<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
_______________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1999
--------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ___________ to ____________
Commission File Number 000-25847
---------
RAZORFISH,INC.
-------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3804503
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
107 Grand Street, 3rd Floor, New York, New York 10013
-----------------------------------------------------
(Address of Principal Executive Offices, Including Zip Code)
(212) 966-5960
--------------
(Registrant's Telephone Number, Including Area Code)
N/A
---
(Former Name, Former Address And Former
Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [_] YES [X] NO
The number of shares outstanding of the Registrant's Class A Common Stock as of
May 31, 1999 was 24,551,367.
<PAGE>
RAZORFISH, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1998
(audited) and March 31, 1999 1
Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 and 1999 2
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1999 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
RAZORFISH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Assets December 31, March 31,
------
1998 1999
-----------------------------------
(audited) (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 598,720 $10,273,995
Accounts receivable, net of allowance for doubtful accounts of $50,000
and $100,000, respectively 2,373,006 8,391,429
Unbilled charges 1,326,905 1,793,611
Prepaid expenses and other current assets 572,700 3,517,398
Deferred tax assets 102,128 48,217
Due from affiliate 601,089 1,596,052
-----------------------------------
Total current assets 5,574,548 25,620,702
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of
$472,410 and $1,206,057, respectively 1,185,544 2,761,529
INTANGIBLES, net of accumulated amortization of $106,634 and $1,339,527, respectively 3,454,582 58,354,255
DEFERRED TAX ASSETS 620,275 620,284
DEFERRED REGISTRATION COSTS 564,165 2,008,576
OTHER ASSETS 686,369 932,411
-----------------------------------
Total assets $12,085,483 $90,297,757
===================================
Liabilities and Stockholders' Equity
------------------------------------
CURRENT LIABILITIES:
Due to Omnicom Group, Inc. $ 1,782,380 $ 566,181
Due to related party 500,000 -
Accounts payable and accrued expenses 1,791,417 8,132,549
Income taxes payable 206,024 927,681
Deferred rent 58,158 82,158
Advanced billings 345,031 1,093,632
Current portion of capital lease obligations 47,107 24,588
Deferred tax liabilities 1,395,884 1,409,700
-----------------------------------
Total current liabilities 6,126,001 12,236,489
LONG-TERM DEBT 3,206,506 3,600,130
CAPITAL LEASE OBLIGATIONS 5,671 5,000
MINORITY INTEREST - 48,779
OTHER LIABILITIES 18,655 394,414
-----------------------------------
Total liabilities 9,356,833 16,284,812
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; 9,223,821 and 21,087,875 shares
issued and outstanding at December 31, 1998 and March 31, 1999, respectively 92,238 210,878
Class B, $.01 par value, 50 shares authorized; 50 shares issued and outstanding - 1
Additional paid-in-capital 2,410,121 73,085,810
Cumulative foreign currency translation adjustments 3,860 (29,199)
Retained earnings 222,431 745,455
-----------------------------------
Total stockholders' equity 2,728,650 74,012,945
-----------------------------------
Total liabilities & stockholders' equity $12,085,483 $90,297,757
===================================
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
1
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1999
----------------------------
(unaudited)
<S> <C> <C>
REVENUES $2,119,017 $12,354,963
DIRECT SALARIES AND COSTS 1,407,000 6,487,956
----------------------------
Gross profit 712,017 5,867,007
SALES AND MARKETING 34,887 468,871
GENERAL AND ADMINISTRATIVE 514,463 3,173,731
AMORTIZATION OF INTANGIBLES 8,124 792,233
NON-CASH COMPENSATION EXPENSE 42,761 27,271
----------------------------
Income from operations 111,782 1,404,901
INTEREST EXPENSE, NET 42,156 9,044
MINORITY INTEREST - (22,143)
----------------------------
Income before income taxes 69,626 1,418,000
PROVISION FOR INCOME TAXES 42,000 894,976
----------------------------
Net income $ 27,626 $ 523,024
============================
PER SHARE INFORMATION:
Net income per share--
Basic $ 0.00 $ 0.03
Diluted $ 0.00 $ 0.03
Weighted average common shares outstanding--
Basic 9,156,819 19,920,783
Diluted 9,623,885 20,574,930
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1999
--------------------------------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 27,626 $ 523,024
Adjustments to reconcile net income to net cash (used in) provided by
operating activities--
Allowance for doubtful accounts 33,000 50,000
Depreciation and amortization 44,444 1,966,540
Non-cash common stock compensation - 27,271
Increase in minority interest - 48,779
(Increase) decrease in deferred taxes, net (202,135) 67,718
Changes in operating assets and liabilities--
Decrease (increase) in accounts receivable 137,423 (6,068,423)
Decrease (increase) in unbilled charges 174,067 (466,706)
Decrease (increase) in prepaid expenses and other current assets 278,632 (2,944,698)
Increase in due from affiliate (53,877) (994,963)
Increase in other assets (734,745) (246,042)
Increase in accounts payable and accrued expenses 458,965 6,716,892
(Decrease) increase in advanced billings (73,029) 748,601
Increase in income taxes payable - 721,657
(Decrease) increase in deferred rent (34,185) 24,000
Decrease in due to related party - (500,000)
-------------------------------------
Net cash provided by (used in) operating activities 56,186 (326,350)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (147,192) (2,309,632)
Acquisitions of subsidiaries, net of cash acquired (777,567) (1,192,088)
-------------------------------------
Net cash used in investing activities (924,759) (3,501,720)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred registration costs - (1,444,411)
Payments under capital lease obligations (30,358) (23,190)
Proceeds from exercise of Communicade's 10% option - 15,814,476
Proceeds from capital contribution 59,261 -
Proceeds from exercise of stock options - 12,104
Net borrowings (repayments) under lines of credit options 160,003 (822,575)
-------------------------------------
Net cash provided by financing activities 188,906 13,536,404
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS - (33,059)
-------------------------------------
Net (decrease) increase in cash and cash equivalents (679,667) 9,675,275
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,176,076 598,720
-------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 496,409 $ 10,273,995
=====================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for--
Income taxes paid $ - $ -
Interest paid - -
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
ACTIVITIES:
Fair market value of common stock issued for acquisition - 54,940,479
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Razorfish, Inc., together with its wholly owned and partially 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 architectures and user interfaces, and creation and customization of
software necessary to implement its digital communication solutions. The Company
primarily uses Internet-based technologies to create digital communication
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 order to service its global clients, the Company
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 unaudited consolidated financial statements of the
Company have been prepared pursuant to the rules of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Registration Statement on Form S-1, as amended (File
No. 333-71043). In the opinion of management, the accompanying unaudited
consolidated financial statements reflect all adjustments, which are of a normal
recurring nature, necessary for a fair presentation of the results for the
periods presented.
The results of operations presented for the three months ended March 31,
1998 and 1999 are not necessarily indicative of the results to be expected for
any other interim period or any future fiscal year.
2. ACQUISITIONS
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. ("Omnicom"), in exchange for an aggregate of 9,881,034 shares of the
Company's Class A Common Stock, par value $.01 per share (the "Common Stock"),
and 50 shares of the Company's non-voting Class B Common Stock (the "Spray
Acquisition"). The shares of Common Stock issued represented 50.0% of the shares
of the Company's Common Stock on a fully diluted basis immediately following the
Spray Acquisition. In addition, the Company entered into employment agreements
with certain executives of Spray Network AB.
4
<PAGE>
3. COMMUNICADE 10% OPTION
On February 3, 1999, Communicade exercised its option to purchase up to
10% of the Company's Common Stock and acquired 1,976,810 shares of Common Stock.
The purchase price per share upon exercise of the 10% option was equal to 80% of
the price per share to be sold in the Company's initial public offering (the
"Offering"). The purchase price paid by Communicade in connection with the
exercise of this option was $15,814,476 and was based on an assumed offering
price of $10.00 per share (or $8.00 per share). The fair value of the 10% option
was recorded as additional purchase price consideration for the Spray
Acquisition. The purchase price for these shares was increased based on a
discount of 20% from $16.00 per share, the actual offering price of the shares
sold in the Offering. In April 1999, Communicade paid $9,488,692, the difference
between the amount paid by Communicade and the amount payable based on such
actual offering price.
4. PRO FORMA INFORMATION
The following information presents the pro forma results of operations
for the Company for the period ending March 31, 1998 as if the acquisitions of
Spray (Note 2), CHBi Limited (May 1998), Plastic (June 1998), <tag> Media (July
1998) and Sunbather (October 1998) had occurred on January 1, 1998:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1998
-----------------
(unaudited)
<S> <C>
(in 000's of U.S. Dollars)
Revenues $ 6,914
Net loss from operations (215)
Net loss (110)
PER SHARE INFORMATION:
Net loss per share--
Basic (.01)
Diluted (.01)
Weighted average common shares outstanding--
Basic 19,037,853
Diluted 19,504,919
</TABLE>
A pro forma consolidated statement of operations has not been presented
for the three months ended March 31, 1999, as the consummation of the Spray
Acquisition occurred on January 5, 1999 and the operations of Spray for the
first four days of January 1999 are not material to the overall unaudited
consolidated statement of operations.
5. NET INCOME PER COMMON SHARE
The Company computes net income per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
Under the provisions of SFAS No. 128 basic net income per share ("Basic EPS") is
computed by dividing net income by the weighted average number of common shares
outstanding. Diluted net income per common share ("Diluted EPS") is computed by
dividing net income 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.
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1999
------------------------------
(unaudited)
<S> <C> <C>
Basic common share outstanding 9,156,819 19,920,783
Stock options 467,066 654,147
------------------------------
Diluted common and common equivalent shares 9,623,885 20,574,930
==============================
</TABLE>
5
<PAGE>
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides
guidance for determining whether computer software is internal-use software and
on accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. SOP 98-1 is effective for fiscal years
beginning after December 31, 1998. The adoption of SOP 98-1 did not have a
material effect on the Company's unaudited consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. The Company
anticipates that the adoption of SFAS No. 133 will not have a significant effect
on the financial condition of the Company.
7. 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>
Three Months Ended March 31,
----------------------------
1998 1999
----------------------------
(unaudited)
<S> <C> <C>
Net income $ 27,626 $ 523,024
Foreign currency translation adjustment - (33,059)
----------------------------
Comprehensive income $ 27,626 $ 489,965
============================
</TABLE>
8. PUBLIC OFFERING
On April 30, 1999, the Company closed the Offering and sold an
aggregate of 3,450,000 shares (including 450,000 shares subject to the
underwriters' overallotment option) of the Company's Common Stock to the public.
All of the shares of Common Stock sold in the Offering were sold by the Company.
Net proceeds to the Company were $48,321,886, after deducting underwriting
discounts and commissions and expenses payable by the Company in connection with
the Offering. The Company used a portion of the net proceeds from the Offering
to repay all outstanding amounts owed by the Company to Omnicom under the lines
of credit provided by Omnicom.
The following pro forma balance sheet sets forth the financial
position of the Company as of March 31, 1999 as if the Offering had closed and
all proceeds were received on March 31, 1999, all IPO related expenses had been
accrued or paid and Communicade had contributed an additional $9,488,692 as an
exercise price adjustment (Note 3) in connection with the previous exercise of
its option to purchase up to 10% of the Company's Common Stock:
6
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, Omnicom IPO March 31, 1999
Assets 1999 10% Option Adjustments Pro forma
------ -----------------------------------------------------------------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 10,273,995 9,488,692 $51,336,000 $ 71,098,687
Accounts receivable, net of allowance for
doubtful accounts of $100,000 8,391,429 - - 8,391,429
Unbilled charges 1,793,611 - - 1,793,611
Prepaid expenses and other current assets 3,517,398 - - 3,517,398
Deferred tax assets 48,217 - - 48,217
Due from affiliate 1,596,052 - - 1,596,052
-----------------------------------------------------------------
Total current assets 25,620,702 9,488,692 51,336,000 86,445,394
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $1,206,057 2,761,529 - - 2,761,529
INTANGIBLES, net of accumulated amortization of
$1,339,527 58,354,255 - - 58,354,255
DEFERRED TAX ASSETS 620,284 - - 620,284
DEFERRED REGISTRATION COSTS 2,008,576 - (2,008,576) -
OTHER ASSETS 932,411 - 932,411
-----------------------------------------------------------------
Total assets $ 90,297,757 9,488,692 $49,327,424 $ 149,113,873
=================================================================
Liabilities and Stockholders' Equity
-------------------------------------
CURRENT LIABILITIES:
Due to Omnicom Group, Inc. $ 566,181 - - $ 566,181
Accounts payable and accrued expenses 8,132,549 - 1,005,538 9,138,087
Income taxes payable 927,681 - - 927,681
Deferred rent 82,158 - - 82,158
Advanced billings 1,093,632 - - 1,093,632
Current portion of capital lease obligations 24,588 - - 24,588
Deferred tax liabilities 1,409,700 - - 1,409,700
-----------------------------------------------------------------
Total current liabilities 12,236,489 - 1,005,538 13,242,027
LONG-TERM DEBT 3,600,130 - - 3,600,130
CAPITAL LEASE OBLIGATIONS 5,000 - - 5,000
MINORITY INTEREST 48,779 - - 48,779
OTHER LIABILITIES 394,414 - - 394,414
-----------------------------------------------------------------
Total liabilities 16,284,812 - 1,005,538 17,290,350
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;
21,087,875 shares issued and outstanding
at March 31, 1999 210,878 - 34,500 245,378
Class B, $.01 par value, 50 shares authorized; 50 shares
issued and outstanding 1 - - 1
Additional paid-in capital 73,085,810 9,488,692 48,287,386 130,861,888
Cumulative foreign currency translation adjustments (29,199) - - (29,199)
Retained earnings 745,455 - - 745,455
-----------------------------------------------------------------
Total stockholders' equity 74,012,945 9,488,692 48,321,886 131,823,523
-----------------------------------------------------------------
Total liabilities & stockholders' equity $ 90,297,757 9,488,692 49,327,424 149,113,873
=================================================================
</TABLE>
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These forward-
looking statements involve risks and uncertainties, and actual results could be
significantly different than those discussed in this Quarterly Report on Form
10-Q. All forward-looking statements included in this document are made as of
the date hereof, based on information available to the Company on the date
thereof, and the Company assumes no obligation to update any forward-looking
statements.
Overview
The Company is a leading-edge international digital communications
solutions provider. The Company's digital communications solutions are designed
to help 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, 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.
The Company'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
the Company's revenues is derived from fixed-fee contracts. Historically, the
Company has not operated on a retainer basis; however, in the first quarter of
1999, the Company entered into a retainer-based arrangement with one of its
clients.
The Company recognizes revenues for time and materials-based, fixed-fee and
retainer-based 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, the Company estimates the total cost of the
project. The Company 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 the Company for all time, materials and expenses incurred by the
Company through the effective date of termination. The Company's retainer-based
arrangement ends on December 31, 1999 and the fixed monthly retainer can be
reduced by 10% by the client on 30 days notice. If clients terminate existing
agreements or if the Company is unable to enter into new engagements, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
In addition, because a proportion of the Company's expenses are relatively
fixed, a variation in the number of client engagements can cause significant
variations in operating results from quarter to quarter.
The Company's projects vary in size and scope; therefore, a client that
accounts for a significant portion of the Company's revenues in one period may
not generate a similar amount of revenue in subsequent periods.
8
<PAGE>
For the three months ended March 31, 1999 no client accounted for more than
10.0% of the Company's revenues. For the three months ended March 31, 1998, the
following clients accounted for the percentage of the Company's actual revenues
set forth opposite their respective names:
Client Percent of Revenues
------ -------------------
Charles Schwab 20.7%
Citibank 16.7%
The Company 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
The Company'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.
The Company'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.
The Company'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.
The Company's amortization of intangibles primarily is comprised of the
amortization of intangibles in relation to the Spray Acquisition.
Seasonality
In general, the laws of the European countries in which the Company
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.
Quarter-to-quarter fluctuations in margins
The Company's operating results and quarter-to-quarter margins may
fluctuate in the future as a result of many factors, some of which are beyond
the Company's control. Historically, the Company'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 services market; and
9
<PAGE>
. economic conditions generally or in the information technology
services market.
The Company expects this trend to continue.
Results of operations
The following table sets forth certain consolidated statement of operations
data of the Company both in actual dollars and as a percentage of revenues for
the period indicated:
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------
1998 1999
--------------------- ---------------------
(unaudited)
(dollars in millions)
Percent Percent
of of
Amount Revenues Amount Revenues
--------------------- ---------------------
<S> <C> <C> <C> <C>
Revenues.................................. $2.12 100.0% $12.36 100.0%
Direct salaries and costs................. 1.41 66.5 6.49 52.5
--------------------- ---------------------
Gross profit.............................. .71 33.5 5.87 47.5
Sales and marketing....................... .04 1.8 .47 3.8
General and administrative................ .51 24.1 3.17 25.6
Amortization of goodwill.................. .01 .5 .79 6.4
Non-cash compensation expense............. .04 1.9 .03 .3
--------------------- ---------------------
Income from operations.................... .11 5.2 1.41 11.4
Interest expense, net..................... .04 1.9 .01 .1
Minority Interest - - (.02) (.2)
-------------------- ---------------------
Income before income taxes................ .07 3.3 1.42 11.5
Provision for income taxes................ .04 1.9 .90 7.3
---------------------------------------------
Net income................................ $ .03 1.4% $ .52 4.2%
=============================================
</TABLE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Revenues
The Company's revenues increased $10.2 million, or 483.0%, to $12.4
million for the three months ended March 31, 1999 from $2.1 million for the
three months ended March 31, 1998. This increase in revenues was primarily due
to (1) the increase of $2.7 million in revenues from the Company's New York
operations as a result of the increase in the number, complexity and the
length of the projects completed, an increase in the billing rates of the
Company's employees and the amount spent per project by clients and (2) $7.5
million in revenues related to the acquisition of Spray and four other
subsidiaries that were completed after the first quarter of 1998.
Direct salaries and costs
The Company's direct salaries and costs increased $5.1 million, or 360.3%,
to $6.5 million for the three months ended March 31, 1999 from $1.4 million
for the three months ended March 31, 1998. As a percentage of revenues, direct
salaries and costs decreased to 52.5% for the three months ended March 31, 1999
from 66.5% for the three months ended March 31, 1998. The increase in direct
salaries and costs in absolute dollar terms was a result of the increase in the
number of billable employees. The decrease in direct salaries and costs as a
percentage of revenues was due to an increase in the utilization of billable
employees to 65% for the three months ended March 31, 1999 from 51% for the
three months ended March 31, 1998.
10
<PAGE>
Sales and marketing
The Company's sales and marketing expenses increased $0.5 million, or
1,075.0%, to $0.5 million for the three months ended March 31, 1999 from $35,000
for the three months ended March 31, 1998. As a percentage of revenues, sales
and marketing expenses increased to 3.8% for the three months ended March 31,
1999 from 1.8% for the three months ended March 31, 1998. The increase in sales
and marketing expenses in absolute dollar terms and as a percentage of revenues
was primarily due to an increase in the number of solutions managers who spend a
portion of their time on sales and marketing activities and an increase in
spending on promotional activities.
General and administrative
The Company's general and administrative expenses increased $2.7 million,
or 521.6%, to $3.2 million for the three months ended March 31, 1999 from $0.5
million for the three months ended March 31, 1998. As a percentage of revenues,
general and administrative expenses increased to 25.6% for the three months
ended March 31, 1999 from 24.1% for the three months ended March 31, 1998. The
increase in general and administrative expenses in absolute dollar terms was a
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.
Amortization of intangibles
Amortization of intangibles for the Company was approximately $0.8 million
for the three months ended March 31, 1999 compared to $8,000 for the three
months ended March 31, 1998. This increase was due to the amortization of
intangibles resulting from the five acquisitions that were completed after the
first quarter of 1998. Seven hundred twenty-six thousand dollars of intangibles
was attributable to the acquisition of Spray that was completed in January 1999.
Non-cash compensation expense
Non-cash compensation expense decreased to $27,000 for the three months
ended March 31, 1999 compared to $42,000 for the three months ended March 31,
1998.
Income Taxes
The Company had income taxes of $0.9 million on pre-tax profits of $1.4
million for the three months ended March 31, 1999. During the three months ended
March 31, 1998, the Company had income taxes of $42,000 on pre-tax profits of
$70,000. The effective income tax rate was 63.1% and 60.3% for the three months
ended March 31, 1999 and March 31, 1998, respectively. The differences in the
effective tax rate for the three months ended March 31, 1999 and March 31,
1998 from the federal and state statutory rates was primarily the result of non-
tax deductible expenses, including (1) amortization of intangibles of $0.8
million and $8,000, respectively, and (2) non-cash compensation expense.
Liquidity and Capital Resources
Historically, the Company relied on borrowings under lines of credit
provided by Omnicom to finance its working capital requirements and capital
expenditures. The Company received $15.8 million in February 1999 when
Communicade exercised its option to purchase 1,976,810 shares of Common Stock,
which represented 10% of the Company's Common Stock on a fully diluted basis at
the time the option was exercised. The Company used a portion of the proceeds
from the exercise of this option by Communicade to repay the outstanding amount
due to Omnicom under the working capital line of credit. Following the
completion of the Offering in April 1999 the Company received net proceeds of
$48.3 million and an additional payment of $9.9 million from Communicade in
connection with the exercise of the 10% option. In April 1999, the Company used
a portion of the proceeds of the Offering to repay all of the outstanding
amounts due to Omnicom under the acquisition lines of credit provided by
Omnicom.
The Company believes that its market risk exposures are immaterial as the
Company does not have instruments for trading purposes and reasonably possible
near-term changes in market rates or prices will not result in material
near-term losses in earnings, material changes in fair values or cash flows for
all other instruments.
11
<PAGE>
The Company's net cash used in operating activities was $0.3 million for
the three months ended March 31, 1999 compared to net cash provided by operating
activities of $56,000 for the three months ended March 31, 1998.
The Company's net cash used in investing activities was $3.5 million for
the three months ended March 31, 1999 compared to $0.9 million for the three
months ended March 31, 1998.
The Company's net cash provided by financing activities was $13.5 million
for the three months ended March 31, 1999 compared to $0.2 million for the three
months ended March 31, 1998.
Year 2000 Compliance
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 than 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.
The Company 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 judgement of management, the Company's
exposure is minimal, the cost of recovery will be insignificant, and its
business will not be adversely impacted.
The Company has examined all of its internal systems that constitute core
components of its operations, including both computer systems and elements of
the office environment. The Company has also conducted a complete inventory of
the hardware and software in use by the Company in order to verify the state of
Year 2000 compliance of all assets necessary to maintain the operations of the
Company during the potential disaster scenarios that the Company has identified.
In connection with its Year 2000 compliance efforts, the Company 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. The
Company's planned upgrades to its telephone system and alarm system necessary to
support the Company's growth will also result in Year 2000 compliance. In the
judgement of management, the cost of compliance could range from $0.1 million to
$0.3 million.
The Company 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. The
Company's investigation into the capabilities of its vendors continues, and the
Company has received statements from approximately 90% of them regarding their
Year 2000 compliance. The company expects to receive additional statements of
compliance from certain of its vendors. In the judgement 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 failure of
these systems would have negligible impact on the Company's operations and would
take only a few days to resolve.
12
<PAGE>
The Company has verified that its internally developed solutions are Year
2000 compliant. Although as a general matter the Company 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, the Company does not
warrant the compliance of third-party software; rather, the Company warrants
only that software created by the Company will be Year 2000 compliant. However,
even absent a specific Year 2000 warranty, there is a risk that clients for whom
the Company has created or implemented software will attempt to hold the Company
liable for any damages that result in connection with Year 2000 problems.
The Company 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. The Company has redundant servers for a variety of
its operating systems to ensure the Company's ability to reconstruct its failed
systems quickly. Secondary DMS serves throughout the Company will maintain the
Company's vital Internet connections.
As part of the analysis of the Year 2000 problem, the Company has analyzed
the impact of the "worst case scenario" on its business. The "worst case
scenario" would occur if the statements and warranties of the Company'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 the Company. 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 application software programs;
. the financial systems;
. nonfunctioning telecommunications systems;
. climate control systems; and
. every office appliance such as copiers and fax machines.
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 26, 1999, the Securities and Exchange Commission declared the
Company's Registration Statement on Form S-1 (File No. 333-71043) effective. On
April 30, 1999, the Company closed its Offering of an aggregate of 3,450,000
shares of the Company's Common Stock at an offering price of $16.00 per share.
The managing underwriters for the offering were Credit Suisse First Boston,
BancBoston Robertson Stephens, BT Alex. Brown and Lehman Brothers. Net proceeds
to the Company, after deducting underwriting discounts and commissions of
$3,864,000 and offering expenses of $3,014,114 were $48,321,886. None of the
expenses incurred in the offering were direct or indirect payments to directors,
officers, or general partners of the issuer or their associates, to persons
owning ten percent or more of any class of equity securities of the issuer or to
affiliates of the issuer. The Company used a portion of the net proceeds from
the Offering to repay all outstanding amounts owed by Razorfish to Omnicom under
the acquisition line of credit provided by Omnicom. The Company has invested
the remainder of the net proceeds in short-term, interest bearing, investment
grade obligations pending their use for the other purposes.
13
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits 3.1 through 10.39 are incorporated herein by reference
to the exhibit with the corresponding number filed as part of the Company's
Registration Statement on Form S-1 filed on January 22, 1999, and all amendments
thereto (File No. 333-71043).
Exhibit
Number Description
- ------ -----------
3.1 Certificate of Incorporation of 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 AB, 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.
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.
10.13 Employment Agreement, dated as of October 1, 1998, between the
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 Restate AB
("Bojner") and the English translation thereof.
14
<PAGE>
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 001 023 ("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.
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 and
Communicade.
10.31 Second Amendment to the Subscription and Exchange Agreement, dated
December 10, 1998, among the Company, Spray Ventures AB, Spray and
Communicade.
10.32 Stock Purchase Agreement, dated 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.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Company during the last
quarter of the period covered by this report.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly cause this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of New York, state of New
York, on June 10, 1999.
RAZORFISH, INC.
By: /s/ Jeffrey A. Dachis
-------------------------------------
Jeffrey A. Dachis
President and Chief Executive Officer
By: /s/ Susan Black
-----------------------------------
Susan Black
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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