Tetre on a fully diluted basis following this transaction. The
Tetre shareholders retained a 49% interest in Tetre. In addition, Messrs.
Bystedt and Randerz, officers of Razorfish, were shareholders and officers of
Tetre both prior to and following the transaction. Spray Ventures and the Tetre
shareholders entered into a shareholders agreement pursuant to which the Tetre
shareholders had a right to acquire the number of shares equal to 1% of Tetre
at the time of the merger with Spray Services if Tetre completed a public
offering of its shares. In addition, following this transaction, Spray Services
changed its name to Spray.
In addition, in June 1997 Tetre and Mr. Bystedt had entered into a
convertible debt agreement pursuant to which Mr. Bystedt loaned approximately
SEK 1.5 million ($0.2 million) to Tetre. Mr. Bystedt exercised his conversion
rights following the transaction with Spray Services and acquired 56 shares of
Spray. See "Certain Transactions."
In February 1998, Spray Ventures transferred its remaining operating company
to Spray in consideration for 414 shares in Spray such that Spray Ventures'
holdings in Spray equaled 58% following the transaction.
During the second quarter of 1998, the former Tetre shareholders converted
their remaining 42% ownership interest in Spray into 42% of Spray Ventures,
and, as a result, Spray became 100% owned by Spray Ventures. In addition, at
the time of this transaction, the shareholders agreement among Spray Ventures
and the former Tetre shareholders was terminated, and accordingly, the option
to purchase 1% of Spray was also terminated. See "Business--Spray acquisition."
Seasonality
In general, the laws of the European countries in which Razorfish operates
mandate that all employees receive significantly more vacation days than in the
United States. For example, in Sweden, each employee must receive a minimum of
25 days paid vacation per year. These vacations are typically taken in the
third quarter, resulting in declining revenues during this period due to a
reduction in both billable hours and client demand.
31
<PAGE>
Quarter-to-quarter fluctuations in margins
Razorfish's operating results and quarter-to-quarter margins may fluctuate
in the future as a result of many factors, some of which are beyond Razorfish's
control. Historically, Razorfish's and Spray's quarterly margins have been
impacted by:
. the number of client engagements undertaken or completed;
. a change in the scope of ongoing client engagements;
. seasonality;
. a shift from fixed-fee to time and materials-based contracts;
. the number of days during the quarter;
. utilization rates of employees;
. marketing and business development expenses;
. charges relating to strategic acquisitions;
. pricing changes in the information technology market; and
. economic conditions generally or in the information technology services
market.
Razorfish expects this trend to continue.
Results of operations
The following table sets forth certain consolidated statement of operations
data of Razorfish both in actual dollars and as a percentage of revenues for
the period indicated:
<TABLE>
<CAPTION>
Year
ended
December
31,
--------------------------------------------------
1996 1997 1998
---------------- --------------- ----------------
Percent Percent Percent
of of of
Amount revenues Amount revenues Amount revenues
------ -------- ------ -------- ------ --------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 1.22 100.0% $3.62 100.0% $13.84 100.0%
Direct salaries and
costs.................. 0.90 73.5 1.91 52.7 7.77 56.1
------ ----- ----- ----- ------ -----
Gross profit............ 0.32 26.5 1.71 47.3 6.07 43.9
Sales and marketing..... 0.13 10.6 0.17 4.8 0.44 3.2
General and
administrative......... 0.50 41.1 0.88 24.2 2.89 20.9
Amortization of
goodwill............... -- -- -- -- 0.11 0.8
Non-cash compensation
expense................ -- -- 0.08 2.2 2.28 16.5
------ ----- ----- ----- ------ -----
Income (loss) from
operations............. (0.31) (25.2) 0.58 16.1 0.35 2.5
Interest expense, net... -- -- 0.02 0.5 0.24 1.7
------ ----- ----- ----- ------ -----
Income (loss) before
income taxes........... (0.31) (25.2) 0.56 15.6 0.11 0.8
Provision (benefit) for
income taxes........... (0.06) (4.7) 0.26 7.3 0.45 3.3
------ ----- ----- ----- ------ -----
Net income (loss)....... $(0.25) (20.5)% $0.30 8.3% $(0.34) (2.5)%
====== ===== ===== ===== ====== =====
</TABLE>
32
<PAGE>
The following table sets forth certain consolidated statement of operations
data of Spray both in actual dollars and as a percentage of revenues for the
period indicated:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------
1996 1997 1998
--------------- ---------------- ----------------
Percent Percent Percent
of of of
Amount revenues Amount revenues Amount revenues
------ -------- ------ -------- ------ --------
(dollars in
millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues.................... $5.32 100.0% $7.82 100.0% $15.40 100.0%
Direct salaries and costs... 4.39 82.6 7.26 92.8 13.11 85.1
----- ----- ------ ------ ------ ------
Gross profit................ 0.93 17.4 0.56 7.2 2.29 14.9
Sales and marketing......... 0.35 6.5 0.40 5.1 0.76 4.9
General and administrative.. 0.26 4.8 0.96 12.3 2.76 17.9
Amortization of goodwill.... -- -- 0.09 1.2 0.33 2.2
----- ----- ------ ------ ------ ------
Income (loss) from
operations................. 0.32 6.1 (0.89) (11.4) (1.56) (10.1)
Interest income (expense),
net........................ -- -- 0.09 1.2 (0.24) (1.6)
----- ----- ------ ------ ------ ------
Income (loss) before
minority interest and
income taxes............... 0.32 6.1 (0.80) (10.2) (1.80) (11.7)
Minority interest........... -- -- (0.09) (1.1) (0.32) (2.0)
----- ----- ------ ------ ------ ------
Income (loss) before income
taxes...................... 0.32 6.1 (0.71) (9.1) (1.48) (9.7)
Provision (benefit) for
income taxes............... 0.24 4.5 (0.02) 0.3 -- --
----- ----- ------ ------ ------ ------
Net income (loss)........... $0.08 1.6% $(0.69) (8.8)% $(1.48) (9.7)%
===== ===== ====== ====== ====== ======
</TABLE>
Year ended December 31, 1998 compared to year ended December 31, 1997
Revenues
Razorfish's revenues increased $10.2 million, or 282.7%, to $13.8 million
for the year ended December 31, 1998 from $3.6 million for the year ended
December 31, 1997. This increase in revenues was primarily due to (1) the
growth in Razorfish's New York operations of $6.9 million as a result of the
increase in the number, complexity and length of the projects completed, an
increase in the billing rates of Razorfish's employees and the amount spent per
project by clients and (2) $3.3 million related to the five acquisitions
completed during 1998. Revenues for the New York operations increased to $6.9
million in 1998 from $3.6 million in 1997. The increase in revenues was also
partially due to a shift from fixed-fee to time and materials based contracts.
Spray's revenues increased $7.6 million, or 97.0%, to $15.4 million for 1998
from $7.8 million for 1997. This increase in revenues was due to (1) the growth
in Spray's Stockholm operations of $4.5 million as a result of the acquisition
of Spray Services in August 1997, an increase in the number, complexity and
length of the projects completed and the amount spent per project by clients
and (2) the inclusion of a full-year of the results of operations of three new
subsidiaries that began operations during the fourth quarter of 1997, which in
the aggregate equalled $3.1 million. Spray's revenues in 1998 were partially
offset by the disruption of operations in connection with the move to new
office space and a change in management in Spray's Stockholm office during the
third quarter of 1998.
Direct salaries and costs
Razorfish's direct salaries and costs increased $5.9 million, or 307.6%, to
$7.8 million for 1998 from $1.9 million for 1997. As a percentage of revenues,
direct salaries and costs increased to 56.1% during 1998 from 52.7% during
1997. The increase in direct salaries and costs in absolute dollar terms was a
result of the increase in the number of billable employees. The increase in
direct salaries and costs as a percentage of revenues was a result of higher
direct costs as a percentage of revenues for the London and Los Angeles offices
as employees were hired without proportionate increases in revenues. The
increase was partially offset by improvements in gross margins in New York and
the high revenues generated by the San Francisco office and an increase in the
size and complexity of projects and more efficient staffing of such projects.
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<PAGE>
Spray's direct salaries and costs increased $5.9 million, or 80.6%, to $13.1
million for 1998 from $7.3 million for 1997. As a percentage of revenues,
salaries and direct costs decreased to 85.1% during 1998 from 92.8% during
1997. This increase in absolute dollar terms was due to the increase in the
number of billable employees and an increase in January 1998 of the salary
rates of the former employees of Spray Services. The decrease in salaries and
direct costs as a percentage of revenues was due to efficiencies and higher
gross margins realized at Spray's offices.
Sales and marketing
Razorfish's sales and marketing expenses increased $0.3 million, or 151.0%,
to $0.4 million for 1998 from $0.2 million in 1997. As a percentage of
revenues, sales and marketing expenses decreased to 3.2% during 1998 from 4.8%
during 1997. The increase in sales and marketing expenses in absolute dollar
terms was primarily due to an increase in the number of solutions managers
spending a portion of their time on sales and marketing activities. The
decrease in sales and marketing expenses as a percentage of revenues was the
result of efficiencies gained as a result of the growth in the size of
Razorfish's operations.
Spray's sales and marketing expenses increased $0.4 million, or 91.7%, to
$0.8 million for 1998 from approximately $0.4 million for 1997. As a percentage
of revenues, sales and marketing expenses decreased to 4.9% during 1998 from
5.1% during 1997. The increase in absolute dollar terms was primarily due to an
increase in the number of employees participating in sales, marketing and
recruiting activities. The decrease in sales and marketing expenses as a
percentage of revenues was the result of efficiencies gained as a result of the
growth in the size of Spray's operations.
General and administrative
Razorfish's general and administrative expenses increased $2.0 million, or
230.5%, to $2.9 million in 1998 from $0.9 million in 1997. As a percentage of
revenues, general and administrative expenses decreased to 20.9% during 1998
from 24.2% in 1997. The increase in general and administrative expenses in
absolute dollar terms was the result of the increase in the number of non-
billable employees and an increase in other types of general and administrative
expenses, such as salaries, rent expense, equipment rental and depreciation.
The increase in the number of non-billable employees was the result of (1) an
increase in the number of support staff hired in connection with the
acquisitions and the growth in the size of Razorfish's operations and (2) a
shift in the classification of certain department heads in Razorfish's larger
offices from billable to non-billable employees because they spent a greater
portion of their time on management functions instead of on billable projects.
The decrease in general and administrative expenses as a percentage of revenues
was due to efficiencies gained as a result of the growth in the size of
Razorfish's operations. In addition, the expansion of Razorfish's operations to
locations where rent expenses were lower, such as San Francisco, and the
decrease in the number of non-billable employees in proportion to the total
number of employees in a given office has also contributed to the decrease in
general and administrative expenses as a percentage of revenues.
Spray's general and administrative expenses increased $1.8 million, or
186.3%, to $2.8 million for 1998 from $1.0 million for 1997. As a percentage of
revenues, general and administrative expenses increased to 17.9% during 1998
from 12.4% during 1997. This increase in general and administrative expenses in
absolute dollar terms was the result of the increase in the number of non-
billable employees and an increase in other types of general and administrative
expenses, such as salaries, rent expense, equipment rental and depreciation.
The increase in general and administrative expenses as a percentage of revenues
was primarily due to the costs incurred in connection with the move of the
Stockholm office to new office space in the third quarter of 1998.
Non-cash compensation expense
Non-cash compensation expense increased to $2.3 million in 1998 from
approximately $79,000 in 1997. This increase was due, primarily, to a one-time
compensation charge of $1.9 million that was incurred in the second quarter of
1998 as a result of the grant of fully vested options to purchase 500,000
shares of Common Stock at an exercise price below the fair market value of the
Common Stock on the date of grant. These
34
<PAGE>
options were granted to an officer of Razorfish pursuant to an employment
agreement entered into by Razorfish and the officer in connection with the
acquisition by Razorfish of Avalanche Systems. See "Business--Other
acquisitions."
Amortization of goodwill
Amortization of goodwill for Razorfish was approximately $0.1 million in
1998 compared to none for 1997. This increase in amortization of goodwill was
due to the goodwill resulting from the five acquisitions completed during 1998.
Amortization of goodwill for Spray was $0.3 million for 1998 compared to $0.1
million for 1997. This increase was the result of the full-year effect of
amortizing the goodwill associated with the subsidiaries of Spray that began
operations in the fourth quarter of 1997. Pro forma amortization of goodwill
would have increased $59,000 to $3.1 million for 1998 from $3.0 million for
1997.
Income taxes
Razorfish had income taxes of $0.5 million on pre-tax profits of $0.1
million during 1998. During 1997, Razorfish had income taxes of $0.3 million on
pre-tax profits of $0.6 million. The effective income tax rate was 406.0% and
47.1% during 1998 and 1997, respectively. The differences in the effective tax
rates during 1998 and 1997 from the federal and state statutory rates are
primarily the result of non-tax deductible expenses, including (1) compensation
charges incurred in connection with the grant of incentive stock options in
1998 of $1.9 million and (2) goodwill of $0.1 million in connection with the
five acquisitions completed in 1998.
Spray had no tax charge for 1998 on pre-tax losses of $1.5 million during
such period. During 1997, Spray had a tax benefit of $24,000 on pre-tax losses
of $0.7 million. During 1997 and 1998, Spray did not book a tax benefit due to
uncertainties of its future realizability as a result of the restructuring of
Spray that occurred in August 1997 and January 1999 and the existence of net
operating losses from previous tax periods.
Year ended December 31, 1997 compared to year ended December 31, 1996
Revenues
Razorfish's revenues increased $2.4 million, or 197.0%, to $3.6 million for
1997 from $1.2 million for 1996. This increase in revenues was primarily the
result of the growth in the Razorfish's business due to a larger client base
and an increase in the number, complexity and length of the projects completed
and a shift from fixed-fee to time and materials based contracts.
Spray's revenues increased $2.5 million, or 47.0%, to $7.8 million for 1997
from $5.3 million for 1996. This increase in revenues was due to the growth in
Spray's Stockholm office as a result of the acquisition of Spray Services in
August 1997, as well as the addition of the results of operations of three new
subsidiaries in the fourth quarter of 1997.
Direct salaries and costs
Razorfish's direct salaries and costs increased $1.0 million, or 112.9%, to
$1.9 million for 1997 from $0.9 million for 1996. As a percentage of revenues,
direct salaries and costs decreased to 52.7% during 1997 from 73.5% during
1996. The increase in direct salaries and costs in absolute dollar terms was
the result of an increase in the number of billable employees hired in 1997 and
an increase in billable employees' salary rates to bring them in line with
those provided by other companies in the industry. The decrease in direct
salaries and costs as a percentage of revenues was due to more efficient
staffing of larger and more complex projects.
Spray's direct salaries and costs increased $2.9 million, or 65.3%, to $7.3
million for 1997 from $4.4 million for 1996. As a percentage of revenues,
direct salaries and costs increased to 92.8% during 1997 from 82.6% during
1996. This increase in absolute dollar terms was due to an increase in the
number of billable employees. The increase in direct salaries and costs as a
percentage of revenues was primarily due to the impact of integrating Spray
Services into Spray following its acquisition which reduced the availability of
Spray's professionals to generate revenues.
35
<PAGE>
Sales and marketing
Razorfish's sales and marketing expenses increased approximately $46,000 or
35.4%, to $0.2 million during 1997 from $0.1 million for 1996. The increase in
sales and marketing expenses in absolute dollar terms was primarily due to an
increase in the number of solutions managers spending a portion of their time
on sales and marketing activities. As a percentage of revenues, sales and
marketing expenses decreased to 4.8% during 1997 from 10.6% in 1996.
Spray's sales and marketing expenses increased $0.1 million, or 12.9%, to
$0.4 million for 1997 from $0.3 million for 1996. As a percentage of revenues,
sales and marketing decreased to 5.1% during 1997 from 6.5% during 1996. This
decrease in sales and marketing expenses as a percentage of revenues was the
result of efficiencies gained as a result of the growth in the size of Spray's
operations.
General and administrative
Razorfish's general and administrative expenses increased $0.4 million, or
75.3%, to $0.9 million for 1997 from $0.5 million for 1996. As a percentage of
revenues, general and administrative expenses decreased to 24.2% during 1997
from 41.1% during 1996. The increase in general and administrative expenses in
absolute dollar terms was due to the increase in the number of non-billable
employees hired in 1997, the growth in the Razorfish's operations and the
rental of additional office space in New York City. The decrease in general and
administrative expenses as a percentage of revenues was due to efficiencies
gained as a result of the growth in the size of Razorfish's operations.
Spray's general and administrative expenses increased $0.7 million, or
277.0%, to $1.0 million for 1997 from $0.3 million for 1996. As a percentage of
revenues, general and administrative expenses increased to 12.3% during 1997
from 4.8% during 1996. This increase in general and administrative expenses,
both in absolute dollar terms and as a percentage of revenues, was the result
of the increase in the number of non-billable employees and an increase in all
the other types of general and administrative expenses.
Income taxes
Razorfish's income taxes increased to approximately $0.3 million on pre-tax
profits of $0.6 million for 1997 compared to a tax benefit of approximately
$57,000 on pre-tax losses of $0.3 million for 1996. The effective income tax
rate was 47.1% for 1997 and 18.3% for 1996. The tax benefit for 1996 was
reduced by the effect of change in Razorfish's status from an "S" corporation
to a "C" corporation in 1996.
Spray had a benefit from income taxes of approximately $24,000 on pre-tax
losses of $0.7 million during 1997. During 1996, Spray had a tax charge of $0.2
million on pre-tax profits of $0.3 million. The effective income tax rate was
3.3% and 74.8% for 1997 and 1996, respectively. The differences in the
effective tax rates for 1997 and for 1996 from the statutory Swedish tax rates
are primarily due to the non-deductibility of certain expenses.
Liquidity and capital resources
Historically, Razorfish has relied on borrowings under lines of credit
provided by Omnicom to finance its working capital requirements and capital
expenditures.
Historically, Spray has relied on cash flow from operations, capital
contributions and proceeds from the issuance of convertible debt to finance its
working capital requirements and capital expenditures.
Net cash provided by (used in) operating activities
Razorfish's net cash provided by operating activities was $2.1 million for
1998 compared to net cash used in operating activities of approximately $0.3
million for 1997. Net cash provided by operating activities in 1998 was
primarily due to an addback of $2.7 million for depreciation and amortization
and non-cash compensation expense, as well as an increase in accounts payable,
accrued expenses of $1.1 million and amounts owed to related parties of $0.5
million.
36
<PAGE>
The net cash used in operating activities of $0.3 million in 1997 was primarily
due to an increase of $1.3 million in accounts receivable related to the growth
in Razorfish's New York operations and an increase in the number of clients and
in the number and size of projects. Net cash used in operating activities was
approximately $0.2 million in 1996.
Spray's net cash used in operating activities was approximately $0.1 million
for 1998 compared to net cash provided by operating activities of $0.3 million
for 1997. Net cash used in operating activities for 1998 was primarily the
result of a net loss of $1.5 million and an increase of $0.8 million in
accounts receivable, an increase of $0.3 million in prepaid expenses and other
current assets which was partially offset by a significant increase of $0.5
million in other current liabilities and $1.1 million of accrued expenses. Net
cash provided by operating activities in 1997 was primarily due to an increase
of $0.5 million in accounts payable, of $0.4 million in accrued expenses and
other current liabilities. Net cash provided by operating activities was $0.4
million for 1996.
Net cash used in investing activities
Razorfish's net cash used in investing activities was $5.2 million for 1998
compared to net cash used in investing activities of approximately $0.3 million
for 1997. Net cash used in investing activities in 1998 was primarily used for
the acquisition of five companies during this period of $4.6 million and was
also used for capital expenditures of $0.7 million consisting primarily of the
purchase of computer equipment, furniture and fixtures and leasehold
improvements. Net cash used in investing activities was approximately $0.2
million in 1996.
Spray's net cash used in investing activities was $1.4 million for 1998
compared to net cash used in investing activities of $0.6 million for 1997. Net
cash used in investing activities in 1998 was primarily used for capital
expenditures of $1.0 million and investments aggregating $0.4 million in the
three new subsidiaries that began operations in the fourth quarter of 1997. Net
cash used in investing activities in 1997 was due to the investment of $0.1
million in the new subsidiaries, net of cash acquired, and capital expenditures
of $0.5 million consisting primarily of the purchase of computer equipment and
leasehold improvements. Net cash used in investing activities was approximately
$0.1 million for 1996.
Net cash provided by financing activities
Razorfish's net cash provided by financing activities was $2.6 million and
approximately $1.7 million for 1998 and 1997, respectively. This increase was
primarily the result of additional borrowings of $3.2 million under the lines
of credit provided by Omnicom in connection with the five acquisitions during
1998 which was partially offset by deferred registration costs of $0.6 million
in connection with this offering and the purchase of treasury stock for $0.5
million. Net cash provided by financing activities was approximately $0.5
million in 1996.
Spray's net cash provided by financing activities was $1.8 million and $0.7
million for 1998 and 1997, respectively. The increase in net cash provided by
financing activities was primarily the result of an increase in related-party
debt of $1.1 million, the conversion of debt of $0.3 million to a capital
contribution and $0.4 million acquired upon the exercise of options to purchase
Common Stock. Net cash used in financing activities was $0.3 million for 1996.
Capital expenditures, earn-out payments and rent expenses
Razorfish's capital expenditures for 1998 were approximately $0.7 million
compared to approximately $0.3 million for 1997. Capital expenditures were
approximately $0.2 million for 1996. Historically, capital expenditures have
been used to make leasehold improvements to Razorfish's leased office space and
to purchase computer hardware and software and furniture and fixtures.
Razorfish does not have any material commitments for capital expenditures for
the forseeable future. Razorfish does not expect to make payments
37
<PAGE>
greater than $250,000 in 1999 in connection with earn-out arrangements under
certain acquisition agreements. Razorfish may make additional payments in
subsequent years pursuant to these agreements, the amounts of which cannot be
determined at this time.
Spray's capital expenditures were $1.0 million and $0.5 million for 1998 and
1997, respectively. Capital expenditures were approximately $0.1 million for
1996. Historically, capital expenditures have been used to make leasehold
improvements to the Spray's leased office space and to purchase computer
hardware and software. Spray does not have any material commitments for capital
expenditures for the forseeable future.
Rental payments for office space leased by Razorfish under current rental
agreements will be $2.6 million in 1999.
Lines of credit and other financings
In September 1996, Razorfish entered into a Shareholders Agreement with
Communicade (f/k/a JWL Associates Corp.), a wholly owned subsidiary of Omnicom,
and Messrs. Dachis and Kanarick, pursuant to which Omnicom agreed that, as long
as it was a shareholder of Razorfish, it would provide Razorfish with a line of
credit of up to $2.0 million for working capital purposes and a financing line
of credit in connection with Razorfish's acquisition of "new media" companies.
The Shareholders Agreement terminated upon the effectiveness of a new
Stockholders Agreement entered into by Razorfish, Communicade, Spray Ventures
and Messrs. Dachis and Kanarick in connection with the acquisition of Spray.
Pursuant to the terms of the Stockholders Agreement, Communicade has provided
the working capital line of credit and the acquisition line of credit to
Razorfish on the same terms and conditions as were set forth in the
Shareholders Agreement. Razorfish repaid all outstanding amounts under the
working capital line of credit in February 1999 with the proceeds from the
exercise of the 10% option by Communicade. As of the date of this prospectus,
Razorfish has approximately $4.0 million outstanding under the acquisition line
of credit. The principal amounts under any loans made pursuant to the
acquisition line of credit are to be repaid quarterly in equal installments
over a seven-year period beginning on the date of the applicable loan. The
Stockholders Agreement terminates on the closing of this offering; accordingly,
Razorfish will no longer have available any line of credit. See "Certain
Transactions."
Pursuant to the terms of the Stockholders Agreement, Communicade was granted
an option to purchase from Razorfish the number of shares of Common Stock equal
to 10% of Razorfish's Common Stock on a fully diluted basis on the date the
option is exercised. The purchase price per share upon exercise of the 10%
Option is equal to 80% of the price per share to be sold in this offering. In
February 1999, Communicade exercised this option and purchased 1,976,810 shares
of Common Stock. The aggregate purchase price that Communicade paid for these
shares was approximately $15.8 million. The final purchase price will be
determined on the closing date of this offering. See "Certain Transactions."
At December 31, 1998, Spray had a loan of SEK 23,576,000 ($2.8 million based
upon the December 31, 1998 exchange rate of SEK 8.1023 = $1.00) due to Spray
Ventures. The terms and conditions of this loan were the same as Razorfish's
borrowings from Omnicom. Razorfish repaid this loan with the proceeds of the
10% option.
Razorfish provides lines of credit to certain of its subsidiaries under the
same terms and conditions as its borrowings from Omnicom.
Razorfish believes that cash generated by operations combined with the
proceeds of the exercise by Communicade of its 10% option and this offering
will be sufficient to meet its working capital needs for the next twelve
months.
38
<PAGE>
Year 2000
The Year 2000 problem is the potential for system and processing failures of
date-related data arising from the use of two digits by computer-controlled
systems, rather than four digits, to define the applicable year. For example,
computer programs that contain time-sensitive software may recognize a date
using two digits of "00" as the year 1900 rather then the year 2000. This could
result in system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar ordinary business activities. The Year 2000
problem is not limited to information technology systems but may also impact
embedded systems, such as those that control elevators, alarm systems and many
other devices.
Razorfish believes that its internal software and hardware systems will
function properly with respect to dates in the year 2000 and thereafter.
Nonetheless, there can be no assurance in this regard until such systems are
operational in the year 2000. In the judgment of management, Razorfish's
exposure is minimal, the cost of recovery will be insignificant, and its
business will not be adversely impacted.
Razorfish has examined all of its internal systems that constitute core
components of its operations, including both computer systems and elements of
the office environment. Razorfish has also conducted a complete inventory of
the hardware and software in use by Razorfish in order to verify the state of
Year 2000 compliance of all assets necessary to maintain the operations of
Razorfish during the potential disaster scenarios that Razorfish has
identified.
In connection with its Year 2000 compliance efforts, Razorfish will continue
to purchase and upgrade all desktop and server hardware and software according
to the capital budget in place for 1999. One full-time information services
specialist is dedicated to the completion of the full hardware and software
inventory and the installation of all application software. Razorfish's planned
upgrades to its telephone system and alarm system necessary to support
Razorfish's growth will also result in Year 2000 compliance. In the judgment of
management, the cost of compliance could range from $0.1 million to $0.3
million.
Razorfish has also examined Year 2000 issues as they relate to each third
party with which it has a material relationship, such as its payroll provider
and the supplier of the software used by the accounting department. Razorfish's
investigation into the capabilities of its vendors continues, and Razorfish has
received statements from approximately 90% of them regarding their Year 2000
compliance. Razorfish expects to receive additional statements of compliance
from certain of its vendors. In the judgment of management, internally used
third-party tools, such as operating systems, databases and other design and
development applications, are 90% Year 2000 compliant and will be fully
compliant by June 30, 1999. Management believes that any failures of these
systems would have negligible impact on Razorfish's operations and would take
only a few days to resolve.
Razorfish has verified that its internally developed solutions are Year 2000
compliant. Although as a general matter Razorfish does not specifically warrant
to clients that its work will be Year 2000 compliant, certain clients have
requested and received such warranties. In such cases, Razorfish does not
warrant the compliance of third-party software; rather, Razorfish warrants only
that software created by Razorfish will be Year 2000 compliant. However, even
absent a specific Year 2000 warranty, there is a risk that clients for whom
Razorfish has created or implemented software will attempt to hold Razorfish
liable for any damages that result in connection with Year 2000 problems.
Razorfish has also prepared a contingency plan, which includes the
availability of Year 2000 compliant software on its servers and the
availability of a full complement of trained information services support staff
to deal with unforeseen desktop failures. Razorfish has redundant servers for a
variety of its operating systems to minimize potential outages of server
operations. Regular backups will be supplemented and relocated offsite to
ensure Razorfish's ability to reconstruct its failed systems quickly. Secondary
DNS servers throughout Razorfish will maintain Razorfish's vital Internet
connections.
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As part of its analysis of the Year 2000 problem, Razorfish has analyzed the
impact of the "worst case scenario" on its business. The "worst case scenario"
would occur if the statements and warranties of Razorfish's vendors concerning
their Year 2000 compliance and upgrade programs were entirely false, its
current upgrades were unsuccessful and its contingency plan failed, resulting
in a critical systems failure throughout Razorfish. Although management does
not believe that this worst case scenario is likely to occur, if it does occur,
management estimates that it would cost approximately $7.0 million to replace
every single system and keep them operational for one month. The worst case
scenario would include replacing or rebuilding:
.all servers and the related operating systems;
.every date-aware function on the network systems;
.all workstation hardware;
.all general application software programs;
.the financial systems;
.nonfunctioning telecommunications systems;
.climate control systems; and
.every office appliance such as copiers and fax machines.
Currency fluctuation and the euro conversion
Razorfish does not believe that it is subject to material currency
fluctuations as a result of its international operations. Revenue from the
operations of its European subsidiaries, Razorfish Limited (formerly CHBi) and
Spray, are currently denominated primarily in British pounds and the Swedish
kroner, respectively. Razorfish does not plan to repatriate such revenues to
the United States in the foreseeable future. Historically, Razorfish has not
experienced any material changes in quarter-to-quarter operating results due to
currency fluctuations. However, no assurance can be given that quarterly
results will not be impacted in the future, for financial reporting purposes
only, due to the conversion into dollars of non-dollar denominated revenues.
Eleven of the fifteen member states of the European Union agreed to adopt
the euro as their common legal currency. On January 1, 1999, these members
began the process of converting their native currencies to the euro, and on
that date the euro commenced trading on currency exchanges and became available
for non-cash transactions. For the period from January 1, 1999 to January 1,
2002 both the euro and the native currencies will be legal tender in the
participating member states. During this period, the conversion rates for
currencies will be determined by a formula that has been established by the
European Commission. On January 1, 2002, new euro-denominated bills and coins
will be fully deployed and all native bills and coins will be withdrawn by July
1, 2002.
In addition, as of January 1, 1999, the new European Central Bank gained the
authority to direct monetary policy with respect to the euro, including money
supply and official interest rates for the euro. Some of the rules and
regulations with regard to the euro have yet to be promulgated and completed by
the European Commission.
While the United Kingdom and Sweden are members of the European Union, they
are not participating in the euro conversion; however, they may elect to
convert to the euro at a later date. Risks related to the conversion to the
euro may not impact Razorfish directly, but could have a materially adverse
effect on its clients' businesses, which could have an indirect effect on their
demand for Razorfish's services. Although Razorfish's management does not
believe that the conversion to the euro will have a material or adverse impact
on its business, they have not completed their assessment of the effect that
the introduction of the euro will have on its business, results of operations
and financial condition.
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Recent accounting pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and display of comprehensive income and its
components in the financial statements. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
SFAS No. 130 offers alternatives for presentation of disclosures required by
the standard. The adoption of SFAS No. 130 did not have a material impact on
Razorfish's results of operations, financial position or cash flows.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which establishes
standards for reporting information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997. The adoption
of SFAS No. 131 did not have a material impact on Razorfish's results of
operations, financial position or cash flows.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities." Statement of Position 98-5, which is
effective for fiscal years beginning after December 15, 1998, provides guidance
on the financial reporting of start-up costs and organization costs. It
requires costs of start-up activities and organization costs to be expensed as
incurred. As Razorfish has expensed these costs historically, the adoption of
this standard is not expected to have a significant impact on Razorfish's
results of operations, financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" which establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. There will be no impact to Razorfish's
results of operations, financial position or cash flows upon the adoption of
this standard.
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BUSINESS
Overview
Razorfish is a leading-edge international digital communications solutions
provider. Digital communications solutions are business solutions that use
digital technologies to enhance communications and interactions between people
and companies. Examples of Razorfish's solutions include (1) a re-designed on-
line trading system for Charles Schwab, (2) a user-interface for theglobe.com,
(3) an enhanced on-line business identity for IBM's RS/6000 product line and
(4) a user-interface for Road Runner, the high-speed on-line service that is
owned by ServiceCo, a joint venture among Time Warner, MediaOne, Microsoft and
Advance Newhouse. Razorfish's digital communications solutions are designed to
help clients increase sales, improve communications and create and enhance
business identities.
Razorfish provides an integrated service offering consisting of strategic
consulting, design of information architectures and user-interfaces and
creation and customization of software necessary to implement its digital
communications solutions. Razorfish primarily uses Internet-based technologies
to create digital communications solutions for the World Wide Web. However,
Razorfish's solutions will increasingly incorporate additional communications
technologies, such as wireless, satellite and broadband communications, for use
with a variety of digital devices and information appliances, including mobile
phones, pagers and personal digital assistants.
Razorfish was established in January 1995. Since its inception, Razorfish
has focused on growing in size and expanding the scope of its business to
provide an increasingly wider range of digital communications solutions.
Razorfish's growth has been the result of internal expansion and the
acquisition of five companies in 1998. In January 1999, Razorfish also acquired
Spray, thereby expanding its geographical presence to a total of six countries.
In addition, as a result of this acquisition, Razorfish's employee base was
increased to 350 full time employees. Razorfish has since grown to 414 full
time employees.
Industry background
Technology has enhanced the ability of companies to create, store, process
and distribute information. As companies face increasing pressure to operate
more efficiently and to better serve customer needs, information flow both
inside and outside an organization has risen in importance. However, the
escalating cost and complexity of information technology and the technical
expertise required to implement technology-based solutions have led companies
to increasingly rely on information technology service providers. This trend
toward outsourcing and a focus by companies on their core business has driven
the rapid growth of the information technology services market. The information
technology services market has grown most quickly in countries, such as the
United States and those in northern Europe, where high personal computer usage
and technology adoption rates among businesses and consumers provide for large
client bases.
With the growth in the use of the Internet, companies are increasingly
seeking to improve their business practices through digital communications
solutions. Today, digital communications solutions are largely Internet-based.
Forrester Research, Inc. projects that the size of the worldwide Internet
professional services market will grow from $2.4 billion in 1997 to $32.8
billion in 2002, a compound annual growth rate of 68.7%. Internet-based
solutions include intranets, extranets and websites. An intranet is an internal
company network that utilizes various Internet Protocols to allow employees
access to corporate information and internal business applications. An extranet
is a secure Internet Protocol network environment that links the company with
customers and suppliers and effectively integrates the stages involved in the
delivery of the company's products or services. Websites present an opportunity
for electronic commerce, Internet branding and the delivery of information and
entertainment services.
As the informational requirements of companies have become more complex,
organizations have required a broader range of information technology services,
including strategy, architecture design, application
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development and systems integration. Due to this demand for a broader range of
services, various types of service providers have entered the market for
digital communications solutions including Internet service firms, technology
consulting firms, technology integrators and strategic consulting firms.
However, Razorfish's management believes that these competitors generally lack
the creativity, breadth of services or technical expertise needed to fully
address an organization's needs. Furthermore, Razorfish's management believes
that firms that focus solely on Internet-based solutions, such as web design
firms, will lack the technical expertise to deliver non-Internet-based digital
communications solutions that companies are beginning to seek. In addition,
because the information technology services market is fragmented by the
cultural and language differences among countries, Razorfish's management
believes that firms that lack a presence and expertise in local markets are
unable to compete as effectively in those markets. The growing demand for
creative digital communications solutions has led to a significant market
opportunity for firms, such as Razorfish, that combine an international
presence with local expertise and provide an integrated service offering.
The Razorfish approach
Razorfish believes that with the tremendous growth in the use of digital
technologies around the world, companies must re-evaluate their traditional
business models and incorporate digital communications into their organizations
in order to remain competitive. Razorfish helps companies interact effectively,
both internally with employees and externally with vendors, suppliers and
customers, in this new digital environment. Razorfish designs and implements
digital communications solutions that are designed to enhance its clients' core
business, operations and communications. In order to service its clients,
Razorfish:
Provides an integrated, full-service offering. Razorfish offers an
integrated service offering consisting of strategic consulting, design of
information architectures and end-user interfaces, and creation and
customization of software necessary to implement digital communications
solutions. Its employees have expertise in a broad range of disciplines
including business strategy, marketing, branding, technology and creative
design. Razorfish works with a client from the analysis of its business
problems to the implementation of an appropriate solution. As a result, clients
benefit not only from the time and cost savings of working with a single firm,
but also from the optimized digital communications solutions made possible by
Razorfish's integrated, full-service offering. Management believes that this
differentiates it from other service providers that focus on a single aspect of
the service offering.
Develops and implements high value-added solutions. Razorfish's goal is to
enable its clients to improve their overall business practices by providing
digital communications solutions that can increase sales, improve
communications and create or enhance business identities. Solutions have
included the creation of new distribution channels, the repositioning of on-
line brands and the integration of a client's operations by opening and
expanding lines of communication among the client's employees, customers,
distributors and vendors. These high value-added solutions are designed to
provide significant opportunities for revenue growth and cost reduction for
Razorfish clients. For example, Razorfish re-designed and enhanced the on-line
trading system for Charles Schwab that now accounts for approximately 61% of
Charles Schwab's daily trading volume.
Provides an end-user-focused solution. Because the end-user determines the
ultimate success of a client's product or service, Razorfish analyzes end-user
needs and applies its creativity and expertise to create digital communications
solutions that are easy-to-use, enjoyable, functional and optimized for a
particular need. Razorfish utilizes information from clients and end-user
surveys to develop user profiles and product and service characteristics that
serve as the basis for the design and development of its digital communications
solutions. Razorfish believes that this end-user-focused approach distinguishes
it from its competitors.
Leverages its international presence and local expertise. Razorfish has
offices in the United States and five European countries. Razorfish believes
that it is better able to serve multi-national and local clients because its
local consulting teams understand the nuances of local cultures, economies and
business practices. In addition, each office has the ability to draw on the
knowledge base and resources of over 285 billable Razorfish professionals
worldwide.
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Strategy
Razorfish's objective is to enhance its position as a leading-edge provider
of digital communications solutions. In order to achieve this goal, Razorfish
will:
Focus on leading-edge digital technologies. Today, Razorfish primarily uses
Internet-based technologies to create digital communications solutions for the
World Wide Web. Razorfish's solutions will increasingly incorporate additional
communications technologies, such as wireless, satellite and broadband
communications, for use with a variety of digital devices and information
appliances, including mobile phones, pagers and personal digital assistants.
Razorfish will continue to build its capabilities by (1) recruiting the most
talented people from leading technology firms and colleges and universities and
(2) providing continuous training for its employees through tuition
reimbursement and training programs. Razorfish believes that by following a
technology-neutral approach to solutions development, it will be well
positioned to capture additional market share as companies seek non-Internet-
based digital communications solutions.
Maintain creative leadership. Razorfish believes that it wins most of its
engagements due to its creativity. Furthermore, management believes that
Razorfish's design team is one of the most established in the information
technology services market. In order to maintain its creative leadership,
Razorfish sponsors cultural seminars and non-traditional special events and
provides benefits, such as a fund for creative learning opportunities, for its
employees. Razorfish will continue to invest in building the creative talents
of its employees.
Target industries that can benefit from the use of digital
communications. Razorfish believes that increased deregulation, consolidation
and global competition will lead companies in more industries to use digital
communications technology to differentiate their products and services.
Razorfish intends to target companies in those industries in order to further
expand its business.
Maintain the Razorfish culture. From its inception, Razorfish has focused on
building a working environment that encourages individuality and initiative to
promote the development of creative, cutting-edge solutions. Razorfish has
instituted programs designed to help maintain a productive and energetic
workplace, including a worldwide employee exchange program that allows
employees to transfer to other offices for specified periods of time. Razorfish
believes that by continuing and expanding these programs it will be able to
attract top professionals and maintain retention rates higher than the industry
average.
Expand through strategic acquisitions. Razorfish believes that building a
critical mass of strategic, technical and creative talent and establishing a
multi-national presence through both acquisitions and internal growth will
provide it with a substantial competitive advantage. Razorfish has grown
rapidly since its inception in 1995. It completed five acquisitions in the
United States and Europe in 1998 and completed the Spray acquisition in January
1999. Razorfish will continue to pursue strategic acquisitions to (1) acquire
expertise in new technologies, (2) gain access to additional talented
professionals, (3) enter into new geographic markets and (4) expand its client
base.
Build partnerships with clients. Razorfish establishes strong ties with its
clients' senior management by assisting them in addressing their strategic
business issues. Razorfish intends to leverage these relationships to expand
the scope and length of current projects and to enter into additional projects.
The Razorfish project management process
Razorfish utilizes a team-based approach to creating digital communications
solutions and has developed a proprietary five-phase project management process
that emphasizes client interaction designed to ensure creative and efficient
solutions. Razorfish's solutions managers, project managers, developers and
creative personnel work together with the client in all five phases to help
ensure that the solution maintains a uniform look and stays within budget. At
the end of each phase, Razorfish produces a set of deliverables for client
acceptance. This process provides assurance that the digital communications
solution meets with the client's expectations at every stage of its
development. This project management process consists of the following phases:
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Phase I: Clarify
Phase I involves understanding the client's business and clarifying the
client's immediate business needs, as well as determining the client's long-
term goals. During this phase, Razorfish evaluates the market segment in which
the client competes and assesses the client's operating and technical
environment. Once the client's objectives are outlined, a strategic plan is
formulated, including a definition of how the success of the project will be
assessed. Razorfish also establishes the project's scope and budget and creates
a detailed work plan during this phase.
Phase II: Architect
During Phase II, Razorfish creates the architecture of the digital
communications solution for the specific business problem to be addressed and
the definition of the functional, technical and creative requirements necessary
to put the solution into effect. Each aspect of the project is documented in
writing and Razorfish collaborates with the client to refine the architecture
of the solution. Razorfish develops a prototype of the solution to test the
initial concept and its functionality.
Phase III: Design
Once the structural foundation is established, Razorfish focuses on
completing the information, interaction and interface design aspects of the
project. Razorfish develops the features of the project, refines the technology
architecture for the solution and conducts usability testing to evaluate the
performance of the solution. By the end of this phase, Razorfish delivers a
functional prototype of the solution and a detailed plan for its
implementation.
Phase IV: Implement
The final product is built and launched for the client during Phase IV. If
necessary, Razorfish integrates the solution with the client's existing
information technology infrastructure. As part of the final delivery process,
Razorfish performs quality assurance tests and ensures that the client
understands how to use and maintain the product through client training and
maintenance documentation.
Phase V: Enhance
After implementation of the solution, Razorfish monitors it for a specified
period of time and analyzes how the solution performs against the criteria
established in Phase I. At the client's option, Razorfish may also design a
marketing and promotion plan for the product. In addition, Razorfish will
encourage clients to continue to work with Razorfish to address the needs for
the next generation of the solution as new technologies are developed and end-
user's requirements evolve.
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Digital communications solutions
The following chart illustrates some of the digital communications solutions
that Razorfish has created for its clients. Razorfish has provided these
examples in order for you to get a better understanding of the type of projects
that it has completed and expects to continue to complete in the forseeable
future.
Financial & Consulting Services
<TABLE>
<S> <C> <C> <C>
Challenge: Assist Charles Schwab Solution: Razorfish redesigned its trading
in responding to floor website and on-line
increased competition marketing presence to strengthen
in on-line investment Charles Schwab's position as the
services. industry-leading e-commerce
brokerage house. Razorfish also
enhanced Schwab's on-line
business identity and developed
a new user experience which are
consistently conveyed throughout
the website. As a result,
Charles Schwab is able to
clearly highlight its distinct
competitive strengths to both
its visitors and customers.
www.schwab.com
Media & Entertainment
Challenge: Strengthen Road Solution: Razorfish developed the user-
Runner's presence in interface and front-end
the high-speed on- application of Road Runner, the
line service high-speed on-line service which
industry. is owned by ServiceCo, the joint
venture among Time Warner,
MediaOne, Microsoft, Compaq and
Advance Newhouse. Leveraging the
use of new technologies, the
front-end application provides a
dynamic and engaging multimedia
experience for users. This new
version of Road Runner is being
deployed throughout Time
Warner's regional cable
affiliates.
www.rr.com
Challenge: Enhance the end- Solution: Razorfish designed an on-line
user's experience and environment to support
strengthen the on- theglobe.com's position as a
line business popular on-line community. The
identity of website features an elegant end-
theglobe.com. user interface designed to
appeal to theglobe.com's diverse
target audience and to provide a
compelling end-user experience.
Razorfish also has developed a
template system that allows both
community members and third
party providers to post content
on the website. Razorfish is
currently working with
theglobe.com to continue to
enhance the end-user's overall
experience and to expand the
features and functionality
offered by theglobe.com.
www.theglobe.com
</TABLE>
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Software, Technology & Telecommunications
<TABLE>
<C> <C> <C> <S>
Challenge: Establish a stronger Solution: Razorfish consolidated the three
on-line business existing RS/6000 websites and
identity for IBM's reorganized the information in a
RS/6000, a series of manner designed to be more user-
powerful UNIX-based friendly. Razorfish also created
workstations, servers a stronger on-line business
and supercomputers. identity for the RS/6000 through
a dynamic homepage, active menus
and its custom Java interface.
www.rs6000.ibm.com
Challenge: Showcase Ericsson's Solution: Spray designed a website to
Multi-Service Access present multiple views of each
group's product, including its technical
communications specifications and use in
networking equipment business solutions. The end-user
in a way that can be can access independent press
appreciated by both coverage about and support for
technicians and each product on the website.
laypersons. Spray created a three-layered
architecture to overlay a
database containing all of the
information to be presented.
This architecture gives the end-
user the ability to access
customized information based on
his or her own level of
understanding of Ericsson's
communications networking
equipment.
www.ericsson.com/access
Challenge: Enhance eBay's Solution: Razorfish is assisting eBay in
successful on-line improving the structure of
trading community eBay's website. The new graphic-
website by improving based look is designed to
the graphic design enhance visual appeal and better
and user-interface. convey the eBay brand. Razorfish
is working with eBay to enhance
the end-user experience for a
rapidly growing customer base
and to seamlessly integrate new
features into this design.
www.ebay.com
</TABLE>
Travel & Leisure
<TABLE>
<C> <C> <C> <S>
Challenge: Create a digital Solution: CHBi created a website that is a
solution to help key channel for product and
reposition the RAC, a service delivery. The website
U.K. motoring club, offers interactive accommodation
from a roadside planning, combined route
recovery organization planning, live traffic news and
to a travel service the ability to become a member
provider. and purchase travel and
automotive accessories and
travel-related services on-line.
Razorfish is currently working
to deliver these services via
other information appliances,
including interactive TV and
mobile phones.
www.rac.co.uk
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Challenge: Create a central Solution: Spray built an on-line travel
information source service featuring an
for the customers of information-rich database that
the six international covers approximately 600
airlines, Air Canada, destinations in over
Lufthansa, SAS, Thai, 100 countries. The website is
United and Varig, automatically updated four times
that form the Star a day and gives users access to
Alliance. flight schedules, maps, currency
exchange rates, three-day
weather forecasts, airport and
ground transportation
information and electrical and
cellular phone standards. Users
can also purchase airline
tickets from certain airlines
and learn about airline bonus
programs.
www.star-alliance.com
Consumer Brands & Retail
Challenge: Display Electrolux Solution: Spray designed a website
products to its featuring a 1950's-style cartoon
world-wide customer house and family. The end-user
base in a way that is invited into each room of the
accommodates country- house where a member of the
to-country family describes the history and
differences in features of the Electrolux
product names and products used in that room in a
packaging while humorous fashion. The website
maintaining a also features "fridge cam," a
consistent business camera mounted in the
identity. refrigerator of an actual
suburban Stockholm family that
snaps a photo and posts it on
the website whenever the
refrigerator door is opened.
Spray has developed tools that
enable Electrolux country
managers to translate the
contents of the website into
local languages while allowing
Electrolux's Swedish
headquarters to control the
brand image and content.
www.electrolux.se
Cultural Institutions
Challenge: Extend The Solution: Razorfish developed a multi-
Smithsonian dimensional, digital exhibit
Institution's reach that allows visitors to explore
beyond its physical cultural history through various
walls. everyday objects. The visitor to
the website controls the
experience by viewing the
exhibition pieces on the website
in any order; the selection of
an object links the visitor to
another "room" with other
related objects and information.
The end result is a
personalized, fluid experience
for the visitor. In addition,
end-users can enhance the
exhibit by donating their own
objects and stories to The
Smithsonian Institution on-line.
www.si.edu/revealingthings
</TABLE>
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Marketing and sales
Razorfish's marketing efforts are dedicated to strengthening its brand name
and enhancing its reputation as a creative provider of digital communications
solutions. Razorfish believes that the current strength of its brand name
provides it with a competitive advantage over those professional information
technology services firms whose brands may not be as well known or may not
convey the same focused message of creative digital communications solutions.
Razorfish's brand development programs are designed to reinforce the message
that Razorfish is an international company with a local presence that can
provide an integrated, full-service offering. Razorfish also intends to
increase its advertising in an effort to expand the recognition of its brand
name. Razorfish's marketing programs, advertising campaigns and marketing tools
are developed within Razorfish and can be delivered to all Razorfish offices
without incurring the additional expense of retaining a marketing firm.
Currently, Razorfish's solutions managers are responsible for marketing and
sales. This approach provides Razorfish with a flexible sales resource. Because
of the historically high demand for Razorfish's services, Razorfish has not
needed a formal marketing or sales force. There can be no assurance that this
trend will continue; therefore, Razorfish intends to use a portion of the
proceeds of the offering to develop a sales and marketing force. Razorfish
intends the marketing and sales force primarily to develop and prioritize new
business leads and to filter incoming contacts from prospective clients.
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Clients
Razorfish currently targets companies in industries that can use digital
technologies to increase sales, improve communications and create business
identities. These industries include financial and consulting services, media
and entertainment, software, technology and telecommunications, industrial and
consumer brands and retail. Set forth below is a representative list of
Razorfish's clients during the past twelve months within each targeted
industry. Because of the project-based nature of Razorfish's business, some of
the listed companies may not be current clients of Razorfish as a result of the
completion of recent projects.
<TABLE>
<S> <C>
FINANCIAL & CONSULTING SERVICES MEDIA & ENTERTAINMENT
Bank One Canal Plus
Barclays Global Cosmopolitan Magazine/Hearst Communications
Charles Schwab Disney
Dow Jones Excite
Egg Financial Times
Goldfish Razorfish Studios
Guardian Life Insurance Company of America Road Runner/Time Warner
Hagstromer and Qviberg Showtime Networks
Husbanken Stern Magazine
KPMG theglobe.com
Sparebank 1 The New Millennium Experience
TV4
CONSUMER BRANDS & RETAIL Warner Music Group
Allied Domecq
Arla SOFTWARE, TECHNOLOGY &
Bayer TELECOMMUNICATIONS
Canon Acer
Electrolux British Telecom
Hennes & Mauritz eBay
Kenwood USA Ericsson
Liz Claiborne HTV
Pripps IBM
Sony Electronics Intel
Toro MCI/WorldCom
Virgin Clothing Microsoft
Virgin Cola NASA Ames Research Center
Nokia
INDUSTRIAL Sega Entertainment
Ashlar SegaSoft
British Aerospace Sharp Electronics
J&W Telewest
Merck Sharp & Dohme Telia
Novartis
Shell Trading & Transport TRAVEL & LEISURE
Siemens Best Western International
Braathens
Finnair
First Hotels
RAC Motoring Services
SAS
Savoy
Star Alliance
Statens Jarnvagar
The Tote
</TABLE>
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Razorfish has also created digital communications solutions for prestigious
cultural institutions including The Smithsonian Institution, Carnegie Hall, The
Whitney Museum and the Norwegian State Church (Norsk Kirkeiutlandet).
Razorfish believes that increased deregulation, consolidation and global
competition will lead companies in more industries to use digital
communications technology to differentiate their products and services.
Razorfish anticipates targeting those industries that it believes will most
effectively be able to use digital communications technologies to increase
sales, improve communications and create business identities.
Each of Razorfish's clients is generally charged for the time, materials and
expenses incurred on a particular project. However, the agreements entered into
in connection with a project are generally terminable by the client upon 30-
days' prior written notice. Razorfish cannot give any assurances that a client
will not terminate an engagement before its completion. If its clients
terminate existing agreements or if Razorfish is unable to enter into new
engagements, its business, financial condition and results of operations could
be materially and adversely affected.
On a pro forma basis assuming all of the 1998 and 1999 acquisitions had
occurred at the beginning of 1998, Charles Schwab would have accounted for
12.1% of revenues in 1998, and no client would have accounted for more than
10.0% of revenues in 1997. Charles Schwab accounted for approximately 27.1% of
Razorfish's actual revenues for 1998. Hagstromer and Qviberg accounted for
approximately 15.0% of Spray's actual revenues for 1998. Razorfish believes
that it will continue to derive a significant portion of its revenues from a
limited number of clients. The volume of work performed for these clients may
not be sustained from year to year, and there is a risk that these principal
clients may not retain Razorfish in the future. Any cancellation, deferral or
significant reduction in work performed for these principal clients or a
significant number of smaller clients could have a material adverse affect on
Razorfish's business, financial condition and results of operations.
Spray acquisition
In January 1999, Razorfish acquired all of the issued and outstanding shares
of capital stock of Spray from Spray Ventures and Communicade in exchange for
an aggregate of 9,881,034 shares of Razorfish Common Stock and 50 shares of
Razorfish non-voting Class B Common Stock. The shares of Common Stock issued
represented 50% of the shares of Razorfish Common Stock on a fully diluted
basis immediately following this acquisition. Immediately prior to this
transaction, Communicade purchased 563 shares of Spray, which represented 20%
of the outstanding shares of Spray on a fully diluted basis at the time of
purchase, from Spray Ventures and sold these shares to Razorfish in connection
with the Spray acquisition. Razorfish, Communicade and Messrs. Dachis and
Kanarick also entered into a Stockholders Agreement in connection with the
acquisition of Spray, which provided Communicade with the option to purchase up
to 10% of Razorfish's Common Stock. Because Omnicom is the parent corporation
of Communicade, it has an indirect interest in Razorfish, which was decreased
as a result of the Spray acquisition and then subsequently increased by
Communicade's exercise of this 10% option resulting in Omnicom's ownership
interest remaining approximately the same as it was prior to these
transactions. See "Certain Transactions" and "Principal Stockholders."
In addition, simultaneously with the Spray acquisition, Messrs. Dachis and
Kanarick sold an aggregate of 363,636 shares of Common Stock to Communicade,
which represented 4% of the outstanding shares of Common Stock on a fully
diluted basis at the time of purchase. See "Certain Transactions."
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<PAGE>
The table below sets forth the ownership interests of Spray Ventures,
Communicade and Messrs. Dachis and Kanarick in Razorfish before and immediately
following the acquisition of Spray:
<TABLE>
<CAPTION>
Ownership interest (%)
-----------------------
Pre- Post-
acquisition acquisition
----------- -----------
<S> <C> <C>
Spray Ventures................................... -- % 40.0%
Communicade...................................... 36.8 30.3
Jeffrey A. Dachis................................ 25.0 11.6
Craig M. Kanarick................................ 25.0 11.6
</TABLE>
Razorfish authorized 50 shares of non-voting Class B Common Stock in
connection with the Spray acquisition. These shares were issued to Communicade
and Spray Ventures at the closing of this acquisition. In addition, the total
number of outstanding shares of Razorfish Common Stock doubled as a result of
this transaction. See "Description of Capital Stock--Common stock--Class B
Common Stock."
At the time of the Spray acquisition, Spray had 171 employees. Spray had
approximately $15.4 million in revenues for the year ended December 31, 1998.
Razorfish gained certain of its current clients as a result of the Spray
acquisition including Hagstromer and Qviberg, one of Sweden's largest
investment banks, Hennes & Mauritz, a Swedish retail clothing company, Canal
Digital, a Norwegian satellite TV company, and Nokia.
Spray Ventures was incorporated in Sweden in July 1995. Its business was the
development of digital solutions primarily for use on the World Wide Web. Spray
Ventures' business grew rapidly in size and scope. By early 1997, Spray
Ventures owned a total of seven operating companies that provided a wide range
of services including web design, content and education regarding use of the
Internet and the solutions created by Spray Ventures. Spray Ventures'
operations expanded from Sweden to include operations in Norway, Finland,
Germany and the United States.
In August 1997, Spray Ventures established a wholly owned subsidiary, Spray
Services, and transferred all of its operating subsidiaries, except for Circus,
a content provider, to Spray Services. In September 1997, Spray Ventures
transferred all of the common shares of Spray Services to Tetre in
consideration for 1,162 common shares of Tetre, which represented 51% of the
common shares of Tetre on a fully diluted basis following this transaction. The
Tetre shareholders retained a 49% interest in Tetre. Spray Ventures and the
Tetre shareholders entered into a shareholders agreement pursuant to which the
Tetre shareholders had a right to acquire the number of shares equal to 1% of
Tetre at the time of the merger with Spray Services if Tetre completed a public
offering of its shares. Tetre also changed its name to Spray Network following
this transaction.
During the end of 1997 and the beginning of 1998, Spray Ventures began
consolidating its operations and reorganizing its corporate structure. In
February 1998, it sold Circus to Spray in consideration for additional shares
in Spray such that Spray Ventures' holdings in Spray equalled 58%. During the
second quarter of 1998, the former Tetre stockholders converted their remaining
42% ownership interests in Spray into 42% of Spray Ventures. In addition, at
the time of this transaction, the shareholders agreement among Spray Ventures
and the former Tetre shareholders was terminated, and accordingly, the option
to purchase 1% of Spray was also terminated. As a result of these transactions,
Spray became 100% owned by Spray Ventures. As part of the consolidation, Spray
Ventures shut down four of its operating subsidiaries and incorporated those
businesses into the remaining operating subsidiaries and shut down its U.S.
operations.
In September 1998, Spray also sold its interests in three non-consultancy
businesses to Spray Ventures and focused its business on interactive media
development and consultancy.
Razorfish and Spray were founded upon like principles and have had similar
growth patterns, which have generated what Razorfish believes are compatible
corporate cultures. In addition, the companies have utilized similar business
methodologies and approaches. For these reasons, Razorfish expects its
integration of Spray to be successful. In addition, Razorfish believes that the
combined strength of the companies and their common
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cultural outlook will help attract and retain qualified personnel. However, the
failure to do so could have a material adverse effect on Razorfish's business,
financial condition and results of operations. Razorfish intends to change the
name of Spray to Razorfish AB.
Other acquisitions
In order to acquire expertise in new technologies, gain access to
professionals and expand into new geographic regions, Razorfish has completed
six acquisitions, including the acquisition of Spray, in the United States and
Europe since its inception in 1995. In assessing a potential acquisition
candidate, Razorfish evaluates the target's internal culture, customer base,
local market share, financial characteristics, service offerings and quality of
management. In addition, Razorfish analyzes macroeconomic issues such as
technology adoption rates and the growth rates of the target's local economy.
Set forth below are descriptions of the acquisitions that Razorfish completed
in 1998.
Sunbather Limited
Razorfish, through Razorfish Limited, acquired in October 1998 substantially
all of the assets of Sunbather, a London-based new media company with
experience in interactive and digital television, from an administrator
appointed for the company. At the time of the acquisition, Sunbather had 11
employees and, in its last completed fiscal year ended March 31, 1998, had
approximately (Pounds)565,000 ($908,000 based upon an average exchange rate for
the fiscal year ended March 31, 1998 of (Pounds)0.6078 = $1.00) in revenues.
<tag> Media
Razorfish acquired substantially all of the assets of Los Angeles-based
<tag> Media in August 1998. <tag> Media had eight employees at the time of the
acquisition and, in its last completed fiscal year ended December 31, 1997,
approximately $322,000 in revenues. <tag> Media specialized in working with
film and record companies to deliver their messages and content through
computer-based entertainment.
Plastic
Razorfish acquired in June 1998 substantially all of the assets of San
Francisco-based Plastic, a new media company with strong technical expertise.
Razorfish acquired Plastic to expand its presence to California. At the time of
the acquisition, Plastic had 15 employees and had, in its last completed fiscal
year ended December 31, 1997, approximately $835,000 in revenues.
CHBi
In May 1998, Razorfish acquired all of the outstanding stock of London-based
CHBi (now Razorfish Limited). Razorfish's acquisition of this new media company
was its first venture into the European markets. At the time of the
acquisition, CHBi had 26 employees and had, in its last completed fiscal year
ended May 31, 1998, approximately (Pounds)835,000 ($1.3 million based upon an
average exchange rate for the fiscal year ended May 31, 1998 of (Pounds)0.6067
= $1.00) in revenues.
Avalanche Systems
In January 1998, Razorfish, through its subsidiary, Avalanche Solutions,
acquired in a foreclosure sale substantially all of the assets of New York-
based Avalanche Systems, a new media company with capabilities in creative
design. Upon the closing of this transaction, Razorfish and the two founders of
Avalanche Systems owned all of the outstanding stock of Avalanche Solutions.
The two founders of Avalanche Solutions surrendered their stock to Razorfish
after the closing, and, as a result, Avalanche Solutions became a wholly owned
subsidiary of Razorfish. At the time of the acquisition, Avalanche Systems had
32 employees and had, in its last completed fiscal year ended December 31,
1997, approximately $2.3 million in revenues.
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Internal information systems
Razorfish continuously works to improve its internal communication systems
and production tools for creating and maintaining digital communications
solutions for its clients. Currently, Razorfish is upgrading its intranet
system by adding new functions and faster hardware. Razorfish's intranet is a
suite of applications including a global calendar and scheduling module, a
timesheet and financial reporting module, a corporate knowledge database,
project tracking and management modules, on-line forums for fostering knowledge
sharing and other applications that increase productivity and creativity.
Razorfish has also developed several applications to improve its
productivity in other areas of service delivery, including: (1) XX, an extranet
tool for on-line collaborative project development, (2) Webspy, an internet
traffic monitoring and reporting tool, (3) Vegas, a streaming media player and
(4) Olof Engine, a multimedia presentation tool. These and other internally
developed technologies reduce development time and cost and increase
productivity at Razorfish. Razorfish believes that these additional
capabilities will improve employee productivity, client service delivery and
management of its worldwide operations.
Competition
The information technology services market has grown dramatically in recent
years as a result of the increasing use of digital technology by businesses for
communication, marketing and information dissemination to their employees,
customers, vendors and suppliers. Different information technology service
providers focus on different types of services, including technology consulting
and marketing services. For example, Internet content providers, consulting and
advertising agencies and telecommunications companies offer very different
services that may be tied to the Internet, such as the creation of intranets
and extranets, consulting and training, website design and development and
advertising. This factor, along with the rapid pace of technological change,
makes the information technology services market an intensely competitive and
rapidly evolving market. Razorfish expects competition to persist and intensify
in the future.
Razorfish's competitors include:
. Internet service firms, such as AGENCY.COM, Icon Medialab, iXL, Modem
Media . Poppe Tyson, Organic Online, Pixelpark, Proxicom and
USWeb/CKS;
. technology consulting firms, such as Diamond Technology Partners and
Metzler Group;
. technology integrators, such as Andersen Consulting, Cambridge
Technology Partners, Cap Gemini, EDS, IBM, Sapient and WM-Data;
. strategic consulting firms, such as Bain, Booz-Allen & Hamilton,
Boston Consulting Group and McKinsey; and
. in-house information technology, marketing and design service
departments of its potential clients.
Many of Razorfish's competitors have:
. longer operating histories;
. larger installed client bases;
. longer relationships with clients;
. greater brand or name recognition; and
. significantly greater financial, technical, marketing and public
relations resources than Razorfish.
Although only a few of these competitors have to date offered a package of
services as fully integrated as Razorfish's, several have announced their
intention to offer a broader range of technology-based solutions. Furthermore,
greater resources may enable a competitor to respond more quickly to new or
emerging technologies and changes in customer requirements and to devote
greater resources to the development, promotion and sale of its products and
services than Razorfish. In addition, the lack of any significant barriers to
entry into this market permits new market entrants that further intensify
competition.
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<PAGE>
Razorfish believes that the principal competitive factors in its market, in
relative importance, are the ability to attract and retain professionals,
technical knowledge and creative skills, brand recognition and reputation,
reliability of the delivered solution, client service and price. Razorfish
believes that it has won most of its engagements due to its creativity and
technology-neutral approach to solving business problems. See "Risk Factors--We
compete in a new and highly competitive market that has low barriers to entry,"
"Risk Factors--We must maintain our reputation and expand our name recognition
to remain competitive" and "Business--Marketing and sales."
Intellectual property rights
Razorfish seeks to protect its intellectual property through a combination
of license agreements and trademark, service mark, copyright and trade secret
laws. Razorfish enters into confidentiality agreements with its employees and
clients and uses it best efforts to limit access to and distribution of
proprietary information licensed from third parties. In addition, Razorfish has
entered into non-competition agreements with certain of its key employees.
Razorfish pursues the protection of its trademarks in the United States and
internationally. It has obtained U.S. registration for the "Razorfish" and
"Webspy" marks and has applied for registration of certain of its other
trademarks and servicemarks.
In addition, Razorfish licenses the "Razorfish" trademark and design logo
and "The Blue Dot" trademark on a royalty-free basis to Razorfish Studios.
Razorfish Studios produces and publishes on-line content, including art,
computer games, and literature, as well as screensavers, audio recordings,
books and films. Razorfish Studios also manages artists and provides management
consulting to artists. Because the "Razorfish" trademark and design logo are
licensed to Razorfish Studios, Razorfish's name and reputation could be
materially and adversely affected by content published or actions taken by
Razorfish Studios. However, the license permits Razorfish to terminate the
license in the event Razorfish Studios takes any action that denigrates the
Razorfish trademark or design logo.
Razorfish's efforts to protect its intellectual property rights could be
inadequate to deter misappropriation of proprietary information. For example,
Razorfish may not detect unauthorized use of its intellectual property. In
addition, the legal status of intellectual property on the Internet is
currently subject to various uncertainties. See "Risk Factors--Misappropriation
of our trademarks and other proprietary rights could harm our reputation,
affect our competitive position and cost us money" and "Risk Factors--Our
business is subject to U.S. and foreign government regulation of the Internet."
U.S. and foreign government regulation
Congress has recently passed legislation that regulates certain aspects of
the Internet, including on-line content, copyright infringement, user privacy,
taxation, access charges, liability for third-party activities and
jurisdiction. In addition, federal, state, local and foreign governmental
organizations also are considering, and may consider in the future, other
legislative and regulatory proposals that would regulate the Internet. Areas of
potential regulation include libel, pricing, quality of products and services
and intellectual property ownership.
The European Union also has recently enacted several directives relating to
the Internet. In order to safeguard against the spread of certain illegal and
socially harmful materials on the Internet, the European Commission has drafted
the "Action Plan on Promoting the Safe Use of the Internet." Other European
Commission directives address the regulation of privacy, e-commerce, security,
commercial piracy, consumer protection and taxation of transactions completed
over the Internet.
It is not known how courts will interpret both existing and new laws.
Therefore, Razorfish is uncertain as to how new laws or the application of
existing laws will affect our business. In addition, our business may be
indirectly affected by our clients who may be subject to such legislation.
Increased regulation of the Internet
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<PAGE>
may decrease the growth in the use of the Internet, which could decrease the
demand for our services, increase our cost of doing business or otherwise have
a material adverse effect on our business, results of operations and financial
condition.
Employees
As of April 1, 1999, Razorfish had 414 full time employees, 168 of whom were
located in the United States and 246 of whom were located in Europe.
Razorfish's employees include 40 solutions managers (business, marketing and
branding strategists), 75 project managers, 112 developers, 98 designers, 17
sales and marketing personnel, 53 support staff (information services, human
resources, financial and legal personnel) and 19 executives (executive vice
presidents and managing directors).
Razorfish's continuing success will depend, in large part, on its ability to
attract, motivate and retain highly qualified employees. Competition for such
personnel is intense, and Razorfish may not be able to retain its senior
management or other key personnel in the future. Razorfish believes it
maintains high employee retention rates as compared to industry averages by
paying competitive salaries, granting stock options and other awards and
reimbursing employees for tuition expenses in connection with information
technology-related coursework. Employees also may temporarily transfer to
another of Razorfish's domestic or European offices. Razorfish plans to
allocate a portion of the proceeds of the offering to expand programs for the
recruitment of qualified personnel. See "Use of Proceeds."
Razorfish's employees are not represented by any union and, except for
senior management and certain other employees, are retained on an at-will
basis. However, the regulations of certain European countries in which
Razorfish operates, including Sweden, may make it difficult for Razorfish to
terminate certain of those at-will employees. In addition, those regulations
govern the amount of vacation time that must be given to employees, which is
significantly more vacation than in the United States. Razorfish considers its
relations with its employees to be satisfactory.
Facilities
Razorfish's headquarters are located in a leased facility in New York City
consisting of approximately 15,000 square feet of office space. The leases for
this office space expire on December 31, 2001. Razorfish also leases office
space in Los Angeles, San Francisco, London, Stockholm, Oslo, Helsinki and
Hamburg.
Legal proceedings
Razorfish is not a party to any material legal proceedings.
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<PAGE>
MANAGEMENT
Directors and executive officers
Set forth below is certain information with respect to the directors and
executive officers of Razorfish.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
President, Chief Executive Officer, Treasurer
Jeffrey A. Dachis....... 32 and Director
Craig M. Kanarick....... 32 Chief Scientist, Vice Chairman of the Board,
Secretary and Director
Per I.G. Bystedt........ 34 Chairman of the Board and Director
Jonas S.A. Svensson..... 31 Vice Chairman of the Board, Executive Vice
President--Corporate Development and Director
Peter Seidler........... 40 Chief Creative Officer
Susan Black............. 32 Chief Financial Officer
Michael S. Simon........ 35 Executive Vice President--Business Affairs and
General Counsel
Executive Vice President--North American
Jean-Philippe Maheu..... 35 Operations
Thomas L. Randerz....... 42 Executive Vice President--European Operations
Evan Orensten........... 33 Executive Vice President--Global Intelligence
and Knowledge Management
Executive Vice President--Mergers and
Johan Ihrfelt........... 31 Acquisitions--Europe
Carter F. Bales......... 60 Director
Kjell A. Nordstrom...... 41 Director
John Wren............... 46 Director
</TABLE>
Jeffrey A. Dachis, a co-founder of Razorfish, has served as President, Chief
Executive Officer, Treasurer and a director of Razorfish since its inception in
January 1995. He was a Graphic Production Specialist for Applied Graphics
Technologies, a graphic pre-press production house, from May 1994 to April
1995. From September 1993 until April 1994, Mr. Dachis served as Vice President
of Corporate Marketing of Game Financial Corp., a credit card cash advance and
electronic funds transfer company. Mr. Dachis is also Chief Executive Officer
and a director of Razorfish Studios. He will devote substantially all of his
time to the management of Razorfish. See "Certain Transactions." Mr. Dachis
holds a B.A. degree in dance and dramatic literature from SUNY Purchase and an
M.A. degree in media/entertainment business from New York University.
Craig M. Kanarick, a co-founder of Razorfish, has been a Vice Chairman of
the Board of Razorfish since January 1999, Chief Scientist of Razorfish since
August 1998 and Secretary and a director of Razorfish since its inception in
January 1995. Mr. Kanarick was Chairman of the Board of Razorfish from its
inception until January 1999. From June 1993 to January 1995, Mr. Kanarick was
a freelance digital media consultant and designer. Mr. Kanarick is Chairman of
the Board, Chief Creative Officer, Secretary and a director of Razorfish
Studios. He is also a director of the New York New Media Association and
Rhizome Communications, Inc., a non-profit digital arts corporation. Mr.
Kanarick will devote substantially all of his time to the management of
Razorfish. See "Certain Transactions." Mr. Kanarick holds a B.A. degree in
philosophy and a B.S. degree in computer science from the University of
Pennsylvania and an M.S. degree in visual studies from the MIT Media Lab at the
Massachusetts Institute of Technology.
Per I.G. Bystedt has served as Chairman of the Board of Razorfish since
January 1999. He is also Chief Executive Officer and a director of Spray
Ventures. Mr. Bystedt served as Chairman of the Board of Spray from September
1997 until the closing of the Spray acquisition in January 1999. From January
1995 until February 1997, Mr. Bystedt served as Chief Executive Officer of TV3
Broadcasting Group Ltd., a Scandinavian satellite and cable television network.
From January 1997 to April 1997, Mr. Bystedt was an Executive Vice President
for Modern Times Group AB with the primary responsibility for supervising all
of the satellite and cable TV, pay TV and smart card system companies within
this organization. Mr. Bystedt also served as Chief
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<PAGE>
Executive Officer for ZTV Group AB, a commercial television company in
Scandinavia, from April 1994 to December 1995, and for the television
production company, Trash Television AB, from September 1992 to April 1994 .
Mr. Bystedt holds a degree in natural science from Hersby Skola and an M.B.A.
degree from the Stockholm School of Economics.
Jonas S.A. Svensson, a co-founder of Spray, has served as a Vice Chairman of
the Board and Executive Vice President--Corporate Development of Razorfish
since January 1999. Prior to the Spray Acquisition, he served as director of
brand and strategic developments of Spray and was also Chairman of the Board of
Spray. From January 1995 to June 1995, Mr. Svensson was Executive Vice
President for Everyday, a company specializing in interactive media and ISP
services that is a member of Kinnevik Group, the Nordic media group. He was a
student at the Stockholm School of Economics from August 1990 to January 1995.
Peter Seidler has been Chief Creative Officer of Razorfish since May 1998.
Mr. Seidler was Chief Creative Officer of Avalanche Solutions, a company that
he founded in connection with the acquisition by Razorfish of Avalanche
Systems' assets, from January 1998 to May 1998. From November 1994 until
January 1998, he was Chief Creative Officer and President of Avalanche Systems,
a strategic digital communications company that he founded. See "Business--
Other acquisitions." Mr. Seidler was also the founder and Creative Director of
Seidler Design Inc., a digital interface design company, from August 1993 until
November 1994. Mr. Seidler holds a B.A. degree from the City University of New
York and an M.F.A. degree in conceptual art from California Institute of the
Arts.
Susan Black has been Chief Financial Officer of Razorfish since January
1998. Prior to joining Razorfish, Ms. Black was Chief Financial Officer of the
New York office of TBWA Chiat/Day Inc., an advertising agency, from March 1996
to December 1997. Prior to the merger of TBWA International and Chiat/Day, Ms.
Black was International Controller for TBWA from May 1994 to February 1996.
From August 1988 to April 1994, Ms. Black worked for Arthur Andersen LLP in
various positions, including manager. Ms. Black holds a First Class B.S. degree
in economics from Loughborough University and is a member of the Institute of
Chartered Accountants of England and Wales.
Michael S. Simon has been Executive Vice President--Business Affairs of
Razorfish since November 1998 and General Counsel of Razorfish since July 1998.
Mr. Simon was Senior Vice President of Business Affairs of Razorfish from July
1998 to November 1998, and he was Razorfish's Vice President of Business
Affairs from October 1996 to July 1998. Prior to joining Razorfish, Mr. Simon
was a Senior Director of Legal Affairs for Polygram Records, Inc. from April
1995 to October 1996. From November 1993 to April 1995, he was an associate at
the law firm Levine Thall Plotkin & Mennin, LLP. Mr. Simon is also the
President and a director of Razorfish Studios. Mr. Simon was also the President
of Simon Ventures, Ltd., an artist management and management consulting firm
that he founded, from October 1996 until Simon Ventures was sold to Razorfish
Studios in February 1999. He will devote a substantial portion of his time to
the management of Razorfish. See "Certain Transactions." Mr. Simon holds a B.A.
degree in American studies from Amherst College and a J.D. degree from Columbia
University.
Jean-Philippe Maheu has served as Executive Vice President--North American
Operations of Razorfish since January 1999 and Executive Vice President of
Corporate Development of Razorfish from December 1997 until December 1998. Mr.
Maheu served as Vice President of Business Development and Strategy of
Razorfish from July 1997 until December 1997. From February 1995 to June 1997,
Mr. Maheu served as a principal of Gunn Partners, a management consulting firm.
From September 1989 to January 1995, Mr. Maheu was a consultant and manager of
A.T. Kearney, an international management consulting firm. Mr. Maheu holds a
M.S. degree in information systems from Pierre and Marie Curie University--
Paris and an M.B.A. degree in finance and marketing from the J.L. Kellogg
Graduate School of Management at Northwestern University.
Thomas L. Randerz has served as Executive Vice President--European
Operations of Razorfish since the closing of the Spray acquisition in January
1999. Following Spray's merger with Tetre AB in June 1997, Mr. Randerz was
responsible for Spray's activities in the financial sector until September 1997
when he became Spray's Chief Operating Officer. He served in such position
until January 1999. Prior to joining Spray, Mr. Randerz was the Chief Executive
Officer of Tetre AB. From May 1987 to October 1995 he was a consultant
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and manager with Cap Gemini, an information technology consulting firm. Mr.
Randerz holds a degree in computer science and business administration from the
University of Stockholm.
Evan Orensten has served as Executive Vice President--Global Intelligence
and Knowledge Management of Razorfish since January 1999. From June 1997 to
January 1999, he was Managing Director of Razorfish's New York office. Mr.
Orensten served as a Vice President and Senior Interactive Strategist of Siegel
& Gale, a consulting firm, from January 1995 to May 1997. From April 1994 to
January 1995, Mr. Orensten was a Production Associate in the multimedia
department of Smith Barney Inc., and from January 1994 to April 1994, he was an
account executive of Interbrand, Inc., a consulting firm. Mr. Orensten holds an
A.B. degree in Asian studies from Vassar College and an M.B.A. degree in
international business from L'Ecole des Haute Etudes Commerciales.
Johan Ihrfelt, a co-founder of Spray, has served as Executive Vice
President--Mergers and Acquisitions--Europe of Razorfish since the closing of
the Spray acquisition in January 1999. He was the Chief Financial Officer and
Human Resources Manager of Spray, as well as a director, from August 1997 until
January 1999. Prior thereto, he served as Chief Executive Officer of Spray from
its incorporation in July 1995 until July 1997. From July 1994 until June 1995,
Mr. Ihrfelt was responsible for international operations at Interactive
Television AB, a member of the Kinnevik Group. He graduated from the Stockholm
School of Economics in June 1994.
Carter F. Bales has been a director of Razorfish since March 1999. Mr. Bales
has served as a managing director of The Wicks Group of Companies, L.L.C., a
private equity investment firm specializing in certain segments of the
communications, information and media industries that he co-founded, since June
1998. From June 1965 until June 1998, Mr. Bales was a director and served in
various other senior positions at McKinsey & Company, Inc., an international
management consulting firm. Since leaving McKinsey in 1998, Mr. Bales has
provided continued services to McKinsey as an outside consultant and as a
member of McKinsey's Advisory Council.
Kjell A. Nordstrom has been a director of Razorfish since March 1999. Mr.
Nordstrom has been executive director of the Institute of International
Business and an assistant professor at the Stockholm School of Economics since
1991. Mr. Nordstrom has also been a director of Spray Ventures since 1998 and a
director of Geelmuyden-Kiesse AS, an indirect subsidiary of Razorfish, since
1996.
John Wren has been a director of Razorfish since September 1996. Mr. Wren
has served as Chief Executive Officer of Omnicom since January 1997 and has
also been President of Omnicom since September 1995. From May 1993 until June
1998, he served as Chairman and Chief Executive Officer of the Diversified
Agency Services division of Omnicom. Mr. Wren was appointed to Omnicom's Board
of Directors in May 1993.
Board of Directors
Razorfish currently has authorized seven directors. Each director holds
office until his successor is duly elected and qualified or until his
resignation or removal, if earlier. Five of the current members of the Board of
Directors were elected pursuant to the terms of the Stockholders Agreement
entered into as of October 1, 1998 by and among Razorfish, Spray Ventures,
Communicade and Messrs. Dachis and Kanarick, which will terminate upon the
consummation of this offering.
In March 1999, Razorfish appointed Messrs. Bales and Nordstrom as
independent directors and Razorfish also established an Audit Committee and a
Compensation Committee upon which both Messrs. Bales and Nordstrom serve.
The Audit Committee reviews the preparations for and the scope of the audit
of Razorfish's annual financial statements, reviews drafts of such statements,
makes recommendations as to the engagement and fees of the independent auditors
and monitors the functioning of Razorfish's accounting and internal control
systems by meeting with representatives of management, the independent auditors
and the internal auditors. The
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Committee has direct access to the independent auditors, the internal auditors
and counsel to Razorfish and performs such other duties relating to the
maintenance of the proper books of account and records of Razorfish and other
matters as the Board of Directors may assign from time to time. In addition, in
order to maintain listing on Nasdaq, Razorfish must maintain an audit committee
with a majority of its members who are "independent directors." Independent
directors are persons who are neither officers nor employees of Razorfish or
its subsidiaries or any other person who has a relationship which, in the
opinion of the Board of Directors, would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director.
The Compensation Committee supervises and makes recommendations with respect
to compensation levels of key employees and all benefit plans involving
employees of Razorfish. It approves, upon the recommendation of the President
or other appropriate officer, the terms of employment of all officers of
Razorfish (except the Chairman of the Board and the President) and recommends
the terms of employment of the Chairman of the Board and the President to the
Board of Directors for approval.
Compensation of Directors
Directors who are also employees of Razorfish receive no additional
compensation for their services as directors. Directors who are not employees
of Razorfish will not receive a fee for attendance in person at meetings of the
Board of Directors or committees of the Board of Directors, but they will be
reimbursed for travel expenses and other out-of-pocket costs incurred in
connection with the attendance of meetings. Messrs. Bales and Nordstrom will
receive options to purchase shares of Common Stock upon the closing of this
offering. Certain of these options will vest 100% on the date of grant, and
each of Messrs. Bales and Nordstrom has agreed to exercise his option to
purchase these shares on the date of grant.
The Delaware General Corporation Law provides that a company may indemnify
its directors and officers as to certain liabilities. Razorfish's Certificate
of Incorporation and By-laws provide for the indemnification of its directors
and officers to the fullest extent permitted by law. The effect of such
provisions is to indemnify the directors and officers of Razorfish against all
costs, expenses and liabilities incurred by them in connection with any action,
suit or proceeding in which they are involved by reason of their affiliation
with Razorfish. Razorfish may obtain directors and officers liability insurance
to effectuate these provisions.
Employment and non-competition agreements
Employment agreements with Messrs. Dachis and Kanarick
Razorfish has entered into employment agreements with each of Messrs. Dachis
and Kanarick, pursuant to which Mr. Dachis serves as President, Chief Executive
Officer and Treasurer and Mr. Kanarick serves as Chief Scientist, Secretary and
Vice Chairman of the Board. Each of Messrs. Dachis and Kanarick is paid an
annual base salary of $104,000, subject to increases in accordance with
Razorfish's salary review and budget policies. In addition, pursuant to the
terms of the agreements, Messrs. Dachis and Kanarick serve as directors of
Razorfish without any additional compensation.
The initial term of each agreement expires on December 31, 2001. Upon the
expiration of the initial term, each agreement remains in effect and may be
terminated by either party upon six months' prior written notice. In addition,
at any time after June 30, 2001, Razorfish may, at its option, elect to place
either executive on "leave of absence status" during which time such executive
will no longer be responsible for his respective duties but will be entitled to
payment of his salary and other benefits provided in the agreement.
These agreements also contain customary provisions relating to the
protection of confidential information and non-solicitation of Razorfish's
employees or clients upon the executive's termination of employment.
Employment agreements with Messrs. Bystedt, Svensson and Ihrfelt
Razorfish has entered into employment agreements with each of Messrs.
Bystedt, Svensson and Ihrfelt, pursuant to which each will perform duties
designated by Razorfish, in either Stockholm or New York, and will report to
Mr. Dachis. Each such employee is paid an annual base salary of $145,000,
subject to increases in accordance with Razorfish's salary review and budget
policies. Beginning after one year of employment, each such employee will be
eligible to participate in Razorfish's bonus and profit-sharing programs.
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The initial term of each agreement expires on December 31, 2001. Upon the
expiration of the initial term, each agreement remains in effect and may be
terminated by either party upon 30-days' prior written notice.
These agreements contain customary provisions relating to assignment to
Razorfish of proprietary information developed during employment and the
protection of confidential information.
Employment agreements with other members of management
Razorfish has also entered into employment agreements with Messrs. Seidler,
Maheu and Orensten. Mr. Seidler serves as Razorfish's Chief Creative Officer
and is paid an annual base salary of $125,000. The initial term of his
employment expires on December 31, 2001. Upon the expiration of such initial
term, Mr. Seidler's agreement continues in effect and may be terminated by
either party upon 30-days' prior written notice. Mr. Maheu serves as Executive
Vice President--North American Operations. His annual base salary under the
agreement is $125,000. The term of Mr. Maheu's employment agreement expires on
June 30, 1999 and is automatically renewable for successive one-year terms
unless terminated by either party 90 days prior to the scheduled renewal date.
Mr. Orensten serves as Executive Vice President--Global Intelligence and
Knowledge Management. His annual base salary under the agreement is $125,000.
The term of Mr. Orensten's employment agreement expires on May 31, 1999 and is
automatically renewable for successive one-year terms unless terminated by
either party 60 days prior to the scheduled renewal date.
Each of Messrs. Seidler, Maheu and Orensten is also eligible to participate
in Razorfish's bonus and profit-sharing programs. The agreements each also
contain customary provisions relating to assignment to Razorfish of proprietary
information developed during employment, the protection of confidential
information, and non-solicitation of Razorfish's employees or clients upon the
executive's termination of employment.
Non-competition agreements with Messrs. Dachis and Kanarick
Razorfish has entered into non-competition agreements with each of Messrs.
Dachis and Kanarick. The agreements provide that each of Messrs. Dachis and
Kanarick will not, until the later of December 31, 2001 and the termination of
such person's employment with Razorfish, (1) solicit business of the type
performed by Razorfish from any Razorfish client, (2) solicit Razorfish's
employees or (3) render services of the type performed by Razorfish for any
Razorfish client. A Razorfish client includes any person that is a client at
the time of, or during the two-year period prior to, termination of such
employee's employment and prospective clients to whom Razorfish has made a
presentation during the one-year period prior to such termination.
Executive compensation
The table below summarizes information concerning the compensation paid by
Razorfish during 1998 to Razorfish's Chief Executive Officer and Razorfish's
four other most highly paid executive officers (collectively, the "Named
Executive Officers"):
<TABLE>
<CAPTION>
Long-term compensation
Annual compensation awards
----------------------------------------------------
Name and principal position Salary Bonus Securities underlying options
- --------------------------- ---------- --------------------------------------
<S> <C> <C> <C>
Jeffrey A. Dachis.......... $ 104,000 $ 5,000 --
President, Chief Executive
Officer and Treasurer
Craig M. Kanarick.......... 104,000 5,000 --
Chief Scientist, Vice
Chairman of the Board and
Secretary
Peter Seidler.............. 112,500(1) 2,000 13,456(2)
Chief Creative Officer
Jean-Philippe Maheu........ 125,000 13,500 --
Executive Vice President--
North American Operations
Evan Orensten.............. 110,416(3) 16,000 --
Executive Vice President--
Global Intelligence and
Knowledge Management
</TABLE>
- --------
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(1) Mr. Seidler's annual salary was $100,000 from January 16, 1998 to April 30,
1998 when it was increased to $125,000.
(2) 13,456 of these options were granted to Mr. Seidler in order to satisfy
certain obligations of Razorfish with respect to a previous grant of
options made to Mr. Seidler.
(3) Mr. Orensten's annual salary was $100,000 from January 1, 1998 until August
1, 1998 when it was increased to $125,000.
The amount of the bonus paid to each Named Executive Officer was partially
based upon the financial results of Razorfish during the first two quarters of
1998 and partially based on the decision of the Chief Executive Officer. An
additional bonus in the form of stock options under the 1997 Stock Option Plan
will be granted to each Named Executive Officer upon the completion of this
offering. Messrs. Dachis, Kanarick, Seidler, Maheu and Orensten will be granted
options to purchase for 20,260, 20,260, 2,500, 5,000 and 5,000 shares of Common
Stock, respectively, exercisable at the price of the shares offered hereby.
Option grants in fiscal 1998
The following table sets forth information regarding stock options granted
pursuant to the 1997 Stock Option Plan during 1998 to each of the Named
Executive Officers.
<TABLE>
<CAPTION>
Potential realized
Individual Grants value at assumed
----------------------------------------------- annual rates of
Number of Percent of stock price
securities total options appreciation for
underlying granted to Exercise or option term
options employees in base price Expiration ------------------
Name granted fiscal 1998 (per share) date 5% 10%
- ---- ---------- ------------- ----------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey A. Dachis....... -- -- % $ -- -- $ -- $ --
Craig M. Kanarick....... -- -- -- -- -- --
Peter Seidler........... 500,000 53.4 1.00 04/30/08 314,445 796,870
13,456 2.9 10.00 11/26/08 3,246,458 25,986
Jean-Philippe Maheu..... -- -- -- -- -- --
Evan Orensten........... -- -- -- -- -- --
</TABLE>
Of the options granted to Mr. Seidler, 13,456 were granted to satisfy an
obligation of Razorfish with respect to a previous grant made to Mr. Seidler.
In addition, the exercise price of the 500,000 options was below the fair
market value of the Common Stock on the date of grant. This determination is
based on an independent third-party valuation of Razorfish's Common Stock.
Accordingly, Razorfish recorded a compensation charge of $1.9 million in 1998.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The values set forth in the last two columns of the table set forth above
represent the gain that Mr. Seidler would realize assuming that (1) he
exercises all of the options granted at the end of their respective terms and
(2) the value of a share of Razorfish's Common Stock has increased annually by
a rate of 5% and 10% during the term of the option. These growth rates are
prescribed by the Securities and Exchange Commission. By including these values
in this prospectus, Razorfish does not intend to forecast the possible
appreciation of its Common Stock or to establish a present value of these
options. In addition, Mr. Seidler will not realize any gain unless there is an
increase in Razorfish's stock price.
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Aggregated option exercises in fiscal 1998 and fiscal year-end option values
The following table sets forth information concerning the value of
unexercised in-the-money options held by the Named Executive Officers as of
December 31, 1998.
<TABLE>
<CAPTION>
Number of securities Value of unexercised
underlying unexercised options in-the-money options at
at fiscal year-end fiscal year-end
Shares acquired Value ----------------------------------- -------------------------
Name on exercise realized Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ---------- --------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey A. Dachis....... -- $ -- 16,667 33,333 $60,001 $119,999
Craig M. Kanarick....... -- -- 16,667 33,333 60,001 119,999
Peter Seidler........... 500,000 1,800,000 13,456 -- (72,662) --
Jean-Philippe Maheu..... 33,334 120,002 9,597 52,525 34,549 189,090
Evan Orensten........... 33,334 120,002 8,334 50,000 30,002 180,000
</TABLE>
There was no public trading market for the Common Stock at December 31,
1998. Accordingly, these values of exercisable and unexercisable in-the-money
options have been calculated on the basis of the fair market value of the
Common Stock at December 31, 1998 ($4.60 per share) as determined by an
independent third-party valuation, less the applicable exercise price per
share, multiplied by the number of shares underlying such options.
The value realized by Messrs. Seidler, Maheu and Orensten upon the exercise
of these options represents the aggregate amount of the difference between the
fair market value for a share of Common Stock on the date of exercise ($4.60
per share) and the exercise price of such options ($1.00 per share).
The table below sets forth what the value of unexercised in-the-money
options at December 31, 1998 would have been for each Named Executive Officer
assuming that the fair market value of Razorfish's Common Stock was $11.00 (the
midpoint of the range disclosed on the cover of this prospectus) on the date of
exercise.
<TABLE>
<CAPTION>
Value of unexercised
in-the-money options at
fiscal year-end
-------------------------
Name Exercisable Unexercisable
- ---- ----------- -------------
<S> <C> <C>
Jeffrey A. Dachis..................................... $166,670 $333,330
Craig M. Kanarick..................................... 166,670 333,330
Peter Seidler......................................... 13,456 --
Jean-Philippe Maheu................................... 95,970 525,250
Evan Orensten......................................... 83,340 500,000
</TABLE>
Employee benefit plans
1997 Stock Option Plan
General. On February 24, 1997, Razorfish's Board of Directors adopted and
its stockholders approved the 1997 Stock Option Plan. The 1997 Stock Option
Plan provides for the issuance of a total of up to 1,172,548 shares of Common
Stock. Generally, shares subject to an award that remain unissued upon
expiration or cancellation of the award are available for other awards under
the 1997 Stock Option Plan.
Awards under the 1997 Stock Option Plan. Awards under the 1997 Stock Option
Plan may be made in the form of (1) incentive stock options, (2) non-qualified
stock options (incentive and non-qualified stock options are collectively
referred to as "Options"), (3) restricted stock or (4) any combination thereof.
Awards may be granted to such directors, employees and consultants of Razorfish
(collectively, "Key Persons") as the Board of Directors or the Compensation
Committee of the Board of Directors shall in its discretion select. Only
employees of Razorfish are eligible to receive grants of incentive stock
options.
Administration. The 1997 Stock Option Plan is administered by the
Compensation Committee. The Compensation Committee is authorized to construe,
interpret and implement the provisions of the 1997 Stock
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Option Plan, to select the Key Persons to whom awards will be granted, to
determine the terms and provisions of awards and, with the consent of the
grantee, to cancel and re-grant outstanding awards. The determinations of the
Compensation Committee are made in its sole discretion and are conclusive.
Grants under the 1997 Stock Option Plan
Options. The Compensation Committee determines the terms and conditions of
each Option. The purchase price per share payable upon the exercise of an
Option (the "Option Exercise Price") is established by the Compensation
Committee, and, in the case of an incentive stock option the Option Exercise
Price must be equal to at least 100% of the fair market value of a share of the
Common Stock on the date of grant. The Option Exercise Price is payable in
cash, by surrender of shares of Common Stock having a fair market value on the
date of the exercise equal to part or all of the Option Exercise Price, or by a
combination of cash and such shares, as the Compensation Committee may
determine.
As of the date of this prospectus, there are Options outstanding to purchase
an aggregate of 647,995 shares of Common Stock of which 221,713 are currently
exercisable. In addition, Razorfish intends to grant all of the remaining
201,886 shares of Common Stock reserved for issuance under the 1997 Stock
Option Plan to some officers and employees concurrently with the consummation
of this offering. Of these Options, 533,664 were granted at an exercise price
less than the fair market value of the Common Stock on the date of grant and
114,331 were granted at an exercise price equal to or in excess of the fair
market value of the Common Stock on the date of grant. The weighted average
exercise price and remaining contractual life of the outstanding Options are
$2.59 and 9 years, respectively.
Restricted stock. The Compensation Committee may grant restricted shares of
Common Stock to such Key Persons, in such amounts and subject to such terms and
conditions (which may depend on or be related to performance goals and other
conditions) as the Compensation Committee shall determine in its discretion.
The restricted period for an award of restricted stock may not exceed five
years. The Compensation Committee may require that the certificates for the
shares of Common Stock covered by a restricted stock award remain in the
possession of a bank, other institution or Razorfish until such shares are free
from restrictions. Subject to all applicable restrictions, the grantee has the
rights of a stockholder with respect to the restricted stock, provided that all
stock dividends, stock rights and stock issued upon split-ups or
reclassification shall be subject to the same restrictions as the restricted
shares to which such dividends, rights and stock relate.
In February 1997, Razorfish issued an aggregate of 65,911 shares of Common
Stock under the 1997 Stock Option Plan to seven employees pursuant to the terms
of Stock Grant Agreements entered into between Razorfish and each such
employee. These shares vested 100% on the date of grant. These shares were
issued to each employee in consideration for services rendered to Razorfish by
such employee. Each Stock Grant Agreement also requires the employee to enter
into a Stock Restriction Agreement with Razorfish. Each Stock Restriction
Agreement provides that the holder of the shares of Common Stock will not sell,
assign, pledge or otherwise transfer the shares without the written consent of
Razorfish. In the event that the holder desires to transfer all or any portion
of the shares or upon the occurrence of certain events, Razorfish has a right
of first refusal to purchase such shares at fair market value as determined by
the Board of Directors. Each Stock Restriction Agreement terminates upon the
cessation of Razorfish's business, the bankruptcy, receivership or dissolution
of Razorfish or by the agreement of the parties.
Termination of employment or service
Options. In general, the option agreements entered into pursuant to the 1997
Stock Option Plan provide that: (1) upon termination of the grantee's
employment or service by reason of discharge other than for death or permanent
and total disability, all options not yet exercised shall terminate; and (2) if
a grantee dies or becomes permanently and totally disabled while in Razorfish's
employ or service, the grantee's options will become exercisable as to all of
the shares underlying such options and generally remain exercisable for one
year after the date of such termination, but not after the expiration date of
the award.
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Restricted stock. If a grantee's employment or service terminates for any
reason or if any condition established by the Compensation Committee with
respect to such restricted shares shall not have occurred prior to the end of
the restricted period, the restricted shares shall be forfeited to Razorfish,
and the rights of the holder with respect to such shares shall cease.
Other features of the 1997 Stock Option Plan. The Compensation Committee
may, without stockholder approval, suspend, discontinue, revise or amend the
1997 Stock Option Plan at any time or from time to time; provided, however,
that stockholder approval shall be obtained for any amendment which (1)
increases the number of shares available for issuances (subject to certain
exceptions), (2) changes who is eligible to receive awards under the 1997 Stock
Option Plan or (3) materially increases the benefits accruing to Key Persons.
Unless sooner terminated by the Compensation Committee, the provisions of the
1997 Stock Option Plan with respect to the grant of incentive stock options
shall terminate on the tenth anniversary of the adoption of the 1997 Stock
Option Plan by the Board of Directors. All awards made under the 1997 Stock
Option Plan prior to its termination shall remain in effect until they are
satisfied or terminated. In the event of a stock dividend, stock split,
recapitalization or the like, to the extent it deems necessary, the
Compensation Committee will equitably adjust the aggregate number of shares
subject to the 1997 Stock Option Plan. No provision is made in the 1997 Stock
Option Plan for the adjustment of outstanding awards.
Tax consequences. The following description of the tax consequences of
awards under the 1997 Stock Option Plan is based on present Federal tax laws,
and does not purport to be a complete description of the tax consequences of
the 1997 Stock Option Plan.
There are generally no Federal tax consequences either to the optionee or to
Razorfish upon the grant of an Option. On the exercise of an incentive stock
option, the optionee will not recognize any income, and Razorfish will not be
entitled to a deduction for tax purposes, although such exercise may give rise
to liability for the optionee under the alternative minimum tax provisions of
the Internal Revenue Code of 1986, as amended (the "Code"). However, if the
optionee disposes of shares acquired upon the exercise of an incentive stock
option within two years of the date of grant or one year of the date of
exercise, the optionee will recognize ordinary income, and Razorfish will be
entitled to a deduction for tax purposes in the amount of the excess of the
fair market value of the shares of Common Stock on the date of exercise over
the Option Exercise Price (or the gain on sale, if less); the remainder of any
gain, and any loss, to the optionee will be treated as capital gain or loss. If
the shares are disposed of after the foregoing holding periods are met,
Razorfish will not be entitled to any deduction, and the entire gain or loss
will be treated as a capital gain or loss to the optionee. On exercise of a
non-qualified stock option, the amount by which the fair market value of Common
Stock on the date of exercise exceeds the Option Exercise Price will generally
be taxable to the optionee as ordinary income and will generally be deductible
for tax purposes by Razorfish. The disposition of shares upon exercise of a
non-qualified option will generally result in capital gain or loss to the
optionee but will have no tax consequences to Razorfish.
An award of restricted shares of Common Stock generally will not result in
income for the grantee or in a tax deduction for Razorfish until such time as
the shares are no longer subject to forfeiture unless the grantee elects
otherwise. At that time, the grantee generally will recognize ordinary income
equal to the fair market value of the shares less any amount paid for them, and
Razorfish generally will be entitled to a tax deduction in the same amount.
Limitations on Razorfish's compensation deduction. Section 162(m) of the
Code limits the deduction which Razorfish may take for otherwise deductible
compensation payable to certain executive officers to the extent that
compensation paid to such officers for a year exceeds $1.0 million, unless such
compensation meets certain requirements. Although Razorfish believes that
compensation realized from options that have been granted under the 1997 Stock
Option Plan generally will satisfy the requirements of Section 162(m) of the
Code, there is no assurance that such awards will satisfy such requirements.
The deduction for compensation resulting from a restricted stock award will be
subject to the limitation imposed by Code Section 162(m).
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1999 Stock Incentive Plan
General. In March 1999, Razorfish's Board of Directors adopted and the
stockholders approved the 1999 Stock Incentive Plan. The 1999 Stock Incentive
Plan provides for the issuance of a total of up to 922,327 shares of Common
Stock. Generally, shares subject to an award that remain unissued upon
expiration, cancellation, settlement or forfeiture of the award are available
for other awards under the 1999 Stock Incentive Plan.
Awards under the 1999 Stock Incentive Plan. Awards under the 1999 Stock
Incentive Plan may be made in the form of:
. incentive stock options;
. non-qualified stock options;
. stock appreciation rights;
. dividend equivalent rights;
. restricted stock;
. performance units;
. performance shares; or
. any combination thereof.
Awards may be granted to such Key Persons as the Compensation Committee
shall in its discretion select. Only employees of Razorfish are eligible to
receive grants of incentive stock options. Each award shall be evidenced by an
agreement (each an "Award Agreement") entered into by Razorfish and the
grantee. The Compensation Committee shall determine the terms and provisions of
each award granted under the 1999 Stock Incentive Plan, including the vesting
schedule, repurchase provisions, rights of first refusal, forfeiture
provisions, form of payment, payment contingencies and satisfaction of any
performance criteria. The performance criteria established by the Compensation
Committee may be based on any one, or any combination of, the following:
. increase in share price;
. earnings per share;
. total stockholders' return;
. net operating income;
. personal management objectives; and
. any other measure of performance selected by the Compensation Committee.
As of the date of this prospectus, no awards have been granted pursuant to
the 1999 Stock Incentive Plan; however, Razorfish intends to grant 430,500
options pursuant to the 1999 Stock Incentive Plan concurrently with the
consummation of this Offering.
Administration. The 1999 Stock Incentive Plan is administered by the
Compensation Committee. The Compensation Committee is authorized to construe,
interpret and implement the provisions of the 1999 Stock Incentive Plan, to
select the Key Persons to whom awards will be granted, to determine the terms
and provisions of awards and, with the consent of the grantee, to amend the
terms of any outstanding award. The determinations of the Compensation
Committee are made in its sole discretion and are conclusive.
Grants under the 1999 Stock Incentive Plan
Awards. The Compensation Committee determines the terms and conditions of
each award. The purchase price per share payable upon the exercise of an Option
(the "Option Exercise Price") is established by the Compensation Committee,
and, in the case of an incentive stock option the Option Exercise Price must be
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<PAGE>
equal to at least 100% of the fair market value of a share of the Common Stock
on the date of grant. The Option Exercise Price is payable in cash, check, by
delivery of grantee's promissory note by surrender of shares of Common Stock
having a fair market value on the date of the exercise equal to the Option
Exercise Price, by the sale of the shares through a broker-dealer or by any
combination of the foregoing methods of payment, as the Compensation Committee
may determine.
Termination of employment or service
Awards. Upon the termination of a Key Person's employment with Razorfish or
any of its subsidiaries, as the case may be, an award granted pursuant to the
1999 Stock Incentive Plan may be exercised to the extent provided in the Award
Agreement.
Other features of the 1999 Stock Incentive Plan. The Board of Directors may,
without stockholder approval, amend, suspend or terminate the 1999 Stock
Incentive Plan at any time or from time to time; provided, however, that (1)
stockholders approval shall be obtained as required to comply with applicable
laws and (2) such amendment, suspension or termination shall not affect awards
that have been previously granted. Unless sooner terminated by the Board of
Directors, the provisions of the 1999 Stock Incentive Plan shall terminate on
the tenth anniversary of the adoption of the 1999 Stock Incentive Plan by the
Board of Directors. All awards made under the 1999 Stock Incentive Plan prior
to its termination shall remain in effect until they are satisfied or
terminated. Subject to any action that may be required by the stockholders of
Razorfish, the Compensation Committee may, in its discretion, proportionately
adjust the number and price of outstanding awards, and the number of shares
authorized for issuance under the 1999 Stock Incentive Plan, in the event of a
stock dividend, stock split, recapitalization or other corporate action having
a similar effect on the capitalization of Razorfish. In the event of a Change
in Control (as defined in the 1999 Stock Incentive Plan), the Compensation
Committee has the authority to accelerate the vesting schedule of, release from
restrictions on transfer of and terminate repurchase or forfeiture rights with
respect to any outstanding award. The Compensation Committee may establish
programs that provide for (1) the exchange of awards for one or more other
types of awards by certain Key Persons and (2) the grant of certain types of
awards to one or more classes of Key Persons. In addition, the Compensation
Committee may at any time offer to buy out for cash or shares of Common Stock
any outstanding award.
Tax consequences. The following description of the tax consequences of
awards under the 1999 Stock Incentive Plan is based on present Federal tax
laws, and does not purport to be a complete description of the tax consequences
of the 1999 Stock Incentive Plan.
The tax consequences of Options and restricted stock granted under the 1999
Stock Incentive Plan will generally be the same as the tax consequences of
Options and restricted stock granted under the 1997 Stock Option Plan. In the
case of a stock appreciation right, upon exercise of such right the holder will
be taxed at ordinary income rates on the amount of cash and the fair market
value of the other property received. Subject to the limitation described
below, Razorfish will be entitled to a deduction at the same time and in the
same amount as the holder has income. The tax consequences of other kinds of
awards will depend on the particular terms and conditions of such awards. In
general, in case of other awards, it is anticipated that such awards will
result in ordinary income to the recipient and a deduction to Razorfish;
however, the amount and timing of such income and any such deduction will
depend on the time and conditions of the award.
Limitations on Razorfish's compensation deduction. Although it is
anticipated that certain awards under the 1999 Stock Incentive Plan will,
pursuant to Section 162(m) of the Code, meet the requirements to avoid a limit
on deductibility, no assurances can be given that all awards will meet such
requirements. Specifically, awards of restricted stock will be subject to the
limitation on deductability imposed by Section 162(m) of the Code.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of April 9, 1999 and as adjusted to reflect the
sale of the Common Stock offered hereby by (1) each person (or group within the
meaning of Section 13(d)(3) of the Securities Exchange Act of 1934) known by
Razorfish to own beneficially 5% or more of the Common Stock, (2) Razorfish's
directors and Named Executive Officers and (3) all directors and executive
officers of Razorfish as a group.
As used in this table, "beneficial ownership" means the sole or shared power
to vote or direct the voting or to dispose or direct the disposition of any
security. A person is deemed to be the beneficial owner of securities that can
be acquired within 60 days from the date of this prospectus through the
exercise of any option, warrant or right. Shares of Common Stock subject to
options, warrants or rights which are currently exercisable or exercisable
within 60 days are deemed outstanding for computing the ownership percentage of
the person holding such options, warrants or rights, but are not deemed
outstanding for computing the ownership percentage of any other person. The
amounts and percentages are based upon 21,087,875 shares of Common Stock
outstanding as of April 9, 1999, and 24,087,875 shares of Common Stock
outstanding as of the closing of this offering, respectively.
Spray Ventures, Communicade and Messrs. Dachis and Kanarick are parties to
the Stockholders Agreement. Because the Stockholders Agreement terminates on
the consummation of this offering, the shares owned by one party to the
Stockholders Agreement are not attributed to the beneficial ownership of the
other parties in this table.
Although listed in the table below, Messrs. Bystedt, Svensson and Wren do
not own directly any shares of Common Stock. They are listed due to their
affiliation with Spray Ventures, in the case of Messrs. Bystedt and Svensson,
and Communicade, in the case of Mr. Wren, both of which are direct holders of
Common Stock. See notes 4, 5 and 7 to the table.
<TABLE>
<CAPTION>
Number of shares Percentage owned
of Common Stock -----------------
beneficially owned
Name and address of prior to and after Prior to After
beneficial owners(1) offering offering offering
-------------------- ------------------ -------- --------
<S> <C> <C> <C>
Spray Ventures AB (2).................... 7,904,827 37.5% 32.8%
Nybrogatan 55
114 85 STOCKHOLM
Per I.G. Bystedt (2)(3)................ 7,904,827(4) 37.5 32.8
Jonas S.A. Svensson (2)(3)............. 7,904,827(4) 37.5 32.8
Omnicom Group, Inc. (5).................. 7,958,333(6) 37.7 33.0
c/o Communicade Inc.
437 Madison Avenue
New York, New York 10022
John Wren.............................. 7,958,333(7) 37.7 33.0
c/o Omnicom Group, Inc.
437 Madison Avenue
New York, New York 10022
Jeffrey A. Dachis........................ 2,346,390(8) 11.1 9.7
Craig M. Kanarick........................ 2,346,390(9) 11.1 9.7
Peter Seidler............................ 515,956(10) 2.4 2.1
Jean-Philippe Maheu...................... 47,931(11) * *
Evan Orensten............................ 46,668(12) * *
Carter F. Bales.......................... 7,000 * *
c/o The Wicks Group of Companies, L.L.C.
405 Park Avenue
New York, New York 10022
Kjell A. Nordstrom.......................
c/o Institute of International Business
Stockholm School of Economics
P.O. Box 6501
11383 Stockholm, Sweden
All directors and executive officers as a
group (14 persons)...................... 21,214,580(13) 99.7 88.0
</TABLE>
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- --------
* Less than 1%
(1) Unless otherwise noted, the address of each of the persons listed is 107
Grand Street, 3rd Floor, New York, New York 10013.
(2) Per Bystedt, Jonas Svensson, Thomas Randerz and Johan Ihrfelt, each of whom
is an officer or director of Razorfish, collectively own more than 50% of
the outstanding voting stock of Spray Ventures AB. There is no agreement
among these individuals as to the voting of their shares of Spray Ventures.
Spray Ventures is a publicly held company in Sweden. In February 1999, the
board of directors of Spray Ventures called an Annual General Meeting of
shareholders to vote on the issuance of warrants to purchase certain of the
shares of Razorfish Common Stock owned by Spray Ventures. The shareholders
of Spray Ventures approved the issuance of the warrants. The warrants were
issued in February 1999 to approximately 200 shareholders including Messrs.
Bystedt, Svensson, Ihrfelt and Randerz, officers of Razorfish. Each Spray
Ventures shareholder is entitled to one warrant for each common share of
Spray Ventures owned by such shareholder. Each warrant gives the holder the
right to purchase eight shares of Razorfish at a purchase price of SEK 256
($31.41) per warrant. The board of directors of Spray Ventures has issued
an aggregate of 481,483 warrants to purchase an aggregate of 3,851,864
shares of Common Stock (or 16.0% of the outstanding shares of Razorfish
Common Stock after giving effect to this offering). Pursuant to the terms
of the warrants holders of the warrants may exercise them during the period
commencing on October 22, 1999 and ending on November 22, 1999. Messrs.
Bystedt, Svensson, Ihrfelt and Randerz, as well as some of the other
warrant holders, have agreed not to sell any shares of Common Stock for 180
days following the closing of this offering without the consent of Credit
Suisse First Boston. As a result, approximately 70% of the warrant holders
will be unable to sell the shares acquired upon exercise of the warrants
during the 180-day period following the closing of this offering.
(3) The principal business address of Messrs. Bystedt and Svensson is c/o Spray
Network AB, Nybrogaten 55, Stockholm 11485, Sweden.
(4) Represents shares of Common Stock beneficially held by Spray Ventures.
Messrs. Bystedt and Svensson are members of the board and shareholders of
Spray Ventures. However, none of Messrs. Bystedt or Svensson or any other
member of the board of Spray Ventures, acting alone, has voting or
investment power with respect to Razorfish's Common Stock directly or
indirectly beneficially owned by Spray Ventures and, as a result, each of
Messrs. Bystedt and Svensson disclaim beneficial ownership of these shares.
Spray Ventures is a publicly held company in Sweden.
(5) The shareholder of record is Communicade, a wholly owned subsidiary of
Omnicom. Omnicom is a publicly held company. John Wren, a director of
Razorfish, is also an executive officer and a director of Omnicom. However,
Mr. Wren, acting alone, has no voting or investment power with respect to
the Razorfish Common Stock held by Communicade.
(6) Includes (a) 2,345,160 shares acquired in connection with the Spray
acquisition and (b) 1,976,810 shares acquired upon the exercise of the 10%
option.
(7) Represents shares of Common Stock beneficially held by Communicade. Mr.
Wren is an executive officer and a director of Omnicom, the parent company
of Communicade. However, neither Mr. Wren nor any other officer or director
of Omnicom, acting alone, has voting or investment power with respect to
the Company's Common Stock directly or indirectly beneficially owned by
Omnicom and, as a result, Mr. Wren disclaims beneficial ownership of these
shares.
(8) Includes 33,334 shares of Common Stock subject to options that are
currently exercisable by Mr. Dachis and 20,260 shares of Common Stock
subject to options to be granted to Mr. Dachis concurrently with the
consummation of this offering and to be 100% vested on the date of grant.
(9) Includes 33,334 shares of Common Stock subject to options that are
currently exercisable by Mr. Kanarick and 20,260 shares of Common Stock
subject to options to be granted to Mr. Kanarick concurrently with the
consummation of this offering and to be 100% vested on the date of grant.
(10) Includes 13,456 shares of Common Stock subject to options that are
currently exercisable by Mr. Seidler and 2,500 shares of Common Stock
subject to options to be granted to Mr. Seidler concurrently with the
consummation of this offering and to be 100% vested on the date of grant.
(11) Includes 9,597 shares of Common Stock subject to options that are
currently exercisable by Mr. Maheu and 5,000 shares of Common Stock
subject to options to be granted to Mr. Maheu concurrently with the
consummation of this offering and to be 100% vested on the date of grant.
(12) Includes 8,334 shares of Common Stock that are currently exercisable by
Mr. Orensten and 5,000 shares of Common Stock subject to options to be
granted to Mr. Orensten concurrently with the consummation of this
offering and to be 100% vested on the date of grant.
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<PAGE>
(13) Includes (a) an aggregate of 113,106 shares of Common Stock subject to
options that are held by the directors and executive officers and are
currently exercisable or exercisable within 60 days of April 9, 1999 and
73,020 shares to be granted to the directors and executive officers
concurrently with the consummation of this offering and to be 100% vested
on the date of grant, (b) shares held by Communicade, the beneficial
ownership of which is attributed to but disclaimed by Mr. Wren, and (c)
shares held by Spray Ventures, the beneficial ownership of which is
attributed to but disclaimed by Messrs. Bystedt and Svensson.
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<PAGE>
CERTAIN TRANSACTIONS
Transactions with Omnicom
In September 1996, Razorfish, Communicade (f/k/a JWL Associates Corp.) and
Messrs. Dachis and Kanarick, officers and directors of Razorfish, entered into
the Shareholders Agreement, which remained in effect until the closing of the
Spray acquisition. Pursuant to the terms of the agreement, Omnicom agreed that,
as long as it was a shareholder of Razorfish, it would provide Razorfish with a
$2.0 million working capital line of credit and an acquisition line of credit
to be used for the purchase of "new media" companies.
In connection with the Spray acquisition, Razorfish, Communicade, Spray
Ventures and Messrs. Dachis and Kanarick entered into the Stockholders
Agreement which terminates upon the closing of this offering. Pursuant to the
terms of the Stockholders Agreement, Communicade has provided the working
capital line of credit and the acquisition line of credit to Razorfish on the
same terms and conditions as were set forth in the Shareholders Agreement.
Razorfish repaid all outstanding amounts borrowed under the working capital
line of credit in February 1999 with the proceeds from the exercise of the 10%
option by Communicade. The first $1.0 million of principal amount outstanding
bore no interest and additional amounts bore interest at a rate set from time
to time by Omnicom. At the time Razorfish repaid this debt, there was a total
of $1.3 million outstanding, and the applicable interest rate was 5.95%. The
working capital line of credit was secured by a first priority lien on
Razorfish's assets. This lien was released at the time of repayment. This line
of credit will terminate upon the closing of this offering.
As of the date of this prospectus, Razorfish has approximately $4.0 million
outstanding under the acquisition line of credit. Interest on any loan made
under the acquisition line of credit accrues at the same rate applicable to the
working capital line of credit and is payable quarterly on the outstanding
principal amount. The principal under any loan under the acquisition line of
credit is payable quarterly in equal installments over a seven-year period. The
unused portion of this line of credit will terminate upon the closing of this
offering, and all amounts outstanding under this line of credit must be repaid
as described in the previous sentence. The current interest rate is 5.93%. The
table below sets forth the amount borrowed for each acquisition of a "new
media" company that Razorfish funded with a loan from Communicade:
<TABLE>
<CAPTION>
Amount
Acquisition borrowed
----------- ----------
<S> <C>
Avalanche Systems........................... $1,000,000
CHBi........................................ 1,966,000
<tag> Media................................. 250,000
Plastic..................................... 525,000
----------
Total....................................... $3,741,000
==========
</TABLE>
See "Business--Other acquisitions" for a description of the acquisitions set
forth above.
Pursuant to the terms of the Stockholders Agreement, Communicade was granted
the 10% option. The purchase price per share upon exercise of the 10% option is
equal to 80% of the price per share to be sold in this offering. In February
1999, Communicade exercised the 10% option and purchased 1,976,810 shares of
Common Stock. The aggregate purchase price that Commmunicade paid for these
shares was $15.8 million. The purchase price paid by Communicade in connection
with the exercise of this option of $8.00 per share was based on an assumed
offering price of $10.00 per share. This 20% discount will be reflected as a
charge to pro forma operations of $3,953,620. The purchase price for these
shares will be adjusted based on the actual offering price of the shares
offered hereby. At the closing of this offering, Communicade will pay, or
Razorfish will refund, the difference between the amount paid by Communicade
and the amount
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<PAGE>
payable based on such actual offering price, as applicable. Assuming that the
actual offering price of the shares offered hereby is $11.00 per share (the
midpoint of the range disclosed on the cover of this prospectus) the purchase
price payable by Communicade will increase by $1,581,448 to $17,395,928. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and capital resources."
Simultaneously with the Spray acquisition, Messrs. Dachis and Kanarick each
transferred an additional 363,636 shares of Common Stock, representing a total
of 4% of the issued and outstanding shares of Common Stock on the date of
transfer, to Communicade in exchange for $1.5 million in cash.
Transactions with Spray executives
In June 1997, Per Bystedt, an officer and a director of Razorfish, and Spray
entered into a convertible debt agreement pursuant to which Mr. Bystedt loaned
Spray approximately SEK 1.5 million ($0.2 million based upon the June 30, 1997
exchange rate of SEK 7.7273 = $1.00). This loan was due on December 31, 1997
and bore interest at 2.0% per annum. Prior to the maturity date of this loan,
Mr. Bystedt exercised his conversion rights pursuant to the agreement and
acquired 56 shares of common stock of Spray with a per share value of
approximately $3,000.
In September 1997, Spray executed a demand note in favor of Mr. Bystedt for
the aggregate principal amount of SEK 1.0 million ($0.1 million based upon the
September 30, 1997 exchange rate of SEK 7.5680 = $1.00). This note bore
interest at a rate of 9.25% and was repaid in 1998. In addition, prior to 1998,
Spray Ventures periodically made advances to Spray in an aggregate amount of
SEK 2.6 million ($0.3 million based upon an average rate for the year ended
December 31, 1997 of SEK 7.6854 = $1.00). These advances were forgiven by Spray
Ventures in 1998.
Razorfish Studios
Razorfish Studios produces and publishes on-line content, including art,
computer games, and literature, as well as screensavers, audio recordings,
books and films. Razorfish Studios also manages artists and provides management
consulting to artists. The majority of Razorfish Studios' common stock is owned
by Communicade and Messrs. Dachis and Kanarick, each of whom is a stockholder
of Razorfish. Michael S. Simon, an officer of Razorfish, is also a stockholder,
a director and President of Razorfish Studios. Mr. Dachis is the Chief
Executive Officer of Razorfish Studios, and Mr. Kanarick is Chairman of the
Board, Chief Creative Officer and Secretary of Razorfish Studios.
Razorfish Studios was formed in October 1997. Both prior to its formation,
and for a period of time after, part of the Razorfish Studios business was
operated as a division of Razorfish. In October 1997, Razorfish assigned to
Razorfish Studios all of its rights, title and interest in and to all of the
Razorfish Studios digital media properties owned by Razorfish, including the
Razorfish Studios website and RSUB, The Razorfish Subnetwork (located at
www.rsub.com), and all content located in such websites.
In exchange for the use of its facilities, Razorfish allocates a portion of
its overhead to Razorfish Studios, based on the ratio of the number of
employees of Razorfish Studios to the number of employees of both Razorfish and
Razorfish Studios. Historically, Razorfish made its employees available to
Razorfish Studios at a single discounted rate which was approximately 57% of
the average billing rate for Razorfish employees. Razorfish currently charges
Razorfish Studios its full billing rates with no discounts. In addition,
Razorfish provides Razorfish Studios with funds to cover operating expenses and
salaries which are refunded by Razorfish Studios. As of December 31, 1998,
Razorfish Studios owed approximately $601,000 to Razorfish for certain services
rendered by Razorfish employees, overhead and other advances made by Razorfish.
Messrs. Dachis and Kanarick have unconditionally guaranteed to pay this amount
to Razorfish in the event of a default by Razorfish Studios, pursuant to a
guaranty entered into in December 1998. Razorfish expects that future amounts
owed by Razorfish Studios will also be guaranteed by Messrs. Dachis and
Kanarick.
Razorfish Studios currently has four employees. Such employees occasionally
perform work for Razorfish at the same hourly rate as is charged to Razorfish
Studios for the use of Razorfish employees. Razorfish Studios also sells
limited numbers of its products to Razorfish and its employees at a discounted
rate to the retail cost. Such products are used by Razorfish primarily as
promotional items for its clients.
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<PAGE>
Razorfish licenses the "Razorfish" trademark and design logo to Razorfish
Studios pursuant to a trademark license agreement on a royalty-free basis. The
trademark license contains customary provisions giving Razorfish the ability to
control the use of the Razorfish trademark by Razorfish Studios. Because the
"Razorfish" trademark and design logo are licensed to Razorfish Studios,
Razorfish's name and reputation could still be materially and adversely
affected by content published or actions taken by Razorfish Studios.
Registration rights agreement
Razorfish and Communicade have entered into a registration rights agreement
pursuant to which, subject to certain limitations, Communicade has certain
rights to require Razorfish to register under the Securities Act the shares of
Common Stock owned by Communicade. The registration rights agreement provides
for five "demand" and unlimited "piggyback" registration rights that will be
exercisable by Communicade. Communicade will pay for any expenses incurred in
connection with a demand registration and for incremental expenses for
piggyback registrations, including underwriting discounts and commissions
attributable to the shares of Common Stock sold by Communicade for both types
of registrations. See "Description of Capital Stock--Registration Rights."
Other transactions
In December 1998, Messrs. Dachis and Kanarick, officers of Razorfish, sold
500,000 shares of Common Stock to Razorfish for an aggregate purchase price of
$500,000. The purchase price was paid in full in March 1999. Messrs. Dachis and
Kanarick sold these shares of Common Stock to Razorfish so that Razorfish could
satisfy its obligations to Mr. Seidler arising under a stock option agreement
entered into by Razorfish and Mr. Seidler. The 500,000 purchased shares were
issued out of treasury to Mr. Seidler in connection with the exercise in
December 1998 of options held by him at an exercise price of $1.00 per share.
See "Management--Option grants in fiscal 1998."
Simultaneously with the Spray acquisition, Communicade purchased 563 common
shares of Spray from Spray Ventures, representing 20% of the issued and
outstanding shares of Spray at the time of the transaction. In connection with
the Spray acquisition, all of these shares were exchanged for 1,976,810 shares
of Common Stock. Upon the closing of these two transactions, Communicade owned
a total of 5,617,887 shares of Common Stock.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Razorfish's authorized capital stock consists of 29,999,950 shares, $.01 par
value per share, of Class A Common Stock, 50 shares, $.01 par value per share,
of Class B Common Stock and 10,000,000 shares, par value $.01 per share, of
preferred stock.
The following summary of the terms and provisions of Razorfish's capital
stock are not complete, and you should read Razorfish's Certificate of
Incorporation and By-laws, which have been filed as exhibits to the
Registration Statement of which this prospectus is a part.
Common stock
Class A Common Stock
Following this offering, 24,087,875 shares of Common Stock will be
outstanding or 24,537,875 shares if the underwriters exercise their over-
allotment option in full. As of April 1, 1999, there were 16 holders of the
Company's Common Stock. Each Stockholder is entitled to one vote for each share
owned on all matters voted upon by stockholders, including the election of
directors. Subject to the rights of any then outstanding shares of preferred
stock, stockholders are entitled to dividends that the Board of Directors may
declare. The decision to declare dividends is made by the Board of Directors in
its sole discretion, but the Board of Directors may only declare dividends if
there are funds legally available to pay for the dividends. See "Dividend
Policy."
Stockholders are entitled to share ratably in the net assets of Razorfish
upon liquidation after payment or provision for all liabilities and any
preferential liquidation rights of any preferred stock then outstanding.
Stockholders have no preemptive rights to purchase shares of stock of
Razorfish. Shares of Common Stock are not subject to any redemption provisions
and are not convertible into any other securities of Razorfish. All outstanding
shares of Common Stock are, and the shares of Common Stock to be sold by
Razorfish in this offering when they are paid for will be, fully paid and non-
assessable.
Class B Common Stock
All 50 shares of the Class B Common Stock are issued and outstanding. The
Class B Common Stock was issued to Spray Ventures and Communicade in February
1999 as a part of the purchase price for Spray. The rights, privileges and
restrictions of the Class B Common Stock are the same as those of the Class A
Common Stock, except that Communicade and Spray Ventures are not entitled to
vote these shares. Communicade and Spray Ventures may have the right to vote
these shares in specific instances in accordance with the Delaware General
Corporation Law.
Preferred stock
Pursuant to the Certificate of Incorporation, the Board of Directors has the
authority, without further action by Razorfish's stockholders, to issue up to
10,000,000 shares of preferred stock. The Board of Directors may issue this
stock in one or more series and may fix the rights, preferences, privileges and
restrictions of this stock. Some of the rights and preferences that the Board
of Directors may designate include dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences and sinking fund terms.
The Board of Directors may determine the number of shares constituting any
series or the designation of such series. Any or all of the rights and
preferences selected by the Board of Directors may be greater than the rights
of the Common Stock. The issuance of preferred stock could adversely affect the
voting power of holders of Common Stock and the likelihood that stockholders
will receive dividend payments and payments upon liquidation. The issuance of
preferred stock could also have the effect of delaying, deferring or preventing
a change in control of Razorfish. Razorfish has no present plan to issue shares
of preferred stock.
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<PAGE>
Registration rights
In March 1999, Razorfish entered into a registration rights agreement with
Communicade pursuant to which Razorfish granted Communicade certain rights with
respect to the registration under the Securities Act of the shares of Common
Stock owned by Communicade. Subject to certain limitations and exclusions,
during the period commencing on the one year anniversary of the closing of this
offering and ending on the fifth anniversary thereof, Communicade will have
five "demand" registration rights to require Razorfish to effect the
registration of the its shares of Common Stock. In addition, at any time during
the period commencing on February 3, 2000 and ending on the fifth anniversary
of the closing date of this offering (the "Registration Rights Period"),
Communicade has unlimited "piggyback" registration rights to have its shares of
Common Stock registered under the Securities Act. The registration rights
agreement provides that, during the Registration Rights Period, whenever
Razorfish proposes to register shares of its Common Stock under the Securities
Act (other than in connection with this Registration Statement and certain
other exceptions), then Communicade will have the right, subject to certain
restrictions, to request that Razorfish register its shares of Common Stock in
connection with such registration. The inclusion of Communicade's shares in any
registration effected by Razorfish will be subject to the right of the managing
underwriter, if any, to reduce or exclude those Shares. Communicade will pay
for all expenses incurred in connection with a demand registration and for
incremental expenses in connection with piggyback registration rights,
including underwriting discounts and commissions attributable to the shares of
Common Stock sold by Communicade for both types of registrations.
Limitation on directors' liabilities
Razorfish's Certificate of Incorporation limits, to the maximum extent
permitted by Delaware law, the personal liability of directors and officers for
monetary damages for breach of their fiduciary duties as directors and
officers, except for liability:
. for any breach of the director's or officer's duty of loyalty to
Razorfish or its stockholders,
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
. under Section 174 of the Delaware General Corporation Law, which concerns
unlawful payments of dividends, stock purchases or redemptions or
. for any transaction from which the director or officer derived an
improper personal benefit.
Razorfish may obtain standard policies of insurance under which coverage
would be provided to its directors and officers against loss arising from
claims of breach of duty or other wrongful act. This insurance would also
provide coverage to Razorfish with respect to payments which may be made by
Razorfish to such officers and directors pursuant to the above indemnification
provision or otherwise as a matter of law.
Anti-takeover effects of provisions of Razorfish's By-laws
Razorfish's By-laws provide that the number of directors may be changed by
an amendment to the By-laws adopted by the Board of Directors or by the holders
of a majority of Razorfish's outstanding voting stock. Vacancies on the Board
of Directors may be filled by the holders of a majority of directors in office
even if such members constitute less than a quorum.
Razorfish's By-laws also provide that special meetings of the stockholders
may be called only by the Chairman of the Board, the Chief Executive Officer,
the President or a majority of the Board of Directors. Razorfish's By-laws also
require advance written notice of a proposal or directors nomination which a
stockholder desires to present at an annual meeting of stockholders.
Razorfish's Secretary must receive the notice from the stockholder not less
than 45 days nor more than 75 days prior to the date on which Razorfish mails
the proxy materials for the previous year's annual meeting.
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<PAGE>
Razorfish's Certificate of Incorporation does not include a provision for
cumulative voting in the election of directors. Under cumulative voting, a
minority stockholder holding a sufficient number of shares may be able to
ensure the election of one or more directors. The absence of cumulative voting
may have the effect of limiting the ability of minority stockholders to affect
changes in Board of Directors and, as a result, may have the effect of
deterring a hostile takeover or delaying or preventing changes in control or
management of Razorfish.
Anti-takeover effects of Delaware law
Razorfish's Certificate of Incorporation contains a provision electing not
to be governed by Section 203. In general, Section 203 of the Delaware General
Corporation Law prohibits a publicly held Delaware corporation from engaging in
a broad range of "business combinations" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. A "business combination" includes a merger, asset sale
or other transaction resulting in a financial benefit to the interested
stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns or, in certain cases, within three years prior,
did own, 15% or more of the corporation's voting stock. As a result of the
Razorfish's election not to be governed by Section 203, Razorfish may engage in
certain transactions with interested parties that change the control of
Razorfish without satisfying the waiting periods presented by the statute.
Transfer agent and registrar
The Transfer Agent and Registrar for the Common Stock is American Stock &
Transfer Co.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, 24,087,875 shares of Common Stock will
be outstanding or 24,537,875 shares if the underwriters exercise their over-
allotment option in full. Of these shares, the 3,450,000 shares of Common
Stock, assuming the underwriters exercise their over-allotment option in full,
sold in this offering will be freely tradable without restriction or further
registration under the Securities Act, unless held by an "affiliate" of
Razorfish (a "Razorfish Affiliate") as that term is defined in Rule 144. All of
the shares of Common Stock outstanding prior to this offering are "restricted
securities," as such term is defined under Rule 144. These shares are
restricted securities because they were issued in private transactions not
involving a public offering and may not be sold in the absence of registration
other than in accordance with Rule 144 or Rule 701 promulgated under the
Securities Act or another exemption from registration. This prospectus may not
be used in connection with any resale of shares of Common Stock acquired in
this offering by Razorfish Affiliates.
Each of Razorfish, its directors and executive officers and its existing
stockholders has agreed not to offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of Razorfish Common Stock or securities convertible into or
exchangeable or exercisable for any shares of Common Stock of Razorfish without
the prior written consent of Credit Suisse First Boston Corporation for a
period of 180 days after the date of this prospectus. The restrictions set
forth in the previous sentence do not apply to grants of employee stock options
pursuant to the terms of Razorfish's stock option plans, issuances of
securities pursuant to the exercise of such options outstanding on the date
hereof or the exercise of any other stock options outstanding on the date
hereof. The foregoing restrictions will also not apply to shares received upon
the exercise of certain warrants by those warrantholders who are not directors,
executive officers or existing stockholders of Razorfish.
In general, under Rule 144 as currently in effect, if a minimum of one year
has elapsed since the later of the date of acquisition of the restricted
securities from the issuer or from an affiliate of the issuer, a person (or
persons whose shares of Common Stock are aggregated), including persons who may
be deemed Razorfish Affiliates, would be entitled to sell within any three-
month period a number of shares of Common Stock that does not exceed the
greater of
(1) one percent of the then-outstanding shares of Common Stock, which
equals approximately 240,879 shares immediately after this offering, or
(2) the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission.
Sales under Rule 144 are also subject to certain restrictions as to the
manner of sale, notice requirements and the availability of current public
information about Razorfish. In addition, under Rule 144(k), if a period of at
least two years has elapsed since the later of the date restricted securities
were acquired from Razorfish or the date they were acquired from a Razorfish
Affiliate, a stockholder who is not a Razorfish Affiliate at the time of sale
and who has not been a Razorfish Affiliate for at least three months prior to
the sale would be entitled to sell shares of Common Stock in the public market
immediately without compliance with the foregoing requirements under Rule 144.
Rule 144 does not require the same person to have held the securities for the
applicable periods. The foregoing summary of Rule 144 is not intended to be a
complete description thereof.
In addition, any employee, director or officer of, or consultant to
Razorfish who acquired shares pursuant to a written compensatory plan or
contract may be entitled to rely on the resale provisions of Rule 701 of the
Securities Act, which permits non-affiliates to sell their Rule 701 shares
without having to comply with the public information, holding period, volume
limitation or notice provisions of Rule 144, and permits Razorfish Affiliates
to sell their Rule 701 shares without having to comply with the holding period
restrictions of Rule 144, in each case, commencing 90 days after the date of
this prospectus.
77
<PAGE>
Immediately following the offering, none of the 21,087,875 "restricted
securities" will be available for immediate sale in the public market pursuant
to Rule 144(k). Beginning 90 days after the date of this prospectus, and
without consideration of the contractual restrictions described above, 647,995
shares either issued under the 1997 Stock Option Plan or acquired upon exercise
of options issued under the 1997 Stock
77--1
<PAGE>
Option Plan will be outstanding and eligible for sale in reliance upon Rule
701. Additional shares may be available if options are exercised in the 180-day
period following the date of this prospectus.
Following this offering, Razorfish intends to file a registration statement
on Form S-8 under the Securities Act to register (1) 1,172,548 shares of Common
Stock reserved or to be available for issuance pursuant to the 1997 Stock
Option Plan and (2) 922,327 shares of Common Stock reserved or to be available
for issuance pursuant to the 1999 Stock Incentive Plan. Shares of Common Stock
issued pursuant to the 1997 Stock Option Plan and the 1999 Stock Incentive Plan
generally will be available for sale in the open market by holders who are not
Razorfish Affiliates and, subject to the volume and other applicable
limitations of Rule 144, by holders who are Razorfish Affiliates, unless such
shares are subject to vesting restrictions or the contractual restrictions
described above.
Prior to this offering, there has been no public market for the Common
Stock. No information is currently available and Razorfish cannot predict the
timing or amount of future sales of shares, or the effect, if any, that future
sales of shares, or the availability of shares for future sale, will have on
the market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of the Common Stock (including shares issuable upon the
exercise of stock options) in the public market after the lapse of the
restrictions described above, or the perception that such sales may occur,
could materially adversely affect the prevailing market prices for the Common
Stock and the ability of Razorfish to raise equity capital in the future. See
"Risk Factors--The volume of trading and price of our Common Stock could
fluctuate significantly, which could adversely affect our stock price" and
"Risk Factors--The sale of a substantial number of shares of our Common Stock
in the public market could adversely affect the market price, which could
negatively impact your investment in us."
78
<PAGE>
UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of the
Common Stock applicable to Non-United States Holders of such Common Stock. For
the purpose of this discussion, a "Non-United States Holder" is any holder that
for United States federal income tax purposes is not a "United States person"
(as defined below). This discussion does not address all aspects of United
States federal income and estate taxation that may be relevant in light of such
Non-United States Holder's particular facts and circumstances (such as being a
U.S. expatriate) and does not address any tax consequences arising under the
laws of any state, local or non-United States taxing jurisdiction. Furthermore,
the following discussion is based on current provisions of the Code and
administrative and judicial interpretations thereof, all as in effect on the
date hereof, and all of which are subject to change, possibly with retroactive
effect. Razorfish has not and will not seek a ruling from the Internal Revenue
Service ("IRS") with respect to the United States federal income and estate tax
consequences described below, and as a result, there can be no assurance that
the IRS will not disagree with or challenge any of the conclusions set forth in
this discussion. For purposes of this discussion, the term "United States
person" means: (i) a citizen or resident of the United States; (ii) a
corporation, partnership, or association or other legal entity taxable as a
corporation created or organized in the United States or under the laws of the
United States or of any political subdivision thereof; (iii) an estate whose
income is included in gross income for United States federal income tax
purposes regardless of its source; or (iv) a trust whose administration is
subject to the primary supervision of a United States court and which has one
or more United States persons who have the authority to control all substantial
decisions of the trust.
Dividends
Razorfish has never paid, and does not anticipate that it will pay, cash
dividends on its Common Stock. Should Razorfish ever pay a cash dividend, any
dividend paid to a Non-United States Holder of Common Stock generally would be
subject to United States withholding tax at the then-effective U.S. withholding
tax rate (currently 30% of the gross amount of the dividend) or such lower rate
as may be specified by an applicable tax treaty. Dividends received by a Non-
United States Holder that are effectively connected with a United States trade
or business conducted by such Non-United States Holder would be exempt from
such withholding tax. However, such effectively connected dividends, net of
certain deductions and credits, would be taxed at the same graduated rates that
apply to United States persons.
Dividends may be subject to backup withholding at the rate of 31% unless the
Non-United States Holder certifies to certain required information in
accordance with United States Treasury Regulations applicable to withholding
and information reporting.
Generally, Razorfish must report annually to the IRS the amount of dividends
paid, the name and address of the recipient, and the amount, if any, of tax
withheld. A similar report is sent to the holder. Pursuant to tax treaties or
other agreements, the IRS may make such reports available to tax authorities in
the recipient's country of residence.
Gain on Disposition of Common Stock
A Non-United States Holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
his Common Stock unless: (i) such gain is effectively connected with a United
States trade or business of the Non-United States Holder (all or a portion of
which gain, in the case of a corporate Non-United States Holder, may be subject
to the branch profits tax at the rate of 30% (or lower treaty rate, if
applicable)); (ii) the Non-United States Holder is an individual who holds such
Common Stock as a capital asset (within the meaning of Section 1221 of the
Code) and who is present in the United States for a period or periods
aggregating 183 days or more during the taxable year in which such sale or
disposition occurs and certain other conditions are met; or (iii) Razorfish is
or has been a "United States real property holding corporation" for federal
income tax purposes at any time within the shorter of the five-year
79
<PAGE>
period preceding such disposition or such Holder's holding period. Razorfish
has determined that it is not and does not believe that it is likely to become
a "United States real property holding corporation" for United States federal
income tax purposes. However, no assurance can be provided that Razorfish will
not become a United States real property holding corporation. If Razorfish were
to become a United States real property holding corporation, gains realized by
a Non-United States Holder which did not directly or indirectly own more than
5% of the Razorfish Common Stock at any time during the shorter of the five-
year period preceding such disposition or such Holder's holding period
generally would not be subject to United States federal income tax as a result
of the status of Razorfish as a United States real property holding
corporation, provided that the Common Stock was regularly traded on an
established securities market.
The payment of the proceeds of a sale of Common Stock to or through the
United States office of a broker is currently subject to both information
reporting and backup withholding at the rate of 31% unless the Non-United
States Holder certifies its non-United States status under penalties of perjury
or otherwise establishes an exemption. Generally, the payment of the proceeds
of a disposition by a Non-United States Holder of Common Stock outside the
United States to or through a foreign office of a broker will not be subject to
backup withholding. However, such payments will be subject to information
reporting if the broker is: (i) a United States person; (ii) a "controlled
foreign corporation" for United States tax purposes; (iii) a foreign person 50%
or more of whose gross income for certain periods is derived from the conduct
of a trade or business in the United States unless, in each of the foregoing
cases, such broker has documentary evidence in its files of the Holder's non-
United States status and certain conditions are met or the Holder otherwise
establishes an exemption; or (iv) with respect to payments made after December
31, 1999, a foreign partnership, if at any time during its taxable year, one or
more of its partners are United States persons, as defined in US Treasury
Regulations, who in the aggregate hold more than 50% of the income or capital
interest in the partnership or if, at any time during its taxable year, such
foreign partnership is engaged in a United States trade or business, unless the
Non-United States Holder establishes an exemption in accordance with recently
finalized regulations regarding withholding and information reporting (the
"Final Regulations"), which will generally be effective for payments made after
December 31, 1999.
The Final Regulations unify current certification procedures and forms and
clarify reliance standards. Except as noted above with respect to foreign
brokers that are partnerships, the Final Regulations generally do not
significantly alter the substantive withholding and information reporting
requirements but do alter the procedures for claiming the benefits of an income
tax treaty and change the certification procedures relating to the receipt by
intermediaries of payments on behalf of the beneficial owner of shares of
Common Stock. Non-United States Holders should consult their own tax advisors
regarding the effect, if any, of the Final Regulations.
Backup withholding, if applied, is not an additional tax. Rather, the tax
liability of persons subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained, provided that the required information is furnished to
the IRS.
Estate Tax
Common Stock owned or treated as owned at the time of death by an individual
who is not a citizen or resident of the United States for federal estate tax
purposes will be included in such individual's estate for United States federal
estate tax purposes, unless an applicable estate tax treaty applies other
rules, and as a result may be subject to United States federal estate tax.
THE FOREGOING DISCUSSION IS A SUMMARY OF THE PRINCIPAL FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF
RAZORFISH COMMON STOCK BY NON-UNITED STATES HOLDERS. ACCORDINGLY, INVESTORS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE INCOME TAX
CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF COMMON STOCK, INCLUDING THE
APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN TO OTHER TAXING
JURISDICTION.
80
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement, dated , 1999, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, BancBoston Robertson
Stephens Inc., BT Alex. Brown Incorporated and Lehman Brothers Inc., are
acting as representatives, the following respective numbers of shares of
Common Stock:
<TABLE>
<CAPTION>
Number
Underwriters of shares
------------ ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
BancBoston Robertson Stephens Inc. ................................
BT Alex. Brown Incorporated........................................
Lehman Brothers Inc. ..............................................
---------
Total.......................................................... 3,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares of Common Stock offered in this offering if any are
purchased, other than those shares covered by the over-allotment option
described below. The underwriting agreement also provides that if an
underwriter defaults the purchase commitments of non-defaulting underwriters
may be increased or this offering of the Common Stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 450,000 additional shares of Common Stock at the initial
public offering price less the underwriting discounts and commissions. This
option may be exercised only to cover over-allotments of Common Stock.
The underwriters propose to offer the Common Stock initially at the public
offering price on the cover page of this prospectus and to selling group
members at that price less a concession of $ per share. The underwriters and
the selling group members may allow a discount of $ per share on sales to
other broker/dealers. After the initial public offering, the public offering
price and concession and discount to dealers may be changed by the
representatives.
The following table summarizes the discounts and commissions and estimated
expenses that we will pay.
<TABLE>
<CAPTION>
Total
-----------------------------
Without With
Per share over-allotment over-allotment
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions
paid by us........................... $ $ $
Expenses payable by us................ $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 10% of the Common Stock being offered.
We, our officers and directors and our existing stockholders have agreed
not to offer, sell, contract to sell, announce their intention to sell, pledge
or otherwise dispose of, directly or indirectly, or file with the Securities
and Exchange Commission a registration statement under the Securities Act
relating to, any additional shares of our Common Stock or securities
convertible into or exchangeable or exercisable for any shares of our Common
Stock without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
in our case for grants of employee stock options pursuant to the terms of a
plan in effect on the date hereof, issuances of securities pursuant to the
exercise of employee stock options outstanding on the date hereof or the
exercise of any other stock options outstanding on the date hereof.
81
<PAGE>
The underwriters have reserved for sale, at the initial offering price, up
to 300,000 shares of Common Stock for employees and certain other persons
associated with Razorfish who have expressed an interest in purchasing Common
Stock in this offering. The number of shares of Common Stock available for sale
to the general public in this offering will be reduced to the extent these
persons purchase the reserved shares. Any reserved shares not so purchased will
be offered by the underwriters to the general public on the same terms as the
other shares.
We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments which the underwriters may be required to make in respect thereof.
We have applied to list the shares of Common Stock on The Nasdaq National
Market under the symbol "RAZF."
Prior to the offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiation between us and the representatives, and does not reflect the market
price for the Common Stock following the offering. Among the principal factors
considered in determining the initial public offering price will be:
. the information set forth in this prospectus and otherwise available to
the representatives;
. market conditions for initial public offerings;
. the history of and prospects for the industry in which we will compete;
. our past and present operations;
. our past and present earnings and current financial position;
. the ability of our management;
. our prospects for future earnings;
. the present state of our development and our current financial condition;
. the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies;
. the general condition of the securities markets at the time of this
offering; and
. other relevant factors.
We can offer no assurances that the initial public offering price will
correspond to the price at which the Common Stock will trade in the public
market subsequent to the offering or that an active trading market for the
Common Stock will develop and continue after the offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Exchange Act of 1934. Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase shares of the Common Stock so
long as the stabilizing bids do not exceed a specified maximum. Syndicate
covering transactions involve purchases of the Common Stock in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the Common Stock originally sold by
such syndicate member is purchased in a syndicate covering transaction to cover
syndicate short positions.
Such stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the Common Stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on The Nasdaq Stock Market's National Market or otherwise and, if
commenced, may be discontinued at any time.
82
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale restrictions
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of Common Stock are effected. Accordingly, any resale of the Common
Stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the Common Stock.
Representations of purchasers
Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (1) such purchaser is entitled under
applicable provincial securities laws to purchase such Common Stock without the
benefit of a prospectus qualified under such securities laws, (2) where
required by law, that such purchaser is purchasing as principal and not as
agent and (3) such purchaser has reviewed the text above under "Resale
Restrictions."
Rights of action (Ontario purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Section 32 of the Regulation under the Ontario Securities Law. As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
Enforcement of legal rights
All of the issuer's directors and officers, as well as the experts named
herein, may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia residents
A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of Common Stock acquired on the same date and under
the same prospectus exemption.
Taxation and eligibility for investment
Canadian purchasers of Common Stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
legislation.
83
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
Razorfish by Morrison & Foerster LLP, New York, New York. The underwriters have
been represented by Cravath, Swaine & Moore, New York, New York.
EXPERTS
The audited consolidated financial statements of Razorfish and Spray as of
December 31, 1997 and 1998 and for the three years ended December 31, 1998, the
audited consolidated financial statements of Spray Ventures as of December 31,
1996 and August 31, 1997 and for the year ended December 31, 1996 and the
eight-month period ended August 31, 1997 and the audited financial statements
of Avalanche Systems as of and for the year ended December 31, 1997 included in
this prospectus and elsewhere in the registration statement have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The financial statements of Avalanche Systems, Inc. for the year ended
December 31, 1996 have been audited by M.R. Weiser & Co., LLP, independent
certified public accountants, as indicated in their report with respect thereto
and are included herein in reliance upon the authority of said firm as experts
in accounting and auditing.
84
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Razorfish has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 with respect to the Common Stock being
offered by this prospectus. This prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to Razorfish and the
shares of Common Stock offered hereby, reference is made to the Registration
Statement, including the exhibits and schedules thereto. Statements contained
in this prospectus as to the contents of any contract or other document
referred to herein are not necessarily complete and, where such contract is an
exhibit to the Registration Statement, each such statement is qualified in all
respects by the provisions of such exhibit, to which such reference is hereby
made. Copies of the Registration Statement, including the exhibits and
schedules thereto, may be examined without charge at the Public Reference Room
of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, or at the Commission's regional offices located at 500 West Madison
Street, Suite 1400, Chicago, IL 60661, and Seven World Trade Center, 13th
Floor, New York, NY 10048 or on the Internet at http://www.sec.gov. Copies of
all or a portion of the Registration Statement can be obtained from the Public
Reference Room of the Securities and Exchange Commission upon payment of
prescribed fees, and information on the operation of the Public Reference Room
may be obtained by calling the Commission at (800) SEC-0330.
As a result of this offering, Razorfish will become subject to the
information and reporting requirements of the Exchange Act and, in accordance
therewith, will file periodic reports, proxy statements and other information
with the Securities and Exchange Commission. Upon approval of the Common Stock
for listing on Nasdaq, such reports, proxy and information statements and other
information may also be inspected at the offices of Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006.
85
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
RAZORFISH, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998.............. F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998...................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1997 and 1998......................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
SPRAY NETWORK AB AND SUBSIDIARIES
Report of Independent Public Accountants.................................. F-24
Consolidated Balance Sheets as of December 31, 1997 and 1998.............. F-25
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998...................................................... F-26
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1997 and 1998......................................... F-27
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998...................................................... F-28
Notes to Consolidated Financial Statements................................ F-29
SPRAY VENTURES AB AND SUBSIDIARIES
Report of Independent Public Accountants.................................. F-39
Consolidated Balance Sheets as of December 31, 1996 and at August 31,
1997..................................................................... F-40
Consolidated Statements of Operations for the years ended December 31,
1996 and the eight months ended August 31, 1997.......................... F-41
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996 and the eight months ended August 31, 1997............. F-42
Consolidated Statements of Cash Flows for the years ended December 31,
1996 and the eight months ended August 31, 1997.......................... F-43
Notes to Consolidated Financial Statements................................ F-44
AVALANCHE SYSTEMS, INC.
Report of Independent Public Accountants.................................. F-50
Independent Auditors' Report.............................................. F-51
Statements of Operations for the years ended December 31, 1996 and 1997... F-52
Statements of Stockholders' Equity (Deficit) for the years ended December
31, 1996 and 1997........................................................ F-53
Statements of Cash Flows for the years ended December 31, 1996 and 1997... F-54
Notes to Financial Statements............................................. F-55
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Razorfish, Inc.:
We have audited the accompanying consolidated balance sheets of Razorfish,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and
1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for the three years ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Razorfish, Inc. and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the three years ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 5, 1999
F-2
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
---------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $1,176,076 $ 598,720
Accounts receivable, net of allowance for doubtful
accounts of $0 and $50,000, respectively............ 1,304,420 2,373,006
Unbilled charges..................................... 371,692 1,326,905
Prepaid expenses and other current assets............ 309,962 572,700
Deferred tax assets.................................. 381,846 102,128
Due from affiliate................................... -- 601,089
---------- -----------
Total current assets............................... 3,543,996 5,574,548
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $136,608 and $472,410,
respectively.......................................... 617,560 1,185,544
INTANGIBLES, net of accumulated amortization of
$106,634.............................................. -- 3,454,582
DEFERRED TAX ASSETS.................................... 35,993 620,275
DEFERRED REGISTRATION COSTS............................ -- 564,165
OTHER ASSETS........................................... 68,961 686,369
---------- -----------
Total assets....................................... $4,266,510 $12,085,483
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to Omnicom Group, Inc............................ $1,805,000 $ 1,782,380
Due to related party................................. -- 500,000
Accounts payable and accrued expenses................ 270,032 1,791,417
Income taxes payable................................. 42,217 206,024
Deferred rent........................................ 39,970 58,158
Advanced billings.................................... 455,096 345,031
Current portion of capital lease obligations......... 71,803 47,107
Deferred tax liabilities............................. 848,421 1,395,884
---------- -----------
Total current liabilities.......................... 3,532,539 6,126,001
LONG-TERM DEBT......................................... -- 3,206,506
CAPITAL LEASE OBLIGATIONS.............................. 76,662 5,671
OTHER LIABILITIES...................................... -- 18,655
---------- -----------
Total liabilities.................................. 3,609,201 9,356,833
---------- -----------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares
authorized; no shares issued or outstanding......... -- --
Common stock:
Class A, $.01 par value, 29,999,950 shares
authorized; 9,156,819 and 9,223,821 shares issued
and outstanding at December 31, 1997 and 1998,
respectively........................................ 91,568 92,238
Class B, $.01 par value, 50 shares authorized; no
shares issued or outstanding........................ -- --
Additional paid-in capital........................... 342,251 2,751,863
Cumulative foreign currency translation adjustments.. -- 3,860
Retained earnings (accumulated deficit).............. 223,490 (119,311)
---------- -----------
Total stockholders' equity......................... 657,309 2,728,650
---------- -----------
Total liabilities and stockholders' equity......... $4,266,510 $12,085,483
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended
December 31,
-----------------------------------
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
REVENUES.................................. $1,218,136 $3,617,688 $13,843,289
DIRECT SALARIES AND COSTS................. 895,220 1,906,111 7,769,752
---------- ---------- -----------
Gross profit............................ 322,916 1,711,577 6,073,537
SALES AND MARKETING....................... 128,959 174,550 438,204
GENERAL AND ADMINISTRATIVE................ 500,063 876,567 2,897,064
AMORTIZATION OF GOODWILL.................. -- -- 106,634
NON-CASH COMPENSATION EXPENSE............. -- 78,819 2,278,281
---------- ---------- -----------
Income (loss) from operations........... (306,106) 581,641 353,354
INTEREST EXPENSE, NET..................... 5,161 19,489 241,342
---------- ---------- -----------
Income (loss) before income taxes....... (311,267) 562,152 112,012
PROVISION (BENEFIT) FOR INCOME TAXES...... (56,801) 264,963 454,813
---------- ---------- -----------
Net income (loss)....................... $ (254,466) $ 297,189 $ (342,801)
========== ========== ===========
PER SHARE INFORMATION:
Net income (loss) per share--
Basic................................. $ (0.03) $ 0.03 $ (0.04)
========== ========== ===========
Diluted............................... $ (0.03) $ 0.03 $ (0.04)
========== ========== ===========
Weighted average common shares
outstanding--
Basic................................. 9,090,906 9,156,819 9,223,821
========== ========== ===========
Diluted............................... 9,537,607 9,886,241 9,670,522
========== ========== ===========
PRO FORMA NET INCOME (LOSS) DATA
(Unaudited)
Net income (loss) before provision
(benefit) for income taxes............. $ (311,267) $ 562,152 $ 112,012
Pro forma income tax provision (benefit)
(actual for December 31, 1997 and 1998)
....................................... (133,845) 264,963 454,813
---------- ---------- -----------
Pro forma net income (loss)............. $ (177,422) $ 297,189 $ (342,801)
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Cumulative
Common Stock Treasury Stock Additional Foreign Retained Total
----------------- ------------------- Paid-in Currency Earnings Stockholders'
Shares Amount Shares Amount Capital Translation (Deficit) Equity
--------- ------- --------- -------- ---------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
1996................... 9,090,906 $90,909 -- $ -- $ (90,909) $ -- $ 35,767 $ 35,767
Capital contribution... -- -- -- -- 500,000 -- -- 500,000
S-corporation
termination........... -- -- -- -- (145,000) -- 145,000 --
Net loss............... -- -- -- -- -- -- (254,466) (254,466)
--------- ------- --------- -------- ---------- ------ --------- ----------
BALANCE, December 31,
1996................... 9,090,906 90,909 -- -- 264,091 -- (73,699) 281,301
Common stock issued to
employees............. 65,913 659 -- -- 12,825 -- -- 13,484
Common stock option
compensation.......... -- -- -- -- 65,335 -- -- 65,335
Net income............. -- -- -- -- -- -- 297,189 297,189
--------- ------- --------- -------- ---------- ------ --------- ----------
BALANCE, December 31,
1997................... 9,156,819 91,568 342,251 -- 223,490 657,309
Purchase of treasury
stock................. -- -- 500,000 (500,000) -- -- -- (500,000)
Common stock issued to
employees............. 67,002 670 (500,000) 500,000 66,331 -- -- 567,001
Common stock option
compensation.......... -- -- -- -- 2,278,281 -- -- 2,278,281
Foreign currency
translation
adjustment............ -- -- -- -- -- 3,860 -- 3,860
Capital contribution... -- -- -- -- 65,000 -- -- 65,000
Net loss............... -- -- -- -- -- -- (342,801) (342,801)
--------- ------- --------- -------- ---------- ------ --------- ----------
BALANCE, December 31,
1998................... 9,223,821 $92,238 -- $ -- $2,751,863 $3,860 $(119,311) $2,728,650
========= ======= ========= ======== ========== ====== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years
Ended December 31,
-----------------------------------
1996 1997 1998
--------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................ $(254,466) $ 297,189 $ (342,801)
Adjustments to reconcile net income
(loss) to net cash (used in) provided by
operating activities--
Allowance for doubtful accounts.......... -- -- 50,000
Depreciation and amortization............ 26,812 107,261 442,436
Non-cash common stock option
compensation............................ -- 78,819 2,278,281
Non-cash capital contribution............ -- -- 65,000
Increase in deferred tax assets.......... (64,265) (348,846) (304,564)
Decrease (increase) in accounts
receivable.............................. 50,404 (1,257,482) (332,131)
Increase in unbilled charges............. -- (371,692) (955,213)
Increase in prepaid expenses and other
current assets.......................... (105,999) (203,963) (262,738)
Increase in due from affiliate........... -- -- (601,089)
Increase in other assets................. (29,145) (40,316) (188,423)
Increase in accounts payable and accrued
expenses................................ 79,678 143,033 1,070,568
Increase (decrease) in advanced
billings................................ -- 455,096 (110,065)
Increase in deferred tax liabilities..... 42,840 795,634 547,463
Increase (decrease) in income taxes
payable................................. 31,399 (1,229) 163,807
Increase in deferred rent................ -- 39,970 18,188
Increase in other liabilities............ -- -- 18,655
Increase in due to related party......... -- -- 500,000
--------- ----------- -----------
Net cash (used in) provided by operating
activities............................. (222,742) (306,526) 2,057,374
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................... (189,356) (316,043) (675,907)
Acquisitions of subsidiaries, net of cash
acquired................................ -- -- (4,553,718)
--------- ----------- -----------
Net cash used in investing activities... (189,356) (316,043) (5,229,625)
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred registration costs.............. -- -- (564,165)
Payments under capital lease
obligations............................. (25,278) (68,979) (95,687)
Proceeds from capital contribution....... 500,000 -- --
Proceeds from exercise of stock options.. -- -- 567,001
Net borrowings under lines of credit
options................................. -- 1,805,000 3,183,886
Purchase of treasury stock............... -- -- (500,000)
--------- ----------- -----------
Net cash provided by financing
activities............................. 474,722 1,736,021 2,591,035
--------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS..................... -- -- 3,860
--------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ 62,624 1,113,452 (577,356)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................... -- 62,624 1,176,076
--------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.. $ 62,624 $ 1,176,076 $ 598,720
========= =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for--
Income taxes paid........................ $ -- $ -- $ --
Interest paid............................ 5,161 17,775 7,442
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING ACTIVITIES:
Equipment acquired under capital leases.. 95,598 126,901 --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Razorfish, Inc. ("Razorfish"), together with its wholly owned subsidiaries
(the "Company"), is an international digital communications solutions provider.
The Company creates digital communications solutions that are designed to help
its clients increase sales, improve communications and create and enhance
business identities. The Company provides an integrated service offering
consisting of strategic consulting, design of information architectures and
user interfaces and creation and customization of software necessary to
implement its digital communications solutions. The Company primarily uses
Internet-based technologies to create digital communications solutions for the
World Wide Web. However, Razorfish's solutions will increasingly incorporate
additional communications technologies, such as wireless, satellite and
broadband communications, for use with a variety of digital devices and
information appliances, including mobile phones, pagers and personal digital
assistants. In order to service its global clients, Razorfish has completed six
acquisitions since its inception in 1995, and currently has offices in New
York, San Francisco, Los Angeles, London, Stockholm, Oslo, Helsinki and
Hamburg.
Principles of Consolidation
The accompanying consolidated financial statements as of and for the year
ended December 31, 1998 include the operations of Razorfish and its wholly
owned United States subsidiaries, Avalanche Solutions, Inc., Razorfish Los
Angeles, Inc., Razorfish San Francisco, Inc. and its wholly owned United
Kingdom subsidiary, CHBi Razorfish Ltd. The Company had no subsidiaries prior
to January 1, 1998. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions, specifically for the allowance for doubtful accounts for accounts
receivable and the useful lives of fixed assets and intangible assets, that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
Revenues are recognized for time and materials-based arrangements and fixed-
fee arrangements on the percentage-of-completion method of accounting based on
the ratio of costs incurred to total estimated costs. Unbilled charges
represent labor costs incurred and estimated earnings, production and other
client reimbursable costs. Advanced billings represent billings of production
and other client reimbursable out-of-pocket costs in excess of revenues earned.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
F-7
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated on a straight-line
basis over estimated useful lives of four to eight years. Leasehold
improvements and equipment held under capital leases are amortized utilizing
the straight-line method over the lesser of the estimated useful life of the
asset or the lease term.
Intangible Assets
Goodwill, which represents the excess of the purchase price over the fair
value of the net assets acquired, is included in intangible assets and is
presently being amortized over a period of 20 years on a straight-line basis.
Management has evaluated the amortization periods in the current period and has
determined that no impairment currently exists. These amortization periods will
be evaluated by management on a continuing basis, and will be adjusted if the
lives of the related intangible assets are impaired.
Accounting for Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." This statement establishes financial accounting and reporting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used, and for
long-lived assets and certain identifiable intangibles to be disposed of.
Management has performed a review of all long-lived assets and has determined
that no impairment of the respective carrying value has occurred as of December
31, 1998.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their tax
bases for operating profit and tax liability carryforward. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets or liabilities of
a change in tax rates is recognized in the period that the tax change occurs.
The Company has elected to file its income tax returns using the cash basis of
accounting.
Foreign Currency Translation
All assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at fiscal year-end exchange rates. Income and expense items are
translated at average exchange rates prevailing during the year. The resulting
translation adjustments are recorded as a component of stockholders' equity in
the accompanying consolidated financial statements.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, due
from affiliate and accounts payable and accrued expenses approximate fair value
due to the short-term maturity of these instruments. The carrying amounts of
due to Omnicom Group, Inc. and capital lease obligations, including current
portions, approximate fair value.
F-8
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Business Concentrations and Credit Risk
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
primarily concentrated in the United States. The Company performs ongoing
credit evaluations, generally does not require collateral and establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of customers, historical trends and other information. To date, such losses
have been within management's expectations.
For the year ended December 31, 1996 four clients accounted for 25%, 21%,
11% and 10%, respectively, of total revenues.
For the year ended December 31, 1997 four clients accounted for 20%, 16%,
14% and 14%, respectively, of total revenues.
For the year ended December 31, 1998 one client accounted for 27% of total
revenues.
As of December 31, 1997, two clients accounted for 59% and 16%,
respectively, of total accounts receivable.
As of December 31, 1998, three clients accounted for 17%, 14% and 14%,
respectively, of total accounts receivable.
Net Income (Loss) Per Common Share
The Company computes net income (loss) per share in accordance with SFAS No.
128, "Earnings Per Share" ("SFAS No. 128") and SEC Staff Accounting Bulletin
No. 98 ("SAB No. 98"). Under the provisions of SFAS No. 128 and SAB No. 98,
basic net income (loss) per common share ("Basic EPS") is computed by dividing
net income (loss) by the weighted average number of common shares outstanding.
Diluted net income (loss) per common share ("Diluted EPS") is computed by
dividing net income (loss) by the weighted average number of common shares and
dilutive common share equivalents then outstanding. SFAS No. 128 requires the
presentation of both Basic EPS and Diluted EPS on the face of the consolidated
statements of operations. The impact of the adoption of this statement by the
Company was not material.
F-9
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation between the numerator and denominator of Basic EPS and
Diluted EPS is as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
1996
-----------------------------------
Net Common Net (Loss) Per
(Loss) Shares Common Share
--------- --------- --------------
<S> <C> <C> <C>
Basic EPS:
Net loss attributable to common stock.... $(254,466) 9,090,906 $(0.03)
Effect of nominal issuances of common
stock options........................... -- 446,701 --
--------- --------- ------
Diluted EPS.......................... $(254,466) 9,537,607 $(0.03)
========= ========= ======
<CAPTION>
For the Year Ended December 31,
1997
-----------------------------------
Net Common Net Income Per
Income Shares Common Share
--------- --------- --------------
<S> <C> <C> <C>
Basic EPS:
Net income attributable to common stock.. $ 297,189 9,156,819 $ 0.03
Effect of nominal issuances of common
stock options........................... -- 446,701 --
Effect of common stock options........... -- 282,721 --
--------- --------- ------
Diluted EPS ........................... $ 297,189 9,886,241 $ 0.03
========= ========= ======
<CAPTION>
For the Year Ended December 31,
1998
-----------------------------------
Net Common Net (Loss) Per
(Loss) Shares Common Share
--------- --------- --------------
<S> <C> <C> <C>
Basic EPS:
Net loss attributable to common stock.... $(342,801) 9,223,821 $(0.04)
Effect of nominal issuances of common
stock options........................... -- 446,701 --
--------- --------- ------
Diluted EPS............................ $(342,801) 9,670,522 $(0.04)
========= ========= ======
</TABLE>
F-10
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company considers nominal issuances of options to purchase Common Stock
to be issuances for which consideration received is significantly less than the
fair value of the underlying Common Stock. Diluted EPS for 1996 and 1998 does
not include the impact of common stock options then outstanding, as the effect
of their inclusion would be anti-dilutive.
Stock-Based Compensation
In 1996, the Company adopted the provisions of SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), and elected to continue the
accounting set forth in Accounting Principles Board No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25") and to provide the necessary pro
forma disclosures as if the fair value method had been applied (Note 8).
Comprehensive Income
During 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income," which established standards for reporting and displaying comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements. The components of comprehensive
income are as follows:
<TABLE>
<CAPTION>
For the Year Ended December
31,
-----------------------------
1996 1997 1998
--------- -------- ---------
<S> <C> <C> <C>
Net income (loss)............................... $(254,466) $297,189 $(342,801)
Foreign currency translation adjustment......... -- -- 3,860
--------- -------- ---------
Comprehensive income (loss)................... $(254,466) $297,189 $(338,941)
========= ======== =========
</TABLE>
Proposed Public Offering
In connection with its contemplated initial public offering of Common Stock,
the Company has incurred approximately $564,000 in registration-related costs
that are being deferred until the consummation of the offering, at which time
they will be charged against additional paid-in capital. If the offering is not
consummated, the deferred registration costs will be expensed. These amounts
are included in deferred registration costs and accrued expenses in the
accompanying consolidated balance sheet as of December 31, 1998.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. The statement
also establishes standards for related disclosure about products and services,
geographic areas and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997 and need not be
applied to interim periods in the initial year of application. Comparative
information for earlier years presented is to be restated. The Company
currently believes that it operates in one segment and that the adoption of
SFAS No. 131 will not materially affect the Company's current disclosure of
geographic information (Note 10).
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities" ("SFAS 133"), which establishes accounting and reporting
standards of derivative instruments, including
F-11
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
certain derivative instruments embedded in other contracts, and for hedging
activities. This statement is effective for all quarters of fiscal years
beginning after June 15, 1999. The Company does not expect the adoption of this
standard to have a material effect on the Company's results of consolidated
operations, financial position or cash flows.
2. ACQUISITIONS
Avalanche Solutions, Inc. and Avalanche Systems, Inc.
In January 1998, the Company purchased a 66 2/3% ownership interest of a
newly formed corporation, Avalanche Solutions, Inc. ("Avalanche Solutions"). In
connection with this transaction, Avalanche Solutions acquired substantially
all of the assets of Avalanche Systems, Inc. ("Avalanche Systems") from Fleet
Bank National Association and Fleet Bank Capital Corporation in a foreclosure
sale. These assets were seized from Avalanche Systems, whose shareholders were
the founders and holders of the remaining 33 1/3% of the capital stock of
Avalanche Solutions. In April 1998, the founders of Avalanche Solutions
surrendered their aggregate 33 1/3% ownership interest in Avalanche Solutions
to the Company. The total cash consideration for all stock and net assets
acquired was approximately $1,294,000.
These acquisitions have been accounted for under the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
tangible and intangible assets acquired and liabilities assumed on the basis of
their respective fair values on the respective acquisition dates. As a result
of these acquisitions, the Company has recorded goodwill of approximately
$789,000, which is the excess cost of net assets acquired and is being
amortized over a useful life of 20 years.
Furthermore, the Company entered into an employment agreement with one of
the former shareholders of Avalanche Solutions. The employment agreement has a
term through December 2001 and includes a signing bonus and base compensation.
In addition, this former shareholder received fully vested options to purchase
500,000 and 13,456 shares of Common Stock of the Company at an exercise price
of $1.00 and $10.00, respectively, per share. This former shareholder is an
executive officer of Razorfish. In December 1998, he exercised options to
purchase 500,000 shares of Common Stock for an aggregate purchase price of
$500,000. In the opinion of management, based upon a third-party valuation
using the Black-Scholes Option Pricing Model, the exercise price was deemed to
be lower than the fair market value per share of the Company's Common Stock at
the grant date and, as such, the Company recorded compensation expense of
$1,865,000 for the year ended December 31, 1998.
CHBi Limited
In May 1998, the Company acquired all of the outstanding stock of London-
based CHBi Limited and, concurrently with the acquisition, CHBi Limited changed
its name to CHBi Razorfish Ltd. The Company paid total cash consideration of
approximately $2,028,000 for the purchase of CHBi Limited. The acquisition has
been accounted for under the purchase method of accounting and, accordingly,
the purchase price has been allocated to the tangible and intangible net assets
acquired and liabilities assumed on the basis of their respective fair values
on the acquisition date. As a result of this acquisition, the Company has
recorded goodwill of approximately $1,972,000, which is the excess cost of net
assets acquired and is being amortized over a useful life of 20 years.
Furthermore, the CHBi Limited Purchase Agreement calls for certain cash earn-
out payments to the former shareholders based upon the achievement of targeted
operating performance of CHBi Razorfish Ltd. through May 2001. No earn-out
amounts have been earned to date. Future earn-out payments, if any, will be
recorded as additional purchase price and will result in an adjustment to
goodwill.
F-12
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Plastic
In June 1998, the Company formed a subsidiary, Razorfish San Francisco, Inc.
("Razorfish San Francisco"), which acquired substantially all of the net assets
of Alpha Online, Inc. d/b/a Plasticweb and Plastic ("Plastic"). In
consideration for the net assets acquired, the Company paid approximately
$686,000 in cash. The acquisition of the assets has been accounted for under
the purchase method of accounting and, accordingly, the purchase price has been
allocated to the tangible and intangible net assets acquired and liabilities
assumed on the basis of their respective fair values on the acquisition date.
As a result of this acquisition, the Company has recorded goodwill of
approximately $305,000, which is the excess cost of net assets acquired and is
being amortized over a useful life of 20 years. Furthermore, the Plastic
Purchase Agreement calls for certain cash earn-out payments to the former
shareholders based upon the achievement of targeted operating performance of
Razorfish San Francisco through December 2001. No earn-out amounts have been
earned to date. Future earn-out payments, if any, will be recorded as
additional purchase price and will result in an adjustment to goodwill.
<tag> Media
In July 1998, the Company formed a subsidiary, Razorfish Los Angeles, Inc.
("Razorfish Los Angeles"), which acquired substantially all of the net assets
of Titus Anspach Group, LLC d/b/a <tag> Media ("<tag> Media "). In
consideration for the net assets acquired, the Company paid approximately
$256,000 in cash. The acquisition of the assets has been accounted for under
the purchase method of accounting and, accordingly, the purchase price has been
allocated to the tangible and intangible assets acquired and liabilities
assumed on the basis of their respective fair values on the acquisition date.
As a result of this acquisition, the Company has recorded goodwill of
approximately $223,000, which is the excess cost of net assets acquired and is
being amortized over a useful life of 20 years. Furthermore, the <tag> Media
Purchase Agreement calls for certain cash earn-out payments to the former
shareholders based upon the achievement of targeted operating performance of
Razorfish Los Angeles through December 2001. No earn-out amounts have been
earned to date. Future earn-out payments, if any, will be recorded as
additional purchase price and will result in such, an adjustment to goodwill.
Sunbather
In October 1998, the Company acquired substantially all of the assets of
London-based Sunbather Limited ("Sunbather"), from an administrator appointed
for Sunbather. The net assets were acquired for cash consideration of
approximately $290,000. This acquisition has been accounted for under the
purchase method of accounting, and accordingly, the purchase price has been
allocated to the tangible and intangible assets acquired and liabilities
assumed on the basis of their respective fair values on the acquisition date.
As a result of this acquisition the Company recorded goodwill of approximately
$272,000, which is the excess cost of net assets acquired and is being
amortized over a useful life of 20 years.
The acquisitions described above were valued based on management's estimate
of the fair value of the net assets acquired at the date of acquisition. Costs
in excess of net assets acquired were recorded as intangible assets as follows:
<TABLE>
<CAPTION>
Avalanche
Systems/
Avalanche CHBi
Solutions Limited Plastic <tag> Media Sunbather
---------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Accounts receivable....... $ 85,625 $ 462,706 $238,124 $ -- $ --
Fixed assets.............. -- 44,626 132,234 32,954 18,065
Other assets.............. 418,680 -- 10,305 -- --
Intangible assets......... 789,257 1,971,823 305,100 223,448 271,588
Current liabilities....... -- (450,817) -- -- --
---------- ---------- -------- -------- --------
Total purchase price.... $1,293,562 $2,028,338 $685,763 $256,402 $289,653
========== ========== ======== ======== ========
</TABLE>
F-13
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Spray Network AB
In January 1999, the Company acquired all of the issued and outstanding
shares of capital stock of Spray Network AB ("Spray") from Spray Ventures AB
and Communicade Inc. ("Communicade", a wholly owned subsidiary of Omnicom
Group, Inc.) in exchange for an aggregate of 9,881,034 shares of Razorfish
Common Stock and 50 shares of Razorfish non-voting Class B Common Stock (the
"Spray Acquisition"). The shares of Common Stock issued represented 50% of the
shares of Razorfish Common Stock on a fully diluted basis immediately following
the Spray Acquisition. Immediately prior to this transaction, Communicade
purchased 563 shares of Spray Network AB, which represented 20% of the
outstanding shares of Spray Network AB on a fully-diluted basis at the time of
purchase, from Spray Ventures AB and sold these shares to Razorfish in
connection with the Spray Acquisition.
In addition, simultaneously with the Spray Acquisition, Messrs. Dachis and
Kanarick, the founders of Razorfish, sold 363,636 shares of Common Stock to
Communicade, which represented 4% of the outstanding shares of Common Stock on
a fully-diluted basis at the time of purchase. In addition, the Company entered
into employment agreements with certain executives of Spray Network AB.
Pro forma results of operations
The following unaudited pro forma consolidated results of operations
reflects the results of operations for the years ended December 31, 1997 and
1998, as if the aforementioned acquisitions had occurred on January 1, 1997,
and after giving effect to purchase accounting adjustments. These pro forma
results have been prepared for comparative purposes only and do not purport to
be indicative of what operating results would have been had the acquisitions
actually taken place on January 1, 1997 and may not be indicative of future
operating results.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Pro forma:
Revenues......................................... $17,812,546 $30,974,052
Net (loss)....................................... (5,687,832) (8,154,330)
Basic net (loss) per share....................... (0.27) (0.39)
Diluted net (loss) per share..................... (0.27) (0.38)
</TABLE>
3. RELATED PARTY TRANSACTIONS
Agreements with Omnicom
In September 1996, Omnicom Group, Inc. ("Omnicom") purchased an aggregate of
3,636,364 shares of Common Stock from Messrs. Dachis and Kanarick, for an
aggregate purchase price of $3.5 million in cash in September 1996 and three
additional earn-out payments pursuant to the terms of a Stock Purchase
Agreement (the "Purchase Agreement"). The first two earn-out payments were paid
in February 1998 and January 1999 in the amounts of $1.3 million and $0.6
million, respectively, and the remaining payment of $1.7 million is payable in
March 1999. The amount of the February 1998 and March 1999 payments are derived
from Razorfish's Annual Revenues (as defined in the Purchase Agreement) and
profit before taxation for the relevant year. The amount of the payment in
January 1999 was the result of an adjustment made to the aggregate purchase
price pursuant to a side letter entered into between Messrs. Dachis and
Kanarick and Communicade (f/k/a JWL Associates Corp.). Simultaneously with the
execution of the Purchase Agreement, the Company entered into a Shareholders
Agreement with Communicade. The Shareholders Agreement restricted the transfer
of shares of Common Stock by the parties and provided that certain actions
require the consent of the
F-14
<PAGE>
Communicade appointed director. In addition, the Shareholders Agreement also
stipulated that Omnicom Finance Inc. ("Omnicom Finance") would provide the
Company with a line of credit for working capital purposes of up to $2.0
million and additional financing for the purpose of funding the Company's
acquisition of "new media companies," as defined, provided that Communicade
remained a shareholder of the Company. Both of these lines of credit were
available upon the execution of the Shareholders Agreement.
F-14--1
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Amounts borrowed under the working capital line of credit bear no interest
on the first $1.0 million of principal amount outstanding and thereafter bear
interest at the rate then charged by Omnicom Finance to its subsidiaries under
Omnicom Finance's cash management program, which was 6.85% and 6.00%,
respectively, as of December 31, 1997 and 1998. As the first $1.0 million
outstanding under the working capital line of credit is non-interest bearing,
the Company has imputed interest on the outstanding amounts based upon a
weighted average imputed interest rate of 6.50%. As such, the Company recorded
a charge to interest expense and a capital contribution of approximately
$65,000 for the year ended December 31, 1998. Imputed interest in all previous
periods was deemed to be immaterial by the Company. The amounts due under the
working capital line of credit are repayable in full on the earlier of December
31, 2001 or upon the closing of an initial public offering of the Company's
Common Stock. All outstanding amounts are secured by a priority lien on all of
the Company's assets.
The Company had $0.8 million and $1.1 million of the working capital line of
credit outstanding as of December 31, 1997 and 1998, respectively. In addition,
the Company had $1.0 million and $3.9 million of the acquisition funding
outstanding as of December 31, 1997 and 1998, respectively, in connection with
the acquisition of "new media companies." See Note 7 for the terms of the
acquisition line of credit.
In connection with the Spray acquisition, the Shareholders Agreement
terminated and was replaced by a Stockholders Agreement. Pursuant to the terms
of the Stockholders Agreement, Omnicom Finance is to provide the working
capital line of credit and the acquisition line of credit to the Company on the
same terms and conditions as set forth in the Shareholders Agreement. The
principal under any loan under the acquisition line of credit is payable
quarterly in equal installments over a seven year period.
Communicade 10% Option
Pursuant to the Stockholders Agreement, in the event of an initial public
offering of the Company's Common Stock, Communicade had the right, but not the
obligation, to purchase from the Company up to such number of shares of Company
Common Stock as equalled 10% of the then issued and outstanding shares of
Razorfish's Common Stock on a fully diluted basis at the time the option was
exercised (the "Option Shares"). Communicade exercised the 10% option by
sending a written notice to the Company indicating its desire to purchase such
Option Shares in January 1999. If Communicade had not provided notice within a
specified time in accordance with the terms of the Stockholders Agreement, the
10% option would have terminated. Such Option Shares are restricted as to their
resale in accordance with the terms of the new Stockholders Agreement.
Razorfish Studios
The Company conducts business with Razorfish Studios ("Studios"). The
majority of Studios' common stock is owned by three of the majority
stockholders of the Company and certain of these stockholders also hold
executive positions at Studios. On October 17, 1997, the Company assigned to
Studios all of its right, title and interest in and to certain digital media
properties owned by the Company. The cost and fair value of such properties
were deemed to be immaterial by the Company's management and as such, there was
no material effect on the Company's consolidated financial statements as of and
for the year ended December 31, 1997.
The Company also provides certain overhead and administrative functions for
Studios for which the Company is reimbursed. In addition, the Company has
provided certain design and consulting services to Studios at discounted
billing rates. The total revenue earned was not material to the accompanying
consolidated
statements of operations. Amounts owed to the Company from Studios for services
rendered, reimbursable expense and advances totaled $0 and $601,089,
respectively, as of December 31, 1997 and 1998. The Company licenses the
"Razorfish" trademark and symbol to Studios pursuant to a trademark license
agreement (the "Trademark License"). The Trademark License contains customary
provisions giving the Company the ability to control the use of the "Razorfish"
trademark by Studios.
F-15
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Repurchase of Treasury Shares
In December 1998, the Company repurchased 500,000 shares of Common Stock
from two of the Company's principal stockholders, for $1.00 per share, pursuant
to an agreement between the Company and the stockholders. The resulting
$500,000 due to the stockholders as of December 31, 1998, is non-interest
bearing and is due in full in March 1999.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Year Ended December
31,
---------------------
1997 1998
--------- ----------
<S> <C> <C>
Computer equipment.................................... $ 250,861 $ 635,617
Equipment under capital leases........................ 290,183 220,583
Furniture and fixtures................................ 179,152 419,229
Leasehold improvements................................ 33,972 382,525
--------- ----------
Total property and equipment........................ 754,168 1,657,954
Less--Accumulated depreciation and amortization....... (136,608) (472,410)
--------- ----------
Property and equipment, net......................... $ 617,560 $1,185,544
========= ==========
</TABLE>
Depreciation and amortization aggregated $26,812, $107,261 and $335,802,
respectively, for the three years ended December 31, 1998.
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Goodwill........................................................ $3,561,216
Less--Accumulated amortization................................ (106,634)
----------
Intangible assets, net...................................... $3,454,582
==========
</TABLE>
Amortization aggregated $106,634 for the year ended December 31, 1998. The
Company did not have any intangible assets prior to January 1, 1998.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
Year Ended December
31,
-------------------
1997 1998
-------- ----------
<S> <C> <C>
Accounts payable........................................ $104,130 $ 873,844
Accrued expenses........................................ 75,902 269,093
Accrued professional fees............................... 90,000 648,480
-------- ----------
Total................................................. $270,032 $1,791,417
======== ==========
</TABLE>
7. LONG-TERM DEBT
Long-term debt consists of acquisition borrowings from Omnicom in the
original principal amount of approximately $3.7 million. The loan is payable in
equal quarterly installments over a period of seven years and bears interest at
approximately 6.0% per annum.
F-16
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Maturities of long-term debt outstanding are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
- ------------
<S> <C>
1999................................................................. $1,782,380
2000................................................................. 534,418
2001................................................................. 534,418
2002................................................................. 534,418
2003................................................................. 534,418
Thereafter........................................................... 1,068,834
----------
Total............................................................ $4,988,886
==========
</TABLE>
8. INCOME TAXES
Income (loss) before taxes and the provision (benefit) for taxes on income
consisted of the amounts shown below:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic.................................. $(311,267) $ 562,152 $(167,080)
International............................. -- -- 279,092
--------- --------- ---------
$(311,267) $ 562,152 $ 112,012
========= ========= =========
Provision (benefit) for taxes on income:
Current--
Federal................................. $ (13,365) $(110,105) $ 41,701
State and local......................... (22,009) (71,720) 75,822
International........................... -- -- 94,891
Deferred--
Federal................................. (12,129) (348,856) 191,224
State and local......................... (9,298) 795,644 51,175
International........................... -- -- --
--------- --------- ---------
$ (56,801) $ 264,963 $ 454,813
========= ========= =========
</TABLE>
A reconciliation of the difference between the statutory U.S. Federal income
tax rate and the Company's effective tax rate follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1996 1997 1998
----- ---- -----
<S> <C> <C> <C>
Statutory federal income tax rate..................... (34.0)% 34.0% 34.0%
State and local taxes on income, net of federal income
tax benefit.......................................... (6.6) 12.4 74.8
Effect on change from "S" corp........................ 28.8 -- --
Disallowed expenses................................... -- -- 24.8
Incentive stock option expense........................ -- -- 239.6
Goodwill amortization................................. -- -- 29.0
Other................................................. (6.4) 0.7 3.8
----- ---- -----
Effective rate...................................... (18.2)% 47.1% 406.0%
===== ==== =====
</TABLE>
F-17
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to a significant
portion of the deferred income tax assets (liabilities), net, are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Current deferred income tax assets (liabilities),
net:
Accrual to cash adjustments....................... $(466,575) $(178,064)
Bad debts......................................... -- 23,088
Other............................................. -- 15,700
Noncurrent deferred tax assets (liabilities), net:
Stock options..................................... 35,993 --
Accrual to cash adjustment........................ -- (534,205)
--------- ---------
Total deferred income taxes, net................ $(430,582) $(673,481)
========= =========
</TABLE>
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the Company's assets and
liabilities. Deferred tax assets result principally from recording certain
expenses in the financial statements, which are not currently deductible for
tax purposes and differences between the tax and book basis of assets and
liabilities recorded in connection with the acquisitions. Deferred tax
liabilities result principally from expenses which are currently deductible for
tax purposes, but have not yet been expensed in the financial statements.
The Company has concluded that it is probable that it will be able to
realize these net deferred tax assets in future periods. In addition, the
company has net operating losses of approximately $200,000 which will expire at
the end of 2018.
On September 18, 1996, pursuant to a Shareholders Agreement (Note 3), the
Company's "S" corporation status was terminated and the Company began
operations as a "C" corporation. Accordingly, the Company became subject to
federal and state income taxes and the retained deficit of the Company was
transferred to additional paid-in capital. During the period from January 1,
1996 to September 18, 1996, the net loss incurred was $180,767. For the period
from September 19, 1996 to December 31, 1996, the net loss incurred was
$73,699.
As described above, the Company began operations as a "C" corporation on
September 18, 1996. The following unaudited pro forma income tax information
has been determined as if the Company operated as a "C" corporation from its
inception, without contemplating any applicable tax laws related to the
utilization of net operating losses. No pro forma income tax provision is
presented for the year ended December 31, 1997 and 1998 as the Company was
operating as a "C" corporation during those periods.
<TABLE>
<CAPTION>
Year Ended
December 31,
1996
------------
<S> <C>
Federal tax (benefit) at statutory rate......................... $(105,831)
State income taxes, net of Federal benefit...................... (28,014)
----------
$(133,845)
==========
</TABLE>
Certain goodwill related to international acquisitions may be deemed
nondeductible under Internal Revenue Service Regulations.
F-18
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. STOCKHOLDERS' EQUITY
Common Shares
In connection with 1-for-2 reverse stock split effected in March 1999, the
Board of Directors authorized 30,000,000 shares of common stock, of which
29,999,950 shares have been designated as Class A Common Stock and 50 shares
have been designated as Class B Common Stock. There were 9,156,819 and
9,223,821 shares of Class A Common Stock issued and outstanding as of December
31, 1997 and 1998, respectively. No shares of Class B Common Stock were issued
as of December 31, 1997 or 1998.
On September 16, 1996, the founders of the Company entered into a Stock
Purchase Agreement with Communicade pursuant to which they sold an aggregate of
3,636,364 shares of Common Stock to Communicade. Communicade made a cash
contribution of $500,000 to the Company without the issuance of any shares of
capital stock to it by the Company.
On February 24, 1997, the Company issued an aggregate of 65,913 shares of
Common Stock to seven employees pursuant to the terms of the Company's 1997
Stock Option and Incentive Plan, as amended (the "1997 Stock Option Plan"), and
Stock Grant Agreements entered into by the Company and each such employee. The
Company issued the shares in consideration for services rendered to the Company
by such employees and as such, the Company recorded compensation expense of
$12,825 for the year ended December 31, 1997, based upon a third-party
valuation of the fair market value of the Company's Common Stock. Each Stock
Grant Agreement also provided that each of the employees enter into a Stock
Restriction Agreement with the Company. The Stock Restriction Agreement
provides that the holder of the shares of Common Stock will not sell, assign,
pledge or otherwise transfer the shares without the written consent of the
Company. In addition, the Company has a right of first refusal to purchase any
shares of Common Stock that the holder desires to sell.
Stock Splits
On February 24, 1997, the Board of Directors authorized a 30,000-for-1 stock
split of the Company's Common Stock and changed the par value to $0.01 per
share. On April 30, 1998, the Board of Directors authorized a 1.515151-for-1
stock split of the Company's Common Stock. On December 14, 1998 the Board of
Directors authorized a 2-for-1 stock split of the Company's issued Common
Stock. On March 4, 1999, the Board of Directors authorized a 1-for-2 reverse
stock split of the Company's issued Common Stock and Common Stock Options under
the 1997 Plan and 1999 Plan and changed the authorized share capital to
40,000,000 (10,000,000 preferred, 29,999,950 Class A Common and 50 Class B
Common). In connection with the split, each holder of the Company's Common
Stock Options amended their respective option agreement to waive their right to
have their options split effected under this stock split. All references in the
accompanying consolidated financial statements and footnotes have been
retroactively restated to give effect to these stock splits.
Stock Options
Under the terms of the 1997 Stock Option Plan 1,172,548 shares of common
stock of the Company have been reserved for:
a. incentive stock options;
b. non-qualified stock options (incentive and non-qualified stock
options are collectively referred to as "Options");
c. restricted stock; or
d. any combination thereof.
F-19
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Awards may be granted to such directors, employees and consultants of the
Company (collectively "Key Persons") as the Board of Directors shall in its
discretion select. Only employees of the Company are eligible to receive grants
of incentive stock options.
Options granted under the Stock Option Plan typically vest annually over a
three-year period and expire ten years from the date of grant.
The Company accounts for the Stock Option Plan under APB Opinion No. 25 and,
accordingly, compensation expense of $65,335 and $2,278,281, respectively, has
only been recognized for stock options granted below fair market value for the
year ended December 31, 1997 and December 31, 1998, respectively, in the
accompanying consolidated financial statements. No options were granted prior
to 1997.
Had compensation for the 1997 Stock Option Plan been determined consistent
with the provisions of SFAS No. 123, the effect on the Company's net income
(loss) and basic and diluted net income (loss) per share would have been
changed to the following pro forma amounts:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1998
----------------- ----------------
<S> <C> <C>
Net income (loss), as reported........ $ 297,189 $ (342,801)
Net loss, pro forma................... (1,127,727) (2,409,308)
Basic income (loss) per share, as
reported............................. 0.03 (0.04)
Basic loss per share, pro forma....... (0.12) (0.26)
Diluted income (loss) per share, as
reported............................. 0.03 (0.04)
Diluted loss per share, pro forma..... (0.11) (0.25)
</TABLE>
A summary of the status of the 1997 Stock Option Plan as of and for the year
ended December 31, 1998 and December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1998
---------------------- ----------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Shares under option, beginning
of period...................... -- $ 1.00 456,795 $1.00
Options granted................. 456,795 1.00 486,661 3.22
Options exercised............... -- 0.00 283,501 1.00
Shares under option, end of
period......................... 456,795 1.00 659,955 2.64
Options exercisable at end of
period......................... -- 0.00 132,161 1.00
Weighted average fair value of
options granted................. -- 0.50 -- 2.71
</TABLE>
The fair market value of each option grant has been estimated on the date of
grant using the Black-Scholes Option Pricing Model with the following
assumptions:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------
1997 1998
------- -------
<S> <C> <C>
Expected option lives........................................ 5 years 5 years
Risk free interest rates..................................... 5.88% 4.98%
Expected volatility.......................................... 83.9% 87.2%
Dividend yield............................................... -- --
</TABLE>
F-20
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about options outstanding and
options exercisable as of December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Shares Average Weighted Shares Weighted
Subject to Remaining Average Subject to Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Price Options Life Price Options Price
----------------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.00.................. 331,974 8 years $1.00 88,441 $ 1.00
1.00.................. 205,900 9 years 1.04 30,264 1.00
1.00 to 10.00......... 122,081 10 years 9.78 13,456 10.00
------- -------
659,955 132,161
======= =======
</TABLE>
10. GEOGRAPHIC INFORMATION
The Company began operations outside of the United States during the year
ended December 31, 1998 through its acquisition of CHBi Limited. A summary of
the Company's operations by geographical area as of and for the year ended
December 31, 1998 is presented below:
<TABLE>
<CAPTION>
United States International Consolidated
------------- ------------- ------------
<S> <C> <C> <C>
Revenues........................... $12,142,869 $1,700,420 $13,843,289
Operating profit (loss)............ 73,854 279,500 353,354
Net income (loss).................. (527,002) 184,201 (342,801)
Identifiable assets................ 10,852,538 1,232,945 12,085,483
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is committed under operating leases principally for office space
and equipment. Certain leases are subject to rent reviews and require payment
of expenses under escalation clauses. Rent expense and equipment rental were
$85,807, $185,175 and $729,921, respectively, for the three years ended
December 31, 1998. Future minimum base rents under terms of noncancellable
operating leases, reduced by rents to be received from existing noncancellable
subleases as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Rental Rental Net Rent
Payments Income Expense
---------- -------- --------
<S> <C> <C> <C>
Year Ending December 31:
1999.......................................... $ 909,537 $264,960 $644,577
2000.......................................... 1,032,184 264,960 767,224
2001.......................................... 977,337 264,960 712,377
2002.......................................... 412,721 264,960 147,761
2003.......................................... 379,016 264,960 114,056
Thereafter.................................... 1,499,725 839,040 660,685
</TABLE>
Employment Agreements
From September 1996 through July 1998, the Company entered into various
employment agreements with certain senior executives, the expirations of which
extend through 2001. The aggregate minimum base salaries under these agreements
are approximately $1,041,200 for each of the years ended December 31, 1999,
2000 and 2001, respectively, for those agreements with terms in excess of one
year at December 31, 1998.
F-21
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In January 1999, the Company entered into various employment agreements with
certain senior executives of Spray Network AB, the expirations of which extend
through December 31, 2001. The aggregate minimum base salaries under these
agreements are approximately $435,000 for each of the years ended December 31,
1999, 2000 and 2001.
Litigation
The Company from time to time becomes involved in various routine legal
proceedings in the ordinary course of its business. The Company believes that
the outcome of all pending legal proceedings and unasserted claims in the
aggregate will not have a material adverse effect on its consolidated results
of operations, consolidated financial position or liquidity.
12. CAPITAL LEASE OBLIGATIONS
At December 31, 1998 the Company was committed under capital leases,
principally for computer equipment and office equipment. The assets and
liabilities under the capital leases are recorded at the lower of the present
value of minimum lease payments or the fair market value of the assets. The
assets are depreciated over their estimated useful lives. The interest rate on
the capital leases ranges from 11.5% to 16.7%.
Future minimum payments under the lease agreement are as follows:
<TABLE>
<S> <C>
Year Ending December 31:
1999.......................................................... $51,459
2000.......................................................... 5,737
2001.......................................................... --
-------
Total minimum lease payments................................ 57,196
Less--
Amounts representing interest............................... 4,418
Current portion............................................. 47,107
-------
Long term portion......................................... $ 5,671
=======
</TABLE>
13. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan covering all of its eligible
employees in the United States. The Plan was effective from January 1, 1998 and
is qualified under Section 401(k) of the Internal Revenue Code of 1986.
Employees may begin participation on monthly enrollment dates provided that
they have reached 18 years of age and three months of service. The Company may
make matching and/or profit sharing contributions to the Plan at its
discretion. There is no contribution expense for the year ended December 31,
1998.
14. SUBSEQUENT EVENTS
In January 1999, the Company acquired all of the issued and outstanding
shares of capital stock of Spray Network AB from Spray Ventures AB and
Communicade in exchange for an aggregate of 9,881,034 shares of Razorfish
Common Stock and 50 shares of Razorfish non-voting Class B Common Stock. The
shares of Common Stock issued represented 50% of the shares of Razorfish Common
Stock on a fully diluted basis immediately following the Spray Acquisition.
(Note 2).
F-22
<PAGE>
In January 1999, the Company sent notice to Omnicom that it was
substantially prepared to make the initial filing of the Registration Statement
with the Securities and Exchange Commission in connection with an initial
public offering of its Common Stock. Omnicom Group, Inc. sent a written notice
to the Company indicating its desire to exercise its option to purchase 10% of
the then-issued and outstanding shares of Common Stock. As such, the company
issued 1,976,810 shares of common stock for total proceeds of approximately
$15,814,000. The purchase price paid by Communicade in connection with the
exercise of this option was based on a 20% discount from an assumed offering
price of $10.00 per share (or $8.00 per share). This discount will be reflected
as a charge to operations of $3,953,620 in the Company's 1999 consolidated
statement of operations.
In March 1999, the Company's Board of Directors adopted and the Company's
stockholders approved a stock incentive plan. The 1999 Stock Incentive Plan
(the "1999 Stock Incentive Plan"), provides for the issuance of a total of up
to 922,327 shares of Common Stock. Generally, shares subject to an award that
remain unissued upon expiration, cancellation or forfeiture of the award are
available for other awards under the 1999 Stock Incentive Plan.
The Company is pursuing an initial public offering of its Class A Common
Stock. The offering contemplates the sale of 3,000,000 shares of Common Stock
at an offering price between $10.00 and $12.00 before taking into account
applicable underwriting commissions and offering expenses.
F-23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Spray Network AB:
We have audited the accompanying consolidated balance sheets of Spray
Network AB (a Kingdom of Sweden corporation) and subsidiaries as of December
31, 1997 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for the three years ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Spray Network AB and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the three years ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 5, 1999
F-24
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's omitted, except share amounts and per share data)
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------ -------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... $ 581 $ 907
Accounts receivable, net of allowance for doubtful accounts
of $0 and $24, respectively................................ 996 1,725
Unbilled charges............................................ 583 712
Prepaid expenses and other current assets................... 241 534
------ -------
Total current assets...................................... 2,401 3,878
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$302 and $493, respectively.................................. 1,015 1,436
INTANGIBLES AND OTHER ASSETS.................................. 1,248 1,513
------ -------
Total assets.............................................. $4,664 $ 6,827
====== =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable............................................ $ 559 $ 1,207
Accrued expenses............................................ 583 1,647
Income taxes payable........................................ 136 --
Related party debt.......................................... 481 1,583
Current portion of long-term debt........................... 16 16
Other current liabilities................................... 772 1,231
------ -------
Total current liabilities................................. 2,547 5,684
------ -------
NON-CURRENT LIABILITIES:
Deferred tax liabilities.................................... 6 --
Long-term debt.............................................. 45 24
Minority interest........................................... 88 71
Other non-current liabilities............................... 361 212
------ -------
Total non-current liabilities............................. 500 307
------ -------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Common stock, $13 par value, 8,000 shares authorized, 2,278
and 2,815 shares issued and outstanding at December 31,
1997 and 1998, respectively................................ 32 37
Additional paid-in capital.................................. 2,360 3,492
Cumulative foreign currency translation adjustments......... (68) (112)
(Accumulated deficit)....................................... (707) (2,581)
------ -------
Total stockholders' equity................................ 1,617 836
------ -------
Total liabilities and stockholders' equity................ $4,664 $ 6,827
====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-25
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted)
<TABLE>
<CAPTION>
For the Year Ended
December 31,
----------------------
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
REVENUES............................................... $5,319 $7,818 $15,402
DIRECT SALARIES AND COSTS.............................. 4,391 7,258 13,111
------ ------ -------
Gross profit......................................... 928 560 2,291
SALES AND MARKETING.................................... 350 395 757
GENERAL AND ADMINISTRATIVE............................. 256 965 2,763
AMORTIZATION OF GOODWILL............................... -- 89 331
------ ------ -------
Income (loss) from operations........................ 322 (889) (1,560)
INTEREST INCOME (EXPENSE), net......................... -- 84 (235)
------ ------ -------
Income (loss) before minority interest and income
taxes............................................... 322 (805) (1,795)
MINORITY INTEREST...................................... -- 88 319
------ ------ -------
Income (loss) before provision (benefit) income
taxes............................................... 322 (717) (1,476)
PROVISION (BENEFIT) FOR INCOME TAXES................... 241 (24) --
------ ------ -------
Net income (loss).................................... $ 81 $ (693) $(1,476)
====== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-26
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(000's omitted, except share amounts)
<TABLE>
<CAPTION>
Cumulative Retained
Common Stock Additional Foreign Earnings Total
------------- Paid-in Currency (Accumulated Stockholders'
Shares Amount Capital Translation Deficit) Equity
------ ------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
1996................... 1,000 $ 15 $ 3 $ 21 $ 437 $ 476
Cash dividends........ -- -- -- -- (280) (280)
Foreign currency
translation
adjustment........... -- -- -- (8) -- (8)
Net income............ -- -- -- -- 81 81
----- ---- ------ ------ ------- -------
BALANCE, December 31,
1996................... 1,000 15 3 13 238 269
Cash dividends........ -- -- -- -- (223) (223)
Contribution of shares
in Spray Services AB-
Group................ 1,162 15 1,952 -- -- 1,967
Issuance of common
stock................ 60 1 194 -- -- 195
Debt converted into
common stock......... 56 1 181 -- -- 182
Transfers of amounts
not available for
distribution......... -- -- 30 -- (29) 1
Foreign currency
translation
adjustment........... -- -- -- (81) -- (81)
Net loss.............. -- -- -- -- (693) (693)
----- ---- ------ ------ ------- -------
BALANCE, December 31,
1997................... 2,278 32 2,360 (68) (707) 1,617
Issuance of common
stock................ 414 4 -- -- -- 4
Exercise of common
stock options........ 123 1 399 -- -- 400
Debt forgiven by
shareholder.......... -- -- 335 -- -- 335
Transfers of amounts
not available for
distribution......... -- -- 398 -- (398) --
Foreign currency
translation
adjustment........... -- -- -- (44) -- (44)
Net loss.............. -- -- -- -- (1,476) (1,476)
----- ---- ------ ------ ------- -------
BALANCE, December 31,
1998................... 2,815 $ 37 $3,492 $ (112) $(2,581) $ 836
===== ==== ====== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-27
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
<TABLE>
<CAPTION>
For the Year Ended
December 31,
----------------------
1996 1997 1998
----- ------ -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $ 81 $ (693) $(1,476)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities--
Allowance for doubtful accounts.................... -- -- 24
Deferred income taxes.............................. 118 (158) (6)
Writeoff of leasehold improvements................. -- -- 172
Depreciation and amortization...................... 33 407 719
Minority interests................................. -- 88 (17)
Changes in operating assets and liabilities--
(Increase) decrease in accounts receivable......... 358 (600) (753)
Increase in unbilled charges....................... (449) (134) (129)
(Increase) decrease in prepaid expenses and other
current assets.................................... 6 (199) (293)
Increase in other assets........................... -- -- (222)
Increase (decrease) in accounts payable............ (74) 456 648
Increase in accrued expenses....................... 92 391 1,064
Increase (decrease) in income taxes payable........ 118 (7) (136)
Increase in non-current liabilities................ -- 361 (149)
Increase in other current liabilities.............. 158 404 459
----- ------ -------
Net cash provided by (used in) operating
activities...................................... 441 316 (95)
----- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................ (95) (502) (981)
Acquisitions, net of cash acquired.................. -- (88) (370)
----- ------ -------
Net cash (used in) investing activities.......... (95) (590) (1,351)
----- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid................................. (280) (223) --
Related party debt, net............................. -- 663 1,102
Long-term debt, net................................. -- 61 (21)
Conversion of debt to capital contribution.......... -- -- 335
Exercise of common stock options.................... -- -- 400
Issuance of common stock............................ -- 195 --
----- ------ -------
Net cash provided by (used in) financing
activities...................................... (280) 696 1,816
----- ------ -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS.......................................... (8) (81) (44)
----- ------ -------
Net increase (decrease) in cash and cash
equivalents..................................... 58 341 326
CASH AND CASH EQUIVALENTS, beginning of period........ 182 240 581
----- ------ -------
CASH AND CASH EQUIVALENTS, end of period.............. $ 240 $ 581 $ 907
===== ====== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes....................................... $ 2 $ 62 $ 1
Interest........................................... 3 21 85
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITY:
Common stock issued for acquisition................. $ -- $1,967 $ 4
Conversion of debt to common stock.................. -- 182 --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-28
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000's omitted, except share and per share data)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Spray Network AB ("Spray Network"), formerly known as Tetre AB prior to
September 1, 1997 (Note 2), is incorporated under the laws of the Kingdom of
Sweden. Spray Network, together with its wholly owned and majority owned
subsidiaries located in Stockholm, Helsinki, and Hamburg, and a joint venture
in Oslo (collectively, the "Company"), is an international digital
communications solutions provider. The Company creates digital communications
solutions that are designed to help its clients increase sales, improve
communications and create and enhance business identities. The Company provides
an integrated service offering consisting of strategic consulting, design of
information architecture and user-interfaces and creation and customization of
software necessary to implement its digital communicating solutions. The
Company primarily uses Internet-based technologies to create digital
communications solutions for the World Wide Web. However, the Company's
solutions will increasingly incorporate additional communications technologies,
such as wireless, satellite and broadband communications, for use with a
variety of digital devices and information appliances, including mobile phones,
pagers and personal digital assistants.
In January 1999, the Company's shareholders, Spray Ventures AB and
Communicade Inc. ("Communicade", a wholly owned subsidiary of the Omnicom
Group, Inc.) sold all of the issued and outstanding shares of capital stock of
the Company to Razorfish, Inc. ("Razorfish") in exchange for an aggregate of
9,881,034 shares of Razorfish Common Stock and 50 shares of Razorfish non-
voting Class B Common Stock (the "Spray Acquisition"). The shares of Razorfish
common stock issued represented 50% of the shares of Razorfish common stock on
a fully diluted basis immediately following the Spray Acquisition. Immediately
prior to this transaction, Communicade purchased 563 shares of Spray Network
from Spray Ventures AB, which represented 20% of the outstanding shares of
Spray Network on a fully diluted basis at the time of purchase, and sold these
shares to Razorfish in connection with the sale of the Company.
Principles of Consolidation
The accompanying consolidated financial statements include the operations of
Spray Network and its wholly owned, majority-owned subsidiaries and controlled
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions, specifically for the allowance for doubtful accounts for accounts
receivable and the useful lives of fixed assets and intangible assets, that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
Revenues are recognized for time and materials-based arrangements and fixed-
fee arrangements on the percentage-of-completion method of accounting based on
the ratio of costs incurred to total estimated costs. Unbilled charges
represent labor costs incurred and estimated earnings, production and other
client reimbursable costs. Advanced billings represent billings of production
and other client reimbursable out-of-pocket costs in excess of revenues
recognized. Amounts billed to clients in excess of revenues recognized to date
are classified as deferred revenues. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
F-29
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated on a straight-line
basis over estimated useful lives of three to ten years. Leasehold improvements
are amortized utilizing the straight-line method over the lesser of the
estimated useful life of the asset or the lease term.
Intangible Assets
Goodwill, which represents the excess of the purchase price over the fair
value of the net assets acquired, is included in intangible assets and is
presently being amortized over a period of five years on a straight-line basis.
Management has evaluated the amortization periods in the current period and has
determined that no impairment currently exists. These amortization periods will
be evaluated by management on a continuing basis, and will be adjusted if the
lives of the related intangible assets are impaired.
Accounting for Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." This statement establishes financial accounting and reporting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used, and for
long-lived assets and certain identifiable intangibles to be disposed of.
Management has performed a review of all long-lived assets and has determined
that no impairment of the respective carrying value has occurred as of December
31, 1998. During 1998, and as a result of the decision to change office
premises in 1998, management determined that certain leasehold improvements
totaling approximately $172 were permanently impaired and as such, recorded a
charge for the entire amount.
Investments in Affiliates
Investments in affiliates, included in other assets in the accompanying
consolidated balance sheet, represent purchased interest of less than 20% and
are accounted for on the cost method. The Company reviews these investments for
impairment whenever events or changes in circumstances indicate that the
carrying amounts of the assets may not be recoverable.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their tax
bases for operating profit and tax liability carryforward. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets or liabilities of
a change in tax rates is recognized in the period that the tax change occurs.
F-30
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Foreign Currency Translation
All assets and liabilities of Spray Network and its subsidiaries are
translated into U.S. dollars at fiscal year-end exchange rates. Income and
expense items are translated at average exchange rates prevailing during the
fiscal year. The resulting translation adjustments are recorded as a component
of stockholders' equity in the accompanying consolidated financial statements.
Stockholders' Equity
Certain subsidiaries and investments of the Company have had fiscal years
other than that ended December 31. Local tax returns and statutory reports have
been prepared under Swedish GAAP and tax practice and submitted to the
authorities for each legal year-end. Stockholders' equity as reported in these
consolidated financial statements has been presented under U.S. GAAP. For these
reasons, the stockholders' equity reported in these consolidated financial
statements may not be immediately available for distribution to stockholders
under the laws of Sweden.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value due to the short-
term maturity of these instruments. The carrying amounts of long-term debt and
related party debt approximate fair value.
Business Concentrations and Credit Risk
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
primarily concentrated in Sweden. The Company performs ongoing credit
evaluations, generally does not require collateral and establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of
customers, historical trends and other information. To date, such losses have
been within management's expectations.
For the year ended December 31, 1996 two clients accounted for 27% and 11%,
respectively, of total revenues.
For the year ended December 31, 1997 two clients accounted for 17% and 12%,
respectively, of total revenues.
For the year ended December 31, 1998, one client accounted for 15% of total
revenues.
F-31
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive Income
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which established standards for reporting and displaying comprehensive
income and its components in a financial statement so that it is displayed with
the same prominence as other financial statements. The components of
comprehensive income are as follows:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
--------------------
1996 1997 1998
---- ----- -------
<S> <C> <C> <C>
Net income (loss)..................................... $81 $(693) $(1,659)
Foreign currency translation adjustment............... (8) (81) (44)
--- ----- -------
Comprehensive income (loss)......................... $73 $(774) $(1,703)
=== ===== =======
</TABLE>
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This statement establishes standards for the way the public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
The statement also establishes standards for related disclosure about products
and services, geographic areas and major customers. This statement is effective
for financial statements for periods beginning after December 15, 1997 and need
not be applied to interim periods in the initial year of application.
Comparative information for earlier years presented is to be restated. The
Company currently believes that it operates in one segment and that the
adoption of SFAS No. 131 did not materially affect the Company's current
disclosure of geographic information (Note 9).
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. This statement is in effect for
all quarters of fiscal years beginning after June 15, 1999. The Company does
not expect the adoption of this standard to have a material effect on the
Company's results of consolidated operations, financial position or cash flows.
2. ACQUISITIONS
On September 1, 1997, the Company (then known as Tetre AB) was acquired by
Spray Ventures AB in a reverse merger. The Company's shareholders exchanged
1,162 newly issued shares of common stock, which represented 51% of the then
outstanding stock of the Company, for all of the outstanding common shares of
Spray Services AB, which was 100% owned by Spray Ventures AB. The shares of
Spray Services AB exchanged by Spray Ventures AB were deemed to have a fair
market value of approximately $1,967. In addition, there were transaction costs
associated with the acquisition amounting to $86, which have been added to the
cost of the investment for a total purchase price of $2,053. The difference
between these amounts and the recorded and the recorded net assets of the
acquired entity, Spray Network, has been reflected as goodwill and will be
amortized over five years, commencing from the acquisition date.
During 1997, the Company invested in subsidiaries in Germany, Finland and
Norway. Goodwill arising from these investments will be amortized over five
years, commencing from the acquisition date. For each of these investments the
Company's investment is for less than 100% of the shares, and thus the minority
interest in equity is shown as a liability. Losses have been incurred for all
three foreign subsidiaries. In accordance with U.S. GAAP, no receivable from
minority stockholders has been recorded when the losses have resulted in a
negative stockholders' equity. The unrecorded receivable from minority
stockholders as of December 31, 1997, amounts to $66 and relates to the
investment in a Norwegian subsidiary.
F-32
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reverse merger described above was valued based on management's estimate
of the fair value of the assets acquired at the date of acquisition. Costs in
excess of net assets acquired were recorded as goodwill as follows:
<TABLE>
<S> <C>
Net assets acquired................................................. $ 718
Intangible assets................................................... 1,249
Acquisition costs................................................... 86
------
Total purchase price.............................................. $2,053
======
</TABLE>
Pro forma results of operations
The following unaudited pro forma consolidated results of operations reflect
the results of operations for the years ended December 31, 1997, as if the
aforementioned reverse merger had occurred on January 1, 1997, and after giving
effect to purchase accounting adjustments. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of
what operating results would have been had the acquisitions actually taken
place on January 1, 1997 and may not be indicative of future operating results.
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
-----------------
<S> <C>
Pro forma:
Revenues............................................... $ 8,955
Net loss............................................... (1,175)
</TABLE>
3. RELATED PARTY TRANSACTIONS
Convertible debt
In June 1997, the Company and its managing director entered into a
convertible debt agreement pursuant to which the managing director loaned
approximately $182 to the Company. This loan bore interest at 2% per annum and
was payable on December 31, 1997. Prior to the repayment date, the Company
converted the full amount of the loan into 56 shares of common stock at a per
share value of approximately $3,000.
In June 1997, the Company entered into several convertible debt agreements
with certain shareholders and officers of the Company pursuant to which such
shareholders and officers loaned the Company an aggregate of $91. The loans
accrued interest at 2% per annum, were payable on December 31, 1997 and the
holders were granted options to purchase an aggregate of 138 shares of the
Company's common stock at a price of $3,277 per share, with an exercise period
of April 27, 1998 to June 30, 2001. All of the loans with interest were repaid
prior to December 31, 1997, except for a loan with the managing director of the
Company for approximately $22, which was converted to a demand note payable
bearing interest at 9.5% per annum and repaid in 1998. In connection with the
convertible loans, a total of 123 options have been exercised during 1998 for
total proceeds of approximately $400. The remaining 15 options were cancelled
due to the termination of certain employees by the Company.
In September 1997, the Company and Spray Ventures entered into a convertible
debt agreement pursuant to which Spray Ventures AB loaned the Company $131.00.
This loan bore interest at 2% per annum and was payable on December 31, 1997.
In connection with this loan, Spray Ventures was granted options to purchase
138 shares of the Company's common stock at a price of $3,277 per share with an
exercise period of April 27, 1998 to June 30, 2001. The Company has repaid this
loan. Spray Ventures has not exercised any options to date.
F-33
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company imputed interest expense on the aforementioned loans, as these
loans were granted to the Company at rates below the market rate available to
the Company from third parties. The fair market value of the options issued in
connection with the convertible debt agreements was determined to be immaterial
and, as such, no charge was taken for such options.
Demand notes payable
In September 1997, each of two shareholders executed a demand note in favor
of the Company for an aggregate amount of approximately $328, bearing interest
at 9.25% per annum and payable on demand. The Company repaid these amounts
subsequent to December 31, 1997.
During 1998, the Company received advances totaling approximately $335 from
Spray Ventures. These advances were subsequently forgiven by Spray Ventures and
recorded as a capital contribution in the accompanying consolidated statement
of stockholders' equity in 1998.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------
1997 1998
------ ------
<S> <C> <C>
Computer equipment............................................ $ 778 $1,354
Leasehold improvements........................................ 539 575
------ ------
Total property and equipment................................ 1,317 1,929
Less--Accumulated depreciation and amortization............... 302 493
------ ------
Property and equipment, net................................. $1,015 $1,436
====== ======
Depreciation and amortization aggregated $33 and $388 for the two years
ended December 31, 1998.
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<CAPTION>
Year Ended
December 31,
-------------
1997 1998
------ ------
<S> <C> <C>
Goodwill...................................................... $1,352 $1,726
Less--Accumulated amortization.............................. 89 420
------ ------
Intangible assets, net.................................... $1,263 $1,306
====== ======
</TABLE>
Amortization aggregated $331 and $89, respectively, for the two years ended
December 31, 1998.
F-34
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. LONG-TERM DEBT:
Long-term debt consists of a loan from an outside lender in the original
principal amount of approximately $66. The loan is payable in equal monthly
installments and bears interest at 11.05% per annum.
Maturities of long-term debt outstanding are as follows:
<TABLE>
<S> <C>
Year Ended December 31,
-----------------------
1999............................................................... $16
2000............................................................... 16
2001............................................................... 8
---
Total............................................................ $40
===
</TABLE>
7. INCOME TAXES
Income (loss) before income taxes and the provision (benefit) for taxes on
income consisted of the amounts shown below:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1996 1997 1998
---- ----- -------
<S> <C> <C> <C>
Income (loss) before income taxes:
United States........................................... $ -- $(281) $ (363)
International........................................... 322 (436) (1,113)
---- ----- -------
$322 $(717) $(1,476)
==== ===== =======
Provision (benefit) for taxes on income:
Current--
International......................................... $124 $ 112 $ (380)
U.S. federal.......................................... -- -- --
U.S. state and local.................................. -- -- --
Deferred--
International......................................... 117 (136) (422)
U.S. federal.......................................... -- -- --
U.S. state and local.................................. -- -- --
---- ----- -------
Valuation allowance................................... -- -- 802
---- ----- -------
$241 $ (24) $ --
==== ===== =======
</TABLE>
A reconciliation of the difference between the statutory Swedish income tax
rate and the Company's effective tax rate follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1996 1997 1998
---- ----- -----
<S> <C> <C> <C>
Statutory U.S. federal income tax rate................ 34.0% 34.0% 34.0%
Swedish tax rate adjustment........................... (6.0) (6.0) (6.0)
International subsidiaries' tax rates less federal
statutory rate....................................... 40.8 -- --
Loss without benefit.................................. -- (28.0) (28.0)
Other................................................. 6.0 (3.3) --
---- ----- -----
Effective rate...................................... 74.8% (3.3)% --%
==== ===== =====
</TABLE>
F-35
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to a significant
portion of the deferred income tax assets (liabilities) net, are as follows:
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------ ------
<S> <C> <C>
Current deferred income tax assets (liabilities) net:
Net operating losses....................................... $ 390 $ 741
Depreciation............................................... 12 61
Accruals................................................... (6) --
Other, net................................................. 26 --
------ ------
422 802
Less--
Valuation allowance........................................ 428 802
------ ------
Total deferred income taxes, net........................... $ (6) $ --
====== ======
</TABLE>
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the Company's assets and
liabilities. Deferred tax assets result principally from recording certain
expenses in the financial statements, which are not currently deductible for
tax purposes, and differences between the tax and book bases of assets and
liabilities recorded in connection with the acquisitions. Deferred tax
liabilities result principally from expenses which are currently deductible for
tax purposes, but have not yet been expensed in the financial statements. The
Company has net operating losses of approximately $2,646 relating to its
Swedish and other international subsidiaries. Substantially all of the net
operating losses have no expiration under the applicable country tax code.
The Company has concluded that it is probable that it will be not able to
realize its net deferred tax assets in future periods and, as such, has
recorded a full valuation allowance against such assets.
8. STOCKHOLDERS' EQUITY
Common stock
The Company sold 60 shares of its common stock in June 1997, at a price of
$3.25 per share, for total proceeds of $195.00.
During 1998, the Company issued 414 shares of common stock to its majority
stockholder as consideration for the purchase of a subsidiary of the majority
shareholder. The value of the shares issued, approximately $5 in the aggregate,
was determined based on the fair market value of the acquired subsidiary. This
subsidiary was subsequently sold back to the parent in return for approximately
$5 in cash, and as such, the Company did not record a gain or loss on these
transactions.
9. GEOGRAPHIC INFORMATION
The Company has operations outside of Sweden. A summary of the Company's
operations by geographical area as of and for the year ended December 31, 1998
is presented below:
<TABLE>
<CAPTION>
Sweden International Consolidated
------- ------------- ------------
<S> <C> <C> <C>
Revenues............................... $11,749 $3,653 $15,402
Operating loss......................... 280 1,280 1,560
Net (loss)............................. (386) (1,090) (1,476)
Identifiable assets.................... 4,554 2,273 6,827
</TABLE>
F-36
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. COMMITMENTS AND CONTINGENCIES
Lease commitments
The Company is committed under operating leases, principally for office
space and equipment. Certain leases are subject to rent reviews and require
payment of expenses under escalation clauses. Rent expense and equipment rental
were $945, $180 and $128, respectively, for the three years ended December 31,
1998. Future minimum base rents under terms of noncancellable operating leases,
reduced by rents to be received from existing noncancellable subleases, are as
follows:
<TABLE>
<S> <C>
Year Ending December 31,
------------------------
1999............................................................ $2,050
2000............................................................ 2,111
2001............................................................ 2,011
2002............................................................ 3,252
Thereafter...................................................... 1,150
</TABLE>
Capital Lease Commitments
At December 31, 1998 the Company was committed under capital leases,
principally for computer equipment and office equipment. The assets and
liabilities under the capital leases are recorded at the lower of the present
value of minimum lease payments or the fair market value of the assets. The
assets are depreciated over their estimated useful lives. The interest rates on
the capital leases range from 10.5% to 13.7%.
Future minimum payments under the lease agreements are as follows:
<TABLE>
<S> <C>
Year Ending December 31,
------------------------
1999............................................................ $140
2000............................................................ 140
2001............................................................ 86
----
Total minimum lease payments.................................. 366
Less--
Amounts representing interest................................. 45
Current portion (included in other current liabilities)....... 123
----
Long-term portion (included in other non-current
liabilities)............................................... $198
====
</TABLE>
Litigation
The Company, from time to time, becomes involved in various routine legal
proceedings in the ordinary course of its business. The Company believes that
the outcome of all pending legal proceedings and unasserted claims in the
aggregate will not have a material adverse effect on its consolidated results
of operations, consolidated financial position or liquidity.
11. SUBSEQUENT EVENTS
In January 1999, Spray Ventures AB and Communicade sold all of the Company's
issued and outstanding shares of capital stock in exchange for an aggregate of
9,881,034 shares of Razorfish Common Stock and 50 shares of Razorfish non-
voting Class B Common Stock. The shares of Razorfish Common Stock issued
represented 50% of the shares of Razorfish Common Stock on a fully diluted
basis immediately following this transaction.
F-37
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Subcontractors
Swedish tax legislation specifically addresses the use of subcontractors. In
the event that compensation to subcontractors is deemed to be the equivalent of
a salary as opposed to compensation for consultancy services performed, certain
adverse tax implications for the disbursing entity may occur. If the consultant
or subcontractor is not deemed to meet certain independence criteria, all
payments may be considered salary, which automatically generates the need for
the payer to report and pay social charges based on this amount. Furthermore,
Value Added Taxes billed by the consultant would not be considered deductible
and would also be considered as salary when disbursed. Should the tax
authorities contest a subcontractors' compensation, the incremental costs could
be approximately 50% of payments made, plus penalty fees. Due to the nature of
the Company's business, a large number of consultants/subcontractors is used.
For this reason management has consulted with legal experts to determine if the
independence criteria for retained consultants/subcontractors have been met.
Management believes this to be the case, and there are no known disputes at
this point in time.
F-38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Spray Ventures AB:
We have audited the accompanying consolidated balance sheets of Spray
Ventures AB (a Kingdom of Sweden corporation) and subsidiaries as of December
31, 1996 and August 31, 1997, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the year ended
December 31, 1996 and the eight months ended August 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Spray Ventures AB and
subsidiaries as of December 31, 1996 and August 31, 1997, and the results of
their operations and cash flows for the year ended December 31, 1996 and the
eight months ended August 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
January 18, 1999
F-39
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's omitted, except share amounts and per share data)
<TABLE>
<CAPTION>
December 31, August 31,
1996 1997
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 129 $ 671
Accounts receivable, net of allowance for doubtful
accounts of $0 and
$39, respectively.................................... 297 1,630
Unbilled charges...................................... 75 17
Prepaid expenses and other current assets............. 101 1,084
----- -------
Total current assets................................. 602 3,402
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $103
and $242, respectively................................ 232 785
OTHER ASSETS........................................... -- 535
----- -------
Total assets......................................... $ 834 $ 4,722
===== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................... $ 161 $ 1,045
Accrued expenses...................................... 100 274
Income taxes payable.................................. 5 4
Short-term debt....................................... 49 --
Other current liabilities............................. 132 207
----- -------
Total current liabilities............................ 447 1,530
----- -------
NON-CURRENT LIABILITIES:
Minority interests.................................... 33 15
Convertible loans..................................... 376 1,585
Other liabilities..................................... 22 36
----- -------
Total non-current liabilities........................ 431 1,636
----- -------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.75, $.66 par value, 476,764 shares
authorized, 120,000 and 155,000 shares issued and
outstanding at December 31, 1996 and August 31, 1997,
respectively......................................... 96 101
Additional paid-in capital............................ 88 3,277
Cumulative foreign currency translation adjustments... 3 6
Retained earnings (accumulated deficit)............... (231) (1,828)
----- -------
Total (accumulated deficit).......................... (44) 1,556
----- -------
Total liabilities and stockholders' equity........... $ 834 $ 4,722
===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-40
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted)
<TABLE>
<CAPTION>
For the Year For the Eight
Ended Months Ended
December 31, 1996 August 31, 1997
----------------- ---------------
<S> <C> <C>
REVENUES..................................... $2,716 $ 1,585
DIRECT SALARIES AND COSTS.................... 2,691 2,644
------ -------
Gross profit (loss)........................ 25 (1,059)
SALES AND MARKETING.......................... 86 53
GENERAL AND ADMINISTRATIVE................... 130 450
NON-RECURRING CHARGES........................ -- 238
------ -------
Loss from operations....................... (191) (1,800)
GAIN ON DISPOSAL OF SUBSIDIARY............... -- 100
INTEREST EXPENSE, net........................ (31) (44)
------ -------
Loss before minority interest and income
taxes..................................... (222) (1,744)
MINORITY INTEREST............................ 41 147
------ -------
Loss before provision for income taxes..... (181) (1,597)
PROVISION FOR INCOME TAXES................... 5 --
------ -------
Net loss................................... $ (186) $(1,597)
====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-41
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(000's omitted, except share amounts)
<TABLE>
<CAPTION>
Cumulative Retained Total
Common Stock Additional Foreign Earnings Stockholders'
-------------- Paid-in Currency (Accumulated Equity
Shares Amount Capital Translation Deficit) (Deficit)
------- ------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
1996................... 10,000 $ 7 $ 88 $ 3 $ 44 $ 142
Stock dividend........ 110,000 89 -- -- (89) --
Net loss.............. -- -- -- -- (186) (186)
------- ---- ------ --- ------- -------
BALANCE, December 31,
1996................... 120,000 96 88 3 (231) (44)
Issuance of common
stock................ 35,000 5 3,189 -- -- 3,194
Foreign currency
translation
adjustment........... -- -- -- 3 -- 3
Net (loss)............ -- -- -- -- (1,597) (1,597)
------- ---- ------ --- ------- -------
BALANCE, August 31,
1997................... 155,000 $101 $3,277 $ 6 $(1,828) $ 1,556
======= ==== ====== === ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-42
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
<TABLE>
<CAPTION>
For the
For the Eight Months
Year Ended Ended
December 31, August 31,
1996 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(186) $(1,597)
Adjustments to reconcile net loss to net cash
(used in) operating activities--
Allowance for doubtful accounts.................... -- 39
Depreciation and amortization...................... 83 139
Minority interest.................................. 33 (18)
Gain on disposal of subsidiary..................... -- 100
Changes in operating assets and liabilities--
(Increase) in accounts receivable................. (243) (1,372)
(Increase) decrease in unbilled charges........... (75) 58
(Increase) in prepaid expenses and other current
assets........................................... (73) (983)
Increase in accounts payable...................... 95 884
Increase in accrued expenses...................... 92 174
Increase (decrease) in income taxes payable....... 5 (1)
Decrease in other liabilities..................... 22 14
Increase in other current liabilities............. 100 75
----- -------
Net cash (used in) operating activities.......... (147) (2,488)
----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................ (131) (792)
Acquisitions of subsidiaries, net of cash acquired.. -- (535)
----- -------
Net cash (used in) investing activities.......... (131) (1,327)
----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term debt....................... 49 (49)
Net change in convertible loans..................... 330 1,209
Proceeds from issuance of common stock.............. -- 3,194
----- -------
Net cash provided by financing activities........ 379 4,354
----- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS......................................... -- 3
----- -------
Net increase in cash and cash equivalents........ 101 542
CASH AND CASH EQUIVALENTS, beginning of period....... 28 129
----- -------
CASH AND CASH EQUIVALENTS, end of period............. $ 129 $ 671
===== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for--
Income taxes....................................... $ -- $ --
Interest........................................... 31 44
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITIES:
Stock dividend..................................... $ 89 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-43
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000's omitted, except share amounts and per share data)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Spray Ventures AB ("Spray Ventures") (f.k.a. "Spray Interactive Media AB"),
through its wholly owned and majority owned subsidiaries (collectively, the
"Company") is an international digital communications solutions provider. The
Company creates digital communications solutions that are designed to help its
clients increase sales, improve communications and create and enhance business
identities. The Company provides an integrated service offering consisting of
strategic consulting, design of information architecture and user-interfaces
and creation and customization of software necessary to implement its digital
communications solutions. The Company primarily uses Internet-based
technologies to create digital communications solutions for the World Wide Web.
However, the Company's solutions will increasingly incorporate additional
communications technologies, such as wireless, satellite and broadband
communications, for use with a variety of digital devices and information
appliances, including mobile phones, pagers and personal digital assistants.
Reorganization
On August 29, 1997, the Company established a wholly owned subsidiary, Spray
Services AB, and transferred all of the operating subsidiaries of the Company
under Spray Services AB. The Company transferred the subsidiaries based upon a
September 1, 1997 merger agreement between Spray Services AB and Spray Network
AB (f.k.a. Tetre AB). Under the terms of the merger agreement, the Company
agreed to purchase 1,162 newly issued shares of Spray Network AB, representing
51% of the then outstanding shares of Spray Network AB common stock, in
exchange for all outstanding shares of Spray Services AB with a fair market
value of $1,967 based upon an independent valuation. In connection with this
transaction, the Company changed its name from Spray Interactive Media AB to
Spray Ventures AB.
Principles of Consolidation
The accompanying consolidated financial statements consist of Spray Ventures
and its wholly owned and majority-owned subsidiaries. As of August 31, 1997,
certain non-operating subsidiaries of Spray Ventures have been carried at cost.
The non-operating subsidiaries do not have a material impact on the
consolidated financial statements of Spray Ventures taken as a whole. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions, specifically for the allowance for doubtful accounts for accounts
receivable and the useful lives of fixed assets and intangible assets, that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
Revenues are recognized for time and materials-based arrangements and fixed-
fee arrangements on the percentage-of-completion method of accounting based on
the ratio of costs incurred to total estimated costs. Unbilled charges
represent labor costs incurred and estimated earnings, production and other
client reimbursable costs. Advanced billings represent billings of production
and other client reimbursable
F-44
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
out-of-pocket costs in excess of revenues recognized. Amounts billed to clients
in excess of revenues recognized to date are classified as deferred revenues.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
Non-recurring Charges
The Company incurred certain non-recurring expenses of approximately $238 in
connection with the start-up of certain international subsidiaries.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated on a straight-line
basis over estimated useful lives of four to eight years. Leasehold
improvements and equipment held under capital leases are amortized utilizing
the straight-line method over the lesser of the estimated useful life of the
asset or the lease term.
Intangible Assets
Goodwill, which represents the excess of the purchase price over the fair
value of the net assets acquired, is included in other assets and is presently
being amortized over a period of 5 years on a straight-line basis. Management
has evaluated the amortization periods in the current period and has determined
that no impairment currently exists. These amortization periods will be
evaluated by management on a continuing basis, and will be adjusted if the
lives of the related intangible assets are impaired. Goodwill totaled $221 as
of August 31, 1997. As the goodwill was recorded on August 29, 1997, no
amortization was recorded for the period. There was no goodwill prior to
January 1, 1997.
Accounting for Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." This statement establishes financial accounting and reporting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used, and for
long-lived assets and certain identifiable intangibles to be disposed of.
Management has performed a review of all long-lived assets and has determined
that no impairment of the respective carrying value has occurred as of August
31, 1997.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their tax
bases for operating profit and tax liability carryforward. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or
F-45
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
settled. The effect on deferred tax assets or liabilities of a change in tax
rates is recognized in the period that the tax change occurs.
Foreign Currency Translation
All assets and liabilities of Spray Ventures and its subsidiaries are
translated into U.S. dollars at fiscal year-end exchange rates. Income and
expense items are translated at average exchange rates prevailing during the
fiscal year. The resulting translation adjustments are recorded as a component
of stockholders' equity in the accompanying consolidated financial statements.
Stockholders' Equity
Certain subsidiaries and investments of the Company have had fiscal years
other than December 31. Local tax returns and statutory reports have been
prepared under Swedish GAAP and tax practice and submitted to the authorities
for each legal year-end. Stockholders' equity as reported in these consolidated
financial statements has been presented under U.S. GAAP. For these reasons, the
stockholders' equity reported in these consolidated financial statements may
not be immediately available for distribution to stockholders under the laws of
Sweden.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and short-term debt approximate fair value due to the short-
term maturity of these instruments. The carrying amounts of long-term debt and
convertible loans approximate fair value.
Business Concentrations and Credit Risk
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
primarily concentrated in Sweden. The Company performs ongoing credit
evaluations, generally does not require collateral, and establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of customers, historical trends and other information. To date, such losses
have been within management's expectations.
The Company did not have any customers that accounted for 10% or more of
revenues during the periods presented or of receivables at the end of each of
the periods presented.
Comprehensive Income
During 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income", which establishes standards for reporting and displaying comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements. The components of comprehensive
income are as follows:
<TABLE>
<CAPTION>
For the
For the Year Eight Months
Ended Ended
December 31, August 31,
1996 1997
------------ ------------
<S> <C> <C>
Net (loss)....................................... $(186) $(1,597)
Foreign currency translation adjustment.......... -- 3
----- -------
Comprehensive (loss)........................... $(186) $(1,594)
===== =======
</TABLE>
F-46
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. RELATED PARTY TRANSACTIONS
Convertible Debt
In 1996, the Company entered into several convertible debt agreements with
certain stockholders and employees pursuant to which the stockholders and
employees loaned the Company approximately $330. These loans were non-interest
bearing and payable on January 1, 1999. In connection with these agreements,
the holders received options to purchase an aggregate of 42,400 shares of
common stock. Subsequent to August 31, 1997, 39,100 options were exercised into
common stock, in lieu of the Company repaying the related debt. The remaining
3,300 options were cancelled based upon the termination of the employment of
certain employees. As these loans were non-interest bearing, the Company
imputed interest based on a rate of 7%; however, no expense was recorded as the
amount was deemed to be immaterial.
In 1997, the Company entered into several convertible debt and debenture
agreements with stockholders, employees and outside investors of the Company.
The aggregate total proceeds received by the Company were approximately $1,408.
The loans accrued interest at 5% per annum and were payable by January 1, 1999.
In connection with the agreements, the holders received options to purchase an
aggregate of 44,928 shares of common stock. Subsequent to August 31, 1997,
19,928 were exercised into common stock, in lieu of the Company repaying the
related debt. A total of 8,700 options were cancelled and 19,600 remain
outstanding.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, August 31,
1996 1997
------------ ----------
<S> <C> <C>
Computer equipment.................................. $224 $ 520
Leasehold improvements.............................. 111 507
---- ------
Total property and equipment...................... 335 1,027
Less--Accumulated depreciation and amortization..... 103 242
---- ------
Property and equipment, net....................... $232 $ 785
==== ======
</TABLE>
Depreciation and amortization aggregated $83 for the year ended December 31,
1996 and $139 for the eight months ended August 31, 1997.
4. INCOME TAXES
The provision for taxes on income consisted of the amounts shown below:
<TABLE>
<CAPTION>
For the Eight
Year Ended Months Ended
December 31, August 31,
1996 1997
------------ -------------
<S> <C> <C>
Provision for taxes on income:
Current--International............................ $ 5 $--
Deferred--International .......................... -- --
--- ----
$ 5 $--
=== ====
</TABLE>
F-47
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
For the Eight
Year Ended Months Ended
December 31, August 31,
1996 1997
------------ -------------
<S> <C> <C>
Statutory U.S. federal income tax rate............ 34.0 % 34.0 %
Swedish tax rate adjustment....................... (6.0) (6.0)
Loss without benefit ............................. (28.0) (28.0)
Other............................................. 2.8 --
----- -----
2.8 % 0 %
===== =====
</TABLE>
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the Company's assets and
liabilities. Deferred tax assets result principally from recording certain
expenses in the financial statements, which are not currently deductible for
tax purposes and differences between the tax and book basis of assets and
liabilities recorded in connection with the acquisitions. Deferred tax
liabilities result principally from expenses which are currently deductible for
tax purposes, but have not yet been expensed in the financial statements, and
from net operating loss carryforwards.
The Company had net deferred tax assets of approximately $44 and $317 as of
December 31, 1996 and August 31, 1997, respectively, which were primarily the
result of the difference between book and tax depreciation expense and the
difference in the book and tax treatment of certain start-up costs. The Company
had net operating losses of approximately $18. These net operating losses have
no expiration under the Swedish tax code.
The Company has concluded that it is not probable that it will be able to
realize these net deferred tax assets in future periods and has, accordingly,
recorded a full valuation allowance.
5. STOCKHOLDERS' EQUITY
Common Shares
In 1996, the Company declared a stock dividend for all stockholders of
record. The Company issued an aggregate of 110,000 shares to its stockholders
to effect this transaction.
In June 1997, the Company issued 35,000 shares of common stock at a price of
approximately $91.25 per share for total proceeds of $3,194.
6. COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company was committed under operating leases, principally for office
space and equipment. Certain leases were subject to rent reviews and require
payment of expenses under escalation clauses. Rent expense was $257 for the
year ended December 31, 1996, and $180 for the eight months ended August 31,
1997. The Company has no further obligations regarding such leases, as a result
of the sale of Spray Services and Spray Network AB (Note 7):
Capital Lease Commitments
At August 31, 1997 the Company was committed under capital leases,
principally for computer equipment and office equipment. The assets and
liabilities under the capital leases are recorded at the lower of the present
value of minimum lease payments or the fair market value of the assets. The
assets are depreciated over its estimated useful lives. The interest rate on
the capital leases ranges from 11.5% to 16.7%.
F-48
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum payments under the lease agreement are as follows:
<TABLE>
<S> <C>
Eight Months Ended August 31,
1998............................................................... $48
1999............................................................... 29
2000............................................................... 10
---
Total minimum lease payments..................................... 87
---
Less--
Amounts representing interest.................................... 7
Current portion.................................................. 25
---
Present value of net minimum lease payments.................... $55
===
</TABLE>
Litigation
The Company, from time to time, becomes involved in various routine legal
proceedings in the ordinary course of its business. The Company believes that
the outcome of all pending legal proceedings and unasserted claims in the
aggregate will not have a material adverse effect on its consolidated results
of operations, consolidated financial position or liquidity.
Subcontractors
Swedish tax legislation specifically addresses the use of subcontractors. In
the event that compensation to subcontractors is deemed to be the equivalent of
a salary as opposed to compensation for consultancy services performed, certain
adverse tax implications for the disbursing entity may occur. If the consultant
or subcontractor is not deemed to meet certain independence criteria, all
payments may be considered salary, which automatically generates the need for
the payer to report and pay social charges based on this amount. Furthermore,
Value Added Tax billed by the consultant would not be considered deductible and
would also be considered as salary when disbursed. Should the tax authorities
contest a subcontractor's compensation, the incremental costs could be
approximately 50% of payments made, plus penalty fees. Due to the nature of the
Company's business, a large number of consultants/subcontractors is used. For
this reason management has consulted with legal experts to determine if the
independence criteria for retained consultants/subcontractors have been met.
Management believes this to be the case, and there are no known disputes at
this point in time.
7. SUBSEQUENT EVENTS
Convertible Loans
In June 1998, the Company entered into two convertible loan agreements for
total proceeds of approximately $1,955. The holders of the debt also received
options to purchase an aggregate of 22,126 shares of common stock of which
19,435 have been exercised into common stock, in lieu of the Company repaying
such debt.
Sale of Spray Network AB
In January 1999, the Company sold 20% of Spray Network AB to Communicade
Inc. ("Communicade"), a wholly-owned subsidiary of Omnicom Group, Inc.
Simultaneously with this transaction, Spray Ventures and Communicade sold all
of the issued and outstanding shares of capital stock of Spray Network AB to
Razorfish, Inc. ("Razorfish") in exchange for an aggregate of 9,881,034 shares
of Razorfish Common Stock and 50 shares of Razorfish non-voting Class B Common
Stock (the "Spray Acquisition"). The shares of Razorfish common stock issued
represented 50.0% of the shares of Razorfish common stock on a fully diluted
basis immediately following the Spray Acquisition. Certain insignificant
subsidiaries of Spray Network AB were not included in the transaction and as
such, ownership was retained by the Company.
F-49
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Avalanche Systems, Inc.:
We have audited the accompanying statements of operations, stockholders'
equity (deficit) and cash flows of Avalanche Systems, Inc. (a Delaware
corporation) for the year ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of income, stockholders'
equity and cash flows are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statements of income, stockholders' equity (deficit) and cash flows. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the statements of operations, stockholders' equity (deficit)
and cash flows referred to above present fairly, in all material respects, the
results of operations, equity and cash flows of Avalanche Systems, Inc. for the
year ended December 31, 1997 in conformity with generally accepted accounting
principles.
The accompanying statements of operations, stockholders' equity (deficit)
and cash flows have been prepared assuming that the Company will continue as a
going concern. As discussed in Note 1, due to the Company's inability to pay
its debts, the seizure of its assets and its filing for dissolution with the
State of Delaware, substantial doubt had been raised about the Company's
ability to continue as a going concern. Further information in regard to this
matter is also described in Note 1. The statements of income, stockholders'
equity (deficit) and cash flows do not include any adjustments that might
result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
New York, New York
March 5, 1999
F-50
<PAGE>
INDEPENDENT AUDITORS' REPORT
To Avalanche Systems, Inc.
We have audited the accompanying statements of operations, stockholders'
equity, and cash flows of Avalanche Systems, Inc. for the year ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Avalanche
Systems, Inc. for the year ended December 31, 1996 in conformity with generally
accepted accounting principles.
M.R. Weiser & Co. llp
New York, N.Y.
March 3, 1997
F-51
<PAGE>
AVALANCHE SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------
1996 1997
---------- -----------
<S> <C> <C>
REVENUES............................................. . $2,814,080 $ 2,313,863
COST OF SERVICES....................................... 1,656,403 2,356,000
---------- -----------
Gross profit......................................... 1,157,677 (42,137)
GENERAL AND ADMINISTRATIVE............................. 1,083,994 2,052,058
---------- -----------
Income (loss) from operations........................ 73,683 (2,094,195)
INTEREST EXPENSE, NET.................................. 25,792 --
---------- -----------
Income (loss) before income taxes.................... 47,891 (2,094,195)
PROVISION FOR INCOME TAXES............................. 33,331 --
---------- -----------
Net income (loss).................................... $ 14,560 $(2,094,195)
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-52
<PAGE>
AVALANCHE SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Additional Retained Total
----------------- Paid-in Earnings Stockholders'
Shares Amount Capital (Deficit) Equity (Deficit)
--------- ------ ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1,
1996................... 150 $5,000 $ -- $ 146,965 $ 151,965
Shares redeemed as
part of corporate
merger............... (150) (5,000) -- -- (5,000)
Shares issued as part
of corporate merger.. 2,700,000 2,700 2,732 -- 5,432
Net income............ -- -- -- 14,560 14,560
--------- ------ ------ ----------- -----------
BALANCE, December 31,
1996................... 2,700,000 2,700 2,732 161,525 166,957
Net loss.............. -- -- -- (2,094,195) (2,094,195)
--------- ------ ------ ----------- -----------
BALANCE, December 31,
1997................... 2,700,000 $2,700 $2,732 $(1,932,670) $(1,927,238)
========= ====== ====== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-53
<PAGE>
AVALANCHE SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years
Ended December 31,
----------------------
1996 1997
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ 14,560 $(2,094,195)
Adjustments to reconcile net income (loss) to net
cash used in operating activities--
Allowance for bad debts............................. 30,000 (30,000)
Depreciation and amortization....................... 70,361 103,225
(Increase) decrease in accounts receivable.......... (213,399) 403,473
(Increase) decrease in prepaid expenses and other
current assets..................................... (44,986) 65,573
(Increase) in other assets.......................... (521) (519)
Increase in accounts payable and accrued expenses... 64,006 1,026,184
Increase in deferred tax liabilities................ 24,602 --
Increase (decrease) in advance billings............. (24,082) (30,418)
Increase (decrease) in income tax payable........... (4,163) 1,350
--------- -----------
Net cash (used in) operating activities............ (83,622) (555,327)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment................ (187,721) (55,010)
--------- -----------
Net cash used in investing activities.............. (187,721) (55,010)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from bank notes......................... 275,000 668,000
Net proceeds from related party notes................ -- 275,000
Proceeds from long-term debt......................... 180,000 --
Principal repayments of bank notes................... -- (275,000)
Principal repayments of long-term debt............... (224,590) (60,000)
Proceeds from common stock transactions.............. 432 --
--------- -----------
Net cash provided by financing activities.......... 230,842 608,000
--------- -----------
Net (decrease) in cash and cash equivalents........ (40,501) (2,337)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........... 43,838 3,337
--------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR................. $ 3,337 $ 1,000
========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for--
Income taxes paid................................... $ 12,892 $ --
Interest paid....................................... 25,792 76,661
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING ACTIVITIES:
Equipment acquired under capital leases............. $ -- $ 483,838
</TABLE>
The accompanying notes are an integral part of these statements.
F-54
<PAGE>
AVALANCHE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1.BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Avalanche Systems, Inc. (the "Company") was an interactive agency. The
Company's products included internet sites, intranets, interactive press kits,
digital video and corporate communications tools developed for the internet and
other multimedia environments.
On August 12, 1996, the Company was merged into a nonactive corporation with
identical ownership interests, incorporated under the laws of the State of
Delaware. This merger was for state tax purposes only and had no effect on
Federal income taxes.
As of January 15, 1998, the Company was indebted to its two lenders for
approximately $1,527,000. Under each specific debt agreement, each lender had a
duly perfected first priority security interest in substantially all of the
assets of the Company.
Due to the Company's inability to pay its debts and obligations, on January
15, 1998, the Company granted to its lenders all rights of possession in and to
all accounts receivable, property and equipment and general intangibles (the
"Collateral") to be disposed of by the lenders with the net proceeds resulting
from any sale or other disposition to be credited to the account of the
Company. The Collateral was subsequently sold to Avalanche Solutions, Inc. for
approximately $594,000 and the Company was relieved of all debts to these
lenders.
Due to the default of these debts and resulting sale of all operating
assets, the Company had limited working capital and cash flow which resulted in
the Company being unable to continue significant operations during 1998. The
Company filed for dissolution with the State of Delaware in February 1999 and
management believes, that at the time of the filing, there was no threatened or
pending litigation against the Company. The Company received certification of
its dissolution from the State of Delaware effective February 12, 1999.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Contract revenue is recognized as services are performed. Advances received
or services billed in advance are recorded as deferred revenue and recognized
as revenue in the period in which the related services are rendered.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
F-55
<PAGE>
AVALANCHE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are depreciated on a straight-line basis over
estimated useful lives of five to seven years. Leasehold improvements and
equipment held under capital leases are amortized utilizing the straight-line
method over the lesser of the estimated useful life of the asset or the
remaining term of the related lease.
Income Taxes
In 1994, the Company elected to be treated as an S corporation under
subchapter "S" of the Internal Revenue Code, whereby the Company's taxable
income is included pro rata in the individual income tax returns of its
stockholders. Accordingly, no provision for Federal income taxes has been made
in the accompanying financial statements. The Company is subject to certain
state and local income taxes.
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their tax
bases for operating profit and tax liability carryforward. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets or liabilities of
a change in tax rates is recognized in the period that the tax change occurs.
The Company has elected to file its income tax returns using the cash basis of
accounting.
Business Concentrations and Credit Risk
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
primarily concentrated in the United States. The Company performs ongoing
credit evaluations, generally does not require collateral and establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of customers, historical trends and other information. To date, such losses
have been within management's expectations.
For the two years ended December 31, 1997, respectively, three clients
accounted for 41% of total net revenues.
Reclassifications
Certain reclassifications have been made to the 1996 statements of
operations to conform with the 1997 presentation.
2. INCOME TAXES
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the Company's assets and
liabilities. Deferred tax assets result principally from recording certain
expenses in the financial statements, which are not currently deductible for
tax purposes, and differences between the tax and book bases of assets and
liabilities recorded in connection with the acquisitions. Deferred tax
liabilities result principally from expenses which are currently deductible for
tax purposes, but have not yet been expensed in the financial statements.
For the year ended December 31, 1997, the Company recorded a full valuation
allowance against its deferred tax assets, primarily resulting from net
operating losses, due to the uncertainty of realizing such assets.
F-56
<PAGE>
AVALANCHE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. RENT EXPENSE
Rent expense amounted to $88,107 and $153,600, respectively, for the two
years ended December 31, 1997.
4. COMMITMENTS AND CONTINGENCIES
Benefit Plan
The Company established a 401(k) plan effective March 1, 1997 covering all
the then current employees and future employees who have met age requirements
and have completed at least one year of employment. The plan requires Company
contributions equal to 75% of each participant's contribution up to 6% of
salary.
5. STOCK OPTION PLAN
On June 27, 1996, the Company established a stock option plan whereby, under
certain circumstances, an employee has the option to purchase shares of common
stock for amounts based upon the fair market value of the shares purchased.
Under the plan, 300,000 shares of the Company's stock is reserved for future
distributions. No stock options have been granted under the plan.
F-57
<PAGE>
[LOGO OF RAZORFISH, INC.]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other expenses of issuance and distribution.
The following table sets forth the expenses to be borne by the registrant,
other than underwriting discounts, in connection with the issuance and
distribution of the Common Stock hereunder:
<TABLE>
<CAPTION>
Item Amount
---- ----------
<S> <C>
SEC registration fee........................................... $ 11,509
NASD filing fee................................................ 6,250
Nasdaq National Market listing fee............................. 96,000
Accounting fees and expenses................................... 800,000
Legal fees and expenses........................................ 550,000
Printing costs................................................. 350,000
Miscellaneous.................................................. 50,000
----------
Total........................................................ $2,113,759
==========
</TABLE>
Item 14. Indemnification of directors and officers.
Reference is made to Section 102(b)(7) of the Delaware General Corporation
Law (the "DGCL"), which permits a corporation in its certificate of
incorporation or an amendment thereto to eliminate or limit the personal
liability of a director for violations of the director's fiduciary duty, except
(1) for any breach of the director's fiduciary duty of loyalty to the
corporation or its stockholders, (2) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3)
pursuant to Section 174 of the DGCL (providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions), or
(4) for any transaction from which the director derived an improper personal
benefit. Razorfish's Certificate of Incorporation contains provisions permitted
by Section 102(b)(7) of the DGCL.
Reference is made to Section 145 of the DGCL which provides that a
corporation may indemnify any persons, including directors and officers, who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
such corporation), by reason of the fact that such person is or was a director,
officer, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided such director, officer, employee or agent acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the corporation's best interests and, with respect to any criminal actions or
proceedings, had no reasonable cause to believe that his conduct was unlawful.
A Delaware corporation may indemnify directors and/or officers in an action or
suit by or in the right of the corporation under the same conditions, except
that no indemnification is permitted without judicial approval if the director
or officer is adjudged to be liable to the corporation. Where a director or
officer is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him or her against the
expenses which such director or officer actually and reasonably incurred.
Razorfish's Certificate of Incorporation filed as Exhibit 3.1 to this
Registration Statement provides indemnification of directors and officers of
Razorfish to the fullest extent permitted by the DGCL.
II-1
<PAGE>
Item 15. Recent sales of unregistered securities.
On the closing date of the offering, Razorfish will grant to four employees
options to purchase an aggregate of 60,000 shares of Common Stock in
consideration for their respective minority interests in certain subsidiaries
of Spray. Exemption from registration for this transaction will be claimed
pursuant to Regulation S of the Securities Act regarding transactions by the
issuer not involving a public offering, in that this transaction was made,
without general solicitation or advertising, to a sophisticated investor
located outside the United States with access to all relevant information
necessary to evaluate this investment and who represented to Razorfish that the
options were being acquired for investment.
On February 3, 1999, Razorfish issued 1,976,810 shares of Common Stock to
Communicade for an estimated purchase price of $15,814,476 which will be
adjusted on the closing date of the offering. Exemption from registration for
this transaction was claimed pursuant to Section 4(2) of the Securities Act
regarding transactions by the issuer not involving a public offering, in that
this transaction was made, without general solicitation or advertising, to a
sophisticated investor with access to all relevant information necessary to
evaluate this investment and who represented to Razorfish that the shares were
being acquired for investment.
On January 5, 1999, Razorfish issued an aggregate of 19,881,034 shares of
Common Stock and in February 1999 an aggregate of 50 shares of Class B Common
Stock to Spray Ventures and Communicade in exchange for all of the issued and
outstanding shares of stock of Spray and warrants exercisable for an additional
138 shares of stock of Spray. Exemption from registration for these
transactions was claimed pursuant to Section 4(2) of the Securities Act
regarding transactions by the issuer not involving a public offering, in that
these transactions were made, without general solicitation or advertising, to
sophisticated investors with access to all relevant information necessary to
evaluate these investments and who represented to Razorfish that the shares
were being acquired for investment.
In February 1997, Razorfish issued under its 1997 Stock Option Plan an
aggregate of 65,911 shares of Common Stock to seven employees pursuant to the
terms of a Stock Grant Agreement entered into by Razorfish and each such
employee. These shares were issued to each employee in consideration for
services rendered to Razorfish by such employee. Exemption from registration
for this transaction was claimed pursuant to Rule 701 of the Securities Act.
Additionally, since February 24, 1997, Razorfish has granted stock options
to certain of its employees and consultants pursuant to its 1997 Stock Option
and Incentive Plan. Such grants were made in reliance on Rule 701 promulgated
under the Securities Act. As of April 1, 1999, the Registrant had granted
options to purchase 647,995 shares of Common Stock to employees and consultants
pursuant to the 1997 Stock Option and Incentive Plan.
Item 16. Exhibits and Financial Statement Schedules.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of Razorfish, Inc. (the "Company"), as
amended.**
3.2 By-laws of the Company.**
4.1 Stockholders Agreement, dated as of October 1, 1998, among the
Company, Spray Ventures, Communicade, Jeffrey A. Dachis and Craig M.
Kanarick.**
4.2 Amendment to Stockholders Agreement, dated February 3, 1999, among
the Company, Spray Ventures, Communicade, Jeffrey A. Dachis and
Craig M. Kanarick.**
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
4.3 Registration Rights Agreement, dated March 30, 1999, between the
Company and Communicade Inc.
4.4 Specimen Common Stock Certificate of the Company.*
5.1 Form of Opinion of Morrison & Foerster LLP.
10.1 The Amended and Restated 1997 Stock Option and Incentive Plan.**
10.2 1999 Stock Incentive Plan.**
10.3 Employment Agreement, dated September 18, 1996, between the Company
and Jeffrey A. Dachis.**
10.4 Non-competition Agreement, dated September 18, 1996, between the
Company and Jeffrey A. Dachis.**
10.5 Employment Agreement, dated September 18, 1996, between the Company
and Craig M. Kanarick.**
10.6 Non-competition Agreement, dated September 18, 1996, between the
Company and Craig M. Kanarick.**
10.7 Employment Agreement, dated April 30, 1998, between the Company and
Peter Seidler.**
10.8 Amendment to Employment Agreement, dated November 26, 1998, between
the Company and Peter Seidler.**
10.9 Employment Agreement, dated June 19, 1997, between the Company and
Jean-Philippe Maheu.**
10.10 Employment Agreement, dated June 1, 1997, between the Company and
Evan Orensten.**
10.11 Employment Agreement, dated as of October 1, 1998, between the
Company and Per Bystedt.**
10.12 Employment Agreement, dated as of October 1, 1998, between the
Company and Jonas Svensson.**
Employment Agreement, dated as of October 1, 1998, between the
10.13 Company and Johan Ihrfelt.**
10.14 Lease Agreement, dated October 28, 1996, between the Company and Man
Yun Real Estate Corporation.**
10.15 Lease Agreement, dated April 30, 1997, between the Company and Man
Yun Real Estate Corporation.**
10.16 Lease Agreement, dated December 23, 1998, between C.H.B.I. Razorfish
Limited and The Mayor and Commonalty and Citizens of the City of
London.**
10.17 Lease Agreement, dated March 10, 1998, between J&R Bechelli and
Alpha Online, Inc., as amended by letter dated February 9, 1999.
10.18 Lease Agreement No. 731 100, dated April 12, 1996, between Spray
(f/k/a Spray Interactive Media Agency AB) and Bojner Estate AB
("Bojner") and the English translation thereof.**
10.19 Lease Agreement No. 741 100, dated September 30, 1997, between Spray
(f/k/a Spray Interactive Media AB) and Bojner and the English
translation thereof.**
10.20 Lease Contract No. 01009 001 024 ("Trygg-Hansa Lease"), dated April
30, 1998, between Spray and Trygg-Hansa ("Trygg-Hansa") and the
English translation thereof.**
10.21 Supplement No. 1, dated April 30, 1998, to Trygg-Hansa Lease and the
English translation thereof.**
10.22 Supplement No. 2, dated August 18, 1998, to Trygg-Hansa Lease and
the English translation thereof.**
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
10.23 Personal Guarantee for Premises, dated April 29, 1998, made by Lars
T. Andersson and Per Bystedt in favor of Trygg-Hansa with respect to
Trygg-Hansa Lease and the English translation thereof.**
10.24 Personal Guarantee for Premises, dated April 29, 1998, made by Johan
Ihrfelt and Jonas Svensson in favor of Trygg-Hansa with respect to
Trygg-Hansa Lease and the English translation thereof.**
10.25 Rent Contract Covering Business Premises, dated February 3, 1998,
between Spray Interactive Media AB and DEGI Deutsche Gesellschaft
fur Immobilienfonds mbH and the English translation thereof.**
10.26 Rental Agreement for Office Space No. 910539, dated April 25, 1997,
between Spray Interactive Media Oy and Valtion Kiinteistolaitos
(State Real Property Authority)/Uusimaa ("State Real Property
Authority") and the English translation thereof.**
10.27 Rental Agreement for Office Space No. 910539, dated May 14, 1997,
between Spray Interactive Media Oy and State Real Property Authority
and the English translation thereof.**
10.28 Lease Contract, dated June 17, 1998, between Spray Geelmuyden.Kiese
A.S. and Kongensgate 2 ANS and the English translation thereof.**
10.29 Subscription and Exchange Agreement, dated as of October 1, 1998,
among the Company, Spray Ventures AB and Communicade.**
10.30 First Amendment to the Subscription and Exchange Agreement, dated
November 25, 1998, among the Company, Spray Ventures AB, Spray
Network AB and Communicade.**
10.31 Second Amendment to the Subscription and Exchange Agreement, dated
December 10, 1998, among the Company, Spray Ventures AB, Spray
Network AB and Communicade.**
10.32 Stock Purchase Agreement, dated as of October 1, 1998, among
Communicade, Jeffrey A. Dachis and Craig M. Kanarick.**
10.33 Stock Purchase Agreement, dated October 23, 1998, between
Communicade and Spray Ventures AB.**
10.34 Amendment to Stock Purchase Agreement, dated December 10, 1998,
between Communicade and Spray Ventures AB.**
10.35 Loan Agreement, dated September 18, 1996, between the Company and
Omnicom Finance Inc.**
10.36 Contractor Agreement, dated December 19, 1997, between the Company
and Charles Schwab & Co., Inc.
10.37 Letter Agreement, dated August 8, 1997, between the Company and Road
Runner Group.
10.38 Agreement, dated November 6, 1997, between the Company and AT&T
Corp.
10.39 Agreement, dated May 12, 1997, between the Company and CBS.
22.1 Subsidiaries of the Company.**
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of M.R. Weiser & Co., LLP.
23.3 Consent of Morrison & Foerster LLP (set forth in Exhibit 5.1).
24.1 Power of Attorney.**
27.1 Financial Data Schedule.**
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
II-4
<PAGE>
Item 17. Undertakings.
The Registrant hereby undertakes the following:
(1) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(2) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(4) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required
by the underwriters to permit prompt delivery to each purchaser.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on April 9, 1999.
RAZORFISH, INC.
*
By: _________________________________
Jeffrey A. Dachis
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name and Signatures Title Date
------------------- ----- ----
<C> <S> <C>
* President, Chief April , 1999
____________________________________ Executive Officer,
Jeffrey A. Dachis Treasurer and Director
* Chief Scientist, Vice April , 1999
____________________________________ Chairman of the Board,
Craig M. Kanarick Secretary and Director
* Chairman of the Board and April , 1999
____________________________________ Director
Per I. G. Bystedt
* Vice Chairman of the April , 1999
____________________________________ Board, Executive Vice
Jonas S. A. Svensson President-Corporate
Development and Director
* Chief Financial Officer April , 1999
____________________________________ (Chief Financial and
Susan Black Accounting Officer)
/s/ Carter F. Bales Director April 9, 1999
____________________________________
Carter F. Bales
Director April , 1999
____________________________________
Kjell A. Nordstrom
* Director April , 1999
____________________________________
John Wren
* By power of attorney.
/s/ Michael S. Simon
_______________________________ April 9, 1999
Michael S. Simon
Attorney-in-fact
</TABLE>
S-1
<PAGE>
Report of Independent Public Accountants
To Razorfish, Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements of Razorfish, Inc. and subsidiaries included in this
registration statement and have issued our report thereon dated March 5, 1999.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation and qualifying accounts
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commissions rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
March 5, 1999
S-2
<PAGE>
Report of Independent Public Accountants
To Spray Ventures AB:
We have audited in accordance with generally accepted auditing standards, the
financial statements of Spray Ventures AB and subsidiaries included in this
registration statement and have issued our report thereon dated January 18,
1999. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of valuation and qualifying
accounts is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commissions rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
January 18, 1999
S-3
<PAGE>
Report of Independent Public Accountants
To Spray Network AB:
We have audited in accordance with generally accepted auditing standards, the
financial statements of Spray Network AB and subsidiaries included in this
registration statement and have issued our report thereon dated March 5, 1999.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation and qualifying accounts
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commissions rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
March 5, 1999
S-4
<PAGE>
Schedule II
RAZORFISH, INC. AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged to
Beginning Costs and Other Balance at
of Year Expenses Accounts Deductions End of Year
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
For the fiscal year
ended December 31, 1996
Allowance for doubtful
accounts............. $-- $-- $-- $-- $--
==== ==== ==== ==== ====
For the fiscal year
ended December 31, 1997
Allowance for doubtful
accounts............. $-- $-- $-- $-- $--
==== ==== ==== ==== ====
For the fiscal year
ended December 31, 1998
Allowance for doubtful
accounts............. $-- $ 50 $-- $-- $ 50
==== ==== ==== ==== ====
</TABLE>
S-5
<PAGE>
Schedule II
SPRAY VENTURES AB AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged to
Beginning Costs and Other Balance at
of Year Expenses Accounts Deductions End of Year
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
For the fiscal year
ended December 31, 1996
Allowance for doubtful
accounts............. $-- $-- $-- $-- $--
==== ==== ==== ==== ====
For the eight months
ended August 31, 1997
Allowance for doubtful
accounts............. $-- $ 39 $-- $-- $ 39
==== ==== ==== ==== ====
</TABLE>
S-6
<PAGE>
Schedule II
SPRAY NETWORK AB AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged to
Beginning Costs and Other Balance at
of Year Expenses Accounts Deductions End of Year
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
For the fiscal year
ended December 31, 1996
Allowance for doubtful
accounts............. $-- $-- $-- $-- $--
==== ==== ==== ==== ====
For the fiscal year
ended December 31, 1997
Allowance for doubtful
accounts............. $-- $-- $-- $-- $--
==== ==== ==== ==== ====
For the fiscal year
ended December 31, 1998
Allowance for doubtful
accounts............. $-- $ 24 $-- $-- $ 24
==== ==== ==== ==== ====
</TABLE>
S-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of Razorfish, Inc. (the "Company"), as
amended.**
3.2 By-laws of the Company.**
4.1 Stockholders Agreement, dated as of October 1, 1998, among the
Company, Spray Ventures, Communicade, Jeffrey A. Dachis and Craig M.
Kanarick.**
4.2 Amendment to Stockholders Agreement, dated February 3, 1999, among
the Company, Spray Ventures, Communicade, Jeffrey A. Dachis and
Craig M. Kanarick.**
4.3 Registration Rights Agreement, dated March 30, 1999, between the
Company and Communicade Inc.
4.4 Specimen Common Stock Certificate of the Company.*
5.1 Form of Opinion of Morrison & Foerster LLP.
10.1 The Amended and Restated 1997 Stock Option and Incentive Plan.**
10.2 1999 Stock Incentive Plan.**
10.3 Employment Agreement, dated September 18, 1996, between the Company
and Jeffrey A. Dachis.**
10.4 Non-competition Agreement, dated September 18, 1996, between the
Company and Jeffrey A. Dachis.**
10.5 Employment Agreement, dated September 18, 1996, between the Company
and Craig M. Kanarick.**
10.6 Non-competition Agreement, dated September 18, 1996, between the
Company and Craig M. Kanarick.**
10.7 Employment Agreement, dated April 30, 1998, between the Company and
Peter Seidler.**
10.8 Amendment to Employment Agreement, dated November 26, 1998, between
the Company and Peter Seidler.**
10.9 Employment Agreement, dated June 19, 1997, between the Company and
Jean-Philippe Maheu.**
10.10 Employment Agreement, dated June 1, 1997, between the Company and
Evan Orensten.**
10.11 Employment Agreement, dated as of October 1, 1998, between the
Company and Per Bystedt.**
10.12 Employment Agreement, dated as of October 1, 1998, between the
Company and Jonas Svensson.**
Employment Agreement, dated as of October 1, 1998, between the
10.13 Company and Johan Ihrfelt.**
10.14 Lease Agreement, dated October 28, 1996, between the Company and Man
Yun Real Estate Corporation.**
10.15 Lease Agreement, dated April 30, 1997, between the Company and Man
Yun Real Estate Corporation.**
10.16 Lease Agreement, dated December 23, 1998, between C.H.B.I. Razorfish
Limited and The Mayor and Commonalty and Citizens of the City of
London.**
10.17 Lease Agreement, dated March 10, 1998, between J&R Bechelli and
Alpha Online, Inc., as amended by letter dated February 9, 1999.
10.18 Lease Agreement No. 731 100, dated April 12, 1996, between Spray
(f/k/a Spray Interactive Media Agency AB) and Bojner Estate AB
("Bojner") and the English translation thereof.**
10.19 Lease Agreement No. 741 100, dated September 30, 1997, between Spray
(f/k/a Spray Interactive Media AB) and Bojner and the English
translation thereof.**
10.20 Lease Contract No. 01009 001 024 ("Trygg-Hansa Lease"), dated April
30, 1998, between Spray and Trygg-Hansa ("Trygg-Hansa") and the
English translation thereof.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
10.21 Supplement No. 1, dated April 30, 1998, to Trygg-Hansa Lease and the
English translation thereof.**
10.22 Supplement No. 2, dated August 18, 1998, to Trygg-Hansa Lease and
the English translation thereof.**
10.23 Personal Guarantee for Premises, dated April 29, 1998, made by Lars
T. Andersson and Per Bystedt in favor of Trygg-Hansa with respect to
Trygg-Hansa Lease and the English translation thereof.**
10.24 Personal Guarantee for Premises, dated April 29, 1998, made by Johan
Ihrfelt and Jonas Svensson in favor of Trygg-Hansa with respect to
Trygg-Hansa Lease and the English translation thereof.**
10.25 Rent Contract Covering Business Premises, dated February 3, 1998,
between Spray Interactive Media AB and DEGI Deutsche Gesellschaft
fur Immobilienfonds mbH and the English translation thereof.**
10.26 Rental Agreement for Office Space No. 910539, dated April 25, 1997,
between Spray Interactive Media Oy and Valtion Kiinteistolaitos
(State Real Property Authority)/Uusimaa ("State Real Property
Authority") and the English translation thereof.**
10.27 Rental Agreement for Office Space No. 910539, dated May 14, 1997,
between Spray Interactive Media Oy and State Real Property Authority
and the English translation thereof.**
10.28 Lease Contract, dated June 17, 1998, between Spray Geelmuyden.Kiese
A.S. and Kongensgate 2 ANS and the English translation thereof.**
10.29 Subscription and Exchange Agreement, dated as of October 1, 1998,
among the Company, Spray Ventures AB and Communicade.**
10.30 First Amendment to the Subscription and Exchange Agreement, dated
November 25, 1998, among the Company, Spray Ventures AB, Spray
Network AB and Communicade.**
10.31 Second Amendment to the Subscription and Exchange Agreement, dated
December 10, 1998, among the Company, Spray Ventures AB, Spray
Network AB and Communicade.**
10.32 Stock Purchase Agreement, dated as of October 1, 1998, among
Communicade, Jeffrey A. Dachis and Craig M. Kanarick.**
10.33 Stock Purchase Agreement, dated October 23, 1998, between
Communicade and Spray Ventures AB.**
10.34 Amendment to Stock Purchase Agreement, dated December 10, 1998,
between Communicade and Spray Ventures AB.**
10.35 Loan Agreement, dated September 18, 1996, between the Company and
Omnicom Finance Inc.**
10.36 Contractor Agreement, dated December 19, 1997, between the Company
and Charles Schwab & Co., Inc.
10.37 Letter Agreement, dated August 8, 1997, between the Company and Road
Runner Group.
10.38 Agreement, dated November 6, 1997, between the Company and AT&T
Corp.
10.39 Agreement, dated May 12, 1997, between the Company and CBS.
22.1 Subsidiaries of the Company.**
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of M.R. Weiser & Co., LLP.
23.3 Consent of Morrison & Foerster LLP (set forth in Exhibit 5.1).
24.1 Power of Attorney.**
27.1 Financial Data Schedule.**
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
<PAGE>
EXHIBIT 1.1
3,000,000 Shares
RAZORFISH, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
, 1999
Credit Suisse First Boston Corporation
BancBoston Robertson Stephens Inc.
BT Alex. Brown Incorporated
Lehman Brothers Inc.
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue
New York, NY 10010-3629
Dear Sirs:
1. Introductory. Razorfish, Inc., a Delaware corporation ("Company"),
proposes to issue and sell 3,000,000 shares ("Firm Securities") of its Common
Stock, par value $0.01 per share ("Securities"), and also proposes to issue and
sell to the Underwriters (as defined), at the option of the Underwriters, an
aggregate of not more than 450,000 additional shares ("Optional Securities") of
its Securities as set forth below. The Firm Securities and the Optional
Securities are herein collectively called the "Offered Securities". The Company
hereby agrees with the several Underwriters named in Schedule A hereto
("Underwriters") as follows:
2. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 333-71043) relating to the Offered
Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("Commission") and either (i) has been
declared effective under the Securities Act of 1933 ("Act") and is not
proposed to be amended or (ii) is proposed to be amended by amendment or
post-effective amendment. If such registration statement ("initial
registration statement") has been declared effective, either (i) an
additional registration statement ("additional registration statement")
relating to the Offered Securities may have been filed with the Commission
pursuant to Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, has
become effective upon filing pursuant to such Rule and the Offered
Securities all have been duly registered under the Act pursuant to the
initial registration statement and, if applicable, the additional
registration statement or (ii) such an additional registration statement is
proposed to be filed with the Commission pursuant to Rule 462(b) and will
become effective upon filing pursuant to such Rule and upon such filing the
Offered Securities will all have been duly registered under the Act
pursuant to the initial registration statement and such additional
registration statement. If the Company does not propose to amend the
initial registration statement or if an additional registration statement
has been filed and the Company does not propose to amend it, and if any
post-effective amendment to either such registration statement has been
filed with the Commission prior to the execution and delivery of this
Agreement, the most recent amendment (if any) to each such registration
statement has been declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act
or, in the case of the additional registration statement, Rule 462(b). For
purposes of this Agreement, "Effective Time" with respect to the initial
registration statement or, if filed prior to the execution and delivery of
this Agreement, the additional registration statement means (i) if the
Company has advised the Representatives that it does not propose to amend
such registration statement, the date and time as of which such
<PAGE>
registration statement, or the most recent post-effective amendment thereto
(if any) filed prior to the execution and delivery of this Agreement, was
declared effective by the Commission or has become effective upon filing
pursuant to Rule 462(c), or (ii) if the Company has advised the
Representatives that it proposes to file an amendment or post-effective
amendment to such registration statement, the date and time as of which
such registration statement, as amended by such amendment or post-effective
amendment, as the case may be, is declared effective by the Commission. If
an additional registration statement has not been filed prior to the
execution and delivery of this Agreement but the Company has advised the
Representatives that it proposes to file one, "Effective Time" with respect
to such additional registration statement means the date and time as of
which such registration statement is filed and becomes effective pursuant
to Rule 462(b). "Effective Date" with respect to the initial registration
statement or the additional registration statement (if any) means the date
of the Effective Time thereof. The initial registration statement, as
amended at its Effective Time, including all information contained in the
additional registration statement (if any) and deemed to be a part of the
initial registration statement as of the Effective Time of the additional
registration statement pursuant to the General Instructions of the Form on
which it is filed and including all information (if any) deemed to be a
part of the initial registration statement as of its Effective Time
pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is hereinafter
referred to as the "Initial Registration Statement". The additional
registration statement, as amended at its Effective Time, including the
contents of the initial registration statement incorporated by reference
therein and including all information (if any) deemed to be a part of the
additional registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as the "Additional Registration
Statement". The Initial Registration Statement and the Additional
Registration Statement are herein referred to collectively as the
"Registration Statements" and each individually as a "Registration
Statement". The form of prospectus relating to the Offered Securities, as
first filed with the Commission pursuant to and in accordance with Rule
424(b) ("Rule 424(b)") under the Act or (if no such filing is required) as
included in a Registration Statement, is hereinafter referred to as the
"Prospectus". No document has been or will be prepared or distributed in
reliance on Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (i) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
promulgated thereunder ("Rules and Regulations") and did not include any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading, (ii) on the Effective Date of the Additional Registration
Statement (if any), each Registration Statement conformed, or will conform,
in all material respects to the requirements of the Act and the Rules and
Regulations and did not include, or will not include, any untrue statement
of a material fact and did not omit, or will not omit, to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading and (iii) on the date of this Agreement,
the Initial Registration Statement and, if the Effective Time of the
Additional Registration Statement is prior to the execution and delivery of
this Agreement, the Additional Registration Statement each conforms, and at
the time of filing of the Prospectus pursuant to Rule 424(b) or (if no such
filing is required) at the Effective Date of the Additional Registration
Statement in which the Prospectus is included, each Registration Statement
and the Prospectus will conform, in all material respects to the
requirements of the Act and the Rules and Regulations, and neither of such
documents includes, or will include, any untrue statement of a material
fact or omits, or will omit, to state any material fact required to be
stated therein or necessary to make the statements therein not misleading.
If the Effective Time of the Initial Registration Statement is subsequent
to the execution and delivery of this Agreement: on the Effective Date of
the Initial Registration Statement, the Initial Registration Statement and
the Prospectus will conform in all material respects to the requirements of
the Act and the Rules and Regulations, neither of such documents will
include any untrue statement of a material fact or will omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, and no Additional Registration Statement
has been or will be filed. The two preceding sentences do not apply to
statements in or omissions from a Registration Statement or the Prospectus
based upon written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein, it being
understood and agreed that the only such information is that described as
such in Section 7(b) hereof.
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with
power and authority (corporate and other)
2
<PAGE>
to own its properties and conduct its business as described in the
Prospectus; and the Company is qualified to do business as a foreign
corporation in good standing in all other jurisdictions in which its
ownership or lease of property or the conduct of its business requires such
qualification except where the failure to be so qualified would not have a
material adverse effect on the condition (financial or other), business,
properties or results of operations of the Company and its subsidiaries
taken as a whole ("Material Adverse Effect").
(d) Each subsidiary of the Company has been duly incorporated and is
an existing corporation in good standing under the laws of the jurisdiction
of its incorporation, with power and authority (corporate and other) to own
its properties and conduct its business as described in the Prospectus; and
each subsidiary of the Company is duly qualified to do business as a
foreign corporation in good standing in all other jurisdictions in which
its ownership or lease of property or the conduct of its business requires
such qualification, except where the failure to be so qualified,
individually or in the aggregate, would not have a Material Adverse Effect;
all of the issued and outstanding capital stock of each subsidiary of the
Company has been duly authorized and validly issued and is fully paid and
nonassessable; and the capital stock of each subsidiary owned by the
Company, directly or through subsidiaries, is owned free from liens,
encumbrances and defects.
(e) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized; all outstanding
shares of capital stock of the Company are, and, when the Offered
Securities have been delivered and paid for in accordance with this
Agreement on each Closing Date (as defined below), such Offered Securities
will have been, validly issued, fully paid and nonassessable and will
conform to the description thereof contained in the Prospectus; and the
stockholders of the Company have no preemptive rights with respect to the
Securities.
(f) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that would
give rise to a valid claim against the Company or any Underwriter for a
brokerage commission, finder's fee or other like payment in connection with
this offering.
(g) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to any
securities of the Company owned or to be owned by such person or to require
the Company to include such securities in the securities registered
pursuant to a Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the Company under the
Act.
(h) The Offered Securities have been approved for listing on The
Nasdaq Stock Market's National Market.
(i) No consent, approval, authorization, or order of, or filing with,
any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance and sale of the Offered Securities by the
Company, except such as have been obtained and made under the Act and such
as may be required under state securities laws.
(j) The execution, delivery and performance of this Agreement, and
the issuance and sale of the Offered Securities will not result in a breach
or violation of any of the terms and provisions of, or constitute a default
under, any statute, any rule, regulation or order of any governmental
agency or body or any court, domestic or foreign, having jurisdiction over
the Company or any subsidiary of the Company or any of their properties, or
any agreement or instrument to which the Company or any such subsidiary is
a party or by which the Company or any such subsidiary is bound or to which
any of the properties of the Company or any such subsidiary is subject
(with such exceptions, individually or in the aggregate, as would not have
a Material Adverse Effect), nor will such action conflict with or result in
any violation of, the charter or by-laws of the Company or any such
subsidiary, and the Company has full power and authority to authorize,
issue and sell the Offered Securities as contemplated by this Agreement.
(k) This Agreement has been duly authorized, executed and delivered by
the Company.
3
<PAGE>
(l) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and all
other properties and assets owned by them, in each case free from liens,
encumbrances and defects that would materially affect the value thereof or
materially interfere with the use made or to be made thereof by them; and
the Company and its subsidiaries hold any leased real or personal property
under valid and enforceable leases with no exceptions that would materially
interfere with the use made or to be made thereof by them.
(m) The Company and its subsidiaries possess adequate certificates,
authorities or permits issued by appropriate governmental agencies or
bodies necessary to conduct the business now operated by them, except for
such certificates, authorities or permits the failure of which to possess
would not have a Material Adverse Effect and have not received any notice
of proceedings relating to the revocation or modification of any such
certificate, authority or permit that, if determined adversely to the
Company or any of its subsidiaries, would individually or in the aggregate
have a Material Adverse Effect.
(n) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
could reasonably be expected to have a Material Adverse Effect.
(o) The Company and its subsidiaries own, possess or can acquire on
reasonable terms, adequate trademarks, trade names and other rights to
inventions, know-how, patents, copyrights, confidential information and
other intellectual property (collectively, "intellectual property rights")
necessary to conduct the business now operated by them, or presently used
by them, and have not received any notice of infringement of or conflict
with asserted rights of others with respect to any intellectual property
rights that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a Material
Adverse Effect.
(p) Except as disclosed in the Prospectus, neither the Company nor
any of its subsidiaries is in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any
court, domestic or foreign, relating to the use, disposal or release of
hazardous or toxic substances or relating to the protection or restoration
of the environment or human exposure to hazardous or toxic substances
(collectively, "environmental laws"), owns or operates any real property
contaminated with any substance that is subject to any environmental laws,
is liable for any off-site disposal or contamination pursuant to any
environmental laws, or is subject to any claim relating to any
environmental laws, which violation, contamination, liability or claim
would individually or in the aggregate have a Material Adverse Effect; and
the Company is not aware of any pending investigation which might lead to
such a claim.
(q) There are no pending legal or governmental actions, suits or
proceedings against or affecting the Company, any of its subsidiaries or
any of their respective properties that, if determined adversely to the
Company or any of its subsidiaries, would individually or in the aggregate
have a Material Adverse Effect, or would materially and adversely affect
the ability of the Company to perform its obligations under this Agreement,
or which are otherwise material in the context of the sale of the Offered
Securities; and no such actions, suits or proceedings are to the Company's
knowledge, threatened.
(r) The financial statements included in each Registration Statement
and the Prospectus present fairly the financial position of the Company and
its consolidated subsidiaries as of the dates shown and their results of
operations and cash flows for the periods shown, and except as otherwise
stated in the Registration Statement, such financial statements have been
prepared in conformity with the generally accepted accounting principles in
the United States applied on a consistent basis and the supporting
schedules included in each Registration Statement present fairly the
information required to be stated therein; and the assumptions used in
preparing the pro forma financial statements included in each Registration
Statement and the Prospectus provide a reasonable basis for presenting the
significant effects directly attributable to the transactions or events
described therein, the related pro forma adjustments give appropriate
effect to those assumptions, and the pro forma columns therein reflect the
proper application of those adjustments to the corresponding historical
financial statement amounts.
(s) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has
been no material adverse change, nor any development or event involving a
prospective material adverse change, in the condition (financial
4
<PAGE>
or other), business, properties or results of operations of the Company and
its subsidiaries taken as a whole, and there has been no dividend or
distribution of any kind declared, paid or made by the Company on any class
of its capital stock.
(t) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" as
defined in the Investment Company Act of 1940.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of $ per share,
the respective numbers of shares of Firm Securities set forth opposite the names
of the Underwriters in Schedule A hereto.
The Company will deliver the Firm Securities to the Representatives for the
accounts of the Underwriters, against payment of the purchase price in Federal
(same day) funds by official bank check or checks or wire transfer to an account
at a bank reasonably acceptable to Credit Suisse First Boston Corporation
("CSFBC") drawn to the order of at the office of
, at a.m., New York time, on , or at such other
time not later than seven full business days thereafter as CSFBC and the Company
determine, such time being herein referred to as the "First Closing Date". For
purposes of Rule 15c6-1 under the Securities Exchange Act of 1934, the First
Closing Date (if later than the otherwise applicable settlement date) shall be
the settlement date for payment of funds and delivery of securities for all the
Offered Securities sold pursuant to the offering. The certificates for the Firm
Securities so to be delivered will be in definitive form, in such denominations
and registered in such names as CSFBC requests and will be made available for
checking and packaging at the office of
not later than 10:00 a.m. on the last business day prior to the First Closing
Date.
In addition, upon written notice from CSFBC given to the Company from time
to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase all or less than all of the Optional Securities at the
purchase price per Security to be paid for the Firm Securities. The Company
agrees to sell to the Underwriters the number of shares of Optional Securities
specified in such notice and the Underwriters agree, severally and not jointly,
to purchase such Optional Securities. Such Optional Securities shall be
purchased for the account of each Underwriter in the same proportion as the
number of shares of Firm Securities set forth opposite such Underwriter's name
bears to the total number of shares of Firm Securities (subject to adjustment by
CSFBC to eliminate fractions) and may be purchased by the Underwriters only for
the purpose of covering over-allotments made in connection with the sale of the
Firm Securities. No Optional Securities shall be sold or delivered unless the
Firm Securities previously have been, or simultaneously are, sold and delivered.
The right to purchase the Optional Securities or any portion thereof may be
exercised from time to time and to the extent not previously exercised may be
surrendered and terminated at any time upon notice by CSFBC to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, against payment of
the purchase price therefor in Federal (same day) funds by official bank check
or checks or wire transfer to an account at a bank reasonably acceptable to
CSFBC drawn to the order of , at the office of
. The certificates for the Optional Securities being purchased on each
Optional Closing Date will be in definitive form, in such denominations and
registered in such names as CSFBC requests upon reasonable notice prior to such
Optional Closing Date and will be made available for checking and packaging at
the office of not later than 10:00 a.m.
on the last business day prior to such Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
described in the Prospectus.
5. Certain Agreements of the Company. The Company agrees with the several
Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance with
subparagraph (1) (or, if applicable and if consented to by
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CSFBC, subparagraph (4)) of Rule 424(b) not later than the earlier of (A)
the second business day following the execution and delivery of this
Agreement or (B) the fifteenth business day after the Effective Date of the
Initial Registration Statement. The Company will advise CSFBC promptly of
any such filing pursuant to Rule 424(b). If the Effective Time of the
Initial Registration Statement is prior to the execution and delivery of
this Agreement and an additional registration statement is necessary to
register a portion of the Offered Securities under the Act but the
Effective Time thereof has not occurred as of such execution and delivery,
the Company will file the additional registration statement or, if filed,
will file a post-effective amendment thereto with the Commission pursuant
to and in accordance with Rule 462(b) on or prior to 10:00 p.m., New York
time, on the date of this Agreement or, if earlier, on or prior to the time
the Prospectus is printed and distributed to any Underwriter, or will make
such filing at such later date as shall have been consented to by CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to amend
or supplement the initial or any additional registration statement as filed
or the related prospectus or the Initial Registration Statement, the
Additional Registration Statement (if any) or the Prospectus and will not
effect any such amendment or supplementation without CSFBC's consent; and
the Company will also advise CSFBC promptly of the effectiveness of each
Registration Statement (if its Effective Time is subsequent to the
execution and delivery of this Agreement) and of any amendment or
supplementation of a Registration Statement or the Prospectus and of the
institution by the Commission of any stop order proceedings in respect of a
Registration Statement and will use its reasonable best efforts to prevent
the issuance of any such stop order and to obtain as soon as possible its
lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of which
the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary at any time to
amend the Prospectus to comply with the Act, the Company will promptly
notify CSFBC of such event and will promptly prepare and file with the
Commission, at its own expense, an amendment or supplement which will
correct such statement or omission or an amendment which will effect such
compliance. Neither CSFBC's consent to, nor the Underwriters' delivery of,
any such amendment or supplement shall constitute a waiver of any of the
conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12
months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Date of the Additional Registration
Statement) that will satisfy the provisions of Section 11(a) of the Act.
For the purpose of the preceding sentence, "Availability Date" means the
45th day after the end of the fourth fiscal quarter following the fiscal
quarter that includes such Effective Date, except that, if such fourth
fiscal quarter is the last quarter of the Company's fiscal year,
"Availability Date" means the 90th day after the end of such fourth fiscal
quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (two of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a
prospectus relating to the Offered Securities is required to be delivered
under the Act in connection with sales by any Underwriter or dealer, the
Prospectus and all amendments and supplements to such documents, in each
case in such quantities as CSFBC reasonably requests. The Prospectus shall
be so furnished on or prior to 3:00 p.m., New York time, on the business
day following the later of the execution and delivery of this Agreement or
the Effective Time of the Initial Registration Statement. All other
documents shall be so furnished as soon as available. The Company will pay
the expenses of printing and distributing to the Underwriters all such
documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such U.S. jurisdictions as CSFBC
designates and will continue such qualifications in effect so long as
required to complete the distribution, provided that in connection
therewith the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction.
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(g) During the period of five years from the Effective Date of the
Initial Registration Statement, the Company will furnish to the
Representatives and, upon request, to each of the other Underwriters, as
soon as practicable after the end of each fiscal year, a copy of its annual
report to stockholders for such year; and the Company will furnish to the
Representatives (i) as soon as available, a copy of each report and any
definitive proxy statement of the Company filed with the Commission under
the Securities Exchange Act of 1934 or mailed to stockholders, and (ii)
from time to time, such other information concerning the Company as CSFBC
may reasonably request.
(h) The Company will pay all expenses incident to the performance of
its obligations under this Agreement, for any filing fees and other
expenses (including fees and disbursements of counsel not to exceed
$8,000.00) incurred in connection with qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC
designates and the printing of memoranda relating thereto, for the filing
fee incident to, and the reasonable fees and disbursements of counsel (not
to exceed $8,000.00) to the Underwriters in connection with, the review by
the National Association of Securities Dealers, Inc. of the Offered
Securities, for any travel expenses of the Company's officers and employees
and any other expenses of the Company in connection with attending or
hosting meetings with prospective purchasers of the Offered Securities and
for expenses incurred in distributing preliminary prospectuses and the
Prospectus (including any amendments and supplements thereto) to the
Underwriters.
(i) For a period of 180 days after the date of the initial public
offering of the Offered Securities, the Company will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly,
or file with the Commission a registration statement under the Act relating
to, any additional shares of its Securities or securities convertible into
or exchangeable or exercisable for any shares of its Securities, or
publicly disclose the intention to make any such offer, sale, pledge,
disposition or filing, in each case without the prior written consent of
CSFBC, except grants of employee stock options pursuant to the terms of the
Company's 1997 Stock Option Plan and 1999 Stock Incentive Plan (each as
defined in the Registration Statement) in effect on the date hereof,
issuances of Securities pursuant to the exercise of such options or the
exercise of any other employee stock options outstanding on the date
hereof.
6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated the date
of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if the
Effective Time of the Initial Registration Statement is subsequent to the
execution and delivery of this Agreement, shall be prior to the filing of
the amendment or post-effective amendment to the registration statement to
be filed shortly prior to such Effective Time), of:
(i) Arthur Andersen LLP confirming that they are independent
public accountants within the meaning of the Act and the applicable
published Rules and Regulations thereunder and stating to the effect
that:
(x) in their opinion the consolidated financial statements
and schedules examined by them and included in the Registration
Statements of the Company, Spray Network AB ("Spray Network") and
Spray Ventures AB ("Spray Ventures") comply as to form in all material
respects with the applicable accounting requirements of the Act and
the related published Rules and Regulations; and
(y) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other financial
information contained in the Registration Statements (in each case to
the extent that such dollar amounts, percentages and other financial
information are derived from the general accounting records of the
Company, Spray Network, Spray Ventures and their respective
subsidiaries subject to the internal controls of the Company's
accounting system or are derived directly from such records by
analysis or
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computation) with the results obtained from inquiries, a reading of
such general accounting records and other procedures specified in such
letter and have found such dollar amounts, percentages and other
financial information to be in agreement with such results, except as
otherwise specified in such letter.
(ii) M.R. Weiser & Co. LLP confirming that they are independent public
accountants within the meaning of the Act and the applicable published
Rules and Regulations thereunder and stating to the effect that:
(x) in their opinion the consolidated financial statements
and schedules examined by them and included in the Registration
Statements of Avalanche Systems, Inc. ("Avalanche") comply as to form
in all material respects with the applicable accounting requirements
of the Act and the related published Rules and Regulations; and
(y) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other financial
information contained in the Registration Statements (in each case to
the extent that such dollar amounts, percentages and other financial
information are derived from the general accounting records of
Avalanche and its subsidiaries subject to the internal controls of the
Company's accounting system or are derived directly from such records
by analysis or computation) with the results obtained from inquiries,
a reading of such general accounting records and other procedures
specified in such letter and have found such dollar amounts,
percentages and other financial information to be in agreement with
such results, except as otherwise specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, "Registration Statements" shall mean the initial registration
statement as proposed to be amended by the amendment or post-effective amendment
to be filed shortly prior to its Effective Time, (ii) if the Effective Time of
the Initial Registration Statement is prior to the execution and delivery of
this Agreement but the Effective Time of the Additional Registration is
subsequent to such execution and delivery, "Registration Statements" shall mean
the Initial Registration Statement and the additional registration statement as
proposed to be filed or as proposed to be amended by the post-effective
amendment to be filed shortly prior to its Effective Time, and (iii)
"Prospectus" shall mean the prospectus included in the Registration Statements.
All financial statements and schedules included in material incorporated by
reference into the Prospectus shall be deemed included in the Registration
Statements for purposes of this subsection.
(b) If the Effective Time of the Initial Registration Statement is not
prior to the execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 p.m., New York time, on the date of this
Agreement or such later date as shall have been consented to by CSFBC. If the
Effective Time of the Additional Registration Statement (if any) is not prior to
the execution and delivery of this Agreement, such Effective Time shall have
occurred not later than 10:00 p.m., New York time, on the date of this Agreement
or, if earlier, the time the Prospectus is printed and distributed to any
Underwriter, or shall have occurred at such later date as shall have been
consented to by CSFBC. If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, the
Prospectus shall have been filed with the Commission in accordance with the
Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing
Date, no stop order suspending the effectiveness of a Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted or, to the knowledge of the Company or the Representatives, shall be
threatened by the Commission.
(c) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred (i) any change, or any development or event involving a
prospective change, in the condition (financial or other), business, properties,
results of operations or prospects of the Company or its subsidiaries which, in
the judgment of a majority in interest of the Underwriters including the
Representatives, is material and adverse and makes it impractical or inadvisable
to proceed with completion of the public offering or the sale of and payment for
the Offered Securities; (ii) any downgrading in the rating of any debt
securities of the Company by any "nationally recognized statistical rating
organization" (as defined for purposes of Rule 436(g)
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<PAGE>
under the Act), or any public announcement that any such organization has under
surveillance or review its rating of any debt securities of the Company (other
than an announcement with positive implications of a possible upgrading, and no
implication of a possible downgrading, of such rating); (iii) any suspension or
limitation of trading in securities generally on the New York Stock Exchange, or
any setting of minimum prices for trading on such exchange, or any suspension of
trading of any securities of the Company on any exchange or in the over-the-
counter market; (iv) any banking moratorium declared by U.S. Federal or New York
authorities; or (v) any outbreak or escalation of major hostilities in which the
United States is involved, any declaration of war by Congress or any other
substantial national or international calamity or emergency if, in the judgment
of a majority in interest of the Underwriters including the Representatives, the
effect of any such outbreak, escalation, declaration, calamity or emergency
makes it impractical or inadvisable to proceed with completion of the public
offering or the sale of and payment for the Offered Securities.
(d) The Representatives shall have received opinions, dated such Closing
Date, of Morrison & Foerster LLP, counsel for the Company, to the effect of
paragraphs (i) through (ix) and (xi) below, and Michael S. Simon, general
counsel of the Company, to the effect of paragraphs (vii) and (x) below, that:
(i) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware
and has full corporate power and authority to own its properties and
conduct its business as described in the Prospectus. The Company is
duly qualified to transact business as a foreign corporation in each
jurisdiction in which the conduct of its business requires such
qualification, except where the failure to be so qualified would not
have a material adverse effect on the financial condition of the
Company and its subsidiaries, taken as a whole;
(ii) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes the legal, valid and binding
obligation of the Company.
(iii) The Offered Securities delivered on such Closing Date have
been duly authorized and, upon delivery to the Underwriters against
payment therefor in accordance with the terms of this Agreement, will
be validly issued, fully paid and nonassessable and the issuance of
the Offered Securities is not subject to preemptive rights; all other
outstanding shares of the Common Stock of the Company have been duly
authorized, validly issued and are fully paid and nonassessable; the
Offered Securities and all other outstanding shares of common stock of
the Company conform in all material respects to the description
thereof contained under the heading "Description of Capital Stock" in
the Prospectus;
(iv) No authorization, approval, consent or order of, or filing
with, any court or governmental authority or agency is required for
the consummation of the transactions contemplated by this Agreement,
except such as have been obtained under the Act and such as may be
required under state securities or blue sky laws in connection with
the issuance and sale of the Offered Securities by the Company and the
purchase or distribution of the Offered Securities by the
Underwriters;
(v) The execution and delivery of this Agreement and the
performance by the Company of its terms and the issuance and sale of
the Offered Securities by the Company to the Underwriters do not
violate or result in a violation of the certificate of incorporation
or bylaws of the Company or any judgment, order or decree, known to
such counsel, of any court, governmental agency or arbiter, to which
the Company is a party, and, to the knowledge of such counsel, will
not constitute a material breach of the terms, conditions or
provisions of or constitute a default under (i) any statute, rule or
regulation of any governmental agency or body which, in the experience
of such counsel, are normally applicable to transactions of the type
contemplated by this Agreement or (ii) any contract, undertaking,
indenture, instrument or other agreement by which the Company is now
bound or to which it is now a party or to which any of the properties
of the Company is subject;
(vi) The Initial Registration Statement was declared effective
under the Act as of the date and time specified in such opinion, the
Additional Registration Statement (if any) became effective under the
Act as of the date and time (if determinable) specified in
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such opinion, the Prospectus either was filed with the Commission
pursuant to the subparagraph of Rule 424(b) specified in such opinion
on the date specified therein or was included in the Initial
Registration Statement or the Additional Registration Statement (as
the case may be), and, to the knowledge of such counsel, no stop order
suspending the effectiveness of a Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
pending or threatened under the Act, and each Registration Statement,
as of its effective or issue date, complied as to form in all material
respects with the requirements of the Act and the Rules and
Regulations (except as to the financial statements, supporting
schedules, footnotes and other financial and statistical information
included therein, as to which such counsel expresses no opinion);
(vii) In the case of Morrison & Foerster, such counsel has
participated in conferences with the Representatives and with
representatives of the Company and its accountants concerning the
Registration Statement and the Prospectus and have considered the
matters required to be stated therein and the statements contained
therein, although such counsel has not independently verified the
accuracy, completeness or fairness of such statements. Based upon and
subject to the foregoing in the case of Morrison & Foerster, nothing
has come to the attention of such counsel that has lead it to believe
that the Registration Statement, at the time it became effective,
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus or any
amendment or supplement thereto, at the time it was filed with the
Commission pursuant to Rule 424(b) under the Act or as of such Closing
Date, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading (it being understood that such
counsel has not been requested to and does not make any comment in
this paragraph with respect to the financial statements, supporting
schedules, footnotes and other financial and statistical information
contained in the Registration Statement or Prospectus);
(viii) The information in the Prospectus under "Risk Factors--
Our business is subject to developing U.S. and foreign government
regulation of the Internet", "Business--U.S. and foreign government
regulation", "Management--Employee benefit plans", "Description of
Capital Stock--Anti-takeover effects of Delaware law", "Shares
Eligible For Future Sale" and in the Registration Statement under
items 14 and 15, to the extent that they constitute matters of law,
summaries of legal matters, documents or proceedings or legal
conclusions, have been reviewed by such counsel and are correct in all
material respects (it being understood that such counsel need express
no opinion as to the financial statements, supporting schedules,
footnotes and other financial and statistical information contained in
the Registration Statement or Prospectus); and
(ix) There is no contract or other document known to such
counsel of a character required to be described in the Prospectus or
to be filed as an exhibit to the Registration Statement that is not
described or filed as required.
(x) Except as otherwise disclosed in the Registration Statement
and, other than those which have been satisfied or waived, there are
no contracts, agreements or understandings known to such counsel
between the Company and any person granting such person the right to
require the Company to file a registration statement under the Act
with respect to any securities of the Company owned or to be owned by
such person or to require the Company to include such securities in
the securities registered pursuant to the Registration statement or in
any securities being registered pursuant to any other registration
statement filed by the company under the Act;
(xi) To their knowledge, except as disclosed in the Prospectus,
there are no pending legal or governmental actions, suits or
proceedings against or affecting the Company or any of its
subsidiaries or any of their respective properties that, if determined
adversely to the Company or any of its subsidiaries, would constitute
a Material Adverse Effect.
In connection with the opinion referred to above to be delivered to the
Representatives by Michael S. Simon, it is understood and agreed by the
Representatives that, although Mr. Simon
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holds the title of General Counsel of the Company and is licensed to practice
law in the State of New York, his day-to-day responsibilities at the Company
do not involve any legal matters relating to the Company but rather
structuring and negotiating transactions and maintaining relationships
between the Company and its constituents, including its employees, service
providers and clients.
(e) The Representatives shall have received from Cravath, Swaine & Moore,
counsel for the Underwriters, such opinion or opinions, dated such Closing
Date, with respect to the incorporation of the Company, the validity of the
Offered Securities delivered on such Closing Date, the Registration
Statements, the Prospectus and other related matters as the Representatives
may require, and the Company shall have furnished to such counsel such
documents as they request for the purpose of enabling them to pass upon such
matters.
(f) The Representatives shall have received a certificate, dated such
Closing Date, of the President or any Vice President and a principal
financial or accounting officer of the Company in which such officers, to the
best of their knowledge after reasonable investigation, shall state that: the
representations and warranties of the Company in this Agreement are true and
correct; the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied hereunder at or prior to
such Closing Date; no stop order suspending the effectiveness of any
Registration Statement has been issued and no proceedings for that purpose
have been instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of subparagraphs
(1) and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including
payment of the applicable filing fee in accordance with Rule 111(a) or (b)
under the Act, prior to the time the Prospectus was printed and distributed
to any Underwriter; and, subsequent to the date of the most recent financial
statements in the Prospectus, there has been no material adverse change, nor
any development or event involving a prospective material adverse change, in
the condition (financial or other), business, properties, results of
operations or prospects of the Company and its subsidiaries taken as a whole
except as set forth in or contemplated by the Prospectus or as described in
such certificate.
(g) The Representatives shall have received a letter, dated such Closing
Date, from each of Arthur Andersen LLP and M.R. Weiser & Co. LLP which meets
the requirements of subsection (a) of this Section, except that the specified
date referred to in such subsection will be a date not more than three days
prior to such Closing Date for the purposes of this subsection.
(h) Each executive officer and director of the Company shall have
furnished to the Representatives on or before the date hereof a letter
substantially in the form of Exhibit A attached hereto and addressed to the
Representatives relating to sales of shares of Securities or any securities
convertible into or exercisable or exchangeable for such Securities, and each
such letter shall be in full force and effect on the Closing Date.
The Company will furnish the Representatives with such conformed copies of
such opinions, certificates, letters and documents as the Representatives
reasonably request. CSFBC may in its sole discretion waive on behalf of the
Underwriters compliance with any conditions to the obligations of the
Underwriters hereunder, whether in respect of an Optional Closing Date or
otherwise.
7. Indemnification and Contribution. (a) The Company will indemnify and
hold harmless each Underwriter, its partners, directors and officers and each
person, if any, who controls such Underwriter within the meaning of Section 15
of the Act, against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission from
any of such documents in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such
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information furnished by any Underwriter consists of the information described
as such in subsection (b) below.
(b) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company, its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the Act, against any
losses, claims, damages or liabilities to which the Company may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company by such Underwriter through the Representatives specifically for use
therein, and will reimburse any legal or other expenses reasonably incurred by
the Company in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being understood
and agreed that the only such information furnished by any Underwriter consists
of the following information in the Prospectus furnished on behalf of each
Underwriter: the last paragraph at the bottom of the cover page concerning the
terms of the offering by the Underwriters, the over-allotment and stabilization
information contained in the [last paragraph] under the caption "Underwriting",
the concession and reallowance figures appearing in the paragraph under
the caption "Underwriting" and the information contained in the
paragraphs under the caption "Underwriting".
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
subsection (a) or (b) above, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under subsection (a) or (b) above. In case any such action is brought against
any indemnified party and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party), and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party under this Section for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof other than
reasonable costs of investigation. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of any
pending or threatened action in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party unless such settlement includes an unconditional release of
such indemnified party from all liability on any claims that are the subject
matter of such action.
(d) If the indemnification provided for in this Section is unavailable or
insufficient to hold harmless an indemnified party under subsection (a) or (b)
above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in subsection (a) or (b) above (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Securities
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and the Underwriters on the other in connection with
the statements or omissions which resulted in such losses, claims, damages or
liabilities as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
bear to the total underwriting discounts and commissions received by the
Underwriters. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid by an indemnified
party as a result of the losses, claims, damages or liabilities referred to in
the first sentence of this subsection (d) shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any action or claim
12
<PAGE>
which is the subject of this subsection (d). Notwithstanding the provisions of
this subsection (d), no Underwriter shall be required to contribute any amount
in excess of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section shall be in addition
to any liability which the Company may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each director of the Company, to each officer of the Company who
has signed a Registration Statement and to each person, if any, who controls the
Company within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default in
their obligations to purchase Offered Securities hereunder on either the First
or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Company for the purchase of such Offered
Securities by other persons, including any of the Underwriters, but if no such
arrangements are made by such Closing Date, the non-defaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Offered Securities that such defaulting Underwriters
agreed but failed to purchase on such Closing Date. If any Underwriter or
Underwriters so default and the aggregate number of shares of Offered Securities
with respect to which such default or defaults occur exceeds 10% of the total
number of shares of Offered Securities that the Underwriters are obligated to
purchase on such Closing Date and arrangements satisfactory to CSFBC and the
Company for the purchase of such Offered Securities by other persons are not
made within 36 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company, except
as provided in Section 9 (provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement will not
terminate as to the Firm Securities or any Optional Securities purchased prior
to such termination). As used in this Agreement, the term "Underwriter"
includes any person substituted for an Underwriter under this Section. Nothing
herein will relieve a defaulting Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated
pursuant to Section 8 or if for any reason the purchase of the Offered
Securities by the Underwriters is not consummated, the Company shall remain
responsible for the expenses to be paid or reimbursed by it pursuant to Section
5 and the respective obligations of the Company and the Underwriters pursuant to
Section 7 shall remain in effect, and if any Offered Securities have been
purchased hereunder the representations and warranties in Section 2 and all
obligations under Section 5 shall also remain in effect. If the purchase of the
Offered Securities by the Underwriters is not consummated for any reason other
than solely because of the termination of this Agreement pursuant to Section 8
or the occurrence of any event specified in clause (iii), (iv) or (v) of Section
6(c), the Company will reimburse the Underwriters for all out-of-pocket expenses
(including fees and disbursements of counsel) reasonably incurred by them in
connection with the offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and, if sent
to the Underwriters, will be mailed, delivered or telegraphed and confirmed to
the Representatives, c/o Credit Suisse First Boston Corporation, Eleven Madison
Avenue, New York, NY 10010-3629, Attention: Investment Banking Department-
Transactions Advisory Group, or, if sent to the Company, will be mailed,
delivered or telegraphed and confirmed to it at Razorfish, Inc., 107 Grand
Street, Third Floor, New York, NY 10013, Attention: Michael S. Simon, with a
copy to Mark L. Mandel, Morrison & Foerster LLP, 1290
13
<PAGE>
Avenue of the Americas, New York, NY 10104; provided, however, that any notice
to an Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed
and confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective successors and the officers and
directors and controlling persons referred to in Section 7, and no other person
will have any right or obligation hereunder. A purchaser of any Offered
Securities from any Underwriter shall not be deemed a successor or assign solely
by reason of such purchase.
12. Representation of Underwriters. The Representatives will act for the
several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CSFBC shall bind all
the Underwriters.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, without regard to principles
of conflicts of laws.
The Company hereby submits to the non-exclusive jurisdiction of the Federal
and state courts in the Borough of Manhattan in The City of New York in any suit
or proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby.
14
<PAGE>
If the foregoing is in accordance with the Representatives' understanding of
our agreement, kindly sign and return to the Company one of the counterparts
hereof, whereupon it will become a binding agreement between the Company and the
several Underwriters in accordance with its terms.
Very truly yours,
Razorfish, Inc.,
By
------------------------------
Name:
Title:
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
BANCBOSTON ROBERTSON STEPHENS INC.
BT ALEX. BROWN INCORPORATED
LEHMAN BROTHERS INC.
Acting on behalf of themselves and as the
Representatives of the several
Underwriters
BY CREDIT SUISSE FIRST BOSTON CORPORATION,
By
----------------------------------
Name:
Title:
15
<PAGE>
SCHEDULE A
Number of
Underwriter Firm Securities
----------- ---------------
Credit Suisse First Boston Corporation...........
BancBoston Robertson Stephens Inc................
BT Alex. Brown Incorporated......................
Lehman Brothers Inc..............................
---------
Total...................................... 3,000,000
=========
16
<PAGE>
Exhibit A
[The undersigned executive officer or director]
, 1999
Razorfish, Inc.
107 Grand Street, Third Floor
New York, NY 10013
Credit Suisse First Boston Corporation
BancBoston Robertson Stephens Inc.
BT Alex. Brown Incorporated
Lehman Brothers Inc.
As Representatives of the Several Underwriters
c/o Credit Suisse First Boston Corporation
Eleven Madison Avenue
New York, NY 10010-3629
Ladies and Gentlemen:
As an inducement to the Underwriters to execute the Underwriting Agreement,
pursuant to which an offering will be made that is intended to result in the
establishment of a public market for the Common Stock, $0.01 par value per share
(the "Securities"), of Razorfish, Inc. (the "Company"), the undersigned hereby
agrees that, for a period of 180 days after the initial public offering (the
"Commencement Date") of the Securities pursuant to the Underwriting Agreement to
which you are or expect to become parties, the undersigned will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, any
shares of Securities or securities convertible into or exchangeable or
exercisable for any shares of Securities, or publicly disclose the intention to
make any such offer, sale, pledge or disposition without the prior written
consent of Credit Suisse First Boston Corporation.
In furtherance of the foregoing, the Company and its transfer agent and
registrar are hereby authorized to decline to make any transfer of shares of
Securities if such transfer would constitute a violation or breach of this
Agreement.
This Agreement shall be binding on the undersigned and the respective
successors, heirs, personal representatives and assigns of the undersigned.
This agreement shall lapse and become null and void if the Commencement Date
shall not have occurred on or before the date that is 180 days after the date of
this Agreement.
Very truly yours
___________________________
Name:
17
<PAGE>
EXHIBIT 4.3
RAZORFISH, INC.
REGISTRATION RIGHTS AGREEMENT
This Agreement is made as of March 12, 1999, by and between Razorfish,
Inc., a Delaware corporation (the "Company"), and Communicade Inc. (the
"Investor").
PREAMBLE
WHEREAS, the Company proposes to sell and issue shares of its Class A
Common Stock, par value $0.01 per share (the "Common Stock") in an initial
public offering; and
WHEREAS, the Investor currently holds 37.75% of the issued and outstanding
shares of Common Stock; and
WHEREAS, as a condition to its approval of the initial public offering, the
Investor has requested that the Company extend to it registration rights as set
forth below.
NOW, THEREFORE, in consideration of the premises and mutual agreements set
forth herein, the Company and the Investor agree as follows:
Section 1. Definitions. As used in this Agreement, the following terms
-----------
shall have the following meanings:
(a) "Commission" shall mean the Securities and Exchange Commission, or
any other federal agency at the time administering the Securities Act.
(b) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
(c) "Initial Public Offering" shall mean the consummation of a bona
fide, firmly underwritten public offering of Common Stock of the Company,
registered under the Securities Act pursuant to a registration statement on Form
S-1 (or any successor form thereto).
(d) "Register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement, and compliance with applicable
state securities laws of such states in which the Investor notifies the Company
of its intention to offer Registrable Securities.
(e) "Registrable Securities" shall mean all of the following to the
extent the same have not been sold to any other person (i) the Common Stock held
by Communicade on the date hereof; or (ii) stock issued in respect of stock
referred to in (i) above in any reorganization; or
<PAGE>
(iii) stock issued in respect of the stock referred to in (i) or (ii) as a
result of a stock split, stock dividend, recapitalization or combination.
(f) "Rule 144" shall mean Rule 144 under the Securities Act or any
successor or similar rule as may be enacted by the Commission from time to time.
(g) "Securities Act" shall mean the Securities Act of 1933, as amended,
or any similar federal statute and the rules and regulations thereunder, all as
the same shall be in effect at the time.
(h) "10% Option Shares" shall mean the shares of Common Stock acquired
on the exercise of the option granted to the Investor pursuant to the
Stockholders Agreement, dated as of October 1, 1998, among the Investor, Spray
Ventures AB, Jeff Dachis, Craig Kanarick and the Company.
Section 2. Demand Registration.
-------------------
(a) Subject to Section 10, if the Company shall receive from the
Investor a written request that the Company effect any registration with respect
to any outstanding Registrable Securities held by the Investor, the Company
shall as soon as practicable use its best efforts to register all Registrable
Securities which the Investor requests to be registered; provided, that the
Company shall not be obligated to file a registration statement pursuant to this
Section 2:
(A) prior to the twelve-month anniversary of the Initial
Public Offering;
(B) which would result in the registration of a greater number
of the 10% Option Shares than the Investor would then be able to sell within a
three-month period pursuant to Rule 144;
(C) within 90 days following the effective date of any
registered offering of the Company's securities to the general public;
(D) if, at the time of such request, the Investor is able to
immediately dispose of all of its Registrable Securities pursuant to the
provisions of Rule 144;
(E) if the Company has effected such a registration within the
previous nine-month period; or
(F) after the Company has effected five such registrations
pursuant to this Section 2 and such registrations have been declared or ordered
effective.
Subject to the foregoing clauses (A) through (F), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practical, but in any event within thirty (30) days
(ninety (90) days in the event the Company is not eligible to use Form S-3 or
any successor form thereto) after receipt of the request of the Investor and
shall use reasonable best efforts to have such registration statement declared
effective by the
2
<PAGE>
Commission within thirty (30) days (ninety (90) days in the event the Company is
not eligible to use Form S-3 or any successor form thereto) after filing whether
or not all Registrable Securities requested to be registered can be included;
provided, however, that if the Company shall furnish to the Investor a
certificate signed by the President of the Company stating that in the good-
faith judgment of the Board of Directors it would be seriously detrimental to
the Company and its shareholders for such registration statement to be filed
within such thirty-day (30-day) or ninety-day (90-day) period, as applicable,
and it is therefore essential to defer the filing of such registration
statement, the Company shall have an additional period of not more than ninety
(90) days after the expiration of the initial period within which to file such
registration statement; provided, that during such time the Company may not file
a registration statement for securities to be issued and sold for its own
account.
(b) If the Investor intends to distribute the Registrable Securities
covered by its request by means of an underwriting, it shall so advise the
Company as a part of its request. In such event or if an underwriting is
required by subsection 2(c), if so requested in writing by the Company, the
Investor shall negotiate with an underwriter selected by the Investor with the
consent of the Company (such consent not to be unreasonably withheld) with
regard to the underwriting of such requested registration. The Company and the
Investor shall enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting. Notwithstanding any
other provision of this Section 2, if the managing underwriter advises the
Company in writing that marketing factors require a limitation of the number of
shares to be underwritten, the Company shall so advise the Investor, and the
number of shares of Registrable Securities that may be included in the
registration and underwriting shall be reduced accordingly; provided, however,
--------
that securities of other holders to be included in such registration statement
as a result of piggyback registration rights as well as any securities to be
offered by the Company, its officers and employees shall be excluded from the
registration statement prior to the exclusion of any Registrable Securities held
by the Investor. Any Registrable Securities which are excluded from the
underwriting by reason of the underwriter's marketing limitation shall be
withdrawn from such registration.
Section 3. Piggyback Registration.
----------------------
(a) Subject to Section 10, if at any time following the twelve-month
anniversary of the acquisition of the 10% Option Shares, the Company shall
determine to register any of its securities, for its own account or the account
of any of its security holders, other than a registration relating solely to
employee benefit plans, or a registration relating solely to an SEC Rule 145
transaction, a transaction relating solely to the sale of debt or convertible
debt instruments or a registration on any form (other than Form S-1, S-2 or S-3,
or their successor forms) which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of Registrable Securities, the Company will:
(i) give the Investor written notice thereof as soon as
practicable but in no event less than 15 days prior to filing the registration
statement; and
3
<PAGE>
(ii) include in such registration and in any underwriting
involved therein, all the Registrable Securities specified in a written request
of the Investor made within fifteen (15) days after receipt of such written
notice from the Company, except as set forth in subsection (b) below.
(b) If the registration is for a registered public offering involving
an underwriting, the Company shall so advise the Investor as a part of the
written notice given pursuant to subsection 3(a)(i). In such event, the right of
the Investor to registration pursuant to this Section 3 shall be conditioned
upon the Investor's participation in such underwriting and the inclusion of the
Investor's Registrable Securities in the underwriting to the extent provided
herein. The Company, the Investor, and all other holders distributing their
securities through such underwriting shall enter into an underwriting agreement
in customary form with the underwriter or underwriters selected for such
underwriting by the Company. Notwithstanding any other provision of this Section
3, if the managing underwriter determines that marketing factors require a
limitation of the number of shares to be underwritten, the managing underwriter
may limit the number of Registrable Securities and other securities held by
holders of piggyback registration rights to be included in the registration and
underwriting. The Company shall so advise the Investor and the other holders
distributing their securities through such underwriting pursuant to piggyback
registration rights similar to this Section 3, and the number of shares of
Registrable Securities and other securities that may be included in the
registration and underwriting shall be allocated among the Investor and other
holders in proportion, as nearly as practicable, to the respective amounts of
Registrable Securities held by the Investor and other securities held by other
holders at the time of filing the registration statement. If the Investor
disapproves of the terms of any such underwriting, it may elect to withdraw
therefrom by written notice to the Company and the managing underwriter. Any
Registrable Securities excluded or withdrawn from such underwriting shall be
withdrawn from such registration.
(c) The Registrable Securities to be registered pursuant to this
Section 3 shall be limited so as not to result in the registration of a greater
number of the 10% Option Shares than the Investor would then be able to sell
within a three-month period pursuant to Rule 144.
Section 4. Nonpublic Information. Any other provisions of this
---------------------
agreement to the contrary notwithstanding, the Company's obligation to file a
registration statement, or cause such registration statement to become and
remain effective, shall be suspended for a period not to exceed 60 days (and for
periods not exceeding, in the aggregate, 120 days in any 24-month period) if
there exists at the time material non-public information relating to the Company
which, in the reasonable opinion of the Company or its counsel, should not be
disclosed.
Section 5. Expenses of Registration.
------------------------
(a) All of the following fees and expenses shall be borne by the
Investor; (i) all out-of-pocket expenses incurred by the Company in connection
with registrations pursuant to Section 2, including without limitation all
registration, filing and qualification fees, printing expenses, fees and
disbursements of counsel for the Company and expenses of any special audits of
the Company's financial statements incidental to or required by such
registration, (ii) all out-
4
<PAGE>
of-pocket expenses incurred by the Company in connection with registrations
pursuant to Section 3 due solely to the inclusion of the Registrable Securities
in such registration, and (iii) all underwriters' fees, discounts or commissions
relating to Registrable Securities, fees of legal counsel for the Investor or
any stock transfer tax or other tax imposed on the Investor.
(b) Except as provided in Sections 5(a)(ii) and 5(a)(iii) above, the
Company shall bear all expenses incurred in connection with registrations
pursuant to Section 3 hereof.
Section 6. Registration Procedures. In the case of each registration
-----------------------
effected by the Company pursuant to this Agreement, the Company will keep the
Investor advised in writing as to the initiation of each registration and as to
the completion thereof. The Company will:
(a) keep such registration continuously effective for periods of ninety
(90) days or such reasonable period necessary to permit the Investor to complete
the distribution described in the registration statement relating thereto,
whichever first occurs;
(b) promptly prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to comply with the provisions of the Securities
Act, and to keep such registration statement effective for that period of time
specified in Section 6(a) above;
(c) furnish such number of prospectuses and other documents incident
thereto as the Investor from time to time may reasonably request;
(d) use reasonable best efforts to obtain the withdrawal of any order
suspending the effectiveness of a registration statement, or the lifting of any
suspension of the qualification of any of the Registrable Securities for sale in
any jurisdiction, at the earliest possible moment;
(e) register or qualify such Registrable Securities for offer and sale
under the securities or blue sky laws of such jurisdictions as the Investor or
any underwriter reasonably requires, and keep such registration or qualification
effective during the period set forth in Section 6(a) above, provided that
--------
the Company shall not be required to register or qualify such Registrable
Securities in any jurisdiction in which the Company would be required to execute
a general consent to service of process in effecting such registration;
(f) cause all Registrable Securities covered by such registrations to
be listed on each securities exchange, including NASDAQ, on which similar
securities issued by the Company are then listed; and
(g) cause its accountants to issue to the underwriter, if any, or the
Investor, if there is no underwriter, comfort letters and updates thereof, in
customary form and covering matters of the type customarily covered in such
letters with respect to underwritten offerings;
(h) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the Investor or
the underwriters, if any,
5
<PAGE>
reasonably, request in order to expedite or facilitate the disposition of such
Registrable Securities (including, without limitation, effecting a stock split
or a combination of shares);
(i) make available for inspection by the Investor, any underwriter
participating in any disposition pursuant to such registration statement, and
any attorney, accountant or other agent retained by the Investor or underwriter,
all financial and other records, pertinent corporate documents and properties of
the Company, and cause the Company's officers, directors, employees and
independent accountants to supply all information reasonably requested by the
Investor or any such underwriter, attorney, accountant or agent in connection
with such registration statement; and
(j) if the offering is underwritten, at the request of the Investor to
furnish on the date that Registrable Securities are delivered to the
underwriters for sale pursuant to such registration: (i) an opinion dated such
date of counsel representing the Company for the purposes of such registration,
addressed to the underwriters and to the Investor, stating that such
registration statement has become effective under the Securities Act and that
(A) to the best knowledge of such counsel, no stop order suspending the
effectiveness thereof has been issued and no proceedings for that purpose have
been instituted or are pending or contemplated under the Securities Act, (B) the
registration statement, the related prospectus and each amendment or supplement
thereof comply as to form in all material respects with the requirements of the
Securities Act (except that such counsel need not express any opinion as to
financial statements or other financial data contained therein) and (C) to such
other effects as reasonably may be requested by counsel for the underwriters or
by the Investor or its counsel and (ii) a letter dated such date from the
independent public accountants retained by the Company, addressed to the
underwriters and to the Investor, stating that they are independent public
accountants within the meaning of the Securities Act and that, in the opinion of
such accountants, the financial statements of the Company included in the
registration statement or the prospectus, or any amendment or supplement
thereof, comply as to form in all material respects with the applicable
accounting requirements of the Securities Act, and such letter shall
additionally cover such other financial matters (including information as to the
period ending no more than five business days prior to the date of such letter)
with respect to such registration as such underwriters reasonably may request;
and
(k) notify the Investor, at any time a prospectus covered by such
registration statement is required to be delivered under the Securities Act, of
the happening of any event of which it has knowledge as a result of which the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing; and
(l) take such other actions as shall be reasonably requested by the
Investor.
Section 7. Lockup Agreement. In consideration for the Company agreeing
----------------
to its obligations under this Agreement, the Investor agrees in connection with
any registration of the Company's securities (whether or not the Investor is
participating in such registration) upon the
6
<PAGE>
request of the Company and the underwriters managing any underwritten offering
of the Company's securities, not to sell, make any short sale of, loan, grant
any option for the purchase of, or otherwise dispose of any Registrable
Securities (other than those included in the registration) without the prior
written consent of the Company or such underwriters, as the case may be, for
such reasonable period of time from the effective date of such registration as
the Company and the underwriters may specify, so long as all stockholders
holding more than one percent (1%) of the outstanding common stock and all
officers and directors of the Company are bound by a comparable obligation.
Section 8. Information by Investor. The Investor shall promptly
-----------------------
furnish to the Company information regarding the Investor, the distribution
proposed by the Investor and such other information as the Company or its
counsel may request in writing and as shall be required in connection with any
registration referred to herein.
Section 9. Suspension of Sales. The Investor agrees that, upon receipt
-------------------
of any notice from the Company of the happening of any event of the kind
described in Section 6(k) (a "Suspension Notice"), the Investor will discontinue
disposition of Registrable Securities until the Investor's receipt from the
Company of copies of an supplemented or amended prospectus or a notice that the
use of the then current prospectus may be resumed (either, the "Update"), and
have received copies of any additional or supplemental filings which are
incorporated by reference in such prospectus. If so directed by the Company, the
Investor shall deliver to the Company all copies of the prospectus current at
the time of receipt of the Suspension Notice. If the Company shall give a
Suspension notice, the time periods set forth in Section 6(a) shall be extended
by the days during the period from and including the date of the giving of such
notice to and including the date of the Update.
Section 10. Termination of Rights. All rights of the Investor under this
---------------------
Agreement shall terminate at 5:00 p.m. Eastern time on the date five (5) years
after the closing date of the Initial Public Offering.
Section 11. Rule 144 Reporting. (a) With a view to making available to
------------------
the Investor the benefits of Rule 144 which may permit the sale of the
Registrable Securities to the public without registration, the Company agrees at
all times after ninety (90) days after the effective date of the Initial Public
Offering to:
(i) make and keep public information available, as those terms
are understood and defined in Rule 144; and
(ii) use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act.
Section 12. Indemnification.
---------------
(a) In the event of a registration of any of the Registrable Securities
under the Securities Act pursuant to this Agreement, the Company will indemnify
and hold harmless the
7
<PAGE>
Investor, each underwriter of the Registrable Securities thereunder and each
other person, if any, who controls the Investor or underwriter within the
meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which the Investor or such underwriter or
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any registration statement under
which such Registrable Securities were registered under the Securities Act, any
preliminary prospectus or final prospectus contained therein, or any amendment
or supplement thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of any rule or regulation promulgated under the Securities Act or any
state securities law applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration, and
will reimburse the Investor, each of its officers, directors and partners, and
each person controlling the Investor, each such underwriter and each person who
controls such underwriter, for any reasonable legal and any other expenses
incurred in connection with investigating, defending or settling any such claim,
loss, damage, liability or action, provided that the Company will not be liable
in any such case to the extent that any such claim, loss, damage or liability
arises out of or is based on any untrue statement or omission based upon written
information furnished to the Company by the Investor or such underwriter
specifically for use therein.
(b) The Investor will, if Registrable Securities held by or issuable to
the Investor are included in the securities as to which such registration is
being effected, indemnify and hold harmless the Company, each of its directors
and officers, each underwriter, if any, of the Company's securities covered by
such a registration statement, each person who controls the Company and each
underwriter within the meaning of the Securities Act, and each other holder of
securities included in such registration, each of such holder's officers,
directors and partners and each person controlling such holder, against all
claims, losses, expenses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such holders and such directors, officers, partners, persons or
underwriters for any reasonable legal or any other expenses incurred in
connection with investigating, defending or settling any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by the Investor specifically for use therein; provided,
however, the total amount for which the Investor, its officers, directors and
partners, and any person controlling the Investor, shall be liable under this
Section 12(b) shall not in any event exceed the aggregate proceeds received by
the Investor from the sale of Registrable Securities sold by the Investor in
such registration.
8
<PAGE>
(c) Each party entitled to indemnification under this Section 12 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claims as to which indemnity may be sought, and
shall permit the Indemnifying Party to assume the defense of any such claim or
any litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and provided further that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations hereunder, unless such failure resulted in actual detriment to the
Indemnifying Party. The Indemnified Party may participate in such defense at
such party's expense; provided, however, that the Indemnifying Party shall pay
such expense if representation of such Indemnified Party by the counsel retained
by the Indemnifying Party would be inappropriate due to actual or potential
differing interests between the Indemnified Party and any other party
represented by such counsel in such proceeding; provided further that in no
event shall the Indemnifying Party be required to pay the expenses of more than
one law firm per jurisdiction as counsel for the Indemnified Party. The
Indemnifying Party also shall be responsible for the expenses of such defense if
the Indemnifying Party does not elect to assume such defense. No Indemnifying
Party, in the defense of any such claim or litigation, shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability in respect of such claim or litigation, and no Indemnified Party
shall consent to entry of any judgment or settle such claim or litigation
without the prior written consent of the Indemnifying Party, which consents
shall not be unreasonably withheld or delayed.
(d) Notwithstanding the foregoing, to the extent that the provisions on
indemnification contained in the underwriting agreements entered into among the
Investor and other selling holders, the Company and the underwriters in
connection with the underwritten public offering are in conflict with the
foregoing provisions, the provisions in the underwriting agreement shall be
controlling as to the Registrable Securities included in the public offering.
(e) If the indemnification provided for in this Section 12 is held by a
court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any loss, liability, claim, damage or expense referred to therein,
then the Indemnifying Party, in lieu of indemnifying such Indemnified Party
thereunder, shall contribute to the amount paid or payable by such Indemnified
Party as a result of such loss, liability, claim, damage or expense in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party on the one hand and of the Indemnified Party on the other hand in
connection with the statements or omissions which resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and the Indemnified
Party shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission to state a
material fact relates to information supplied by the Indemnifying Party or by
the Indemnified Party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Investor agree that it would not be just and equitable if
9
<PAGE>
contribution pursuant to this Section 12(e) were determined by any method of
allocation which does not take account of the equitable considerations referred
to above. Notwithstanding the foregoing, the amount the Investor shall be
obligated to contribute pursuant to this Section 12(e) shall be limited to an
amount equal to the net proceeds to the Investor of the Restricted Securities
sold pursuant to the registration statement which gives rise to such obligation
to contribute (less the aggregate amount of any damages which the Investor has
otherwise been required to pay in respect of such loss, claim, damage, liability
or action or any substantially similar loss, claim, damage, liability or action
arising from the sale of such Restricted Securities), provided, however, that no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim for
contribution may be made against another party or parties under this Section,
notify such party or parties from whom contribution may be sought, but the
omission so to notify such party or parties from whom contribution may be sought
shall not relieve such party from any other obligation it or they may have
thereunder or otherwise under this Section, except to the extent that the party
from whom contribution is sought is materially adversely affected by such
failure. No party shall be liable for contribution with respect to any action,
suit, proceeding or claim settled without its prior written consent, which
consent shall not be unreasonably withheld.
(f) The indemnification provided by this Section 12 shall be a
continuing right to indemnification and shall survive the registration and sale
of any securities by the Investor and the expiration or termination of this
Agreement.
Section 13. Miscellaneous.
-------------
(a) Amendments. This Agreement may be amended only by a writing
----------
signed by the Investor and the Company. The Investor hereby consents to future
amendments to this Agreement that permit future investors, other than employees,
officers or directors of the Company, to be made parties hereto, provided that
the rights granted to such future investors are identical or subordinate to the
rights of the Investor hereunder.
(b) Notices, Etc. All notices and other communications required or
-------------
permitted hereunder shall be in writing and may be sent initially by facsimile
transmission and shall be mailed by registered or certified mail, postage
prepaid, or otherwise delivered by hand or by messenger, addressed (a) if to the
Investor, at the Investor's address set forth on the books of the Company, or at
such other address as the Investor shall have furnished to the Company in
writing, or (c) if to the Company, one copy should be sent to the Company's
current address at 107 Grand Street, 3rd Floor, New York, NY 10013, or at such
other address as the Company shall have furnished to the Investor. Each such
notice or other communication shall for all purposes of this Agreement be
treated as effective or having been given when delivered if delivered
personally, if sent by facsimile transmission, when so sent and receipt
acknowledged by an appropriate facsimile receipt, or, if sent by first class,
postage prepaid mail, at the earlier of
10
<PAGE>
its receipt or seventy-two (72) hours after the same has been deposited in a
regularly maintained receptacle for the deposit of the United States mail,
addressed and mailed as aforesaid.
(c) Severability. If any provision of this Agreement shall be held
------------
to be illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any manner
affect or render illegal, invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if any such illegal,
invalid or unenforceable provision were not contained herein.
(d) Dilution. If, and as often as, there is any change in the Common
--------
Stock by way of a stock split, stock dividend, combination or reclassification,
or through a merger, consolidation, reorganization or recapitalization, or by
any other means, appropriate adjustment shall be made in the provisions hereof
so that the rights and privileges granted hereby shall continue with respect to
the Common Stock as adjusted.
(e) Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of New York without regard to principles of conflict
of law.
(f) Counterparts. This Agreement may be executed in any number of
------------
counterparts, all of which shall constitute a single instrument.
11
<PAGE>
IN WITNESS WHEREOF, the Company and the Investor have executed this
agreement in counterparts as of the date first above specified.
The Company
-----------
RAZORFISH, INC.
By:____________________________________
Name:
Title:
The Investor
____________
COMMUNICADE INC.
By:____________________________________
Name:
Title:
12
<PAGE>
[MORRISON & FOERSTER LLP LETTERHEAD]
FORM OF OPINION
April , 1999
Razorfish, Inc.
107 Grand Street, 3rd Floor
New York, NY 10013
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
S-1 filed by Razorfish, Inc., a Delaware corporation (the "Company"), with the
Securities and Exchange Commission on January 22, 1999 (Registration No. 333-
71043), Amendment No. 1 thereto filed on March 12, 1999, Amendment No. 2 thereto
filed on April, 1999 and Amendment No. 3 thereto filed on [ ] [ ], 1999
(collectively, the "Registration Statement"), relating to the registration under
the Securities Act of 1933, as amended, of up to 3,450,000 shares of the
Company's Class A Common Stock, $0.01 par value per share (the "Common Stock"),
(including up to 450,000 shares of Common Stock subject to the underwriters'
over-allotment option). The Common Stock is to be sold to the underwriters
named in the Registration Statement for resale to the public.
As counsel to the Company, we have examined the proceedings taken by
the Company in connection with the issuance and sale by the Company of the
shares of Common Stock.
We are of the opinion that the shares of Common Stock to be offered
and sold by the Company have been duly authorized and, when issued and sold by
the Company in the manner described in the Registration Statement and in
accordance with the resolutions adopted by the Board of Directors of the
Company, will be legally issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the
Registration Statement and further consent to all references to us in the
Registration Statement, the prospectus constituting a part thereof and any
amendments or supplements thereto.
Very truly yours,
Morrison & Foerster LLP
<PAGE>
EXHIBIT 10.17
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. Basic Provisions ("Basic Provisions").
1.1 Parties. This Lease ("Lease"), dated for reference purposes only, March,
1998, is made by and between J & R Bechelli, a California general partnership
("Lessor"), and Alpha Online, Inc., a California corporation, dba Plastic, Inc.
("Lessee") (collectively, the "Parties," or individually a "Party").
1.2 (a) Premises: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 179 11th Street, 2nd Floor, located in
the City of San Francisco, County of San Francisco, State of California, with
zip code ________, as outlined on Exhibit 1 attached hereto ("Premises"). The
"Building" is that certain building containing the Premises and generally
described as (describe briefly the nature of the Building): commercial building
located at 179 11th Street, San Francisco, California. In addition to Lessee's
rights to use and occupy the Premises as hereinafter specified, Lessee shall
have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7
below) as hereinafter specified, but shall not have any rights to the roof,
exterior walls or utility raceways of the Building or to any other buildings in
the Industrial Center. The Premises, the Building, the Common Areas, the land
upon which they are located, along with all other buildings and improvements
thereon, are herein collectively referred to as the "Industrial Center." (Also
see Paragraph 2.)
(b) Parking: No unreserved vehicle parking spaces ("Unreserved
Parking Spaces"); and no reserved vehicle parking spaces ("Reserved Parking
Spaces"). (Also see Paragraph 2.6.)
1.3 Term: 5 years and 0 months ("Original Term") commencing March 20, 1998
("Commencement Date") and ending March 19, 2003 ("Expiration Date"). (Also see
Paragraph 3.) See Paragraph 56
1.4 Early Possession: N/A ("Early Possession Date"). (Also
----------------
see Paragraphs 3.2 and 3.3.)
1.5 Base Rent: $3,750.00 per month ("Base Rent"), payable on the first day
of each month commencing April 1, 1998. (Also see Paragraph 4.)
[_] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum No. 1 attached hereto.
1.6 (a) Base Rent Paid Upon Execution: $3,750 as Base Rent for the period
April 1 April 30, 1998.
(b) Lessee's Share of Common Area Operating Expenses: 26.8% ("Lessee's
Share") as determined by [_] prorata square footage of the Premises as compared
to the total square footage of the Building or [_] other criteria as described
in Addendum ___.
<PAGE>
1.7 Security Deposit: $8,500.00 ("Security Deposit"). (Also see Paragraph
5.)
1.8 Permitted Use: Multimedia/General Office; no residential use
("Permitted Use"). (Also see Paragraph 6.).
1.9 Insuring Party: Lessor is the "Insuring Party." (Also see Paragraph
8.)
1.10 (a) Real Estate Brokers. The following real estate broker(s)
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[X] Stardboard Commercial Realty represents Lessor exclusively ("Lessor's
Broker").
[X] Walker Emerald represents Lessee exclusively ("Lessee's Broker"); or
[_] ____________________ represents both Lessor and Lessee ("Dual Agency").
(Also see Paragraph 15.)
1.11 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by N/A ("Guarantor"). (Also see Paragraph 37.)
-------------------
1.12 Addenda and Exhibits. Attached hereto is an Addendum consisting of
Paragraphs 49 through 56, and Exhibits 1-2, all of which constitute a part of
this Lease.
2. Premises, Parking and Common Areas.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental and/or Common Area Operating
Expenses, is an approximation which Lessor and Lessee agree is reasonable and
the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is
not subject to revision whether or not the actual square footage is more or
less.
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free
of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the Commencement
Date. If a non-compliance with said warranty exists as of the Commencement
Date, Lessor shall, except as otherwise provided in this Lease, promptly after
receipt of written notice from Lessee setting forth with specificity the nature
and extent of such non-compliance, rectify same at Lessor's expense. If Lessee
does not give Lessor written notice of a non-compliance with this warranty
within thirty (30) days after the Commencement Date, correction of that non-
compliance shall be the obligation of Lessee at Lessee's sole cost and expense.
<PAGE>
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants that any improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement Date.
Lessor further warrants to Lessee that Lessor has no knowledge of any claim
having been made by any governmental agency that a violation or violations of
applicable building codes, regulations, or ordinances exist with regard to the
Premises as of the Commencement Date. Said warranties shall not apply to any
Alterations or Utility installations (defined in Paragraph 7.3(a)) made or to be
made by Lessee. If the Premises do not comply with said warranties, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee given within six (6) months following the
Commencement Date and setting forth with specificity the nature and extent of
such compliance, take such action, at Lessor's expense, as may be reasonable or
appropriate to rectify the non-compliance. Lessor makes no warranty that the
Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable
Laws (as defined in Paragraph 2.4).
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has
been advised by the Broker(s) to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, seismic and earthquake requirements,
and compliance with the Americans with Disabilities Act and applicable zoning,
municipal, county, state and federal laws, ordinances and regulations and any
covenants or restrictions of record (collectively, "Applicable Laws") and the
present and future suitability of the Premises for Lessee's intended use; (b)
that Lessee has made such investigation as it deems necessary with reference to
such matters, is satisfied with reference thereto, and assumes all
responsibility therefor as the same relate to Lessee's occupancy of the Premises
and/or the terms of this Lease; and (c) that neither Lessor, nor any of Lessor's
agents, has made any oral or written representations or warranties with respect
to said matters other than as set forth in this Lease.
2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In
such event, Lessee shall, at Lessee's sole cost and expense, correct any non-
compliance of the Premises with said warranties.
2.6 Vehicle Parking. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking.
(a) Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee or Lessee's employees, suppliers, shippers, customers,
contractors or invitees to be loaded, unloaded, or parked in areas other than
those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.6, then Lessor shall have the right, without
notice, in addition to such other
<PAGE>
rights and remedies that it may have, to remove or tow away the vehicle involved
and charge the cost to Lessee, which cost shall be immediately payable upon
demand by Lessor.
2.7 Common Areas--Definition. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Industrial Center and interior utility raceways within the Premises that
are provided and designated by the Lessor from time to time for the general non-
exclusive use of Lessor, Lessee and other lessees of the Industrial Center and
their respective employees, suppliers, shippers, customers, contractors, and
invitees, including loading and unloading areas, trash areas, sidewalks,
walkways, driveways and landscaped areas, if any.
2.8 Common Areas--Lessee's Rights. Lessor hereby grants to Lessee, for
the benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the non-exclusive right
to use, in common with others entitled to such use, the Common Areas as they
exist from time to time, subject to any rights, powers, and privileges reserved
by Lessor under the terms hereof or under the terms of any rules and regulations
or restrictions governing the use of the Industrial Center. Under no
circumstances shall the right herein granted to use the Common Areas be deemed
to include the right to store any property, temporarily or permanently, in the
Common Areas. Any such storage shall be permitted only by the prior written
consent of Lessor or Lessor's designated agent, which consent may be revoked at
any time. In the event that any unauthorized storage shall occur then Lessor
shall have the right, without notice, in addition to such other rights and
remedies that it may have, to remove the property and charge the cost to Lessee,
which cost shall be immediately payable upon demand by Lessor.
2.9 Common Areas--Rules and Regulations. Lessor or such other person(s)
as Lessor may appoint shall have the exclusive control and management of the
Common Areas and shall have the right, from time to time, to establish, modify,
amend and enforce reasonable Rules and Regulations with respect thereto in
accordance with Paragraph 40. Lessee agrees to abide by and conform to all such
Rules and Regulations, and to cause its employees, suppliers, shippers,
customers, contractors and invitees to so abide and conform. Lessor shall not
be responsible to Lessee for the non-compliance with said rules and regulations
by other lessees of the Industrial Center.
2.10 Common Areas--Changes. Lessor shall have the right, in Lessor's sole
discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the Industrial
Center to be a part of the Common Areas;
<PAGE>
(d) To add additional buildings and improvements to the Common Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other changes in,
to or with respect to the Common Areas and Industrial Center as Lessor may, in
the exercise of sound business judgment, deem to be appropriate.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the
Early Possession Date but prior to the Commencement Date, the obligation to pay
Base Rent shall be abated for the period of such early occupancy. All other
terms of this Lease, however (including but not limited to the obligations to
pay Lessee's Share of Common Area Operating Expenses and to carry the insurance
required by Paragraph 8), shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.
3.3 Delay in Possession. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, of if no Early Possession Date is specified, by the
Commencement Date, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease, or the obligations of
Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not,
except as otherwise provided herein, be obligated to pay rent or perform any
other obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. If possession of the Premises is not
delivered to Lessee within sixty (60) days after the Commencement date, Lessee
may, at its option, by notice in writing to Lessor within ten (10) days after
the end of said sixty (60) day period, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder; provided further,
however, that if such written notice of Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect. Except as may be otherwise
provided, and regardless of when the Original Term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee does
not terminate this Lease, as aforesaid, the period free of the obligation to pay
Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the
date of delivery of possession and continue for a period equal to the period
during which the Lessee would have otherwise enjoyed under the terms hereof, but
minus any days of delay caused by the acts, changes or omissions of Lessee.
4. Rent.
4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges, as
the same may be adjusted from time to time, to Lessor in lawful money of the
United States, without offset or deduction, on or before the day on which it is
due under the terms of this Lease. Base Rent and all other rent and charges for
any period during the term hereof which is for less than
<PAGE>
one full month shall be prorated based upon the actual number of days of the
month involved. Payment of Base Rent and other charges shall be made to Lessor
at its address stated herein or to such other persons or at such other addresses
as Lessor may from time to time designate in writing to Lessee. See Paragraph
49.
4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during the
term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "Common Area Operating Expenses" are defined, for purposes of
this Lease, as all costs incurred by Lessor relating to the ownership and
operation of the Industrial Center, including, but not limited to, the
following: See Paragraph 52.
(i) The operation, repair and maintenance, in neat, clean, good
order and condition, of the following:
(aa) The Common Areas, including parking areas, loading and
unloading areas, trash areas, sidewalks, walkways, Common Area lighting
facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, and electricity to service the
Common Areas.
(iii) Trash disposal, property management and security services
and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and repair of Common
Areas.
(v) Any increase above the Base Real Property Taxes (as defined
in Paragraph 10.2(b)) for the Building and the Common Areas.
(vi) Any "Insurance Cost Increase" (as defined in Paragraph 8.1).
(vii) The cost of insurance carried by Lessor with respect to the
Common Areas.
(viii) Any deductible portion of an insured loss concerning the
Building or the Common Areas.
(ix) Any other services to be provided by Lessor that are stated
elsewhere in this Lease to be a Common Area Operating Expense.
<PAGE>
(b) Any Common Area Operating Expenses and Real Property Taxes that are
specifically attributable to the Building or to any other building in the
Industrial Center or to the operation, repair and maintenance thereof, shall be
allocated entirely to the Building or to such other building. However, any
Common Area Operating Expenses and Real Property Taxes that are not specifically
attributable to the Building or to any other building or to the operation,
repair and maintenance thereof, shall be equitably allocated by Lessor to all
buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon
Lessor to either have said improvements or facilities or to provide those
services unless the Industrial Center already has the same, Lessor already
provides the services, or Lessor has agreed elsewhere in this Lease to provide
the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be payable
by Lessee within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time of Lessee's Share of annual
Common Area Operating Expenses and the same shall be payable monthly or
quarterly, as Lessor shall designate, during each 12-month period of the Lease
term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to
Lessee within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual Common Area
Operating Expenses incurred during the preceding year. If Lessee's payments
under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as
indicated on said statement, Lessor shall be credited the amount of such over-
payment against Lessee's Share of Common Area Operating Expenses next becoming
due. If Lessee's payments under this Paragraph 4.2(d) during said preceding year
were less than Lessee's Share as indicated on said statement, Lessee shall pay
to Lessor the amount of the deficiency within ten (10) days after delivery by
Lessor to Lessee of said statement.
5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefor
deposit monies with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional monies with Lessor as an addition to the Security Deposit so that the
total amount of the Security Deposit shall at all times bear the same proportion
to the then current Base Rent as the initial Security Deposit bears to the
initial Base Rent set forth in Paragraph 1.5. Lessor shall not be required to
keep all or any part of the Security Deposit separate from its general accounts.
Lessor shall, at the expiration or earlier termination of the term hereof and
after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option,
to the last assignee, if any, of Lessee's interest herein) that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed in writing by
<PAGE>
Lessor, no part of the Security Deposit shall be considered to be held in trust,
to bear interest or other increment for its use, or to be prepayment for any
monies to be paid by Lessee under this Lease. See paragraph 51.
6. Use.
6.1 Permitted Use.
(a) Lessee shall use and occupy the Premises only for the Permitted
Use set forth in Paragraph 1.8 and for no other purpose. Lessee shall not use or
permit the use of the Premises in a manner that is unlawful, creates waste or a
nuisance, or that disturbs owners and/or occupants of, or causes damage to the
Premises or neighboring premises or properties.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance"
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment, or the Premises; (ii) regulated or monitored by any governmental
authority; or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products or by-products thereof. Lessee
shall not engage in any activity in or about the Premises which constitutes a
Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Requirements (as defined in
Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any
above or below ground storage tank, (ii) the generation, possession, storage,
use, transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority, and (iii) the presence
in, on or about the Premises of a Hazardous Substance with respect to which any
Applicable Laws require that a notice be given to persons entering or occupying
the Premises or neighboring properties. Notwithstanding the foregoing, Lessee
may, without Lessor's prior consent, but upon notice to Lessor and in compliance
with all Applicable Requirements, use any ordinary and customary materials
reasonably required to be used by Lessee in the normal course of the Permitted
Use, so long as such use is not a Reportable Use and does not expose the
Premises or neighboring properties to any meaningful risk of contamination or
damage or expose Lessor to any liability therefor. In addition, Lessor may (but
without any obligation to do so) condition its consent to any Reportable Use of
any Hazardous Substance by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefor, including but not limited to
the installation (and, at Lessor's option, removal on or before Lease expiration
or earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof.
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(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises or the Building, other than as previously consented to by
Lessor, Lessee shall immediately give Lessor written notice thereof, together
with a copy of any statement, report, notice, registration, application, permit,
business plan, license, claim, action, or proceeding given to, or received from,
any governmental authority or private party concerning the presence, spill,
release, discharge of, or exposure to, such Hazardous Substance, including but
not limited to all such documents as may be involved in any Reportable Use
involving the Premises. Lessee shall not cause or permit any Hazardous Substance
to be spilled or released in, on, under or about the Premises (including,
without limitation, through the plumbing or sanitary sewer system).
(c) Indemnification. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's
obligations under this Paragraph 6.2(c) shall include, but not be limited to,
the effects of any contamination or injury to person, property or the
environment created or suffered by Lessee, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances, unless specifically so agreed by Lessor in writing at the
time of such agreement.
6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's sole
cost and expense, fully, diligently and in a timely manner, comply with all
"Applicable Requirements," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information, including
but not limited to permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediately upon receipt, notify Lessor in
writing (with copies of any documents involved) of any threatened or actual
claim, notice, citation, warning, complaint or report pertaining to or involving
failure by Lessee or the Premises to comply with any Applicable Requirements.
6.4 Inspection; Compliance with Law. Lessor, Lessor's agents, employees,
contractors and designated representatives, and the holders of any mortgages,
deeds of trust or ground leases on the Premises ("Lenders") shall have the right
to enter the Premises at any time in the case of an emergency, and otherwise at
reasonable times, for the purpose of inspecting the
<PAGE>
condition of the Premises and for verifying compliance by Lessee with this Lease
and all Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall
be entitled to employ experts and/or consultants in connection therewith to
advise Lessor with respect to Lessee's activities, including but not limited to
Lessee's installation, operation, use, monitoring, maintenance, or removal of
any Hazardous Substance on or from the Premises. The costs and expenses of any
such inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or to be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. Maintenance, Repairs, Utility Installations, Trade Fixtures and
Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
part thereof in good order, condition and repair (whether or not such portion of
the Premises requiring repair, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the Premises), including, without limiting the generality
of the foregoing, all equipment or facilities specifically serving the Premises,
such as plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire hose connections if
within the Premises, fixtures, interior walls, interior surfaces of exterior
walls, ceilings, floors, windows, doors, plate glass, and skylights, but
excluding any items which are the responsibility of Lessor pursuant to Paragraph
7.2 below. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair. See Paragraph 52.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance for
and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation system
for the Premises. However, Lessor reserves the right, upon notice to Lessee, to
procure and maintain the contract for the heating, air conditioning and
ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor,
upon demand, for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case no
notice shall be required), perform such obligations on Lessee's behalf, and put
the Premises in good order, condition and repair, in accordance with Paragraph
13.2 below.
<PAGE>
7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement
pursuant to Paragraph 4.2, shall keep in good order, condition and repair the
foundations, exterior walls, structural condition of interior bearing walls,
exterior roof, fire sprinkler and/or standpipe and hose (if located in the
Common Areas) or other automatic fire extinguishing system including fire alarm
and/or smoke detection systems and equipment, fire hydrants, parking lots,
walkways, parkways, driveways, landscaping, fences, signs and utility systems
serving the Common Areas and all parts thereof, as well as providing the
services for which there is a Common Area Operating Expense pursuant to
Paragraph 4.2. Lessor shall not be obliged to paint the exterior or interior
surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or
replace windows, doors or plate glass of the Premises. Lessee expressly waives
the benefit of any statute now or hereafter in effect which would otherwise
afford Lessee the right to make repairs at Lessor's expense or to terminate this
Lease because of Lessor's failure to keep the Building, Industrial Center or
Common Areas in good order, condition and repair.
7.3 Utility Installations, Trade Fixtures, Alterations. See Paragraph 54
and Exhibit 2.
(a) Definitions; Consent Required. The term "Utility Installations"
is used in this Lease to refer to all air lines, power panels, electrical
distribution, security, fire protection systems, communications systems,
lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures"
shall mean Lessee's machinery and equipment which can be removed without doing
material damage to the Premises. The term "Alterations" shall mean any
modification of the improvements on the Premises which are provided by Lessor
under the terms of this Lease, other than Utility Installations or Trade
Fixtures. "Lessee-Owned Alterations and/or Utility Installations" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be
made any Alterations or Utility Installations in, on, under or about the
Premises without Lessor's prior written consent. Lessee may, however, make non-
structural Utility Installations to the interior of the Premises (excluding the
roof) without Lessor's consent but upon notice to Lessor, so long as they are
not visible from the outside of the Premises, do not involve puncturing,
relocating or removing the roof or any existing walls, or changing or
interfering with the fire sprinkler or fire detection systems and the cumulative
cost thereof during the term of this Lease as extended does not exceed
$2,500.00.
(b) Consent. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. All consents given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and
<PAGE>
workmanlike manner, with good and sufficient materials, and be in compliance
with all Acceptable Requirements. Lessee shall promptly upon completion thereof
furnish Lessor with as-built plans and specifications therefor. Lessor may (but
without obligation to do so) condition its consent to any requested Alteration
or Utility Installation that costs $2,500.00 or more upon Lessee's providing
Lessor with a lien and completion bond in an amount equal to one and one-half
times the estimated cost of such Alteration or Utility Installation.
(c) Lien Protection. Lessee shall pay when due all claims for labor
or materials furnished or alleged to have been furnished to or for Lessee at or
for use on the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on, or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided by law. If
Lessee shall, in good faith, contest the validity of any such lien, claim or
demand, then Lessee shall, at its sole expense, defend and protect itself,
Lessor and the Premises against the same and shall pay and satisfy any such
adverse judgment that may be rendered thereon before the enforcement thereof
against the Lessor or the Premises. If Lessor shall require, Lessee shall
furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one
and one-half times the amount of such contested lien claim or demand,
indemnifying Lessor against liability for the same, as required by law for the
holding of the Premises free from the effect of such lien or claim. In addition,
Lessor may require Lessee to pay Lessor's attorneys' fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so.
7.4 Ownership, Removal, Surrender, and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal and
to cause Lessee to become the owner thereof as hereinafter provided in this
Paragraph 7.4, all Alterations and Utility Installations made to the Premises by
Lessee shall be the property of and owned by Lessee, but considered a part of
the Premises. Lessor may, at any time and at its option, elect in writing to
Lessee to be the owner of all or any specified part of the Lessee-Owned
Alterations and Utility Installations. Unless otherwise instructed per
Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility
Installations shall, at the expiration or earlier termination of this Lease,
become the property of Lessor and remain upon the Premises and be surrendered
with the Premises by Lessee.
(b) Removal. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee-Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding that their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises by the
end of the last day of the Lease term or any earlier termination date, clean and
free of debris and in good operating order, condition and state of repair,
ordinary wear and tear excepted. Ordinary wear and tear shall not include any
damage or deterioration that would have been prevented by good maintenance
practice or by Lessee performing all of its obligations under this Lease. Except
as otherwise agreed or specified herein, the Premises, as surrendered, shall
include the
<PAGE>
Alterations and Utility Installations. The obligation of Lessee shall include
the repair of any damage occasioned by the installation, maintenance or removal
of Lessee's Trade Fixtures, furnishings, equipment, and Lessee-Owned Alterations
and Utility Installations, as well as the removal of any storage tank installed
by or for Lessee, and the removal, replacement, or remediation of any soil,
material or ground water contaminated by Lessee, all as may then be required by
Applicable Requirements and/or good practice. Lessee's Trade Fixtures shall
remain the property of Lessee and shall be removed by Lessee subject to its
obligation to repair and restore the Premises per this Lease.
8. Insurance; Indemnity.
8.1 Payment of Premium Increases.
(a) As used herein, the term "Insurance Cost Increase" is defined as
any increase in the actual cost of the insurance applicable to the Building and
required to be carried by Lessor pursuant to Paragraphs 8.2(b), 8.3(a) and
8.3(b) ("Required Insurance"), over and above the Base Premium, as hereinafter
defined, calculated on an annual basis. "Insurance Cost Increase" shall include,
but not be limited to, requirements of the holder of a mortgage or deed of trust
covering the Premises, increased valuation of the Premises, and/or a general
premium rate increase. The term "Insurance Cost Increase" shall not, however,
include any premium increases resulting from the nature of the occupancy of any
other lessee of the Building. If the parties insert a dollar amount in Paragraph
1.9, such amount shall be considered the "Base Premium." If a dollar amount has
not been inserted in Paragraph 1.9 and if the Building has been previously
occupied during the twelve (12) month period immediately preceding the
Commencement Date, the "Base Premium" shall be the annual premium applicable to
such twelve (12) month period. If the Building was not fully occupied during
such twelve (12) month period, the "Base Premium" shall be the lowest annual
premium reasonably obtainable for the Required Insurance as of the Commencement
Date assuming the most nominal use possible of the Building. In no event,
however, shall Lessee be responsible for any portion of the premium cost
attributable to liability insurance coverage in excess of $1,000,000 procured
under Paragraph 8.2(b).
(b) Lessee shall pay any Insurance Cost Increase to Lessor pursuant
to Paragraph 4.2. Premiums for policy periods commencing prior to, or extending
beyond, the term of this Lease shall be prorated to coincide with the
corresponding Commencement Date or Expiration Date.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee, Lessor and any Lender(s) whose names have been provided to
Lessee in writing (as additional insureds) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" endorsement for damage caused by
heat, smoke or fumes form hostile fire.
<PAGE>
The policy shall not contain any intra-insured exclusions as between insured
persons or organizations, but shall include coverage for liability assumed under
this Lease as an "insured-contract" for the performance of Lessee's indemnity
obligation under this Lease. The limits of said insurance required by this Lease
or as carried by Lessee shall not, however, limit the liability of Lessee nor
relieve Lessee of any obligation hereunder. All insurance to be carried by
Lessee shall be primary to and not contributory with any similar insurance
carried by Lessor, whose insurance shall be considered excess insurance only.
(b) Carried by Lessor. Lessor shall also maintain liability insurance
described in Paragraph 8.2(a) above, in addition to and not in lieu of, the
insurance required to be maintained by Lessee. Lessee shall not be named as an
additional insured therein.
8.3 Property Insurance-Building, Improvements and Rental Value.
(a) Building and Improvements. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor, with
loss payable to Lessor and to any Lender(s), insuring against loss or damage to
the Premises. Such insurance shall be for full replacement cost, as the same
shall exist from time to time, or the amount required by any Lender(s), but in
no event more than the commercially reasonable and available insurable value
thereof if, by reason of the unique nature of age of the improvements involved,
such latter amount is less than full replacement cost. Lessee-Owned Alterations
and Utility Installations, Trade Fixtures and Lessee's personal property shall
be insured by Lessee pursuant to Paragraph 8.4. If the coverage is available and
commercially appropriate, Lessor's policy or policies shall insure against all
risks of direct physical loss or damage (except the perils of flood and/or
earthquake unless required by a Lender or included in the Base Premium),
including coverage for any additional costs resulting from debris removal and
reasonable amounts of coverage for the enforcement of any ordinance or law
regulating the reconstruction or replacement of any undamaged sections of the
Building required to be demolished by removed by reason of the enforcement of
any building, zoning, safety or land use laws as the result of a covered loss,
but not including plate glass insurance. Said policy or policies shall also
contain an agreed valuation provision in lieu of any co-insurance clause, waiver
of subrogation, and inflation guard protection causing an increase in the annual
property insurance coverage amount by a factor of not less than the adjusted
U.S. Department of Labor Consumer Price Index for All Urban Consumers for the
city nearest to where the Premises are located.
(b) Rental Value. Lessor shall also obtain and keep in force during
the term of this Lease a policy or policies in the name of Lessor, with loss
payable to Lessor and any Lender(s), insuring the loss of the full rental and
other charges payable by all lessees of the Building to Lessor for one year
(including all Real Property Taxes, insurance costs, all Common Area Operating
Expenses and any scheduled rental increases). Said insurance may provide that in
the event the Lease is terminated by reason of an insured loss, the period of
indemnity for such coverage shall be extended beyond the date of the completion
of repairs or replacement of the Premises, to provided for one full year's loss
of rental revenues from the date of any such loss. Said insurance shall contain
an agreed valuation provision in lieu of any co-insurance clause, and the amount
of coverage shall be adjusted annually to reflect the projected rental income.
Real Property Taxes, insurance premium costs and other expenses, if any,
otherwise payable, for the
<PAGE>
next 12-month period. Common Area Operating Expenses shall include any
deductible amount in the event of such loss.
(c) Adjacent Premises. Lessee shall pay for any increase in the
premiums for the property insurance of the Building and for the Common Areas or
other buildings in the Industrial Center if said increase is caused by Lessee's
acts, omission, use or occupancy of the Premises.
(d) Lessee's Improvements. Since Lessor is the Insuring Party, Lessor
shall not be required to Insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at Lessor's option,
by endorsement to a policy already carried, maintain insurance coverage on all
of Lessee's personal property, Trade Fixtures and Lessee-Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by Lessor as the Insuring Party under Paragraph 8.3(a). such insurance
shall be full replacement cost coverage with a deductible not to exceed $1,000
per occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of personal property and the restoration of Trade Fixtures and
Lessee-Owned Alterations and Utility Installations. Upon request from Lessor,
Lessee shall provide Lessor with written evidence that such insurance is in
force.
8.5 Insurance Policies. Insurance required hereunder shall be in companies
duly licensed to transact business in the state where the Premises are located,
and maintaining during the policy term a "General Policyholders Rating" of at
least B+, V, or such other rating as may be required by a Lender, as set forth
in the most current issue of "Best's Insurance Guide." Lessee shall not do or
permit to be done anything which shall invalidate the insurance policies
referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor,
within seven (7) days after the earlier of the Early Possession Date or the
Commencement Date, certified copies of, or certificates evidencing the existence
and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such
policy shall be cancelable or subject to modification except after thirty (30)
days' prior written notice to Lessor. Lessee shall at least thirty (30) days
prior to the expiration of such policies, furnish Lessor with evidence of
renewals or "insurance binders" evidencing renewal thereof, or Lessor may order
such insurance and charge the cost thereof to Lessee, which amount shall be
payable by Lessee to Lessor upon demand.
8.6 Waiver of Subrogation. Without affecting any other rights or remedies,
Lessee and Lessor each hereby release and relieve the other, and waive their
entire right to recover damages (whether in contract or in tort) against the
other, for loss or damage to their property arising out of or incident to the
perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
<PAGE>
8.7 Indemnity. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, loss of permits, attorneys' and consultants'
fees, expenses and/or liabilities arising out of, involving, or in connection
with, the occupancy of the Premises by Lessee, the conduct of Lessee's business,
any act, omission or neglect of Lessee, its agents, contractors, employees or
invitees, and out of any Default or Breach by Lessee in the performance in a
timely manner or any obligation on Lessee's part to be performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or preceding involved therein, and whether or
not (in the case of claims made against Lessor) litigated and/or reduced to
judgment. In case any action or proceeding be brought against Lessor by reason
of any of the foregoing matters, Lessee upon notice from Lessor shall defend the
same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, and any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or form any other
cause, whether said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause of such
damages or injury or the means of repairing the same is accessible or not.
Lessor shall not be liable for any damages arising from any act or neglect of
any other lessee of Lessor nor from the failure by Lessor to enforce the
provisions of any other lease in the Industrial Center. Notwithstanding Lessor's
negligence or breach of the Lease, Lessor shall under no circumstances be liable
for injury to Lessee's business or for any loss or income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is less than thirty percent (30%) of
the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destruction.
(b) "Premises Total Destruction" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is less than thirty percent (30%) of
the then Replacement Cost of the Premises (excluding Lessee-Owned Alterations
and Utility Installations and Trade Fixtures) immediately prior to such damage
or destruction. In addition, damage or destruction to the Building, other than
Lessee-Owned Alterations and Utility Installations and Trade Fixtures of
<PAGE>
any lessees of the Building, the cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned
Alterations and Utility Installations and Trade Fixtures of any lessees of the
Building) of the Building shall, at the option of Lessor, be deemed to be
Premises Total Destruction.
(c) "Insured Loss" shall mean damage or destruction to the Premises,
other than Lessee-Owned Alterations and Utility Installations and Trade
Fixtures, which was caused by an event required to be covered by the insurance
described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage
limits involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of this occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building closes, ordinances or
laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 Premises Partial Damage--Insured Loss. If Premises Partial Damage that
is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect. In the event, however, that there is a shortage of
insurance proceeds and such shortage is due to the fact that, by reason of the
unique nature of the improvements in the Premises, full replacement cost
insurance coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to fully
restore the unique aspects of the Premises unless Lessee provides Lessor with
the funds to cover same, or adequate assurance thereof, within ten (10) days
following receipt of written notice of such shortage and request therefor. If
Lessor receives said funds or adequate assurance thereof within said ten (10)
day period, Lessor shall complete them as soon as reasonably possible and this
Lease shall remain in full force and effect. If Lessor does not receive such
funds or assurance within said period, Lessor may nevertheless elect by written
notice to Lessee within ten (10) days thereafter to make such restoration and
repair as is commercially reasonable with Lessor paying and shortage in
proceeds, in which case this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within such ten (10) day period,
and if Lessor does not so elect to restore and repair, then this Lease shall
terminate sixty (60) days following the occurrence of the damage or destruction.
Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor for any funds contributed by Lessee to repair any such
damage or destruction. Premises Partial Damage due to flood or earthquake shall
be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that
there may be some insurance coverage, but the net proceeds of any such insurance
shall be made available for the repairs if made by either Party.
9.3 Partial Damage--Uninsured Loss. If Premises Partial Damage that is not
an Insured Loss occurs, unless caused by a negligent or willful act of Lessee
(in which event Lessee shall make the repairs at Lessee's expense and this Lease
shall continue in full force and effect),
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Lessor may at Lessor's option, either (i) repair such damage as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) give written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage of Lessor's desire to terminate this Lease as of the date sixty (60) days
following the date of such notice. In the event Lessor elects to give such
notice of Lessor's intention to terminate this Lease, Lessee shall have the
right within ten (10) days after the receipt of such notice to give written
notice to Lessor of Lessee's commitment to pay for the repair of such damage
totally at Lessee's expense and without reimbursement from Lessor. Lessee shall
provide Lessor with the required funds or satisfactory assurance thereof within
thirty (30) days following such commitment from Lessee. In such event this Lease
shall continue in full force and effect, and Lessor shall proceed to make such
repairs as soon as reasonably possible after the required funds are available.
If Lessee does not give such notice and provide the funds or assurance thereof
within the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 9.7.
9.5 Damage Near End of Term. If at any time during the last six (6) months
of the term of this Lease there is damage for which the cost to repair exceeds
one month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's
option, terminate this Lease effective sixty (60) days following the date of
occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by (a) exercising such option, and (b) providing Lessor with any shortage
in insurance proceeds (or adequate assurance thereof) needed to make the repairs
on or before the earlier or (i) the date which is ten (10) days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or (ii)
the day prior to the date upon which such option expires. If Lessee duly
exercises such option during such period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's expense repair such damage as soon as reasonably possible and
this Lease shall continue in full force and effect. If Lessee fails to exercise
such option and provide such funds or assurance during such period, then this
Lease shall terminate as of the date set forth in the first sentence of this
Paragraph 9.5.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of (i) Premises Partial Damage or (ii) Hazardous
Substance Condition for which Lessee is not legally responsible, the Base Rent,
Common Area Operating Expenses and other charges, if any, payable by Lessee
hereunder for the period during which such damage or condition, its repair,
remediation or restoration continues, shall be abated in proportion to the
degree to which Lessee's use of the Premises is impaired, but not in excess of
<PAGE>
proceeds from insurance required to be carried under Paragraph 8.3(b). Except
for abatement of Base Rent, Common Area Operating Expenses and other charges, if
any, as aforesaid, all other obligations of Lessee hereunder shall be performed
by Lessee, and Lessee shall have no claim against Lessor for any damage suffered
by reason of any such damage, destruction, repair, remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises under the
provisions of this Paragraph 9 and shall not commence, in a substantial and
meaningful way, the repair or restoration of the Premises within ninety (90)
days after such obligation shall accrue, Lessee may, at any time prior to the
commencement of such repair or restoration, give written notice to Lessor and to
any Lenders of which lessee has actual notice of Lessee's election to terminate
this Lease on a date not less than sixty (60) days following the giving of such
notice. If Lessee gives such notice to Lessor and such Lenders and such repair
or restoration is not commenced within thirty (30) days after receipt of such
notice, this Lease shall terminate as of the date specified in said notice. If
Lessor or a Lender commences the repair or restoration of the Premises within
thirty (30) days after the receipt of such notice, this Lease shall continue in
full force and effect. "Commence" as used in this Paragraph 9.6 shall mean
either the unconditional authorization of the preparation of the required plans,
or the beginning of the actual work on the Premises, whichever occurs first.
9.7 Hazardous Substance Conditions. If a Hazardous Substance condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but subject
to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at
Lessor's option either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) if the
estimated cost to investigate and remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $100,000, whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of
the occurrence of such Hazardous Substance Condition to Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the excess costs of (a) investigation and remediation of such
Hazardous Substance Condition to the extent required by Applicable Requirements,
over (b) an amount equal to twelve (12) times the then monthly Base Rent or
$100,000, whichever is greater. Lessee shall provide Lessor with the funds
required of Lessee or satisfactory assurance thereof within thirty (30) days
following said commitment by Lessee. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.8 Termination--Advance Payments. Upon termination of this Lease pursuant
to this Paragraph 9, Lessor shall return to Lessee any advance payment made by
Lessee to Lessor
<PAGE>
and so much of Lessee's Security Deposit as has not been, or is not then
required to be, used by Lessor under the terms of this Lease.
9.9 Waiver of Statutes. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby waive
the provisions of any present or future statute to the extent it is inconsistent
herewith.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as defined
in Paragraph 10.2(a), applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, any increases in such amounts over the
Base Real Property Taxes shall be included in the calculation of Common Area
Operating Expenses in accordance with the provisions of Paragraph 4.2.
10.2 Real Property Tax Definitions.
(a) As used herein, the term "Real Property Taxes" shall include any
form of real estate tax or assessment, general, special, ordinary or
extraordinary, and any license fee, commercial rental tax, improvement bond or
bonds, levy or tax (other than inheritance, personal income or estate taxes)
imposed upon the Industrial Center by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage, or other improvement
district thereof, levied against any legal or equitable interest of Lessor in
the Industrial Center or any portion thereof, Lessor's right to rent or other
income therefrom, and/or Lessor's business of leasing the Premises. The term
"Real Property Taxes" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring, or
changes in Applicable Law taking effect, during the term of this Lease,
including but not limited to a change in the ownership of the Industrial Center
or in the improvements thereon, the execution of this Lease, or any
modification, amendment or transfer thereof, and whether or not contemplated by
the Parties.
(b) As used herein, the term "Base Real Property Taxes" shall be the
amount of Real Property Taxes, which are assessed against the Premises, Building
or Common Areas in the calendar year during which the Lease is executed. In
calculating Real Property Taxes for any calendar year, the Real Property Taxes
for any real estate tax year shall be included in the calculation of Real
Property Taxes for such calendar year based upon the number of days which such
calendar year and tax year have in common.
10.3 Additional Improvements. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
Lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
<PAGE>
10.4 Joint Assessment. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of the
Real Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Alterations and Utility
installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. Utilities. Lessee shall pay directly for all utilities and services
supplied to the Premises, including but not limited to electricity, telephone,
security, gas and cleaning of the Premises, together with any taxes thereon. If
any such utilities or services are not separately metered to the Premises or
separately billed to the Premises, Lessee shall pay to Lessor a reasonable
proportion to be determined by Lessor of all such charges jointly metered or
billed with other premises in the Building, in the manner and within the time
periods set forth in Paragraph 4.2(d).
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or
sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent given under and subject to the terms of
Paragraph 36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five
percent (25%) or more of the voting control of Lessee shall constitute a change
in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of full
execution and delivery of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Net Worth of Lessee was or is greater, shall be considered an assignment of
this Lease by Lessee to which Lessor may reasonably withhold its consent. "Net
Worth of Lessee" for
<PAGE>
purposes of this Lease shall be the net worth of Lessee (excluding any
Guarantors) established under generally accepted principles consistently
applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1, or a non-curable Breach without
the necessity of any notice and grace period. If Lessor elects to treat such
unconsented to assignment or subletting as a non-curable Breach, Lessor shall
have the right to either: (i) terminate this Lease, or (ii) upon thirty (30)
days' written notice ("Lessor's Notice"), increase the monthly Base Rent for the
Premises to the greater of the then fair market rental value of the Premises, as
reasonably determined by Lessor, or one hundred ten percent (110%) of the Base
Rent then in effect. Pending determination of the new fair market value, if
disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice,
with any overpayment credited against the next installment(s) of Base Rent
coming due, and any underpayment for the period retroactively to the effective
date of the adjustment being due and payable immediately upon the determination
thereof. Further, in the event of such Breach and rental adjustment, (i) the
purchase price of any option to purchase the Premises held by Lessee shall be
subject to similar adjustment to the then fair market value as reasonably
determined by Lessor (without the Lease being considered an encumbrance or any
deduction for depreciation or obsolescence, and considering the Premises at its
highest and best use and in good condition) or one hundred ten percent (110%) of
the price previously in effect, (ii) any index-oriented rental or price
adjustment formulas contained in this Lease shall be adjusted to require that
the base index be determined with reference to the index applicable to the time
of such adjustment, and (iii) any fixed rental adjustments scheduled during the
remainder of the Lease term shall be increased in the same ratio as the now
rental bears to the Base Rent in effect immediately prior to the adjustment
specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, nor (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's obligations
from any person other than Lessee pending approval or disapproval of an
assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent for performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the assignee or
sublessee. However, Lessor may consent
<PAGE>
to subsequent sublettings and assignments of the sublease or any amendments or
modifications thereto without notifying Lessee or anyone else liable under this
Lease or the sublease and without obtaining their consent, and such action shall
not relieve such persons from liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessor's obligation under
this Lease, Lessor may proceed directly against Lessee, any Guarantors or anyone
else responsible for the performance of the Lessee's obligations under this
Lease, including any sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor.
(e) Each request for consent to an assignment or subletting shall be in
writing, accompanied by information relevant to Lessor's determination as to the
financial and operational responsibility and appropriateness of the proposed
assignee of sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a non-refundable
deposit of $1,000 or ten percent (10%) of the monthly Base Rent applicable to
the portion of the Premises which is the subject of the proposed assignment of
sublease, whichever is greater, as reasonable consideration for Lessor's
considering and processing the request for consent. Lessee agrees to provide
Lessor with such other or additional information and/or documentation as may be
reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in Paragraph 12.2(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased by an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
Security Deposit increase a condition to Lessor's consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment or
subletting, may require that the amount and adjustment schedule of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment schedule for property similar to the Premises as then constituted, as
determined by Lessor.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward
<PAGE>
Lessee's obligations under this Lease, provided, however, that until a Breach
(as defined in Paragraph 13.1) shall occur in the performance of Lessee's
obligations under this Lease, Lessee may, except as otherwise provided in this
Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor
shall not, by reason of the foregoing provision or any other assignment of such
sublease to Lessor, nor by reason of the collection of the rents from a
sublessee, be deemed liable to the sublessee for any failure of Lessee to
perform and comply with any of Lessee's obligations to such sublessee under such
Sublease. Lessee hereby irrevocably authorizes and directs any such sublessee,
upon receipt of a written notice from Lessor stating that a Breach exists in the
performance of Lessee's obligations under this Lease, to pay to Lessor the rents
and other charges due and to become due under the sublease. Sublessee shall rely
upon any such statement and request from Lessor and shall pay such rents and
other charges to Lessor without any obligation or right to inquire as to whether
such Breach exists and notwithstanding any notice from or claim from Lessee to
the contrary. Lessee shall have no right or claim against such sublessee, or,
until the Breach has been cured, against Lessor, for any such rents and other
charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior defaults
or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all or any part of the Premises without Lessor's prior written
consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350,000 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said default. A "Default" by Lessee is
defined as a failure by Lessee to observe, comply with or perform any of the
terms, covenants, conditions or rules applicable to Lessee under this Lease. A
"Breach" by Lessee is defined as the occurrence of any one or more of the
following Defaults, and, where a grace period for cure after notice is specified
herein, the failure by Lessee to cure such Default prior to the expiration of
the
<PAGE>
applicable grace period, and shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure
by Lessee to make any payment of Base Rent, Lessee's Share of Common Area
Operating Expenses, or any other monetary payment required to be made by Lessee
hereunder as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
the failure of Lessee to fulfill any obligation under this Lease which endangers
or threatens life or property, where such failure continues for a period of
three (3) days following written notice thereof by or on behalf of Lessor to
Lessee.
(c) Except as expressly otherwise provided in this Lease, the failure
by Lessee to provide Lessor with reasonable written evidence (in duly executed
original form, if applicable) of (i) compliance with Applicable Requirements per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or
subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37,
(v) the subordination or non-subordination of this Lease per Paragraph 30, (vi)
the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that
are to be observed, complied with or performed by Lessee, other than those
described in Subparagraphs 13.1(a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written notice thereof by or on
behalf of Lessor to Lessee, provided, however, that if the nature of Lessee's
Default is such that more than thirty (30) days are reasonably required for its
cure, then it shall not be deemed to be a Breach of this Lease by Lessee if
Lessee commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making by
Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same as is dismissed within sixty (60) days); (iii) the appointment
of a trustee or receiver to take possession of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where
possession is not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this Subparagraph 13.1(e) is contrary to any
applicable law, such provision shall be of no force or effect, and shall not
affect the validity of the remaining provisions.
<PAGE>
(f) The discovery by Lessor that any financial statement of Lessee or
of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially
false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (6) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurances of security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the Guarantors that existed at the time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any affirmative duty or obligation
of Lessee under this Lease, within ten (10) days after written notice to Lessee
(or in case of an emergency, without notice), Lessor may at its option (but
without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its own
option, may require all future payments to be made under this Lease by the
Lessee to be made only by cashier's check. In the event of a Breach of this
Lease by Lessee (as defined in Paragraph 13.1), with or without further notice
or demand, and without limiting Lessor in the exercise of any right or remedy
which Lessor may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District
in which the Premises are located at the time of award plus one percent (1%).
Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of
<PAGE>
this Lease shall not waive Lessor's right to recover damages under this
Paragraph 13.2. If termination of this Lease is obtained through the provisional
remedy of unlawful detainer, Lessor shall have the right to recover in such
proceeding the unpaid rent and damages as are recoverable therein, or Lessor may
reserve the right to recover all or any part thereof in a separate suit for such
rent and/or damages. If a notice and grace period required under Subparagraph
13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or
to perform or quit, as the case may be, given to Lessee under any statute
authorizing the forfeiture of leases for unlawful detainer shall also constitute
the applicable notice for grace period purposes required by Subparagraph
13.1(b), (c) or (d). In such case, the applicable grace period under the
unlawful detainer statute shall run concurrently after the one such statutory
notice, and the failure of Lessee to cure the Default within the greater of the
two (2) such grace periods shall constitute both an unlawful detainer and a
Breach of this Lease entitling Lessor to the remedies provided for in this Lease
and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
recover the rent as it becomes due, provided Lessee has the right to sublet or
assign, subject only to reasonable limitations. Lessor and Lessee agree that the
limitation on assignments and subletting in this Lease are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the appointment
of a receiver to protect the Lessor's interest under this Lease, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor under
the laws of judicial decisions of the state wherein the Premises are located.
(d) The expiration or termination of this Lease and/or the termination
of Lessee's right to possession shall not relieve Lessee from liability under
any indemnity provisions of this Lease as to matters occurring or accruing
during the terms hereof or by reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture in Event of Breach. Any agreement by Lessor for
free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement Provisions" shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such
Inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor, as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this
Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of
such acceptance.
<PAGE>
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or deed of trust covering the Premises.
Accordingly, if any installment of rent or other sum due from Lessee shall not
be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default of Breach will respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. for which of this Paragraph 13.5, a reasonable time
shall in no event be less than thirty (30) days after receipt by Lessor, and by
any Lender(s) whose name and address shall have been furnished to Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days after such notice
are reasonably required for its performance, then Lessor shall not be in breach
of this Lease if performance is commenced within such thirty (30) day period and
thereafter diligently pursed to completion.
14. Condemnation. If the Premises or any portion thereof are taken under
the power of eminent domain or sold under the threat of the exercise of said
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority takes
title or possession, whichever first occurs. If more than ten percent (10%) of
the floor area of the Premises, or more than twenty-five percent (25%) of the
portion of the Common Areas designated for Lessee's parking, is taken by
condemnation, Lessee may, at Lessee's option, to be exercised in writing within
ten (10) days after Lessor shall have given Lessee written notice of such taking
(or in the absence of such notice, within (10) days after the condemning
authority shall have taken possession) terminate this Lease as of the date the
condemning authority takes such possession. If Lessee does not terminate this
Lease in accordance with the foregoing, this Lease shall remain in full force
and effect as to the portion of the Premises remaining, except that the Base
Rent shall be reduced in the same proportion as the rentable floor area of the
Premises taken bears to the total rentable floor area of the Premises. No
reduction of Base Rent shall occur if the condemnation does not apply to any
portion of the Premises. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution of value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that Lessee
shall be entitled to any compensation, separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this Lease is not
<PAGE>
terminated by reason of such condemnation, Lessor shall to the extent of its net
severance damages received, over and above Lessee's Share of the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage to the
Premises caused by such condemnation authority. Lessee shall be responsible for
the payment of any amount in excess of such net severance damages required to
complete such repair.
15. Brokers' Fees. Are covered by separate agreements.
16. Tenancy and Financial Statements.
16.1 Tenancy Statement. Each Party (as "Responding Party") shall within ten
(10) days after written notice from the other Party (the "Requesting Party")
execute, acknowledge and deliver to the Requesting Party a statement in writing
in a form similar to the then most current "Tenancy Statement" form published by
the American Industrial Real Estate Association, plus such additional
information, confirmation and/or statements as may be reasonably requested by
the Requesting Party.
16.2 Financial Statement. If Lessor desires to finance, refinance, or sell
the Premises or the Building, or any part thereof, Lessee and all Guarantors
shall deliver to any potential lender or purchaser designated by Lessor such
financial statements of Lessee and such Guarantors as may be reasonably required
by such lender or purchaser, including but not limited to Lessee's financial
statements for the past three (3) years. All such financial statements shall be
received by Lessor and such lender or purchaser in confidence and shall be used
only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises. In the
event of a transfer of Lessor's title or interest in the Premises or in this
Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit)
any unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10) days
following the date on which it was due, shall bear interest from the date due at
the prime rate charged by the largest state chartered bank in the state in which
the Premises are located plus four percent (4%) per annum, but not exceeding the
maximum rate allowed by law, in addition to the potential late charge provided
for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
<PAGE>
21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. No Prior or other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lesser and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. Each Broker shall be an intended third party
beneficiary of the provisions of this Paragraph 22.
23. Notices.
23.1 Notice Requirements. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by messenger or
courier service) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile transmission
during normal business hours, and shall be deemed sufficiently given if served
in a manner specified in this Paragraph 23. The addresses noted adjacent to a
Party's signature on this Lease shall be the Party's address for delivery or
mailing of notice purposes. Either Party may by written notice to the other
specify a different address for notice purposes, except that upon Lessee's
taking possession of the Premises, the Premises shall constitute Lessee's
address for the purpose of mailing or delivering notices to Lessee. A copy of
all notices required or permitted to be given to Lesser hereunder shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
23.2 Date of Notice. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail, the notice shall be deemed given forth-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantees next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the United States Postal Service or courier. If any
notice is transmitted by facsimile transmission or similar means, the same shall
be deemed served or delivered upon telephone or facsimile confirmation of
receipt of the transmission thereof, provided a copy is also delivered via
delivery or mail. If notice is received on a Saturday or a Sunday or a legal
holiday, it shall be deemed received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any such act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent
or similar act by Lessee, or be construed as the basis of an estoppel to enforce
the provision or provisions of this Lease requiring such consent. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be
<PAGE>
a waiver of any Default or Breach by Lessee of any provision hereof. Any payment
given Lessor by Lessee may be accepted by Lessor on account of moneys or damages
due Lessor, notwithstanding any qualifying statements or conditions made by
Lessee in connection therewith, which such statements and/or conditions shall be
of no force or effect whatsoever unless specifically agreed to in writing by
Lessor at or before the time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased by two hundred percent
(200%) of the Base Rent applicable during the month immediately preceding such
expiration or earlier termination. Nothing contained herein shall be construed
as a consent by Lessor to any holding over by Lessee.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all over remedies at
law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default pursuant
to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
<PAGE>
30.2 Attornment. Subject to the non-disclosure provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be
effective without the execution of any further documents; provided, however,
that upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. Attorneys' Fees. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereinafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "Prevailing Party" shall include,
without limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by compromise, settlement, judgment,
or the abandonment by the other Party or Broker of its claim or defense. The
attorneys' fee award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
incurred. Lessor shall be entitled to attorneys' fees, costs and expenses
incurred in preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach. Broker(s) shall be intended
third party beneficiaries of this Paragraph 31.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the Building, as Lessor
may reasonably deem necessary. Lessor may at any time place on or about the
Premises or Building any ordinary "For Sale" signs and Lessor may at any time
during the last one hundred eighty (180) days of the term hereof place on or
about the Premises any ordinary "For Lease" signs. All such activities of
Lessor shall be without abatement of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written
<PAGE>
consent. Notwithstanding anything to the contrary in this Lease, Lessor shall
not be obligated to exercise any standard of reasonableness in determining
whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the exterior of the Premises
or the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to advertise
Lessee's own business so long as such signs are in a location designated by
Lessor and comply with Applicable Requirements and the signage criteria
established for the Industrial Center by Lessor. The installation of any sign
on the Premises by or for Lessee shall be subject to the provisions of Paragraph
7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations).
Unless otherwise expressly agreed herein, Lessor reserves all rights to the use
of the roof of the Building, and the right to install advertising signs on the
Building, including the roof, which do not unreasonably interfere with the
conduct of Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs. See Paragraph 55.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described in Paragraph 12.2(e), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering and
responding to Lessee's request. Any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgement that no Default or Breach by Lessee exists, nor shall such
consent be deemed a waiver of any then existing Default or Breach, except as may
be otherwise specifically stated in writing by Lessor at the time of such
consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the impositions by
Lessor at the time of consent
<PAGE>
of such further or other conditions as are then reasonable with reference to the
particular matter for which consent is being given.
37. Guarantor.
37.1 Form of Guaranty. If there are to be any Guarantors of this Lease per
Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor
shall be in the form most recently published by the American Industrial Real
Estate Association, and each such Guarantor shall have the same obligations as
Lessee under this lease, including but not limited to the obligation to provide
the Tenancy Statement and information required in Paragraph 16.
37.2 Additional Obligations of Guarantor. It shall constitute a Default of
the Lessee under this Lease if any such Guarantor fails or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of the
guaranty called for by this Lease, including the authority of the Guarantor (and
of the party signing on Guarantor's behalf) to obligate such Guarantor on said
guaranty, and resolution of its board of directors authorizing the making of
such guaranty, together with a certificate of incumbency showing the signatures
of the persons authorized to sign on its behalf, (b) current financial
statements of Guarantor as may from time to time be requested by Lessor, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
39. Options. See Paragraph 50.
39.1 Definition. As used in this Lease, the word "Option" has the following
meaning: (a) the right to extend the term of this Lease or to renew this Lease
or to extend or renew any lease that Lessee has on other property of Lessor; (b)
the right of first refusal to lease the Premises or the right of first offer to
lease the Premises or the right of first refusal to lease other property of
Lessor or the right of first offer to lease other property of Lessor; (c) the
right to purchase the Premises, or the right of first refusal to purchase the
Premises, or the right of first offer to purchase the Premises, or the right to
purchase other property of Lessor, or the right of first refusal to purchase
other property of Lessor, or the right of first offer to purchase other property
of Lessor.
39.2 Options Personal to Original Lessee. Each Option granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee is in full and
actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
<PAGE>
39.3 Multiple Options. In the event that Lessee has any multiple Options to
extend or renew this Lease, a later option cannot be exercised unless the prior
Options to extend or renew this Lease have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3) or more notices of separate Defaults under Paragraph 13.1 during the twelve
(12) month period immediately preceding the exercise of the Option, whether or
not the Defaults are cured.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of separate Defaults under Paragraph 13.1
during any twelve (12) month period, whether or not the Defaults are cured, or
(iii) if Lessee commits a Breach of this Lease.
40. Rules and Regulations. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. Reservations. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps and restrictions do not reasonably
interfere with the use of the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
<PAGE>
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
the Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing the Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall within thirty (3)0 days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.
46. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
<PAGE>
ADDENDUM NO. 1 TO STANDARD
--------------------------
INDUSTRIAL/COMMERCIAL MULTI-LESSEE LEASE - GROSS
------------------------------------------------
49. Annual CPI Increases in Base Rent. The Base Rent during the Original Term
and any extended term (as defined in Paragraph 50) of this Lease shall be
increased on each anniversary of the Commencement Date (the "Rental Adjustment
Date") to reflect any increase in the United States Department of Labor, Bureau
of Labor Statistics, Consumer Price Index for All Urban Consumers (All Items)
San Francisco-Oakland-San Jose (1982-84=100) (the "Index") as follows:
(a) The Base Rent (the "Comparison Base Rent") in effect immediately
before each Rental Adjustment Date shall be increased by the percentage that the
Index has increased from the date (the "Comparison Date") on which payment of
the Comparison Base Rent began (either the Commencement Date of the Lease, in
the case of the first such adjustment, or the date of the most recent Rental
Adjustment Date, in the case of subsequent adjustments) through the month in
which the applicable Rental Adjustment Date occurs. The Base Rent shall not be
reduced by reason of any such computation. Landlord shall notify Tenant of each
increase by a written statement which shall include the Index for the applicable
Comparison Date, the Index for the applicable Rental Adjustment Date, the
percentage increase between those two Indices, and the new Base Rent. Regardless
of any increases or decreases in the Index over any annual adjustment period,
the Base Rent shall increase on and as of each Rental Adjustment Date a minimum
of three percent (3%) and a maximum of six percent (6%).
(b) Tenant shall pay the new Base Rent from the applicable Rental
Adjustment Date until the next Rental Adjustment Date. Landlord's notice of the
increase may be given after the applicable Rental Adjustment Date, and Tenant
shall pay Landlord the accrued rental adjustment for the months elapsed between
the effective date of the increase and Landlord's notice of such increase within
ten (10) days after Landlord's notice. If the format or components of the Index
are materially changed after the Commencement Date, Landlord shall substitute an
index which is published by the Bureau of Labor Statistics or similar agency and
which is most nearly equivalent to the Index in effect on the Commencement Date.
The substitute index shall be used to calculate the increase in the Base Rent
unless Tenant objects to such index in writing within fifteen (15) days after
receipt of Landlord's notice. If Tenant objects, Landlord and Tenant shall
submit the selection of the substitute index for binding arbitration in
accordance with the rules and regulations of the American Arbitration
Association at its office closest to the Premises. The costs of arbitration
shall be borne equally by Landlord and Tenant.
50. Option to Renew. In addition to the Original Term set forth in Paragraph
1.3 ("Term") of this Lease, and subject to the provisions of Paragraph 39
("Options") of this Lease:
(a) Lessee is given the option to extend the term of this Lease, on
all the provisions contained in this Lease except for the amount of Base Rent,
for a single additional term of two (2) years (the "extended term") following
expiration of the Original Term of this Lease, by delivering unequivocal,
written notice of Lessee's exercise of this option (the "option
<PAGE>
notice") to Lessor at least six (6) months but not more than twelve (12) months
prior to the Expiration Date of the Original Term of this Lease, provided,
--------
however, that if Lessee is in default of any provisions of this Lease on the
- -------
date of giving the option notice, the option notice shall be entirely
ineffective, and if Lessee is in default of any provision of this Lease on the
date the extended term is to commence, the extended term shall not commence and
this Lease shall expire at the end of the Original Term of this Lease.
(b) Base Rent for the first twelve months of the extended term shall
be the then current fair market rental value of the Premises, which sum shall be
determined in the following manner: The parties shall have thirty (30) days
after Lessor receives the option notice in which to agree on the Base Rent for
the first twelve months of the extended term of the Lease. If the parties agree
on the Base Rent for the first twelve (12) months of the extended term, they
shall promptly execute an amendment to this Lease identifying the Base Rent for
such period which shall become effective upon the commencement of the extended
term.
(c) If the parties are unable to agree on the Base Rent for the first
twelve (12) months of the extended term of this Lease within ten (10) days after
expiration of the thirty (30) day period referenced in subsection (b), above,
then either party, at its cost and by giving written notice to the other party,
shall appoint a real estate appraiser with at least five (5) years' full-time
commercial appraisal experience in the area in which the Premises are located to
appraise and set the Base Rent for the first twelve (12) months of the extended
term. If a party does not appoint an appraiser (by giving the other party
written notice of such appointment) within ten (10) days after the other party
has given written notice of the name of its appraiser, the single appraiser
appointed shall be the sole appraiser and shall set the Monthly Base Rent for
the first twelve (12) months of the extended term. If the two appraisers are
appointed by the parties as stated in this paragraph, they shall meet promptly
and attempt to set the Monthly Base Rent for the first twelve (12) months of the
extended term. If they are unable to agree within fifteen (15) days after the
second appraiser has been appointed, they shall attempt to elect a third
appraiser meeting the qualifications stated in this paragraph within ten (10)
days after the last day the two appraisers are given to set the Base Rent. If
they are unable to agree on a third appraiser, either of the parties to this
Lease by giving five (5) days' notice to the other party may file a petition
with the American Arbitration Association ("AAA") solely for the purpose of
having the AAA select a third appraiser who meets the qualifications stated in
this paragraph. Each party shall bear half the cost of the AAA appointing the
third appraiser and of paying the third appraiser's fees and expenses. The third
appraiser, however selected, shall be a person who has not previously acted in
any capacity for either party. Within fifteen (15) days after the selection of
the third appraiser, a majority of the appraisers shall set the Base Rent for
the first twelve (12) months of the extended term. If a majority of the
appraisers are unable to set the Base Rent for the first twelve (12) months of
the extended term of the Lease within the stipulated period of time, the three
appraisers shall be added together and their total divided by three; the
resulting quotient, subject to the reduction referenced below, shall be the Base
Rent for the Premises during the first twelve (12) months of the extended term
of the Lease.
(d) In setting the Base Rent for the first twelve (12) months of the
extended term the appraiser or appraisers, as the case may be, shall consider
the use to which the Premises are restricted under this Lease.
<PAGE>
(e) After the Base Rent for the first twelve (12) months of the
extended term has been determined, the appraiser or appraisers shall immediately
notify the parties and the amount so determined shall become the Base Rent and
shall be effective as of the date of commencement of the extended term,
provided, however, that under no circumstances, shall the Monthly Base Rent
- -------- -------
during the first twelve (12) months of the extended term be less than one
hundred and three percent (103%) of the Base Rent during the final month of the
Original Term of this Lease.
(f) The new Base Rent shall be subject to annual CPI increases
calculated in accordance with the provisions of Paragraph 49 of this Lease
commencing at the end of the first twelve months of the extended term.
(g) The option granted to Lessee under this Paragraph 50 shall be
voidable, at the option of Lessor, in the event that either the Building in
which the Premises is located is sold to a third party prior to the expiration
of the Original Term of this Lease, or in the event that the Lessor enters into
a binding contract to sell the Building in which the Premises is located to a
third party prior to the expiration of the Original Term of this Lease. Upon
either such occurrence, Lessor shall promptly give written notice to Lessee of
such fact and of Lessor's election to declare this option void. Upon receipt by
Lessee of any such notice, this option and all of Lessee's rights under this
option shall be rendered null and void and of no further force or effect.
51. Security Deposit. Notwithstanding the provisions of Paragraphs 1.7
("Security Deposit") and 5 ("Security Deposit") of this Lease to the contrary,
Lessor agrees to return to Lessee the sum of Four Thousand Two Hundred Fifty
Dollars ($4,250.00) of Lessee's original Security Deposit on the first
anniversary of the Commencement Date if (i) Lessee is not then in default of any
provision of this Lease, and (ii) Lessee has, by such date, completed each of
the items of improvement referenced in subparagraphs (a) through (e), inclusive,
of Paragraph 54 ("Lessee's Improvements to the Premises") of this Lease.
52. Elevator Maintenance And Repair Expense. Lessor shall maintain the single
elevator in the Building of which the Premises is a part. Lessee shall reimburse
Lessor for one-half (1/2) of the cost of all elevator maintenance incurred by
Lessor during the term of this Lease and any extension thereof, provided,
however, that Lessee shall reimburse Lessor for the entire cost of any
maintenance, repair or replacements to the elevator which are caused by Tenant,
its officers, directors, shareholders, partners, principals, employees, agents,
representatives, contractors or invitees. Tenant shall fully satisfy its
reimbursement obligation to Landlord under this Paragraph 52 within ten (10)
days after receipt of any written statement from Landlord which sets forth in
reasonable detail the nature and extent of any such cost incurred by Lessor and
Lessee's resulting reimbursement obligations.
53. Lessor's Improvements to the Premises. Promptly upon execution of this
Lease by both parties, Lessor shall commence and diligently prosecute to
completion each of the following items of improvement to the Building and/or the
Premises:
(a) Perform a general cleaning of the interior and exterior lobby of
the Building and remove all graffiti;
<PAGE>
(b) Repaint the interior stairway;
(c) Repair the existing lighting fixtures in the interior stairway;
and
(d) Install a heating system in the Premises, at a cost to Lessor of
no more than Four Thousand One Hundred Dollars ($4,100.00).
54. Lessee's Improvements to the Premises. Lessor hereby consents to Lessee's
making each of the following improvements to the Premises, provided that each is
performed in accordance with the applicable requirement of Paragraph 7.3
("Utility Installations, Trade Fixtures, Alterations") of this Lease:
(a) Installation of air conditioning in the network room, at a cost
of approximately $2,500,000;
(b) Refinishing the hardwood floors in the Premises, at a cost of
approximately $2,000,000;
(c) Painting the interior of the Premises, at a cost of approximately
$2,500.00;
(d) Installing new lighting fixtures (and related electrical work) in
the Premises, at a cost of approximately $2,500.00; and
(e) Installation of new computer and telephone cabling in the
Premises, at a cost of approximately $8,000.00.
In addition to the foregoing, Lessee shall have the right, but not the
obligation, to remove the ceiling in the Premises in order expose the ceiling
joists and structure, provided, however, that all such work must be performed in
accordance with the applicable requirements of Paragraph 7.3 of the Lease and,
provided further, that all such work (and related permits, approvals, etc.)
shall be performed at Lessee's sole cost and expense.
55. Signage. Notwithstanding any provisions of Paragraph 34 ("Signs") of this
Lease to the contrary, Lessee shall have the right to place a sign identifying
Lessee on the main entrance to the Premises and on the exterior of the second
floor of the Building, provided, however, that each of the signs must be of a
-------- -------
size, presentation and location which are mutually agreed upon by Lessor and
Lessee, and otherwise compliant with all applicable laws and regulations.
56. Asbestos. Attached as Exhibit 2 to this Lease is one copy of a report by
Gemini Petrographic Investigations, dated 12/19/97, which reports on the
existence of asbestos in the Building and in the Premises. It is Lessor's
understanding and belief that there is asbestos containing material in the
acoustical ceiling material within the Premises, per the attached report.
Promptly upon execution of this Lease by Lessee, Lessor shall commence and
diligently prosecute to completion a lawful and complete removal and abatement
of all asbestos containing material from the Premises in the form of acoustical
ceiling material. Lessor shall expend its best efforts to cause such removal
and abatement to be completed prior to March 20, 1998. In the event that Lessor
is unable to cause such removal and abatement to be completed prior to
<PAGE>
March 20, 1998, the Commencement Date shall be modified to the date following
the completion of such removal and abatement.
<PAGE>
EXHIBITS TO LEASE:
-----------------
Exhibit 1 Graphic Depiction of the Premises
Exhibit 2 Asbestos Notification and Report
<PAGE>
Exhibit 1
FLOOR PLAN
<PAGE>
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSER AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR
ATTORNEYS' REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED
TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF
ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO
REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL
REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR
CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH
IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN
COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE
SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM
THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
<TABLE>
<CAPTION>
<S> <C>
Executed at: San Francisco, CA Executed at: San Francisco, CA
--------------------------------- ---------------------------------
on: March 10, 1998 on: March 10, 1998
------------------------------------------ ------------------------------------------
By Lessor: By Lessee:
J & R Bechelli, a California Alpha Online, Inc., a California
- --------------------------------------------- ---------------------------------------------
general partnership Corporation, dba Plastic, Inc.
- --------------------------------------------- ---------------------------------------------
By: /s/ Richard L. Bechelli By: /s/ Leonard Sellers
------------------------------------------ ------------------------------------------
Name Printed: Richard L. Bechelli Name Printed: Leonard Sellers
-------------------------------- --------------------------------
Title: Partner Title: President
--------------------------------------- ---------------------------------------
By: By:
------------------------------------------ ------------------------------------------
Name Printed: Name Printed:
-------------------------------- --------------------------------
Title: Title:
--------------------------------------- --------------------------------------
Address: 3344 Broderich Street Address:
------------------------------------- -------------------------------------
San Francisco, CA 94123
------------------------------------- -------------------------------------
Telephone: (415) 929-8167, (415) 921-9195 Telephone: (415) 977-1222
----------------------------------- -----------------------------------
Facsimile: (415) 921-8340 Facsimile: (415) 977-1226
----------------------------------- -----------------------------------
</TABLE>
<PAGE>
J & R BECHELLI
3535 Webster Street
San Francisco CA 94123-1716
February 9, 1999
Mr. Len Sellers, Managing Director
Mr. Shane Ginsberg, Director
RAZORFISH SAN FRANCISCO, INC.
179-11th Street
San Francisco CA 94103
Dear Len and Shane:
It was, as always, a pleasure to meet with you yesterday. Joe and I are pleased
to know that you will be with us for at least the next four years.
As per our agreement of February 8, 1999, J & R BECHELLI will reduce the monthly
rent by $5,000 for eleven months starting on March 1, 1999 and ending on January
31, 2000, for a total rent reduction of $55,000.
The base rent for the second floor will increase starting March 1, 1999 by $126
due to provisions in paragraph 49 of the lease dated March 20, 1998 between J &
R BECHELLI and ALPHA ONLINE/RAZORFISH. That paragraph allows a minimum of a 3%
increase ($4,200 X 3% = $126).
Therefore, the rent due on March 1, 1999 is as follows:
First floor and Mezzanine: $ 7,000
Second floor: $ 4,326
-------
Total $11,326
This rent is in effect until February 1, 2000, at which time the rent due will
be $16,326.
We wish you all the success in the world and we are thrilled to be sharing, to
some degree, that success with you.
Best regards,
J & R BECHELLI
/s/ Richard L. Bechelli
Richard L. Bechelli
cc: Joe Bechelli
<PAGE>
EXHIBIT 10.36
CONTRACTOR AGREEMENT
Business Terms
THIS CONTRACTOR AGREEMENT, consisting of the Business Terms, Standard
Conditions, and any attachments thereto ("Agreement") is made by and between
Charles Schwab & Co., Inc., a California corporation having its principal place
of business at 101 Montgomery Street, San Francisco, CA 94104 ("Schwab"), and
the party identified below ("Contractor") .
Capitalized terms not defined in the Business Terms are defined in the
Standard Conditions. Schwab and Contractor agree to the following:
Contractor Information:
Contractor: Razorfish, Inc
Responsible Person: Cindy Pound
Address: 107 Grand Street, 3rd Floor
New York, New York 10013
Phone Number: (212) 966-5960
Fax Number: (212) 966-6915
Email Address cindy@razorfish. com
Employer Tax I.D. Number: 13-3804503
Description Of Services: (USE ATTACHMENTS IF NECESSARY )
The description of services is provided in Exhibit A, which is incorporated
herein and made a part of this Agreement
DESCRIPTION OF DELIVERABLES: (USE ATTACHMENTS IF NECESSARY)
The description of deliverables is provided in Exhibit A.
PAYMENTS:
1. Contract Sum:
------------
In consideration for the completion of the work set forth in Exhibit A,
Schwab agrees to pay Contractor the amounts described in Exhibit A.
Payment Schedule: Schwab will pay Contractor according to the payment schedule
- ----------------
in
Exhibit A:
The parties agree to the terms and conditions of this Agreement, which
includes the Business Terms, Standard Conditions, and any exhibits or
attachments thereto.
Charles Schwab & Co., Inc. Razorfish, Inc.
By: /s/ Gideon Sasson By: /s/ Jeffrey A. Dachis
-------------------------- --------------------------
Name: Gideon Sasson Name: Jeffrey A. Dachis
-------------------------- --------------------------
Its: Its: President
-------------------------- --------------------------
Date: 12/19/97 Date: 12/16/97
-------------------------- --------------------------
1 of 8
<PAGE>
CONTRACTOR AGREEMENT
STANDARD CONDITIONS
Capitalized terms not defined in the Standard Conditions are defined in the
Business Terms.
1. Term of Contract. This Agreement will commence as of the day it is
executed by both parties and will remain in effect until terminated in
accordance with its provisions.
2. Independent Contractor Status. It is the express intent of the parties
that Contractor is an independent contractor and not an employee, agent,
joint venturer or partner of Schwab. Nothing in this Agreement shall be
interpreted or construed as creating or establishing the relationship of
employer and employee between Schwab and Contractor. Both parties
acknowledge that Contractor is not an employee for state or federal tax
purposes. Contractor shall retain the right to perform services for others
during the term of this Agreement.
3. Services to be Performed by Contractor. Contractor shall personally
undertake and perform the services set forth in the Business Terms in
accordance with the schedule, if any, set forth in the Business Terms (the
"Services"). No performance or partial performance of Services shall be
deemed complete unless such services comply with the warranties set forth
in Paragraphs 9 and 10 of these Standard Conditions.
4. Time. Time is of the essence with regard to the performance of the
Services. Contractor shall indemnify Schwab against all damages suffered by
Schwab because of Contractor's delay, except this indemnity does not extend
to any damages suffered by Schwab as a result of any delay caused by
Schwab.
5. Payment for Services. In consideration for the timely and fully
satisfactory performance of the Services, Schwab agrees to pay Contractor
the Contract Sum specified in Exhibit A in the manner specified in Exhibit
A. Any Milestone Payments specified in Exhibit A shall be credited against
and deducted from the Contract Sum.
6. Responsibility for Costs. Except for any Reimbursable Expenses specified
in Exhibit A, Contractor shall be responsible for all costs and expenses
incidental to the performance of Services for Schwab, including but not
limited to, all costs of equipment provided by Contractor, all fees, fines,
licenses, bonds or taxes required of or imposed against Contractor and all
other of Contractor's costs of doing business. No payments will be made for
services rendered or expenses incurred by Contractor other than the
Services unless such services are approved in advance in writing by Schwab,
and for which Contractor supplies such documentation as Schwab may require
in substantiation of such costs, e.g., copies of third-party invoices.
7. Invoices. Contractor shall submit its invoice for the Contract Sum within
thirty (30) calendar days after the completion of Services, or, if
applicable, for each Milestone Payment, within thirty (30) calendar days
after the Milestone Date specified for such
2 of 8
<PAGE>
CONTRACTOR AGREEMENT
Milestone Payment in the Business Terms, except to the extent otherwise
specified in the Business Terms. Contractor's invoice shall include such
detail, and Contractor shall provide such supplementary documentation, as
Schwab may request.
8. Payments.
a. The Contract Sum, any Milestone Payments and any Reimbursable Expenses
shall be payable upon Schwab's receipt of Contractor's invoice except
as may be otherwise specified in the Business Terms. Schwab may at any
time cancel any aspect of the Services, provided that Schwab informs
Contractor of any such cancellation in writing. In the event of any
such cancellation, Contractor shall be compensated for any Services
rendered prior to notice to Contractor of such cancellation, but any
compensation allocated to services which were yet to be rendered with
regard to any canceled aspect of the Services shall then be
eliminated, and the Contract Sum set forth in the Business Terms shall
be reduced accordingly. If Schwab cancels any aspect of the Services,
Contractor is not required to refund any portion of the nonrefundable
retainer fee paid by Schwab as specified in Exhibit A.
b. In the event of any breach or alleged breach of the representations or
warranties set forth below, or any material obligations of Contractor
under this Agreement, and Contractor fails to cure such breach or
alleged breach within five (5) business days after written notice
thereof by Schwab, Schwab's obligation to make payments yet to be made
under this Agreement shall be terminated, and Schwab shall have no
further obligation to pay any amount to Contractor. Termination of
such payment obligations shall be in addition to any other rights or
remedies that Schwab may have in the event of any such breach or
alleged breach. The remedies stated in this Paragraph 8 are not
exclusive, and Schwab shall retain the right to pursue all remedies
available to it under this Agreement or otherwise.
9. Obligations of Contractor.
a. All of Contractor's activities hereunder shall be at Contractor's own
risk, and neither Contractor nor Contractor's employees or agents
shall be entitled to any benefits under the policies of insurance
maintained by Schwab. Contractor shall be solely responsible for
making arrangements for insurance covering losses sustained in
connection with performing work under this Agreement, including
hospital and medical costs in connection with any injury or illness.
b. Contractor agrees to provide workers' compensation insurance for
Contractor's employees and agents, and agrees to hold harmless and
indemnify Schwab for any and all claims arising out of the injury,
disability, or death of Contractor (if Contractor is an individual) or
any of Contractor's employees or agents. Schwab may require proof of
such coverage.
c. Contractor shall be solely responsible for determining the means and
methods for performing the Services under this Agreement.
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CONTRACTOR AGREEMENT
d. Contractor may not assign, delegate or subcontract this Agreement nor
any of its rights, duties or obligations under this Agreement without
the express written consent of Schwab. Any purported assignment or
delegation in violation of this provision shall be void at the option
of Schwab. Contractor's obligations are personal to Contractor, and
Contractor acknowledges that Schwab has entered this Agreement in
reliance on Contractor's ability and agreement to perform its
obligations accurately, competently and completely. Schwab reserves
the right to assign its rights and obligations hereunder, as it deems
appropriate.
e. As Contractor is not Schwab's employee, Contractor is responsible for
paying all required state and federal taxes or other amounts due as a
result of the payment of compensation by Schwab under this Agreement.
In particular, Schwab will not withhold FICA from Contractor's
payments; Schwab will not make state or federal unemployment insurance
contributions on behalf of Contractor; Schwab will not withhold state
or federal income tax from the payments to Contractor; Schwab will not
make disability insurance contributions on behalf of Contractor;
Schwab will not obtain workers' compensation insurance on behalf of
Contractor. However, Schwab may, at its sole discretion, report its
payments to Contractor to appropriate state and federal government
agencies.
f. Except as expressly stated in the Business Terms, Contractor shall be
solely responsible for payment of all sales, use, or other taxes
assessed against or associated with the Services or any other service
authorized by Schwab under this Agreement.
10. Representations and Warranties. Contractor represents and warrants that:
(a) the work created or performed by Contractor hereunder, alone or in
collaboration with others, shall not constitute a slander or libel on any
person or entity; (b) Contractor has the full power to enter into and
perform this Agreement and to make the grant of rights contained herein;
(c) all Services performed hereunder shall be performed in accordance with
Schwab's specifications and requirements and with all necessary care, skill
and diligence; (d) the Deliverables will meet the Description of
Deliverables set forth in the Business Terms and will be free of defects in
design, material and workmanship and will be suitable for the purposes
intended; (e) upon delivery of each Deliverable, Schwab will have
marketable title to such Deliverable, free and clear of all liens and
encumbrances; and (f) the use of the Deliverables for the purposes intended
will not infringe upon or violate any rights of privacy, publicity,
patents, copyrights or other proprietary rights owned or controlled by a
third party. Schwab represents and warrants that: (a) it has the full power
to enter into and perform this Agreement, (b) that the embodiment by
Contractor of any materials provided by Schwab in the Schwab Web site will
not infringe upon or violate any rights of privacy, publicity, patents,
copyrights or other proprietary rights owned or controlled by a third
party, and (c) if necessary, it has acquired the right to use and is
responsible for any compensation due to any third party for materials
provided by Schwab for use in providing the Services hereunder.
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<PAGE>
CONTRACTOR AGREEMENT
11. Ownership.
a. All services and/or works, and any elements thereof, created,
performed, contributed or prepared by Contractor pursuant to this
Agreement, and any results or proceeds therefrom, are and shall be the
property of Schwab. Any proprietary materials owned by Contractor that
it utilizes in providing the Services and performing work hereunder
shall remain the property of Contractor.
b. Contractor hereby assigns, transfers and conveys to Schwab,
exclusively and perpetually, all rights, titles, and interests
throughout the world it may acquire in any and all services and/or
works, and any elements thereof, created, performed, contributed or
prepared by Contractor pursuant to this Agreement, including without
limitation any copyrights, patents or rights of reproduction, and the
right to secure registrations, renewals, reissues, and extensions
thereof. Such services and/or works are not "fine art" within the
meaning of Div. 2, Part 3, Title II, Chapter 3 of the California Civil
Code. No rights of any kind are reserved to or by the Contractor or
shall revert to Contractor. Contractor agrees to execute such further
documents and to do such further acts as may be necessary to register
or enforce Schwab's ownership of such rights, in whole or in part. If
Contractor fails or refuses to execute any such documents, Contractor
appoints Schwab as Contractor's attorney-in-fact (this appointment
irrevocable and a power coupled with an interest) to act on
Contractor's behalf to execute such documents.
c. Contractor hereby forever waives and agrees never to assert against
Schwab, its successors or licensees any and all Moral Rights (as
defined herein) Contractor may have in any services and/or works, and
any elements thereof, created, performed, contributed or prepared by
Contractor pursuant to this Agreement, and any results or proceeds
therefrom, even after expiration or termination of this Agreement.
"Moral Rights" means any right to claim authorship of a work, any
right to object to any distortion or other modification of a work, and
any similar right, existing under the law of any country in the world,
or under any treaty.
12. Confidentiality. Each party (as such, a "Receiving Party") acknowledges
and agrees that pursuant to this Agreement, it may have access to the other
party's (as such a "Disclosing Party") confidential and proprietary
information and materials concerning or pertaining to the Disclosing
Party's business, including without limitation, methods, plans, customers
and/or projects, and that such information is confidential and proprietary
to the Disclosing Party. The Receiving Party agrees and acknowledges that
the Party's sole purpose in disclosing confidential or proprietary
information to the Receiving Party or allowing the Receiving Party access
to such information is to aid the Receiving Party in performing the
Services. The Receiving Party will receive and hold such information in the
strictest confidence, and acknowledges, represents and warrants that it
will use its best efforts to protect the confidentiality of the Disclosing
Party's information. The Receiving Party agrees that, without the prior
written consent Disclosing Party, the Receiving Party shall not use, copy
or divulge to third parties or otherwise use except in accordance with the
terms of this Agreement, any information obtained from or through the
Disclosing Party in connection with this Agreement, unless (a) the
information is
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<PAGE>
CONTRACTOR AGREEMENT
known to the Receiving Party prior to obtaining same from the Disclosing
Party; (b) the information is, at the time of disclosure to the Receiving
Party, then in the public domain; or (c) the information is obtained by the
Receiving Party from a third party who did not receive same, directly or
indirectly, from the Disclosing Party. The Receiving Party further agrees
that the Receiving Party will not, without the prior written consent of the
Disclosing Party, disclose to any third party any information developed or
obtained by the Receiving Party in connection with this Agreement, to the
extent that said information falls within one of the categories described
in (a), (b) or (c) above. Upon the Disclosing Party's written request or
upon expiration or termination of this Agreement for any reason, the
Receiving Party will promptly:
(i) return or destroy, at the Disclosing Party's option, all originals
and copies of all documents and materials it has received containing
the Disclosing Party's information;
(ii) deliver or destroy, at the Disclosing Party's option, all originals
and copies of all summaries, records, descriptions, modifications,
negatives, drawings, adoptions and other documents or materials,
whether in writing or in machine-readable form, prepared by Receiving
Party prepared under its direction or at its request from the
documents materials referred to in subparagraph (i), and
(iii) provide a notarized written statement to the Disclosing Party
certifying that documents and materials referred to in subparagraphs
(i) and (ii) have been delivered to the Disclosing Party or
destroyed, as requested by the Disclosing Party.
13. Indemnification. Contractor agrees to defend, indemnify, and hold Schwab
harmless from and against any and all damages, liabilities, costs and
expenses (including but not limited to attorneys' fees) incurred by Schwab
as a result of any claim, judgment or proceeding against Schwab: (a)
arising out of or connected in any manner with the performance of the
Services or the acquiring, making and delivery of the Deliverables
hereunder; or (b) by reason of any breach or alleged breach or failure of
any of the warranties, agreements, representations or obligations of
Contractor under this Agreement, provided that Schwab promptly notifies
Contractor of any such claim, judgment or proceeding in writing and tenders
to Contractor the opportunity to settle such claim, judgment or proceeding
at Contractor's expense and cooperates with Contractor in settling such
claim, judgment or proceeding. Schwab agrees to defend, indemnify, and hold
Contractor harmless from and against any and all damages, liabilities,
costs and expenses (including but not limited to attorneys' fees) incurred
by Contractor as a result of any claim, judgment or proceeding against
Contractor by reason of any breach or alleged breach or failure of any of
the warranties, agreements, representations or obligations of Schwab under
this Agreement, provided that Contractor promptly notifies Schwab of any
such claim, judgment or proceeding in writing and tenders to Schwab the
opportunity to settle such claim, judgment or proceeding at Schwab's
expense and cooperates with Schwab in settling such claim, judgment or
proceeding.
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<PAGE>
CONTRACTOR AGREEMENT
14. Termination. This Agreement shall terminate automatically upon the
bankruptcy or insolvency of either party, the sale of the business of the
Contractor, or the death of Contractor (if Contractor is an individual).
Should Contractor default in the performance of this Agreement or
materially breach any of its provisions, Schwab, at Schwab's option, may
terminate this Agreement by giving written notice to Contractor. For the
purpose of this paragraph, material breach of this Agreement shall include,
but not be limited to, the destruction of Schwab property, breach of any
Confidentiality Agreement entered into by Contractor and Schwab, dishonesty
or theft, or failure to perform the Services to Schwab's satisfaction. In
addition, this Agreement may be terminated immediately by either party upon
fourteen (14) days written notice to the other party for any reason,
notwithstanding that the non-terminating party is in compliance with all
delivery, performance or payment requirements. Notwithstanding the
foregoing or any breach or termination of the Agreement, Paragraphs 9, 10,
11, 12, 13, 16 and 17 herein shall remain in full force and effect.
15. Arbitration. Contractor and Schwab agree to settle by binding arbitration
any dispute or controversy between Contractor and Schwab and/or any of
Schwab's officers, employees, directors or agents which in any way arises
out of or relates to this Agreement, the work performed by Contractor
hereunder or the relationship between Contractor and Schwab. Such
arbitration shall be conducted in San Francisco, California by the American
Arbitration Association under the Commercial Arbitration rules then in
effect. Either Contractor or Schwab may initiate arbitration by serving or
mailing a written notice to the other. Any award entered by the
arbitrator(s) shall be final and judgment thereon may be entered in any
court having jurisdiction. The prevailing party shall be entitled to
recovery of costs, fees (including attorney's fees) and/or taxes paid or
incurred in obtaining the award. Furthermore, any costs, fees or taxes
involved in enforcing the award shall be fully assessed against and paid by
the party resisting enforcement of the award.
16. Advertising. Contractor shall acquire no right to use, and shall not use,
without Schwab's prior written consent, the names, characters, artwork,
designs, trade names, copyrighted materials, trademarks or service marks of
Schwab, its related or subsidiary companies, parent, employees, directors,
shareholders, assigns, successors or licensees: (a) in any advertising,
publicity or promotion; (b) to express or to imply any endorsement of
Contractor's services; or (c) in any manner other than expressly in
accordance with this Agreement. Schwab agrees, however, to work with
Contractor in developing and approving a standard press release with
respect to the Services contemplated hereunder, provided however, that
Contractor must obtain Schwab's prior written approval in advance of each
use of the standard press release.
17. Records. Contractor shall retain all documents, notes, records, and all
other documentation with regard to the Services for a period of two (2)
years after completion of such services. Schwab or its duly authorized
representative, at all reasonable times during the performance of such
services and such subsequent two (2) year period, shall have access to such
documents, notes and records for purposes of auditing and verifying the
costs of such services or for any other reasonable purpose.
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CONTRACTOR AGREEMENT
18. Future Employment. The parties agree and acknowledge that this Agreement
is not to be construed as an offer of future employment.
19. Notices. Any and all notices or other communications required or permitted
by this Agreement shall be in writing and shall be deemed delivered when
personally delivered to the party to whom it is addressed, or in lieu of
such personal services, seventy-two (72) hours after deposit in the United
States mail, first-class, postage pre-paid, addressed to such party at the
appropriate address set forth in the Business Terms. Either party may
change its address for the purpose of this provision by giving written
notice of such change to the other.
20. Entire Agreement. This Agreement contains all of the covenants and
agreements between the parties with respect to the rendering of the
Services and any other matter hereunder, and supersedes any and all prior
negotiations, representations and agreements whether written or oral,
between the parties with respect to the rendering of such Services and any
other matter hereunder. Each party acknowledges that no representations,
inducements, promises or agreements, orally or otherwise have been made by
any party. No other agreement, statement or promise not contained in this
Agreement, and no changes or modifications to this Agreement, will be
effective unless it is writing and signed by both parties.
21. Waivers. All waivers hereunder must be made in writing, and failure at any
time to require the other party's performance of any obligation under this
Agreement shall not affect the right subsequently to require performance of
that obligation.
22. Governing Law. The interpretation and enforcement of this Agreement shall
be governed by the law of the State of California applicable to contracts
entirely entered into and performed in California by California residents.
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EXHIBIT 10.37
RAZORFISH, INC.
107 GRAND STREET, THIRD FLOOR
NEW YORK, NEW YORK 10013
Dated as of August 8, 1997
Road Runner Group
290 Harbor Drive
Stamford, CT 06902-7441
Ladies and Gentlemen:
This letter shall constitute the exclusive agreement between Road Runner
Group, A Joint Venture of Time Inc. And Time Warner Cable, A division of time
Warner Entertainment Company, L.P. ("You") and us ("Razorfish") and shall
supersede all letters and/or other communications by and between the parties
hereto (including, without limitation, by and between their respective agents,
attorneys and so forth) prior to the date hereof regarding the subject matter
hereof. The terms of said agreement are as follows:
1. SCOPE OF WORK, FEES, TERMS AND CONDITIONS
-----------------------------------------
1.01 Razorfish will work with You to plan, develop and design the
so-called Road Runner Online Service (the "Work") in accordance with the scope
of work, terms and conditions and fee structure as more particularly described
in Exhibit A attached hereto and made a part hereof.
2. RIGHTS
------
2.01 (a) The Work shall be considered a "work made for hire".
If and to the extent that the Work is not deemed to be a work made for hire,
Razorfish shall, and hereby does, assign, transfer and otherwise convey to You
all right, title, and interest in and to the Work. Razorfish hereby waives any
and all claims that Razorfish may have now or may hereafter have in any
jurisdiction to so-called "rental rights", "moral rights" and all rights of
"droit moral" with respect to the Work, and to the results and proceeds thereof.
Razorfish agrees to take all appropriate action, and to execute any and all
documents, necessary or reasonably requested by You to effectuate any of the
foregoing.
(b) Notwithstanding anything to the contrary set forth in
paragraph 2.01(a) above, Razorfish shall retain all right, title and interest in
any source code and object code created by Razorfish prior to or during the term
of this Agreement and which are of general applicability and non-site specific
(the "Razorfish Utilities"). Razorfish hereby grants to You a non-exclusive,
royalty free, perpetual, irrevocable and worldwide right and license to use the
Razorfish Utilities in the form provided by Razorfish; it being understood that
You shall not have the right to copy, publish or distribute any Developer
Utilities other than as part of the Work. In order for a utility to be deemed a
Developer Utility: (i) Razorfish shall have adequately identified to You in
writing the existence of a Developer utility in any deliverable
<PAGE>
hereunder prior to the delivery of such deliverable, and (ii) Razorfish shall
update such list at the time of delivery of such deliverable.
2.02 In the event that You desire to modify the Work after the
same is delivered by Razorfish and You do not desire to modify the work
Yourself, You will provide Razorfish with the first opportunity to modify the
same in accordance with the terms and conditions to be negotiated in good faith.
In the event that You and Razorfish fail to agree upon all material terms with
respect to such modification within fifteen (15) days following Your written
request for such modifications, Your obligations pursuant to this paragraph 2.02
shall terminate.
2.03 Razorfish is hereby granted the right to promote the Work in
its on-line portfolio, its press kit, its press releases, and any other
promotional materials. You shall have the right of approval with respect to the
promotion by Razorfish of that portion of the Work that embodies Your name in
its on-line portfolio, its press kit, its press releases, and any other
promotional materials, provided, however, that such approval shall not be
unreasonably withheld and shall be deemed to have been given within fifteen (15)
days following Your receipt of such material, unless You notify Razorfish to the
contrary within said fifteen (15) day period.
3. WARRANTIES, REPRESENTATIONS AND INDEMNIFICATION
-----------------------------------------------
3.01 You warrant and represent the following:
(a) You are authorized, empowered and able to enter into
and fully perform its obligations under this agreement. Neither this agreement
nor the fulfillment thereof by any party infringes upon the rights of any third
party.
(b) The use and/or embodiment by Razorfish in the Work of
any materials provided by You to Razorfish hereunder shall not violate or
infringe upon the rights of any third party.
(c) You shall be solely responsible for and shall pay all
sums due to any third parties entitled to receive any payments in connection
with materials provided by You to Razorfish hereunder and/or materials which You
require Razorfish to obtain for display and/or digital transmission in the Work.
(d) You agree to and do hereby indemnify, save and hold
Razorfish harmless of and from any and all liability, loss, damage, cost or
expenses (including reasonable attorneys' fees) arising out of or connected with
any breach or alleged breach of this agreement or any claim which is
inconsistent with any of the warranties or representations made by You in this
agreement, and agree to reimburse Razorfish on demand for any payment made or
incurred by Razorfish with respect to any of the foregoing.
3.02 Razorfish warrants and represents the following:
(a) Razorfish is authorized, empowered and able to enter
into and fully perform its obligations under this agreement. Neither this
agreement nor the fulfillment thereof by any party infringes upon the rights of
any third party.
2
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(b) Razorfish shall be solely responsible for and shall pay
all sums due to any third parties entitled to receive any payments in connection
with materials embodied in the Work by Razorfish other than as provided and/or
instructed by You as described in paragraph 3.01(c) above.
(c) The Work (other than content contributed by You) and
all work prepared by Razorfish hereunder will be the original work of Razorfish.
(d) The Work (other than content contributed by You) and
all materials and methodologies used by Razorfish in performing its services
hereunder will not knowingly (i) invade the right of privacy or publicity of any
third person, (ii) contain any libelous, obscene, indecent or otherwise unlawful
material, or (iii) infringe any patent, copyright, trademark, trade secret or
other proprietary right in any jurisdiction or otherwise contravene any rights
of any third person.
(e) When delivered, the Work will be free of any disabling
code or other device ("Disabling Device") that is intended by Razorfish:
(i) to cause the Work or any portion thereof to
become erased other than as may be expressly requested by You in writing; or
(ii) to cause the Work or any portion thereof to
become incapable of performing or operating as intended by the parties hereto;
or
(iii) to cause any other system to become erased or
inoperable.
(f) For a period of 30 days following the launch thereof,
the Work will be (i) free from defects in material and workmanship under normal
use and (ii) will function as intended in accordance with this agreement. In the
event that the Work fails to conform to the provisions of this paragraph
3.02(f), Razorfish shall make, at its own expense, whatever corrections are
reasonably necessary in order to satisfy such provisions.
(g) Razorfish, in performing its services hereunder, will
not alter the content contributed to the Work by You in any manner without
permission.
(h) Razorfish will, in performing its obligations
hereunder, comply with all applicable laws.
(i) In the event that the Work embodies date-related
functionalities, the Work shall (1) accurately process date-related information
for all dates during and after January 1, 2000; (2) function without any change
in operation associated with the commencement of the year 2000 other than as may
be intended by the parties hereto; (3) respond to two-digit date information in
a way that resolves any ambiguity as to century; and (4) store and provide
output of date information in ways that are unambiguous as to century.
(j) Razorfish agrees to and does hereby indemnify, save and
hold You harmless of and from any and all liability, loss, damage, cost or
expenses (including reasonable attorneys' fees) arising out of or connected with
any breach or alleged breach of this agreement
3
<PAGE>
or any claim which is inconsistent with any of the warranties or representations
made by Razorfish in this agreement, and agrees to reimburse You on demand for
any payment made or incurred by You with respect to any of the foregoing.
4. CONFIDENTIALITY
---------------
4.01 You and Razorfish acknowledge that, in connection with the
services rendered hereunder, the parties may provide certain proprietary
technical, financial and other information (collectively, the "Information") to
each other.
4.02 You and Razorfish agree that the Information will be
treated, held and maintained by You and Razorfish and their respective
representatives in the strictest confidence, will be used by You and Razorfish
and their respective representatives solely and exclusively for the purpose of
furthering the activities contemplated herein, and will not, directly or
indirectly, be used for any other purpose whatsoever by either party or its
representatives without prior written consent of the other party.
4.03 You and Razorfish agree that, upon written request by either
party hereto, all Information given by one party to the other party shall
immediately be returned to the party which owns, controls or developed the same
and no part thereof shall be retained by the other party or such other party's
representatives in any form and/or for any reason.
4.04 (a) Notwithstanding the provisions of paragraph 4.02 above,
Razorfish does not have to keep Information confidential if: it is or becomes
available to the public, other than as a result of disclosure by Razorfish; it
becomes available to Razorfish from a source other than You and that source was
not bound by a confidentiality agreement with You or Razorfish can demonstrate
that Razorfish possessed the Information prior to disclosure by You or
otherwise.
(b) Notwithstanding the provisions of paragraph 4.02 above,
You does not have to keep Information confidential if: it is or becomes
available to the public, other than as a result of disclosure by You it becomes
available to You from a source other than Razorfish and that source was not
bound by a confidentiality agreement with Razorfish; or You can demonstrate that
You possessed the Information prior to disclosure by Razorfish or otherwise.
4.05 If a party hereto becomes legally compelled to disclose any
of the other party's Information, the compelled party shall undertake reasonable
efforts to provide the other party with prompt notice of such requirement or
advice prior to disclosure so that the other party may seek a protective order
or other appropriate remedy and/or waive compliance with the terms of this
agreement. If such protective order or other remedy is not obtained, or the
other party waives compliance with the provisions hereof, the compelled party
agrees to furnish only that portion of the Information which it is legally
required to so furnish and, at the request of the other party, to use reasonable
efforts to obtain assurance that confidential treatment will be accorded such
Information, it being understood that such reasonable efforts shall be at the
cost and expense of the party whose Information has been sought.
4
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5. MISCELLANEOUS
-------------
5.01 All notices hereunder shall be in writing and shall be sent
by certified mail, return receipt requested, overnight courier, by messenger or
by facsimile, with confirmation of receipt, to the applicable address above. If
the notice is sent by mail, the effective date of the notice will be the fifth
day after the date of the United States Postal Service postmark, or the date of
actual receipt if it was not postmarked by the United States Postal Service. If
the notice is sent by overnight courier, the effective date of the notice will
be the date the notice was given to the courier service, as shown by the courier
service's records. If the notice is hand delivered, the effective date of the
notice will be the date shown on a written receipt given by the recipient to the
messenger.
5.02 The invalidity or unenforceability of any provision hereof
shall not affect the validity or enforceability of any other provision hereof.
This writing sets forth the entire understanding between the parties with
respect to the subject matter hereof, and no modification, amendment, waiver,
termination or discharge of this agreement shall be binding upon either party
unless confirmed by a written instrument signed by the parties hereto. Section
headings are included for reference only, and are not part of this agreement.
5.03 This agreement is made under and governed by the internal
laws of New York State, excluding its conflict of laws rules.
5.04 (a) Neither party hereto, without the prior written consent
of the other party, may assign this agreement or any of its rights and/or
obligations hereunder other than in connection with a merger, acquisition or
consolidation involving all or substantially all of the assigning party's
assets. No assignment made in accordance with the terms of this paragraph
5.04(a) shall relieve the respective assignor of its obligations hereunder, it
being understood that such assignor shall remain primarily liable with respect
thereto.
(b) Razorfish shall cause every person it employs in
connection with its services hereunder to agree in writing to comply with the
terms and conditions of Articles 2 and 4 hereof.
5.05 The parties acknowledge and agree that a breach of any of
the provisions of this agreement would result in immediate and irreparable harm
for which money damages would not be an adequate remedy. In the event of any
breach of the provisions of this agreement, the non-breaching party shall be
entitled to seek equitable relief, including in the form of injunctions and
orders for specific performance, in addition to all other remedies available at
law or in equity.
5.06 The provisions of Paragraphs 2.01, 2.03, 3.4 and Article 5
shall survive termination, expiration or cancellation of this agreement.
5
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If the foregoing is not consistent with Your understanding and agreement,
then please contact Razorfish immediately as Razorfish is proceeding in reliance
thereon; otherwise please sign in the respective space provided below.
Very truly yours,
RAZORFISH, INC.
By: /s/ Jeffrey A. Dachis
-------------------------------
Jeffrey A. Dachis
Its: President
AGREED TO AND ACCEPTED
ROADRUNNER GROUP, A JOINT VENTURE OF TIME
INC. AND TIME WARNER CABLE, A DIVISION OF
TIME WARNER ENTERTAINMENT CO., L.P. ("YOU")
By: /s/ Kendra Egge Wilde
-------------------------------
Kendra Egge Wilde
Its: Vice President - Business Development
And An Authorized Representative
6
<PAGE>
EXHIBIT 10.38
AT&T CORP. RAZORFISH, INC.
10 Independence Blvd. 107 Grand Street, 3rd Flr.
Warren, New Jersey 07059 New York, NY 10013
Attention: Willie Mae Harris Attention: Michael Simon
AT&T Corp. ("Company") agrees to purchase and Razorfish, Inc. ("Supplier")
agrees to sell in accordance with the terms and conditions stated in this
Agreement and any attachments to this Agreement.
Section One
-----------
STATEMENT OF WORK - Supplier shall perform all services under this Agreement as
set forth in Attachment A and Attachment A2, attached to and made a part of this
Agreement (the "work" or "services") to the extent that it (a) describes the
work to be performed, and (b) identifies any applicable schedules. Any other
matters addressed in the attached proposal are not made part of this Agreement
and are excluded from the understanding between the parties. Any conflict
between the attached proposal and this Agreement No. N7000015 will be resolved
in favor of the Agreement.
COMPENSATION - This is a fixed price Agreement and Company shall pay Supplier,
in full compensation for the Work under this Agreement, the total sum of
$673,200.00. Payments shall be made in installments, as defined in Attachment
A, in the section Schedule of Deliverables and Payment, attached hereto, based
on successful performance and acceptance of contract requirements or progress
toward contract requirements. Successful performance or progress towards
deliverables or any adjustment will be agreed to or negotiated by the
responsible AT&T Technical Manager acknowledging acceptance of work.
PERIOD OF PERFORMANCE - This Agreement will be effective August 18, 1997 and
---------------
will terminate on or about March 6, 1998.
TERMS OF PAYMENT - Net 15 days.
Section Two
-----------
ASSIGNMENT AND SUBCONTRACTING - Supplier shall not assign any right or interest
under this Agreement (excepting monies due or to become due) or delegate or
subcontract any Work or other obligation to be performed or owed under this
Agreement without the prior written consent of Company. Any attempted
assignment, delegation or subcontracting in contravention of the above
provisions shall be void and ineffective. Any assignment of monies shall be
void and ineffective to the extent that (1) Supplier shall not have given
Company at least thirty (30) days prior written notice of such assignment or (2)
such assignment attempts to impose upon Company obligations to the assignee
additional to the payment of such monies, or to preclude Company from dealing
solely and directly with Supplier in all matters pertaining to this Agreement
including the negotiation of amendments or settlements of charges due. All Work
performed by Supplier's subcontractor(s) at any tier shall be deemed Work
performed by Supplier.
<PAGE>
Agreement No.
Page 2 of 13
CHANGES - Company may at any time (pursuant to the Change Order procedures set
forth in this paragraph) during the progress of the Work require additions to or
alterations of or deductions or deviations (all hereinafter referred to as a
"Change") from the Work called for by the specifications, drawings and samples.
No Change shall be considered as an addition or alteration to or deduction or
deviation from the Work called for by the specifications, drawings and samples
nor shall Supplier be entitled to any compensation for work done pursuant to or
in contemplation of a Change, unless made pursuant to a written Change Order
issued by Company. Within ten (10) days after a request for a Change, Supplier
shall submit a proposal to Company which includes any increases or decreases in
Supplier's costs or changes in the delivery or Work schedule necessitated by the
Change. Company shall, within ten (10) days of receipt of the proposal, either
(i) accept the proposal, in which event Company shall issue a written Change
Order directing Supplier to perform the Change or (ii) advise Supplier not to
perform the Change in which event Supplier shall proceed with the original Work.
CHOICE OF LAW - The construction, interpretation and performance of this
Agreement and all transactions under it shall be governed by the laws of the
State of New Jersey excluding its choice of laws rules and excluding the
Convention for the International Sale of Goods. The parties agree that the
provisions of the New Jersey Uniform Commercial Code apply to this Agreement and
all transactions under it, including agreements and transactions relating to the
furnishing of services, the lease or rental of equipment or material, and the
license of software. Supplier agrees to submit to the jurisdiction of any court
wherein an action is commenced against Company based on a claim for which
Supplier has agreed to indemnify Company under this Agreement.
COMPLIANCE WITH LAWS - Supplier and all persons furnished by Supplier shall
comply at their own expense with all applicable federal, state, local and
foreign laws, ordinances, regulations and codes, including those relating to the
use of chlorofluorocarbons, and including the identification and procurement of
required permits, certificates, licenses, insurance, approvals and inspections
in performance under this Agreement. Supplier agrees to indemnify, defend (at
Company's request) and save harmless Company, its affiliates, its and their
customers and each of their officers, directors and employees from and against
any losses, damages, claims, demands, suits, liabilities, fines, penalties and
expenses (including reasonable attorney's fees) that arise out of or result from
any failure to do so.
ENTIRE AGREEMENT - This Agreement shall incorporate the typed or written
provisions on Company's orders issued pursuant to this Agreement and shall
constitute the entire agreement between the parties with respect to the subject
matter of this Agreement and the order(s) and shall not be modified or
rescinded, except by a writing signed by Supplier and Company. All references
in these terms and conditions to this Agreement or to Work, services, material,
equipment, products, software or information furnished under, in performance of,
pursuant to, or in contemplation of, this Agreement shall also apply to any
orders issued pursuant to this Agreement. Printed provisions on the reverse
side of Company's orders (except as specified otherwise in this Agreement) and
all provisions on Supplier's forms shall be deemed deleted. Additional or
different
<PAGE>
Agreement No.
Page 3 of 13
terms inserted in this Agreement by Supplier, or deletions thereto,
whether by alterations, addenda, or otherwise, shall be of no force and effect,
unless expressly consented to by Company in writing. Estimates or forecasts
furnished by Company shall not constitute commitments. The provisions of this
Agreement supersede all contemporaneous oral agreements and all prior oral and
written quotations, communications, agreements and understandings of the parties
with respect to the subject matter of this Agreement. The term "Work" as used
in this Agreement may also be referred to as "services."
FORCE MAJEURE - Neither party shall be held responsible for any delay or failure
in performance of any part of this Agreement to the extent such delay or failure
is caused by fire, flood, explosion, war, strike, embargo, government
requirement, civil or military authority, act of God, or other similar causes
beyond its control and without the fault or negligence of the delayed or
nonperforming party or its subconstractors ("force majeure conditions").
Notwithstanding the foregoing, Supplier's liability for loss or damage to
Company's material in Supplier's possession or control shall not be modified by
this clause. If any force majeure condition occurs, the party delayed or unable
to perform shall give immediate notice to the other party, stating the nature of
the force majeure condition and any action being taken to avoid or minimize its
effect. The party affected by the other's delay or inability to perform may
elect to: (1) suspend this Agreement or an order for the duration of the force
majeure condition and (i) at its option buy, sell, obtain or furnish elsewhere
material or services to be bought, sold, obtained or furnished under this
Agreement or an order (unless such sale or furnishing is prohibited under this
Agreement) and deduct from any commitment the quantity bought, sold, obtained or
furnished or for which commitments have been made elsewhere and (ii) once the
force majeure condition ceases, resume performance under this Agreement or an
order with an option in the affected party to extend the period of this
Agreement or order up to the length of time the force majeure condition endured
and/or (2) when the delay or nonperformance continues for a period of at least
fifteen (15) days, terminate, at no charge, this Agreement or an order or the
part of it relating to material not already shipped, or services not already
performed. Unless written notice is given within forty-five (45) days after the
affected party is notified of the force majeure condition, (1) shall be deemed
selected.
GOVERNMENT CONTRACT PROVISIONS - The following provisions regarding equal
opportunity, and all applicable laws, rules, regulations and executive orders
specifically related thereto, including applicable provisions and clauses from
the Federal Acquisition Regulation and all supplements thereto are incorporated
in this Agreement as they apply to work performed under specific U.S. Government
contracts: 41 CFR 60-1.4, Equal Opportunity; 41 CFR 60-1.7, Reports and Other
Required Information; 41 CFR 60-1.8, Segregated Facilities; 41 CFR 60-250.4,
Affirmative Action For Disabled Veterans and Veterans of the Vietnam Era (if in
excess of $10,000); and 41 CFR 60-741.4, Affirmative Action for Disabled Workers
(if in excess of $2,500), wherein the terms "contractor" and "subcontractor"
shall mean "Supplier". In addition, orders placed under this Agreement
containing a notation that the material or services are intended for use under
Government contracts shall be subject to such other Government provisions
printed, typed or written thereon, or on the reverse side thereof, or in
attachments thereto.
<PAGE>
Agreement No.
Page 4 of 13
IDENTIFICATION - Supplier shall not, without Company's prior written consent,
engage in advertising, promotion or publicity related to this Agreement, or make
public use of any Identification in any circumstances related to this Agreement.
"Identification" means any copy or semblance of any trade name, trademark,
service mark, insignia, symbol, logo, or any other product, service or
organization designation, or any specification or drawing of AT&T or its
affiliates, or evidence of inspection by or for any of them. Supplier shall
remove or obliterate any Identification prior to any use or disposition of any
material rejected or not purchased by Company, and, shall indemnify, defend (at
Company's request) and save harmless AT&T and its affiliates and each of their
officers, directors and employees from and against any losses, damages, claims,
demands, suits, liabilities, fines, penalties and expenses (including reasonable
attorneys' fees) arising out of Supplier's failure to so remove or obliterate.
IMPLEADER - Supplier shall not implead or bring an action against Company or its
customers or the employees of either based on any claim by any person for
personal injury or death to an employee of Company or its customers occurring in
the course or scope of employment and that arises out of material or services
furnished under this Agreement.
INDEMNITY - All persons furnished by Supplier shall be considered solely
Supplier's employees or agents, and Supplier shall be responsible for payment of
all unemployment, social security and other payroll taxes, including
contributions when required by law. Supplier agrees to indemnify and save
harmless Company, its affiliates, its and their customers and each of their
officers, directors, employees, successors and assigns (all hereinafter referred
to in this clause as "Company") from and against any losses, damages, claims,
demands, suits, liabilities, fines, penalties and expenses (including reasonable
attorney's fees) that arise out of or result from: (1) injuries or death to
persons or damage to property, including theft, in any way arising out of or
occasioned by, caused or alleged to have been caused by or on account of the
performance of the Work or services performed by Suppler or persons furnished by
Supplier; (2) assertions under Workers' Compensation or similar acts made by
persons furnished by Supplier or by any subcontractor or by reason of any
injuries to such persons for which Company would be responsible under Workers'
Compensation or similar acts if the persons were employed by Company; (3) any
failure on the part of Supplier to satisfy all claims for labor, equipment,
materials and other obligations relating directly or indirectly to the
performance of the Work; or (4) any failure by Supplier to perform Supplier's
obligations under this clause or the INSURANCE clause. Supplier agrees to
defend Company, at Company's request, against any such claim, demand or suit.
Company agrees to notify Supplier within a reasonable time of any written claims
or demands against Company for which Supplier is responsible under this clause.
INFRINGEMENT - Supplier shall indemnify and save harmless Company, its
affiliates, its and their customers, and each of their officers, directors,
employees, successors and assigns (all hereinafter referred to in this clause as
Company) from and against any losses, damages, liabilities, fines, penalties,
and expenses (including reasonable attorneys' fees) that arise out of or result
from any proved or unproved claim (1) of
<PAGE>
Agreement No.
Page 5 of 13
infringement of any patent, copyright, trademark or trade secret right, or other
intellectual property right, private right, or any other proprietary or personal
interest, and (2) related by circumstances to the existence of this Agreement or
performance under or in contemplation of it (an Infringement Claim). If the
Infringement Claim arises solely from Supplier's adherence to Company's written
instructions regarding services or tangible or intangible goods provided by
Supplier (Items) and if the Items are not (1) commercial items available on the
open market or the same as such items, or (2) items of Supplier's designated
origin, design or selection, Company shall indemnify Supplier. Company or
Supplier (at Company's request) shall defend or settle, at its own expense any
demand, action or suit on any Infringement Claim against the other for which it
is the indemnitor under the preceding provisions and each shall timely notify
the other of any assertion against it of any Infringement Claim and shall
cooperate in good faith with the other to facilitate the defense of any such
claim.
INSPECTION - Company's Representatives shall at all times have access to the
Work for the purpose of inspection or a Quality Review and Supplier shall
provide safe and proper facilities for such purpose.
INSURANCE - Supplier shall maintain and cause Supplier's subcontractors to
maintain during the term of this Agreement: (1) Workers' Compensation insurance
as prescribed by the law of the state or nation in which the Work is performed;
(2) employer's liability insurance with limits of at least $500,000 for each
occurrence; (3) Commercial General Liability ("CGL") insurance, including
Blanket Contractual Liability and Broad Form Property Damage with limits of at
least $1,000,000 combined single limit for bodily injury and property damage for
each occurrence; Supplier agrees that Supplier, Supplier's insurer(s) and anyone
claiming by, through, under or in Supplier's behalf shall have no claim, right
of action or right of subrogation against Company and its customers based on any
loss or liability insured against under the foregoing insurance. Supplier and
Supplier's subcontractors shall furnish prior to the start of Work certificates
or adequate proof of the foregoing insurance including, if specifically
requested by Company, copies of the endorsements and insurance policies.
Company shall be notified in writing at least thirty (30) days prior to
cancellation of or any change in the policy.
INVOICING - Supplier's invoices shall be rendered upon completion of the Work or
at other times expressly provided for in this Agreement or order; and shall be
payable when the Work has been performed to the satisfaction of Company.
Supplier shall mail invoices with copies of any supporting documentation
required by Company to the address shown on this Agreement or order. The Work
shall be delivered free from all claims, liens, and charges whatsoever. Company
reserves the right to require, before making payment, proof that all parties
furnishing labor and materials for the Work have been paid.
PAYMENT TERMS - Unless payment terms more favorable to Company appear on
Supplier's invoice and Company elects to pay on such terms, invoices shall be
paid in accordance with the terms stated in this Agreement, and due dates for
payment of invoices shall be computed from the date of receipt of invoice by
Company.
<PAGE>
Agreement No.
Page 6 of 13
RELEASES VOID - Neither party shall require (i) waivers or releases of any
personal rights or (ii) execution of documents which conflict with the terms of
this Agreement, from employees, representatives or customers of the other in
connection with visits to its premises and both parties agree that no such
releases, waivers or documents shall be pleaded by them or third persons in any
action or proceeding.
RIGHT OF ENTRY AND PLANT RULES - Each party shall have the right to enter the
premises of the other party during normal business hours with respect to the
performance of this Agreement, subject to all plant rules and regulations,
security regulations and procedures and U.S. Government clearance requirements
if applicable. Supplier shall become acquainted with conditions governing the
delivery, receipt and storage of materials at the site of the Work so that
Supplier will not interfere with Company's operations. Storage space will not
necessarily be provided adjacent to the site of the Work. Therefore, Supplier
shall be expected to select, uncrate, remove and transport materials from the
storage areas provided. Company is not responsible for the safekeeping of
Supplier's property on Company premises. Supplier shall not stop, delay or
interfere with Company's work schedule without the prior approval of Company's
Representative. Suppler shall provide and maintain sufficient covering and take
any other precautions necessary to protect Company's stock, equipment and other
property from damage due to Supplier's performance of the Work.
SUPPLIER'S INFORMATION - Supplier shall not provide under, or have provided in
contemplation of, this Agreement any idea, data, program, technical, business or
other intangible information, however conveyed, or any document, print, tape,
disk, semiconductor memory or other information-conveying tangible article,
unless Supplier has the right to do so, and Supplier shall not view any of the
foregoing as confidential or proprietary.
SURVIVAL OF OBLIGATIONS -The obligations of the parties under this Agreement
which by their nature would continue beyond the termination, cancellation or
expiration of this Agreement, including, by way of illustration only and not
limitation, those in the clauses COMPLIANCE WITH LAWS, IDENTIFICATION,
IMPLEADER, INDEMNITY, INFRINGEMENT, INSURANCE, RELEASES VOID, USE OF INFORMATION
and WARRANTY, shall survive termination, cancellation or expiration of this
Agreement.
TAXES - Company shall reimburse Supplier only for the following tax payments
with respect to transactions under this Agreement unless Company advises
Supplier that an exemption applies: state and local sales and use taxes, as
applicable. Taxes payable by Company shall be billed as separate items on
Supplier's invoices and shall not be included in Supplier's prices. Company
shall have the right to have Supplier contest any such taxes that Company deems
improperly levied at Company's expense and subject to Company's direct and
control.
TERMINATION - Company may at any time terminate this Agreement or an order, in
whole or in part, by written notice to Supplier. In such case, Company's
liability shall be limited to payment of the amount due for Work performed up to
and including the date of
<PAGE>
Agreement No.
Page 7 of 13
termination (which amount shall be substantiated with proof satisfactory to
Company), and no further Work will be rendered by Supplier. Such payment shall
constitute a full and complete discharge of Company's obligations. In no event
shall Company's liability exceed the price for the Work being terminated.
TOOLS AND EQUIPMENT - Unless otherwise specifically provided in this Agreement,
Supplier shall provide all labor, tools and equipment (the "tools") for
performance of this Agreement. Should Supplier actually use any tools owned or
rented by Company or its customer, Supplier acknowledges that Supplier accepts
the tools "as is, where is," that neither Company nor its customer have any
responsibility for the condition or state of repair of the tools and that
Supplier shall have risk of loss and damage to such tools. Supplier agrees not
to remove the tools from Company's or its customer's premises and to return the
tools to Company or its customer upon completion of use, or at such earlier time
as Company or its customer may request, in the same condition as when received
by Supplier, reasonable wear and tear excepted.
USE OF INFORMATION - Supplier shall view as Company's property any idea, data,
program, technical, business or other intangible information, however conveyed,
and any document, print, tape, disk, tool, or other tangible information-
conveying or performance-aiding article owned or controlled by Company, and
provided to, or acquired by, Supplier under or in contemplation of this
Agreement (Information). Supplier shall, at no charge to Company, and as
Company directs, destroy or surrender to Company promptly at its request any
such article or any copy of such Information. Supplier shall keep Information
confidential and use it only in performing under this Agreement and obligate its
employees, subcontractors and others working for it do so, provided that the
foregoing shall not apply to information previously known to Supplier free of
obligation, or made public through no fault imputable to Supplier.
WAIVER - The failure of either party at any time to enforce any right or remedy
available to it under this Agreement or otherwise with respect to any breach or
failure by the other party shall not be construed to be a waiver of such right
or remedy with respect to any other breach or failure by the other party.
WARRANTY - Supplier warrants to Company that material furnished will be new,
merchantable, free from defects in design, material and workmanship and will
conform to and perform in accordance with the specifications, drawings and
samples. These warranties extend to the future performance of the material and
shall continue for one year after the material is accepted by Company. Supplier
also warrants to Company that services will be performed in a first class,
workmanlike manner. In addition, if material furnished contains one or more
manufacturers' warranties, Supplier hereby assigns such warranties to Company
and its customers. All warranties shall survive inspection, acceptance and
payment. Material or services not meeting the warranties will be, at Company's
option, returned for refund, repaired, replaced or reperformed by Supplier at no
cost to Company or its customers and with transportation costs and risk of loss
and damage in transit borne by Supplier. Repaired and replacement material
shall be warranted as set forth above in this clause.
<PAGE>
Agreement No.
Page 8 of 13
WORK DONE BY OTHERS - If any of the Work is dependent on work done by others,
Supplier shall inspect and promptly report to Company's Representative any
defect that renders such other work unsuitable for Supplier's proper
performance. Supplier's silence shall constitute approval of such work as fit
and suitable for Supplier's performance.
Section Three
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MEDIATION - If a dispute arises out of or relates to this Agreement, or its
breach, and the parties have not been successful in resolving such dispute
through negotiation, the parties agree to attempt to resolve the dispute through
mediation by submitting the dispute to a sole mediator selected by the parties
or, at any time at the option of a party, to mediation by the American
Arbitration Association ("AAA"). Each party shall bear its own expenses and an
equal share of the expenses of the mediator and the fees of the AAA. The
parties, their representatives, other participants and the mediator shall hold
the existence, content and result of the mediation in confidence. If such
dispute is not resolved by such mediation, the parties shall have the right to
resort to any remedies permitted by law. All defenses based on passage of time
shall be tolled pending the termination of the mediation. Nothing in this
clause shall be construed to preclude any party from seeking injunctive relief
in order to protect its rights pending mediation. A request by a party to a
court for such injunctive relief shall not be deemed a waiver of the obligation
to mediate.
Section Four
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AUDIT - With the exception of prices fixed by this Agreement, Supplier shall
maintain accurate and complete records including a physical inventory, if
applicable, of all costs incurred under this Agreement which may affect costs
(i.e. travel, living expense, etc.) payable by Company under this Agreement.
These records shall be maintained in accordance with recognized commercial
accounting practices so they may be readily audited and shall be held until
costs have been finally determined under this Agreement and payment or final
adjustment of payment, as the case may be, has been made. Supplier shall permit
Company or Company's representative to examine and audit these records and all
supporting records at all reasonable times. Audits shall be made not later than
three (3) calendar year(s) after the (a) final delivery date of material ordered
or completion of services rendered or three (3) calendar year(s) after
expiration date of this Agreement, whichever comes later.
AUTHORSHIP, COPYRIGHT AND MASK WORK RIGHTS - The entire right, title, and
interest, including copyright and mask work rights, in all original works of
authorship fixed in any tangible medium of expression heretofore or hereafter
created by Supplier, or on Supplier's behalf, for Company or furnished to
Company hereunder is hereby transferred to and vested in Company. The parties
expressly agree to consider as works made for hire those works ordered or
commissioned by Company which qualify as such in accordance with the Copyright
laws. For all such original works, Supplier agrees to provide documentation
satisfactory to Company to assure the conveyance of all such right, title, and
interest, including copyright and mask work rights, to Company.
<PAGE>
Agreement No.
Page 9 of 13
BANKRUPTCY AND TERMINATION FOR FINANCIAL INSECURITY - Either party may terminate
this Agreement by notice in writing:
1) if the other party makes an assignment for the benefit of creditors (other
than solely an assignment of moneys due); or
2) if the other party evidences an inability to pay debts as they become due,
unless adequate assurance of such ability to pay is provided within thirty (30)
days of such notice.
If a proceeding is commenced under any provision of the United States Bankruptcy
Code, voluntary or involuntary, by or against either party, and this Agreement
has not been terminated, the non-debtor party may file a request with the
bankruptcy court to have the court set a date within sixty (60) days after the
commencement of the case, by which the debtor party will assume or reject this
Agreement, and the debtor party shall cooperate and take whatever steps
necessary to assume or reject the Agreement by such date.
CLAUSE HEADINGS - The headings of the clauses in this Agreement are inserted for
convenience only and are not intended to affect the meaning or interpretation of
this Agreement.
DEVELOPED INFORMATION - Supplier agrees that Supplier will and, where
applicable, will have Supplier's associates (as defined in the INVENTIONS
clause), disclose and furnish promptly to Company any and all technical
information, computer or other apparatus programs, specifications, drawings,
records, documentation, works of authorship or other creative works, ideas,
knowledge or data, written, oral or otherwise expressed ("Information"),
originated or developed by Supplier or by any of Supplier's associates as a
result of Work performed under, or in anticipation of, this Agreement. Supplier
further agrees that all such Information shall be Company's property, shall be
kept in confidence by Supplier and Supplier's associates, shall be used only in
performing this Agreement or in the filling of orders hereunder, and may not be
used for other purposes except upon such terms as may be agreed upon between the
parties in writing. If such Information includes materials previously developed
or copyrighted by Supplier and not originated or developed hereunder, Supplier
agrees to grant and hereby grants to Company and AT&T Corp. ("AT&T"), severally,
a nonexclusive, royalty-free license to use and copy such materials. The
licenses so granted to Company and to AT&T include the right to grant
sublicenses to their subsidiaries and associated companies. Supplier also
agrees to acquire from Supplier's associates such assignments, rights and
covenants as to assure that Company and AT&T shall receive the rights provided
for in the DEVELOPED INFORMATION clause.
HARMONY - Supplier shall be entirely responsible for all persons furnished by
Supplier working in harmony with all others when working on Company's premises
or those of Company's customers.
IDENTIFICATION CREDENTIALS - Company may, at its discretion, require Supplier's
employees to exhibit identification credentials, which Company may issue, in
<PAGE>
Agreement No.
Page 10 of 13
order to gain access to Company's premises for the performance of the Work. If,
for any reason, any of Supplier's employees are no longer performing Work,
Supplier shall immediately inform Company's Representative in the speediest
manner possible. Notification shall be followed by the prompt delivery to
Company's Representative of the identification credentials involved or a written
statement of the reasons why the identification credentials cannot be returned.
Supplier shall be liable for any damage or loss sustained by Company if such
identification credentials are not returned to Company.
INSPECTION AND/OR REJECTION OF WORK - Supplier shall provide Company with free
access to the work performed and the equipment and materials furnished by
Supplier under this Contract, if any, for the purpose of inspection thereof. At
any time during the progress of the work, Company may condemn or reject any or
all of the work, equipment or materials if the same are not in accordance with
this Contract and shall give written notice to Supplier of such default.
Supplier will thereupon have twenty-four (24) hours to remedy the default. If
Supplier fails to timely remedy the default, Company reserves the right to take
over any or all work, to provide labor, equipment and materials, and to complete
or have completed any part or all of the work. The cost of completion by
Company shall be deducted from the unpaid balance, if any, due or which may
become due Supplier under this Contract. If there is no unpaid balance or if
the cost of completion by Company is in excess of the unpaid balance, Supplier
agrees to reimburse Company for such cost, less the amount of the unpaid
balance, if any.
NONEXCLUSIVE SERVICES - It is expressly understood and agreed that this
Agreement neither grants to Supplier an exclusive right or privilege to sell to
Company any or all material or services of the type described in this Agreement
which Company may require, nor requires the purchase of any material or services
from Supplier by Company. It is, therefore, understood that Company may
contract with other manufacturers and Suppliers for the procurement of
comparable materials or services. In addition, Company shall at its sole
discretion, decide the extent to which Company will market, advertise, promote,
support, or otherwise assist in further offerings of the material or services.
Supplier agrees that purchases by Company under this Agreement shall neither
restrict the right of Company to cease purchasing nor require Company to
continue any level of such purchases.
NOTICES - Any notice or demand which under the terms of this Agreement or under
any statute must or may be given or made by Supplier or Company shall be in
writing and shall be given or made by telegram tested telex, confirmed
facsimile, or similar communication or by certified or registered mail addressed
to the respective parties as follows:
To Company: AT&T Corp.
10 Independence Blvd.
Warren, New Jersey 07059
Attention: Manager, Supplier Management
<PAGE>
Agreement No.
Page 11 of 13
To: Razorfish, Inc.
107 Grand Street, 3rd Fl.
New York, NY 10013
Attention: Michael Simon
Such notice or demand shall be deemed to have been given or made when sent by
telegram, telex, or facsimile, or other communication or when deposited, postage
prepaid in the U.S. mail. The above addresses may be changed at any time by
giving prior written notice as above provided.
REPRESENTATIVES - Company's Technical Representative is Mary Lou Floyd and
--------------
Company's Agreement Representative is Willie Mae Harris. All Work rendered
under this Agreement is subject to inspection and acceptance by Company's
Technical Representative or, in the Technical Representative's absence, by
others as may be delegated in writing by Company.
RIGHT OF ACCESS - Each party shall permit the other party reasonable access to
its facilities in connection with work under this Agreement. No charge shall be
made for such visits. It is agreed that prior notification will be given when
access is required.
STANDARDS - Employees with records of criminal convictions, other than minor
traffic violations, shall not be assigned to Company's premises until a detailed
statement of the circumstances is furnished to Company for its review and
Company has given its written approval to such assignment. In fulfilling
Supplier's obligations under this clause, Supplier shall comply with all laws
relating to the making of investigation reports and the disclosure of the
information contained therein.
SUPPLIER EMPLOYEES - The term Supplier employee means anyone performing the Work
or furnished by Supplier under this Agreement, including but not limited to the
Supplier's employees, consultants, representatives, agents, subcontractors, and
subcontractors' subcontractors at all tiers. It is agreed that all persons
provided by Supplier to perform the Work are not employees or agents of Company,
and Company shall not exercise any direct control or supervision over Supplier
employees but Company's Representative will be available for consultation.
Supplier shall be responsible for its own labor relations with any trade or
union which represents its employees and shall be responsible for negotiating
and adjusting all disputes. Supplier shall be the sole entity responsible for
receiving complaints from Supplier employees regarding their assignments and for
notifying Supplier employees of the termination or change of their assignments.
Company has the right at any time (prior to and after assignment to Company's
Work) and for any reason to reject or to have Supplier remove Supplier's
employees from the Work under this Agreement upon notice to Supplier. Upon such
notice, Supplier shall, at Company's request, replace the Supplier employee(s).
In the event of any staffing change, Company shall not be charged for the time
required to train the replacement. The amount of noncompensatory training time,
if any, shall be mutually determined by Supplier and Company's Representative.
<PAGE>
Agreement No.
Page 12 of 13
Supplier further agrees that any of Supplier's employees who is or becomes a
`leased employee' (as defined in Section 414(n) of the Internal Revenue Code) of
Company during the term of this Agreement, shall not be covered by, and shall be
excluded from participation in, any employee benefit plan maintained by Company.
Supplier shall indemnify and save Company harmless from and against any losses,
damages, claims, demands, suits, and liabilities that arise out of, or results
from, any failure by Supplier to perform its obligations under this clause.
Supplier shall also indemnify and save Company harmless from any entitlement,
assertion, or claim, which any of Supplier's employees might have or might make
relative to rights or privileges in any Company employee benefit plan and which
arises, in whole or in part, out of Work rendered under this Agreement.
SUPPLIER'S INFORMATION - Except for information owned by Company under the
clause DEVELOPED INFORMATION, no specifications, drawings, sketches, models,
samples, tools, computer or other apparatus programs, technical or business
information or data, written, oral, or otherwise, furnished by Supplier to
Company under this Agreement or order, or in contemplation of this Agreement or
order shall be considered by Supplier to be confidential or proprietary.
TIMELY PERFORMANCE - If Supplier has knowledge that anything prevents or
threatens to prevent the timely performance of the Work under this Agreement,
Supplier shall immediately notify Company's Representative thereof and include
all relevant information concerning the delay or potential delay.
ACCEPTANCE
When in Supplier's opinion the Technical Services and/or project deliverables
described in this Agreement have been completed, Supplier shall provide written
notification of such fact to Company.
A. Company shall evaluate each deliverable furnished under this Agreement for
compliance with the Specifications and shall submit a written acceptance or
rejection to Supplier within ten (10) days after the receipt by Company of the
complete deliverable associated with each task. Such written acceptance or
rejection shall be made only by Company's Technical Representative. In no event
shall early turnover of the deliverable by Supplier to Company or use of such
deliverable by Company or its customers for business, profit, revenue or any
other lawful use constitute acceptance of such deliverable by Company. Company
shall have the right to accept portions of any deliverable. Company's acceptance
of any deliverable or any portion thereof shall occur only upon a formal written
acceptance sent by the aforementioned Company Representative.
B. If a deliverable evaluated pursuant to paragraph A of this clause is
rejected, Supplier agrees to correct, at its expense, each error or defect
(referred to herein collectively as "defect") leading to such rejection and
resubmit the corrected deliverable to Company within fifteen (15) days after
receipt of notice from Company of such error or defect. Company shall have ten
(10) days after the resubmitting of such corrected
<PAGE>
Agreement No.
Page 13 of 13
deliverable to accept or reject such deliverable. If the corrected deliverable
complies with the Specifications, Supplier shall incorporate the corrections in
the deliverable.
C. If the defects in a rejected deliverable are not corrected within the
fifteen (15) day period specified in paragraph B of this clause or if a
resubmitted deliverable retested or re-evaluated by Company during the ten (10)
day re-evaluation period is again rejected, then Company may at its option: (1)
retain the deliverable at an equitable adjustment in price as may be agreed by
the parties, in which case that deliverable shall be deemed accepted; (2) afford
Supplier one or more correction extensions for a period or periods to be
specified by Company without prejudice to Company's rights to thereafter
exercise its option under either clause (1) or (3) of this paragraph without
further notice to Supplier, if the defects have not been corrected; or (3) be
entitled to a prompt and full refund of all moneys previously paid under this
Agreement. If option (3) is exercised, Company shall have no further obligation
to Supplier under this Agreement as to such deliverable or any other deliverable
and may elect to terminate this Agreement at any time by written notice to
Supplier.
AGREED:
AT&T Corp. Razorfish, Inc.
By: By:
--------------------------------- --------------------------------
Name: Mary Lou Floyd Name:
------------------------------- ------------------------------
Title: General Manager Title: V.P. Business Development
------------------------------ -----------------------------
Dated: 11/6/97 Date: 11/6/97
------------------------------ ------------------------------
<PAGE>
EXHIBIT 10.39
RAZORFISH, INC.
107 GRAND STREET, THIRD FLOOR
NEW YORK, NEW YORK 10013
Dated as of: May 12, 1997
CBS News Media, a division of CBS Inc.
524 West 57th Street
New York, New York 10019
Attn.: Meredith Stark
Ladies and Gentlemen:
This letter shall constitute the exclusive agreement between you ("CBS")
and us ("Razorfish") and shall supersede all letters and/or other communications
by and between the parties hereto (including, without limitation, by and between
their respective agents, attorneys and so forth) prior to the date hereof
regarding the subject matter hereof. The terms of said agreement are as
follows:
1. DEVELOPMENT OF THE PROJECT
--------------------------
1.01. Phase One: Development of a Prototype of CBS Now Web Site
(a) Razorfish will work with CBS to develop a series of
screens to promote the CBS Now Web Site (the "Work") concept to the affiliates
of CBS. This prototype (the "Prototype") of the Work will contain sample
versions of some of the Work's final features as mutually determined by
Razorfish and CBS.
(b) Development of the Prototype will include, without
limitation, the following: delivery of presentation recommendations to CBS;
architectural recommendations and site map; navigational and information design;
production of all graphical elements, including icons, and illustrations;
development of mock news "content" where appropriate; development of all mocked-
up functionality (Java Script, gif-89 animation, etc.) and code architecture.
(c) The completion date for phase one of the Work as
described in this paragraph 1.01 will be no later than May 24, 1997. Razorfish
understands that prompt performance of the services described in this paragraph
1.01 is required by CBS in order to meet its schedules and commitments. Neither
party, however, shall be responsible for any delays that are not due to such
party's fault or negligence that could not have been reasonably foreseen or
provided against.
1.02. Phase Two: Development of the Work
(a) CBS may terminate this agreement no later than June 10,
1997 upon express written notice to Razorfish. In the event that CBS does not
exercise its right to
<PAGE>
terminate this agreement in accordance with the terms of the preceding sentence,
the parties hereto shall proceed to phase two of the Work as described in
paragraphs 1.02(b) and 1.02(c) below.
(b) Razorfish will work with CBS to: finalize design of the
templates; produce all necessary banners, buttons, icons, and other interface
elements; program and script identified site functionalities; code of all the
site HTML; make provisions for the integration of content partner materials;
make provisions for the integration of the site database to be implemented by
CBS; make provisions for the publishing system to be implemented by CBS; develop
several different templates which will enable CBS affiliates to produce content
for embodiment in the Work; and, build out the CBS service for a
September/October soft launch.
(c) The estimated completion date for phase two of the Work
as described in this paragraph 1.02 is September/October 1997.
1.03. Phase Three: Further Refinements of the Work
(a) Razorfish will work with CBS to further refine and
finalize the Work for its official launch in January 1998. This process will
include, without limitation, integration of the final elements, extensive
quality assurance and the supervision of the final porting and launch of the
Work.
(b) Subject to paragraph 1.03(c) below, the completion date
of phase three of the Work as described in paragraph 1.03(a) above shall be no
later than December 31, 1997. Razorfish understands that prompt performance of
the services described in this paragraph 1.03(b) is required by CBS in order to
meet its schedules and commitments. Neither party, however, shall be responsible
for any delays that are not due to such party's fault or negligence that could
not have been reasonably foreseen or provided against.
(c) CBS shall have the right, upon written notice to
Razorfish no later than December 15, 1997 accompanied by the payment set forth
in paragraph 2.01(d) below, to extend (the "Extension Option") the completion
date set forth in paragraph 1.03(b) to and including January 31, 1998. Razorfish
understands that prompt performance of the services described in this paragraph
1.03(c) is required by CBS in order to meet its schedules and commitments.
Neither party, however, shall be responsible for any delays that are not due to
such party's fault or negligence that could not have been reasonably foreseen or
provided against.
1.04. Work Outside the Scope of this Agreement
(a) The following services are specifically excluded from the
Work: programming of the site database; programming of the site publishing
system; programming of a search and archive feature; redesign of content partner
sites to comply with templates designed for the Work; development of server and
network infrastructure; implementation of the Work at the affiliate level;
training of the affiliate stations.
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<PAGE>
(b) Any services performed in the areas described in
paragraph 1.04(a) above will be considered outside of the scope of work as
described in this Article 1 and will be subject to the provisions set forth in
paragraph 2.03 below.
2. FEES, TERMS AND CONDITIONS
--------------------------
2.01. (a) CBS shall pay Razorfish a non-refundable retainer (the
"Retainer") in an amount equal to One Hundred Eighty Thousand Dollars ($180,000)
upon complete execution hereof.
(b) In the event that CBS exercises its right of termination
in accordance with the terms of paragraph 1.02(a) above, CBS shall pay to
Razorfish, in addition to the amount set forth in paragraph 2.01(a) above, an
amount equal to Fifty Thousand Dollars ($50,000) on June 10, 1997.
(c) In the event that CBS does not exercise its right of
termination in accordance with the terms of paragraph 1.02(a) above, CBS shall
pay Razorfish, in addition to the amount set forth in paragraph 2.01(a) above,
as follows:
(i) an additional fee of Fifty Thousand Dollars
($50,000) on June 10, 1997 in consideration of expedited services rendered in
accordance with the satisfaction of the conditions set forth in paragraph 1.01
above; and
(ii) an additional Retainer in the following manner:
(1) One Hundred Seventy Thousand Dollars ($170,000)
on July 15, 1997;
(2) One Hundred Seventy Thousand Dollars ($170,000)
on September 15, 1997; and
(3) the balance of One Hundred Seventy Thousand
Dollars ($170,000) simultaneous with complete delivery in
accordance with paragraph 1.03 above.
(d) Notwithstanding the provisions of paragraph
2.01(c)(ii)(3) to the contrary and in lieu thereof, in the event that CBS
exercises the Extension Option as described in paragraph 1.03(c) above, CBS
shall pay Razorfish as follows:
(i) Seventy Thousand Dollars ($70,000) upon exercise of
the Extension Option: and
(ii) One Hundred Thousand Dollars ($100,000) simultaneous
with complete delivery in accordance with paragraph 1.03 above.
2.02. The Retainers and fees described in paragraph 2.01 above
are determined by taking into account the time and effort required to satisfy
CBS's objectives, the timely delivery by CBS to Razorfish of the materials
needed in order to create the Work, the timely
3
<PAGE>
availability of CBS representatives to review the Work on the agreed upon sign-
off dates, the nature of the matter involved and the Razorfish personnel who
perform the services hereunder. Retainers are pre-payments of monthly hourly
bills and, other than as set forth in paragraph 2.01(a) above and subject to
paragraph 2.03 below, are recoupable against actual hourly bills accrued on a
monthly basis. Razorfish shall prepare on a monthly basis and provide to CBS a
summary of time expended in connection with the Work and disbursements applied
to the Work as reconciled against the overall estimated budget of the Work.
2.03. Notwithstanding anything to the contrary set forth in
paragraphs 2.01 and 2.02 above, in the event that the scope of work as described
in Article 1 above and more further described in the Agreement (as defined in
paragraph 6.01 below) is modified or otherwise expanded, Razorfish will bill CBS
separately for the modifications on a monthly basis. Prior to the completion of
any overage work, Razorfish will submit a change order request to CBS's
designated project manager for approval. Upon written approval by CBS of the
subject change order, Razorfish will begin the work described.
2.04. (a) Sales tax is not included in the amounts set forth
in this Article 2 and will be included on any applicable transactions.
(b) Expenses have not been included in the amounts set
forth in this Article 2 and will be included and itemized in monthly billing.
Expenses are calculated and billed on a cost basis. Project expenses include,
but are not limited to: long-distance calls, facsimiles, copies, overnight
delivery, messengers, etc.
3. RIGHTS
------
3.01. (a) The Work shall be considered a "work made for hire".
(b) Notwithstanding anything to the contrary set forth
in paragraph 3.01 above, any technology owned and/or controlled by Razorfish and
which Razorfish embodies in the Work shall be excluded from the work made for
hire provisions.
3.02. In the event that CBS desires to modify the Work after
the same is delivered by Razorfish, CBS will provide Razorfish with the first
opportunity to modify the same in accordance with the terms and conditions to be
negotiated in good faith.
3.03. CBS shall have the right of approval with respect to the
promotion by Razorfish of that portion of the Work that embodies CBS's name in
its on-line portfolio, its press kit, its press releases, and any other
promotional materials, provided, however, that such approval shall not be
unreasonably withheld and shall be deemed to have been given within five (5)
days following CBS's receipt of such material, unless CBS notifies Razorfish to
the contrary within said five (5) day period. Notwithstanding the foregoing, any
inadvertent failure by Razorfish to obtain the aforesaid approval shall not be
deemed a breach of this agreement.
4
<PAGE>
4. WARRANTIES, REPRESENTATIONS AND INDEMNIFICATON
----------------------------------------------
4.01. CBS warrants and represents the following:
(a) CBS is authorized, empowered and able to enter into
and fully perform its obligations under this agreement. Neither this agreement
nor the fulfillment thereof by any party infringes upon the rights of any third
party.
(b) The use and/or embodiment by Razorfish in the Work
of any materials provided by CBS to Razorfish hereunder shall not violate or
infringe upon the rights of any third party.
(c) CBS shall be solely responsible for and shall pay
all sums due to any third parties entitled to receive any payments in connection
with materials provided by CBS to Razorfish hereunder and/or materials which CBS
requires Razorfish to obtain for display and/or digital transmission in the
Work.
(d) CBS agrees to and does hereby indemnify, save and
hold Razorfish harmless of and from any and all liability, loss, damage, cost or
expenses (including attorneys' fees) arising out of or connected with any breach
or alleged breach of this agreement or any claim which is inconsistent with any
of the warranties or representations made by CBS in this agreement, and agrees
to reimburse Razorfish on demand for any payment made or incurred by Razorfish
with respect to any of the foregoing.
4.02. Razorfish warrants and represents the following:
(a) Razorfish is authorized, empowered and able to enter
into and fully perform its obligations under this agreement. Neither this
agreement nor the fulfillment thereof by an party infringes upon the rights of
any third party.
(b) Razorfish shall be solely responsible for and shall
pay all sums due to any third parties entitled to receive any payments in
connection with materials embodied in the Work by Razorfish other than as
provided and/or instructed by CBS as described in paragraph 4.01(c) above.
(c) Razorfish agrees to and does hereby indemnify, save
and hold CBS harmless of and from any and all liability, loss, damage, cost or
expenses (including attorneys' fees) arising out of or connected with any breach
or alleged breach of this agreement or any claim which is inconsistent with any
of the warranties or representations made by Razorfish in this agreement, and
agrees to reimburse CBS on demand for any payment made or incurred by CBS with
respect to any of the foregoing.
5
<PAGE>
5. CONFIDENTIALITY
---------------
5.01. CBS and Razorfish acknowledge that, in connection with
the services rendered hereunder, the parties may provide certain proprietary
technical, financial and other information (collectively, the "Information") to
each other.
5.02. CBS and Razorfish agree that the Information will be
treated, held and maintained by CBS and Razorfish and their respective
representatives in the strictest confidence, will be used by CBS and Razorfish
and their respective representatives solely and exclusively for the purpose of
furthering the activities contemplated herein, and will not, directly or
indirectly, be used for any other purpose whatsoever by either party or its
representatives without prior written consent of the other party.
5.03. CBS and Razorfish agree that, upon written request by
either party hereto, all Information given by one party to the other party shall
immediately be returned to the party which owns, controls or developed the same
and no part thereof shall be retained by the other party or such other party's
representatives in any form and/or for any reason.
5.04. (a) Notwithstanding the provisions of paragraph 5.02
above, Razorfish does not have to keep Information confidential if: it is or
becomes available to the public, other than as a result of disclosure by
Razorfish; it becomes available to Razorfish from a source other than CBS and
that source was not bound by a confidentiality agreement with CBS; or Razorfish
can demonstrate that Razorfish possessed the Information prior to disclosure by
CBS or otherwise.
(b) Notwithstanding the provisions of paragraph 5.02
above, CBS does not have to keep Information confidential if: it is or becomes
available to the public, other than as a result of disclosure by CBS; it becomes
available to CBS from a source other than Razorfish and that source was not
bound by a confidentiality agreement with Razorfish; or CBS can demonstrate that
CBS possessed the Information prior to disclosure by Razorfish or otherwise.
6. MISCELLANEOUS
-------------
6.01. Razorfish and CBS hereby acknowledge that it is their
mutual intent to enter into a more formal agreement (the "Agreement") at a later
date. The terms and provisions of the Agreement shall be the terms and
provisions set forth in Razorfish's standard form agreement as modified by the
terms set forth above provided, however, that Razorfish and CBS agree to
negotiate in good faith concerning the non-financial terms of the Agreement.
Notwithstanding the foregoing, until such time as the Agreement is concluded,
this letter shall constitute the exclusive agreement between CBS and Razorfish.
6.02. In the event that Thomas Mueller is unable to render his
services in connection with this agreement, Razorfish shall consult with CBS
concerning the identity of the individual allocated to the Work in the capacity
of the Senior Designer.
If the foregoing is not consistent with CBS's understanding and agreement,
then please contact Razorfish immediately as Razorfish is proceeding in reliance
thereon; otherwise, please sign in the respective space provided below.
6
<PAGE>
Very truly yours,
RAZORFISH, INC.
By:__________________________________
Jeffrey A. Dachis
Its: President
AGREED TO AND ACCEPTED:
CBS NEWS MEDIA, a division of CBS INC.
By: __________________________________
[ ]
Its: President, CBS Television Network
7
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports dated March 5, 1999 for Razorfish, Inc. and subsidiaries, March 5, 1999
for Spray Network AB and subsidiaries, March 5, 1999 for Avalanche Systems, Inc.
and January 18, 1999 for Spray Ventures AB and subsidiaries included in or
made a part of this registration statement.
ARTHUR ANDERSEN LLP
New York, New York
April 9, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and the
use of our report dated March 3, 1997 relating to the financial statements of
Avalanche Systems, Inc. for the year ended December 31, 1996 included in
Amendment No. 1 to Registration Statement No. 333-71043 on Form S-1 for the
registration of the Class A Common Stock of Razorfish, Inc.
/s/ M.R. Weiser & Co. LLP
M.R. Weiser & Co. LLP
New York, New York
April 9, 1999
