<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
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 September 30, 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 0-28547
---------
RAZORFISH, INC.
-------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3804503
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
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. [X] YES [_] NO
The number of shares outstanding of the Registrant's Class A Common Stock as of
October 31, 1999 was 25,359,185.
<PAGE>
RAZORFISH, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1998 (audited) and
September 30, 1999
Consolidated Statements of Operations for the Three Months and Nine
Months Ended September 30, 1998 and 1999
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1999
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Qualitative and Quantitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit 27. Financial Data Schedule
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
RAZORFISH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Assets December 31, September 30,
------ 1998 1999
----------------------------
(audited) (unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 599 $ 58,232
Accounts receivable, net of allowance for doubtful accounts
of $50 and $690 respectively 2,373 14,151
Unbilled charges 1,327 6,625
Prepaid expenses and other current assets 573 1,967
Deferred tax assets 102 61
Due from affiliates 601 365
----------------------------
Total current assets 5,575 81,401
Property and Equipment, net of accumulated depreciation and amortization of $472 and
$2,377, respectively 1,186 6,307
Intangibles, net of accumulated amortization of $107 and $2,703, respectively 3,455 81,741
Deferred Tax Assets 620 798
Deferred Registration Costs 564 -
Loan to Affiliate - 1,872
Other Assets 685 768
----------------------------
Total assets $12,085 $172,887
============================
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $ 1,791 12,255
Income taxes payable 206 318
Deferred rent 58 234
Advanced billings 345 2,642
Due to Omnicom Group, Inc. 1,782 -
Due to related party 500 -
Current portion of capital lease obligations 47 27
Deferred tax liabilities 1,396 573
----------------------------
Total current liabilities 6,125 16,049
Long-Term Debt 3,207 169
Capital Lease Obligations 6 152
Minority Interest - 26
Other Liabilities 19 2,135
----------------------------
Total liabilities 9,357 18,531
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 25,354,257 shares
issued and outstanding at December 31, 1998 and September 30, 1999, respectively 92 254
Class B, $.01 par value, 50 shares authorized; 50 shares issued and outstanding - -
Additional paid-in capital 2,410 152,374
Cumulative foreign currency translation adjustments 4 22
Retained earnings 222 2,294
Less: Treasury stock - (588)
----------------------------
Total stockholders' equity 2,728 154,356
----------------------------
Total liabilities & stockholders' equity $12,085 $172,887
============================
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
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<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------------- ---------------------------------------
September 30, 1998 September 30, 1999 September 30, 1998 September 30, 1999
-------------------------------------- ---------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 3,968 $ 19,058 $ 9,118 $ 46,468
Project personnel costs 1,642 7,884 3,930 19,852
-------------------------------------- ---------------------------------------
Gross profit 2,326 11,174 5,188 26,616
Sales and marketing 132 1,359 226 2,471
General and administrative 1,332 7,174 3,256 17,059
Amortization of intangibles 37 900 65 2,529
Non-cash compensation expense 120 108 1,820 162
-------------------------------------- ---------------------------------------
Income (loss) from operations 705 1,633 (179) 4,395
Interest (income) expense, net 62 (798) 165 (1,385)
Minority interest - - - (22)
-------------------------------------- ---------------------------------------
Income (loss) before income taxes 643 2,431 (344) 5,802
Provision for (benefit from) income taxes 314 1,518 (271) 3,731
-------------------------------------- ---------------------------------------
Net income (loss) $ 329 $ 913 $ (73) $ 2,071
====================================== =======================================
Per Share Information:
Net income (loss) per share:
Basic $0.04 $0.04 ($ 0.01) $0.09
===== ===== ====== =====
Diluted $0.03 $0.04 ($ 0.01) $0.09
===== ===== ====== =====
Weighted average common shares
outstanding:
Basic 9,156,819 24,755,232 9,156,819 22,777,316
========= ========== ========= ==========
Diluted 9,777,371 25,617,670 9,156,819 23,392,817
========= ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1999
------------------------------------
(unaudited)
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) ($73) $ 2,071
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Allowance for doubtful accounts 50 640
Depreciation and amortization 293 4,434
Non-cash common stock option compensation 1,869 162
Increase in deferred tax assets (1,027) (136)
Change in operating assets and liabilities, net of purchase acquisitions:
Increase in accounts receivable (658) (12,402)
Increase in unbilled charges (692) (5,298)
Increase in prepaid expenses and other current assets (153) (1,394)
Increase (decrease) in due from affiliates (424) 236
Increase in other assets (596) (81)
Increase in accounts payable and accrued expenses 878 8,847
Increase (decrease) in advanced billings (303) 2,297
Increase in deferred tax liabilities 319 1,010
Increase in income taxes payable 661 112
Increase in deferred rent 18 176
Decrease in due to related party - (500)
--------------------------
Net cash provided by operating activities 162 174
Cash flow from investing activities:
Capital expenditures (738) (7,026)
Long-term loan to affiliate - (1,872)
Acquisitions of subsidiaries, net of cash acquired (3,269) (3,874)
--------------------------
Net cash used in investing activities (4,007) (12,772)
Cash flows from financing activities:
Deferred registration costs (125) 564
Proceeds (payments) under capital lease obligations (72) 125
Proceeds from initial public offering - 48,322
Proceeds from exercise of Communicade's 10% option - 25,303
Proceeds from exercise of stock options - 1,308
Net borrowings (repayments) under lines of credit options 3,054 (4,821)
Repurchase of treasury stock - (588)
--------------------------
Net cash provided by financing activities 2,857 70,213
Effect of exchange rate changes on cash and cash equivalents 4 18
--------------------------
Net increase (decrease) in cash and cash equivalents (984) 57,633
Cash and cash equivalents, beginning of period 1,176 599
--------------------------
Cash and cash equivalents, end of period $ 193 $ 58,232
==========================
Supplemental disclosures of cash flow information:
Income taxes paid $ - $ 3,980
Interest paid - -
Supplemental disclosure of non-cash investing activities:
Fair market value of common stock issued for acquisition - 75,030
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-4-
<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. The Company 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 and nine months ended
September 30, 1998 and 1999, are not necessarily indicative of the results to be
expected for any other interim period or any future fiscal year.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current
period presentation.
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.
In June 1999, the Company acquired substantially all of the assets of the New
York-based company, Electrokinetics, Inc. In consideration for the assets
acquired, the Company paid approximately $846,500 in cash. In addition, the
Company entered into employment agreements with certain executives of
Electrokinetics, Inc.
In the second quarter, 1999, Razorfish purchased the remaining 15% of
Razorfish Oy, its Finnish subsidiary, approximately 24% of Razorfish AG, its
German subsidiary, and 15% of Razorfish AS, its Norwegian subsidiary for a total
of $1,370,000 and a grant of 60,000 share options at fair market value. In the
Razorfish AS purchase, Razorfish also agreed to repay certain capital
contributions and loans over the next three years.
On September 15, 1999, Razorfish acquired all of the outstanding stock of Los
Angeles-based Fuel, Inc. and Tonga, Inc. Under the terms of the acquisition,
Razorfish issued 656,000 shares of its Common Stock and paid $750,000 in
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<PAGE>
cash to Fuel and Tonga's sole stockholder in exchange for the entire equity
interest in Fuel and Tonga. Furthermore, the Fuel and Tonga purchase agreement
calls for a stock or cash earn-out payment to the former stockholder, based upon
the achievement of certain revenue levels for 1999.
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 periods ending September 30, 1998 and 1999 as if the
acquisitions of Spray (Note 2), CHBi Limited (May 1998), Plastic (June 1998),
<tag> Media (July 1998), Sunbather (October 1998), Electrokinetics (June 1999),
Fuel, Inc. and Tonga, Inc. (September, 1999), and i-Cube (November 1999) had
occurred on January 1, 1998:
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
September September September September
30, 1998 30, 1999 30, 1998 30, 1999
-------------------------------------------------------------------------
(In thousands, except per share data) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 23,481 $41,669 $66,636 $107,421
Income (loss) from operations 1,600 6,950 2,185 13,697
Net income (loss) $ 562 $ 4,545 $ 405 $ 8,761
PER SHARE INFORMATION:
Net loss per share:
Basic 36,024 42,674 34,466 40,393
======= ======= ======= ========
Diluted 40,362 47,193 38,554 44,327
======= ======= ======= ========
Weighted average common shares outstanding:
Basic $ 0.02 $ 0.11 $ 0.01 $ 0.22
======= ======= ======= ========
Diluted $ 0.01 $ 0.10 $ 0.01 $ 0.20
======= ======= ======= ========
</TABLE>
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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ----------------------------
1998 1999 1998 1999
------------------------------ ----------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Basic common share outstanding 9,156,819 24,755,232 915,819 22,777,316
</TABLE>
-6-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Stock options 620,552 862,438 - 615,501
----------------------------- ----------------------------
Diluted common and common equivalent
shares 9,777,371 25,617,670 9,156,819 23,392,817
============================= ============================
</TABLE>
Diluted loss per share for the three and nine months ended September 30, 1998
does not include the impact of common stock options as the effect of their
inclusion would be anti-dilutive.
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 ("FASB") 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.
In July, 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
statement No. 133", which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000.
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>
(In Thousands of U.S. Dollars) Three Months Ended September 30,
----------------------------------
1998 1999
----------------------------------
(unaudited)
<S> <C> <C>
Net income $ 329 $ 913
Foreign currency translation adjustment (4) 119
----------------------------------
Comprehensive income $ 325 $1,132
==================================
</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' over-
allotment 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.
9. SUBSEQUENT EVENTS
On November 2, 1999, Razorfish completed its acquisition of International
Integration Incorporated ("i-Cube"). In connection with the acquisition,
Razorfish issued 18,034,612 shares of Razorfish Class A Common Stock at a ratio
0.875 Razorfish share i-Cube outstanding share for 20,610,985 outstanding shares
of i-Cube Common Stock for a total market value of $1,411,208,379 given a
closing price of $78.25 per Razorfish share as of the acquisition date. The
acquisition has been accounted for as a pooling of interests. The Company's
board of directors voted to increase the authorized number of Class A common
stock from 29,999,950 to 200,000,000 shares.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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<PAGE>
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.
For the three month period ended September 30, 1999, no single client
accounted for 10% or more of the company's revenue. For the nine months ended
September 30, 1999, one client accounted for 10% of the Company's revenues. For
the three months and nine months ended September 30, 1998, one client accounted
for 24% and 29% of the Company's actual revenues, respectively, and another
client accounted for 13% and 14% of the Company's actual revenues, respectively.
No other clients accounted for more than 10% of the Company's revenues for the
same periods.
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.
-8-
<PAGE>
Operating and other expenses
The Company's project personnel costs are comprised primarily of salaries,
employee benefits and incentive compensation of billable 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 the costs of the company's facilities and other general and administrative
expense.
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, possibly resulting in declining revenues for these countries 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
. economic conditions generally or in the information technology services
market.
The Company expects this trend to continue.
-9-
<PAGE>
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>
The Months Ended September 30, Nine Months Ended September 30,
----------------------------------------------- ---------------------------------------
1998 1999 1998 1999
-------------------- ---------------------- ------------------- ----------------
(unaudited) (unaudited)
(dollars in millions) (dollars in millions)
Percent Percent Percent Percent
of of of of
Amount Revenues Amount revenues Amount revenues Amount revenues
-------------------- ---------------------- ------------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................. $4.0 100% $19.1 100% $ 9.1 100 % $46.5 100 %
Project personnel costs.................. 1.7 41 7.9 41 3.9 43 19.9 43
-------------------- ---------------------- ------------------- ----------------
Gross profit............................. 2.3 59 11.2 59 5.2 57 26.6 57
Sales and marketing...................... 0.2 3 1.4 7 0.2 3 2.5 5
General and administrative............... 1.4 34 7.2 38 3.3 36 17.0 37
Amortization of goodwill................. - 1 0.9 5 0.1 1 2.5 5
Non-cash compensation expense............ .1 3 0.1 1 1.8 20 0.2 0
-------------------- ---------------------- ------------------- ----------------
Income (loss) from operations............ 0.7 18 1.6 9 (0.2) (2) 4.4 10
Interest expense, net.................... 0.1 2 (0.8) (4) 0.2 2 (1.4) (3)
Minority Interest........................ - - - - - - - -
-------------------- ---------------------- ------------------- ----------------
Income (loss) before income taxes........ 0.6 16 2.4 13 (0.4) (4) 5.8 13
Provision (benefit) for income taxes..... 0.3 8 1.5 8 (0.3) (3) 3.7 8
-------------------- ---------------------- ------------------- ----------------
Net income (loss)........................ $0.3 8% .9 5 % (0.1) (1)% 2.1 5 %
==================== ====================== =================== ================
</TABLE>
Three Months Ended September 30, 1999 Compared to the Three Months Ended
September 30, 1998
Revenues
The Company's revenues increased $15.1 million, or 380%, to $19.1 million for
the three months ended September 30, 1999 from $4.0 million for the comparable
period in 1998. This increase in revenue was primarily due to the growth of the
Company's eight offices 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, the amount spent per project by clients and revenues
related to acquisitions that were completed after the second quarter of 1998.
Project personnel costs
The Company's project personnel costs increased $6.2 million, or 380%, to $7.9
million for the three months ended September 30, 1999 from $1.7 million for the
comparable period in 1998. As a percentage of revenues, project personnel costs
remained at 41% for the three months ended September 30, 1999 and the comparable
period in 1998.
Sales and marketing
The Company's sales and marketing costs increased $1.23 million, or 930%, to
$1.36 million for the three months ended September 30, 1999 from $130,000 for
the comparable period in 1998. As a percentage of revenues, sales and marketing
expenses increased to 7% for the three months ended September 30, 1999 from 3%
for the comparable period in 1998. The increase in sales and marketing costs 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 $5.8 million, or
439%, to $7.2 million for the three months ended September 30, 1999 from $1.4
million for the comparable period in 1998. As a percentage of revenues, general
and administrative expenses increased to 38% for the three months ended
September 30, 1999 from 34% for the comparable period in 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.
-10-
<PAGE>
Amortization of intangibles
Amortization of intangibles for the Company was approximately $0.9 million for
the three months ended September 30, 1999 compared to $37,000 for the comparable
period in 1998. This increase was due to the amortization of intangibles
resulting from the three acquisitions that were completed after the second
quarter of 1998 and to the acquisition of Spray that was completed in January
1999.
Non-cash compensation expense
Non-cash compensation expense decreased to $108,000 for the three months ended
September 30, 1999 compared to $120,000 for the comparable period in 1998.
Income Taxes
The effective income tax rate was 62% and 49% for the three months ended
September 30, 1999 and September 30, 1998, respectively. The differences in the
effective tax rate for the three months ended September 30, 1999 and September
30, 1998 from the federal and state statutory rates was primarily the result of
non-tax deductible expenses, including amortization of intangibles of $0.9
million and $37,000, respectively, and non-cash compensation expense of $108,000
and $120,000 respectively.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenues
The Company's revenues increased $37.4 million, or 410%, to $46.5 million for
the nine months ended September 30, 1999 from $9.1million for the comparable
period in 1998. This increase in revenue was primarily due to the growth of the
Company's eight offices 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, the amount spent per project by clients and revenues
related to acquisitions that were completed after the second quarter of 1998.
Project personnel costs
The Company's project personnel costs increased $16.0 million, or 405%, to
$19.9 million for the nine months ended September 30, 1999 from $3.9 million for
the comparable period in 1998. As a percentage of revenues, project personnel
costs decreased to 43% for the nine months ended September 30, 1999 from 43% for
the comparable period in 1998. The increase in project personnel costs in
absolute dollar terms was a result of the increase in the number of billable
employees.
Sales and marketing
The Company's sales and marketing costs increased $1.0 million, or 1085%, to
$1.1 million for the nine months ended September 30, 1999 from $94,000 for the
comparable period in 1998. As a percentage of revenues, sales and marketing
expenses increased to 4% for the nine months ended September 30, 1999 from 2%
for the comparable period in 1998. The increase in sales and marketing costs 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 $6.5 million, or
534%, to $7.7 million for the nine months ended September 30, 1999 from $1.2
million for the comparable period in 1998. As a percentage of revenues, general
and administrative expenses increased to 28% for the nine months ended September
30, 1999 from 23% for the comparable period in 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 $1.6 million for
the nine months ended September 30, 1999 compared to $27,000 for the comparable
period in 1998. This increase was due to the amortization of intangibles
resulting from the acquisitions that were completed after the second quarter of
1998.
-11-
<PAGE>
Non-cash compensation expense
Non-cash compensation expense decreased to $54,000 for the nine months
ended September 30, 1999 compared to $1.7 million for the comparable period in
1998. The expense for the comparable period in 1998 was largely attributable to
the granting of 500,000 share options to a former shareholder of Avalanche
Systems, Inc. in connection with the acquisition of substantially all of the
assets of Avalanche Systems, Inc. These options automatically vested at an
exercise price which was deemed to be lower than the fair market value.
Income Taxes
The Company had income taxes of $2.2 million on pre-tax profits of $3.4
million for the nine months ended September 30, 1999. During the comparable
period in 1998, the Company had a benefit for income taxes of $0.6 million on
pre-tax losses of $1.0 million. The effective income tax rate was 66% and 59%
for the nine months ended September 30, 1999 and September 30, 1998,
respectively. The differences in the effective tax rate for the nine months
ended September 30, 1999 and September 30, 1998 from the federal and state
statutory rates was primarily the result of non-tax deductible expenses,
including amortization of intangibles of $1.6 million and $27,000, respectively,
and non-cash compensation expense of $54,000 and $1.7 million respectively.
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.
The Company's net cash provided by operating activities was $0.2 million for
the nine months ended September 30, 1999 compared to net cash provided by
operating activities of $0.2 million for the nine months ended September 30,
1998.
The Company's net cash used in investing activities was $12.8 million for the
nine months ended September 30, 1999 compared to $4.0 million for the nine
months ended September 30, 1998.
The Company's net cash provided by financing activities was $70.2 million for
the nine months ended September 30, 1999 compared to $2.9 million for the nine
months ended September 30, 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
-12-
<PAGE>
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. Two full-time information services
specialist are dedicated to the completion of the full hardware and software
inventory and the installation of all application software. The Company has
upgraded its telephone system and alarm system, allowing for Company growth and
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 November 30, 1999. Management believes that any failure of
these systems would have negligible impact on the Company's operations and would
be resolved as expediently as possible.
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 $8.0 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.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
Not applicable
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-13-
<PAGE>
On October 1, 1999, the Securities and Exchange Commission declared effective
the Company's Registration Statement on Form S-4 (File No. 333-87031). Pursuant
to this Registration Statement, the Company completed a registration for
21,356,655 shares of its Common Stock to be issued in connection with its
acquisition of i-Cube.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The items to be included in Exhibits 2.1 through 10.41 herein are
incorporated by reference from the same-numbered exhibits to the
documents identified in the footnotes thereto.
EXHIBIT INDEX
Exhibit No. Exhibit
- -------------------
* 2.1 Agreement and Plan of Merger, dated August 10, 1999, by and
between Razorfish, Ray Merger Sub, Inc. and i-Cube).(2)
* 3.1 Certificate of Incorporation of Razorfish.(2)
* 3.2 Form of Certificate of Amendment of Certificate of Incorporation of
Razorfish to become effective upon the closing of the merger.(2)
* 3.3 Bylaws of Razorfish.(1)
* 4.1 Stockholders Agreement, dated as of October 1, 1998, among Razorfish,
Spray Ventures, Communicade, Jeffrey A. Dachis and Craig M.
Kanarick.(1)
* 4.2 Amendment to Stockholders Agreement, dated February 3, 1999, among
Razorfish, Spray Ventures, Communicade, Jeffrey A. Dachis and Craig M.
Kanarick.(1)
* 4.3 Registration Rights Agreement, dated March 30, 1999, between Razorfish
and Communicade Inc.(1)
* 4.4 Specimen Class A Common Stock Certificate of Razorfish.(1)
*10.1 The Amended and Restated 1997 Stock Option and Incentive Plan.(1)
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<PAGE>
10.2 1999 Stock Incentive Plan.(2)
10.3 1999 Amended and Restated Stock Incentive Plan.(2)
*10.4 Employment Agreement, dated September 18, 1996, between Razorfish and
Jeffrey A. Dachis.(1)
*10.5 Non-competition Agreement, dated September 18, 1996, between Razorfish
and Jeffrey A. Dachis.(1)
*10.6 Employment Agreement, dated September 18, 1996, between Razorfish and
Craig M. Kanarick.(1)
*10.7 Non-competition Agreement, dated September 18, 1996, between Razorfish
and Craig M. Kanarick.(1)
*10.8 Employment Agreement, dated April 30, 1998, between Razorfish and Peter
Seidler.(1)
*10.9 Amendment to Employment Agreement, dated November 26, 1998, between
Razorfish and Peter Seidler.(1)
*10.10 Employment Agreement, dated June 19, 1997, between Razorfish and Jean-
Philippe Maheu.(1)
*10.11 Employment Agreement, dated June 1, 1997, between Razorfish and Evan
Orensten.(1)
*10.12 Employment Agreement, dated as of October 1, 1998, between Razorfish
and Per Bystedt.(1)
*10.13 Employment Agreement, dated as of October 1, 1998, between Razorfish
and Jonas Svensson.(1)
*10.14 Employment Agreement, dated as of October 1, 1998, between Razorfish
and Johan Ihrfelt.(1)
*10.15 Lease Agreement, dated October 28, 1996, between Razorfish and Man Yun
Real Estate Corporation.(1)
*10.16 Lease Agreement, dated April 30, 1997, between Razorfish and Man Yun
Real Estate Corporation.(1)
*10.17 Lease Agreement, dated March 10, 1998 between C.H.B.I Razorlish Limited
and The Mayor and Commonalty and Citizens of the City of London.(1)
*10.18 Lease Agreement, dated March 10, 1998, between J&R Bechelli and Alpha
Online, Inc., as amended by letter dated February 9, 1999.(1)
*10.19 Lease Agreement No. 731 100, dated April 12, 1996, between Spray (f/k/a
Spray Interactive
-15-
<PAGE>
Media Agency AB) and Bojner Estate AB ("Bojner") and the English
translation thereof.(1)
*10.20 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.(1)
*10.21 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.(1)
*10.22 Supplement No. 1, dated April 30, 1998, to Trygg-Hansa Lease and the
English translation thereof.(1)
*10.23 Supplement No. 2, dated August 18, 1998, to Trygg-Hansa Lease and the
English translation thereof.(1)
*10.24 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.(1)
*10.25 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.(1)
*10.26 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.(1)
*10.27 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.(1)
*10.28 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.(1)
*10.29 Lease Contract, dated June 17, 1998, between Spray Geelmuyden.Kiese
A.S. and Kongensgate 2 ANS and the English translation thereof.(1)
*10.30 Subscription and Exchange Agreement, dated as of October 1, 1998, among
Razorfish, Spray Ventures AB and Communicade.(1)
*10.31 First Amendment to the Subscription and Exchange Agreement, dated
November 25, 1998, among Razorfish, Spray Ventures AB, Spray Network AB
and Communicade.(1)
*10.32 Second Amendment to the Subscription and Exchange Agreement, dated
December 10, 1998, among Razorfish, Spray Ventures AB, Spray Network AB
and Communicade.(1)
*10.33 Stock Purchase Agreement, dated as of October 1, 1998, among
Communicade, Jeffrey A. Dachis and Craig M. Kanarick.(1)
-16-
<PAGE>
*10.34 Stock Purchase Agreement, dated October 23, 1998, between Communicade
and Spray Ventures AB.(1)
*10.35 Amendment to Stock Purchase Agreement, dated December 10, 1998, between
Communicade and Spray Ventures AB.(1)
*10.36 Loan Agreement, dated September 18, 1996, between Razorfish and Omnicom
Finance Inc.(1)
*10.37 Contractor Agreement, dated December 19, 1997, between Razorfish and
Charles Schwab & Co., Inc.(1)
*10.38 Letter Agreement, dated August 8, 1997, between Razorfish and Road
Runner Group.(1)
*10.39 Agreement, dated November 6, 1997, between Razorfish and AT&T Corp.(1)
*10.40 Agreement, dated May 12, 1997, between Razorfish and CBS.(1)
*10.41 Forms of Voting Agreements.(2)
-17-
<PAGE>
27.1 Financial Data Schedule of Razorfish.
- --------------
* Previously filed.
(1) Filed as an exhibit to Razorfish's Registration statement on Form S-1 or
amendments thereto declared effective by the Securities and Exchange
Commission on April 26, 1999 (File No. 333-71043) and incorporated herein
by reference.
(2) Filed as an exhibit to Razorfish's Registration Statement on Form S-4 or
amendments thereto declared effective by the Securities and Exchange
Commission on October 1, 1999 (File No. 333-87031) and incorporated herein
by reference.
(b) Reports on Form 8-K
The following reports on Form 8-K have been filed with the Securities and
Exchange Commission.
Form 8-K filed August 13, 1999, attaching the press release issued
regarding the signing of the Agreement and Plan of Merger dated August 10,
1999 with i-Cube and Ray Merger Sub, Inc.; and
Form 8-K filed September 30, 1999 relating to the acquisition of Fuel,
Inc. and Tonga, Inc.
-18-
<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 November 15, 1999.
RAZORFISH, INC.
By: /s/ Jeffrey A. Dachis
-------------------------------------
Jeffrey A. Dachis
President and Chief Executive Officer
By: /s/ Lawrence P. Begley
-------------------------------------
Lawrence P. Begley
Chief Financial Officer and
Executive Vice President, Finance
(Principal Financial and Accounting
Officer)
-19-
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