<PAGE>
As filed with the Securities and Exchange Commission on January 22, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
RAZORFISH, INC.
(Exact name of registrant as specified in its charter)
---------------
<TABLE>
<S> <C> <C>
New York 7379 13-3804503
(State or other
jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or
organization) Classification Code Number) Identification No.)
</TABLE>
107 Grand Street, 3rd Floor
New York, New York 10013
(212) 966-5960
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Jeffrey A. Dachis
President and Chief Executive Officer
Razorfish, Inc.
107 Grand Street, 3rd Floor
New York, New York 10013
(212) 966-5960
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
With copies sent to:
<TABLE>
<S> <C>
Mark L. Mandel, Esq. William J. Whelan, III, Esq.
Morrison & Foerster LLP Cravath, Swaine & Moore
1290 Avenue of the Americas Worldwide Plaza
New York, New York 10104-0012 825 Eighth Avenue
(212) 468-8000 New York, New York 10019-7475
(212) 474-1000
</TABLE>
---------------
Approximate date of commencement of the proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of Each Class of Securities to Proposed Maximum Amount of
be Registered Aggregate Offering Price(1)(2) Registration Fee
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Common Stock, $.01 par value...... $57,500,000 $15,985.00
- -----------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) In accordance with Rule 457(o) under the Securities Act of 1933, the
number of shares of Common Stock being registered and the proposed maximum
offering price per share are not included in this table.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
The Registrant hereby amends the Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this Prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This Prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 22, 1999
Shares
[LOGO]
Razorfish, Inc.
Class A Common Stock
--------
Prior to this offering, there has been no public market for our Class A
Common Stock. The initial public offering price is expected to be between $
and $ per share. We will apply to list our Class A Common Stock on the
Nasdaq National Market under the symbol " ."
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotments of shares.
Investing in our Class A Common Stock involves certain risks. See "Risk
Factors" beginning on page 3.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Razorfish
------------- ------------- -------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of Class A Common Stock will be made on or about
,1999, against payment in immediately available funds.
Neither the Securities and Exchange Commission nor any other state securities
commission has approved or disapproved these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston
BancBoston Robertson Stephens
BT Alex. Brown
Lehman Brothers
Prospectus dated , 1999
<PAGE>
TABLE OF CONTENTS
Page
----
Currency and Exchange Rates.............. i
Prospectus Summary....................... 1
Risk Factors............................. 3
Use of Proceeds..........................13
Dividend Policy..........................13
Capitalization...........................14
Dilution.................................15
Selected Consolidated Financial
Information of Razorfish................16
Selected Consolidated Financial
Information of Spray....................17
Unaudited Pro Forma Consolidated
Financial Information...................18
Page
----
Management's Discussion and Analysis of
Financial Condition and Results of
Operations..............................24
Business.................................37
Management...............................50
Principal Stockholders...................60
Certain Transactions.....................62
Description of Capital Stock.............64
Shares Eligible for Future Sale..........66
Underwriting.............................68
Legal Matters............................71
Experts..................................71
Where You Can Find More Information......72
Index to Financial Statements...........F-1
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may be used only where it is legal
to sell these securities. The information in this document may be accurate only
on the date of this document.
------------
Unless otherwise indicated, all references to "Razorfish," "we" and the
"Company" refer to Razorfish, Inc. and, subsequent to their acquisition or
formation, its subsidiaries, including Spray Network AB ("Spray").
Razorfish, the Razorfish symbol, Webspy and the Blue Dot are trademarks or
service marks and in some jurisdictions (including the United States)
registered trademarks or service marks of Razorfish. Other trademarks appearing
in this prospectus are the property of their respective owners.
CURRENCY AND EXCHANGE RATES
Unless otherwise noted, in this prospectus all references to "dollars,"
"U.S. dollars" or "$" are to the lawful currency of the United States,
references to "SEK" or "kroner" are to the lawful currency of the Kingdom of
Sweden and references to "(Pounds)" or "pounds sterling" are to the lawful
currency of the United Kingdom.
Solely for the convenience of the reader, this prospectus contains
translations of certain amounts in kroner or pounds sterling into dollars at
specified rates. Except for information set forth in or derived from the
financial statements included in this prospectus,
. all translations from kroner to dollars were made (unless otherwise
indicated) at the noon buying rate for cable transfers in kroner as
certified for customs purposes by the Federal Reserve Bank of New York in
effect on January 21, 1999, which was SEK 7.7355 = $1.00; and
. all translations from pounds sterling to dollars were made (unless otherwise
indicated) at the noon buying rate for cable transfers in pounds sterling as
certified for customs purposes by the Federal Reserve Bank of New York in
effect on January 21, 1999, which was (Pounds)1.00 = $1.6516.
All assets and liabilities of foreign subsidiaries of the Company were
translated into dollars at fiscal year-end exchange rates. Income and expense
items were translated at average exchange rates prevailing during the fiscal
year. No representation is made that the pounds sterling or kroner amounts have
been, could have been or could be converted into dollars at the rates indicated
or at any other rates.
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights certain information from this prospectus. It has
been provided for your convenience only, and you should not consider it to be
complete. To better understand this offering, you should read this entire
prospectus carefully.
Except as otherwise indicated, all references to the number of outstanding
shares of Razorfish's Class A Common Stock (the "Common Stock") do not include
the number of shares that Razorfish will issue if the representatives of the
underwriters exercise their over-allotment option in full. In addition, the
information in this prospectus assumes that the initial public offering price
will be $ per share.
The Company
Razorfish is a leading-edge international digital communications solutions
provider. These digital communications solutions help our clients increase
sales, improve communications and create brand identities. Our solutions have
included (1) a re-designed on-line trading system for Charles Schwab, (2) an
enhanced on-line brand identity for IBM's RS/6000 product line, (3) a user-
interface and front-end application for Road Runner, the high speed modem
service that is owned by ServiceCo, a joint venture among Time Warner,
MediaOne, Microsoft, Compaq and Advance Newhouse, and (4) a unique interface
design and user experience for theglobe.com. We offer an integrated package of
services consisting of strategic consulting, design of information
architectures and end-user interfaces and creation and customization of
software necessary to implement our digital communications solutions. We
primarily use Internet-based technologies to create digital communications
solutions for the World Wide Web. However, our solutions will increasingly
incorporate additional communications technologies, such as wireless, satellite
and broadband communications, for use with a variety of digital devices,
including mobile phones, pagers and personal digital assistants.
With the growth in the use of the Internet, companies are increasingly
seeking to improve their business practices through Internet-based digital
communications solutions. Forrester Research, Inc. projects that the size of
the worldwide Internet professional services market will grow from $2.4 billion
in 1997 to $32.8 billion in 2002, a compound annual growth rate of 68.7%.
As the informational requirements of companies have become more complex,
organizations have required a broader range of information technology ("IT")
services including strategy, architecture design, application development and
systems integration. As a result, numerous firms are active in the IT services
market; few, however, offer the creativity, breadth of services and technical
expertise necessary to fully address an organization's needs. In addition,
because the IT services market is fragmented by the cultural and language
differences among countries, firms that lack a presence and expertise in
important local markets are unable to compete effectively in those markets. The
growing demand for creative digital communications solutions has led to a
significant market opportunity for firms such as Razorfish that combine an
international presence with local expertise and provide an integrated package
of services.
We have grown rapidly since our inception in 1995. In 1998, we expanded our
geographic presence by acquiring five companies. In January 1999, we acquired
Spray for 50% of our Common Stock on a fully-diluted basis (after giving effect
to this acquisition). Spray had $11.0 million in revenues for the nine months
ended September 30, 1998. We currently have offices in New York, San Francisco,
Los Angeles, London, Stockholm, Oslo, Helsinki and Hamburg.
Our principal executive office is located at 107 Grand Street, 3rd Floor,
New York, New York 10013, and our telephone number is (212) 966-5960. We
maintain a site on the World Wide Web at www.razorfish.com which is not part of
this prospectus. We are currently incorporated in New York, but we intend to
reincorporate in Delaware prior to the consummation of this offering and to
amend our certificate of incorporation.
1
<PAGE>
The Offering
Common Stock offered by
Razorfish............... shares
Common Stock to be
outstanding after this
offering................ shares(1)(2)
Use of proceeds.......... General corporate purposes, including expanding our
human resources department and hiring qualified
personnel, developing a formal sales and marketing
department, strategic acquisitions, international
expansion, technical upgrades of internal systems
and working capital requirements. See "Use of
Proceeds."
Proposed Nasdaq National
Market Symbol........... " "
- -------
(1) Does not include shares of Common Stock that will be offered if the
underwriters' over-allotment option is exercised in full.
(2) Based on shares of Common Stock outstanding at September 30, 1998. Does not
include 2,345,096 shares of Common Stock reserved for issuance pursuant to
Razorfish's 1997 Stock Option and Incentive Plan (the "1997 Stock Option
Plan") of which options to purchase 1,801,928 shares were outstanding and
options to purchase 746,575 shares were exercisable. See "Capitalization"
and "Management--Employee Benefit Plans" for a more complete description of
the capitalization of Razorfish and our employee benefit plans.
Summary Condensed Consolidated and Pro Forma Financial Information
The following table presents summary condensed consolidated and pro forma
financial information with respect to Razorfish and has been derived from (1)
the audited financial statements of Razorfish for the three years ended
December 31, 1997, the audited consolidated financial statements of Razorfish
as of September 30, 1998 and for the nine months ended September 30, 1998 and
the unaudited financial statements of Razorfish for the nine months ended
September 30, 1997 and (2) the unaudited pro forma consolidated financial
statements included elsewhere in this prospectus that give effect to the
Acquisitions, including Spray, the exercise of the 10% Option (each as we have
defined elsewhere in this prospectus) and this offering. The summary financial
information for Razorfish for the nine months ended September 30, 1997 is
derived from unaudited financial statements that, in the opinion of management,
include all adjustments necessary for the fair presentation of such
information. Results from interim periods are not necessarily indicative of the
results for the full year. The information set forth below should be read in
conjunction with the consolidated financial statements and notes thereto, the
pro forma consolidated financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Actual Pro forma
---------------------------------- ----------------------------
Nine months Nine months
Year ended ended ended
December 31, September 30, Year ended September 30,
------------------- -------------- December 31, ---------------
1995 1996 1997 1997 1998 1997 1997 1998
---- ------ ------ ------ ------ ------------ ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $312 $1,218 $3,618 $1,836 $9,118 $17,895 $11,565 $21,808
Direct salaries and
costs.................. 107 895 1,906 1,268 5,090 14,972 10,250 16,208
Gross profit............ 205 323 1,712 568 4,027 2,922 1,314 5,599
Operating expenses...... 158 629 1,051 738 2,323 4,591 3,252 5,253
Amortization of good-
will................... -- -- -- -- 65 3,123 1,916 1,573
Non-cash compensation
expense................ -- -- 79 53 2,141 79 53 2,141
Net income (loss)....... 36 (254) 297 (125) (394) (4,207)
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
-------------------
Pro forma
Actual as adjusted
------- -----------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................... $ 192 $
Total assets................................................ 10,621
Total debt.................................................. 4,859
Stockholders' equity........................................ 2,457
</TABLE>
2
<PAGE>
RISK FACTORS
In this section we highlight some of the risks associated with our business
and operations. This prospectus contains forward-looking statements relating to
future events or our future financial performance. Actual results could be
significantly different, and you should carefully consider the following risk
factors, as well as the other information we have included in this prospectus,
when evaluating whether to purchase our Common Stock.
Uncertainties Associated with Limited Operating History
We were formed in January 1995 and, therefore, have only a limited operating
history upon which you can evaluate our business. You should evaluate our
chances of financial and operational success in light of the risks,
uncertainties, expenses, delays and difficulties associated with starting a new
business, many of which may be beyond our control. In addition, we compete in a
relatively new industry known as the information technology services market.
Because this market is new and rapidly evolving, companies competing in it may
face many uncertainties.
Our success will depend on many factors, including the following:
. implementing our business strategy;
. integrating Spray and other recently acquired businesses;
. managing our rapid internal growth rate;
. attracting, retaining and motivating professionals;
. responding to technological and competitive developments;
. maximizing the value of services delivered to our clients;
. expanding our customer base; and
. maintaining the Razorfish brand.
Our failure to succeed in one or more of these areas could have a material
adverse effect on our business, results of operations and financial condition.
Shortage and Potential Loss of Professionals
Our business is labor intensive, and our success depends, in large part, on
identifying, hiring, training and retaining professionals. These professionals
must have skills in consulting, strategy, technology, creative design and
marketing. If a significant number of our current employees or any of our key
project managers leave, we may be unable to complete or retain existing
projects or bid for new projects of similar scope and revenue. Even if we
retain our current employees, our senior management must continually recruit
talented professionals in order for our business to grow. There is currently a
shortage of qualified personnel in the IT services market, and this shortage is
likely to continue. We compete intensely for qualified personnel with other
companies. If we cannot attract, motivate and retain qualified professionals,
our business and results of operations could be materially and adversely
affected.
Project-Based Source of Revenue; Customer Concentration
Our revenues are derived primarily from fees for services generated on an
engagement-by-engagement basis. These engagements vary in size and scope.
Therefore, a client that accounts for a significant portion of our revenue in a
given period may not generate a similar amount of revenue, if any, in
subsequent periods. In addition, after the completion of a project, we have no
assurance that a client will retain us in the future. As a consequence, our
revenues are not recurring from period-to-period, which may result, to some
extent, in unpredictability of our revenues in any period.
3
<PAGE>
Each of our clients is generally charged for the time, materials and
expenses incurred on a particular project. 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 us for all time,
materials and expenses incurred by us through the effective date of
termination. We cannot give any assurances that a client will not terminate an
engagement before its completion. If our clients terminate existing agreements
or if we are unable to enter into new engagements, our business, financial
condition and results of operations could be materially and adversely affected.
A portion of our revenues is derived from fixed-fee contracts. If the costs
of completing a project exceed the fixed-fee for such project, our operating
results could be materially adversely affected.
In addition, because a proportion of our expenses are relatively fixed, a
variation in the number of client engagements can cause significant variations
in operating results from quarter to quarter.
Assuming that we had completed the Acquisitions on January 1, 1997, no
client would have accounted for more than 10.0% of revenues in 1997, and
Charles Schwab would have accounted for 11.9% of our revenues for the nine
months ended September 30, 1998. CBS, AT&T, Road Runner and Charles Schwab
accounted for 19.5%, 16.2%, 14.1% and 13.7% of our actual revenues,
respectively, during 1997. Charles Schwab and Citibank accounted for 28.5% and
13.6% of our revenues, respectively, for the first three quarters of 1998.
Telia and SAS accounted for 17.0% and 12.0% of Spray's actual revenues,
respectively, during 1997. Hagstromer and Qviberg accounted for 11.9% of
Spray's revenues for the nine months ended September 30, 1998. We believe that
we will continue to derive a significant portion of our revenues from a limited
number of larger clients. The volume of work performed for these clients may
not be sustained from year to year, and there is a risk that these principal
clients may not retain us in the future. Any cancellation, deferral or
significant reduction in work performed for these principal clients or a
significant number of smaller clients could have a material adverse effect on
our business, financial condition and results of operations.
Integration of Acquired Companies
We acquired five businesses during 1998 and acquired Spray in January 1999.
We are experiencing certain financial, operational and managerial challenges in
integrating these acquired companies. To the extent our management must devote
significant time and attention to the integration of technology, operations and
personnel as a result of these acquisitions, our ability to service current
clients and win new clients may suffer. In addition, our senior management
faces the difficult and potentially time consuming challenge of implementing
uniform standards, controls, procedures and policies throughout our U.S. and
European offices.
We could also experience financial or other setbacks if any of the acquired
businesses experienced problems in the past of which our management is not
presently aware. For example, if an acquired business had dissatisfied
customers or had any performance problems, our reputation could suffer as a
result of our association with that business. Our management is unaware of any
material legal liabilities of the acquired companies. However, to the extent
any customer or other third party asserts any material legal claims against any
of the acquired companies, our business, financial condition and results of
operations could be materially and adversely affected. See "Business--
Acquisition of Spray" and "Business--Other Acquisitions" for descriptions of
the acquisitions we have completed since the beginning of 1998.
Potential Strain on Resources Due to Continued Growth
Our recent growth has strained our managerial and operational resources. A
key part of our strategy is to grow, both by hiring more personnel and through
acquisitions, which will continue to strain our resources. To manage future
growth, our management must continue to improve our operational and financial
systems and expand, train, retain and manage our employee base. Our management
cannot assure you that they will be able to manage our growth effectively. If
our systems, procedures and controls are inadequate to support our operations,
our expansion would be halted and we could lose our opportunity to gain
significant market share. Any inability to manage growth effectively could have
a material adverse effect on our business, results of operations and financial
condition.
4
<PAGE>
Implementation of Acquisition Growth Strategy
Our business strategy includes increasing our market share and global
presence through strategic acquisitions of other digital communications
solutions or content providers and web design or consulting firms. Our
continued growth will depend, in part, on our ability to acquire companies that
complement or enhance our business on acceptable terms. As part of this growth
strategy, we have entered into a non-binding letter of intent with respect to
the acquisition of a firm located in Finland. Our management cannot assure you
that this acquisition or future acquisitions will be completed or that the
anticipated results of any acquisitions will be realized. Some of the risks
that we may encounter in acquiring this or other companies include the
following:
. expenses, delays and difficulties of integrating the acquired company into
our existing organization;
. potential disruption of our ongoing business;
. diversion of management's attention;
. expenses of amortizing the acquired company's intangible assets;
. impact on our financial condition due to the timing of the acquisition;
. failure to retain key personnel;
. difficulties of integrating the personnel and cultures of the acquired
company into the existing organization; and
. potential legal liabilities.
If realized, any of these risks could have a material adverse effect on our
business, results of operations and financial condition.
Potential Need for Additional Funds
Razorfish and Spray have experienced operating losses, as well as net
losses, for some of the years during which they have operated. Similarly, in
the future, we may not generate sufficient revenue from operations to pay all
of our operating or other expenses. If we fail to generate sufficient cash from
our operations to pay these expenses, senior management will need to identify
other sources of funds. We may not be able to borrow money or issue more shares
of Common Stock to meet our cash needs, and even if we can complete such
transactions, they may not be on terms that are favorable or reasonable from
our perspective. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a more complete description of our
historical financial condition, results of operations and liquidity.
Variability of Quarterly Results
Our revenues and operating results may vary from quarter to quarter. Because
a high percentage of our expenses are relatively fixed, a variation in the
number, size or scope of client engagements can cause significant variations in
operating results from quarter to quarter. If our operating results fall short
of investors' expectations in any quarter, the trading price of our Common
Stock could be materially and adversely affected, even if such results do not
signal any longer-term problems. Variations in our quarterly results would
likely be caused by variations in the following:
. number and size of client engagements commenced or completed during a
quarter;
. scope of ongoing engagements;
. seasonality in European markets;
. number of business days in a quarter;
. timing of employee hiring and utilization rates;
. timing of business development and marketing expenses;
. timing of strategic acquisition;
5
<PAGE>
. pricing changes in the industry;
. economic conditions in general and specific to the IT services market; or
. legal or regulatory developments regarding the Internet.
New and Highly Competitive Market; Low Barriers to Entry
We compete in the IT services market which is relatively new and intensely
competitive. We expect competition to intensify as the market evolves. Our
competitors fall into several categories, including the following:
. Internet service firms, such as AGENCY.COM, Icon Medialab, iXL, Modem
Media . Poppe Tyson, Organic Online, Pixelpark, Proxicom, Online
Marketing Communications and USWeb/CKS;
. technology consulting firms, such as Diamond Technology Partners and
Metzler Group;
. technology integrators, such as Andersen Consulting, Cambridge Technology
Partners, Cap Gemini, EDS, IBM, Sapient and WM-Data;
. strategic consulting firms, such as Bain, Booz-Allen & Hamilton, Boston
Consulting Group and McKinsey; and
. in-house IT, marketing and design departments of our potential clients.
Many of our competitors have longer operating histories, larger client
bases, longer relationships with clients, greater brand or name recognition and
significantly greater financial, technical, marketing and public relations
resources than we do. As a result of their greater resources, our competitors
may be in a position to respond more quickly to new or emerging technologies
and changes in customer requirements and to develop and promote their products
and services more effectively than we do. Although only a few of these
competitors have to date offered as fully an integrated package of professional
IT services as we have, several have announced their intention to offer a
broader range of technology-based services than they currently provide.
There are relatively low barriers to entry into the IT services market. As a
result, new market entrants pose a threat to our business. We do not own any
patent technology that precludes or inhibits competitors from entering the IT
services market. Existing or future competitors may develop or offer services
that are comparable or superior to ours at a lower price, which could have a
material adverse effect on our business, results of operations and financial
condition. See "Business--Industry Overview" and "Business-- Competition" for a
more complete description of the industry in which we compete and the
competitive factors within the industry.
Need to Keep Pace with Rapid Technological Change
Our continued success depends, in part, on our ability to keep pace with (1)
rapid technological change, (2) new products and services embodying new
processes and technologies and (3) industry standards and practices. Failure to
respond to these changes could render our existing service practices and
methodologies obsolete. Our failure to respond quickly, cost-effectively or
sufficiently to these developments could materially and adversely affect our
business, results of operations and financial condition.
Risks Associated with International Operations and Expansion
A key element of our strategy is to expand our business into international
markets. In addition to our domestic operations, we have operations in five
European cities: London, England; Stockholm, Sweden; Oslo, Norway; Helsinki,
Finland; and Hamburg, Germany. Our management may have difficulty in managing
international operations because of distance, as well as language and cultural
differences. Our management cannot assure you that they will be able to market
and operate our services successfully in foreign markets.
6
<PAGE>
Other risks related to our international operations include:
. fluctuations in currency exchange rates and the conversion to the "euro"
by several members of the European Union (the "EU");
. difficulties arising from staffing and managing foreign operations;
. unexpected changes in the legal and regulatory requirements of different
countries;
. potential political and economic instability; and
. overlapping or differing tax laws.
If any of these risks materialize, our international and domestic
businesses, results of operations and financial condition could be materially
and adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a more complete description of our
historical financial condition, results of operations and liquidity.
Dependence on Continued Growth in the Use of the Internet
Our future success is substantially dependent upon continued growth in the
use of the Internet. The number of users on the Internet may not increase and
commerce over the Internet may not become more accepted and widespread for a
number of reasons, including:
. actual or perceived lack of security of information, such as credit card
numbers;
. lack of access and ease of use;
. congestion of traffic on the Internet;
. inconsistent quality of service and lack of availability of cost-
effective, high speed service;
. possible outages due to Year 2000 difficulties or other damage to the
Internet;
. excessive governmental regulation;
. uncertainty regarding intellectual property ownership; and
. lack of high speed modems and other communications equipment.
Published reports have also indicated that capacity constraints caused by
growth in the use of the Internet may, unless resolved, impede further
development of the Internet to the extent that users experience delays,
transmission errors and other difficulties. Further, the adoption of the
Internet for commerce and communications, particularly by those individuals and
companies that have historically relied upon alternative means of commerce and
communication, generally requires the understanding and acceptance of a new way
of conducting business and exchanging information. In particular, companies
that have already invested substantial resources in other means of conducting
commerce and exchanging information may be particularly reluctant or slow to
adopt a new Internet-based strategy that may make their existing personnel and
infrastructure obsolete. If the necessary infrastructure, products, services or
facilities are not developed, or if the Internet does not become a viable
commercial medium, our business, results of operations and financial condition
could be materially and adversely affected. See "Risk Factors--Intellectual
Property and Proprietary Risks" and "Risk Factors--Government Regulation and
Legal Uncertainties--U.S. and Foreign" for other risks that are related to the
use of the Internet.
Dependence on Key Personnel
Our success depends upon the members of our senior management team,
including Jeffrey A. Dachis, our President and Chief Executive Officer, Craig
M. Kanarick, our Chief Scientist and a Vice Chairman of the Board, Per Bystedt,
our Executive Vice President and Chairman of the Board, and Jonas Svensson, a
Vice Chairman of the Board. We have entered into employment agreements, with
all of these individuals. However, these key personnel may leave us or compete
with us. The loss of any of these individuals, or of one or more
7
<PAGE>
of our other key employees, could have a material adverse effect on our
business, results of operations and financial condition. Highly skilled
employees with technical, managerial, creative, marketing, sales, product
development and other specialized training are highly sought after by
competitors in the IT industry. We may not be able to attract or retain such
employees. See "Management--Employment and Non-Competition Agreements" for a
more complete description of the employment agreements with our senior
management.
Control by Certain Stockholders
Immediately following this offering, the stockholders set forth below
collectively will own approximately % of the outstanding shares of our Common
Stock and will own individually the percentage set forth opposite their
respective names:
<TABLE>
<S> <C>
Spray Ventures AB................................................... %
Communicade Inc.....................................................
Jeffrey A. Dachis...................................................
Craig M. Kanarick...................................................
</TABLE>
Communicade is a wholly-owned subsidiary of Omnicom Group, Inc. ("Omnicom").
Per Bystedt, Jonas Svensson, Thomas Randerz and Johan Ihrfelt, each of whom is
an officer or director of Razorfish, collectively own more than 50% of the
outstanding voting stock of Spray Ventures AB ("Spray Ventures").
If the stockholders listed above choose to act or vote in concert, they will
have the power to influence the election of our directors, the appointment of
new management and the approval of any other action requiring the approval of
our stockholders, including any amendments to our certificate of incorporation
and mergers or sales of all of our assets. In addition, without the consent of
these stockholders, we could be prevented from entering into certain
transactions that could be beneficial to us. Also, third parties could be
discouraged from making a tender offer or bid to acquire our company at a price
per share that is above the price at which the Common Stock will trade on
Nasdaq.
Risks Associated with Maintaining Reputation and Name Recognition
We believe that establishing and maintaining a good reputation and name
recognition is critical for attracting and expanding our targeted client base.
We also believe that the importance of reputation and name recognition will
increase due to the growing number of IT service providers. Promotion and
enhancement of our name will depend largely on our success in continuing to
provide high quality services and digital communications solutions, which
cannot be assured. If clients do not perceive our digital communications
solutions to be effective or of high quality, our brand name and reputation
could be materially and adversely affected.
In addition, we license the "Razorfish" trademark and symbol and "The Blue
Dot" trademark on a royalty-free basis to Razorfish Studios, Inc. ("Razorfish
Studios"), a company controlled by Communicade and Messrs. Dachis and Kanarick.
Razorfish Studios produces and publishes on-line content, including art,
computer games, and literature, as well as screensavers, CDs, books and films.
Because the "Razorfish" trademark and symbol are closely associated with both
Razorfish Studios and Razorfish, our name and reputation could be materially
and adversely affected by content published or actions taken by Razorfish
Studios. See "Certain Transactions" for a more complete description of the
business relationship between Razorfish and Razorfish Studios.
Intellectual Property and Proprietary Risks
We believe our trademarks and other proprietary rights are important to our
success and competitive position. We have registered certain of our trademarks
in the United States and abroad. We also limit access to and distribution of
our proprietary information, as well as proprietary information licensed from
third-parties. Our management cannot ensure that these strategies will be
adequate to deter misappropriation of our proprietary information and material.
8
<PAGE>
Despite efforts to protect our intellectual property, we also face the
following risks:
. non-recognition or inadequate protection of our proprietary rights in
certain foreign countries;
. undetected misappropriation of our proprietary information or materials;
. development of similar technologies by our competitors;
. unenforceablity of the non-competition agreements entered into by our key
employees; and
. infringement claims, even if not meritorious, against our company.
If any of these risks materialize, we could be required to pay significant
amounts to defend our rights and our managerial resources could be diverted.
Government Regulation and Legal Uncertainties--U.S. and Foreign
Congress has recently passed legislation that regulates certain aspects of
the Internet, including on-line content, copyright infringement, user privacy,
taxation, access charges, liability for third-party activities and
jurisdiction. In addition, federal, state, local and foreign governmental
organizations also are considering other legislative and regulatory proposals
that would regulate the Internet. Areas of potential regulation include libel,
pricing, quality of products and services and intellectual property ownership.
The EU also has recently enacted several directives relating to the
Internet. In order to safeguard against the spread of certain illegal and
socially harmful materials on the Internet, the European Commission has drafted
the "Action Plan on Promoting the Safe Use of the Internet." Other European
Commission directives address the regulation of privacy, e-commerce, security,
commercial piracy, consumer protection and taxation of transactions completed
over the Internet.
It is not known how courts will interpret both existing and new laws.
Therefore, we are uncertain as to how new laws or the application of existing
laws will affect our business. In addition, our business may be indirectly
affected by our clients who may be subject to such legislation. Increased
regulation of the Internet may decrease the growth in the use of the Internet,
which could decrease the demand for our services, increase our cost of doing
business or otherwise have a material adverse effect on our business, results
of operations and financial condition.
Year 2000 Risks
The Year 2000 issue 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 IT systems but may also impact embedded systems, such
as those that control elevators, alarm systems and many other devices.
We believe that our internal software and hardware systems will function
properly with respect to dates in the year 2000 and thereafter. Nonetheless, we
can give you no assurance in this regard until such systems are operational in
the year 2000. In addition, Year 2000 problems of our clients could affect our
systems or operations. Widespread Year 2000 difficulties could also decrease
demand for our services as companies expend resources upgrading their computer
systems.
Although, as a general matter, we do not specifically warrant to clients
that our work will be Year 2000 compliant, certain clients have requested and
received such warranties. In such cases, we do not warrant the compliance of
third-party software; rather, we warrant only that software created by us will
be Year 2000
9
<PAGE>
compliant. However, even absent a specific Year 2000 warranty, there is a risk
that clients for whom we have created or implemented software will attempt to
hold us liable for any damages that result in connection with Year 2000 issues.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for a more complete description of the Year 2000 risks that we
face and the steps we have taken to reduce those risks.
Conversion to "Euro" Risks
In January 1999, a new currency called the "euro" was introduced in eleven
of the fifteen EU member states. There is a three-year phase-in period for the
euro, and by January 2002 the participating EU member states are expected to
operate with the euro as their single currency. Some of the rules and
regulations with regard to the euro have yet to be promulgated and completed by
the European Commission. Although our management does not believe that the
conversion to the euro will have a material or adverse impact on our business,
they have not completed their assessment of the effect that the introduction of
the euro will have on our business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a more complete description of the impact of the
conversion to the euro on our financial condition.
No Prior Market for Razorfish's Common Stock; Potential Volatility of Price of
the Common Stock
There is currently no public market for our Common Stock. The initial public
offering price of the Common Stock will be determined through negotiations
between the representatives of the underwriters and us and may not be
representative of the price that will prevail in the open market. See
"Underwriting" for a description of factors that will be evaluated in
determining the initial public offering price and of the arrangement between
the representatives and us.
We will file an application for the quotation of our Common Stock on Nasdaq.
We do not know the extent to which investor interest will lead to the
development of a trading market or how liquid it may be. The market price for
our Common Stock could be highly volatile and could be subject to wide
fluctuations in response to the following factors:
.quarterly variations in our operating results;
.investor perception of our company and the IT services market in general;
.announcements of technological innovations;
.announcements by us or our competitors of new products or services;
.changes in financial estimates by securities analysts; and
.general economic and IT services market conditions.
The common stock of many companies has experienced significant fluctuations
in trading price and volume. Often these fluctuations have been unrelated to
operating performance. In the past, following periods of market volatility,
securityholders of these companies have instituted class action litigation. If
we were involved in such litigation, such litigation could have a substantial
cost and divert management's attention, which could have a material adverse
effect on our business, results of operations and financial condition. Declines
in the trading of our Common Stock could also materially and adversely affect
employee morale and retention, our access to capital and other aspects of our
business.
10
<PAGE>
Shares Eligible for Future Sale
The market price of our Common Stock could drop as a result of sales of
substantial amounts of Common Stock in the public market after the closing of
this offering, or the perception that such sales could occur. In addition,
these factors could make it more difficult for us to raise funds through future
offerings of Common Stock. There will be shares of Common Stock
outstanding immediately after this offering, or shares if the
representatives exercise their over-allotment option in full. All of the shares
sold in the offering will be freely transferable without restriction or further
registration under the Securities Act of 1933 (the "Securities Act"), except
for any shares purchased by our "affiliates," as defined in Rule 144
promulgated under the Securities Act ("Rule 144"). The remaining 42,161,077
shares of Common Stock outstanding, including the 40,894,827 shares held by
Spray Ventures, Communicade, Jeffrey A. Dachis and Craig M. Kanarick, will be
"restricted securities" as defined in Rule 144. These shares may be sold in the
future without registration under the Securities Act to the extent permitted by
Rule 144 or other exemptions under the Securities Act.
In connection with this offering, Razorfish, our executive officers and
directors and all of our existing stockholders have agreed that, with certain
exceptions, they will not sell any shares of Common Stock without the consent
of the representatives for 180 days after the date of this prospectus (the
"Lock-up Period"). See "Shares Eligible for Future Sale" for a more complete
description of the restrictions on selling shares of Common Stock after the
offering.
During the Lock-up Period, we intend to register on a Form S-8 registration
statement under the Securities Act a total of (1) 2,345,096 shares of Common
Stock reserved for issuance under the 1997 Stock Option Plan and (2) a total of
1,200,000 shares of Common Stock which we intend to reserve for issuance under
our 1999 Stock Incentive Plan. None of these shares may be sold for a period of
180 days subsequent to the completion of the offering. As of the date of this
prospectus, there were outstanding options to purchase 1,326,217 shares of
Common Stock, of which 266,059 were exercisable. See "Management--Employee
Benefit Plans" for a more complete description of our employee benefit plans
and the grants of options under such plans.
Broad Discretion in Use of Proceeds
Our senior management intends to use the proceeds of this offering for
general corporate purposes. These purposes could include the development of a
formal sales and marketing force, strategic acquisitions or investments,
international expansion, technical upgrades of internal systems and working
capital requirements. Management will have significant flexibility in applying
the net proceeds of this offering. The failure of management to apply such
proceeds effectively could have a material adverse effect on the our business,
results of operations and financial condition. See "Use of Proceeds."
Dilution
The public offering price is substantially higher than the pro forma net
tangible book value per share of our Common Stock. The pro forma net tangible
book value as of September 30, 1998 would have been $ per share. Assuming a
public offering price of $ per share, the value of your purchase of Common
Stock will be immediately and substantially diluted by $ per share. See
"Dilution."
Anti-Takeover Provisions of Delaware's General Corporation Law and Razorfish's
Certificate of Incorporation
Certain provisions of the Delaware General Corporation Law (the "DGCL") may
discourage or prevent a third party from acquiring control of our Company. Such
provisions may discourage bids for our Common Stock at a premium over the
market price and may adversely affect the market price and the voting and other
rights of the holders of our Common Stock.
11
<PAGE>
Our Certificate of Incorporation (the "Certificate of Incorporation")
authorizes our Board of Directors to issue up to 10,000,000 shares of "blank
check" preferred stock. The Board of Directors will have the authority without
action by our stockholders to fix the rights, privileges and preferences of,
and to issue shares of, such preferred stock. The issuance of preferred stock
could make it more difficult for a third party to acquire our Company. We have
no present plans to issue shares of preferred stock. See "Description of
Capital Stock--Preferred Stock" and "Description of Capital Stock--Anti-
takeover Effects of Delaware Law" for a more complete description of our
capitalization and the effects of the DGCL on certain actions that we may take.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to Razorfish from the sale of the shares of Common
Stock being offered hereby are estimated to be approximately $ million ($
million if the over-allotment option is exercised in full), after deducting
underwriting discounts and commissions and estimated offering expenses payable
by Razorfish.
Razorfish expects to use such net proceeds for general corporate purposes,
including expanding its human resources department and hiring qualified
personnel, the development of a formal sales and marketing department,
strategic acquisitions or investments, international expansion, technical
upgrades of internal systems and working capital requirements. Razorfish's
management continually evaluates potential strategic acquisitions or
investments. Razorfish has entered into a non-binding letter of intent with
respect to the acquisition of a company located in Finland. Pending such uses,
Razorfish intends to invest the net proceeds from the offering in U.S.
government securities and investment-grade, interest-bearing instruments.
The foregoing represents Razorfish's present intentions with respect to the
allocation of proceeds of the offering based upon its present plans and
business conditions. The occurrence of certain unforeseen events or changed
business conditions, however, could result in the application of the proceeds
of the offering in a manner other than as described in this prospectus. See
"Risk Factors--Broad Discretion in Use of Proceeds" for discussion of this
risk.
DIVIDEND POLICY
Razorfish's Board of Directors has never declared or paid any cash dividends
on its Common Stock and does not expect to do so in the foreseeable future.
Razorfish currently intends to retain any earnings to finance the expansion and
development of its business. Any future determination of the payment of
dividends will be made at the discretion of the Board of Directors of Razorfish
based upon conditions then existing, including Razorfish's earnings, financial
condition and capital requirements as well as such economic and other
conditions as the Board of Directors may deem relevant. In addition, the
payment of dividends may be limited by financing agreements that may be entered
into by Razorfish in the future.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Razorfish (1) on an
actual basis as of September 30, 1998, (2) on a pro forma basis assuming the
Spray Acquisition, the Sunbather Acquisition and the exercise of the 10% Option
(as we have defined elsewhere in this prospectus) as if they had been completed
on September 30, 1998 and (3) as further adjusted to give pro forma effect to
the sale of shares of Common Stock offered hereby. This table should be
read in conjunction with the "Unaudited Pro Forma Consolidated Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and each of the Company's and Spray's consolidated
financial statements and notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of September 30, 1998
-----------------------------
Pro forma
Actual Pro forma as adjusted
------ --------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Total long-term obligations...................... $ 22 $ $
Stockholders' equity:
Class A Common Stock, $.01 par value;
46,999,950 shares authorized; 18,313,638
shares issued and outstanding, actual
(42,026,649 issued and outstanding, pro forma;
issued and outstanding pro forma as
adjusted) (1)................................. 183
Class B Common Stock, $.01 par value; 50 shares
authorized; no shares issued and outstanding,
actual (50 shares issued and outstanding, pro
forma and pro forma as adjusted)(2)...........
Additional paid-in capital..................... 2,441
Retained earnings (deficit).................... (171)
Cumulative foreign currency translation
adjustments................................... 4
------ ----- -----
Total stockholders' equity................... 2,457
------ ----- -----
Total capitalization....................... $2,479 $ $
====== ===== =====
</TABLE>
- --------
(1) Does not include (1) 2,345,096 shares of Common Stock reserved for issuance
pursuant to the 1997 Stock Option Plan of which options to purchase
1,801,928 shares were outstanding and 746,575 were exercisable at September
30, 1998 or (2) 1,200,000 shares of Common Stock reserved for issuance
pursuant to the 1999 Stock Incentive Plan of which no options are
outstanding. See "Management--Employee Benefit Plans."
(2) These non-voting shares are a portion of the purchase price to be paid by
the Company in connection with the Spray Acquisition, and they will be
issued prior to the Company's reincorporation into Delaware. See
"Business--Acquisition of Spray" and "Description of Capital Stock--Common
Stock."
14
<PAGE>
DILUTION
Assuming that the Spray Acquisition, the Sunbather Acquisition and the
exercise of the 10% Option had been completed at September 30, 1998, the
Company's pro forma net tangible book value at September 30, 1998 would have
been approximately $ million, or $ per share. Net tangible book value per
share is equal to the total tangible assets of the Company minus total
liabilities divided by the number of shares of Common Stock outstanding.
Assuming the Company had also sold the shares of Common Stock offered
hereby (at an assumed initial public offering price of $ per share), and
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company, the Company's pro forma net tangible book
value at September 30, 1998 would have been approximately $ , or $ per
share. This represents an immediate increase in pro forma net tangible book
value of $ per share to existing stockholders (including Spray Ventures and
Communicade) and an immediate dilution of $ per share to new investors.
Dilution is determined by subtracting pro forma net tangible book value per
share after the offering from the amount of cash paid by a new investor for a
share of Common Stock. The following table illustrates the substantial and
immediate per share dilution to new investors:
<TABLE>
<CAPTION>
Per share
-------------
<S> <C> <C>
Assumed initial public offering price per share.............. $
Pro forma net tangible book value per share at September
30, 1998.................................................. $
Increase per share attributable to new investors...........
------
Pro forma net tangible book value per share after giving
effect to the offering......................................
------
Dilution per share to new investors.......................... $
======
</TABLE>
The following table sets forth at September 30, 1998 the number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price per share paid by existing stockholders and by new investors at
an assumed offering price of $ per share:
<TABLE>
<CAPTION>
Shares Total
purchased consideration
-------------- -------------- Average price
Number Percent Amount Percent per share
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)....... % $ % $
New investors..................
--- --- ---- --- ------
Total........................ 100% $ 100% $
=== === ==== === ======
</TABLE>
- --------
(1) Includes shares acquired by Spray Ventures and shares acquired by
Communicade at $ per share and $ per share, respectively, pursuant to
the Spray Acquisition, and shares acquired by Communicade at $ per
share pursuant to the exercise of the 10% Option.
The foregoing tables assume no exercise of any outstanding stock options to
purchase Common Stock. If the over-allotment is exercised in full, the pro
forma net tangible book value per share of Common Stock at September 30, 1998
would have been $ per share, which would result in dilution to the new
investors of $ per share, and the number of shares held by the new investors
will increase to , or % of the total number of shares to be outstanding
after the offering, and the number of shares held by the existing stockholders
will be 42,161,077 shares, or % of the total number of shares to be
outstanding after the offering. At September 30, 1998, there were outstanding
options to purchase an aggregate of 1,801,928 shares of Common Stock, 746,575
of which were then exercisable, and the Company had also reserved for issuance
an additional 543,168 shares of Common Stock for issuance upon the exercise of
options which had not yet been granted under the 1997 Stock Option Plan. The
Company has reserved a total of 1,200,000 shares of Common Stock for issuance
under the 1999 Stock Option Plan. Since September 30, 1998, Razorfish has
granted options to purchase an additional 91,715 shares of Common Stock, each
at an exercise price of $ . To the extent options are exercised, there will be
further dilution to new investors. See "Capitalization," "Employee Benefit
Plans" and note 7 to Razorfish's consolidated financial statements.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF RAZORFISH
The following selected consolidated financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Razorfish financial statements and notes thereto
included elsewhere in this prospectus. The statement of operations data for the
nine months ended September 30, 1998 and the years ended December 31, 1995,
1996 and 1997 and the balance sheet data as of September 30, 1998 and December
31, 1995, 1996 and 1997 are derived from the consolidated financial statements
of Razorfish which have been audited by Arthur Andersen LLP, independent
accountants, and are included elsewhere in this prospectus. The selected
financial data as of September 30, 1997 are derived from unaudited financial
statements of Razorfish, which in the opinion of management include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information set forth therein. Interim
results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ 312 $ 1,218 $ 3,618 $ 1,836 $ 9,118
Direct salaries and
costs.................. 107 895 1,906 1,268 5,090
----------- ----------- ----------- ----------- -----------
Gross profit............ 205 323 1,712 568 4,028
Sales and marketing..... 16 129 175 127 226
General and
administrative......... 142 500 877 610 2,097
Amortization of
goodwill............... -- -- -- -- 65
Non-cash compensation
expense................ -- -- 79 53 2,141
----------- ----------- ----------- ----------- -----------
Income (loss) from
operations............. 47 (306) 581 (222) (501)
Interest expense, net... -- 5 19 -- 165
----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes........... 47 (311) 562 (222) (666)
Provision (benefit) for
income taxes........... 11 (57) 265 (97) (272)
----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ 36 $ (254) $ 297 $ (125) $ (394)
Net income (loss) per
share
Basic.................. 0.00 (0.01) 0.02 (0.01) (0.02)
Diluted................ 0.00 (0.01) 0.02 (0.01) (0.02)
Common shares
outstanding
Basic.................. 18,181,812 18,181,812 18,313,638 18,313,638 18,313,638
Diluted................ 19,074,922 19,074,922 19,745,308 19,206,748 19,206,748
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
1998
----------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................... $ 192
Total assets................................................... 10,621
Total debt..................................................... 4,859
Stockholders' equity........................................... 2,457
</TABLE>
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF SPRAY
The following selected consolidated financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Spray's financial statements and notes thereto
included elsewhere in this prospectus. The statement of operations data for the
nine months ended September 30, 1998 and the years ended December 31, 1995,
1996 and 1997 and the balance sheet data as of September 30, 1998 and December
31, 1995, 1996 and 1997 are derived from the consolidated financial statements
of Spray which have been audited by Arthur Andersen LLP, independent
accountants, and are included elsewhere in this prospectus. The selected
financial data as of September 30, 1997 are derived from audited financial
statements of Spray, which in the opinion of management include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information set forth therein. The
historical results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
Nine months
Year ended ended
December 31, September 30,
-------------------- ---------------
1995 1996 1997 1997 1998
------ ------ ------ ------ -------
(dollars in thousands, except
per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues............................... $2,192 $5,319 $7,818 $4,703 $10,961
Direct salaries and costs.............. 1,734 4,391 7,258 3,735 9,436
------ ------ ------ ------ -------
Gross profit........................... 458 928 560 968 1,525
Sales and marketing.................... 97 348 395 70 509
General and administrative............. -- 256 961 1,041 1,987
Amortization of goodwill............... -- -- 93 -- 219
------ ------ ------ ------ -------
Income (loss) from operations.......... 361 322 (889) (143) (1,190)
Interest expense net................... 1 -- (84) 14 (37)
------ ------ ------ ------ -------
Income (loss) before minority interest
and income taxes...................... 362 322 (805) (129) (1,227)
Minority interest...................... -- -- 88 -- 120
------ ------ ------ ------ -------
Income (loss) before provision
(benefit) income taxes................ 362 322 (717) (129) (1,107)
Provision (benefit) for income taxes... 66 241 (24) 157 --
------ ------ ------ ------ -------
Net income (loss)...................... $ 296 $ 81 $ (693) $ (286) $(1,107)
</TABLE>
<TABLE>
<CAPTION>
At September 30,
1998
----------------
<S> <C>
Balance Sheet Data:
Cash and cash equivalents...................................... $ 329
Total assets................................................... 6,647
Total long-term debt........................................... 33
Stockholders' equity........................................... 1,351
</TABLE>
17
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial statements are
based on Razorfish's consolidated financial statements appearing elsewhere in
this prospectus, as adjusted to give pro forma effect to the Acquisitions, the
exercise of the 10% Option and this offering (collectively, the "Transactions")
as if they had been completed on January 1, 1997, January 1, 1998 and September
30, 1998.
The unaudited pro forma consolidated statements of operations do not purport
to be indicative of what Razorfish's actual results of operations would have
been assuming the Transactions had been completed on such dates, nor do they
purport to be indicative of results of operations that may be achieved in the
future.
These pro forma financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto of Razorfish for
the year ended December 31, 1997 and as of and for the nine months ended
September 30, 1998, the audited consolidated financial statements of Spray for
the year ended December 31, 1997, the unaudited consolidated financial
statements of Spray as of and for the nine months ended September 30, 1998 and
the audited consolidated financial statements of Avalanche Systems as of and
for the year ended December 31, 1997. The pro forma adjustments are based upon
available information and certain assumptions that management believes are
reasonable.
The Acquisitions have been accounted for using the purchase method of
accounting. The purchase method of accounting allocates the aggregate purchase
price to the assets acquired and liabilities assumed based upon their
respective fair values. The excess of purchase price over the fair value of
assets acquired, which equals $38.6 million (based upon on a preliminary
allocation) for Spray. $0.8 million for Avalanche Systems, Inc. ("Avalanche
Systems") and $2.6 million for the other acquisitions, in the aggregate, has
been reflected as goodwill. The final allocation of the aggregate purchase
price for Spray is contingent upon studies and valuations which have not yet
been completed. The Company is unable to predict whether any adjustments to
such allocations will have a material effect on the pro forma financial
statements.
18
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of September 30, 1998
<TABLE>
<CAPTION>
Historical Pro forma adjustments
----------------------------------- -----------------------------
Offering and Pro
Razorfish Spray Sunbather Acquisitions 10% Option forma
----------- ----------- --------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash
equivalents........... $ 192,517 $ 329,000 $ -- $ (168,200)(a) $ $
Accounts receivable,
net................... 1,911,856 2,531,000 --
Other current assets... 2,382,603 1,043,000 --
----------- ----------- ------- ----------- -------- --------
Total current assets.. 4,486,976 3,903,000 -- (168,200)
Property and equipment,
net.................... 1,154,263 1,338,000 18,065
Intangibles............. 3,176,921 -- -- 38,799,135(a)
Investments and other
assets................. 1,803,205 1,406,000 --
----------- ----------- ------- ----------- -------- --------
Total assets.......... $10,621,365 $ 6,647,000 $18,065 $38,630,935 $ $
=========== =========== ======= =========== ======== ========
Current liabilities:
Due to Omnicom Group,
Inc................... $ 4,858,506 $ -- $ -- $ $ $
Accounts payable and
accrued expenses...... 1,147,739 1,794,000 --
Deferred tax
liabilities........... 1,167,904 -- --
Other current
liabilities........... 968,198 2,881,000 --
----------- ----------- ------- ----------- -------- --------
Total current
liabilities.......... 8,142,347 4,675,000 --
Long-term liabilities... 22,062 621,000 --
----------- ----------- ------- ----------- -------- --------
Total liabilities... 8,164,409 5,296,000 --
Stockholders' equity:
Common stock........... 183,136 39,000 18,065 140,556(a)
Additional paid-in
capital............... 2,440,502 3,154,000 -- 36,648,379(a)
Retained deficit....... (170,542) (1,758,000) -- 1,758,000(a)
Cumulative translation
adjustments........... 3,860 (84,000) -- 84,000(a)
----------- ----------- ------- ----------- -------- --------
Total stockholder's
equity............... 2,456,956 1,351,000 18,065 38,630,935
----------- ----------- ------- ----------- -------- --------
Total liabilities
and stockholders'
equity............. $10,621,365 $ 6,647,000 $18,065 $38,630,935 $ $
=========== =========== ======= =========== ======== ========
</TABLE>
The accompanying notes and management's assumptions to the pro forma
consolidated financial statements are integral parts of this statement.
19
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
------------------------------------- ---------------------------
OFFERING
OTHER AND
RAZORFISH SPRAY ACQUISITIONS ACQUISITIONS 10% OPTION PRO FORMA
---------- ----------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $9,117,812 $10,961,000 $1,728,763 $ $ $21,807,575
Direct salaries and
costs.................. 5,090,436 9,436,000 1,681,737 16,208,173
---------- ----------- ---------- ----------- ---- -----------
Gross profit.......... 4,027,376 1,525,000 47,026 5,599,402
Sales and marketing..... 226,491 509,000 164,222 899,713
General and
administrative......... 2,096,770 1,987,000 269,223 4,352,993
Amortization of
intangibles............ 64,552 219,000 61,307 1,227,696 (b) 1,572,555
Non-cash compensation
expense................ 2,140,819 -- -- 2,140,819
---------- ----------- ---------- ----------- ---- -----------
(Loss) from
operations........... (501,256) (1,190,000) (447,726) (1,227,696) (3,366,678)
Interest expense, net... 165,471 37,000 5,342
Minority interests...... -- (120,000) -- (120,000)
---------- ----------- ---------- ----------- ---- -----------
(Loss) before income
taxes................ (666,727) (1,107,000) (453,068) (1,227,696)
Benefit from income
taxes.................. (272,695) -- (181,227)
---------- ----------- ---------- ----------- ---- -----------
Net (loss)............ $ (394,032) $(1,107,000) $ (271,841) $(1,227,696) $ $
========== =========== ========== =========== ==== ===========
Per share information:
Net loss per share:
Basic................. $ (0.02) $ (0.05) $
========== =========== ===========
Diluted............... $ (0.02) $ (0.05) $
========== =========== ===========
Weighted average common
shares outstanding:
Basic................. 18,313,638 23,713,011 (c)
========== =========== ===========
Diluted............... 19,206,740 23,713,011 (c)
========== =========== ===========
</TABLE>
The accompanying notes and management's assumptions to the pro forma
consolidated financial statements are an integral part of this statement.
20
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
------------------------------------------------ ------------------------------
OFFERING
OTHER AND
RAZORFISH SPRAY AVALANCHE ACQUISITIONS ACQUISITIONS 10% OPTION PRO FORMA
---------- ---------- ----------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $3,617,688 $7,818,000 $ 2,313,863 $3,007,745 $ 1,137,250 (d) $ $17,894,546
Direct salaries and
costs.................. 1,906,111 7,258,000 2,585,654 2,108,185 1,114,225 (d) 14,972,175
---------- ---------- ----------- ---------- ----------- ---- -----------
Gross profit........... 1,711,577 560,000 (271,791) 899,560 23,025 2,922,371
Sales and marketing..... 174,550 395,000 21,974 136,379 659,000 (d) 1,386,903
General and
administrative......... 876,567 961,000 1,723,769 385,727 (743,385)(d) 3,203,678
Amortization of
intangibles............ -- 93,000 -- 134,797 2,667,225 (d)(f) 2,895,052
Non-cash compensation
expense................ 78,819 -- -- -- 78,819
---------- ---------- ----------- ---------- ----------- ---- -----------
Income (loss) from
operations............ 581,641 (889,000) (2,017,534) 242,657 (2,559,845) (4,642,081)
Interest expense, net.. 19,489 (84,000) 76,661 12,952 79,090 (d)
Minority interests...... -- (88,000) -- 16,610 (7,100)(d) (78,490)
---------- ---------- ----------- ---------- ----------- ---- -----------
Income (loss) before
income taxes........... 562,152 (717,000) (2,094,195) 213,095 (2,631,835)
Provision (benefit) for
income taxes........... 264,963 (24,000) (984,272) 85,237 (30,030)(d)
---------- ---------- ----------- ---------- ----------- ---- -----------
Net income (loss)....... $ 297,189 $ (693,000) $(1,109,923) 127,858 $(2,601,805) $ $
========== ========== =========== ========== =========== ==== ===========
Per share information:
Net income (loss) per
share:
Basic.................. $ 0.02 $ (0.11) $
========== =========== ===========
Diluted................ $ 0.02 $ (0.11) $
========== =========== ===========
Weighted average common
shares outstanding:
Basic.................. 18,313,638 23,713,011 (c)
========== =========== ===========
Diluted................ 19,745,300 23,174,451 (c)
========== =========== ===========
</TABLE>
The accompanying notes and management's assumptions to the pro forma
consolidated financial statements are an integral part of this statement.
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
Historical Pro forma adjustments
------------------------------------------------- --------------------------------
Other Offering and
Razorfish Avalanche Spray acquisitions Acquisitions 10% Option Pro forma
---------- ----------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............... $1,836,461 $ 1,723,000 $4,703,000 $2,016,105 $ 1,286,060 (f)(h) $ $ 11,564,626
Direct salaries and
costs................. 1,268,321 1,925,625 3,735,000 1,465,529 1,855,920 (h) 10,250,395
---------- ----------- ---------- ---------- ----------- ---- ------------
Gross profit........... 568,140 (202,625) 968,000 550,576 (569,860) 1,314,231
Sales and marketing.... 127,111 16,369 70,000 95,042 633,000 (h) 941,522
General and
administrative........ 610,518 1,283,635 1,041,000 270,076 (895,000)(h) 2,310,229
Amortization of
goodwill.............. -- -- -- 110,530 1,805,009 (h) 1,915,539
Noncash compensation
expense............... 53,304 -- -- 53,304
---------- ----------- ---------- ---------- ----------- ---- ------------
Income (loss) from
operations............ (222,793) (1,502,628) (143,000) 74,928 (2,112,869) (3,906,362)
Interest (income)
expense, net.......... -- 57,496 (20,000) 9,770 60,500 (h)
Minority interests..... -- -- 6,000 16,610 (6,000)(h) 16,610
---------- ----------- ---------- ---------- ----------- ---- ------------
Income (loss) before
income taxes.......... (222,793) (1,560,124) (129,000) 48,548 (2,167,369)
Provision (Benefit) for
income taxes.......... (97,408) (733,258) 157,000 23,192
---------- ----------- ---------- ---------- ----------- ---- ------------
Net income (loss)...... $ (125,385) $ (826,866) $ (286,000) 25,356 $(2,167,369) $
========== =========== ========== ========== =========== ==== ============
Per share information:
Net loss per share:
Basic.................. $ (0.01) $ (0.09) $
========== =========== ============
Diluted................ $ (0.01) $ (0.09) $
========== =========== ============
Weighted average common
shares outstanding:
Basic.................. 18,313,638 23,713,011 (d)
========== =========== ============
Diluted................ 19,206,740 23,713,011 (d)
========== =========== ============
</TABLE>
22
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma financial information is based on the following
assumptions and adjustments:
a. In January 1999, Razorfish acquired all of the issued and outstanding
shares of capital stock of Spray in exchange for an aggregate of
19,762,068 shares of Common Stock (representing 50% of the outstanding
shares of Common Stock on a fully-diluted basis immediately following
this acquisition) and 50 shares of non-voting Class B common stock (to be
authorized and issued prior to the consummation of this offering). Based
upon a third-party valuation of $40.0 million for Spray and a preliminary
determination that the fair market value of the net assets acquired of
$1.4 million, goodwill is $38.8 million. In October 1998, Razorfish
acquired all of the assets of Sunbather Limited for cash consideration of
$168,200. The following table summarizes the adjustments for these
acquisitions:
<TABLE>
<CAPTION>
Consideration Elimination Elimination
Consideration for of Spray of Sunbather Net
for Spray Sunbather equity equity investment
------------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Common stock............ $ 197,621 $ (39,000) $(18,065) $ 140,556
Additional paid-in
capital................ 39,802,379 (3,154,000) -- 36,648,379
Retained deficit........ 1,758,000 -- 1,758,000
Cumulative translation
adjustments............ 84,000 -- 84,000
Cash and cash
equivalents............ $(168,200) -- -- 168,200
Intangible assets....... 38,649,000 150,135 38,799,135
</TABLE>
The estimated fair value of the net assets acquired for these
acquisitions was determined based on management's knowledge of current
industry trends and transactions, and management considers such
estimates to be reasonable. However, the pro forma adjustments for Spray
are based on preliminary assumptions regarding purchase accounting
adjustments. The actual allocation of the purchase price will be
determined after consummation of these acquisitions and will be adjusted
in accordance with Statement of Financial Accounting Standard No. 38
"Accounting for Preacquisition Contingencies of Purchased Enterprises,"
to the extent that actual amounts differ from management's estimates.
b. Reflects the amortization of excess purchase price over the fair value of
net assets acquired in the Spray Acquisition in the amount of $1.4 million
for the nine months ended September 30, 1998, based upon a 20-year life
and the amortization of intangible assets in the amount of $58,665,
acquired in the other Acquisitions, for the months prior to each
respective acquisition date and reflects the elimination of the previously
recorded historical amortization of intangibles for Spray in the amount of
$219,000 and for other Acquisitions in the amount of $61,307, in each case
for the nine months ended September 30, 1998.
c. Basic and diluted weighted average common shares outstanding and net loss
per share amounts have been adjusted to reflect: (1) the issuance of
19,762,118 shares of Razorfish's common stock in connection with the Spray
Acquisition, as if the shares had been outstanding for all periods
presented; and (2) the issuance of 3,950,944 shares of the Company's
Common Stock for the exercise of the 10% Option, as if the shares were
outstanding for all periods presented. The diluted weighted average common
shares outstanding for the year ended December 31, 1997 has also been
reduced by 538,560 to reflect outstanding options to purchase shares of
Common Stock of Razorfish that would have had an anti-dilutive effect on
the pro forma diluted net loss per share for the year then ended.
23
<PAGE>
d. The following table reflects the pro forma adjustments related to the
Acquisitions as if they had occurred on January 1, 1997:
<TABLE>
<CAPTION>
Spray Services
and
Non-Purchased Other
Subsidiaries (e) Spray Avalanche acquisitions Total
---------------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues................ $1,137,250 $ -- $ -- $ -- $ 1,137,250
Direct salaries and
costs.................. 1,114,225 -- -- -- 1,114,225
---------- ----------- --------- ------- -----------
Gross profit........... 23,025 -- -- -- 23,025
Sales and marketing..... 659,000 -- -- -- 659,000
General and
administrative......... (743,385) -- -- -- (743,385)
Amortization of
intangibles............ 793,000 1,839,450 (f) 39,150 (f) (4,345)(f) 2,667,255
---------- ----------- --------- ------- -----------
(Loss) from operations.. (685,590) (1,839,450) (39,150) 4,345 (2,559,645)
Interest expense, net... 9,090 -- 70,000 (g) -- 79,090
Minority interests...... 7,100 -- -- -- 7,100
---------- ----------- --------- ------- -----------
(Loss) before income
taxes.................. (687,580) (1,839,450) (109,150) 4,345 (2,631,835)
---------- ----------- --------- ------- -----------
(Benefit) for income
taxes.................. (30,030) -- -- -- (30,030)
Net (loss)............. $ (657,550) $(1,839,450) $(109,150) $ 4,345 $(2,601,805)
========== =========== ========= ======= ===========
</TABLE>
e. These amounts give pro forma effect to the acquisition of Spray Services
by Spray as if such acquisition took place on January 1, 1997. Spray
Services was a wholly-owned subsidiary of Spray Ventures, whose
historical financial statements are included elsewhere in this
prospectus. In addition, these amounts eliminate the results of
operations for the year ended December 31, 1997 of certain insignificant
former subsidiaries of Spray, which were not purchased by Razorfish. The
results of operations of those subsidiaries are included in the
historical consolidated financial statements of Spray that are included
elsewhere in this prospectus.
f. For the year ended December 31, 1997, these amounts reflect the
amortization of excess purchase price over the fair value of net assets
acquired in the Spray Acquisition, Avalanche Transaction and other
Acquisitions based upon useful lives of twenty years and reflect the
elimination of the previously recorded historical amortization of
intangibles for Spray in the amount of $93,000 and for other Acquisitions
in the amount of $134,797. For the nine months ended September 30, 1997,
these amounts reflect the amortization of excess purchase price over the
fair value of net assets acquired in the Spray Acquisition, the Avalanche
Transaction and the other Acquisitions based upon useful lives of 20
years and reflect the elimination of the previously recorded historical
amortization of intangibles for other Acquisitions in the amount of
$110,530.
g. These amounts reflect the pro forma interest expense effect of
approximately $1,000,000 of interest-free borrowings from Omnicom, at an
imputed interest rate of 7%, which were used for the purchase of
Avalanche.
23--1
<PAGE>
h. The following table reflects the pro forma adjustments related to the
Acquisitions as if they had occurred on January 1, 1997:
<TABLE>
<CAPTION>
SPRAY SERVICES
AND
NON-PURCHASED OTHER
SUBSIDIARIES (E) SPRAY AVALANCHE ACQUISITIONS TOTAL
---------------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues................ $1,286,060 $ -- $ -- $ -- $ 1,286.060
Direct salaries and
costs.................. 1,855,920 -- -- -- 1,855,920
---------- ----------- -------- ------- -----------
Gross profit........... (569,860) -- -- -- (569,860)
Sales and marketing..... 633,000 -- -- -- 633,000
General and
administrative......... (895,000) -- -- -- (895,000)
Amortization of
intangibles............ 339,000 1,449,338 (f) 29,363 (f) (12,692)(f) 1,805,009
---------- ----------- -------- ------- -----------
Income (loss) from
operations............ (646,860) (1,449,338) (29,363) 12,692 (2,112,869)
Interest expense, net... 8,000 -- 52,500 (g) -- 60,500
Minority interests...... 6,000 -- -- -- 6,000
---------- ----------- -------- ------- -----------
Income (loss) before
income taxes.......... (648,860) (1,449,338) (81,863) 12,692 (2,167,369)
Provision (benefit) for
income taxes........... -- -- -- - --
---------- ----------- -------- ------- -----------
Net income (loss)...... $ (648,860) $(1,449,338) $(81,863) $12,692 $(2,167,369)
========== =========== ======== ======= ===========
</TABLE>
23--2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
each of Razorfish's and Spray's consolidated financial statements and notes
thereto and the "Unaudited Pro Forma Consolidated Financial Statements" and the
notes thereto included elsewhere in this prospectus. This prospectus contains
forward-looking statements relating to future events and Razorfish's future
financial performance. Actual results could be significantly different than
those discussed in this prospectus. Factors that could cause or contribute to
such differences include those set forth in the section entitled "Risk
Factors," as well as those discussed elsewhere in this prospectus.
Overview
Razorfish is a leading-edge international digital communications solutions
provider. Razorfish's digital communications solutions help its clients
increase sales, improve communications and create brand identities. Razorfish
offers an integrated package of services consisting of strategic consulting,
design of information architectures and end-user interfaces and creation and
customization of software necessary to implement its digital communications
solutions. Razorfish primarily uses Internet-based technologies to create
digital communications solutions for the World Wide Web. However, Razorfish's
solutions will increasingly incorporate additional communications technologies,
such as wireless, satellite and broadband communications, for use with a
variety of digital devices, including mobile phones, pagers and personal
digital assistants ("PDAs").
Razorfish's revenues are derived from fees for services generated on an
engagement-by-engagement basis. A portion of Razorfish's revenues is derived
from fixed-fee contracts. Historically, Razorfish has not operated on a
retainer basis; however, in the future, Razorfish may utilize such
arrangements.
Except for fixed-fee arrangements, the clients are charged for the time,
materials and expenses incurred on a particular project. Razorfish recognizes
revenue for time and material based arrangements as services are rendered.
Razorfish recognizes revenues on fixed-fee arrangements as services are
rendered on the percentage of completion method of accounting. At the beginning
of each fixed-fee engagement, Razorfish estimates the total cost of the
project. Razorfish reassesses its estimated costs for each project on a
quarterly basis, and provisions for estimated losses on unfinished projects are
made over the life of the project in the period in which such losses are
determined.
The agreements entered into in connection with a project, whether time and
materials or fixed-fee based, are generally terminable by the client upon 30-
days' prior written notice. If the client terminates the agreement, it is
required to pay Razorfish for all time, materials and expenses incurred by
Razorfish through the effective date of termination. If the Company's 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 Razorfish's expenses are relatively
fixed, a variation in the number of client engagements can cause significant
variations in operating results from quarter to quarter.
Razorfish's projects vary in size and scope; therefore, a client that
accounts for a significant portion of Razorfish's revenues in one period may
not generate a similar amount of revenue in subsequent periods. On a pro forma
basis, no client would have accounted for more than 10.0% of revenues in 1997.
Charles Schwab would have accounted for approximately 11.9% of revenues on a
pro forma basis for the nine months ended September 30, 1998. CBS, AT&T, Road
Runner and Charles Schwab accounted for approximately 19.5%, 16.2%, 14.1% and
13.7% of Razorfish's actual revenues, respectively, during 1997. Charles Schwab
and Citibank accounted for approximately 28.5% and 13.6% of Razorfish's actual
revenues, respectively, for the
24
<PAGE>
nine months ended September 30, 1998. Telia and SAS accounted for approximately
17.0% and 12.0% of Spray's actual revenues, respectively, during 1997.
Hagstromer and Qviberg accounted for approximately 11.9% of Spray's actual
revenues for the nine months ended September 30, 1998. Razorfish believes that
it will continue to derive a significant portion of its revenues from a limited
number of larger clients. Any cancellation, deferral or significant reduction
in work performed for these principal clients or a significant number of
smaller clients could have a material adverse effect on our business, financial
condition and results of operations.
Operating and Other Expenses
Razorfish's direct salaries and costs are comprised primarily of salaries,
employee benefits and incentive compensation of billable employees and a
proportionate share of all other operating expenses based on the ratio of
billable to total employees.
Razorfish's sales and marketing expenses are comprised of the salaries of
employees who engage in sales and marketing activities and the costs of those
activities.
Razorfish's general and administrative expenses are comprised of the
salaries, employee benefits and incentive compensation of non-billable
employees and a proportionate share of all other operating expenses based on
the ratio of non-billable to total employees.
Razorfish's non-cash compensation expense is comprised of the compensation
cost associated with the difference between the fair market value of options
granted and the exercise price of such options over the vesting period of the
options. Razorfish will incur a maximum of approximately $343,000 in 1999,
$142,000 in 2000 and $28,000 in 2001 in non-cash compensation expense relating
to the grant of certain options to employees in 1997 and 1998. Such amounts may
decrease if employees depart Razorfish before their options are fully vested.
Acquisitions
Razorfish completed four acquisitions during the nine months ended September
30, 1998. Razorfish also acquired one company in the fourth quarter of fiscal
1998 and Spray in the first quarter of fiscal 1999. Razorfish acquired
substantially all of the assets of: (1) Sunbather Limited ("Sunbather"), a
London-based new media company, in October 1998; (2) Titus Anspach Group, LLC
d/b/a <tag> Media ("<tag> Media"), a Los Angeles-based new media entertainment
consultant, in August 1998; (3) Alpha On-line, Inc. d/b/a Plasticweb and
Plastic ("Plastic"), a San Francisco-based new media company, in June 1998; and
(4) Avalanche Systems, Inc. ("Avalanche Systems"), a New York-based new media
company, in January 1998. In May 1998, Razorfish acquired all of the capital
stock of CHBi Ltd. ("CHBi"), a London-based new media company. In January 1999,
Razorfish acquired Spray for 50% of Razorfish's Common Stock on a fully-diluted
basis (after giving effect to this acquisition). All of these acquisitions are
collectively referred to herein as the "Acquisitions." See "Business--Other
Acquisitions"and "Business--Acquisition of Spray."
Spray commenced operations in Germany, Norway and Finland in the fourth
quarter of 1997. In August 1997, Spray Ventures established a wholly-owned
subsidiary, Spray Services AB ("Spray Services") and transferred all the
operating subsidiaries of Spray Ventures to Spray Services. Spray Ventures then
transferred Spray Services to Spray (f/k/a Tetre AB) in consideration for 51.0%
of the outstanding stock of Spray. Spray Ventures acquired the remaining
outstanding stock of Spray in the second quarter of 1998.
Historically, Razorfish has commenced new operations through the acquisition
of existing companies. Following an acquisition it has generally taken at least
one quarter before a new Razorfish operation has achieved profitability. Spray
has historically expanded through the opening of new offices, rather than the
acquisition of existing operations. Such start-up operations generally have
taken one year or more to achieve profitability.
25
<PAGE>
Seasonality
In general, the laws of the European countries in which Razorfish operates
mandate that all employees receive significantly more vacation 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, which has resulted in revenues declining during this period due
to a reduction in billable hours and client demand.
Fluctuations in Margins
Historically, Razorfish's quarterly margins have been impacted by the
seasonality of its business and the rate of growth of its offices. Razorfish
expects this trend to continue.
Results of Operations
The following table sets forth certain consolidated statement of operations
data of Razorfish as a percentage of revenues for the period indicated:
<TABLE>
<CAPTION>
Fiscal year ended December 31, Nine months ended September 30,
------------------------------------------------- ----------------------------------
1995 1996 1997 1997 1998
--------------- ---------------- --------------- ---------------- ----------------
Percent Percent Percent Percent Percent
of of of of of
Amount revenues Amount revenues Amount revenues Amount revenues Amount revenues
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $0.31 100.0% $ 1.22 100.0% $3.62 100.0% $ 1.84 100.0% $ 9.12 100.0%
Direct salaries and
costs.................. 0.11 34.2 0.90 73.5 1.91 52.7 1.27 69.1 5.09 55.8
----- ----- ------ ----- ----- ----- ------ ----- ------ -----
Gross profit............ 0.20 65.8 0.32 26.5 1.71 47.3 0.57 30.9 4.03 44.2
Sales and marketing..... 0.02 5.1 0.13 10.6 0.17 4.8 0.13 6.9 0.23 2.5
General and
administrative......... 0.14 45.4 0.50 41.1 0.88 24.2 0.61 33.2 2.10 23.0
Amortization of
goodwill............... -- -- -- -- -- -- -- -- 0.06 0.7
Non-cash compensation
expense................ -- -- -- -- 0.08 2.2 0.05 2.9 2.14 23.5
----- ----- ------ ----- ----- ----- ------ ----- ------ -----
Income (loss) from
operations............. 0.04 15.3 (0.31) (25.2) 0.58 16.1 (0.22) (12.1) (0.50) (5.5)
Interest expense, net... -- -- -- -- 0.02 0.5 -- -- 0.17 1.8
Income (loss) before
income taxes........... 0.04 15.1 (0.31) (25.6) 0.56 15.6 (0.22) (12.1) (0.67) (7.3)
Provision (benefit) for
income taxes........... 0.01 3.6 (0.06) (4.7) 0.26 7.3 (0.10) (5.3) (0.27) (3.0)
----- ----- ------ ----- ----- ----- ------ ----- ------ -----
Net income (loss)....... $0.03 11.5% $(0.25) (20.9)% $0.30 8.3% $(0.12) (6.8)% $(0.40) (4.3)%
===== ===== ====== ===== ===== ===== ====== ===== ====== =====
</TABLE>
26
<PAGE>
The following table sets forth certain consolidated statement of operations
data of Spray as a percentage of revenues for the period indicated:
<TABLE>
<CAPTION>
Fiscal year ended December 31, Nine months ended September 30,
------------------------------------------------ ----------------------------------
1995 1996 1997 1997 1998
--------------- --------------- ---------------- ---------------- ----------------
(unaudited)
Percent Percent Percent Percent Percent
of of of of of
Amount revenues Amount revenues Amount revenues Amount revenues Amount revenues
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(dollars in
millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $2.19 100.0% $5.32 100.0% $7.82 100.0% $4.70 100.0% $10.96 100.0%
Direct salaries and
costs.................. 1.73 79.1 4.39 82.6 7.26 92.8 3.73 79.4 9.44 86.1
----- ----- ----- ----- ------ ------ ------ ------ ------ ------
Gross profit............ 0.46 20.9 0.93 17.4 0.56 7.2 0.97 20.6 1.52 13.9
Sales and marketing..... 0.10 4.4 0.35 6.5 0.40 5.1 0.07 1.5 0.51 4.6
General and
administrative......... -- -- 0.26 4.8 0.96 12.3 1.04 22.1 1.99 18.1
Amortization of
goodwill............... -- -- -- -- 0.09 1.2 -- -- 0.22 2.0
----- ----- ----- ----- ------ ------ ------ ------ ------ ------
Income (loss) from
operations............. 0.36 16.5 0.32 6.1 (0.89) (11.4) (0.14) (3.0) (1.20) (10.8)
Interest income
(expense), net......... -- -- -- -- 0.09 1.2 0.01 0.3 (0.04) (0.3)
----- ----- ----- ----- ------ ------ ------ ------ ------ ------
Income (loss) before
minority interest and
income taxes........... 0.36 16.5 0.32 6.1 (0.80) (10.2) (0.13) (2.7) (1.24) (11.1)
Minority interest....... -- -- -- -- 0.09 1.1 -- -- 0.12 1.1
----- ----- ----- ----- ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes........... 0.36 16.5 0.32 6.1 (0.71) (9.1) (0.13) (2.7) (1.12) (10.0)
Provision (benefit) for
income taxes........... 0.07 3.0 0.24 4.5 (0.02) 0.3 0.16 3.3 -- --
----- ----- ----- ----- ------ ------ ------ ------ ------ ------
Net income (loss)....... $0.29 13.5% $0.08 1.6% $(0.69) (8.8)% $(0.29) (6.0)% $(1.12) (10.0)%
===== ===== ===== ===== ====== ====== ====== ====== ====== ======
</TABLE>
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
Revenues. Pro forma revenues for the Company would have increased $10.2
million, or 88.6%, to $21.8 million for the nine months ended September 30,
1998 from $11.6 million for the nine months ended September 30, 1997.
Razorfish's revenues increased $7.3 million, or 396.5%, to $9.1 million for
the nine months ended September 30, 1998 from $1.8 million for the nine months
ended September 30, 1997. This increase in revenues was due to the growth in
Razorfish's New York operations as a result of the increase in the number,
complexity and length of the projects completed, an increase in the billing
rates of Razorfish's employees and the amount spent per project by clients, as
well as the four acquisitions completed during the nine months ended September
30, 1998.
Spray's revenues increased $6.3 million, or 133.1%, to $11.0 million for the
nine months ended September 30, 1998 from $4.7 million for the nine months
ended September 30, 1997. This increase in revenues was due to the growth in
Spray's Stockholm operations as a result of the acquisition of Spray Services
in August 1997, an increase in the number, complexity and length of the
projects completed and the amount spent per project by clients, as well as the
addition of the results of operations of three new subsidiaries that began
operations during the fourth quarter of 1997.
Direct salaries and costs. Pro forma direct salaries and costs would have
increased $6.0 million, or 58.1%, to $16.2 million for the nine months ended
September 30, 1998 from $10.3 million for the nine months ended September 30,
1997. As a percentage of pro forma revenues, pro forma direct salaries and
costs would have
27
<PAGE>
decreased to 74.3% during the nine months ended September 30, 1998 from 88.6%
during the nine months ended September 30, 1997. The decrease in pro forma
direct salaries and costs, as a percentage of pro forma revenues, was due to a
shift from fixed-fee to time and materials-based contracts, an increase in the
size and complexity of projects and more efficient staffing of such projects at
Razorfish, the increase in revenue from the U.S. operations as compared to the
European operations, which resulted in higher gross margins because of the
lower employer taxes in the United States, which was partially offset by a
decrease in Spray's revenues during this period without corresponding decreases
in direct salaries and costs.
Razorfish's direct salaries and costs increased $3.8 million, or 301.4%, to
$5.1 million for the nine months ended September 30, 1998 from $1.3 million for
the nine months ended September 30, 1997. However, as a percentage of revenues,
direct salaries and costs decreased to 55.8% during the nine months ended
September 30, 1998 from 69.1% during the nine months ended September 30, 1997.
The increase in direct salaries and costs in absolute dollar terms was a result
of the increase in the number of billable employees. The decrease in direct
salaries and costs as a percentage of revenues was a result of a shift from
fixed-fee to time and materials-based contracts, as well as an increase in the
size and complexity of projects and more efficient staffing of such projects.
Spray's direct salaries and costs increased $5.7 million, or 152.6%, to $9.4
million for the nine months ended September 30, 1998 from $3.7 million for the
nine months ended September 30, 1997. As a percentage of revenues, direct
salaries and costs increased to 86.1% during the nine months ended September
30, 1998 from 79.4% during the nine months ended September 30, 1997. This
increase in absolute dollar terms was due to the increase in the number of
billable employees and an increase in January 1998 of the salary rates of the
former employees of Spray Services. The increase in direct salaries and costs
as a percentage of revenues was due to a decrease in Spray's revenues during
the third quarter of 1998 as a result of the disruption of operations in
connection with the move to new office space and a change in the management of
Spray's Stockholm office.
Sales and marketing. Pro forma sales and marketing expenses would have
remained relatively flat at $0.9 million for the nine months ended September
30, 1998 and for the nine months ended September 30, 1997. As a percentage of
pro forma revenues, pro forma sales and marketing expenses would have decreased
to 4.1% during the nine months ended September 30, 1998 from 8.1% during the
nine months ended September 30, 1997.
Razorfish's sales and marketing expenses increased $0.1 million, or 78.2%,
to $0.2 million for the nine months ended September 30, 1998 from $0.1 million
for the nine months ended September 30, 1997. As a percentage of revenues,
sales and marketing expenses decreased to 2.5% during the nine months ended
September 30, 1998 from 6.9% during the nine months ended September 30, 1997.
The increase in sales and marketing expenses in absolute dollar terms was
primarily due to the increase in the number of employees participating in sales
and marketing activities. The decrease in sales and marketing expenses as a
percentage of revenues was the result of efficiencies gained as a result of the
growth in the size of Razorfish's operations.
Spray's sales and marketing expenses increased $0.4 million, or 627.1%, to
$0.5 million for the nine months ended September 30, 1998 from approximately
$70,000 for the nine months ended September 30, 1997. As a percentage of
revenues, sales and marketing expenses increased to 4.6% during the nine months
ended September 30, 1998 from 1.5% during the nine months ended September 30,
1997. This increase, both in absolute dollar terms and as a percentage of
revenues, was primarily due to an increase in the number of employees
participating in sales, marketing and recruiting activities.
General and administrative. Pro forma general and administrative expenses
would have increased $2.0 million, or 88.4%, to $4.4 million for the nine
months ended September 30, 1998 from $2.3 million for the nine months ended
September 30, 1997. As a percentage of pro forma revenues, pro forma general
and administrative expenses remained flat at 20.0% of revenue.
28
<PAGE>
Razorfish's general and administrative expenses increased $1.5 million, or
243.4%, to $2.1 million for the nine months ended September 30, 1998 from $0.6
million for the nine months ended September 30, 1997. As a percentage of
revenues, general and administrative expenses decreased to 23.0% during the
nine months ended September 30, 1998 from 33.2% in the nine months ended
September 30, 1997. The increase in general and administrative expenses in
absolute dollar terms was the result of the increase in the number of non-
billable employees and an increase in all other types of general and
administrative expenses. The decrease in general and administrative expenses as
a percentage of revenues was due to efficiencies gained as a result of the
growth in the size of Razorfish's operations.
Spray's general and administrative expenses increased $1.0 million, or
90.9%, to $2.0 million for the nine months ended September 30, 1998 from $1.0
million for the nine months ended September 30, 1997. As a percentage of
revenues, general and administrative expenses decreased to 18.1% during the
nine months ended September 30, 1998 from 22.1% during the nine months ended
September 30, 1997. This increase in general and administrative expenses in
absolute dollar terms was the result of the increase in the number of non-
billable employees and an increase in all other types of general and
administrative expenses. The decrease in general and administrative expenses as
a percentage of revenues was due to the higher rate of growth in revenues as
compared to the rate of growth in general and administrative expenses and an
increase in operating efficiencies during the nine months ended September 30,
1998.
Non-cash compensation expense. Pro forma and Razorfish's non-cash
compensation expense increased to $2.1 million in the nine months ended
September 30, 1998 from approximately $53,000 in the nine months ended
September 30, 1997. This increase was due, in part, to a one-time compensation
charge of $1.9 million that was incurred in the second quarter of 1998 as a
result of the grant of fully vested options to purchase 500,000 shares of
Common Stock at an exercise price below the fair market value of the Common
Stock on the date of grant. These options were granted to an officer of the
Company in connection with the acquisition by Razorfish of substantially all of
the assets of Avalanche Systems, Inc. ("Avalanche Systems"). See "Business--
Other Acquisitions."
Amortization of goodwill. Pro forma amortization of goodwill would have
decreased to $1.6 million for the nine months ended September 30, 1998 from
$1.9 million for the nine months ended September 30, 1997. Amortization of
goodwill for Razorfish was approximately $65,000 for the nine months ended
September 30, 1998 compared to none for the nine months ended September 30,
1997. This increase in amortization of goodwill was due to the goodwill
resulting from the four acquisitions completed during the nine months ended
September 30, 1998.
Income taxes. Pro forma income taxes would have decreased to $ million
benefit for the nine months ended September 30, 1998 on pro forma pre-tax
losses of $ million from a pro forma tax benefit of $ million on pro forma
pre-tax losses of $ million for the nine months ended September 30, 1997. The
pro forma effective income tax rate would have been % and % during the
nine months ended September 30, 1998 and the nine months ended September 30,
1997, respectively. The low pro forma effective tax rate for the nine months
ended September 30, 1998 was primarily due to the non-deductability of the
amortization of goodwill relating to the Spray Acquisition and was also
affected because Spray did not book a tax benefit due to uncertainties of its
future realizability and the existence of net operating losses from previous
periods. The low pro forma effective tax rate for the nine months ended
September 30, 1997 was due to the non-deductability of the goodwill relating to
the Spray Acquisition.
Razorfish had a benefit from income taxes of $0.3 million on pre-tax losses
of $0.7 million during the nine months ended September 30, 1998. During the
nine months ended September 30, 1997, Razorfish also had a benefit from income
taxes of $0.1 million on pre-tax losses of $0.2 million. The effective income
tax rate was
29
<PAGE>
40.9% and 43.7% during the nine months ended September 30, 1998 and the nine
months ended September 30, 1997, respectively. The differences in the effective
tax rates during the nine months ended September 30, 1998 and the nine months
ended September 30, 1997 from the federal and state statutory rates are
primarily the result of non-tax deductible expenses. The decrease in the
effective income tax rate for the nine months ended September 30, 1998 compared
to the nine months ended September 30, 1997 resulted from the inclusion in the
nine months ended September 30, 1998 of the results of operations of
Razorfish's office in the United Kingdom where the effective tax rate is lower
than in the United States.
Spray had no tax charge for the nine months ended September 30, 1998 on pre-
tax losses of $1.1 million during such period. During the nine months ended
September 30, 1997, Spray had a tax charge of $0.2 million on pre-tax losses of
$0.1 million. During the nine months ended September 30, 1998, Spray did not
book a tax benefit due to uncertainties of its future realizability and the
existence of net operating losses from previous tax periods. The tax charge for
the nine months ended September 30, 1997 was the result of the non-
deductibility of certain expenses.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. Pro forma revenues for the Company would have been $17.9 million
for the fiscal year ended December 31, 1997 ("Fiscal 1997").
Razorfish's revenues increased $2.4 million, or 197.0%, to $3.6 million for
Fiscal 1997 from $1.2 million for the fiscal year ended December 31, 1996
("Fiscal 1996"). This increase in revenues was primarily the result of the
growth in the Razorfish's business due to an increased client base and an
increase in the number, complexity and length of the projects completed.
Spray's revenues increased $2.5 million, or 47.0%, to $7.8 million for
Fiscal 1997 from $5.3 million for Fiscal 1996. This increase in revenues was
due to the growth in Spray's Stockholm office as a result of the acquisition of
Spray Services in August 1997, as well as the addition of the results of
operations of three new subsidiaries in the fourth quarter 1997.
Direct salaries and costs. Pro forma direct salaries and costs for the
Company would have been $15.0 million for Fiscal 1997. As a percentage of pro
forma revenues, pro forma direct salaries and costs would have been 83.7%
during Fiscal 1997.
Razorfish's direct salaries and costs increased $1.0 million, or 112.9%, to
$1.9 million for Fiscal 1997 from $0.9 million for Fiscal 1996. As a percentage
of revenues, direct salaries and costs decreased to 52.7% during Fiscal 1997
from 73.5% in Fiscal 1996. The increase in direct salaries and costs in
absolute dollar terms was the result of an increase in the number of billable
employees hired in Fiscal 1997 and an increase in billable employee's salary
rates to bring them in line with those provided by other companies in the
industry. The decrease in direct salaries and costs as a percentage of revenues
was due to a shift from fixed-fee to time and materials based contracts, as
well as an increase in the size and complexity of projects and more efficient
staffing of such projects.
Spray's direct salaries and costs increased $2.9 million, or 65.3%, to $7.3
million for Fiscal 1997 from $4.4 million for Fiscal 1996. As a percentage of
revenues, direct salaries and costs increased to 92.8% during Fiscal 1997 from
82.6% during Fiscal 1996. This increase in absolute dollar terms was due to an
increase in the number of billable employees. The increase in direct salaries
and costs as a percentage of revenues was primarily due to the impact of
integrating Spray Services into Spray following its acquisition.
Sales and marketing. Pro forma sales and marketing would have been $1.4
million in Fiscal 1997. As a percentage of pro forma revenues, pro forma sales
and marketing would have been 7.8% during Fiscal 1997.
Razorfish's sales and marketing expenses increased approximately $46,000 or
35.4%, to $0.2 million during Fiscal 1997 from $0.1 million for Fiscal 1996. As
a percentage of revenues, sales and marketing expenses decreased to 4.8% during
Fiscal 1997 from 10.6% in Fiscal 1996.
30
<PAGE>
Spray's sales and marketing expenses increased $0.1 million, or 12.9%, to
$0.4 million for Fiscal 1997 from $0.3 million for Fiscal 1996. As a percentage
of revenues, sales and marketing decreased to 5.1% during Fiscal 1997 from 6.5%
during Fiscal 1996. This decrease in sales and marketing expenses as a
percentage of revenues was the result of efficiencies gained as a result of the
growth in the size of Spray's operations.
General and administrative. Pro forma general and administrative expenses
for the Company would have been $3.2 million for Fiscal 1997. As a percentage
of pro forma revenues, pro forma general and administrative expenses would have
been 17.9% during Fiscal 1997.
Razorfish's general and administrative expenses increased $0.4 million, or
75.3%, to $0.9 million for Fiscal 1997 from $0.5 million for Fiscal 1996. As a
percentage of revenues, general and administrative expenses decreased to 24.2%
in Fiscal 1997 from 41.1% in Fiscal 1996. The increase in general and
administrative expenses in absolute dollar terms was due to the increase in the
number of non-billable employees hired in Fiscal 1997, the growth in the
Razorfish's operations and the rental of additional office space in New York
City. The decrease in general and administrative expenses as a percentage of
revenues was due to efficiencies gained as a result of the growth in the size
of Razorfish's operations.
Spray's general and administrative expenses increased $0.7 million, or
275.4%, to $1.0 million for Fiscal 1997 from $0.3 million for Fiscal 1996. As a
percentage of revenues, general and administrative expenses increased to 12.3%
in Fiscal 1997 from 4.8% in Fiscal 1996. This increase in general and
administrative expenses, both in absolute dollar terms and as a percentage of
revenues, was the result of the increase in the number of non-billable
employees and an increase in all other types of general and administrative
expenses.
Income taxes. Pro forma income taxes would have been a $ million benefit
for Fiscal 1997 on pro forma pre-tax profits of approximately $ million. The
effective pro forma income tax rate would have been % for Fiscal 1997.
Razorfish's income taxes increased to approximately $0.3 million on pre-tax
profits of $0.6 million for Fiscal 1997 compared to a tax benefit of
approximately $57,000 on pre-tax losses of $0.3 million for Fiscal 1996. The
effective income tax rate was 47.1% for Fiscal 1997 and 18.3% for Fiscal 1996.
The tax benefit for Fiscal 1996 was reduced by the effect of change in
Razorfish's status from an "S" corporation to a "C" corporation in Fiscal 1996.
Spray had a benefit from income taxes of approximately $24,000 on pre-tax
losses of $0.7 million during Fiscal 1997. During Fiscal 1996, Spray had a tax
charge of $0.2 million on pre-tax profits of $0.3 million. The effective income
tax rate was 3.3% and 74.8% for Fiscal 1997 and Fiscal 1996, respectively. The
differences in the effective tax rates for Fiscal 1997 and for Fiscal 1996 from
the statutory Swedish tax rates are primarily due to the non-tax deductibility
of certain expenses.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues. Razorfish's revenues increased $0.9 million, or 290.1%, to $1.2
million for Fiscal 1996 compared to $0.3 million for the fiscal year ended
December 31, 1995 ("Fiscal 1995"). This increase in revenues was primarily the
result of an increase in the amount spent per project by clients, as well as
the increase in the number, complexity and length of the projects completed.
Spray's revenues increased $3.1 million, or 142.7%, to $5.3 million for
Fiscal 1996 from $2.2 million for Fiscal 1995. This increase in revenues was
due to the increase in the number of projects and the amount spent per project
by clients.
Direct salaries and costs. Razorfish's direct salaries and costs increased
$0.8 million, or 737.4%, to $0.9 million for Fiscal 1996 from $0.1 million for
Fiscal 1995. As a percentage of revenues, direct salaries and costs increased
to 73.5% in Fiscal 1996 from 34.2% in Fiscal 1995. This increase in direct
salaries and costs, both in absolute dollar terms and as a percentage of
revenues, resulted primarily from the increase in the number employees hired by
Razorfish and the use of freelance employees during Fiscal 1996 and an increase
in the average salary per employee.
31
<PAGE>
Spray's direct salaries and costs increased $2.7 million, or 153.2%, to $4.4
million for Fiscal 1996 from $1.7 million for Fiscal 1995. As a percentage of
revenues, direct salaries and costs increased to 82.6% in Fiscal 1996 from
79.1% in Fiscal 1995. This increase in direct salaries and costs, both in
absolute dollar terms and as a percentage of revenues, was due to an increase
in the number of billable employees and a restructuring of Spray in Fiscal 1996
that reduced the revenue earned per billable employee.
General and administrative. Razorfish's general and administrative expenses
increased $0.4 million, or 252.5%, to $0.5 million for Fiscal 1996 from $0.1
million for Fiscal 1995. As a percentage of revenues, general and
administrative expenses decreased to 41.1% during Fiscal 1996 from 45.4% in
Fiscal 1995. The increase in general and administrative expenses in absolute
dollar terms was due to the increase in the number of non-billable employees
hired in Fiscal 1996, the rental of office space in New York City and the
growth in Razorfish's operations. The decrease in general and administrative as
a percentage of revenues was due to the higher percentage growth rate in
revenues as compared to the growth rate in general and administrative.
Spray's general and administrative expenses was $0.3 million for Fiscal
1996; there were no such expenses for Fiscal 1995 because Spray had no non-
billable employees. This increase in general and administrative expenses in
absolute dollar terms was the result of the hiring of non-billable employees in
Fiscal 1996 and the allocation of their salaries and direct costs to general
and administrative expenses.
Income taxes. Razorfish had a tax benefit of approximately $57,000 on pre-
tax losses of $0.3 million for Fiscal 1996 compared to income tax of
approximately $11,000 on pre-tax profits of approximately $47,000 for Fiscal
1995. The effective income tax rate was 18.2% for Fiscal 1996 and 23.9% for
Fiscal 1995. The tax benefit was related to the change in Razorfish's status
from an "S" corporation to a "C" corporation in Fiscal 1996 and the loss in
income before taxes during Fiscal 1996.
Spray had a tax charge of $0.2 million on pre-tax profits of $0.3 million
for Fiscal 1996. Spray had a tax charge of approximately $66,000 on pre-tax
profits of $0.4 million for Fiscal 1995. The effective income tax rate
increased to 74.8% for Fiscal 1996 from an effective income tax rate of 18.2%
for Fiscal 1995. The differences in the effective tax rates for Fiscal 1996 and
Fiscal 1995 from the statutory Swedish tax rates were primarily due to the
inability of Spray to take advantage of net operating losses in certain of its
subsidiaries that filed individual tax returns.
Liquidity and Capital Resources
Historically, Razorfish has relied on borrowings under lines of credit
provided by Omnicom to finance its working capital requirements and capital
expenditures.
Historically, Spray has relied on cash flow from operations, capital
contributions and convertible debt agreements to finance its working capital
requirements and capital expenditures.
Net cash (used in) provided by operating activities
Razorfish's net cash provided by operating activities was $0.9 million for
the nine months ended September 30, 1998 compared to net cash used in operating
activities of approximately $0.4 million for the nine months ended September
30, 1997. Net cash used in operating activities for the nine months ended
September 30, 1998 was primarily the result of an increase in unbilled charges
and amounts due from affiliates and was partially offset by an increase in
income taxes payable, accounts payable and accrued expenses. Net cash used in
operating activities increased to approximately $0.5 million in Fiscal 1997
from net cash used in operating activities of approximately $0.2 million in
Fiscal 1996. This increase in net cash used in operating activities was
primarily due to the growth in Razorfish's New York operations and an increase
in the number of clients and in the number and size of projects.
Spray's net cash used in operating activities was approximately $0.6 million
for the nine months ended September 30, 1998 compared to net cash provided by
operating activities of $0.6 million for the nine months ended September 30,
1997. The decrease in net cash provided by operating activities for the nine
months ended September 30, 1998 was primarily the result of an increase in net
loss, and a significant increase in other
32
<PAGE>
current liabilities and accrued expenses which were partially offset by an
increase in accounts receivable, prepaid expenses and other current assets. Net
cash provided by operating activities decreased to $0.3 million for Fiscal 1997
from net cash provided by operating activities of $0.4 million for Fiscal 1996.
This decrease in net cash provided by operating activities was primarily due to
an increase in net loss and an increase in accounts receivable that was offset
by a decrease in other current liabilities.
Net cash used in investing activities
Razorfish's net cash used in investing activities was $4.7 million for the
nine months ended September 30, 1998 compared to net cash used in investing
activities of approximately $0.2 million for the nine months ended September
30, 1997. Net cash used in investing activities in the nine months ended
September 30, 1998 was primarily used for the acquisition of four companies
during this period and was also used for capital expenditures. Net cash used in
investing activities increased to approximately $0.3 million in Fiscal 1997
from net cash used in investing activities of approximately $0.2 million in
Fiscal 1996. The increase was due to the growth in the size of Razorfish's
operations requiring additional capital expenditures consisting primarily of
the purchase of the computer equipment and leasehold improvements.
Spray's net cash used in investing activities was $1.4 million for the nine
months ended September 30, 1998 compared to net cash used in investing
activities of $0.5 million for the nine months ended September 30, 1997. Net
cash used in investing activities in the nine months ended September 30, 1998
and in the nine months ended September 30, 1997 was primarily used for capital
expenditures and investments in the three new subsidiaries that began
operations in the fourth quarter of Fiscal 1997. Net cash used in investing
activities increased to $0.6 million for Fiscal 1997 from net cash used in
investing activities of approximately $95,000 for Fiscal 1996. The increase in
net cash used in investing activities was due to the investment in such new
subsidiaries, net of cash acquired, and capital expenditures consisting
primarily of the purchase of the computer equipment and leasehold improvements.
Net cash provided by financing activities
Razorfish's net cash provided by financing activities was $2.9 million and
approximately $0.7 million for the nine months ended September 30, 1998 and
1997, respectively. This increase was primarily the result of additional
borrowings under the lines of credit provided by Omnicom in connection with the
four acquisitions during the nine months ended September 30, 1998. Net cash
provided by financing activities was $1.9 million in Fiscal 1997 compared to
net cash provided by financing activities of approximately $0.5 million in
Fiscal 1996. The increase was the result of cash borrowed at the end of Fiscal
1997 to fund Razorfish's first acquisition in Fiscal 1998 and the growth in
Razorfish's operations.
Spray's net cash provided by financing activities was $1.8 million and $0.6
million for the nine months ended September 30, 1998 and the nine months ended
September 30, 1997, respectively. The decrease in net cash provided by
financing activities was primarily the result of reductions in capital
contributions received, net of any cash dividend paid. Net cash provided by
financing activities was $0.7 million for Fiscal 1997 compared to net cash used
in financing activities of $0.3 million for Fiscal 1996. The increase in net
cash provided by financing activities was the result of a capital contribution
of $2.3 million received in Fiscal 1996.
Capital expenditures
Razorfish's capital expenditures for the nine months ended September 30,
1998 were approximately $528,000 compared to approximately $256,000 for the
nine months ended September 30, 1997. Capital expenditures for Fiscal 1997 were
approximately $316,000 compared to approximately $189,000 for Fiscal 1996.
Historically, capital expenditures have been used to make leasehold
improvements to Razorfish's leased office space and to purchase computer
hardware and software.
Spray's capital expenditures were $1.0 million and $0.3 million for the nine
months ended September 30, 1998 and the nine months ended September 30, 1997,
respectively. Capital expenditures for Fiscal 1997 were approximately $0.5
million compared to approximately $95,000 for Fiscal 1996. Historically,
capital
33
<PAGE>
expenditures have been used to make leasehold improvements to the Spray's
leased office space and to purchase computer hardware and software.
Lines of credit and other financings
Razorfish provides lines of credit to each of its subsidiaries under the
same terms and conditions as its borrowings from Omnicom.
In September 1996, Razorfish entered into a Shareholders Agreement (the
"Shareholders Agreement") with Communicade (f/k/a JWL Associates Corp.), a
wholly-owned subsidiary of Omnicom, Mr. Jeffrey A. Dachis and Mr. Craig M.
Kanarick, pursuant to which Omnicom agreed that, as long as it was a
shareholder of Razorfish, it would provide Razorfish with a line of credit of
up to $2.0 million for working capital purposes (the "Line of Credit") and a
financing line of credit in connection with Razorfish's acquisition of "new
media" companies (the "Acquisition Financing"). The Shareholders Agreement
terminated upon the effectiveness of a Stockholders Agreement (the "New
Stockholders Agreement") entered into by Razorfish, Communicade, Spray Ventures
and Messrs. Dachis and Kanarick in connection with the Spray Acquisition.
Pursuant to the terms of the New Stockholders Agreement, Communicade is to
provide the Line of Credit and the Acquisition Financing to Razorfish on the
same terms and conditions as are set forth in the Shareholders Agreement. As of
the date of this prospectus, Razorfish has approximately $1.3 million
outstanding under the Line of Credit and approximately $3.9 million outstanding
under the Acquisition Financing. The New Stockholders Agreement terminates upon
the closing date of the offering (the "Closing Date"), and Razorfish is
required to pay to Omnicom the aggregate principal amount outstanding and
interest thereon under the Line of Credit on the Closing Date. The principal
under any loan pursuant to the Acquisition Financing is to be repaid quarterly
in equal installments over a seven-year period beginning on the date of the
applicable loan. See "Related Party Transactions."
Pursuant to the terms of the New Stockholders Agreement, Communicade was
granted an option (the "10% Option") to purchase from Razorfish the number of
shares of Common Stock which is equal to 10% of the Common Stock on a fully
diluted basis on the date the 10% Option is exercised. The purchase price per
share upon exercise of the Omnicom 10% Option is equal to 80% of the price per
share to be sold in this offering. Razorfish expects that Communicade will
exercise the 10% Option and will purchase 3,950,944 shares of Common Stock in
January 1999. See "Related Party Transactions."
Spray currently has an outstanding loan of SEK15,009,000 ($1.9 million) due
to Spray Ventures. The terms and conditions of this loan are the same as
Razorfish's borrowings from Omnicom. Razorfish expects to repay this loan with
the proceeds of the 10% Option.
Razorfish believes that cash generated by operations combined with the
proceeds of the 10% Option and the offering will be sufficient to meet its
working capital needs for the next twelve months.
Rental payments for office space leased by Razorfish under current rental
agreements will be $2.6 million in 1999.
YEAR 2000
The Year 2000 issue 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
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example, computer programs that contain time-sensitive software may recognize a
date using two digits of "00" as the year 1900 rather then the year 2000. This
could result in system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar ordinary business activities.
The Year 2000 problem is not limited to IT systems but may also impact embedded
systems, such as those that control elevators, alarm systems and many other
devices.
Razorfish believes that its internal software and hardware systems will
function properly with respect to dates in the year 2000 and thereafter.
Nonetheless, there can be no assurance in this regard until such systems are
operational in the year 2000. In the judgment of management, Razorfish's
exposure is minimal, the cost of recovery will be insignificant and its
business will not be adversely impacted.
Razorfish has examined all of its internal systems that constitute core
components of its operations, including both computer systems and elements of
the office environment. Razorfish has also conducted a complete inventory of
the hardware and software in use by Razorfish in order to verify the state of
Year 2000 compliance of all assets necessary to maintain the operations of
Razorfish during the potential disaster scenarios that Razorfish has
identified. Razorfish has verified that its internally developed solutions and
operational support applications are Year 2000 compliant.
Razorfish has also examined Year 2000 issues as they relate to the third
parties with which it has a material relationship, such as its payroll provider
and the supplier of the software used by the accounting department. Razorfish's
investigation into the capabilities of its vendors continues, but Razorfish
expects to receive statements from them of Year 2000 compliance shortly. In the
judgment of management, internally used third-party tools, such as operating
systems, databases and other design and development applications are 90% Year
2000 compliant and will be fully compliant by June 30, 1999. Management
believes that any failures of these systems would have negligible impact on
Razorfish's operations and would take only a few days to resolve.
Although, as a general matter, Razorfish does not specifically warrant to
clients that its work will be Year 2000 compliant, certain clients have
requested and received such warranties. In such cases, Razorfish does not
warrant the compliance of third-party software, rather Razorfish warrants only
that software created by Razorfish will be Year 2000 compliant. However, even
absent a specific Year 2000 warranty, there is a risk that clients for whom
Razorfish has created or implemented software will attempt to hold Razorfish
liable for any damages that result in connection with Year 2000 issues.
Razorfish continues to purchase and upgrade all desktop and server hardware
and software according to the capital budget in place for 1999. One full-time
information services specialist is dedicated to the completion of the full
hardware and software inventory and the installation of all application
software. Razorfish's planned upgrades to its telephone system and alarm system
necessary to support Razorfish's growth will also result in Year 2000
compliance. In the judgment of management, the cost of compliance could range
from $100,000 to $250,000.
Razorfish has also prepared a contingency plan, which includes the
availability of Year 2000 compliant software on its servers and the
availability of a full complement of trained information services support staff
to deal with unforeseen desktop failures. Razorfish has redundant servers for a
variety of its operating systems to minimize potential outages of server
operations. Regular backups will be supplemented and relocated offsite to
ensure Razorfish's ability to reconstruct its failed systems quickly. Secondary
DNS servers throughout Razorfish will maintain Razorfish's vital Internet
connections.
Currency Fluctuation and the "Euro" Conversion
Razorfish does not believe that it is subject to material currency
fluctuations as a result of its international operations. Revenue from the
operations of its subsidiaries, CHBi Razorfish Ltd. (formerly CHBi, "Razorfish
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<PAGE>
London") and Spray, are currently denominated primarily in British pounds and
the Swedish kroner, respectively. The Company does not plan to repatriate such
revenues to the United States in the foreseeable future.
Eleven of the fifteen member states of the EU have agreed to adopt the
"euro" as their common legal currency. On January 1, 1999, these members began
the process of converting their native currencies to the euro, and on that date
the euro commenced trading on currency exchanges and became available for non-
cash transactions. For the period from January 1, 1999 to January 1, 2002 both
the euro and the native currencies will be legal tender in the participating
member states. During this period, the conversion rates for currencies will be
determined by a formula that has been established by the European Commission.
On January 1, 2002, new euro-denominated bills and coins will be fully deployed
and all native bills and coins will be withdrawn by July 1, 2002.
In addition, as of January 1, 1999, the new European Central Bank gained the
authority to direct monetary policy with respect to the euro, including money
supply and official interest rates for the euro. Some of the rules and
regulations with regard to the euro have yet to be promulgated and completed by
the European Commission.
While the United Kingdom and Sweden are members of the European Union, they
are not participating in the euro conversion; however, they may elect to
convert to the euro at a later date. Risks related to the conversion to the
euro may not impact Razorfish directly, but could have a materially adverse
effect on its clients' businesses, which could have an indirect effect on their
demand for Razorfish's services. Although Razorfish's management does not
believe that the conversion to the euro will have a material or adverse impact
on its business, they have not completed their assessment of the effect that
the introduction of the euro will have on its business, results of operations
and financial condition.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"), which establishes standards for reporting and display
of comprehensive income and its components in the financial statements. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. SFAS No. 130 offers alternatives for
presentation of disclosures required by the standard. The adoption of SFAS No.
130 did not have a material impact on the Company's results of operations,
financial position or cash flows.
In June 1997, FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"), which establishes standards for reporting information about
operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. The adoption of SFAS No. 131 did not have a material impact
on the Company's results of operations, financial position or cash flows.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5, which is effective
for fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start-up activities and organization costs to be expensed as incurred. As
the Company has expensed these costs historically, the adoption of this
standard is not expected to have a significant impact on the Company's results
of operations, financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities" ("SFAS 133"), which establishes accounting and reporting
standards of derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. There will be no
impact to the Company's results of operations, financial position or cash flows
upon the adoption of this standard.
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BUSINESS
The information in this section includes forward-looking statements which
involve risks and uncertainties. Razorfish's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under the caption "Risk
Factors" and elsewhere in this prospectus.
Overview
Razorfish is a leading-edge international digital communications solutions
provider. Razorfish's digital communications solutions help its clients
increase sales, improve communications and create brand identities. Razorfish's
solutions have included (1) a re-designed on-line trading system for Charles
Schwab, (2) an enhanced on-line brand identity for IBM's RS/6000 product line,
(3) a user-interface and front-end application for ServiceCo's Road Runner
high-speed modem service and (4) a unique interface design and user experience
for theglobe.com. Razorfish offers an integrated package of services consisting
of strategic consulting, design of information architectures and end-user
interfaces, and creation and customization of software necessary to implement
its digital communications solutions. Razorfish primarily uses Internet-based
technologies to create digital communications solutions for the World Wide Web.
However, Razorfish's solutions will increasingly incorporate additional
communications technologies, such as wireless, satellite and broadband
communications, for use with a variety of digital devices, including mobile
phones, pagers and PDAs.
Industry Background
Technology has enhanced the ability of companies to create, store, process
and distribute information. As companies face increasing pressure to operate
more efficiently and to better serve customer needs, information flow both
inside and outside the organization has risen in importance. However, the
escalating cost and complexity of information technology and the technical
expertise required to implement technology-based solutions have led companies
to increasingly rely on IT service providers. This trend toward outsourcing and
a focus by companies on their core business has driven the rapid growth of the
IT services market. The IT services market has grown most quickly in countries,
such as the United States and those in northern Europe, where high PC
penetration and technology adoption rates among businesses and consumers
provide for large client bases.
With the growth in the use of the Internet, companies are increasingly
seeking to improve their business practices through digital communications
solutions. Today, digital communications solutions are largely Internet-based.
Forrester Research projects that the size of the worldwide Internet
professional services market will grow from $2.4 billion in 1997 to $32.8
billion in 2002, a compound annual growth rate of 68.7%. Internet-based
solutions include intranets, extranets and websites. An intranet is an internal
company network that utilizes various Internet Protocols ("IP") to allow
employees access to corporate information and internal business applications.
An extranet is a secure IP network environment that links the company with
customers and suppliers and effectively integrates the stages involved in the
delivery of the company's products or services. Websites present an opportunity
for electronic commerce, Internet branding and the delivery of information and
entertainment services.
As the informational requirements of companies have become more complex,
organizations have required a broader range of IT services, including strategy,
architecture design, application development and systems integration. Due to
this demand for a broader range of services, various types of service providers
have entered the market for digital communications solutions including Internet
service firms, technology consulting firms, technology integrators and
strategic consulting firms. However, these competitors generally lack the
creativity, breadth of services or technical expertise needed to fully address
an organization's needs. Furthermore, firms that focus solely on Internet-based
solutions, such as web design firms, will lack the technical expertise to
deliver non-Internet-based digital communications solutions that companies are
beginning to seek. In addition, because the IT services market is fragmented by
the cultural and language differences among countries, firms
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that lack a presence and expertise in important local markets are unable to
compete as effectively in those markets. The growing demand for creative
digital communications solutions has led to a significant market opportunity
for companies, such as Razorfish, that combine an international presence with
local expertise and provide an integrated package of services.
The Razorfish Approach
Razorfish believes that with the tremendous growth in the use of digital
technologies around the world, companies must re-evaluate their traditional
business models and incorporate digital communications into their organizations
in order to remain competitive. Razorfish helps companies interact effectively,
both internally with employees and externally with vendors, suppliers and
customers, in this new digital environment. Razorfish designs and implements
digital communications solutions to enhance its clients' core business,
operations and communications. In order to service its clients, Razorfish:
Provides an integrated, full-service offering. Razorfish offers an
integrated package of services consisting of strategic consulting, design of
information architectures and end-user interfaces, and creation and
customization of software necessary to implement the digital communications
solution. Its employees have expertise in a broad range of disciplines
including business strategy, marketing, branding, technology and creative
design. Razorfish works with a client from the analysis of its business
problems to the implementation of an appropriate solution. As a result, clients
benefit not only from the time and cost savings of working with a single firm,
but also from the optimized digital communications solution made possible by
Razorfish's integrated service offering. The Company believes that its
integrated, full-service offering differentiates it from other service
providers that focus on a single aspect of the service offering.
Develops and implements high value-added solutions. Razorfish enables its
clients to improve their overall business practices by providing digital
communications solutions that can increase sales, improve communications and
create brand identities. Solutions have included the creation of new
distribution channels, the repositioning of on-line brands and the integration
of a client's operations by opening and expanding lines of communication among
the client's employees, customers, distributors and vendors. These high value-
added solutions result in significant opportunities for revenue growth and cost
reduction for Razorfish clients. For example, Razorfish re-designed and
enhanced the on-line trading system for Charles Schwab that now accounts for
approximately 51% of Charles Schwab's daily trading volume.
Provides an end-user-focused solution. Because the end-user determines the
ultimate success of a client's product or service, Razorfish analyzes end-user
needs and applies its creativity and expertise to create digital communications
solutions that are easy-to-use, enjoyable, functional and optimized for a
particular need. Razorfish utilizes information from clients and end-user
surveys to develop user profiles and product and service characteristics that
serve as the basis for the design and development of its digital communications
solutions. Razorfish believes that this end-user-focused approach distinguishes
the Company from its competitors.
Leverages its international presence and local expertise. Razorfish has
offices in the United States and five European countries. The Company believes
that it is better able to serve multi-national and local clients because its
local consulting teams understand the nuances of local cultures, economies and
business practices. In addition, each office has the ability to draw on the
knowledge base and resources of over 270 Razorfish professionals worldwide.
Strategy
Razorfish's objective is to enhance its position as a leading-edge provider
of digital communications solutions. Razorfish's strategy to attain this goal
includes the following components:
Focus on leading-edge digital technologies. Today, Razorfish primarily uses
Internet-based technologies to create digital communications solutions for the
World Wide Web. Razorfish's solutions will increasingly
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incorporate additional communications technologies, such as wireless, satellite
and broadband communications, for use with a variety of digital devices,
including mobile phones, pagers and PDAs. The Company will continue to build
its capabilities by (1) recruiting the most talented people from leading
technology firms and colleges and universities and (2) providing continuous
training for its employees through tuition reimbursement and training programs.
Razorfish believes that by following a technology-neutral approach to solutions
development, it will be well positioned to capture additional market share as
companies seek non-Internet-based digital communications solutions.
Maintain creative leadership. Razorfish believes that it wins most of its
engagements due to its creativity. Unlike many other IT service providers,
Razorfish has established a team dedicated solely to creative design. In order
to maintain its creative leadership, the Company sponsors cultural seminars and
non-traditional special events and provides benefits, such as a fund for
creative learning opportunities, for its employees. Razorfish will continue to
invest in building the creative talents of its employees.
Target industries that can benefit from the use of digital communications.
The Company believes that increased deregulation, consolidation and global
competition will lead companies in more industries to use digital communications
technology to differentiate their products and services. Razorfish intends to
target companies in those industries in order to further expand its business.
Maintain the Razorfish culture. From its inception, Razorfish has focused on
building a working environment that encourages individuality and initiative to
promote the development of creative, cutting-edge solutions. Razorfish has
instituted programs that help maintain a productive and energetic workplace,
including a worldwide employee exchange program that allows employees to
transfer to other offices for specified periods of time. The Company believes
that by continuing and expanding these programs it will be able to attract top
professionals and maintain retention rates higher than the industry average.
Expand through strategic acquisitions. Razorfish believes that building a
critical mass of strategic, technical and creative talent and establishing a
multi-national presence through both acquisitions and internal growth will
provide it with a substantial competitive advantage. Razorfish has grown
rapidly since its inception in 1995. It completed five acquisitions in the
United States and Europe in 1998 and completed the Spray Acquisition in January
1999. Razorfish will continue to pursue strategic acquisitions to (1) acquire
expertise in new technologies, (2) gain access to additional talented
professionals, (3) enter into new geographic markets and (4) expand its client
base.
Build partnerships with clients. Razorfish establishes strong ties with its
clients' senior management by assisting them in addressing their strategic
business issues. The Company intends to leverage these relationships to expand
the scope and length of current engagements and to enter into additional
engagements.
The Razorfish Project Management Process
Razorfish utilizes a team-based approach to creating digital communications
solutions and has developed a proprietary five-phase project management process
that emphasizes client interaction to ensure creative and efficient solutions.
The Company's solutions managers, project managers, technologists and creative
personnel work together with the client in all five phases to guarantee that
the solution maintains a uniform look and stays within budget. At the end of
each phase Razorfish produces a set of deliverables for client acceptance. This
process ensures that the digital communications solution meets with the
client's expectations at every stage of its development. This project
management process consists of the following phases:
Phase I: Clarify
Phase I involves understanding the client's business and clarifying the
client's immediate business needs, as well as determining the client's long-
term goals. During this phase, the Company evaluates the market
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segment in which the client competes and assesses the client's operating and
technical environment. Once the client's objectives are outlined, a strategic
plan is formulated, including a definition of how the success of the project
will be assessed. Razorfish also establishes the project's scope and budget and
creates a detailed work plan during this phase.
Phase II: Architect
During Phase II, the Company creates the architecture of the digital
communications solution for the specific business problem to be addressed and
the definition of the functional, technical and creative requirements necessary
to put the solution into effect. Each aspect of the project is documented in
writing, and the Company collaborates with the client to refine the
architecture of the solution. The Company develops a demo of the solution to
test the initial concept and its functionality.
Phase III: Design
Once the structural foundation is established, the Company focuses on
completing the information, interaction and interface design aspects of the
project. The Company develops the features of the project, refines the
technology architecture for the solution and conducts usability testing to
evaluate the performance of the solution. By the end of this phase, the Company
delivers a functional prototype of the solution and a detailed plan for its
implementation.
Phase IV: Implement
The final product is built and launched for the client during Phase IV. If
necessary, Razorfish integrates the solution with the client's existing IT
infrastructure. As part of the final delivery process, the Company performs
quality assurance tests and ensures that the client understands how to use and
maintain the product through client training and maintenance documentation.
Phase V: Enhance
After implementation of the solution, the Company monitors it for a
specified period of time and analyzes how the solution performs against the
criteria established in Phase I. At the client's option, Razorfish may also
design a marketing and promotion plan for the product. In addition, Razorfish
will encourage clients to continue to work with Razorfish to address the needs
for the next generation of the solution as new technologies are developed and
end-user's requirements evolve.
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Digital Communications Solutions
The following chart illustrates some of the digital communications solutions
that Razorfish has created for its clients:
Financial & Consulting Services
<TABLE>
<C> <C> <C> <S>
Challenge: Assist Charles Schwab Solution: Redesigned its trading floor
in responding to website and on-line marketing
increased competition presence to strengthen Charles
in on-line investment Schwab's position as the
services. industry-leading e-commerce
brokerage house. Razorfish also
enhanced Schwab's on-line brand
identity and developed a new
user experience which are
consistently conveyed throughout
the website. As a result,
Charles Schwab is able to
clearly highlight its distinct
competitive strengths to both
its visitors and customers.
www.schwab.com
Media & Entertainment
Challenge: Strengthen Road Solution: Developed the user interface and
Runner's presence in front-end application of Road
the high-speed modem Runner, the high-speed modem
service industry. service which is owned by
ServiceCo, the joint venture
among Time Warner, MediaOne,
Microsoft, Compaq and Advance
Newhouse. Leveraging the use of
new technologies, the front-end
application provides a dynamic
and engaging multimedia
experience for users. This new
version of Road Runner is being
deployed throughout Time
Warner's regional cable
affiliates.
www.rr.com
Challenge: Enhance the end- Solution: Designed a unique on-line
user's experience and environment to support
strengthen the on- theglobe.com's position as a
line brand identity popular on-line community. The
for theglobe.com. website features an elegant end-
user interface designed to
appeal to theglobe.com's diverse
target audience and to provide a
compelling end-user experience.
Razorfish also has developed a
template system that allows both
community members and third
party providers to post content
on the website. Razorfish is
currently working with
theglobe.com to continue to
enhance the end-user's overall
experience and to expand the
features and functionality
offered by the globe.com.
</TABLE>
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Software, Technology & Telecommunications
<TABLE>
<C> <C> <C> <S>
Challenge: Establish a stronger Solution: Consolidated the three existing
on-line brand RS/6000 websites and reorganized
identity for IBM's the information to be more user-
RS/6000, a series of friendly. The Company also
powerful UNIX-based created a stronger on-line brand
workstations, servers identity for the RS/6000 through
and supercomputers. a dynamic homepage, active menus
and its custom Java interface.
www.rs6000.ibm.com
Challenge: Showcase Ericsson's Solution: Designed a website to present
Multi-Service Access multiple views of each product,
group's including its technical
communications specifications and use in
networking equipment business solutions. The end-user
in a way that can be can access independent press
appreciated by both coverage about and support for
technicians and each product on the website.
laypersons. Razorfish created a three-
layered architecture to overlay
a database containing all of the
information to be presented.
This architecture gives the end-
user the ability to access
customized information based on
his or her own level of
understanding of Ericsson's
communications networking
equipment.
www.ericsson.se/access
Challenge: Enhance eBay's Solution: Razorfish is assisting eBay in
successful on-line improving the structure of
trading community eBay's website. The new graphic-
website by improving based look will enhance visual
the graphic design appeal and better convey the
and user interface. eBay brand. Razorfish is working
with eBay to enhance the user
experience for a rapidly growing
user base and to seamlessly
integrate new features into this
design.
www.ebay.com
</TABLE>
Travel & Leisure
<TABLE>
<C> <C> <C> <S>
Challenge: Create a digital Solution: Created a website that is a key
solution to help channel for product and service
reposition the RAC, a delivery. The website offers
leading U.K. motoring interactive accommodation
club, from a roadside planning, combined route
recovery organization planning, live traffic news and
to a travel service the ability to become a member
provider. and purchase travel and
automotive accessories and
travel-related services on-line.
Razorfish is currently working
to deliver these services via
other media platforms, including
interactive TV and mobile
phones.
www.rac.co.uk
</TABLE>
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<TABLE>
<C> <C> <C> <S>
Challenge: Create a central Solution: Built an on-line travel service
information source featuring an information-rich
for the customers of database that covers
the six international approximately 600 destinations
airlines, Air Canada, in over 100 countries. The
Lufthansa, SAS, Thai, website is automatically updated
United and Varig, four times a day and gives users
that form the Star access to flight schedules,
Alliance(TM). maps, currency exchange rates,
three-day weather forecasts,
airport and ground
transportation information and
electrical and cellular phone
standards. Users can also
purchase airline tickets from
certain airlines and learn about
airline bonus programs.
www.star-alliance.com
</TABLE>
Consumer Brands & Retail
<TABLE>
<C> <C> <C> <S>
Challenge: Emulate the overall Solution: Created an interactive "toy box"
FAO Schwarz on the Internet that recreates
experience within a FAO Schwarz stores' whimsical
digital environment. atmosphere in a digital
environment. The website
features a user-friendly
interface that is rich in
graphics and animation and
permits visitors to access
information about FAO Schwarz's
services and to purchase its
products through the easily
updated electronic catalog.
Razorfish built the site to work
in conjunction with FAO Schwarz'
existing internal fulfillment
system. This e-commerce
capability has increased the
flow of purchase orders and
opened up a new sales channel
for the store.
www.faoschwarz.com
Challenge: Display Electrolux Solution: Designed a website featuring a
products to its 1950's-style cartoon house and
world-wide customer family. The end-user is invited
base in a way that into each room of the house
accommodates country- where a member of the family
to-country describes the history and
differences in features of the Electrolux
product names and products used in that room in a
packaging while humorous fashion. The website
maintaining a also features "fridge cam," a
consistent brand camera mounted in the
identity. refrigerator of an actual
suburban Stockholm family that
snaps a photo and posts it on
the website whenever the
refrigerator door is opened.
Razorfish has developed tools
that enable Electrolux country
managers to translate the
contents of the website into
local languages while allowing
Electrolux's Swedish
headquarters to control the
brand image and content.
www.electrolux.se
</TABLE>
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Cultural Institutions
<TABLE>
<C> <C> <C> <S>
Challenge: Extend The Solution: Developed a multi-dimensional,
Smithsonian digital exhibit that allows
Institution's reach visitors to explore cultural
beyond its physical history through various everyday
walls. objects. The visitor to the
website controls the experience
by viewing the exhibition pieces
on the website in any order; the
selection of an object links the
visitor to another "room" with
other related objects and
information. The end result is a
personalized, fluid experience
for the visitor. In addition,
end-users can enhance the
exhibit by donating their own
objects and stories to The
Smithsonian Institution on-line.
www.si.edu/revealingthings
</TABLE>
Marketing and Sales
The Company's marketing efforts are dedicated to strengthening its brand
name and enhancing its reputation as a creative provider of digital
communications solutions. The Company believes that the current strength of its
brand name provides it with a competitive advantage over those professional IT
services firms whose brands may not be as well known or may not convey the same
focused message of creative digital communications solutions.
The Company's brand development programs are designed to reinforce the
message that Razorfish is an international company with a local presence that
can provide a complete service offering. The Company also intends to increase
its advertising in an effort to expand the recognition of its brand name. The
Company's marketing programs, advertising campaigns and marketing tools are
developed within the Company and can be delivered to all Razorfish offices
without incurring the additional expense of retaining a marketing firm.
Currently, the Company's solutions managers are responsible for marketing
and sales. This approach provides the Company with a flexible sales resource.
Because of the current high demand for the Company's services, the Company has
not needed a formal sales or marketing force. There can be no assurance that
this trend will continue; therefore, the Company intends to use a portion of
the proceeds of the offering to develop a sales force. Razorfish intends the
sales and marketing force primarily to develop and prioritize new business
leads and to filter incoming contacts from prospective clients.
44
<PAGE>
Clients
Razorfish currently targets companies in industries that can use digital
technologies to increase sales, improve communications and create brand
identities. These industries include financial and consulting services, media
and entertainment, software, technology and telecommunications and consumer
brands and retail. Set forth below is a list of certain of the Company's
clients during the past twelve months within each targeted industry. This list
is not necessarily indicative of Razorfish's current clients.
<TABLE>
<S> <C>
FINANCIAL & CONSULTING SERVICES MEDIA & ENTERTAINMENT
Bank One Canal Digital
Cosmopolitan Magazine/Hearst Communications
Barclays Global Inc.
Charles Schwab & Co. Disney/ABC
Dow Jones & Co. Financial Times
Egg Medialab
Guardian Life Insurance Company of America Razorfish Studios
Goldfish Road Runner
Hagstromer and Qviberg Stern Magazine
Husbanken Showtime Networks
KPMG LLP theglobe.com
Sparebank 1 The New Millennium Experience Company
TV4
CONSUMER BRANDS & RETAIL Warner Music Group
Allied Domecq PLC
Arla SOFTWARE, TECHNOLOGY &
Bayer AG TELECOMMUNICATIONS
Canon Acer
Electrolux British Telecom
Hennes & Mauritz eBay
Kenwood USA Ericsson
Liz Claiborne HTV
Pripps IBM
Sony Electronics Corporation MCI/WorldCom
Toro Microsoft
Virgin Cola NASA Ames Research Center
Virgin Clothing Nokia
SegaSoft
INDUSTRIAL Sega Entertainment
Ashlar Inc. Telia
British Aerospace PLC Telewest
J&W
Merck Sharp & Dohme TRAVEL & LEISURE
Shell Trading & Transport Best Western International Inc.
Braathens
Finnair
First Hotels
RAC Motoring Services
Savoy
Scandinavian Airline Systems
Star Alliance
Statens Jarnvagar
The Tote
</TABLE>
45
<PAGE>
Razorfish has also created digital communications solutions for prestigious
cultural institutions including The Smithsonian Institution, Carnegie Hall, The
Whitney Museum and the Norwegian State Church (Norsk Kirkeiutlandet).
Razorfish believes that increased deregulation, consolidation and global
competition will lead companies in more industries to use digital
communications technology to differentiate their products and services. The
Company anticipates targeting those industries that it believes will most
effectively be able to use digital communications technologies to increase
sales, improve communications and create brand identities.
Each of Razorfish's clients is generally charged for the time, materials and
expenses incurred on a particular project. However, the agreements entered into
in connection with a project are generally terminable by the client upon 30-
days' prior written notice. We cannot give any assurances that a client will
not terminate an engagement before its completion. If our clients terminate
existing agreements or if we are unable to enter into new engagements, our
business, financial condition and results of operations could be materially and
adversely affected.
On a pro forma basis, no client accounted for more than 10.0% of revenue in
1997. Charles Schwab accounted for approximately 11.9% of revenue on a pro
forma basis for the nine months ended September 30, 1998. CBS, AT&T, Road
Runner and Charles Schwab accounted for approximately 19.5%, 16.2%, 14.1% and
13.7% of Razorfish's revenues, respectively, during fiscal 1997. Charles Schwab
and Citibank accounted for approximately 28.5% and 13.6% of Razorfish's
revenues, respectively for the nine months ended September 30, 1998. Telia and
SAS accounted for approximately 17.0% and 12.0% of Spray's revenues,
respectively, during fiscal 1997. Hagstromer and Qviberg accounted for
approximately 11.9% of Spray's revenues for the nine months ended September 30,
1998. The Company believes that it will continue to derive a significant
portion of its revenues from a limited number of larger clients. The volume of
work performed for these clients may not be sustained from year to year, and
there is a risk that these principal clients may not retain Razorfish in the
future. Any cancellation, deferral or significant reduction in work performed
for these principal clients or a significant number of smaller clients could
have a material adverse affect on Razorfish's business, financial condition and
results of operations.
ACQUISITION OF SPRAY
In January 1999, the Company acquired all of the issued and outstanding
shares of capital stock of Spray from Spray Ventures and Communicade (the
"Spray Acquisition") in exchange for an aggregate of 19,762,068 shares of
Razorfish Common Stock and an aggregate of 50 shares of Razorfish non-voting
Class B Common Stock (the "Class B Shares"). The Class B Shares will be issued
prior to the Company's reincorporation in Delaware. The shares of Common Stock
issued represented 50.0% of the shares of Razorfish Common Stock on a fully-
diluted basis immediately following the Spray Acquisition. At the time of the
Spray Acquisition, Spray had 171 employees. Spray had approximately $7.8
million in revenues for the fiscal year ended December 31, 1997. Razorfish
gained certain of its current clients as a result of the Spray Acquisition
including Hagstromer and Qviberg, one of Sweden's largest investment banks,
Hennes & Mauritz, a Swedish retail clothing company, Canal Digital, a Norwegian
satellite TV company, and Nokia.
Razorfish and Spray were founded upon like principles and have had similar
growth patterns, which have generated what Razorfish believes are compatible
corporate cultures. In addition, the companies have utilized similar business
methodologies and approaches. For these reasons, Razorfish expects its
integration of Spray to be successful. In addition, the Company believes that
the combined strength of the companies and their common cultural outlook will
help attract and retain qualified personnel.
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<PAGE>
Other Acquisitions
In order to acquire expertise in new technologies, gain access to
professionals and expand into new geographic regions, Razorfish has completed
six acquisitions, including the Spray Acquisition, in the United States and
Europe since its inception in 1995. In assessing a potential acquisition
candidate, the Company evaluates the target's internal culture, customer base,
local market share, financial characteristics, service offerings and quality of
management. In addition, the Company analyzes macroeconomic issues such as
technology adoption rates and the growth rates of the target's local economy.
Set forth below are descriptions of the acquisitions that Razorfish completed
in Fiscal 1998:
Sunbather Limited
The Company, through Razorfish London, acquired in October 1998
substantially all of the assets of Sunbather, a London-based new media company
with experience in interactive and digital television, from an administrator
appointed for the company (the "Sunbather Acquisition"). At the time of the
acquisition, Sunbather had 11 employees and, in its last completed fiscal year
ended March 31, 1998 had approximately (Pounds)565,000 ($933,000) in revenues.
<tag> media
Razorfish acquired substantially all of the assets of Los Angeles-based
<tag> Media in August 1998. <tag> Media had eight employees at the time of the
acquisition and in its last completed fiscal year ended December 31, 1997
approximately $322,000 in revenues. <tag> Media specialized in working with
film and record companies to deliver their messages and content through
computer-based entertainment.
Plastic
Razorfish acquired in June 1998 substantially all of the assets of San
Francisco-based Plastic, a new media company with strong technical expertise.
The Company acquired Plastic to expand its presence to the West coast. At the
time of the acquisition, Plastic had 15 employees and had in its last completed
fiscal year ended December 31, 1997 approximately $835,000 in revenues.
CHBi
In May 1998, the Company acquired all of the outstanding stock of London-
based CHBi (now Razorfish London). Razorfish's acquisition of this new media
company was its first venture into the European markets. At the time of the
acquisition, CHBi had 26 employees and had in its last completed fiscal year
ended May 31, 1998 approximately (Pounds)835,000 ($1.4 million) in revenues.
Avalanche Solutions, Inc.
In January 1998, Razorfish acquired in a foreclosure sale substantially all
of the assets of New York-based Avalanche Systems, a new media company with
capabilities in creative design. At the time of the acquisition, Avalanche
Systems had 32 employees and had in its last completed fiscal year ended
December 31, 1997 approximately $2.3 million in revenues.
Internal Information Systems
The Company continuously works to improve its internal communication systems
and production tools for creating and maintaining digital communications
solutions for its clients. Currently, Razorfish is upgrading its intranet
system by adding new functions and faster hardware. Razorfish's intranet is a
suite of applications including a global calendar and scheduling module, a
timesheet and financial reporting module, a corporate knowledge database,
project tracking and management modules, on-line forums for fostering knowledge
sharing and other applications that increase productivity and creativity.
47
<PAGE>
Razorfish has also developed several applications to improve its
productivity in other areas of service delivery, including: (1) XX, an extranet
tool for on-line collaborative project development; (2) Webspy, an internet
traffic monitoring and reporting tool; (3) Vegas, a streaming media player; and
(4) Olof Engine, a multimedia presentation tool. These and other internally
developed technologies reduce development time and cost and increase
productivity at Razorfish. The Company believes that these additional
capabilities will improve employee productivity, client service delivery and
management of its worldwide operations.
Competition
The IT services market has grown dramatically in recent years as a result of
the increasing use of digital technology by businesses for communication,
marketing and information dissemination to their employees, customers, vendors
and suppliers. Different IT service providers focus on different types of
services, including technology consulting and marketing services. For example,
Internet content providers, consulting and advertising agencies and
telecommunications companies offer very different services that may be tied to
the Internet, such as the creation of intranets and extranets, consulting and
training, website design and development and advertising. This factor, along
with the rapid pace of technological change, makes the IT services market an
intensely competitive and rapidly evolving market. The Company expects
competition to persist and intensify in the future.
The Company's competitors include:
. Internet service firms, such as AGENCY.COM, Icon Medialab, iXL, Modem
Media . Poppe Tyson, Organic Online, Pixelpark, Proxicom, Online
Marketing Communications and USWeb/CKS;
. technology consulting firms, such as Diamond Technology Partners and
Metzler Group;
. technology integrators, such as Andersen Consulting, Cambridge Technology
Partners, Cap Gemini, EDS, IBM, Sapient and WM-Data;
. strategic consulting firms, such as Bain, Booz-Allen & Hamilton, Boston
Consulting Group, and McKinsey; and
. in-house IT, marketing and design service departments of its potential
clients.
Many of the Company's competitors have longer operating histories, larger
installed client bases, longer relationships with clients, greater brand or
name recognition and significantly greater financial, technical, marketing and
public relations resources than the Company. Although only a few of these
competitors have to date offered a package of services as fully integrated as
Razorfish's, several have announced their intention to offer a broader range of
technology-based solutions. Furthermore, greater resources may enable a
competitor to respond more quickly to new or emerging technologies and changes
in customer requirements and to devote greater resources to the development,
promotion and sale of its products and services than the Company. In addition,
the lack of any significant barriers to entry into this market permits new
market entrants that further intensify competition.
The Company believes that the principal competitive factors in its market,
in relative importance, are the ability to attract and retain professionals,
technical knowledge and creative skills, brand recognition and reputation,
reliability of the delivered solution, client service and price. Razorfish
believes that it has won most of its engagements due to its creativity and
technology-neutral approach to solving business problems. See "Risk Factors--
Competition," "Risk Factors--Risks Associated with Maintaining Reputation and
Name Recognition" and "Business--Marketing and Sales."
48
<PAGE>
Intellectual Property Rights
The Company protects its intellectual property through a combination of
license agreements and trademark, service mark, copyright and trade secret
laws. The Company enters into confidentiality agreements with its employees and
clients and limits access to and distribution of proprietary information
licensed from third parties. In addition, the Company enters into non-
competition agreements with its key employees.
The Company pursues the registration of its trademarks in the United States
and internationally. It has obtained U.S. registration for the "Razorfish" and
"Webspy" marks and has applied for registration of certain of its other
trademarks and servicemarks.
In addition, Razorfish licenses the "Razorfish" trademark and symbol and
"The Blue Dot" trademark on a royalty-free basis to Razorfish Studios.
Razorfish Studios produces and publishes on-line content, including art,
computer games, and literature, as well as screensavers, CDs, books and films.
Because the "Razorfish" trademark and symbol are closely associated with both
Razorfish Studios and the Company, the Company's name and reputation could be
materially and adversely affected by content published or actions taken by
Razorfish Studios.
The Company's efforts to protect its intellectual property rights could be
inadequate to deter misappropriation of proprietary information. For example,
the Company may not detect unauthorized use of its intellectual property. In
addition, the legal status of intellectual property on the Internet is
currently subject to various uncertainties. See "Risk Factors--Intellectual
Property and Proprietary Risks" and "Risk Factors--Government Regulation and
Legal Uncertainties--U.S. and Foreign."
Employees
As of January 15, 1999, Razorfish had 350 full time employees, 137 of whom
were located in the United States and 213 of whom were located in Europe. The
Company's employees include 35 solutions managers (business, marketing and
branding strategists), 67 project managers, 92 developers, 80 designers, 13
sales and marketing personnel, and 63 support staff (including information
services, finance and legal personnel) and executives.
The Company's continuing success will depend in large part on its ability to
attract, motivate and retain highly qualified employees. Competition for such
personnel is intense, and the Company may not be able to retain its senior
management or other key personnel in the future. Razorfish believes it
maintains high employee retention rates as compared to industry averages by
paying competitive salaries, granting stock options and other awards and
reimbursing employees for tuition expenses in connection with IT-related
coursework. Employees also may temporarily transfer to another of Razorfish's
domestic or European offices. Razorfish plans to allocate a portion of the
proceeds of the offering to expand programs for the recruitment of qualified
personnel. See "Use of Proceeds."
The Company's employees are not represented by any union, and except for
senior management and certain other employees, are retained on an at-will
basis. However, the regulations of certain European countries in which the
Company operates, including Sweden, may make it difficult for the Company to
terminate those employees. In addition, those regulations govern the amount of
vacation time that must be given to employees, which is significantly more
vacation than in the United States. The Company considers its relations with
its employees to be satisfactory.
Facilities
The Company's headquarters are located in a leased facility in New York City
consisting of approximately 15,000 square feet of office space. The leases
expire on December 31, 2001. The Company also leases office space in Los
Angeles, San Francisco, London, Stockholm, Oslo, Helsinki and Hamburg.
Legal Proceedings
The Company is not a party to any material legal proceedings.
49
<PAGE>
MANAGEMENT
Directors and Executive Officers
Set forth below is certain information with respect to the directors and
executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
President, Chief Executive Officer, Treasurer
Jeffrey A. Dachis....... 32 and Director
Craig M. Kanarick....... 32 Chief Scientist, Vice Chairman of the Board,
Secretary and Director
Executive Vice President, Chairman of the Board
Per Bystedt............. 33 and Director
Jonas Svensson.......... 30 Vice Chairman of the Board and Director
Peter Seidler........... 40 Chief Creative Officer
Susan Black............. 32 Chief Financial Officer
Michael S. Simon........ 35 Executive Vice President--Business Affairs and
General Counsel
Jean-Philippe Maheu..... 35 Executive Vice President--North America
Thomas Randerz.......... 42 Executive Vice President--Europe
Evan Orensten........... 33 Executive Vice President--Corporate Development
Johan Ihrfelt........... 31 Executive Vice President--Corporate Development
John Wren............... 46 Director
</TABLE>
Jeffrey A. Dachis, a co-founder of the Company, has served as the
President, Chief Executive Officer, Treasurer and a director of the Company
since its inception in January 1995. He was a Graphic Production Specialist
for Applied Graphics Technologies, a graphic pre-press production house, from
May 1994 to April 1995. From September 1993 until April 1994, Mr. Dachis
served as Vice President of Corporate Marketing of Game Financial Corp., a
credit card cash advance and electronic funds transfer company. Mr. Dachis is
also the Chief Executive Officer and a director of Razorfish Studios. He will
devote substantially all of his time to the management of the Company. See
"Certain Transactions." Mr. Dachis holds a B.A. in dance and dramatic
literature from SUNY Purchase and a M.A. in media/entertainment business from
New York University.
Craig M. Kanarick, a co-founder of the Company, has been a Vice Chairman of
the Board since January 1999, Chief Scientist of the Company since August 1998
and Secretary and a director of the Company since its inception in January
1995. Mr. Kanarick was Chairman of the Board of the Company from its inception
until January 1999. From June 1993 to January 1995, Mr. Kanarick was a
freelance digital media consultant and designer. Mr. Kanarick is the Chairman
of the Board, Chief Creative Officer, Secretary and a director of Razorfish
Studios. He is also a director of the New York New Media Association and
Rhizome Communications, Inc., a non-profit digital arts corporation. Mr.
Kanarick will devote substantially all of his time to the management of
Razorfish. See "Certain Transactions." Mr. Kanarick holds a B.A. degree in
philosophy and a B.S. degree in computer science from the University of
Pennsylvania and a M.S. degree in visual studies from the MIT Media Lab at the
Massachusetts Institute of Technology.
Per Bystedt has served as an Executive Vice President and the Chairman of
the Board since January 1999. He is also the Chief Executive Officer and a
director of Spray Ventures. Mr. Bystedt served as the Chairman of the Board of
Spray from September 1997 until the Spray Acquisition. From January 1995 until
February 1997, Mr. Bystedt served as Chief Executive Officer of TV3
Broadcasting Group Ltd., a Scandinavian satellite and cable television
network. From January 1997 to April 1997, Mr. Bystedt was an Executive Vice
President for Modern Times Group AB with the primary responsibility for
supervising all of the satellite and cable TV, pay TV and smart card system
companies within this organization. Mr. Bystedt also served as Chief Executive
Officer for the television production company, Trash Television AB, from
September 1992 to April 1994 and for ZTV Group AB, a commercial television
company in Scandinavia, from April 1994 to December 1995.
50
<PAGE>
Jonas Svensson, a co-founder of Spray, has served as a Vice Chairman of the
Board since January 1999. Prior to the Spray Acquisition, he served as the
director of brand and strategic developments of Spray and was also the Chairman
of the Board of Spray. From January 1995 to June 1995, Mr. Svensson was the
Executive Vice President for Everyday, a company specializing in interactive
media and ISP services that is a member of Kinnevik, the Nordic media group. He
was a student at the Stockholm School of Economics from August 1990 to January
1995.
Peter Seidler has been the Chief Creative Officer of the Company since May
1998. Mr. Seidler was the Chief Creative Officer of Avalanche Solutions, a
company that he founded in connection with the acquisition by the Company of
Avalanche Systems' assets, from January 1998 to May 1998. From November 1994
until January 1998, he was the Chief Creative Officer and President of
Avalanche Systems, a strategic digital communications company that he founded.
See "Business--Other Acquisitions." Mr. Seidler was also the founder and
Creative Director of Seidler Design Inc., a digital interface design company,
from August 1993 until November 1994. Mr. Seidler holds a B.A. degree in
philosophy from New York University and a M.F.A. degree in conceptual art from
California Institute of the Arts.
Susan Black has been Chief Financial Officer of the Company since January
1998. Prior to joining the Company, Ms. Black was Chief Financial Officer of
the New York office of TBWA Chiat/Day Inc., an advertising agency, from March
1996 to December 1997. Prior to the merger of TBWA International ("TBWA") and
Chiat/Day, Ms. Black was the International Controller for TBWA from May 1994 to
February 1996. From August 1988 to April 1994, Ms. Black worked for Arthur
Andersen LLP in various positions, including manager. Ms. Black holds a First
Class B.S. degree in economics from Loughborough University and is a member of
the Institute of Chartered Accountants of England and Wales.
Michael S. Simon has been Executive Vice President--Business Affairs since
November 1998 and General Counsel of the Company since July 1998. Mr. Simon was
Senior Vice President of Business Affairs of the Company from July 1998 to
November 1998, and he was the Company's Vice President of Business Affairs from
October 1996 to July 1998. Prior to joining the Company, Mr. Simon was a Senior
Director of Legal Affairs for Polygram Records, Inc. from April 1995 to October
1996. From November 1993 to April 1995, he was an associate at the law firm
Levine Thall Plotkin & Mennin, LLP. Mr. Simon is also the President and a
director of Razorfish Studios. Mr. Simon has also been the President of Simon
Ventures, Ltd., an artist management and management consulting firm that he
founded, since October 1996. He will devote a substantial portion of his time
to the management of Razorfish. See "Certain Transactions." Mr. Simon holds a
J.D. degree from Columbia University and a B.A. degree from Amherst College.
Jean-Philippe Maheu has served as Executive Vice President--North America
since January 1999 and Executive Vice President of Corporate Development from
December 1997 until December 1998. Mr. Maheu served as Vice President of
Business Development and Strategy from July 1997 until December 1997. From
February 1995 to June 1997, Mr. Maheu served as a principal of Gunn Partners, a
management consulting firm. From September 1989 to January 1995, Mr. Maheu was
a consultant and manager of A.T. Kearney, an international management
consulting firm. Mr. Maheu holds a M.S. degree in information systems from
Pierre and Marie Curie University--Paris and a M.B.A. degree in finance and
marketing from the J.L. Kellogg Graduate School of Management at Northwestern
University.
51
<PAGE>
Thomas Randerz has served as Executive Vice President--Europe since the
closing of the Spray Acquisition. Following Spray's merger with Tetre AB in
June 1997, Mr. Randerz was responsible for Spray's activities in the financial
sector until September 1997 when he became Spray's Chief Operating Officer. He
served in such position until January 1999. Prior to joining Spray, Mr. Randerz
was the Chief Executive Officer of Tetre AB. From May 1987 to October 1995 he
was a consultant and manager with Cap Gemini, an IT consulting firm.
Evan Orensten has served as Executive Vice President--Corporate Development
since January 1999. From June 1997 to January 1999, he was a Managing Director
of Razorfish's New York office. Mr. Orensten served as a Vice President and
Senior Interactive Strategist of Siegel & Gale, a consulting firm, from January
1995 to May 1997. From April 1994 to January 1995, Mr. Orensten was a
Production Associate in the multimedia department of Smith Barney Inc., and
from January 1994 to April 1994, he was an account executive of Interbrand,
Inc., a consulting firm. Mr. Orensten holds a A.B. degree in Asian studies from
Vassar College and an M.B.A. degree in international business from L'Ecole des
Haute Etudes Commerciales.
Johan Ihrfelt, a co-founder of Spray, has served as Executive Vice
President--Corporate Development since January 1999. He was the Chief Financial
Officer and Human Resources Manager of Spray, as well as a director, from
August 1997 until January 1999. Prior thereto, he served as Chief Executive
Officer of Spray from its incorporation until July 1997. From July 1994 until
June 1995, Mr. Ihrfelt was responsible for international operations at
Interactive Television AB, a member of the Kinnevik Group. He graduated from
the Stockholm School of Economics in June 1994.
John Wren has been a director of the Company since September 1996. Mr. Wren
has served as the Chief Executive Officer of Omnicom since January 1997 and has
also been President of Omnicom since September 1995. From May 1993 until June
1998, he served as the Chairman and the Chief Executive Officer of the
Diversified Agency Services division of Omnicom. Mr. Wren was appointed to
Omnicom's Board of Directors in May 1993.
Board of Directors
The Company currently has authorized five directors. Each director holds
office until his successor is duly elected and qualified or until his
resignation or removal, if earlier. Each of the current members of the Board of
Directors has been elected pursuant to the terms of the Stockholders Agreement
entered into as of October 1, 1998 by and among the Company, Spray Ventures,
Communicade and Messrs. Dachis and Kanarick, which will terminate upon the
consummation of this offering.
Prior to the consummation of the offering, the Company will appoint two
independent directors and will establish an Audit Committee and a Compensation
Committee with such independent directors as members.
The Audit Committee will review the preparations for and the scope of the
audit of the Company's annual financial statements, review drafts of such
statements, make recommendations as to the engagement and fees of the
independent auditors and monitor the functioning of the Company's accounting
and internal control systems by meeting with representatives of management, the
independent auditors and the internal auditors. The Committee will have direct
access to the independent auditors, the internal auditors and counsel to the
Company and perform such other duties relating to the maintenance of the proper
books of account and records of the Company and other matters as the Board of
Directors may assign from time to time. In addition, in order to maintain
listing on Nasdaq, the Company must maintain an audit committee with a majority
of its members who are "independent directors." Independent directors are
persons who are neither officers or employees of the Company or its
subsidiaries or any other person who has a relationship which, in the opinion
of the Board of Directors, would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director.
52
<PAGE>
The Compensation Committee will supervise and make recommendations with
respect to compensation levels of key employees and all benefit plans involving
employees of the Company and its subsidiaries. It will approve, upon the
recommendation of the President or other appropriate officer, the terms of
employment of all officers of the Company (except the Chairman of the Board and
the President) and recommend the terms of employment of the Chairman of the
Board and the President to the Board of Directors for approval.
Compensation of Directors
Directors who are also employees of the Company receive no additional
compensation for their services as directors. Directors who are not employees
of the Company may receive a fee for attendance in person at meetings of the
Board of Directors or committees of the Board of Directors. Directors may also
be reimbursed for travel expenses and other out-of-pocket costs incurred in
connection with the attendance of meetings.
The DGCL provides that a Company may indemnify its directors and officers as
to certain liabilities. The Company's Certificate of Incorporation and By-laws
provide for the indemnification of its directors and officers to the fullest
extent permitted by law. The effect of such provisions is to indemnify the
directors and officers of the Company against all costs, expenses and
liabilities incurred by them in connection with any action, suit or proceeding
in which they are involved by reason of their affiliation with the Company. The
Company may obtain directors and officers liability insurance to effectuate
these provisions.
Employment and Non-Competition Agreements
Employment Agreements with Messrs. Dachis and Kanarick
The Company has entered into employment agreements with each of Jeffrey A.
Dachis and Craig M. Kanarick, pursuant to which Mr. Dachis serves as President
and Chief Executive Officer and Mr. Kanarick serves as the Chief Scientist,
Secretary and Vice Chairman of the Board. Each of Messrs. Dachis and Kanarick
is paid a base salary of $104,000, subject to increases in accordance with the
Company's salary review and budget policies. In addition, pursuant to the terms
of the agreements, Messrs. Dachis and Kanarick serve as directors of the
Company without any additional compensation.
The initial term of each agreement expires on December 31, 2001. Upon the
expiration of the initial term, each agreement remains in effect and may be
terminated by either party upon six months' prior written notice. In addition,
at any time after June 30, 2001, the Company may, at its option, elect to place
either executive on "leave of absence status" during which time such executive
will no longer be responsible for his respective duties but will be entitled to
payment of his salary and other benefits provided in the agreement.
These agreements also contain customary provisions relating to the
protection of confidential information and non-solicitation of the Company's
employees or clients upon the executive's termination of employment.
Employment Agreements with Per Bystedt, Jonas Svensson and Johan Ihrfelt
The Company has entered into employment agreements with each of Per Bystedt,
Jonas Svensson and Johan Ihrfelt, pursuant to which each will perform duties
designated by the Company, in either Stockholm or New York, and will report to
Mr. Dachis. Each such employee is paid a base salary of $145,000, subject to
increases in accordance with the Company's salary review and budget policies.
Beginning after one year of employment, each such employee will be eligible to
participate in the Company's bonus and profit-sharing programs.
The initial term of each agreement expires on December 31, 2001. Upon the
expiration of the initial term, each agreement remains in effect and may be
terminated by either party upon thirty days' prior written notice.
53
<PAGE>
These agreements contain customary provisions relating to assignment to the
Company of proprietary information developed during employment and the
protection of confidential information.
Employment Agreements with Other Members of Management
The Company has also entered into employment agreements with Peter Seidler,
Jean-Philippe Maheu and Evan Orensten. Mr. Seidler serves as the Company's
Chief Creative Officer and is paid a base salary of $125,000. The initial term
of his employment expires on December 31, 2001. Upon the expiration of such
initial term, Mr. Seidler's agreement continues in effect and may be terminated
by either party upon 30 days' prior written notice. Mr. Maheu serves as
Executive Vice President--North America. His annual base salary under the
agreement is $125,000 per annum. The term of Mr. Maheu's employment agreement
expires on June 30, 1999 and is automatically renewable for successive one-year
terms unless terminated by either party 90 days prior to the scheduled renewal
date. Mr. Orensten serves as an Executive Vice President--Corporate
Development. His annual base salary under the agreement is $125,000 per annum.
The term of Mr. Orensten's employment agreement expires on May 31, 1999 and is
automatically renewable for successive one-year terms unless terminated by
either party 60 days prior to the scheduled renewal date.
Each of Messrs. Seidler, Maheu and Orensten is also eligible to participate
in the Company's bonus and profit-sharing programs. The agreements each also
contain customary provisions relating to assignment to the Company of
proprietary information developed during employment, the protection of
confidential information, and non-solicitation of the Company's employees or
clients upon the executive's termination of employment.
Non-Competition Agreements with Messrs. Dachis and Kanarick
The Company has entered into non-competition agreements with each of Jeffrey
A. Dachis and Craig M. Kanarick. The agreements provide that each of Messrs.
Dachis and Kanarick will not, until the later of December 31, 2001 and the
termination of such person's employment with the Company, (1) solicit business
of the type performed by the Company from any Company client, (2) solicit the
Company's employees or (3) render services of the type performed by the Company
for any Company client. A Company client includes any person that is a client
at the time of, or during the two-year period prior to, termination of such
employee's employment and prospective clients to whom the Company has made a
presentation during the one-year period prior to such termination.
EXECUTIVE COMPENSATION
The table below summarizes information concerning the compensation paid by
the Company during Fiscal 1998 to the Company's Chief Executive Officer and the
Company's four other most highly paid executive officers (collectively, the
"Named Executive Officers"):
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------- -----------------------------
NAME AND PRINCIPAL
POSITION SALARY BONUS SECURITIES UNDERLYING OPTIONS
- ------------------ ---------- --------- -----------------------------
<S> <C> <C> <C>
Jeffrey A. Dachis....... $ 104,000 $ 5,000(1) --
Chief Executive
Officer, President and
Treasurer
Craig M. Kanarick....... 104,000 5,000(1) --
Chief Scientist, Vice
Chairman of the Board
and
Secretary
Peter Seidler........... 112,500(2) 2,000(1) 526,912(3)
Chief Creative Officer
Jean-Philippe Maheu..... 125,000 13,500(1) --
Executive Vice
President--North
America
Evan Orensten........... 110,416(4) 16,000(1) --
Executive Vice
President--Corporate
Development
</TABLE>
- --------
(1) The amount of the bonus paid to the Named Executive Officer was partially
based upon the financial results of the Company during the first two
quarters of Fiscal 1998 and partially based on the performance of the Named
Executive Officer. An additional bonus ranging from $0 to $10,000 will be
paid to the Named Executive Officer during the first quarter of fiscal
1999; the amount of which will be partially based on the financial results
of the Company during the third and fourth quarters of Fiscal 1998 and
partially based on the performance of the Named Executive Officer.
54
<PAGE>
(2) Mr. Seidler's salary was $100,000 per year from January 16, 1998 to April
30, 1998 when it was increased to $125,000 per year.
(3) 26,912 of these options were granted to Mr. Seidler in order to satisfy
certain obligations of the Company with respect to a previous grant of
options made to Mr. Seidler.
(4) Mr. Orensten's salary was $100,000 per year from January 1, 1998 until
August 1, 1998 when it was increased to $125,000 per year.
Option Grants in Fiscal 1998
<TABLE>
<CAPTION>
Potential
Realized
Individual Grants Value at Assumed
-------------------------------------------------- Annual Rates of
Number of Percent of Stock Price
Securities Total Options Appreciation for
Underlying Granted to Exercise or Option Term(2)
Options Employees in Base Price Expiration -----------------
Name Granted(#) Fiscal 1998(1) ($/Share) Date 5% 10%
- ---- ---------- -------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey A. Dachis....... -- -- -- -- -- --
Craig M. Kanarick....... -- -- -- -- -- --
Peter Seidler........... 500,000 53.4% $1.00(3) 04/30/08 $314,445 $796,870
26,912(4) 2.9 11/26/08
Jean-Philippe Maheu..... -- -- -- -- -- --
Evan Orensten........... -- -- -- -- -- --
</TABLE>
The following table sets forth information regarding stock options granted
pursuant to the 1997 Stock Option Plan during Fiscal 1998 to each of the Named
Executive Officers.
- --------
(1) Based on an aggregate of 936,000 options granted to employees in Fiscal
1998, including options granted to Named Executive Officers.
(2) The values set forth in these columns represent the gain which would be
realized by each Named Executive Officer assuming (i) the option granted in
Fiscal 1998 is exercised at the end of its term and (ii) the value of a
share of the Company's Common Stock has increased annually by a rate of 5%
and 10%, respectively, during the term of the option. These growth rates
are prescribed by the Commission and are not intended to forecast possible
future appreciation of the Company's Common Stock or to establish a present
value of options. In addition, no gain to the optionees will be realized
unless there is an increase in the Company's stock price, which will
benefit all stockholders commensurately.
(3) The exercise price of these options was below the fair market value of the
Common Stock on the date of grant based on a subsequent valuation, and the
Company booked a compensation charge accordingly. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview."
(4) These options were granted to Mr. Seidler in order to satisfy certain
obligations of the Company with respect to a previous grant of options made
to Mr. Seidler.
Aggregated Option Exercises in Fiscal 1998 and Fiscal Year-End Option Values
The following table sets forth information concerning the value of
unexercised in-the-money options held by the Named Executive Officers as of
December 31, 1998.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options at
at Fiscal Year-End Fiscal Year-End(1)
Shares Acquired Value ---------------------------------- -------------------------
Name on Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ----------- -------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey A. Dachis....... -- -- 33,334 66,666 $43,334 $86,665
Craig M. Kanarick....... -- -- 33,334 66,666 43,334 86,665
Peter Seidler........... 500,000 $1,800,000(2) 26,912 -- --
Jean-Philippe Maheu..... 33,334 120,002(2) 19,193 105,049 24,950 136,563
Evan Orensten........... 33,334 -- 16,667 99,999 21,667 129,998
</TABLE>
- --------
(1) There was no public trading market for the Common Stock at December 31,
1998. Accordingly, these values have been calculated on the basis of the
fair market value of the Common Stock at December 31, 1998 ($2.30) as
determined by the Board of Directors of the Company, less the applicable
exercise price per share, multiplied by the number of shares underlying
such options. The per share fair market value of the Common Stock was
halved on December 23, 1998 as the result of a two-for-one stock split that
did not affect the outstanding options.
55
<PAGE>
(2) The value realized upon the exercise of such options represents the
aggregate amount of the excess of the fair market value for a share of
Common Stock on the date of exercise ($4.60 per share) over the exercise
price of such options ($1.00 per share).
Employee Benefit Plans
1997 Stock Option and Incentive Plan.
General. On February 24, 1997, the Company's Board of Directors adopted and
the Company's stockholders approved a stock option and incentive plan. The 1997
Stock Option Plan provides for the issuance of a total of up to 2,345,096
shares of Common Stock. Generally, shares subject to an award that remain
unissued upon expiration or cancellation of the award are available for other
awards under the 1997 Stock Option Plan.
Awards Under the Stock Option Plan. Awards under the 1997 Stock Option Plan
may be made in the form of (1) incentive stock options, (2) non-qualified stock
options (incentive and non-qualified stock options are collectively referred to
as "Options"), (3) restricted stock or (4) any combination thereof. Awards may
be granted to such directors, employees and consultants of Razorfish
(collectively, "Key Persons") as the Compensation Committee of the Board of
Directors (the "Committee") shall in its discretion select. Only employees of
Razorfish are eligible to receive grants of incentive stock options.
Administration. The 1997 Stock Option Plan is administered by the Committee,
which must be composed of at least two directors. The Committee is authorized
to construe, interpret and implement the provisions of the 1997 Stock Option
Plan, to select the Key Persons to whom awards will be granted, to determine
the terms and provisions of awards and, with the consent of the grantee, to
cancel and re-grant outstanding awards. The determinations of the Committee are
made in its sole discretion and are conclusive. The Committee will consist of
the independent directors.
Grants Under the 1997 Stock Option Plan.
Options. The Committee determines the terms and conditions of each Option.
The purchase price per share payable upon the exercise of an Option (the
"Option Exercise Price") is established by the Committee, and, in the case of
an incentive stock option the Option Exercise Price must be equal to at least
100% of the fair market value of a share of the Common Stock on the date of
grant. The Option Exercise Price is payable in cash, by surrender of shares of
Common Stock having a fair market value on the date of the exercise equal to
part or all of the Option Exercise Price, or by a combination of cash and such
shares, as the Committee may determine.
As of the date of this prospectus, there are Options outstanding to purchase
an aggregate of 1,326,217 shares of Common Stock of which 266,059 are currently
exercisable. Of these Options, 1,085,805 were granted at an exercise price less
than the fair market value of the Common Stock on the date of grant and 240,412
were granted at an exercise price equal to or in excess of the fair market
value of the Common Stock on the date of grant. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Overview." The
weighted average exercise price and remaining contractual life of the
outstanding Options are $ and years, respectively.
Restricted Stock. The Committee may grant restricted shares of Common Stock
to such Key Persons, in such amounts and subject to such terms and conditions
(which may depend on or be related to performance goals and other conditions)
as the Committee shall determine in its discretion. The restricted period for
an award of restricted stock may not exceed five years. The Committee may
require that the certificates for the shares of Common Stock covered by a
restricted stock award remain in the possession of a bank, other institution or
the Company until such shares are free from restrictions. Subject to all
applicable restrictions, the grantee has the rights of a stockholder with
respect to the restricted stock, provided that all stock dividends, stock
rights and stock issued upon split-ups or reclassification shall be subject to
the same restrictions as the restricted shares to which such dividends, rights
and stock relate.
56
<PAGE>
As of the date of this prospectus, all of the 131,814 shares granted
pursuant to the 1997 Stock Option Plan are subject to such restrictions.
Termination of Employment or Service.
Options. In general, the option agreements entered into pursuant to the 1997
Stock Option Plan provide that: (1) upon termination of the grantee's
employment or service by reason of discharge other than for death or permanent
and total disability, all options not yet exercised shall terminate; and (2) if
a grantee dies or becomes permanently and totally disabled while in the
Company's employ or service, the grantee's options will become exercisable as
to all of the shares underlying such options and generally remain exercisable
for one year after the date of such termination, but not after the expiration
date of the award.
Restricted Stock. If a grantee's employment or service terminates for any
reason or if any condition established by the Committee with respect to such
restricted shares shall not have occurred prior to the end of the restricted
period, the restricted shares shall be forfeited to the Company and the rights
of the holder with respect to such shares shall cease.
Other Features of the 1997 Stock Option Plan. The Board of Directors may,
without stockholder approval, suspend, discontinue, revise or amend the 1997
Stock Option Plan at any time or from time to time; provided, however, that
stockholder approval shall be obtained for any amendment which (1) increases
the number of shares available for issuances (subject to certain exceptions),
(2) changes who is eligible to receive awards under the 1997 Stock Option Plan
or (3) materially increases the benefits accruing to Key Persons. Unless sooner
terminated by the Board of Directors, the provisions of the 1997 Stock Option
Plan with respect to the grant of incentive stock options shall terminate on
the tenth anniversary of the adoption of the 1997 Stock Option Plan by the
Board of Directors. All awards made under the 1997 Stock Option Plan prior to
its termination shall remain in effect until they are satisfied or terminated.
In the event of a stock dividend, stock split, recapitalization or the like, to
the extent it deems necessary, the Committee will equitably adjust the
aggregate number of shares subject to the 1997 Stock Option Plan. No provision
is made in the 1997 Stock Option Plan for the adjustment of outstanding awards.
Tax Consequences. The following description of the tax consequences of
awards under the 1997 Stock Option Plan is based on present Federal tax laws,
and does not purport to be a complete description of the tax consequences of
the 1997 Stock Option Plan.
There are generally no Federal tax consequences either to the optionee or to
the Company upon the grant of an Option. On the exercise of an incentive stock
option, the optionee will not recognize any income, and the Company will not be
entitled to a deduction for tax purposes, although such exercise may give rise
to liability for the optionee under the alternative minimum tax provisions of
the Internal Revenue Code of 1986, as amended (the "Code"). However, if the
optionee disposes of shares acquired upon the exercise of an incentive stock
option within two years of the date of grant or one year of the date of
exercise, the optionee will recognize ordinary income, and the Company will be
entitled to a deduction for tax purposes in the amount of the excess of the
fair market value of the shares of Common Stock on the date of exercise over
the Option Exercise Price (or the gain on sale, if less); the remainder of any
gain, and any loss, to the optionee will be treated as capital gain or loss. If
the shares are disposed of after the foregoing holding periods are met, the
Company will not be entitled to any deduction, and the entire gain or loss will
be treated as a capital gain or loss to the optionee. On exercise of a non-
qualified stock option, the amount by which the fair market value of Common
Stock on the date of exercise exceeds the Option Exercise Price will generally
be taxable to the optionee as ordinary income and will generally be deductible
for tax purposes by the Company. The disposition of shares upon exercise of a
non-qualified option will generally result in capital gain or loss to the
optionee but will have no tax consequences to the Company.
An award of restricted shares of Common Stock generally will not result in
income for the grantee or in a tax deduction for the Company until such time as
the shares are no longer subject to forfeiture unless the
57
<PAGE>
grantee elects otherwise. At that time, the grantee generally will recognize
ordinary income equal to the fair market value of the shares less any amount
paid for them, and the Company generally will be entitled to a tax deduction
in the same amount.
Limitations on the Company's Compensation Deduction. Section 162(m) of the
Code limits the deduction which the Company may take for otherwise deductible
compensation payable to certain executive officers to the extent that
compensation paid to such officers for a year exceeds $1.0 million, unless
such compensation meets certain requirements. Although the Company believes
that compensation realized from options that have been granted under the 1997
Stock Option Plan generally will satisfy the requirements of Section 162(m) of
the Code, there is no assurance that such awards will satisfy such
requirements. The deduction for compensation resulting from a restricted stock
award will be subject to the limitation imposed by Code Section 162(m).
1999 Stock Incentive Plan.
General. The Company's Board of Directors intends to adopt and submit to
the stockholders prior to the consummation of the offering a stock incentive
plan. The 1999 Stock Incentive Plan provides for the issuance of a total of up
to 1,200,000 shares of Common Stock. Generally, shares subject to an award
that remain unissued upon expiration, cancellation settlement or forfeiture of
the award are available for other awards under the 1999 Stock Incentive Plan.
Awards Under the 1999 Stock Incentive Plan. Awards under the 1999 Stock
Option Plan may be made in the form of (1) incentive stock options, (2) non-
qualified stock options, (3) stock appreciation rights, (4) dividend
equivalent rights, (5) restricted stock, (6) performance units, (7)
performance shares or (8) any combination thereof. Awards may be granted to
such Key Persons as the Board of Directors or a Board-- appointed committee
(the "Administrator") shall in its discretion select. Only employees of
Razorfish are eligible to receive grants of incentive stock options. Each
award shall be evidenced by an agreement (each an "Award Agreement") entered
into by the Company and the grantee. Either the Board of Directors or the
Administrator shall determine the terms and provisions of each award granted
under the 1999 Stock Incentive Plan, including the vesting schedule,
repurchase provisions, rights of first refusal, forfeiture provisions, form of
payment, payment contingencies and satisfaction of any performance criteria.
The performance criteria established by the Administrator may be based on any
one, or any combination of, the following: (1) increase in share price, (2)
earnings per share, (3) total stockholders' return, (4) net operating income,
(5) personal management objectives and (6) any other measure of performance
selected by the Administrator.
As of the date of this prospectus, no awards have been granted pursuant to
the 1999 Stock Incentive Plan.
Administration. The 1999 Stock Incentive Plan is administered by the
Administrator. The Administrator is authorized to construe, interpret and
implement the provisions of the 1999 Stock Incentive Plan, to select the Key
Persons to whom awards will be granted, to determine the terms and provisions
of awards and, with the consent of the grantee, to amend the terms of any
outstanding award. The determinations of the Administrator are made in its
sole discretion and are conclusive.
Grants Under the 1999 Stock Option Plan.
Awards. The Administrator determines the terms and conditions of each
award. The purchase price per share payable upon the exercise of an Option
(the "Option Exercise Price") is established by the Administrator, and, in the
case of an incentive stock option the Option Exercise Price must be equal to
at least 100% of the fair market value of a share of the Common Stock on the
date of grant. The Option Exercise Price is payable in cash, check, by
delivery of grantee's promissory note by surrender of shares of Common Stock
having a fair market value on the date of the exercise equal to the Option
Exercise Price, by the sale of the shares through a broker-dealer or by any
combination of the foregoing methods of payment, as the Administrator may
determine.
As of the date of this prospectus, there have been no awards issued.
58
<PAGE>
Restricted Stock. The Administrator may grant restricted shares of Common
Stock to such Key Persons, in such amounts and subject to such terms and
conditions (which may depend on or be related to performance goals and other
conditions) as the Administrator shall determine in its discretion. The
restricted period for an award of restricted stock will be stated in the Award
Agreement.
Termination of Employment or Service
Awards. Upon the termination of a Key Person's employment with the Company
or any of its subsidiaries, as the case may be, an award granted pursuant to
the 1999 Stock Incentive Plan may be exercised to the extent provided in the
Award Agreement.
Other Features of the 1999 Stock Option Plan. The Board of Directors may,
without stockholder approval, amend, suspend or terminate the 1999 Stock
Incentive Plan at any time or from time to time; provided, however, that: (i)
stockholders approval shall be obtained as required; and (2) such amendment,
suspension or termination shall not affect awards that have been previously
granted. Unless sooner terminated by the Board of Directors, the provisions of
the 1999 Stock Incentive Plan shall terminate on the tenth anniversary of the
adoption of the 1999 Stock Incentive Plan by the Board of Directors. All awards
made under the 1999 Stock Incentive Plan prior to its termination shall remain
in effect until they are satisfied or terminated. Subject to any action that
may be required by the stockholders of Razorfish, the Administrator may, in its
discretion, proportionately adjust the number and price of outstanding awards,
and the number of shares authorized for issuance under the 1999 Stock Incentive
Plan, in the event of a stock dividend, stock split, recapitalization or other
corporate action having a similar effect on the capitalization of the Company.
In the event of a Change in Control (as defined in the 1999 Stock Incentive
Plan), the Committee has the authority to accelerate the vesting schedule of,
release from restrictions on transfer of and terminate repurchase or forfeiture
rights with respect to any outstanding award. The Administrator may establish
programs that provide for (1) the exchange of awards for one or more other
types of awards by certain Key Persons and (2) the grant of certain types of
awards to one or more classes of Key Persons. In addition, the Administrator
may at any time offer to buy out for cash or shares of Common Stock any
outstanding award.
Tax Consequences. The following description of the tax consequences of
awards under the 1999 Stock Incentive Plan is based on present Federal tax
laws, and does not purport to be a complete description of the tax consequences
of the 1999 Stock Incentive Plan.
The tax consequences of Options and restricted stock granted under the 1999
Stock Incentive Plan will generally be the same as the tax consequences of
Options and restricted stock granted under the 1997 Stock Option Plan. In the
case of a stock appreciation right, on exercise the holder will be taxed at
ordinary income rates on the amount of cash and the fair market value of the
other property received. Subject to the limitation described below, the Company
will be entitled to a deduction at the same time and in the same amount as the
holder has income. The tax consequences of other kinds of awards will depend on
the particular terms and conditions of such awards. In general, in case of
other awards, it is anticipated that such awards will result in ordinary income
to the recipient and a deduction to the Company; however, the amount and timing
of such income and any such deduction will depend on the time and conditions of
the award.
Limitations on the Company's Compensation Deduction. Although it is
anticipated that certain awards under the 1999 Stock Incentive Plan will,
pursuant to Section 162(m) of the Code, meet the requirements to avoid a limit
on deductibility, no assurances can be given that all awards will meet such
requirements. Specifically, awards of restricted stock will be subject to the
limitation on deductability imposed by Code Section 162(m).
59
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of January 22, 1999 and as adjusted to reflect the
sale of the Common Stock offered hereby by:
(1) each person (or group within the meaning of Section 13(d)(3) of the
Securities Exchange Act of 1934) known by the Company to own beneficially 5% or
more of the Common Stock,
(2) the Company's directors and Named Executive Officers, and
(3) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OWNED
OF COMMON STOCK -----------------
BENEFICIALLY OWNED
NAME AND ADDRESS OF PRIOR TO PRIOR TO AFTER
BENEFICIAL OWNERS(1)(2) OFFERING(3) OFFERING OFFERING
----------------------- ------------------ -------- --------
<S> <C> <C> <C>
Spray Ventures AB....................... 15,809,654 37.5%
Nybrogatan 55
114 85 STOCKHOLM
Omnicom Group, Inc. (4)................. 15,913,991(5) 37.7
c/o Communicade Inc.
437 Madison Avenue
New York, New York 10022
Jeffrey A. Dachis....................... 4,652,258(6) 11.0
Craig M. Kanarick....................... 4,652,258(7) 11.0
Per Bystedt (8)......................... 15,809,654(9) 37.7
Jonas Svensson (8)...................... 15,809,654(9) 37.7
Peter Seidler........................... 1,026,912(10) 2.4
Jean-Philippe Maheu..................... 85,861(11) * *
Evan Orensten........................... 83,335(12) * *
John Wren............................... 15,913,991(13) 37.7
c/o Omnicom Group, Inc.
437 Madison Avenue
New York, New York 10022
All directors and executive officers as
a group (12 persons)................... 42,237,603(14) 99.7%
</TABLE>
- --------
* Less than 1%
(1) Unless otherwise noted, the address of each of the persons listed is 107
Grand Street, 3rd Floor, New York, New York 10013.
(2) As used in this table, "beneficial ownership" means the sole or shared
power to vote or direct the voting or to dispose or direct the disposition
of any security. A person is deemed to be the beneficial owner of
securities that can be acquired within 60 days from the date of this
prospectus through the exercise of any option, warrant or right. Shares of
Common Stock subject to options, warrants or rights which are currently
exercisable or exercisable within 60 days are deemed outstanding for
computing the ownership percentage of the person holding such options,
warrants or rights, but are not deemed outstanding for computing the
ownership percentage of any other person. The amounts and percentages are
based upon 42,161,077 shares of Common Stock outstanding as of January 22,
1999, and shares of Common Stock outstanding as of the close of the
offering, respectively.
(3) Spray Ventures, Communicade and Messrs. Dachis and Kanarick are parties to
the New Stockholders Agreement. Because the New Stockholders Agreement
terminates on the consummation of this offering, the shares owned by one
party to the New Stockholders Agreement are not attributed to the
beneficial ownership of the other parties in this table.
60
<PAGE>
(4) The shareholder of record is Communicade, a wholly-owned subsidiary of
Omnicom.
(5) Includes (i) 4,690,319 shares acquired in connection with the Spray
Acquisition and (ii) 3,950,944 shares to be acquired upon the exercise of
the 10% Option.
(6) Includes 33,334 shares of Common Stock subject to options that are
currently exercisable by Mr. Dachis and 33,333 shares of Common Stock
subject to options exercisable in February 1999.
(7) Includes 33,334 shares of Common Stock subject to options that are
currently exercisable by Mr. Kanarick and 33,333 shares of Common Stock
subject to options exercisable in February 1999.
(8) The principal business address of Messrs. Bystedt and Svensson is c/o Spray
Network AB, Nybrogaten 55, Stockholm 11485, Sweden.
(9) Represents shares of Common Stock beneficially held by Spray Ventures. Mr.
Bystedt and Mr. Svensson are members of the board and shareholders of Spray
Ventures. However, none of Mr. Bystedt, Mr. Svensson or any other member of
the board of Spray Ventures, acting alone, has voting or investment power
with respect to the Company's Common Stock directly or indirectly
beneficially owned by Spray Ventures and, as a result, each of Mr. Bystedt
and Mr. Svensson disclaim beneficial ownership of these shares.
(10) Includes 26,912 shares of Common Stock subject to options that are
currently exercisable by Mr. Seidler.
(11) Includes 19,193 shares of Common Stock subject to options that are
currently exercisable by Mr. Maheu.
(12) Includes 16,667 shares of Common Stock that are currently exercisable by
Mr. Orensten.
(13) Represents shares of Common Stock beneficially held by Communicade. Mr.
Wren is an executive officer of Omnicom, the parent company of
Communicade. However, neither Mr. Wren nor any other officer or director
of Omnicom, acting alone, has voting or investment power with respect to
the Company's Common Stock directly or indirectly beneficially owned by
Omnicom and, as a result, Mr. Wren disclaims beneficial ownership of these
shares.
(14) Includes (i) an aggregate of 209,440 shares of Common Stock subject to
options that are held by the directors and executive officers and are
currently exercisable or exercisable within 60 days of January 22, 1998,
(ii) shares held by Communicade the beneficial ownership of which is
attributed to but disclaimed by Mr. Wren, and (iii) shares held by Spray
Ventures the beneficial ownership of which is attributed to but disclaimed
by Messrs. Bystedt and Svensson.
61
<PAGE>
CERTAIN TRANSACTIONS
In September 1996, Razorfish, Communicade (f/k/a JWL Associates Corp.) and
Messrs. Dachis and Kanarick entered into a Shareholders Agreement (the
"Shareholders Agreement"). The agreement remained in effect until the closing
of the Spray Acquisition. Pursuant to the terms of the agreement, Omnicom
agreed that, as long as it was a shareholder of Razorfish, it would provide
Razorfish with a Line of Credit. The first $1.0 million of principal amount
outstanding under the Line of Credit bears no interest and additional amounts
bear interest at the rate then charged by Omnicom to its subsidiaries under
Omnicom's cash management program (the "Applicable Rate"). The Line of Credit
is secured by a first priority lien on all of Razorfish's assets. In addition,
pursuant to the terms of the Shareholders Agreement, Communicade also agreed to
provide the Acquisition Financing. Any such acquisition was to be approved by
the unanimous vote of the Company's Board of Directors. Interest on any loan
made pursuant to the Acquisition Financing accrued at the Applicable Rate and
was payable quarterly on the outstanding principal amount. The principal under
any loan pursuant to the Acquisition Financing was to be repaid quarterly in
equal installments over a seven year period.
In connection with the Spray Acquisition, Razorfish, Communicade, Spray
Ventures and Messrs. Dachis and Kanarick entered into a Stockholders Agreement
which terminates upon the closing of the offering (the "New Stockholders
Agreement"). The Shareholders Agreement terminated upon the effectiveness of
the New Stockholders Agreement. Pursuant to the terms of the New Stockholders
Agreement, Communicade is to provide the Line of Credit and the Acquisition
Financing to Razorfish on the same terms and conditions as are set forth in the
Shareholders Agreement. As of the date of this prospectus, the Company has
approximately $1.3 million outstanding under the Line of Credit and
approximately $3.9 million outstanding under the Acquisition Financing. The New
Stockholders Agreement terminates upon the Closing Date, and Razorfish is
required pay to Omnicom the aggregate principal amount outstanding and interest
thereon under the Line of Credit on the Closing Date.
Pursuant to the terms of the New Stockholders Agreement, Communicade was
granted the 10% Option. The purchase price per share upon exercise of the 10%
Option is equal to 80% of the price per share to be sold in this offering.
Razorfish expects that Communicade will exercise the 10% Option and will
purchase 3,950,944 shares of Common Stock in January 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity."
In February 1997, the Company issued an aggregate of 131,814 shares of
Common Stock to seven employees pursuant to the terms of Stock Grant Agreements
entered into between the Company and each such employee. These shares were
issued to each employee in consideration for services rendered to the Company
by such employee. Each Stock Grant Agreement also requires the employee to
enter into a Stock Restriction Agreement with the Company. Each Stock
Restriction Agreement provides that the holder of the shares of Common Stock
will not sell, assign, pledge or otherwise transfer the shares without the
written consent of the Company. In the event that the holder desires to
transfer all or any portion of the shares or upon the occurrence of certain
events, the Company has a right of first refusal to purchase such shares. Each
Stock Restriction
Agreement terminates upon the cessation of the Company's business, the
bankruptcy, receivership or dissolution of the Company or by the agreement of
the parties.
Simultaneously with the Spray Acquisition, Mr. Dachis and Mr. Kanarick each
transferred an additional 363,636 shares of Common Stock (then representing a
total of 4% of the issued and outstanding shares of Common Stock) to
Communicade in exchange for $125,000 in cash and shares of Razorfish Studios
representing 20% of the issued and outstanding shares of common stock of
Razorfish Studios.
Razorfish Studios produces and publishes on-line content, including art,
computer games, and literature, as well as screensavers, CDs, books and films.
The majority of Razorfish Studios' common stock is owned by Communicade,
Jeffrey A. Dachis and Craig M. Kanarick, each of whom is a stockholder of
Razorfish.
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Michael S. Simon, an officer of Razorfish, is also a stockholder and a director
and the President of Razorfish Studios. Mr. Dachis is the Chief Executive
Officer of Razorfish Studios, and Mr. Kanarick is the Chairman of the Board,
Chief Creative Officer and Secretary of Razorfish Studios.
Razorfish Studios was formed in October 1997. Both prior to its formation,
and for a period of time after, part of the Razorfish Studios business was
operated as a division of the Company. In October 1997, the Company assigned to
Razorfish Studios all of its rights, title and interest in and to all of the
Razorfish Studios digital media properties owned by the Company, including the
Razorfish Studios website and RSUB, The Razorfish Subnetwork (located at
www.rsub.com), and all content located in such websites.
In exchange for the use of its facilities, Razorfish allocates a portion of
its overhead to Razorfish Studios, based on the ratio of the number of
employees of Razorfish Studios to the number of employees of both Razorfish and
Razorfish Studios. Historically, the Company made its employees available to
Razorfish Studios at a single discounted rate which was approximately 57% of
the average billing rate for Razorfish employees. The Company currently charges
Razorfish Studios its full billing rates with no discounts. In addition,
Razorfish provides Razorfish Studios with funds to cover operating expenses and
salaries which are refunded by Razorfish Studios. As of September 30, 1998,
Razorfish Studios owed approximately $424,400 to Razorfish for certain services
rendered by Razorfish employees, overhead and other advances made by Razorfish.
Messrs. Dachis and Kanarick have unconditionally guaranteed to pay this amount
to Razorfish in the event of a default by Razorfish Studios, pursuant to a
guaranty entered into in September 1998. Razorfish expects that future amounts
owed by Razorfish Studios will also be guaranteed by Messrs. Dachis and
Kanarick.
Razorfish Studios currently has three employees. Such employees occasionally
perform work for the Company at the same hourly rate as is charged to Razorfish
Studios for the use of Company employees. Razorfish Studios also sells limited
numbers of its products to Razorfish at a discounted rate to the wholesale
cost. Such products are used by Razorfish primarily as promotional items for
its clients.
Razorfish licenses the "Razorfish" trademark and symbol to Razorfish Studios
pursuant to a trademark license agreement on a royalty-free basis (the
"Trademark License"). The Trademark License contains customary provisions
giving Razorfish the ability to control the use of the Razorfish trademark by
Razorfish Studios. Because the "Razorfish" trademark and symbol are closely
associated with both Razorfish Studios and the Company, the Company's name and
reputation could still be materially and adversely affected by content
published or actions taken by Razorfish Studios.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Prior to consummation of the offering, the Company intends to reincorporate
in Delaware and amend its Certificate of Incorporation to reflect the capital
structure described below.
The Company's authorized capital stock consists of 46,999,950 shares, $.01
par value per share, of Class A Common Stock, 50 shares, $.01 par value per
share, of Class B Common Stock and 10,000,000 shares, par value $.01 per share,
of preferred stock.
The following summary of the terms and provisions of the Company's capital
stock does not purport to be complete and is qualified in its entirety by
reference to the provisions of applicable law and to the Company's Certificate
of Incorporation and By-laws, which have been filed as exhibits to the
Registration Statement of which this prospectus is a part.
COMMON STOCK
Class A Common Stock
Following the offering, shares will be outstanding ( if the
Representatives' over-allotment option is exercised in full). As of January 22,
1998, there were 15 holders of the Company's Common Stock. The holders of
Common Stock are entitled to one vote for each share on all matters voted upon
by stockholders, including the election of directors. Subject to the rights of
any then outstanding shares of Preferred Stock, the holders of the Common Stock
are entitled to such dividends as may be declared in the discretion of the
Board of Directors out of funds legally available therefor. See "Dividend
Policy." Holders of Common Stock are entitled to share ratably in the net
assets of the Company upon liquidation after payment or provision for all
liabilities and any preferential liquidation rights of any Preferred Stock then
outstanding. The holders of Common Stock have no preemptive rights to purchase
shares of stock of the Company. Shares of Common Stock are not subject to any
redemption provisions and are not convertible into any other securities of the
Company. All outstanding shares of Common Stock are, and the shares of Common
Stock to be sold by the Company in the offering when payment is received
therefor will be, fully paid and nonassessable.
Class B Common Stock
None of the shares of the Class B Common Stock are issued and outstanding.
The rights (including, but not limited to, rights to dividends), privileges and
restrictions of the Class B Common Stock are identical in all respects to the
Class A Common Stock, except that holders of Class B Common Stock are not
entitled to vote such shares (except as required by law). The Class B Common
Stock is a part of the purchase price for Spray in connection with the Spray
Acquisition and will be issued prior to the reincorporation in Delaware.
PREFERRED STOCK
Pursuant to the Certificate of Incorporation, the Board of Directors has the
authority, without further action by the Corporation's stockholders, to issue
up to 10,000,000 shares of preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any
series or the designation of such series, any or all of which may be greater
than the rights of the Common Stock. The issuance of preferred stock could
adversely affect the voting power of holders of Common Stock and the likelihood
that such holders will receive dividend payments and payments upon liquidation
and could have the effect of delaying, deferring or preventing a change in
control of the Company. The Company has no present plan to issue shares of
preferred stock.
LIMITATION ON DIRECTORS' LIABILITIES
The Certificate of Incorporation limits, to the maximum extent permitted by
the DGCL, the personal liability of directors and officers for monetary damages
for breach of their fiduciary duties as directors and officers, except for
liability (1) for any breach of the directors duty of loyalty to the Company or
its stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing
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violation of law, (3) under Section 174 of the DGCL, which concerns unlawful
payments of dividends, stock purchases or redemptions or (4) for any
transaction from which the director derived an improper personal benefit.
The Company maintains standard policies of insurance under which coverage is
provided (1) to its directors and officers against loss arising from claims
made by reason of breach of duty or other wrongful act, and (2) to the Company
with respect to payments which may be made by the Company to such officers and
directors pursuant to the above indemnification provision or otherwise as a
matter of law.
Anti-takeover Effects of Provisions of the Company's By-laws
The Company's By-laws provide that the authorized number of directors may be
changed by an amendment to the By-laws adopted by the Board of Directors or by
a majority of the Company's outstanding voting stock. Vacancies in the Board of
Directors may be filled by the holders of a majority of directors in office
even if such members constitute less than a quorum.
The Company's By-laws also provide that special meetings of the stockholders
of the Company may be called only by the Chairman of the Board, the Chief
Executive Officer, the President or the Board of Directors. The Company's By-
laws also require advance written notice, which must be received by the
Secretary of the Company not less than 45 days prior to the meeting, by a
stockholder of a proposal or directors nomination which such stockholder
desires to present at an annual meeting of stockholders. The Company's
Certificate of Incorporation does not include a provision for cumulative voting
in the election of directors. Under cumulative voting, a minority stockholder
holding a sufficient number of shares may be able to ensure the election of one
or more directors. The absence of cumulative voting may have the effect of
limiting the ability of minority stockholders to effect changes in Board of
Directors and, as a result, may have the effect of deterring a hostile takeover
or delaying or preventing changes in control or management of the Company.
Anti-takeover Effects of Delaware Law
The Company's Certificate of Incorporation contains a provision electing not
to be governed by Section 203. In general, Section 203 of the DGCL prohibits a
publicly held Delaware corporation from engaging in a broad range of "business
combinations" with an "interested stockholder" for a period of three years
after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed
manner. A "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or, in certain cases, within three years prior, did own) 15%
or more of the corporation's voting stock. Under Section 203, a business
combination between the Company and an interested stockholder is prohibited
unless it satisfies one of the following conditions:
(1) the Company's Board of Directors must have previously approved either
the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
(2) upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the Company outstanding at the time the
transaction commenced (excluding, for purposes of determining the number
of shares outstanding, shares owned by (a) persons who are directors and
also officers and (b) employee stock plans, in certain instances); or
(3) the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of the stockholders by the
affirmative vote of the holders of at least 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is American Stock &
Transfer Co.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the offering, shares of Common Stock will be
outstanding ( shares if the over-allotment option is exercised in full). Of
these shares, the shares of Common Stock sold in the offering will be
freely tradable without restriction or further registration under the Act,
unless held by an "affiliate" of the Company (a "Company Affiliate") as that
term is defined in Rule 144. All of the shares of Common Stock outstanding
prior to the offering are "restricted securities," as such term is defined
under Rule 144, in that such shares were issued in private transactions not
involving a public offering and may not be sold in the absence of registration
other than in accordance with Rule 144 or Rule 701 promulgated under the
Securities Act or another exemption from registration. This prospectus may not
be used in connection with any resale of shares of Common Stock acquired in the
offering by Company Affiliates.
Each of the Company and its existing stockholders has agreed that it will
not offer, sell, contract to sell, pledge, or otherwise dispose of, directly or
indirectly, or file with the Securities and Exchange Commission a registration
statement under the Securities Act relating to, any shares of its common stock
or securities convertible into or exchangeable or exercisable for any shares of
the Company without the prior written consent of the Representatives for a
period of 180 days after the date of this prospectus, except grants of employee
stock options pursuant to the terms of a plan in effect on the date hereof,
issuances of securities pursuant to the exercise of such options outstanding on
the date hereof or the exercise of any other stock options outstanding on the
date hereof.
In general, under Rule 144 as currently in effect, if a minimum of one year
has elapsed since the later of the date of acquisition of the restricted
securities from the issuer or from an affiliate of the issuer, a person (or
persons whose shares of Common Stock are aggregated), including persons who may
be deemed Company Affiliates, would be entitled to sell within any three-month
period a number of shares of Common Stock that does not exceed the greater of
(1) one percent of the then-outstanding shares of Common Stock
(approximately shares immediately after the offering) or
(2) the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the
Commission.
Sales under Rule 144 are also subject to certain restrictions as to the
manner of sale (which restrictions are proposed to be eliminated), notice
requirements and the availability of current public information about the
Company. In addition, under Rule 144(k), if a period of at least two years has
elapsed since the later of the date restricted securities were acquired from
the Company or the date they were acquired from a Company Affiliate, a
stockholder who is not a Company Affiliate at the time of sale and who has not
been a Company Affiliate for at least three months prior to the sale would be
entitled to sell shares of Common Stock in the public market immediately
without compliance with the foregoing requirements under Rule 144. Rule 144
does not require the same person to have held the securities for the applicable
periods. The foregoing summary of Rule 144 is not intended to be a complete
description thereof.
In addition, any employee, director or officer of, or consultant to the
Company who purchased shares pursuant to a written compensatory plan or
contract may be entitled to rely on the resale provisions of Rule 701 of the
Act, which permits non-affiliates to sell their Rule 701 shares without having
to comply with the public information, holding period, volume limitation or
notice provisions of Rule 144, and permits Company Affiliates to sell their
Rule 701 shares without having to comply with the holding period restrictions
of Rule 144, in each case, commencing 90 days after the date of this
prospectus.
Immediately following the offering, none of the 42,161,077 "restricted
securities" will be available for immediate sale in the public market pursuant
to Rule 144(k). Beginning 90 days after the date of this prospectus, and
without
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consideration of the contractual restrictions described above, 1,266,250 shares
either issued under the 1997 Stock Option Plan or acquired upon exercise of
options issued under the 1997 Stock Option Plan will be outstanding and
eligible for sale in reliance upon Rule 701. Additional shares may be available
if options are exercised in the 180-day period following the date of this
prospectus.
Following the offering, the Company intends to file a registration statement
on Form S-8 under the Securities Act to register (1) 2,345,096 shares of Common
Stock reserved or to be available for issuance pursuant to the 1997 Stock
Option Plan and (2) 1,200,000 shares of Common Stock reserved or to be
available for issuance pursuant to the 1999 Stock Incentive Plan. Shares of
Common Stock issued pursuant to the 1997 Stock Option Plan generally will be
available for sale in the open market by holders who are not Company Affiliates
and, subject to the volume and other applicable limitations of Rule 144, by
holders who are Company Affiliates, unless such shares are subject to vesting
restrictions or the contractual restrictions described below.
Prior to the offering, there has been no public market for the Common Stock.
No information is currently available and the Company cannot predict the timing
or amount of future sales of shares, or the effect, if any, that future sales
of shares, or the availability of shares for future sale, will have on the
market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of the Common Stock (including shares issuable upon the
exercise of stock options) in the public market after the lapse of the
restrictions described below, or the perception that such sales may occur,
could materially adversely affect the prevailing market prices for the Common
Stock and the ability of the Company to raise equity capital in the future. See
"Risk Factors--No Prior Market for the Common Stock; Potential Volatility of
Price of Common Stock" and "Risk Factors--Shares Eligible for Future Sale."
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, the underwriters named below, for whom Credit
Suisse First Boston Corporation, BancBoston Robertson Stephens Inc., BT Alex.
Brown Incorporated and Lehman Brothers Inc., are acting as representatives,
have severally but not jointly agreed to purchase from the Company the
following respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
BancBoston Robertson Stephens Inc. ................................
BT Alex. Brown Incorporated........................................
Lehman Brothers Inc. ..............................................
-----
Total..........................................................
=====
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions and that they will be obligated to purchase
all of the shares of Common Stock offered hereby if any are purchased (other
than those shares covered by the over-allotment option described below). The
underwriting agreement provides that, in the event of a default, in certain
circumstances, the purchase commitments may be increased or the underwriting
agreement may be terminated.
We have granted to the representatives a 30-day option to purchase, on a pro
forma basis, up to additional shares of Common Stock at the initial
public offering price less the underwriting discounts and commissions. Such
option may be exercised only to cover over-allotments.
The underwriters will offer the Common Stock initially at the public
offering price on the cover page of this prospectus and, to certain dealers at
such price less a concession of $ per share. The underwriters and such
dealers may allow a discount of $ per share on sales to certain other
dealers. After the initial public offering, the public offering price and
concession and discount to dealers may be changed by the representatives.
The following table summarizes the compensation that we will pay the
underwriters and the expenses we will pay:
<TABLE>
<CAPTION>
TOTAL
-----------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions
paid by Razorfish.................... $ $ $
Expenses payable by Razorfish......... $ $ $
</TABLE>
The representatives have informed us that they do not expect discretionary
sales by the underwriters to exceed 5% of the shares now offered.
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Razorfish, our officers and directors and our existing stockholders have
agreed that they will not offer, sell, contract to sell, announce their
intention to sell, pledge, or otherwise dispose of, directly or indirectly, or
file with the Securities and Exchange Commission (the "Commission") a
registration statement under the Securities Act relating to, any additional
shares of our Common Stock or securities convertible into or exchangeable or
exercisable for any shares of the Company without the prior written consent of
the representatives for a period of 180 days after the date of this prospectus,
except grants of employee stock options pursuant to the terms of a plan in
effect on the date hereof, issuances of securities pursuant to the exercise of
such options outstanding on the date hereof or the exercise of any other stock
options outstanding on the date hereof.
We have reserved for purchase from the underwriters up to shares of
Common Stock which employees and friends of ours may purchase through a
directed share program. Such sales will be at the initial public offering
price. The number of shares of Common Stock available to the general public
will be reduced to the extent these persons purchase the reserved shares.
We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments which the underwriters may be required to make in respect thereof.
We will apply to list the shares of Common Stock on The Nasdaq National
Market under the symbol " ".
Prior to the offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiation between us and the representatives, and does not reflect the market
price for the Common Stock following the offering. Among the principal factors
considered in determining the initial public offering price will be:
. the information set forth in this prospectus and otherwise available to
the representatives;
. market conditions for initial public offerings;
. the history of and prospects for the industry in which we will compete;
. our past and present operations;
. our past and present earnings and current financial position;
. the ability of our management;
. our prospects for future earnings;
. the present state of our development and our current financial condition;
. the recent market prices of, and the demand for, publicly-traded Common
Stock of generally comparable companies;
. the general condition of the securities markets at the time of this
offering; and
. other relevant factors.
We can offer no assurances that the initial public offering price will
correspond to the price at which Common Stock will trade in the public market
subsequent to the offering or that an active trading market for the Common
Stock will develop and continue after the offering.
The representatives, on behalf of the underwriters, may engage in over-
allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934, as amended (the "Exchange Act").
Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
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Stabilizing transactions permit bids to purchase the shares of Common Stock
so long as the stabilizing bids do not exceed a specified maximum.
Syndicate covering transactions involve purchases of the Common Stock in the
open market after the distribution has been completed in order to cover
syndicate short positions.
Penalty bids permit the representatives to reclaim a selling concession from
a syndicate member when the Common Stock originally sold by such syndicate
member is purchased in a syndicate covering transaction to cover syndicate
short positions.
Such stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the Common Stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on Nasdaq or otherwise and, if commenced, may be discontinued at any
time.
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company prepare
and file a prospectus with the securities regulatory authorities in each
province where trades of Common Stock are effected. Accordingly, any resale of
the Common Stock in Canada must be made in accordance with applicable
securities laws which will vary depending on the relevant jurisdiction, and
which may require resales to be made in accordance with available statutory
exemptions or pursuant to a discretionary exemption granted by the applicable
Canadian securities regulatory authority. Purchasers are advised to seek legal
advice prior to any resale of the Common Stock.
Representations of Purchasers
Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company and the dealer from
whom such purchase confirmation is received that (1) such purchaser is entitled
under applicable provincial securities laws to purchase such Common Stock
without the benefit of a prospectus qualified under such securities laws, (2)
where required by law, that such purchaser is purchasing as principal and not
as agent and (3) such purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
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Notice to British Columbia Residents
A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Common Stock acquired on the same date
and under the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of Common Stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
Legislation.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Morrison & Foerster LLP, New York, New York. The underwriters have
been represented by Cravath, Swaine & Moore, New York, New York.
EXPERTS
The audited financial statements and schedules included in this prospectus
and elsewhere in the registration statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
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WHERE YOU CAN FIND MORE INFORMATION
The Company has filed with Commission a Registration Statement on Form S-1
with respect to the Common Stock being offered by this prospectus. This
prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the shares of Common Stock offered
hereby, reference is made to the Registration Statement, including the exhibits
and schedules thereto. Statements contained in this prospectus as to the
contents of any contract or other document referred to herein are not
necessarily complete and, where such contract is an exhibit to the Registration
Statement, each such statement is qualified in all respects by the provisions
of such exhibit, to which such reference is hereby made. Copies of the
Registration Statement, including the exhibits and schedules thereto, may be
examined without charge at the Public Reference Room of the Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, or at the
Commission's Regional Offices located at 500 West Madison Street, Suite 1400,
Chicago, IL 60661, and Seven World Trade Center, 13th Floor, New York, NY 10048
or on the Internet at http://www.sec.gov. Copies of all or a portion of the
Registration Statement can be obtained from the Public Reference Room of the
Securities and Exchange Commission upon payment of prescribed fees, and
information on the operation of the Public Reference Room may be obtained by
calling the Commission at (800) SEC-0330.
As a result of the offering, the Company will become subject to the
information and reporting requirements of the Exchange Act and, in accordance
therewith, will file periodic reports, proxy statements and other information
with the Securities and Exchange Commission. Upon approval of the Common Stock
for quotation on Nasdaq, such reports, proxy and information statements and
other information may also be inspected at the offices of Nasdaq Operations,
1735 K Street, N.W., Washington, D.C. 20006.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
RAZORFISH, INC. AND SUBSIDIARIES
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets at December 31, 1996 and 1997 and September
30, 1998................................................................ F-3
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997 and the nine months ended September 30, 1998........ F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997 and the nine months ended September 30,
1998.................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997 and the nine months ended September 30, 1998........ F-6
Notes to Consolidated Financial Statements............................... F-7
SPRAY NETWORK AB AND SUBSIDIARIES
Report of Independent Public Accountants................................. F-24
Consolidated Balance Sheets at December 31, 1996 and 1997 and September
30, 1998 (unaudited).................................................... F-25
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997 and the nine months ended September 30, 1998
(unaudited)............................................................. F-26
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997 and the nine months ended September 30,
1998 (unaudited)........................................................ F-27
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997 and the nine months ended September 30, 1998
(unaudited)............................................................. F-28
Notes to Consolidated Financial Statements............................... F-29
SPRAY VENTURES AB AND SUBSIDIARIES
Report of Independent Public Accountants................................. F-39
Consolidated Balance Sheets at December 31, 1995 and 1996 and at August
31, 1997................................................................ F-40
Consolidated Statements of Operations for the years ended December 31,
1995 and 1996 and the eight-months ended August 31, 1997................ F-41
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995 and 1996 and the eight-months ended August 31, 1997... F-42
Consolidated Statements of Cash Flows for the years ended December 31,
1995 and 1996 and the eight-months ended August 31, 1997................ F-43
Notes to Consolidated Financial Statements............................... F-44
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Razorfish, Inc.:
We have audited the accompanying consolidated balance sheets of Razorfish,
Inc. (a New York corporation) and subsidiaries as of December 31, 1996 and 1997
and September 30, 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for the three years ended December 31, 1997
and the nine months ended September 30, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Razorfish, Inc. and
Subsidiaries as of December 31, 1996 and 1997 and September 30, 1998, and the
results of its operations and its cash flows for the three years ended December
31, 1997 and the nine months ended September 30, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
January 18, 1999
F-2
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------- September 30,
1996 1997 1998
-------- ---------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 62,624 $1,176,076 $ 192,517
Accounts receivable, net of allowance for
doubtful accounts of $0, $0 and $50,000,
respectively............................. 46,938 1,304,420 1,911,856
Unbilled charges.......................... -- 371,692 1,063,490
Prepaid expenses and other current
assets................................... 105,999 309,962 463,107
Deferred tax assets....................... 68,993 381,846 431,578
Due from affiliate........................ -- -- 424,428
-------- ---------- -----------
Total current assets.................... 284,554 3,543,996 4,486,976
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $29,343,
$136,608 and $338,087, respectively........ 279,420 617,560 1,154,263
INTANGIBLES, net of accumulated amortization
of $64,552................................. -- -- 3,176,921
DEFERRED TAX ASSETS......................... -- 35,993 1,013,579
DEFERRED REGISTRATION COSTS................. -- -- 124,534
OTHER ASSETS................................ 28,645 68,961 665,092
-------- ---------- -----------
Total assets............................ $592,619 $4,266,510 $10,621,365
======== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to Omnicom Group, Inc................. $ -- $1,805,000 $ 4,858,506
Accounts payable and accrued expenses..... 126,999 270,032 1,147,739
Income taxes payable...................... 40,988 42,217 702,965
Deferred rent............................. -- 39,970 58,158
Advanced billings......................... -- 455,096 152,321
Current portion of capital lease
obligations.............................. 35,415 71,803 54,754
Deferred tax liabilities.................. 52,787 848,421 1,167,904
-------- ---------- -----------
Total current liabilities............... 256,189 3,532,539 8,142,347
CAPITAL LEASE OBLIGATIONS................... 55,129 76,662 22,062
-------- ---------- -----------
Total liabilities....................... 311,318 3,609,201 8,164,409
-------- ---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 47,000,000
shares authorized, 18,181,812, 18,313,638
and 18,313,638 shares issued and
outstanding at December 31, 1996 and 1997
and September 30, 1998, respectively..... 181,818 183,136 183,136
Additional paid-in capital................ 173,182 250,683 2,440,502
Retained earnings (deficit)............... (73,699) 223,490 (170,542)
Cumulative foreign currency translation
adjustments.............................. -- -- 3,860
-------- ---------- -----------
Total stockholders' equity.............. 281,301 657,309 2,456,956
-------- ---------- -----------
Total liabilities and stockholders'
equity................................. $592,619 $4,266,510 $10,621,365
======== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended For the Nine Months
December 31, Ended September 30,
---------------------------------- -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ----------- ----------
(Unaudited) (Audited)
<S> <C> <C> <C> <C> <C>
REVENUES................ $ 312,234 $1,218,136 $3,617,688 $1,836,461 $9,117,812
DIRECT SALARIES AND
COSTS.................. 106,899 895,220 1,906,111 1,268,321 5,090,436
---------- ---------- ---------- ---------- ----------
Gross profit.......... 205,335 322,916 1,711,577 568,140 4,027,376
SALES AND MARKETING..... 15,819 128,959 174,550 127,111 226,491
GENERAL AND
ADMINISTRATIVE......... 141,852 500,063 876,567 610,518 2,096,770
AMORTIZATION OF
GOODWILL............... -- -- -- -- 64,552
NONCASH COMPENSATION
EXPENSE................ -- -- 78,819 53,304 2,140,819
---------- ---------- ---------- ---------- ----------
Income (loss) from
operations........... 47,664 (306,106) 581,641 (222,793) (501,256)
INTEREST EXPENSE, NET... 656 5,161 19,489 -- 165,471
---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes......... 47,008 (311,267) 562,152 (222,793) (666,727)
PROVISION (BENEFIT) FOR
INCOME TAXES........... 11,241 (56,801) 264,963 (97,408) (272,695)
---------- ---------- ---------- ---------- ----------
Net income (loss)..... $ 35,767 $ (254,466) $ 297,189 $ (125,385) $ (394,032)
========== ========== ========== ========== ==========
PER SHARE INFORMATION:
Net income (loss) per
share--
Basic............... $ 0.00 $ (0.01) $ 0.02 $ (0.01) $ (0.02)
========== ========== ========== ========== ==========
Diluted............. $ 0.00 $ (0.01) $ 0.02 $ (0.01) $ (0.02)
========== ========== ========== ========== ==========
Weighted average
common shares
outstanding--
Basic............... 18,181,812 18,181,812 18,313,638 18,313,638 18,313,638
========== ========== ========== ========== ==========
Diluted............. 19,074,922 19,074,922 19,745,308 19,206,748 19,206,748
========== ========== ========== ========== ==========
PRO FORMA NET INCOME
(LOSS) DATA (Unaudited)
Net income (loss)
before provision
(benefit) for income
taxes................ $ 47,008 $ (311,267) $ 562,152 $ (222,793) $ (666,727)
Pro forma income tax
provision (benefit)
(actual for December
31, 1997,
September 30, 1997
and 1998) ........... 20,213 (133,845) 264,963 (97,408) (272,695)
---------- ---------- ---------- ---------- ----------
Pro forma net income
(loss)............... $ 26,795 $ (177,422) $ 297,189 $ (125,385) $ (394,032)
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Cumulative
Common Stock Additional Foreign Retained Total
------------------- Paid-in Currency Earnings Stockholders'
Shares Amount Capital Translation (Deficit) Equity
---------- -------- ---------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 19,
1995................... -- $ -- $ -- $ -- $ -- $ --
Common stock issued to
founders............. 18,181,812 181,818 (181,818) -- -- --
Net income............ -- -- -- -- 35,767 35,767
---------- -------- ---------- ------ --------- ----------
BALANCE, December 31,
1995................... 18,181,812 181,818 (181,818) -- 35,767 35,767
Capital contribution.. -- -- 500,000 -- -- 500,000
S-Corporation
termination.......... -- -- (145,000) -- 145,000 --
Net loss.............. -- -- -- -- (254,466) (254,466)
---------- -------- ---------- ------ --------- ----------
BALANCE, December 31,
1996................... 18,181,812 181,818 173,182 -- (73,699) 281,301
Common stock issued to
employees............ 131,826 1,318 12,166 -- -- 13,484
Common stock option
compensation......... -- -- 65,335 -- -- 65,335
Net income............ -- -- -- -- 297,189 297,189
---------- -------- ---------- ------ --------- ----------
BALANCE, December 31,
1997................... 18,313,638 183,136 250,683 -- 223,490 657,309
Common stock option
compensation......... -- -- 2,140,819 -- -- 2,140,819
Foreign currency
translation
adjustment........... -- -- -- 3,860 -- 3,860
Capital contribution.. -- -- 49,000 -- -- 49,000
Net loss.............. -- -- -- -- (394,032) (394,032)
---------- -------- ---------- ------ --------- ----------
BALANCE, September 30,
1998................... 18,313,638 $183,136 $2,440,502 $3,860 $(170,542) $2,456,956
========== ======== ========== ====== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years For the Nine Months
Ended December 31, Ended September 30,
-------------------------------- -----------------------
1995 1996 1997 1997 1998
-------- --------- ----------- ----------- -----------
(Unaudited) (Audited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)..... $ 35,767 $(254,466) $ 297,189 $(125,385) $ (394,032)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities-
Allowance for doubtful
accounts............. -- -- -- -- 50,000
Depreciation and
amortization......... 2,532 26,812 107,261 55,256 266,302
Non cash common stock
option compensation.. -- -- 78,819 13,484 2,140,819
Non cash capital
contribution......... -- -- -- -- 49,000
(Increase) in deferred
tax assets........... (4,728) (64,265) (348,846) (324,595) (1,027,318)
(Increase) decrease in
accounts receivable.. (97,342) 50,404 (1,257,482) (752,694) 129,019
(Increase) in unbilled
charges.............. -- -- (371,692) (16,260) (691,798)
(Increase) in prepaid
expenses and other
current assets....... -- (105,999) (203,963) (178,655) (153,195)
(Increase) in due from
affiliates........... -- -- -- -- (424,428)
(Increase) in other
assets............... -- (29,145) (40,316) (50,686) (167,366)
Increase in accounts
payable and accrued
expenses............. 47,321 79,678 143,033 152,172 426,890
Increase (decrease) in
advanced billings.... -- -- 455,096 422,921 (302,775)
Increase in deferred
tax liabilities...... 9,947 42,840 795,634 401,232 319,483
Increase (decrease) in
income taxes
payable.............. 9,589 31,399 (1,229) -- 660,748
Increase in deferred
rent................. -- -- 39,970 29,974 18,188
-------- --------- ----------- --------- -----------
Net cash provided by
(used in) operating
activities.......... 3,086 (222,742) (306,526) (373,236) 899,537
-------- --------- ----------- --------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures.. -- (189,356) (316,043) (255,653) (528,368)
Acquisitions of
subsidiaries net of
cash acquired........ -- -- -- -- (4,215,911)
-------- --------- ----------- --------- -----------
Net cash used in
investing
activities.......... -- (189,356) (316,043) (255,653) (4,744,279)
-------- --------- ----------- --------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Deferred registration
costs................ -- -- -- -- (124,534)
Payments under capital
lease obligations.... (3,086) (25,278) (68,979) (51,734) (71,649)
Proceeds from capital
contribution......... -- 500,000 -- -- --
Net borrowings under
lines of credit
options.............. -- -- 1,805,000 775,000 3,053,506
-------- --------- ----------- --------- -----------
Net cash provided by
(used in) financing
activities.......... (3,086) 474,722 1,736,021 723,266 2,857,323
-------- --------- ----------- --------- -----------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH AND
CASH EQUIVALENTS...... -- -- -- -- 3,860
-------- --------- ----------- --------- -----------
Net increase
(decrease) in cash
and cash
equivalents......... -- 62,624 1,113,452 94,377 (983,559)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. -- -- 62,624 62,624 1,176,076
-------- --------- ----------- --------- -----------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ -- $ 62,624 $ 1,176,076 $ 157,001 $ 192,517
======== ========= =========== ========= ===========
SUPPLEMENTAL
DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the
period for--
Income taxes paid..... $ -- $ -- $ -- $ -- $ --
Interest paid......... 656 5,161 17,775 13,331 98,031
SUPPLEMENTAL DISCLOSURE
OF NON-CASH INVESTING
ACTIVITIES:
Equipment acquired
under capital
leases............... 23,805 95,598 126,901 116,199 --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Razorfish, Inc. ("Razorfish"), together with its wholly-owned subsidiaries
(the "Company"), is an international digital communications solutions provider.
The Company creates digital communications solutions to help its clients
increase sales, improve communications and create brand identities. The
Company's integrated service offering includes strategic consulting, design of
information architectures and end-user interfaces and creation and
customization of software necessary to implement its digital communications
solutions. The Company primarily uses Internet-based technologies to create
digital communications solutions for the World Wide Web. However, Razorfish's
solutions will increasingly incorporate additional communications technologies,
such as wireless, satellite and broadband communications, for use with a
variety of digital devices including mobile phones, pagers and personal digital
assistants ("PDAs"). In order to service its global clients, Razorfish has
completed six acquisitions since its inception in 1995, and currently has
offices in New York, San Francisco, Los Angeles, London, Stockholm, Oslo,
Helsinki and Hamburg.
Principles of Consolidation
The accompanying consolidated financial statements as of and for the nine
months ended September 30, 1998 include the operations of Razorfish and its
wholly-owned United States subsidiaries, Avalanche Solutions, Inc., Razorfish
Los Angeles, Inc., Razorfish San Francisco, Inc. and its wholly-owned United
Kingdom subsidiary, CHBi Razorfish Ltd. The Company had no subsidiaries prior
to January 1, 1998. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions, specifically for allowance for doubtful accounts for accounts
receivable, the useful lives of fixed assets and intangible assets, that affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Revenue Recognition
Revenues are recognized as services are rendered on the percentage-of-
completion method of accounting based on the ratio of costs incurred to total
estimated costs. Revenues derived from fixed-fee contracts are recognized as
services are rendered. Unbilled charges represent labor costs incurred and
estimated earnings, production and other client reimbursable costs. Advanced
billings represent billings of production and other client reimbursable out-of-
pocket costs in excess of revenues earned. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
F-7
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated on a straight-line
basis over estimated useful lives of four to eight years. Leasehold
improvements and equipment held under capital leases are amortized utilizing
the straight-line method over the lesser of the estimated useful life of the
asset or the remaining term of the related lease.
Intangible Assets
Goodwill, which represents the excess of the purchase price over the fair
value of the net assets acquired, is included in intangible assets and is
presently being amortized over a period of 20 years on a straight-line basis.
Management has evaluated the amortization periods in the current period and has
determined that no impairment currently exists. These amortization periods will
be evaluated by management on a continuing basis, and will be adjusted if the
lives of the related intangible assets are impaired.
Accounting for Long-Lived Assets
The Company accounts for long-lived assets under the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
This statement establishes financial accounting and reporting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used, and for long-lived assets and
certain identifiable tangibles to be disposed of. Management has performed a
review of all long-lived assets and has determined that no impairment of the
respective carrying value has occurred as of December 31, 1997 and September
30, 1998.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their tax
bases for operating profit and tax liability carryforward. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets or liabilities of
a change in tax rates is recognized in the period that the tax change occurs.
This Company has elected to file its income tax returns using the cash basis of
accounting.
Foreign Currency Translation
All assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at fiscal year-end exchange rates. Income and expense items are
translated at average exchange rates prevailing during the fiscal year. The
resulting translation adjustments are recorded as a component of stockholders'
equity in the accompanying consolidated financial statements.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, due
from affiliate and accounts payable approximate fair value due to the short-
term maturity of these instruments. The carrying amounts of due to Omnicom
Group, Inc. and capital lease obligations, including current portions,
approximate fair value.
F-8
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Business Concentrations and Credit Risk
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
primarily concentrated in the United States. The Company performs ongoing
credit evaluations, generally does not require collateral and establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of customers, historical trends and other information. To date, such losses
have been within management's expectations.
For the year ended December 31, 1995, two clients accounted for 17% and 16%
respectively, of total revenues.
For the year ended December 31, 1996 four clients accounted for 25%, 21%,
11% and 10%, respectively, of total revenues.
For the year ended December 31, 1997 four clients accounted for 19%, 16%,
14% and 14%, respectively, of total revenues.
For the nine months ended September 30, 1998 two clients accounted for 28%
and 14%, respectively, of total revenues.
As of December 31, 1996, three clients accounted for 47%, 32% and 21%,
respectively, of total accounts receivable.
As of December 31, 1997, two clients accounted for 59% and 16%,
respectively, of total accounts receivable.
As of September 30, 1998, two clients accounted for 21% and 14%,
respectively, of total accounts receivable.
Net Income (Loss) Per Common Share
The Company computes net income (loss) per share in accordance with SFAS No.
128, "Earnings Per Share" ("SFAS No. 128") and SEC Staff Accounting Bulletin
No. 98 ("SAB No. 98"). Under the provisions of SFAS No. 128 and SAB No. 98,
basic net income (loss) per common share ("Basic EPS") is computed by dividing
net income (loss) by the weighted average number of common shares outstanding.
Diluted net income (loss) per common share ("Diluted EPS") is computed by
dividing net income (loss) by the weighted average number of common shares and
dilutive common share equivalents then outstanding. SFAS No. 128 requires the
presentation of both Basic EPS and Diluted EPS on the face of the consolidated
statements of operations. The impact of the adoption of this statement was not
material.
F-9
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation between the numerator and denominator of Basic EPS and
Diluted EPS is as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1995
--------------------------------------
Net Common Net Income Per
Income Shares Common Share
--------- ---------- ----------------
<S> <C> <C> <C>
Basic:
Net income attributable to common
stock................................ $ 35,767 18,181,812 $ 0.00
Effect of nominal issuances of common
stock options........................ -- 893,110 --
Diluted EPS............................. -- -- --
--------- ---------- ------
Net income attributable to common
stock............................ $ 35,767 19,074,922 $ 0.00
========= ========== ======
<CAPTION>
For the Year Ended December 31, 1996
--------------------------------------
Net Common Net (Loss) Per
(Loss) Shares Common Share
--------- ---------- ----------------
<S> <C> <C> <C>
Basic EPS:
Net loss attributable to common
stock................................ $(254,466) 18,181,812 $(0.01)
Effect of nominal issuances of common
stock options........................ -- 893,110 --
Diluted EPS............................. -- -- --
--------- ---------- ------
Net loss attributable to common
stock............................ $(254,466) 19,074,922 $(0.01)
========= ========== ======
<CAPTION>
For the Year Ended December 31, 1997
--------------------------------------
Net Common Net Income Per
Income Shares Common Share
--------- ---------- ----------------
<S> <C> <C> <C>
Basic EPS:
Net income attributable to common
stock................................ $ 297,189 18,313,638 $ 0.02
Effect of nominal issuances of common
stock options........................ -- 893,110 --
Effect of common stock options........ -- 538,560 --
Diluted EPS............................. -- -- --
--------- ---------- ------
Net income attributable to common
stock and common stock options..... $ 297,189 19,745,308 $ 0.02
========= ========== ======
<CAPTION>
For the Nine Months Ended
September 30, 1997 (unaudited)
--------------------------------------
Net Common Net (Loss) Per
(Loss) Shares Common Share
--------- ---------- ----------------
<S> <C> <C> <C>
Basic EPS:
Net income attributable to common
stock................................ $(125,385) 18,313,638 $(0.01)
Effect of nominal issuances of common
stock options........................ -- 893,110 --
Diluted EPS............................. -- -- --
--------- ---------- ------
Net income attributable to common
stock and common stock options..... $(125,385) 19,206,748 $(0.01)
========= ========== ======
</TABLE>
F-10
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, 1998
------------------------------------
Net Common Net (Loss) Per
(Loss) Shares Common Share
--------- ---------- --------------
<S> <C> <C> <C>
Basic EPS:
Net loss attributable to common stock.... $(394,032) 18,313,638 $(0.02)
Effect of nominal issuances of common
stock options........................... -- 893,110 --
Diluted EPS................................ -- -- --
--------- ---------- ------
Net income attributable to common stock
and common stock options.............. $(394,032) 19,206,748 $(0.02)
========= ========== ======
</TABLE>
Diluted EPS for 1996 and the nine months ended September 30, 1998 and 1997
(unaudited) does not include the impact of non-nominal issuances of common
stock options then outstanding, as the effect of their inclusion would be anti-
dilutive.
Stock-Based Compensation
In 1996, the Company adopted the provisions of SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), and elected to continue the
accounting set forth in Accounting Principles Board No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25") and to provide the necessary pro
forma disclosures as if the fair value method has been applied (Note 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>
For the Years Ended For the Nine Months
December 31, Ended September 30,
--------------------------- ---------------------
1995 1996 1997 1997 1998
------- --------- -------- ----------- ---------
(Unaudited) (Audited)
<S> <C> <C> <C> <C> <C>
Net income (loss).......... $35,767 $(254,466) $297,189 $(125,385) $(394,032)
Foreign currency
translation adjustment.... -- -- -- -- 3,860
------- --------- -------- --------- ---------
Comprehensive income
(loss).................. $35,767 $(254,466) $297,189 $(125,385) $(390,172)
======= ========= ======== ========= =========
</TABLE>
Proposed Public Offering
In connection with its contemplated initial public offering of Common Stock,
the Company has incurred approximately $125,000 in registration related costs
that are being deferred until the consummation of the offering, at which time
they will be charged against additional paid-in capital. If the offering is not
consummated, the deferred registration costs will be expensed. These amounts
are included in deferred registration costs and accrued expenses in the
accompanying consolidated balance sheet as of September 30, 1998.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes standards for the way
F-11
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. This statement is effective for financial statements for periods
beginning after December 15, 1997 and need not be applied to interim periods in
the initial year of application. Comparative information for earlier years
presented is to be restated. The Company does not expect the adoption of this
statement to have a material impact on the Company's results of consolidated
operations, financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities" ("SFAS 133"), which establishes accounting and reporting
standards of derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Company does not
expect the adoption of this standard to have a material effect on the Company's
results of consolidated operations, financial position or cash flows.
Unaudited Interim Consolidated Financial Statements
The unaudited consolidated financial information included herein for the
nine months ended September 30, 1997, has been prepared in accordance with
generally accepted accounting principles for interim financial statements. In
the opinion of the Company, these unaudited consolidated financial statements,
reflect all adjustments necessary, consisting of normal recurring adjustments,
for a fair presentation of such data on a basis consistent with that of the
audited data presented herein. The consolidated results of operations for
interim periods are not necessarily indicative of the results expected for a
full year.
2. ACQUISITIONS
Avalanche Solutions, Inc. and Avalanche Systems, Inc.
In January 1998, the Company purchased a 66 2/3% ownership interest from the
shareholders in a newly formed corporation, Avalanche Solutions, Inc.
("Avalanche Solutions"). In connection with this transaction, Avalanche
Solutions acquired substantially all of the assets of Avalanche Systems, Inc.
("Avalanche Systems") from Fleet Bank National Association and Fleet Bank
Capital Corporation in a foreclosure sale. These assets were seized from
Avalanche Systems, whose shareholders were the holders of the remaining 33 1/3%
of the capital stock of Avalanche Solutions. In April 1998, the Company
purchased this 33 1/3% ownership interest in Avalanche Solutions. The total
consideration for all stock and net assets acquired was approximately
$1,287,000.
These acquisitions have been accounted for under the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
tangible and intangible assets acquired and liabilities assumed on the basis of
their respective fair values on the respective acquisition dates. As a result
of these acquisitions, the Company has recorded goodwill of approximately
$783,000, which is the excess cost of net assets acquired and is being
amortized over a useful life of 20 years.
Furthermore, the Company entered into an employment agreement with one of
the former shareholders of Avalanche Solutions. The employment agreement has a
term through December 2001 and includes a signing bonus and base compensation.
In addition, the former shareholder received fully vested options to purchase
526,912 shares of Common Stock of the Company at an exercise price of $1.00 per
share. In the opinion of management, based upon a third party valuation, the
exercise price was deemed to be lower than the fair market value per share of
the Company's Common Stock at the grant date and, as such, the Company recorded
compensation expense of $1,865,000 for the nine months ended September 30,
1998.
F-12
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CHBi Limited
In May 1998, the Company acquired all of the outstanding stock of London-
based CHBi Limited and, concurrently with the acquisition, CHBi Limited changed
its name to CHBi Razorfish Ltd. The Company paid total consideration of
approximately $2,022,000 in cash for the purchase of CHBi Limited. The
acquisition has been accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the tangible and
intangible net assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date. As a result of this
acquisition, the Company has recorded goodwill of approximately $1,965,000,
which is the excess cost of net assets acquired and is being amortized over a
useful life of 20 years. Furthermore, the CHBi Limited Purchase Agreement calls
for certain earn-out payments to the former shareholders based upon the
achievement of targeted operating performance of CHBi Razorfish Ltd. through
May 2001. No earn-out amounts have been earned to date. Future earnout
payments, if any, will be recorded as additional purchase price and, as such,
an adjustment to goodwill.
Plastic
In June 1998, the Company formed a subsidiary, Razorfish San Francisco, Inc.
("Razorfish San Francisco"), which acquired substantially all of the net assets
of Alpha Online, Inc. d/b/a Plasticweb and Plastic ("Plastic"). In
consideration for the net assets acquired, the Company paid approximately
$657,000 in cash. The acquisition of the assets has been accounted for under
the purchase method of accounting and, accordingly, the purchase price has been
allocated to the tangible and intangible net assets acquired and liabilities
assumed on the basis of their respective fair values on the acquisition date.
As a result of this acquisition, the Company has recorded goodwill of
approximately $277,000, which is the excess cost of net assets acquired and is
being amortized over a useful life of 20 years. Furthermore, the Plastic
Purchase Agreement calls for certain earn-out payments to the former
shareholders based upon the achievement of targeted operating performance of
Razorfish San Francisco through December 2001. No earn-out amounts have been
earned to date. Future earn-out payments, if any, will be recorded as
additional purchase price and, as such, an adjustment to goodwill.
<tag> media
In August 1998, the Company formed a subsidiary, Razorfish Los Angeles, Inc.
("Razorfish Los Angeles"), which acquired substantially all of the net assets
of Titus Anspach Group, LLC d/b/a <tag> media ("<tag> media "). In
consideration for the net assets acquired, the Company paid approximately
$250,000 in cash. The acquisition of the assets has been accounted for under
the purchase method of accounting and, accordingly, the purchase price has been
allocated to the tangible and intangible net assets acquired and liabilities
assumed on the basis of their respective fair values on the acquisition date.
As a result of this acquisition, the Company has recorded goodwill of
approximately $217,000, which is the excess cost of net assets acquired and is
being amortized over a useful life of 20 years. Furthermore, the <tag> media
Purchase Agreement calls for certain earn-out payments to the former
shareholders based upon the achievement of targeted operating performance of
Razorfish Los Angeles through December 2001. No earn-out amounts have been
earned to date. Future earn-out payments, if any, will be recorded as
additional purchase price and, as such, an adjustment to goodwill.
Sunbather
On October 1, 1998, the Company acquired substantially all of the assets of
London-based Sunbather Limited ("Sunbather"), from an administrator appointed
for Sunbather. The net assets were acquired for a cash consideration of
$168,000 and this acquisition will be accounted for under the purchase method
of accounting.
F-13
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The acquisitions described above were valued based on management's estimate
of the fair value of the net assets acquired at the date of acquisition. Costs
in excess of net assets acquired were recorded as intangible assets as follows:
<TABLE>
<CAPTION>
Avalanche
Systems, Inc./
Avalanche CHBi
Solutions, Inc. Limited Plastic <tag>media Sunbather
--------------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Accounts receivable..... $ 85,625 $ 462,706 $238,124 $ -- $ --
Fixed assets............ -- 44,626 132,234 32,954 18,065
Other assets............ 418,680 -- 10,305 -- --
Intangible assets....... 782,569 1,965,377 276,534 216,993 150,135
Current liabilities..... -- (450,817) -- -- --
---------- ---------- -------- -------- --------
Total purchase price.. $1,286,874 $2,021,892 $657,197 $249,947 $168,200
========== ========== ======== ======== ========
</TABLE>
Spray Network AB
In January 1999, the Company acquired all of the issued and outstanding
shares of capital stock of Spray Network AB (the "Spray Acquisition") from
Spray Ventures AB and Communicade in exchange for an aggregate of
19,762,068 shares of Razorfish Common Stock and 50 shares of Razorfish non-
voting Class B Common Stock (the "Class B Shares"). The Class B Shares will be
issued prior to the reincorporation of the Company in Delaware. The shares of
Common Stock issued represented 50.0% of the shares of Razorfish 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.
Pro Forma Results of Operations
The following unaudited pro forma consolidated results of operations
reflects the results of operations for the year ended December 31, 1997 and the
nine months ended September 30, 1998, as if the aforementioned acquisitions had
occurred on January 1, 1997, and after giving effect to purchase accounting
adjustments. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what operating results
would have been had the acquisitions actually taken place on January 1, 1997
and may not be indicative of future operating results.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 1997 September 30, 1998
----------------- ------------------
<S> <C> <C>
Pro forma:
Revenues................ $17,894,546 $21,807,575
Net income (loss)....... (3,979,681) (3,000,569)
Basic net income (loss)
per share.............. (0.10) (0.08)
Diluted net income
(loss) per share....... (0.10) (0.08)
</TABLE>
3. RELATED PARTY TRANSACTIONS
Shareholder Agreement with Omnicom
In September 1996, the Company entered into a Shareholders Agreement with
Communicade (f/k/a JWL Associates Corp.), a wholly-owned subsidiary of Omnicom
Group, Inc. ("Omnicom"), which had previously purchased shares of the Company
from the founders. The Shareholders Agreement stipulates that Omnicom Finance
Inc. ("Omnicom Finance") would provide the
F-14
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company with a line of credit for working capital purposes of up to $2.0
million and additional financing above the $2.0 million line of credit in
connection with the Company's acquisition of "new media companies," as defined,
provided that Communicade remained a shareholder of the Company.
Amounts borrowed under the working capital line of credit bear no interest
on the first $1.0 million of principal amount outstanding and thereafter bear
interest at the rate then charged by Omnicom Finance to its subsidiaries under
Omnicom Finance's cash management program, which was 6.85% and 6.32%,
respectively, as of December 31, 1997 and September 30, 1998. As the first $1.0
million outstanding under the working capital line of credit is non-interest
bearing, the Company has imputed interest on the outstanding amounts based upon
a weighted average imputed interest rate of 6.50%. As such, the Company
recorded a charge to interest expense and a capital contribution of
approximately $49,000 in the nine months ended September 30, 1998. Imputed
interest in all previous periods was deemed to be immaterial by the Company.
The amounts are repayable in full on the earlier of December 31, 2001 or upon
the closing of an initial public offering of the Company's Common Stock. All
outstanding amounts are secured by a priority lien on all of the Company's
assets.
The Company had $0.8 million and $1.0 million of the working capital line of
credit outstanding as of December 31, 1997 and September 30, 1998,
respectively. In addition, the Company had $1.0 million and $3.9 million of the
acquisition funding outstanding as of December 31, 1997 and September 30, 1998,
respectively, in connection with the acquisition of "new media companies."
In connection with the Spray acquisition, the Shareholders Agreement will
terminate and will be replaced by a "New Stockholders Agreement." Pursuant to
the terms of the New Stockholders Agreement, Omnicom Finance is to provide the
working capital line of credit and the acquisition funding to the Company on
the same terms and conditions as set forth in the Shareholders Agreement.
OMNICOM 10% OPTION
In the event of an initial public offering of the Company's Common Stock,
Omnicom has the right, but not the obligation, to purchase from the Company up
to such number of shares of Company Common Stock as shall equal 10% of the then
issued and outstanding Company Stock on a fully diluted basis (after giving
effect to the acquisition) (the "Option Shares"). Omnicom shall exercise the
10% option, in whole or in part, by sending a written notice to the Company
indicating its desire to purchase such Option Shares within 10 days following
notice to Omnicom from the Company that it is substantially prepared to make
the initial filing of the Registration Statement with the Securities and
Exchange Commission. If Omnicom exercises its 10% option, then Omnicom shall be
obligated to purchase and the Company shall be obligated to sell the Option
Shares, at a per share price equal to 80% of the initial public offering price.
RAZORFISH STUDIOS
The Company conducts business with Razorfish Studios ("Studios"). The
majority of Studios' common stock is owned by the majority stockholders of the
Company and certain of these stockholders also hold executive positions at
Studios. On October 17, 1997, the Company assigned to Studios all of its right,
title and interest in and to certain Studios digital media properties owned by
the Company. The cost and fair value of such properties were deemed to be
immaterial by the Company's management and as such, there was no material
effect on the Company's consolidated financial statements as of and for the
year ended December 31, 1997.
The Company also provides certain overhead and administrative functions for
Studios for which the Company is reimbursed. In addition, the Company has
provided certain design and consulting services to Studios at discounted
billing rates. The total revenue earned was not material to the accompanying
consolidated
F-15
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
statements of operations. Amounts owed to the Company from Studios for services
rendered, reimbursable expense and advances totaled $0 and $424,428,
respectively, as of December 31, 1997 and September 30, 1998. The Company
licenses the "Razorfish" trademark and symbol to Studios pursuant to a
trademark license agreement (the "Trademark License"). The Trademark License
contains customary provisions giving the Company the ability to control the use
of the "Razorfish" trademark by Studios. However, because the "Razorfish"
trademark and symbol are closely associated with both Studios and the Company,
the Company's name and reputation could be materially and adversely affected by
content published or actions taken by Studios.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------- September 30,
1996 1997 1998
-------- --------- -------------
<S> <C> <C> <C>
Computer equipment...................... $ 81,090 $ 250,861 $ 563,264
Equipment under capital leases.......... 135,958 290,183 207,155
Furniture and fixtures.................. 59,344 179,152 349,139
Leasehold improvements.................. 32,371 33,972 372,792
-------- --------- ----------
Total property and equipment.......... 308,763 754,168 1,492,350
Less--Accumulated depreciation and
amortization........................... (29,343) (136,608) (338,087)
-------- --------- ----------
Property and equipment, net........... $279,420 $ 617,560 $1,154,263
======== ========= ==========
</TABLE>
Depreciation and amortization aggregated $2,532, $26,812 and $107,261,
respectively, for the three years ended December 31, 1997, $55,256 for the nine
months ended September 30, 1997 (unaudited) and $266,302 for the nine months
ended September 30, 1998.
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
September 30,
1998
-------------
<S> <C>
Goodwill....................................................... $3,241,473
Less--Accumulated amortization............................... (64,552)
----------
Intangible assets, net..................................... $3,176,921
==========
</TABLE>
Amortization aggregated $64,552 for the nine months ended September 30,
1998. The Company did not have any intangible assets prior to January 1, 1998.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------- September 30,
1996 1997 1998
-------- -------- -------------
<S> <C> <C> <C>
Accounts payable............................. $ -- $104,130 $ 629,694
Accrued expenses............................. 66,999 75,902 429,402
Accrued professional fees.................... 60,000 90,000 88,643
-------- -------- ----------
Total...................................... $126,999 $270,032 $1,147,739
======== ======== ==========
</TABLE>
F-16
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. INCOME TAXES
Income before taxes and the provision for taxes on income consisted of the
amounts shown below:
<TABLE>
<CAPTION>
Nine Months
Years Ended December 31, Ended
---------------------------- September 30,
1995 1996 1997 1998
------- --------- --------- -------------
<S> <C> <C> <C> <C>
Income (loss) before income
taxes:
Domestic.................... $47,008 $(311,267) $ 562,152 $(839,563)
International............... -- -- -- 172,836
------- --------- --------- ---------
$47,008 $(311,267) $ 562,152 $ 666,727
======= ========= ========= =========
Provisions for taxes on
income:
Current--
Federal................... $ -- $ (13,365) $(110,105) $ 184,186
State and local........... 6,021 (22,009) (71,720) 192,190
International............. -- -- -- 58,764
Deferred--
Federal................... -- (12,129) (348,856) (378,792)
State and local........... 5,220 (9,298) 795,644 (329,043)
International............. -- -- -- --
------- --------- --------- ---------
$11,241 $ (56,801) $ 264,963 $(272,695)
======= ========= ========= =========
</TABLE>
A reconciliation of the difference between the statutory U.S. Federal Income
Tax Rate and the Company's effective tax rate follows:
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended
------------------ September 30,
1995 1996 1997 1998
---- ----- ---- -------------
<S> <C> <C> <C> <C>
Statutory federal income tax rate........ -- % (34.0)% 34.0% (34.0)%
State and local taxes on income, net of
federal income tax benefit.............. 23.9 (6.6) 12.4 (13.5)
Effect on change from "S" Corp........... -- 28.8 -- --
Other.................................... -- (6.4) 0.7 6.6
---- ----- ---- -----
Effective rate......................... 23.9% (18.2)% 47.1% (40.9)%
==== ===== ==== =====
</TABLE>
The tax effects of temporary differences that give rise to a significant
portion of the deferred income tax asset, net, are as follows:
<TABLE>
<CAPTION>
December 31,
----------------- September 30,
1996 1997 1998
------- --------- -------------
<S> <C> <C> <C>
Current deferred income tax assets
(liabilities), net:
Accrual to cash adjustments............ $16,206 $(466,575) $ (736,326)
Noncurrent deferred tax asset
(liabilities), net:
Stock options.......................... -- 35,993 1,013,579
------- --------- ----------
Total deferred income taxes, net..... $16,206 $(430,582) $ 277,253
======= ========= ==========
</TABLE>
F-17
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the Company's assets and
liabilities. Deferred tax assets result principally from recording certain
expenses in the financial statements, which are not currently deductible for
tax purposes and differences between the tax and book basis of assets and
liabilities recorded in connection with the acquisitions. Deferred tax
liabilities result principally from expenses which are currently deductible for
tax purposes, but have not yet been expensed in the financial statements.
The Company has concluded that it is probable that it will be able to
realize these net deferred tax assets in future periods.
On September 18, 1996, pursuant to a Shareholders Agreement (Note 3), the
Company's "S" Corporation status was terminated and the Company began
operations as a "C" Corporation. Accordingly, the Company became subject to
federal and state income taxes and the retained deficit of the Company was
transferred to additional paid-in capital. During the period from January 1,
1996 to September 18, 1996, the net loss incurred was $180,767. For the period
from September 19, 1996 to December 31, 1996, the net loss incurred was
$73,699.
As described above, the Company began operations as a "C" Corporation on
September 18, 1996. The following unaudited pro forma income tax information
has been determined as if the Company operated as a "C" Corporation from its
inception, without contemplating any applicable tax laws related to the
utilization of net operating losses. No pro forma income tax provision is
presented for the year ended December 31, 1997 or the nine months ended
September 30, 1997 and 1998 as the Company was operating as a "C" Corporation
during those periods.
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1995 1996
------- ----------
<S> <C> <C>
Federal tax provision (benefit) at statutory rate........ $15,983 $(105,831)
State income taxes, net of federal benefit............... 4,230 (28,014)
------- ----------
$20,213 $(133,845)
======= ==========
</TABLE>
Certain goodwill related to international acquisitions may be deemed
nondeductible under Internal Revenue Service Regulations.
7. STOCKHOLDERS' EQUITY
Common Shares
The Company has 47,000,000 authorized shares of Common Stock, of which
18,313,638 were issued and outstanding as of December 31, 1997 and September
30, 1998, respectively.
In connection with the formation of the Company, the Company issued
18,181,812 shares of Common Stock to its founders.
On September 16, 1996, the founder of the Company entered into a Stock
Purchase Agreement with Communicade (f/k/a/ JWL Associates Corp.) pursuant to
which they sold shares of Common Stock to Communicade. Communicade made a cash
contribution of $500,000 to the Company without the issuance of any shares of
capital stock to it by the Company.
On February 24, 1997, the Company issued an aggregate of 131,826 shares of
Common Stock to seven employees pursuant to the terms of the Company's 1997
Stock Option and Incentive Plan, as amended (the "Stock Option Plan"), and
Stock Grant Agreements entered into by the Company and each such employee.
F-18
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company issued the shares in consideration for services rendered to the
Company by such employees and as such, the Company recorded compensation
expense of $13,484 for the year ended December 31, 1997, based upon a third-
party valuation of the fair market value of the Company's Common Stock. Each
Stock Grant Agreement also provided that each of the employees enter into a
Stock Restriction Agreement with the Company. The Stock Restriction Agreement
provides that the holder of the shares of Common Stock will not sell, assign,
pledge or otherwise transfer the shares without the written consent of the
Company.
STOCK SPLITS
On February 27, 1997, the Board of Directors authorized a 30,000-to-1 stock
split of the Company's Common Stock and changed the par value to $0.01 per
share. On April 30, 1998, the Board of Directors authorized a 1.515151-to-1
stock split. On December 14, 1998 the Board of Directors authorized a 2-to-1
stock split of the Company's issued Common Stock and increased the authorized
share capital to 47,000,000. In connection with the split, each holder of the
Company's Common Stock Options amended their respective option agreement to
waive their right to have their options split effected under this stock split.
All references in the accompanying consolidated financial statements and
footnotes have been retroactively restated to give effect to these stock
splits.
STOCK OPTIONS
Under the terms of the 1997 Stock Option Plan 2,345,096 shares of common
stock of the Company have been reserved for:
a. incentive stock options,
b. non-qualified stock options (incentive and non-qualified stock
options are collectively referred to as "Options"),
c. restricted stock or
d. any combination thereof.
Awards may be granted to such directors, employees and consultants of the
Company (collectively "Key Persons") as the Board of Directors shall in its
discretion select. Only employees of the Company are eligible to receive grants
of incentive stock options.
Options granted under the Stock Option Plan typically vest annually over a
three-year period and expire ten years from the date of grant.
The Company accounts for the Stock Option Plan under APB Opinion No.25 and,
accordingly, compensation cost of $65,335 and $2,140,819, respectively, has
only been recognized for its stock options granted below fair market value for
the year ended December 31, 1997 and for the nine months ended September 30,
1998, respectively, in the accompanying consolidated financial statements. No
options were granted prior to 1997.
F-19
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Had compensation for the Stock Option Plan been determined consistent with
the provisions of SFAS No.123, the effect on the Company's net income (loss)
and basic and diluted net income (loss) per share would have been changed to
the following pro forma amounts:
<TABLE>
<CAPTION>
000'S OMITTED EXCEPT PER SHARE DATA
------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
<S> <C> <C>
Net income (loss), as reported........ $ 297,189 $ (394,032)
Net income (loss), pro forma.......... (4,289,536) (8,043,734)
Basic income (loss) per share, as
reported............................. 0.02 (0.02)
Basic income (loss) per share, pro
forma................................ (0.23) (0.44)
Diluted income (loss) per share, as
reported............................. 0.02 (0.02)
Diluted income (loss) per share, pro
forma................................. (0.22) (0.42)
</TABLE>
A summary of the status of the Stock Option Plan as of and for the period
ended September 30, 1998 and the year ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
---------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Shares under option, beginning
of period.................... -- $1.00 907,763 $1.00
Options granted............... 907,763 1.00 894,165 2.60
Options exercised............. -- 0.00 -- 0.00
Shares under option, end of
period....................... 907,763 1.00 1,801,928 1.74
Options exercisable at period-
end.......................... -- 0.00 746,575 1.00
Weighted average fair value of
options granted............... -- 4.41 -- 2.96
</TABLE>
The fair market value of each option grant has been estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Expected option lives............................. 5 years 5 years
Risk free interest rates.......................... 4.73% 4.73%
Expected volatility............................... 83.90% 83.90%
Dividend yield.................................... -- --
</TABLE>
The following table summarizes information about options outstanding and
options exercisable at September 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.00.................. 660,913 8 years $1.00 500,000 $1.00
1.00.................. 409,474 9 years 1.00 246,575 1.00
1.00 to 10.00......... 731,541 10 years 2.67 -- 0.00
--------- -------
1,801,928 746,575
========= =======
</TABLE>
F-20
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. SEGMENT REPORTING
The Company began operations outside of the United States during the nine
months ended September 30, 1998 through its acquisition of CHBi Limited. A
summary of the Company's operations by geographical area as of September 30,
1998 and for the nine months then ended is presented below:
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL CONSOLIDATED
------------- ------------- ------------
<S> <C> <C> <C>
Revenues........................... $8,198,111 $919,701 $ 9,117,812
Operating profit (loss)............ (839,563) 172,836 (666,727)
Net income (loss).................. (508,104) 114,072 (394,032)
Identifiable assets................ 9,805,738 815,627 10,621,365
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company is committed under operating leases principally for office space
and equipment. Certain leases are subject to rent reviews and require payment
of expenses under escalation clauses. Rent expense and equipment rental were
$34,677, $85,807 and $185,175, respectively, for the three years ended December
31, 1997 and $485,272 for the nine months ended September 30, 1998. Future
minimum base rents under terms of noncancellable operating leases, reduced by
rents to be received from existing noncancellable subleases, are as follows:
<TABLE>
<CAPTION>
RENTAL RENTAL NET RENT
PAYMENTS INCOME EXPENSE
-------- ---------- ---------
<S> <C> <C> <C>
Year ending December 31:
1998........................................ $656,669 $ 66,240 $ 590,429
1999........................................ 724,320 264,960 459,360
2000........................................ 742,223 264,960 477,263
2001........................................ 701,369 264,960 436,409
2002........................................ 233,160 264,960 (31,800)
Thereafter.................................. 801,375 1,104,000 (302,625)
<CAPTION>
RENTAL RENTAL NET RENT
PAYMENTS INCOME EXPENSE
-------- ---------- ---------
<S> <C> <C> <C>
Nine Months Ended September 30:
1999........................................ $543,241 $ 198,720 $ 344,521
2000........................................ 556,668 198,720 357,948
2001........................................ 533,585 198,720 334,865
2002........................................ 174,390 198,720 (24,330)
Thereafter.................................. 611,295 839,040 (227,745)
</TABLE>
EMPLOYMENT AGREEMENTS
From September 1996 through July 1998, the Company entered into various
employment agreements with certain senior executives, the expirations of which
extend through 2001. The aggregate minimum base salaries under these agreements
are approximately $692,000, $692,000 and $126,000 for the years ended September
30, 1999, 2000 and 2001, respectively, for those agreements with terms in
excess of one year at September 30, 1998.
F-21
<PAGE>
Subsequent to September 30, 1998, the Company entered into various
employment agreements with certain senior executives of Spray Network AB, the
expirations of which extend through December 31, 2001. The aggregate minimum
base salaries under these agreements are approximately $326,000, $435,000,
$435,000 and $109,000 for the years ended September 30, 1999, 2000, 2001 and
2002, respectively.
Litigation
The Company, from time to time, becomes involved in various routine legal
proceedings in the ordinary course of its business. The Company believes that
the outcome of all pending legal proceedings and unasserted claims in the
aggregate will not have a material adverse effect on its consolidated results
of operations, consolidated financial position or liquidity.
F-21--1
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. CAPITAL LEASE OBLIGATIONS
At December 31, 1997 and September 30, 1998 the Company was committed under
capital leases, principally for computer equipment and office equipment. The
assets and liabilities under the capital leases are recorded at the lower of
the present value of minimum lease payments or the fair market value of the
assets. The assets are depreciated over their estimated useful lives. The
interest rate on the capital leases ranges from 11.5% to 16.7%.
Future minimum payments under the lease agreement are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998.......................................................... $89,596
1999.......................................................... 61,699
2000.......................................................... 7,058
-------
Total minimum lease payments................................ 158,353
Less--
Amounts representing interest............................... 9,888
Current portion............................................. 71,803
-------
Long term portion......................................... $76,662
=======
Nine months ending September 30:
1999.......................................................... $70,040
2000.......................................................... 9,869
-------
Total minimum lease payments................................ 79,909
Less--
Amounts representing interest............................... 3,093
Current portion............................................. 54,754
-------
Long term portion......................................... $22,062
=======
</TABLE>
12. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan covering all of its eligible
employees in the U.S. The Plan was effective from January 1, 1998 and is
qualified under Section 401(k) of the Internal Revenue Code of 1986. Employees
may begin participation on monthly enrollment dates provided that they have
reached 18 years of age and three months of service. The Company may make
matching and/or profit sharing contributions to the Plan at its discretion.
There is no contribution expense for the nine months ended September 30, 1998.
13. SUBSEQUENT EVENTS
The Company is pursuing an initial public offering of its securities. The
offering contemplates the sale of shares of common stock at an offering price
to be determined before underwriting commissions and offering expenses.
On December 16, 1998, an executive officer of the Company and former
shareholder of Avalanche Solutions, Inc. exercised 500,000 share options at an
exercise price of $1.00 per share for a total cash consideration of $500,000.
In January 1999, the Company sent notice to Omnicom that it is substantially
prepared to make the initial filing of the Registration Statement with the
Securities and Exchange Commission. Omnicom Group, Inc.
F-22
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
has 10 days following the notice to send a written notice to the Company
indicating its desire to purchase their 10% option of the then issued and
outstanding Company stock.
In January 1999, the Company's Board of Directors adopted and the Company's
stockholders approved a stock incentive plan. The 1999 Stock Incentive Plan
(the "1999 Stock Incentive Plan"), provides for the issuance of a total of up
to 1,200,000 shares of Common Stock. Generally, shares subject to an award that
remain unissued upon expiration, cancellation or forfeiture of the award are
available for other awards under the 1999 Stock Incentive Plan.
F-23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Spray Network AB:
We have audited the accompanying consolidated balance sheets of Spray
Network AB (a Kingdom of Sweden corporation) and subsidiaries as of December
31, 1996 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the three years ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Spray Network AB and
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations for the three years ended December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
January 18, 1999
F-24
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's omitted except share and per share data)
<TABLE>
<CAPTION>
December 31,
------------- September 30,
1996 1997 1998
------ ------ -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents....................... $ 240 $ 581 $ 329
Accounts receivable............................. 396 996 1,739
Unbilled charges................................ 449 583 792
Prepaid expenses and other current assets....... 57 241 1,043
------ ------ ------
Total current assets.......................... 1,142 2,401 3,903
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $49, $302 and $508 (unaudited),
respectively..................................... 97 1,015 1,338
INTANGIBLES AND OTHER ASSETS...................... -- 1,248 1,406
------ ------ ------
Total assets.................................. $1,239 $4,664 $6,647
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable................................ $ 103 $ 559 $ 579
Accrued expenses................................ 192 583 1,215
Income taxes payable............................ 143 136 --
Related party debt.............................. -- 481 1,400
Current portion of long-term debt............... -- 16 16
Other current liabilities....................... 368 772 1,465
------ ------ ------
Total current liabilities..................... 806 2,547 4,675
------ ------ ------
NONCURRENT LIABILITIES:
Deferred tax liabilities........................ 164 6 --
Long-term debt.................................. -- 45 33
Minority interest............................... -- 88 212
Other noncurrent liabilities.................... -- 361 376
------ ------ ------
Total noncurrent liabilities.................. 164 500 621
------ ------ ------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $15, $13 and $13 par value, 8,000
shares authorized, 1,000, 2,278 and 2,815
shares issued and outstanding at
December 31, 1996 and 1997 and September 30,
1998
(unaudited), respectively...................... 15 32 39
Additional paid-in capital...................... 3 2,360 3,154
Cumulative foreign currency translation
adjustments.................................... 13 (68) (84)
Retained earnings (deficit)..................... 238 (707) (1,758)
------ ------ ------
Total stockholders' equity.................... 269 1,617 1,351
------ ------ ------
Total liabilities and stockholders' equity.... $1,239 $4,664 $6,647
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-25
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000'S OMITTED)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEARS ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ---------------
1995 1996 1997 1997 1998
------ ------ ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................................ $2,192 $5,319 $7,818 $4,703 $10,961
DIRECT SALARIES AND COSTS............... 1,734 4,391 7,258 3,735 9,436
------ ------ ------ ------ -------
Gross profit.......................... 458 928 560 968 1,525
SALES AND MARKETING..................... 97 350 395 70 509
GENERAL AND ADMINISTRATIVE.............. -- 256 961 1,041 1,987
AMORTIZATION OF GOODWILL................ -- -- 93 -- 219
------ ------ ------ ------ -------
Income (loss) from operations......... 361 322 (889) (143) (1,190)
INTEREST INCOME (EXPENSE), net.......... 1 -- 84 14 (37)
------ ------ ------ ------ -------
Income (loss) before minority interest
and income taxes..................... 362 322 (805) (129) (1,227)
MINORITY INTEREST....................... -- -- 88 -- 120
------ ------ ------ ------ -------
Income (loss) before provision
(benefit) income taxes............... 362 322 (717) (129) (1,107)
PROVISION (BENEFIT) FOR INCOME TAXES.... 66 241 (24) 157 --
------ ------ ------ ------ -------
Net income (loss)..................... $ 296 $ 81 $ (693) $ (286) $(1,107)
====== ====== ====== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-26
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(000's omitted, except share amounts)
<TABLE>
<CAPTION>
Cumulative
Common Stock Additional Foreign Retained Total
------------- Paid-in Currency Earnings Stockholders'
Shares Amount Capital Translation (Deficit) Equity
------ ------ ---------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
1995................... 1,000 $15 $ -- $-- $ 144 $ 159
Transfers of amounts
not available for
distribution......... -- -- 3 -- (3) --
Foreign currency
translation
adjustment........... -- -- -- 21 -- 21
Net income............ -- -- -- -- 296 296
----- --- ------ ---- ------- ------
BALANCE, December 31,
1995................... 1,000 15 3 21 437 476
Cash dividends........ -- -- -- -- (280) (280)
Foreign currency
translation
adjustment........... -- -- -- (8) -- (8)
Net income............ -- -- -- -- 81 81
----- --- ------ ---- ------- ------
BALANCE, December 31,
1996................... 1,000 15 3 13 238 269
Cash dividends........ -- -- -- -- (223) (223)
Contribution of shares
in Spray Services AB-
Group................ 1,162 15 1,952 -- -- 1,967
Issuance of common
stock................ 60 1 194 -- -- 195
Debt converted into
common stock......... 56 1 181 -- -- 182
Transfers of amounts
not available for
distribution......... -- -- 30 -- (29) 1
Foreign currency
translation
adjustment........... -- -- -- (81) -- (81)
Net loss.............. -- -- -- -- (693) (693)
----- --- ------ ---- ------- ------
BALANCE, December 31,
1997................... 2,278 32 2,360 (68) (707) 1,617
Issuance of common
stock................ 414 5 -- -- -- 5
Exercise of common
stock options........ 123 2 398 -- -- 400
Debt forgiven by
shareholder.......... -- -- 335 -- -- 335
Transfers of amounts
not available for
distribution......... -- -- 61 -- (61) --
Foreign currency
translation
adjustment........... -- -- -- (16) -- (16)
Other................. 117 117
Net loss (unaudited).. -- -- -- -- (1,107) (1,107)
----- --- ------ ---- ------- ------
BALANCE, September 30,
1998 (unaudited)....... 2,815 $39 $3,154 $(84) $(1,758) $1,351
===== === ====== ==== ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-27
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
<TABLE>
<CAPTION>
For the Years
Ended December For the Nine Months
31, Ended September 30,
------------------- ---------------------
1995 1996 1997 1997 1998
----- ---- ------ --------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)................ $ 296 $ 81 $ (693) $ (286) $ (1,107)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities--
Deferred income taxes........... 45 118 (158) 49 (6)
Writeoff of leasehold
improvements................... -- -- -- -- 279
Depreciation and amortization... 16 33 407 144 671
Minority interests.............. -- -- 88 -- 124
Changes in operating assets and
liabilities--
(Increase) in accounts
receivable...................... (492) 358 (600) (2,401) (743)
(Increase) decrease in unbilled
charges......................... -- (449) (134) 449 (209)
(Increase) in prepaid expenses
and other current assets........ (58) 6 (184) (758) (802)
Increase (decrease) in accounts
payable......................... 109 (74) 456 1,677 20
Increase in accrued expenses..... 109 92 391 242 632
Increase (decrease) in income
taxes payable................... -- 118 (7) (75) (136)
Increase in noncurrent
liabilities..................... -- -- 361 396 15
Increase in other current
liabilities..................... 68 158 404 1,211 693
----- ---- ------ --------- ----------
Net cash provided by (used in)
operating activities......... 93 441 331 648 (569)
----- ---- ------ --------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures............. (47) (95) (502) (347) (990)
Acquisitions, net of cash
acquired........................ -- -- (103) (103) (436)
----- ---- ------ --------- ----------
Net cash used in investing
activities................... (47) (95) (605) (450) (1,426)
----- ---- ------ --------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Cash dividends paid.............. -- (280) (223) (223) --
Related party debt, net.......... -- -- 663 663 1,244
Long-term debt, net.............. -- -- 61 61 (12)
Exercise of common stock
options......................... -- -- -- -- 400
Issuance of common stock......... -- -- 195 195 --
Other, net....................... -- -- -- (130) 127
----- ---- ------ --------- ----------
Net cash provided by (used in)
financing activities......... -- (280) 696 566 1,759
----- ---- ------ --------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS......... 21 (8) (81) (65) (16)
----- ---- ------ --------- ----------
Net increase (decrease) in
cash and cash equivalents.... 67 58 341 699 (252)
CASH AND CASH EQUIVALENTS,
beginning of period............... 115 182 240 240 581
----- ---- ------ --------- ----------
CASH AND CASH EQUIVALENTS, end of
period............................ $ 182 $240 $ 581 $ 939 $ 329
===== ==== ====== ========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Income taxes.................... $ -- $ 2 $ 62 $ 51 $ 74
Interest........................ 6 3 21 9 84
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITY:
Common stock issued for
acquisition..................... $ -- $-- $1,967 $ 1,967 $ --
Conversion of debt to common
stock........................... -- -- 182 182 5
Debt forgiven by shareholder..... -- -- -- -- 335
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-28
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000's omitted, except share and per share data)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Spray Network AB ("Spray Network"), formerly known as Tetre AB prior to
September 1, 1997 (Note 2), is incorporated under the laws of the Kingdom of
Sweden. Spray Network, its wholly-owned and majority-owned subsidiaries located
in Stockholm, Helsinki, and Hamburg, and a joint venture in Oslo (collectively,
the "Company"), are a leading international digital communications solutions
provider. The Company creates digital communications solutions to help its
clients increase sales, improve communications and create brand identities. The
Company's integrated service offerings include strategic consulting, design of
information architecture and end-user interfaces and customization and
implementation of enabling software technologies. The Company primarily uses
Internet-based technologies to create digital communications solutions and is
building capabilities in additional technologies, such as wireless and
satellite, to create solutions for a variety of media including personal
digital assistants and TV set-top boxes.
In January 1999, the Company's shareholders, Spray Ventures AB (a Kingdom of
Sweden corporation) and Communicade, Inc. (a Delaware corporation) entered into
an agreement to sell all of the issued and outstanding shares of common stock
of Spray Network to Razorfish, Inc. (a New York corporation) ("Razorfish") in
exchange for an aggregate of 19,762,068 shares of Razorfish common stock and an
aggregate of 50 shares of Razorfish non-voting Class B common stock. The shares
of Razorfish common stock issued represent 50% of the shares of Razorfish
common stock on a fully-diluted basis, based upon Spray Network having a fair
market value of $40,000, as determined by a third-party valuation. Certain
insignificant subsidiaries of the Company were not included in the sale of the
Company as ownership was retained by the former shareholders.
Principles of Consolidation
The accompanying consolidated financial statements include the operations of
Spray Network and its wholly-owned, majority-owned subsidiaries and controlled
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions, specifically for allowance for doubtful accounts for accounts
receivable, the useful lives of fixed assets and intangible assets, that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Revenue Recognition
Revenues are recognized as services are rendered on the percentage-of-
completion method of accounting based on the ratio of costs incurred to total
estimated costs. Revenues derived from fixed-fee contracts are recognized as
services are rendered. Unbilled charges represent labor costs incurred and
estimated earnings, production and other client reimbursable costs. Advanced
billings represent billings of production and other client reimbursable out-of-
pocket costs in excess of revenues recognized. Amounts billed to clients in
excess of revenues recognized to date are classified as deferred revenues.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
F-29
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated on a straight-line
basis over estimated useful lives of three to ten years. Leasehold improvements
are amortized utilizing the straight-line method over the lessor of the
estimated useful life of the asset or the remaining term of the related lease.
Intangible Assets
Goodwill, which represents the excess of the purchase price over the fair
value of the net assets acquired, is included in intangible assets and is
presently being amortized over a period of five years on a straight-line basis.
Management has evaluated the amortization periods in the current period and has
determined that no impairment currently exists. These amortization periods will
be evaluated by management on a continuing basis, and will be adjusted if the
lives of the related intangible assets are impaired.
Accounting for Long-Lived Assets
The Company accounts for long-lived assets under the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This statement establishes financial accounting and reporting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used, and for long-lived assets and
certain identifiable tangibles to be disposed of. Management has performed a
review of all long-lived assets and has determined that no impairment of the
respective carrying value has occurred as of December 31, 1997. Subsequent to
year end, and as a result of the decision to change office premises in 1998,
management determined that certain leasehold improvements totaling
approximately $279 (unaudited) were permanently impaired and as such, recorded
a charge for the entire amount.
Investments in Affiliates
Investments in affiliates, included in other assets in the accompanying
consolidated balance sheet, represent purchased interest of less than 20% and
are accounted for on the cost method. The Company reviews these investments for
impairment whenever events or changes in circumstances indicate that the
carrying amounts of the assets may not be recoverable.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their tax
bases for operating profit and tax liability carryforward. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets or liabilities of
a change in tax rates is recognized in the period that the tax change occurs.
F-30
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Foreign Currency Translation
All assets and liabilities of Spray Network and its subsidiaries are
translated into U.S. dollars at fiscal year-end exchange rates. Income and
expense items are translated at average exchange rates prevailing during the
fiscal year. The resulting translation adjustments are recorded as a component
of shareholders' equity in the accompanying consolidated financial statements.
Stockholders' Equity
Certain subsidiaries and investments of the Company have had other fiscal
years than that ended December 31. Local tax returns and statutory reports have
been prepared under Swedish GAAP and tax practice and submitted to the
authorities for each legal year-end. Stockholders' equity as reported in these
consolidated financial statements has been presented under U.S. GAAP. For these
reasons, the stockholders' equity reported in these consolidated financial
statements may not be immediately available for distribution to stockholders
under the laws of Sweden.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to the short-term maturity of these
instruments. The carrying amounts of long-term debt and related party debt,
approximate fair value.
Business Concentrations and Credit Risk
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
primarily concentrated in Sweden. The Company performs ongoing credit
evaluations, generally does not require collateral and establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of
customers, historical trends and other information. To date, such losses have
been within management's expectations.
For the year ended December 31, 1995, one client accounted for 65% of total
revenues.
For the year ended December 31, 1996 two clients accounted for 27% and 11%,
respectively, of total revenues.
For the year ended December 31, 1997 two clients accounted for 17% and 12%,
respectively, of total revenues.
F-31
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive Income
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which established standards for reporting and displaying comprehensive
income and its components in a financial statement so that it is displayed with
the same prominence as other financial statements. The components of
comprehensive income are as follows:
<TABLE>
<CAPTION>
For the
For the Nine Months
Years Ended Ended
December 31, September 30,
---------------- --------------
1995 1996 1997 1997 1998
---- ---- ----- ----- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net income (loss)......................... $296 $81 $(693) $(286) $(1,107)
Foreign currency translation adjustment... 21 (8) (81) (65) (16)
---- --- ----- ----- -------
Comprehensive income (loss)............. $317 $73 $(774) $(351) $(1,123)
==== === ===== ===== =======
</TABLE>
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This statement establishes standards for the way the public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
This statement is effective for financial statements for periods beginning
after December 15, 1997 and need not be applied to interim periods in the
initial year of application. Comparative information for earlier years
presented is to be restated. The Company does not expect the adoption of this
statement to have a material impact on the Company's results of consolidated
operations, financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company does not expect the
adoption of this standard to have a material effect on the Company's results of
consolidated operations, financial position or cash flows.
Unaudited Interim Consolidated Financial Statements
The unaudited consolidated financial information included herein as of
September 30, 1998 and for the nine months ended September 30, 1997 and 1998,
have been prepared in accordance with generally accepted accounting principles
for interim financial statements. In the opinion of the Company, these
unaudited consolidated financial statements reflect all adjustments necessary,
consisting of normal recurring adjustments, for a fair presentation of such
data on a basis consistent with that of the audited data presented herein. The
consolidated results of operations for interim periods are not necessarily
indicative of the results expected for a full year.
2. ACQUISITIONS
On September 1, 1997, the Company acquired the Spray Services AB-Group from
Spray Ventures AB (formerly Spray Interactive Media AB). Payment was made by
means of a new share issue of 1,162 shares in the Company (then known as Tetre
AB), which subsequently changed its name to Spray Network AB, which represented
51% of the then outstanding common stock of the Company. These shares were at
the time deemed to have a fair market value
F-32
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of approximately $1,967. In addition, there were transaction costs associated
with the acquisition amounting to $86, which have been added to the cost of the
investment for a total purchase price of $2,053. The difference between these
amounts and the recorded net assets of the acquired entity has been recorded as
goodwill and will be amortized over five years, commencing from the acquisition
date.
During 1997, the Company invested in subsidiaries in Germany, Finland and
Norway. Goodwill arising from these investments will be amortized over five
years, commencing from the acquisition date. For each of these investments the
Company's investment is for less than 100% of the shares, and thus the minority
interest in equity is shown as a liability. Losses have been incurred for all
three foreign subsidiaries. In accordance with U.S. GAAP, no receivable from
minority shareholders has been recorded when the losses have resulted in a
negative shareholders' equity. The unrecorded receivable from minority
shareholders as of December 31, 1997, amounts to $66 and relates to the
investment in a Norwegian subsidiary.
The Spray Services AB-Group acquisition described above was valued based on
management's estimate of the fair value of the assets acquired at the date of
acquisition. Costs in excess of net assets acquired were recorded as goodwill
as follows:
<TABLE>
<S> <C>
Net assets acquired................................................. $ 733
Intangible assets................................................... 1,234
Acquisition costs................................................... 86
------
Total purchase price.............................................. $2,053
======
</TABLE>
Pro Forma Results of Operations
The following unaudited pro forma consolidated results of operations reflect
the results of operations for the years ended December 31, 1997 and 1996, as if
the aforementioned Spray Services AB-Group acquisition had occurred on January
1, 1997 and 1996, and after giving effect to purchase accounting adjustments.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of what operating results would have been had the
acquisitions actually taken place on January 1, 1997, and may not be indicative
of future operating results.
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------
1996 1997
------ -------
<S> <C> <C>
Pro forma:
Revenues................................................ $8,036 $ 8,955
Net loss................................................ (105) (1,175)
</TABLE>
3. RELATED PARTY TRANSACTIONS
Convertible Debt
In June 1997, the Company entered into a convertible debt agreement with its
managing director for approximately $182, bearing interest at 2% and payable on
December 31, 1997. Prior to the repayment date, the Company converted the full
amount into 56 shares of common stock at a per share value of approximately
$3,000.
In June 1997, the Company entered into several convertible debt agreements
with shareholders and officers of the Company. The aggregate total of loans
received by the Company was approximately $91. The loans
F-33
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
accrued interest at 2% per annum, were payable by December 31, 1997 and the
holders were granted an aggregate total of 138 options to purchase 138 shares
of the Company's common stock at a price of $3,277 per share, with an exercise
period of April 27, 1998 to June 30, 2001. All of the loans with interest were
repaid prior to December 31, 1997, except for a loan with the managing director
of the Company for approximately $22, which was converted to a demand note
payable bearing interest at 5% per annum and repaid subsequent to December 31,
1997. In connection with the convertible loans, a total of 123 options have
been exercised subsequent to December 31, 1997 for total proceeds of
approximately $400. The remaining 15 options were cancelled due to the
termination of certain employees by the Company.
In September 1997, the Company entered into a convertible debt agreement
with Spray Ventures AB for $131.00, bearing interest at 2% and payable on
December 31, 1997. In connection with the loan, Spray Ventures was granted 138
options to purchase 138 shares of the Company's common stock at a price of
$3,277 per share with an exercise period of April 27, 1998 to June 30, 2001.
The Company subsequently paid this amount.
The Company imputed interest expense on the aforementioned loans, as these
loans were granted to the Company at rates below the market rate available to
the Company from third parties. The fair market value of the options issued in
connection with the convertible debt agreements was determined to be immaterial
and, as such, no charge was taken for such options.
Demand Notes Payable
In September 1997, the Company entered into two demand note agreements two
stockholders for an aggregate amount of approximately $328, bearing interest at
9.5% and payable on demand. These amounts were paid subsequent to December 31,
1997.
Subsequent to December 31, 1997, the Company received advances totaling
approximately $335 (unaudited) from Spray Ventures AB. These advances were
subsequently forgiven by Spray Ventures AB and recorded as a capital
contribution in the accompanying consolidated statement of stockholders' equity
(unaudited) in 1998.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December
31,
----------- September 30,
1996 1997 1998
---- ------ -------------
(Unaudited)
<S> <C> <C> <C>
Computer equipment................................ $146 $ 778 $1,307
Leasehold improvements............................ -- 539 539
---- ------ ------
Total property and equipment.................... 146 1,317 1,846
Less--Accumulated depreciation and amortization... 49 302 508
---- ------ ------
Property and equipment, net..................... $ 97 $1,015 $1,338
==== ====== ======
</TABLE>
Depreciation and amortization aggregated $317, $33 and $16 for the years
ended December 31, 1997, 1996 and 1995, respectively.
F-34
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
(Unaudited)
<S> <C> <C>
Goodwill.......................................... $1,337 $1,778
Less--Accumulated amortization.................. 89 372
------ ------
Intangible assets, net........................ $1,248 $1,406
====== ======
</TABLE>
Amortization aggregated $89 for the year ended December 31, 1997.
6. LONG-TERM DEBT:
Long-term debt consists of a loan from an outside lender in the original
amount of approximately $66. The loan is payable in equal monthly installments
and bears interest at 11.05%.
Maturities of long-term debt outstanding as of the year ended December 31,
1997 are as follows:
<TABLE>
<S> <C>
1998................................................................. $16
1999................................................................. 16
2000................................................................. 16
2001................................................................. 13
---
$61
===
</TABLE>
7. INCOME TAXES
Income before taxes and the provision for taxes on income consisted of the
amounts shown below:
<TABLE>
<CAPTION>
Years Ended Nine Months
December 31, Ended
---------------- September 30,
1995 1996 1997 1998
----- ---- ----- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Income (loss) before income taxes:
United States................................ $ -- $ -- $(281) $ (270)
International................................ 362 322 (436) (837)
----- ---- ----- -------
$ 362 $322 $(717) $(1,107)
===== ==== ===== =======
Provisions (benefits) for taxes on income:
Current--
International.............................. $ 18 $124 $ 112 $ 106
U.S. Federal............................... -- -- -- --
U.S. state and local....................... -- -- -- --
Deferred--
International.............................. 48 117 (136) (206)
U.S. Federal............................... -- -- -- --
U.S. state and local....................... -- -- -- --
----- ---- ----- -------
Valuation Allowance........................ -- -- -- (100)
----- ---- ----- -------
$ 66 $241 $ (24) $ --
===== ==== ===== =======
</TABLE>
F-35
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the difference between the statutory Swedish Income Tax
Rate and the Company's effective tax rate follows:
<TABLE>
<CAPTION>
Years Ended Nine Months
December 31, Ended
------------------- September 30,
1995 1996 1997 1998
---- ---- ----- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Statutory U.S. federal income tax rate.... 34.0 % 34.0 % 34.0 % 34.0 %
U.S. state and local taxes on income, net
of U.S. federal income tax benefit....... -- -- -- --
Swedish tax rate adjustment............... -- (6.0) (6.0) (6.0)
International subsidiaries' tax rates less
federal statutory rate................... (6.0) 40.8
Loss without benefit...................... -- -- (28.0) (28.0)
Other..................................... 9.8 8.0 (3.3) --
---- ---- ----- -----
Effective Rate.......................... 18.2 % 74.8 % (3.3)% -- %
==== ==== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to a significant
portion of the deferred income tax asset, net, are as follows:
<TABLE>
<CAPTION>
December September
31, 30,
----------- -----------
1996 1997 1998
----- ---- -----------
(Unaudited)
<S> <C> <C> <C>
Current deferred income tax assets (liabilities)
net:
Net operating losses........................... $ -- $ 15 $ 13
Depreciation................................... -- 12 78
Accruals....................................... (124) (6) --
Other, net..................................... (40) 26 9
Noncurrent deferred tax asset (liabilities),
net............................................. -- -- --
----- ---- ----
(164) 47 100
Less: valuation allowance -- 53 100
----- ---- ----
Total deferred income taxes, net............... $(164) $ (6) $--
===== ==== ====
</TABLE>
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the Company's assets and
liabilities. Deferred tax assets result principally from recording certain
expenses in the financial statements, which are not currently deductible for
tax purposes, and differences between the tax and book bases of assets and
liabilities recorded in connection with the acquisitions. Deferred tax
liabilities result principally from expenses which are currently deductible for
tax purposes, but have not yet been expensed in the financial statements.
The Company has concluded that it is probable that it will be not able to
realize its net deferred tax asset in future periods, as such, has recorded a
full valuation allowance against such assets.
F-36
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. STOCKHOLDERS' EQUITY
Common Shares
The Company sold 60 shares of its common stock in June 1997, at a price of
$3.25 per share, for total proceeds of $195.
Subsequent to December 31, 1997, the Company issued 414 shares of common
stock to its majority stockholder as consideration for the purchase of a
subsidiary of the majority shareholder. The value of the shares issued,
approximately $5 in the aggregate, was determined based on the fair market
value of the acquired subsidiary. This subsidiary was subsequently sold back to
the parent in return for approximately $5 in cash, and as such, the Company did
not record a gain or loss on these transactions.
F-36--1
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. SEGMENT REPORTING
The Company has operations outside of Sweden. A summary of the Company's
operations by geographical area as of and for the year ended December 31, 1997
is presented below:
<TABLE>
<CAPTION>
SWEDEN INTERNATIONAL CONSOLIDATED
------ ------------- ------------
<S> <C> <C> <C>
Revenues................................ $7,204 $ 614 $7,818
Operating loss.......................... (155) (734) (889)
Net income (loss)....................... 40 (733) (693)
Identifiable assets..................... 3,664 1,000 4,664
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company is committed under operating leases, principally for office
space and equipment. Certain leases are subject to rent reviews and require
payment of expenses under escalation clauses. Rent expense and equipment rental
were $180, $128 and $6, respectively, for the three years ended December 31,
1997. Future minimum base rents under terms of noncancellable operating leases,
reduced by rents to be received from existing noncancellable subleases, are as
follows:
<TABLE>
<S> <C>
Year ending December 31:
1998............................................................ $ 760
1999............................................................ 1,681
2000............................................................ 1,668
2001............................................................ 1,602
2002............................................................ 1,570
Thereafter...................................................... 1,177
</TABLE>
CAPITAL LEASE COMMITMENTS
At December 31, 1997 the Company was committed under capital leases,
principally for computer equipment and office equipment. The assets and
liabilities under the capital leases are recorded at the lower of the present
value of minimum lease payments or the fair market value of the assets. The
assets are depreciated over its estimated useful lives. The interest rate on
the capital leases is approximately 14.2%.
Future minimum payments under the lease agreement are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1998.............................................................. $49
1999.............................................................. 25
2000.............................................................. 2
---
Total minimum lease payments.................................... 76
Less--
Amounts representing interest................................... 6
Current portion (included in other current liabilities)......... 45
---
Long-term portion (included in other noncurrent liabilities).. $35
===
</TABLE>
F-37
<PAGE>
SPRAY NETWORK AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Litigation
The Company, from time to time, becomes involved in various routine legal
proceedings in the ordinary course of its business. The Company believes that
the outcome of all pending legal proceedings and unasserted claims in the
aggregate will not have a material adverse effect on its consolidated results
of operations, consolidated financial position or liquidity.
Subcontractors
Swedish tax legislation specifically addresses the use of subcontractors. In
the event that compensation to subcontractors is deemed to be the equivalent of
a salary as opposed to compensation for consultancy services performed, certain
adverse tax implications for the disbursing entity may occur. If the consultant
or subcontractor is not deemed to meet certain independence criteria, all
payments may be considered salary, which automatically generates the need for
the payer to report and pay social charges based on this amount. Furthermore,
VAT billed by the consultant would not be considered deductible and would also
be considered as salary when disbursed. Should the tax authorities contest a
subcontractors' compensation, the incremental costs could be approximately 50%
of payments made, plus penalty fees. Due to the nature of the Company's
business, a large number of consultants/subcontractors is used. For this reason
management has consulted with legal experts to determine if the independence
criteria for retained consultants/subcontractors have been met. Management
believes this to be the case, and there are no known disputes at this point in
time.
F-38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Spray Ventures AB:
We have audited the accompanying consolidated balance sheets of Spray
Ventures AB (a Kingdom of Sweden corporation) and subsidiaries as of December
31, 1995 and 1996 and August 31, 1997, and the related consolidated statements
of operations, stockholders' equity and cash flows for the years ended December
31, 1995 and 1996 and the eight months ended August 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Spray Ventures AB and
subsidiaries as of December 31, 1995 and 1996 and August 31, 1997, and the
results of their operations for the years ended December 31, 1995 and 1996 and
the eight months ended August 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
January 18, 1999
F-39
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's omitted except share and per share data)
<TABLE>
<CAPTION>
December
31,
---------- August 31,
1995 1996 1997
---- ----- ----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 28 $ 129 $ 671
Accounts receivable, net of allowance for doubtful
accounts of $0, $0 and
$39, respectively..................................... 54 297 1,630
Unbilled charges....................................... -- 75 17
Prepaid expenses and other current assets.............. 28 101 1,084
---- ----- -------
Total current assets.................................. 110 602 3,402
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $20, $103
and $242, respectively................................. 184 232 785
OTHER ASSETS............................................ -- -- 535
---- ----- -------
Total assets.......................................... $294 $ 834 $ 4,722
==== ===== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable....................................... $ 66 $ 161 $ 1,045
Accrued expenses....................................... 8 100 274
Income taxes payable................................... -- 5 4
Short-term debt........................................ -- 49 --
Other current liabilities.............................. 32 132 207
---- ----- -------
Total current liabilities............................. 106 447 1,530
---- ----- -------
NONCURRENT LIABILITIES:
Minority interests..................................... -- 33 15
Convertible loans...................................... -- 376 1,585
Other liabilities...................................... 46 22 36
---- ----- -------
Total noncurrent liabilities.......................... 46 431 1,636
---- ----- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.70, $.75, $.66 par value, 476,764
shares authorized,
10,000, 120,000 and 155,000 shares issued and
outstanding at December 31, 1995 and 1996 and August
31, 1997, respectively................................ 7 96 101
Additional paid-in capital............................. 88 88 3,277
Retained earnings (deficit)............................ 44 (231) (1,828)
Cumulative foreign currency translation adjustments.... 3 3 6
---- ----- -------
Total stockholders' equity (deficit).................. 142 (44) 1,556
---- ----- -------
Total liabilities and stockholders' equity (deficit).. $294 $ 834 $ 4,722
==== ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-40
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted)
<TABLE>
<CAPTION>
For the Years
Ended
December 31, For the Eight
------------- Months Ended
1995 1996 August 31, 1997
------------- ---------------
<S> <C> <C> <C>
REVENUES........................................ $ 338 $ 2,716 $ 1,585
DIRECT SALARIES AND COSTS....................... 239 2,691 2,644
----- ------- -------
Gross profit (loss)........................... 99 25 (1,059)
SALES AND MARKETING............................. 38 86 53
GENERAL AND ADMINISTRATIVE...................... 17 130 450
NON-RECURRING CHARGES........................... -- -- 238
----- ------- -------
Income (loss) from operations................. 44 (191) (1,800)
GAIN ON DISPOSAL OF SUBSIDIARY.................. -- -- 100
INTEREST EXPENSE, net........................... -- (31) (44)
----- ------- -------
Income (loss) before minority interest and
income taxes................................. 44 (222) (1,744)
MINORITY INTEREST............................... -- 41 147
----- ------- -------
Income (loss) before provision (benefit) from
income taxes................................. 44 (181) (1,597)
PROVISION (BENEFIT) FROM INCOME TAXES........... -- 5 --
----- ------- -------
Net income (loss)............................. $ 44 $ (186) $(1,597)
===== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-41
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(000's omitted except share amounts)
<TABLE>
<CAPTION>
Cumulative
Common Stock Additional Foreign Retained Total
-------------- Paid-in Currency Earnings Stockholders'
Shares Amount Capital Translation (Deficit) Equity
------- ------ ---------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
1995................... 10,000 $ 7 $ -- $-- $ -- $ 7
Capital contribution.. -- -- 88 -- -- 88
Foreign currency
translation
adjustment........... -- -- -- 3 -- 3
Net income............ -- -- -- -- 44 44
------- ---- ------ ---- ------- -------
BALANCE, December 31,
1995................... 10,000 7 88 3 44 142
Stock dividend........ 110,000 89 -- -- (89) --
Net loss.............. -- -- -- -- (186) (186)
------- ---- ------ ---- ------- -------
BALANCE, December 31,
1996................... 120,000 96 88 3 (231) (44)
Issuance of common
stock................ 35,000 5 3,189 -- -- 3,194
Foreign currency
translation
adjustment........... -- -- -- 3 -- 3
Net loss.............. -- -- -- -- (1,597) (1,597)
------- ---- ------ ---- ------- -------
BALANCE, August 31,
1997................... 155,000 $101 $3,277 $ 6 $(1,828) $ 1,556
======= ==== ====== ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-42
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
<TABLE>
<CAPTION>
For the
For the Eight
Years Ended Months
December 31 Ended
------------ August 31,
1995 1996 1997
----- ----- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ 44 $(186) $(1,597)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities--
Allowance for doubtful accounts..................... -- -- 39
Depreciation and amortization....................... 20 83 139
Minority interest................................... -- 33 (18)
Gain on disposal of subsidiaries.................... -- -- 100
Changes in operating assets and liabilities--
(Increase) in accounts receivable.................. (54) (243) (1,372)
(Increase) in unbilled charges..................... -- (75) 58
(Increase) in prepaid expenses and other current
assets............................................ (28) (73) (983)
Increase in accounts payable....................... 66 95 884
Increase in accrued expenses....................... 8 92 174
Increase (decrease) in income taxes payable........ -- 5 (1)
(Decrease) in other liabilities.................... -- 22 14
Increase in other current liabilities.............. 32 100 75
----- ----- -------
Net cash provided by (used in) operating
activities....................................... 88 (147) (2,488)
----- ----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................. (197) (131) (792)
Acquisitions of subsidiaries, net of cash acquired... -- -- (535)
----- ----- -------
Net cash used in investing activities............. (197) (131) (1,327)
----- ----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term debt........................ -- 49 (49)
Net change in convertible loans...................... 46 330 1,209
Capital contribution................................. 81 -- --
Proceeds from issuance of common stock............... -- -- 3,194
----- ----- -------
Net cash provided by financing activities......... 127 379 4,354
----- ----- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS.......................................... 3 -- 3
----- ----- -------
Net increase in cash and cash equivalents......... 21 101 542
CASH AND CASH EQUIVALENTS, beginning of period........ 7 28 129
----- ----- -------
CASH AND CASH EQUIVALENTS, end of period.............. $ 28 $ 129 $ 671
===== ===== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for--
Income taxes paid................................... $ 1 $ -- $ --
Interest paid....................................... -- 31 44
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITIES:
Stock dividend...................................... $ -- $ 92 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-43
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000's omitted, except for share and per share data)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Spray Ventures AB ("Spray Ventures") (f.k.a. "Spray Interactive Media AB"),
through its wholly owned and majority-owned subsidiaries (collectively, the
"Company") is a leading international digital communications solutions
provider. The Company creates digital communications solutions to help its
clients increase sales, improve communications and create brand identities. The
Company's integrated service offering includes strategic consulting, design of
information architecture and end-user interfaces and customization and
implementation of enabling software technologies. The Company primarily uses
Internet-based technologies to create digital communications solutions and is
building capabilities in additional technologies, such as wireless and
satellite, to create solutions for a variety of media including personal
digital assistants and TV set-top boxes.
Reorganization
On August 29, 1997, the Company established a wholly-owned subsidiary, Spray
Services AB, and transferred all of the operating subsidiaries of the Company
under Spray Services AB. The Company transferred the subsidiaries based upon a
merger agreement with Spray Network AB (f.k.a. "Tetre AB") entered into on June
13, 1997, whereby the Company sold Spray Services AB to Spray Network AB
effective September 1, 1997. In consideration for Spray Services AB, Spray
Network AB issued 1,162 new shares of Spray Network AB common stock,
representing 51% of the resulting outstanding stock of Spray Network AB, with a
fair market value of $1,967,000, based upon an independent valuation. In
connection with this transaction, the Company changed its name from Spray
Interactive Media AB to Spray Ventures AB.
Principles of Consolidation
The accompanying consolidated financial statements consist of Spray Ventures
and its wholly owned and majority-owned subsidiaries. As of August 31, 1997,
certain non-operating subsidiaries of Spray Ventures have been carried at cost.
The non-operating subsidiaries do not have a material impact on the
consolidated financial statements of Spray Ventures taken as a whole. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions, specifically for allowance for doubtful accounts for accounts
receivable, the useful lives of fixed assets and intangible assets, that affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Revenue Recognition
Revenues are recognized as services are rendered on the percentage-of-
completion method of accounting based on the ratio of costs incurred to total
estimated costs. Revenues derived from fixed-fee contracts are
F-44
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recognized as services are rendered. Unbilled charges represent labor costs
incurred and estimated earnings, production and other client reimbursable
costs. Advanced billings represent billings of production and other client
reimbursable out-of-pocket costs in excess of revenues recognized. Amounts
billed to clients in excess of revenues recognized to date are classified as
deferred revenues. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined.
Non-Recurring Charges
The Company incurred certain non-recurring expenses of approximately $238 in
connection with the start-up of certain international subsidiaries.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated on a straight-line
basis over estimated useful lives of four to eight years. Leasehold
improvements and equipment held under capital leases are amortized utilizing
the straight-line method over the lessor of the estimated useful life of the
asset or the remaining term of the related lease.
Intangible Assets
Goodwill, which represents the excess of the purchase price over the fair
value of the net assets acquired, is included in other assets and is presently
being amortized over a period of 5 years on a straight-line basis. Management
has evaluated the amortization periods in the current period and has determined
that no impairment currently exists. These amortization periods will be
evaluated by management on a continuing basis, and will be adjusted if the
lives of the related intangible assets are impaired. Goodwill totaled $221 as
of August 31, 1997. As the goodwill was recorded on August 29, 1997, no
amortization was recorded for the period. There was no goodwill prior to
January 1, 1997.
Accounting for Long-Lived Assets
The Company accounts for long-lived assets under the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This statement establishes financial accounting and reporting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used, and for long-lived assets and
certain identifiable tangibles to be disposed of. Management has performed a
review of all long-lived assets and has determined that no impairment of the
respective carrying value has occurred as of August 31, 1997.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their tax
bases for operating profit and tax liability carryforward. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or
F-45
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
settled. The effect on deferred tax assets or liabilities of a change in tax
rates is recognized in the period that the tax change occurs.
Foreign Currency Translation
All assets and liabilities of Spray Ventures and its subsidiaries are
translated into U.S. dollars at fiscal year-end exchange rates. Income and
expense items are translated at average exchange rates prevailing during the
fiscal year. The resulting translation adjustments are recorded as a component
of shareholders' equity in the accompanying consolidated financial statements.
Stockholders' Equity
Certain subsidiaries and investments of the Company have had other fiscal
years than the December 31. Local tax returns and statutory report have been
prepared under Swedish GAAP and tax practice and submitted to the authorities
for each legal year-end. Stockholders' equity as reported in these consolidated
financial statements has been presented under U.S. GAAP. For these reasons, the
stockholders' equity reported in these consolidated financial statements may
not be immediately available for distribution to stockholders, under the laws
of Sweden.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and short-term debt approximate fair value due to the short-
term maturity of these instruments. The carrying amounts of long-term debt and
convertible loans approximate fair value.
Business Concentrations and Credit Risk
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
primarily concentrated in Sweden. The Company performs ongoing credit
evaluations, generally does not require collateral, and establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of customers, historical trends and other information. To date, such losses
have been within management's expectations.
The Company did not have any significant customers during each of the
periods presented.
Comprehensive Income
During 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income", which established standards for reporting and displaying comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements. The components of comprehensive
income are as follows:
<TABLE>
<CAPTION>
For the Years For the
Ended Eight Months
December 31, Ended
-------------- August 31,
1995 1996 1997
------ ------- ------------
<S> <C> <C> <C>
Net income (loss)............................ $ 44 $ (186) $(1,597)
Foreign currency translation adjustment...... 3 -- 87
----- ------- -------
Comprehensive income (loss)................ $ 47 $ (186) $(1,510)
===== ======= =======
</TABLE>
F-46
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. RELATED PARTY TRANSACTIONS
Convertible Debt
In 1996, the Company entered into several convertible debt agreements with
certain stockholders and employees for approximately $330, non-interest bearing
and payable on January 1, 1999. In connection, with these agreements, the
holders received options to purchase 42,400 shares of common stock. Subsequent
to August 31, 1997, 39,100 options were exercised into common stock, in lieu of
the Company repaying the related debt. The remaining 3,300 options were
cancelled based upon the termination of certain employees. As these loans were
non-interest bearing, the Company imputed interest based on a rate of 7%;
however, no expense was recorded as the amount was deemed to be immaterial.
In 1997, the Company entered into several convertible debt and debenture
agreements with stockholders, employees and outside investors of the Company.
The aggregate total proceeds received by the Company was approximately $1,408.
The loans accrued interest at 5% per annum, were payable by January 1, 1999. In
connection with the agreements, the holders received options to purchase 44,928
of common stock. Subsequent to August 31, 1997, 19,928 were exercised into
common stock, in lieu of the Company repaying the related debt. A total of
8,700 options were cancelled and 19,600 remain outstanding.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December
31,
--------- August 31,
1995 1996 1997
---- ---- ----------
<S> <C> <C> <C>
Computer equipment...................................... $108 $224 $ 520
Leasehold improvements.................................. 96 111 507
---- ---- ------
Total property and equipment.......................... 204 335 1,027
Less--Accumulated depreciation and amortization......... 20 103 242
---- ---- ------
Property and equipment, net........................... $184 $232 $ 785
==== ==== ======
</TABLE>
F-47
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation and amortization aggregated $20 and $83, respectively, for the
years ended December 31, 1995 and 1996, and $139 for the eight months ended
August 31, 1997.
4. INCOME TAXES
Income before taxes and the provision for taxes on income consisted of the
amounts shown below:
<TABLE>
<CAPTION>
Years Ended
December For the Eight
31, Months Ended
------------ August 31,
1995 1996 1997
------ ----- -------------
<S> <C> <C> <C>
Provisions for taxes on income:
Current--International........................... $ -- $ 5 $--
Deferred--International ......................... -- -- --
------ ----- ----
$ -- $ 5 $--
====== ===== ====
</TABLE>
F-48
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the Company's assets and
liabilities. Deferred tax assets resulting principally from recording certain
expenses in the financial statements, which are not currently deductible for
tax purposes and differences between the tax and book basis of assets and
liabilities recorded in connection with the acquisitions. Deferred tax
liabilities result principally from expenses which are currently deductible for
tax purposes, but have not yet been expensed in the financial statements and
net operating loss carryforwards.
The Company has concluded that it is not probable that it will be able to
realize these net deferred tax asset in future periods and has, accordingly,
recorded a full valuation allowance.
5. STOCKHOLDERS' EQUITY
Common Shares
In 1996, the Company declared a stock dividend for all stockholders of
record. The Company issued 110,000 shares to its stockholders to effect this
transaction.
In June 1997, the Company issued 35,000 shares of common stock at a price of
approximately $91.25 per share for total proceeds of $3,194.
F-49
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company was committed under operating leases, principally for office
space and equipment. Certain leases were subject to rent reviews and require
payment of expenses under escalation clauses. Rent expense and equipment rental
were $19 and $257, respectively, for the years ended December 31, 1995 and
1996, and $180 for the eight months ended August 31, 1997. The Company has no
further obligations regarding such leases, as a result of the sale of Spray
Services and Spray Network AB (Note 8):
Capital Lease Commitments
At August 31, 1997 the Company was committed under capital leases,
principally for computer equipment and office equipment. The assets and
liabilities under the capital leases are recorded at the lower of the present
value of minimum lease payments or the fair market value of the assets. The
assets are depreciated over its estimated useful lives. The interest rate on
the capital leases ranges from 11.5% to 16.7%.
Future minimum payments under the lease agreement are as follows:
<TABLE>
<S> <C>
Eight months ended August 31:
1998............................................................... $48
1999............................................................... 29
2000............................................................... 10
---
Total minimum lease payments..................................... 87
---
Less--
Amounts representing interest.................................... 7
Current portion.................................................. 25
---
Present value of net minimum lease payments.................... $55
===
</TABLE>
Litigation
The Company, from time to time, becomes involved in various routine legal
proceedings in the ordinary course of its business. The Company believes that
the outcome of all pending legal proceedings and unasserted claims in the
aggregate will not have a material adverse effect on its consolidated results
of operations, consolidated financial position or liquidity.
Subcontractors
Swedish tax legislation specifically addresses the use of subcontractors. In
the event that compensation to subcontractors is deemed to be the equivalent of
a salary as opposed to compensation for consultancy services performed, certain
adverse tax implications for the disbursing entity may occur. If the consultant
or subcontractor is not deemed to meet certain independence criteria, all
payments may be considered salary, which automatically generates the need for
the payer to report and pay social charges based on this amount.
F-50
<PAGE>
SPRAY VENTURES AB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Furthermore, VAT billed by the consultant would not be considered deductible
and would also be considered as salary when disbursed. Should the tax
authorities contest a subcontractors' compensation, the incremental costs could
be approximately 50% of payments made, plus penalty fees. Due to the nature of
the Company's business, a large number of consultants/subcontractors is used.
For this reason management has consulted with legal experts to determine if the
independence criteria for retained consultants/subcontractors have been met.
Management believes this to be the case, and there are no known disputes at
this point in time.
7. SUBSEQUENT EVENTS
Convertible Loans
In June 1998, the Company entered into two convertible loan agreements for
total proceeds of approximately $1,955. The holders of the debt also received
options to purchase a total of 22,126 shares of common stock of which 19,435
have been exercised into common stock, in lieu of the company repaying such
debt.
Investment by Communicade Inc.
In January 1999, Communicade Inc. (a wholly-owned subsidiary of Omnicom
Group, Inc.) purchased a 20% ownership interest in the Company from the current
shareholders.
Sale of Spray Network AB
In January 1999, the Company and one of its stockholders, Communicade Inc.
entered into an agreement to sell all of the issued and outstanding shares of
common stock of Spray Network AB to Razorfish, Inc. (a New York corporation)
("Razorfish") in exchange for an aggregate of 19,762,068 shares of Razorfish
common stock and an aggregate of 50 shares of Razorfish nonvoting Class B
common stock. The shares of Razorfish common stock issued represent 50% of the
fully diluted outstanding common stock after the transaction, collectively
having a fair market value of $40,000. Certain insignificant subsidiaries of
Spray Network AB were not included in the transaction and as such, ownership
was retained by the Company.
F-51
<PAGE>
[LOGO]
Dealer Prospectus Delivery Obligation
Until , 1999 (25 days after the commencement of the offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses to be borne by the registrant,
other than underwriting discounts, in connection with the issuance and
distribution of the Common Stock hereunder:
<TABLE>
<CAPTION>
Item Amount
---- -------
<S> <C>
SEC registration fee.............................................. $15,985
NASD filing fee................................................... 6,250
Nasdaq National Market listing fee................................ *
Accounting fees and expenses...................................... *
Legal fees and expenses........................................... *
Printing costs.................................................... *
Miscellaneous..................................................... *
-------
Total........................................................... $ *
=======
</TABLE>
- --------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers.
Reference is made to Section 102(b)(7) of the DGCL, which permits a
corporation in its certificate of incorporation or an amendment thereto to
eliminate or limit the personal liability of a director for violations of the
director's fiduciary duty, except (1) for any breach of the director's
fiduciary duty of loyalty to the corporation or its stockholders, (2) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) pursuant to Section 174 of the DGCL (providing
for liability of directors for unlawful payment of dividends or unlawful stock
purchases or redemptions), or (4) for any transaction from which the director
derived an improper personal benefit. Razorfish's Certificate of Incorporation
contains provisions permitted by Section 102(b)(7) of the DGCL.
Reference is made to Section 145 of the DGCL which provides that a
corporation may indemnify any persons, including directors and officers, who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
such corporation), by reason of the fact that such person is or was a director,
officer, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided such director, officer, employee or agent acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the corporation's best interests and, with respect to any criminal actions or
proceedings, had no reasonable cause to believe that his conduct was unlawful.
A Delaware corporation may indemnify directors and/or officers in an action or
suit by or in the right of the corporation under the same conditions, except
that no indemnification is permitted without judicial approval if the director
or officer is adjudged to be liable to the corporation. Where a director or
officer is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him or her against the
expenses which such director or officer actually and reasonably incurred.
Razorfish's Certificate of Incorporation filed as Exhibit 3.1 to this
Registration Statement provides indemnification of directors and officers of
the Registrant to the fullest extent permitted by the DGCL.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
In February 1997, Razorfish issued an aggregate of 131,826 shares of Common
Stock to seven employees pursuant to the terms of a Stock Grant Agreement
entered into by the Registrant and each such employee. These shares were issued
to each employee in consideration for services rendered to the Registrant by
such employee. Exemption from registration for this transaction was claimed
pursuant to Rule 701 of the Securities Act.
On January 22, 1999, the Company issued 3,950,944 shares of Common Stock to
Communicade for an estimated purchase price of $[ ] which will be adjusted on
the closing date of the offering. Exemption from registration for this
transaction was claimed pursuant to Section 4(2) of the Securities Act
regarding transactions by the issuer not involving a public offering, in that
this transaction was made, without general solicitation or advertising, to a
sophisticated investor with access to all relevant information necessary to
evaluate this investment and who represented to the Registrant that the shares
were being acquired for investment.
On January 5, 1999, the Registrant issued an aggregate of 19,762,068 shares
of Common Stock and an aggregate of 50 shares of Class B Common Stock to Spray
Ventures and Communicade in exchange for all of the issued and outstanding
shares of stock of Spray and warrants exercisable for an additional 138 shares
of stock of Spray. Exemption from registration for these transactions are
claimed pursuant to Section 4(2) of the Securities Act regarding transactions
by the issuer not involving a public offering, in that these transactions were
made, without general solicitation or advertising, to sophisticated investors
with access to all relevant information necessary to evaluate these investments
and who represented to the Registrant that the shares were being acquired for
investment.
Additionally, since February 24, 1997, the Registrant has granted stock
options to certain of its employees and consultants pursuant to its 1997 Stock
Option and Incentive Plan. Such grants were made in reliance on Rule 701
promulgated under the Securities Act. As of January 21, 1999, the Registrant
had granted options to purchase 1,326,217 shares of Common Stock to employees
and consultants pursuant to the 1997 Stock Option and Incentive Plan.
Item 16. Exhibits and Financial Statement Schedules.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of Razorfish, Inc.*
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 Specimen Common Stock Certificate of the Company.*
5.1 Form of Opinion of Morrison & Foerster LLP.*
10.1 1997 Stock Option and Incentive Plan, as amended.*
10.2 1999 Stock Incentive Plan.*
10.3 Employment Agreement, dated September 18, 1996, between the Company
and Jeffrey A. Dachis.*
10.4 Employment Agreement, dated September 18, 1996, between the Company
and Craig M. Kanarick.*
10.5 Employment Agreement, dated April 30, 1998, between the Company and
Peter Seidler.*
10.6 Amendment to Employment Agreement, dated November 26, 1998, between
the Company and Peter Seidler.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.7 Employment Agreement, dated June 19, 1997, between the Company and
Jean-Philippe Maheu.*
10.8 Employment Agreement, dated June 1, 1997, between the Company and
Evan Orensten.*
10.9 Employment Agreement, dated as of October 1, 1998, between the
Company and Per Bystedt.*
Employment Agreement, dated as of October 1, 1998, between the
10.10 Company and Jonas Svenson.*
Employment Agreement, dated as of October 1, 1998, between the
10.11 Company and Johan Ihrfelt.*
10.12 Lease Agreement, dated October 28, 1996, between the Company and Man
Yun Real Estate Corporation.*
10.13 Lease Agreement, dated April 30, 1997, between the Company and Man
Yun Real Estate Corporation.*
10.14 Lease Agreement, dated September 22, 1995, between Curtis Hoy
Beeston Interactive (CHBi)
Limited and London Industrial Plc.*
10.15 Lease Agreement, dated March 10, 1998, between J&R Bechelli and
Alpha Online, Inc.*
10.16 Subscription and Exchange Agreement, dated as of October 1, 1998,
among the Company, Spray Ventures AB and Communicade.*
10.17 Stock Purchase Agreement, dated as of October 1, 1998, among
Communicade, Jeffrey A. Dachis and Craig M. Kanarick.*
22.1 Subsidiaries of the Company.*
23.1 Consent of Arthur Andersen LLP.
23.3 Consent of Morrison & Foerster LLP (set forth in Exhibit 5.1).*
Power of Attorney (set forth on the signature page to this
24.1 Registration Statement).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
Item 17. Undertakings.
The Registrant hereby undertakes the following:
(1) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(2) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the
II-3
<PAGE>
Securities Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(4) The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required
by the Underwriters to permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on January , 1999.
RAZORFISH, INC.
/s/ Jeffrey A. Dachis
By: _________________________________
Jeffrey A. Dachis
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints and hereby authorizes Michael S. Simon and Susan
Black, severally, such person's true and lawful attorneys-in-fact, with full
power of substitution or resubstitution, for such person and in such person's
name, place and stead, in any and all capacities, to sign on such person's
behalf, individually and in each capacity stated below, any and all amendments,
including post-effective amendments to this Registration Statement and to sign
any and all additional registration statements relating to the same offering of
securities as this Registration Statement that are filed pursuant to Rule
462(b) of the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in and about the premises, as fully to all intents and purposes as
such person might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name and Signatures Title Date
------------------- ----- ----
<C> <S> <C>
/s/ Jeffrey A. Dachis President, Chief Executive
____________________________________ Officer, Treasurer and Director
Jeffrey A. Dachis
/s/ Craig M. Kanarick Chief Scientist, Vice Chairman
____________________________________ of the Board, Secretary and
Craig M. Kanarick Director
/s/ Per Bystedt Executive Vice President,
____________________________________ Chairman of the Board and
Per Bystedt Director
/s/ Jonas Svensson Vice Chairman of the Board and
____________________________________ Director
Jonas Svensson
/s/ Susan Black Chief Financial Officer (Chief
____________________________________ Financial and Accounting
Susan Black Officer)
/s/ John Wren Director
____________________________________
John Wren
</TABLE>
II-5
<PAGE>
Report of Independent Public Accountants
To Razorfish, Inc:
We have audited in accordance with generally accepted auditing standards, the
financial statements of Razorfish, Inc. and subsidiaries included in this
registration statement and have issued our report thereon dated January 18,
1999. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commissions rules and is not part of
the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
January 18, 1999
S-1
<PAGE>
Report of Independent Public Accountants
To Spray Ventures AB:
We have audited in accordance with generally accepted auditing standards, the
financial statements of Spray Ventures AB and subsidiaries included in this
registration statement and have issued our report thereon dated January 18,
1999. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commissions rules and is not part of
the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
January 18, 1999
S-2
<PAGE>
Schedule II
RAZORFISH, INC. AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged to
Beginning Costs and Other Balance at
of Year Expenses Accounts Deductions End of Year
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
For the fiscal year
ended December 31, 1995
Allowance for doubtful
accounts............. $-- $-- $-- $-- $--
==== ==== ==== ==== ====
For the fiscal year
ended December 31, 1996
Allowance for doubtful
accounts............. $-- $-- $-- $-- $--
==== ==== ==== ==== ====
For the fiscal year
ended December 31, 1997
Allowance for doubtful
accounts............. $-- $-- $-- $-- $--
==== ==== ==== ==== ====
For the nine months
ended September 30,
1998
Allowance for doubtful
accounts............. $-- $ 50 $-- $-- $ 50
==== ==== ==== ==== ====
</TABLE>
S-3
<PAGE>
Schedule II
SPRAY VENTURES AB AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged to
Beginning Costs and Other Balance at
of Year Expenses Accounts Deductions End of Year
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
For the fiscal year
ended December 31, 1995
Allowance for doubtful
accounts............. $-- $-- $-- $-- $--
==== ==== ==== ==== ====
For the fiscal year
ended December 31, 1996
Allowance for doubtful
accounts............. $-- $-- $-- $-- $--
==== ==== ==== ==== ====
For the eight months
ended August 31, 1997
Allowance for doubtful
accounts............. $-- $ 39 $-- $-- $ 39
==== ==== ==== ==== ====
</TABLE>
S-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of Razorfish, Inc.*
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 Specimen Common Stock Certificate of the Company.*
5.1 Form of Opinion of Morrison & Foerster LLP.*
10.1 1997 Stock Option and Incentive Plan, as amended.*
10.2 1999 Stock Incentive Plan.*
10.3 Employment Agreement, dated September 18, 1996, between the Company
and Jeffrey A. Dachis.*
10.4 Employment Agreement, dated September 18, 1996, between the Company
and Craig M. Kanarick.*
10.5 Employment Agreement, dated April 30, 1998, between the Company and
Peter Seidler.*
10.6 Amendment to Employment Agreement, dated November 26, 1998, between
the Company and Peter Seidler.*
10.7 Employment Agreement, dated June 19, 1997, between the Company and
Jean-Philippe Maheu.*
10.8 Employment Agreement, dated June 1, 1997, between the Company and Evan
Orensten.*
10.9 Employment Agreement, dated as of October 1, 1998, between the Company
and Per Bystedt.*
Employment Agreement, dated as of October 1, 1998, between the Company
10.10 and Jonas Svenson.*
Employment Agreement, dated as of October 1, 1998, between the Company
10.11 and Johan Ihrfelt.*
10.12 Lease Agreement, dated October 28, 1996, between the Company and Man
Yun Real Estate Corporation.*
10.13 Lease Agreement, dated April 30, 1997, between the Company and Man Yun
Real Estate Corporation.*
10.14 Lease Agreement, dated September 22, 1995, between Curtis Hoy Beeston
Interactive (CHBi)
Limited and London Industrial Plc.*
10.15 Lease Agreement, dated March 10, 1998, between J&R Bechelli and Alpha
Online, Inc.*
10.16 Subscription and Exchange Agreement, dated as of October 1, 1998,
among the Company, Spray Ventures AB and Communicade.*
10.17 Stock Purchase Agreement, dated as of October 1, 1998, among
Communicade, Jeffrey A. Dachis and Craig M. Kanarick.*
22.1 Subsidiaries of the Company.*
23.1 Consent of Arthur Andersen LLP.
23.3 Consent of Morrison & Foerster LLP (set forth in Exhibit 5.1).*
Power of Attorney (set forth on the signature page to this
24.1 Registration Statement).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
New York, New York
January 22, 1999
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<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 DEC-31-1997
<CASH> 192,517 1,176,076
<SECURITIES> 0 0
<RECEIVABLES> 1,911,856 1,304,420
<ALLOWANCES> 50,000 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,486,976 3,543,996
<PP&E> 1,154,263 617,560
<DEPRECIATION> 266,302 107,261
<TOTAL-ASSETS> 10,621,365 4,266,510
<CURRENT-LIABILITIES> 8,142,347 3,532,539
<BONDS> 0 0
0 0
0 0
<COMMON> 183,136 183,136
<OTHER-SE> 2,273,820 474,173
<TOTAL-LIABILITY-AND-EQUITY> 10,621,365 4,266,510
<SALES> 9,117,812 3,617,688
<TOTAL-REVENUES> 9,117,812 3,617,688
<CGS> 5,090,436 1,906,111
<TOTAL-COSTS> 5,090,436 1,906,111
<OTHER-EXPENSES> 2,367,310 253,369
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 165,471 19,489
<INCOME-PRETAX> (666,727) 562,152
<INCOME-TAX> (272,695) 264,963
<INCOME-CONTINUING> (394,032) 297,189
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (394,032) 297,189
<EPS-PRIMARY> .02 .02
<EPS-DILUTED> .02 .02
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