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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION l3 OR l5(d) OF
THE SECURITIES EXCHANGE ACT OF l934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ____
Commission file number 000-25847
Razorfish, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 13-3804503
(State or other jurisdiction of incorporation or organization (I.R.S. Employer Identification No.)
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107 Grand Street, 3rd Floor
New York, New York 10013
(Address of Principal Executive Offices, including zip code)
Registrant's telephone number, including area code: (212) 966-5960
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section l2(g) of the Act:
Class A Common Stock, par value $.01 per share
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act of
l934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant, based on the closing price of the Class A Common Stock, par value
$0.01 (the "Common Stock") on March 22, 2000 of $28.50, as reported on the
NASDAQ National Market was approximately $1,785,136,300. Shares of Common Stock
held by each officer and director and by each person who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for any other purpose.
As of March 22, 2000, the registrant had outstanding 95,425,889 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for the 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K
Report, which Proxy Statement is to be filed within 120 days after the end of
the Registrant's fiscal year ended December 31, 1999.
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INDEX
RAZORFISH, INC.
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PART I
Item 1. BUSINESS................................................................................... 3
Item 2. PROPERTIES................................................................................. 22
Item 3. LEGAL PROCEEDINGS.......................................................................... 22
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 22
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................... 23
Item 6. SELECTED FINANCIAL DATA.................................................................... 25
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................................. 26
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 34
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................ 35
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE................................................................................. 35
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................... 36
Item 11. EXECUTIVE COMPENSATION..................................................................... 36
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................. 36
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................. 36
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........................... 37
SIGNATURES.................................................................................................. 41
CONSOLIDATED FINANCIAL STATEMENTS........................................................................... F-1
EXHIBITS
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PART I
Item 1. Business
From time to time, Razorfish may report, through its press releases and/or
Securities and Exchange Commission filings, certain matters that would be
characterized as forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act") that are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected. Certain of these risks and uncertainties are beyond
management's control. This report contains statements which could constitute
forward-looking statements. These statements appear in a number of places in
this report and include statements regarding the intent, belief or current
expectations of Razorfish, its directors or its officers, primarily with respect
to the future operating performance of Razorfish. Readers are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those in the forward-looking statements as a result of various factors. The
information contained in this report identifies certain important factors that
could cause such differences, beginning on page 15 below and elsewhere in this
report.
Overview
Razorfish is a leading provider of global digital solutions. Digital
solutions are business solutions that use digital technologies to enhance
communications and commerce between businesses and their consumers, suppliers,
employees and other partners. Razorfish provides an integrated, end-to-end
solution. Razorfish's strategy, creative and technology professionals carry out
every aspect of a solution from strategic consulting to design of information
architectures and user-interfaces to integration of backend Enterprise Resource
Planning (ERP) and legacy systems. These digital solutions utilize a wide
variety of platforms, including the World Wide Web, wireless, broadband and
satellite communications and a variety of digital devices and information
appliances, including desktop PCs, mobile phones, pagers and personal digital
assistants. Razorfish thereby creates for its clients digital solutions designed
to help them re-architect their traditional business models and identify and
improve communications and commerce opportunities.
Examples of Razorfish's solutions include (1) a user-interface incorporating
Wireless Application Protocol, or WAP, technology for Nokia, (2) an open
collaborative business environment delivering SAP AG's personalized ERP software
solutions and (3) a multiple digital channel strategy for NatWest Bank.
Razorfish's digital solutions are designed to help clients fundamentally
re-architect their business models and identify and improve communications and
commerce opportunities.
Razorfish was established in January 1995. Since its inception, Razorfish
has focused on growing in size and expanding the scope of its business to
provide an increasingly wider range of digital solutions. Razorfish's growth has
been the result of internal expansion and acquisitions. It has a geographical
presence in a total of seven countries, including the US, and has grown to over
1,355 full time employees.
Industry background
The rapid growth in digital technology, the use of the Internet and
e-commerce have fundamentally changed the way in which companies conduct
business and interact with customers. Digital technology has created new
business models, new ways of sharing knowledge and experience, more efficient
ways to transact business and new channels through which to do so, direct ways
of communicating with customers and employees and dramatically enhanced
efficiencies of scale and scope. International Data Corporation estimates that
the number of Internet users will grow from 159 million in 1998 to 510 million
in 2003, and as a result, estimates e-commerce revenues to increase from
approximately $50 billion to more than $1.3 trillion over the same period. As
companies face increasing pressure to reinvent their business models for the
digital economy, operate more efficiently and better serve customer needs,
information flow both inside and outside an organization has become critical.
However, the escalating cost and complexity of information technology and the
shortage of in-house technical expertise required to implement technology-based
solutions has led companies to increasingly rely on Internet service providers.
This trend toward outsourcing and a focus by companies on their core business
has driven the rapid growth of the Internet services market. International Data
Corporation
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estimates that the market for Internet professional services worldwide will grow
from $7.8 billion in 1998 to $78.6 billion in 2003, representing a compound
annual growth rate of 59%.
Over the past several years companies have been increasingly engaging
Internet professional service providers to capitalize on opportunities with
respect to the Internet. Companies require service providers who can create and
design an online identity and website, develop web-based content and
applications and integrate front end web-based applications with existing ERP
backbones and legacy systems. Additionally, companies are no longer just seeking
to be on the Internet or a desktop environment. Companies are seeking to improve
their business practices through full service digital solutions that function
across a multitude of platforms which include wireless technology (i.e. WAP),
broadband and satellite communications.
The recent convergence of wireless communications and the Internet has
enabled the delivery of wireless multimedia applications, including voice, data,
image and video through a proliferation of wireless devices. Wireless devices
include personal digital assistants, or PDAs, such as Palm Pilot connected
organizers, mobile phones and two-way Internet-enabled pagers. Dataquest
estimates that the worldwide number of digital wireless subscribers will grow
from 217 million in 1998 to 828 million in 2003. In addition, the convergence of
wireless communications and the Internet has created new opportunities for the
delivery of wireless data services. Dataquest estimates that the number of
wireless data subscribers worldwide will grow from approximately 16 million at
the end of 1998 to approximately 111 million at the end of 2003.
Due to this demand for Internet services, various types of service providers
have entered the market for digital solutions, including companies focused
solely on internet services, technology consulting firms, technology integrators
and strategic consulting firms. However, Razorfish believes that these
competitors generally lack the combination of creativity, breadth of services
and technical expertise needed to address the full scope of a client's needs. In
addition, because the Internet services market is fragmented by the cultural and
language differences among countries, Razorfish believes that firms that lack a
presence and expertise in local markets are unable to compete as effectively in
those markets. The growing demand for comprehensive digital solutions has led to
a significant market opportunity for firms, such as Razorfish, that combine an
international presence with local expertise and provide a comprehensive
integrated solution.
The Razorfish solution
Razorfish believes that companies must reinvent their traditional business
models in order to remain competitive in the digital economy. Razorfish helps
its clients incorporate digital technologies including the World Wide Web,
wireless, satellite and broadband communications. This enables the client to
communicate and transact more effectively with their customers, suppliers,
employees and other business partners. Razorfish believes that the following
factors distinguish Razorfish's ability to deliver solutions to its clients from
that of its competitors.
Focuses on leading-edge digital technologies. Razorfish uses leading-edge
digital technologies to create solutions on a wide variety of platforms that
include the World Wide Web, wireless, broadband, satellite communications and
legacy systems for use with a variety of digital devices and information
appliances, including desk tops, mobile phones, pagers and personal digital
assistants.
Provides an integrated end-to-end solution. Razorfish provides an integrated
offering consisting of strategic consulting, design of information architectures
and user-interfaces and creation and customization of software necessary to
integrate backend ERP and legacy systems. Our employees have extensive expertise
in a broad range of skill sets including strategy, creative and technology.
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 solutions made possible by Razorfish's integrated,
full-service offering.
Develops and implements new business models. Razorfish's goal is to enable
its clients to re-orient their business models for the digital economy in order
to create or enhance business identities, improve communications, increase
sales, reduce costs and remain competitive in the digital economy. As an
example,
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Razorfish helped its client, The Financial Times, turn its website from a simple
outlet for newspaper articles to a leading brand and web destination for
business people worldwide.
Leverages its global presence and local expertise. Razorfish is a global
company that established a European presence in May of 1998. Approximately 40%
of Razorfish's billable employees are based in Europe. Razorfish is located in
four cities in the United States and seven cities in six European countries.
Razorfish believes that it is better able to serve multi-national and local
clients because its local consultants 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 1000 billable Razorfish
professionals worldwide.
Strategy
Razorfish's objective is to enhance its position as a leading provider of
digital solutions. In order to achieve this goal, Razorfish will:
Remain at the leading edge of technology. Razorfish intends to remain at the
leading edge of digital technologies including the internet, wireless, broadband
and satellite technologies. The Company is currently working on more than 20
wireless engagements worldwide and intends to further leverage and build upon
its Mobile Solutions Laboratory, a research and development facility focused on
exploratory and market defining mobile solutions. Through its Mobile Solutions
Laboratory, Razorfish creates applications using GPRS, Bluetooth, Satellite
technology and IMT 2000 compatible networks, over a wide variety of platforms,
including WAP, PalmOS, EPOC, Microsoft CE and Pocket PC. Razorfish also believes
that the Mobile Solutions Laboratory will help create and implement industry
standards through organizations such as the WAP Forum. The WAP Forum is an
industry association that develops global standards for wireless information and
telephony services in digital mobile phones and other wireless terminals.
Target industries that can benefit from the use of digital technology.
Razorfish believes that increased deregulation, consolidation and global
competition will lead companies in more industries to use digital communications
technology to differentiate their products and services. Razorfish intends to
target companies in industries such as financial services, media and
entertainment, information and telecommunications, travel and leisure,
healthcare, manufacturing and retail.
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's
management continues to develop programs designed to help maintain a productive
and energetic workplace. Programs such as the "fish (employee) of the day"
shared across MOM, the Razorfish intranet, and an employee exchange program that
allows employees to transfer to other offices for specified periods of time,
help create a consistent global culture. Razorfish believes that these programs
have enabled it to quickly integrate the employees from its numerous
acquisitions and to attract top professionals. By continuing to focus on and
expand these efforts, Razorfish hopes to achieve a higher-than-average retention
rate.
Expand through strategic acquisitions. Razorfish has grown rapidly since its
inception in 1995 through internal growth and acquisitions. 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.
Seek new ways of leveraging intellectual capital and thought leadership.
Razorfish intends to explore opportunities to leverage its intellectual capital
and thought leadership. It has recently received Board approval to make up to
$30 million in venture capital investments. The details of the venture
investment strategy have yet to be determined.
The Razorfish delivery model
Razorfish has organized its professionals in a unique structure in
recognition of the complex and fast changing nature of technology and the needs
of its clients. Razorfish delivers its end-to-end multi-platform solution by
approaching its delivery model from three perspectives: (1) providing its
clients with comprehensive
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end-to-end solutions which require strategy, creative and technology skill sets;
(2) utilizing its knowledge of all technology platforms including the World Wide
Web, wireless, broadband networks and legacy systems; and (3) utilizing its
expertise and business process knowledge of key industries: media and
entertainment, financial services, travel and leisure, healthcare,
manufacturing, retail and information and telecommunications. The client
engagement team comprises professionals who have the relevant skill sets,
technology platform expertise and industry knowledge.
Digital solutions
The following chart illustrates some of the digital solutions that Razorfish
has created for its clients. Razorfish has provided these examples in order for
you to obtain a better understanding of the type of projects that it has
completed and expects to continue to complete in the foreseeable future.
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Financial Services
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Challenge: Provide a new customer Solution: Razorfish created an innovative mobile, 24-hour
service channel for insurance service for Pohjola. With a mobile
Pohjola Group Insurance phone that supports WAP (wireless application
Corporation, a Finnish protocol) technology, Pohjola's clients can
insurance company. search for information and complete insurance
transactions in any place, at any time. The
service focuses on traffic accidents,
displaying first aid and insurance claim
information on the customer's telephone, and
provides a link for ordering towing services and
contacting service stations.
www.pohjola.fi
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Challenge: Bring the established Solution: Razorfish created the E-dentity project with
brand identity of NatWest NatWest to develop a multiple digital channel
Bank into new digital strategy for the NatWest brand. The project
channels and re-invent focuses on consistency in both look and feel for
NatWest's main consumer customer service across new media channels such
banking website. as the Internet, ATMs, mobile phone and PDAs.
Razorfish also dismantled and reassembled NatWest
existing site, to bring it into line with NatWest
innovative new advertising style and provide new
interactive features to maximize the quality of
the user experience. The site combines interactive
tools, online banking and stock trading in an easily
-navigable structure.
www.natwest.com
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Media & Entertainment
Challenge: Redefine The Financial Solution: Razorfish transformed ft.com into a global
Times as a digital brand business portal designed to provide
by transforming the compreshensive information and tools for business
ft.com site. people worldwide. The site provides editorial
coverage of the business world, a comprehensive
business directory, stock quotes, industry
information and other resources. The flexible
design allows for expansion across different
cultures, countries and distribution channels.
www.ft.com
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Challenge: Develop a global brand Solution: Razorfish designed a fully-animated broadcast
identity for Fox Kids and print package with a unique iconic language
Network. that uses symbols in place of navigational text.
The modular design package features a line of
collectible network logos that complement shows,
along with signature characters, stylized
"character buttons" for each program genre, and a
system of symbols that conveys schedule and
program information, providing consistency
across international markets while allowing local
customization. The package includes integrated
premiums such as stickers, mangnets and a CD
remix of popular program theme songs.
Healthcare
Challenge: Strengthen the brand and Solution: Razorfish led Cieos through a complete re-naming
business of Cieos, a naming and re-branding program, and helped
provider of digital refocus its business on improved customer
infrastructures to the satisfaction and the development of proprietary
professional services hardware. The first product designed by
industry. Razorfish and Cieos, Cieoport, is targeted at the
dental industry. It is a handheld LCD touch
screen controlled by standard personal computer
operating systems which provides content and
connections for electronic dental tools. The
Cieoport provides access to patient information,
including digital x-rays, dental records, office
databases, and also delivers educational and
entertainment materials to the patient.
www.cieos.com
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Information & Telecommunications
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Challenge: Streamline the delivery of Solution: Razorfish designed mySAP.com, an open,
business solutions by SAP collaborative business environment providing
AG, a provider of ERP personalized solutions on demand. mySAP.com
software solutions. Internet offerings provide companies with
seamless end-to-end integration of SAP and
non-SAP solutions, originating at the
point of customer contact with customer
relationship management applications and
extending through the business operation to
provide a total e-business environment.
Offerings including mySap.com Workplace,
Marketplace, business scenarios and
application hosting. Razorfish was able to
gather diverse data streams and display the
resulting information in a concise manner
that significantly shortened the normal
information retrieval process for each of the
scenarios.
www.mySAP.com
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Travel & Leisure
Challenge: Create a digital strategy Solution: Razorfish created a website for the RAC that
for the Royal Automobile features interactive accommodation planning
Club (RAC) that utilizes route planning and live traffic news. Razorfish
their "movement drives re-engineered the navigational system, look and
us" campaign and feel, and functionality of the site. More RAC
enhances customer services, such as Status Check, were incorporated
recruitment and retention. into the site, thereby introducing new revenue
streams.
www.rac.co.uk
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Challenge: Help SJ, a Swedish Solution: Razorfish established SJ's website as a new
railroad, take advantage sales channel, providing it with a dynamic
of digital technologies to marketing tool and providing its customers with
streamline its costs and an easy way to book tickets, streamlining SJ's
internal operations and costs in the process.
give it a competitive
advantage.
www.sj.se
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Retail
Challenge: Develop a compelling Solution: Razorfish redesigned armaniexchange.com both
online presence for architecturally and visually and also refined the
Armani Exchange that is site's content, creating a more intuitive user
unified with offline experience for a site designed to be a fashion
advertising and branding destination. Razorfish is currently working with
initiatives. Giorgio Armani on the construction of its
giorgioarmani.com site
www.armaniexchange.com
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Challenge: Target new customers for Solution: Razorfish worked with C&A to create a
C&A, a leading European multilingual site utilizing a flexible architecture
fashion retailer, with a which enables C&A to frequently change site
global e-commerce site, content and accommodates new market areas. To
and incorporate the meet the needs of C&A's reorganized digital
website into a restructured business, Razorfish helped develop new stock and
digital organization. distribution lines to cope with the demands of
direct selling, annexed order fulfillment and
secure payment systems to the site and created
new functionality to support online marketing.
www.c-and-a.com
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Manufacturing
Challenge: Keep Alliant - Wisconsin Solution: Razorfish migrated Alliant - WP&L's aging and
Power & Light (now complex Customer Information and Billing
Alliant Energy) System (CIS) to a platform that supports open
competitive in a systems, including the Internet. The new
marketplace increasingly platform makes CIS more accessible and reliable,
crowded by deregulation enabling Alliant - WP&L to provide new features
by enhancing its customer such as summary billing and online account
service capabilities. access. Razorfish met the company's objective
without making it technology-dependent on a
single architecture or vendor.
www.alliantenergy.com
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Marketing and sales
Razorfish dedicates its marketing efforts to strengthening its brand name
and enhancing its reputation as a creative, full-service provider of digital
solutions. Razorfish believes that the current strength of its brand name
provides it with a competitive advantage over those Internet services firms
whose brands may not be as well known or may not convey the same focused message
of integrated digital solutions.
Razorfish designs its brand development programs to reinforce the message
that Razorfish is an international company with a local presence that can
provide an integrated, full-service offering. Razorfish also intends to increase
its advertising in an effort to expand the recognition of its brand name.
Razorfish develops its marketing programs, advertising campaigns and marketing
tools internally and can deliver such tools to all Razorfish offices without
incurring the additional expense of retaining a marketing firm.
Razorfish employs a marketing staff with responsibilities for promoting
Razorfish and its brand, communicating with Razorfish's investors, and informing
Razorfish employees about current activities. However, currently Razorfish's
client partners, the employees responsible for maintaining client relationships,
are responsible for sales as well as the delivery of solutions. This approach
provides Razorfish with a flexible sales resource. Because of the historically
high demand for Razorfish's services, Razorfish has not needed a formal sales
force. There can be no assurance that this trend will continue, especially as
Razorfish and its engagements continue to grow in size; therefore Razorfish may
need to develop a sales force in the future.
Clients
Razorfish currently targets companies in industries that can use digital
technologies to increase sales, improve communications and create business
identities. These industries include financial services, media and
entertainment, information and telecommunications, manufacturing, travel and
leisure, healthcare and retail.
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Razorfish has also created digital solutions for prestigious cultural
institutions including The Smithsonian Institution, Carnegie Hall, The Whitney
Museum and the Norwegian State Church (Norsk Kirkeiutlandet).
Razorfish believes that increased deregulation, consolidation and global
competition will lead companies in more industries to use digital communications
technology to differentiate their products and services. Razorfish will continue
to target those industries that it believes will most effectively be able to use
digital communications technologies to increase sales, improve communications
and create business identities.
Each of Razorfish's clients is generally charged for the time, materials and
expenses incurred on a particular project. Agreements entered into in connection
with a project are generally terminable by the client upon 30-days' prior
written notice. Razorfish cannot give any assurances that a client will not
terminate an engagement before its completion. If its clients terminate existing
agreements or if Razorfish is unable to enter into new engagements, its
business, financial condition and results of operations could be materially and
adversely affected.
No client accounted for more than 10.0% of Razorfish's revenues in 1999 or
1998, and in 1997 Salt River Project accounted for approximately 13.8% of
revenues. Although, Razorfish does not believe that it will derive a significant
portion of its revenues from a limited number of clients, there is a risk that
it may do so. Any cancellation, deferral or significant reduction in work
performed for 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.
i-Cube acquisition
On November 2, 1999, Razorfish acquired all of the outstanding capital stock
of International Integration Incorporated ("i-Cube"). This acquisition was
completed by the exchange of 0.875 shares of Razorfish Common Stock for each
share of i-Cube common stock that was outstanding immediately prior to the
acquisition. Razorfish issued a total of 36,069,224 shares of Common Stock and
paid a total of $6,700 (in lieu of issuing fractional shares) to the former
i-Cube stockholders in connection with this transaction.
i-Cube was an IT solutions provider that specialized in consulting,
electronic business and transformation services. These services enabled
organizations to align the capabilities of their IT systems with their business
strategies. The company utilized a fixed-time, fixed-price model and a unique
client teaming approach to deliver solutions that leveraged the value of its
customers' existing business processes and information systems to create new
capabilities and competitive advantages. i-Cube created and developed a set of
tools and methodologies that were designed to address the large-scale strategic
application projects of its customers.
i-Cube was incorporated in 1992. During 1998, i-Cube expanded its operations
by opening an office in Mannheim, Germany. During the second quarter of 1999, in
order to enhance its interactive design and technology development services
capabilities, i-Cube acquired Conduit. At the time of the acquisition, i-Cube
had operations in Massachusetts, California, London, The Netherlands and
Germany, and 435 employees. For the nine months ended September 30, 1999 and the
year ended December 31, 1998, i-Cube had approximately $57.0 and $56.8 million
in revenues, respectively.
Razorfish believes that the combined company has the potential to improve
long-term operating and financial results and a superior competitive position.
Razorfish has had strong consulting, design, creative brand practices, and
i-Cube was an IT solutions provider of electronic business, application
migration and custom software development services. For these reasons, Razorfish
believes that the combined company has been and will continue to be able to
offer clients a broad spectrum of front-to-back-end integrated Internet, client
server and legacy systems services from a sole source. In addition, the
companies have utilized similar business methodologies and approaches;
therefore, Razorfish expects its integration of i-Cube to be successful.
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Spray acquisition
In January 1999, Razorfish acquired all of the issued and outstanding shares
of capital stock of Spray Network AB ("Spray") from Spray Ventures AB ("Spray
Ventures") and Communicade Inc. 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 shares of Common Stock issued represented 50% of the shares of
Razorfish Common Stock on a fully diluted basis immediately following this
acquisition. Immediately prior to this transaction, Communicade purchased 563
shares of Spray, which represented 20% of the outstanding shares of Spray on a
fully diluted basis at the time of purchase, from Spray Ventures and sold these
shares to Razorfish in connection with the Spray acquisition. Razorfish,
Communicade and Messrs. Dachis and Kanarick also entered into a Stockholders
Agreement in connection with the acquisition of Spray, which provided
Communicade with an option to purchase up to 10% of Razorfish's Common Stock.
Because Omnicom is the parent corporation of Communicade, it has an indirect
interest in Razorfish, which was decreased as a result of the Spray acquisition
and then subsequently increased by Communicade's exercise of this 10% option
resulting in Omnicom's ownership interest remaining approximately the same as it
was prior to these transactions.
At the time of the Spray acquisition, Spray had 171 employees. Spray had
approximately $15.4 million in revenues for the year ended December 31, 1998.
Razorfish gained certain of its current clients as a result of the Spray
acquisition including Hagstromer and Qviberg, one of Sweden's largest investment
banks, Hennes & Mauritz, a Swedish retail clothing company, Canal Digital, a
Norwegian satellite TV company, and Nokia.
Spray Ventures was incorporated in Sweden in July 1995. Its business was the
development of digital solutions primarily for use on the World Wide Web. Spray
Ventures' business grew rapidly in size and scope. By early 1997, Spray Ventures
owned a total of seven operating companies that provided a wide range of
services including web design, content and education regarding use of the
Internet and the solutions created by Spray Ventures. Spray Ventures' operations
expanded from Sweden to include operations in Norway, Finland, Germany and the
United States.
In August 1997, Spray Ventures established a wholly owned subsidiary, Spray
Services, and transferred all of its operating subsidiaries, except for Circus,
a content provider, to Spray Services. In September 1997, Spray Ventures
transferred all of the common shares of Spray Services to Tetre in consideration
for 1,162 common shares of Tetre, which represented 51% of the common shares of
Tetre on a fully diluted basis following this transaction. The Tetre
shareholders retained a 49% interest in Tetre. Spray Ventures and the Tetre
shareholders entered into a shareholders agreement pursuant to which the Tetre
shareholders had a right to acquire the number of shares equal to 1% of Tetre at
the time of the merger with Spray Services if Tetre completed a public offering
of its shares. Tetre also changed its name to Spray Network following this
transaction.
During the end of 1997 and the beginning of 1998, Spray Ventures began
consolidating its operations and reorganizing its corporate structure. In
February 1998, it sold Circus to Spray in consideration for additional shares in
Spray such that Spray Ventures' holdings in Spray equaled 58%. During the second
quarter of 1998, the former Tetre stockholders converted their remaining 42%
ownership interests in Spray into 42% of Spray Ventures. In addition, at the
time of this transaction, the shareholders agreement among Spray Ventures and
the former Tetre shareholders was terminated, and accordingly, the option to
purchase 1% of Spray was also terminated. As a result of these transactions,
Spray became 100% owned by Spray Ventures. As part of the consolidation, Spray
Ventures shut down four of its operating subsidiaries and incorporated those
businesses into the remaining operating subsidiaries and shut down its U.S.
operations.
In September 1998, Spray also sold its interests in three non-consultancy
businesses, including Circus, to Spray Ventures and focused its business on
interactive media development and consultancy.
Razorfish and Spray were founded upon like principles and had similar growth
patterns, which have generated what Razorfish believes are compatible corporate
cultures. In addition, the companies utilized similar business methodologies and
approaches. Razorfish believes that its integration of Spray to be successful
and
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that the combined strength of the companies has helped attract and retain
qualified personnel. Razorfish changed the name of Spray to Razorfish AB.
Other acquisitions
In order to acquire expertise in new technologies, gain access to
professionals and expand into new geographic regions, Razorfish has completed
eleven acquisitions, including the acquisitions of i-Cube and Spray, in the
United States and Europe since its inception in 1995. In assessing a potential
acquisition candidate, Razorfish evaluates the target's internal culture,
customer base, local market share, financial characteristics, service offerings
and quality of management. In addition, Razorfish analyzes macroeconomic issues
such as technology adoption rates and the growth rates of the target's local
economy. Set forth below are descriptions of the other acquisitions that
Razorfish completed in 1998 and 1999.
TSDesign, Inc.
On December 1, 1999, Razorfish completed its acquisition of TSDesign, Inc.,
an internet strategy and product design firm. TSDesign created and facilitated
business and design processes and enabled people in organizations to build and
support effective e-business and solutions. Razorfish issued a total of 180,000
shares of Common Stock in connection with this transaction.
Lee Hunt Associates, Inc.
On December 1, 1999, Razorfish acquired all of the outstanding capital stock
of Lee Hunt Associates, Inc. in exchange for 1,250,000 shares of Razorfish
Common Stock. Lee Hunt was an established leader in strategic marketing and
creative production for the entertainment industry that was known for launching,
positioning, designing and promoting media brands and television networks.
Razorfish completed this acquisition to deepen its capabilities in broadband
solutions.
Fuel, Inc. and Tonga, Inc.
On September 16, 1999, Razorfish acquired all of the outstanding stock of
Los Angeles-based Fuel, Inc. and Tonga, Inc. Under the terms of the acquisition,
Razorfish issued 1,312,000 shares of its Common Stock and paid $750,000 in cash
to Fuel and Tonga's sole stockholder in exchange for the entire equity interest
in Fuel and Tonga. The Fuel and Tonga purchase agreement calls for a stock or
cash earn-out payment to the former stockholder based upon the achievement of
certain revenue levels for 1999. Fuel, Inc. specialized in graphic design and
branding for television, and Tonga, Inc. specialized in production of television
commercials.
Electrokinetics
In June 1999, Razorfish acquired substantially all of the assets of
Electrokinetics, Inc., a New York-based company. In consideration for the assets
acquired, Razorfish paid approximately $847,000 in cash. In addition, Razorfish
entered into employment agreements with certain executives of Electrokinetics,
Inc.
Acquisition of Minority Interests in Subsidiaries
In the second quarter of 1999, Razorfish purchased the remaining 15% of
Razorfish Oy, its Finnish subsidiary, approximately 24% of Razorfish AG, its
German subsidiary, and 15% of Razorfish AS, its Norwegian subsidiary, for a
total purchase price of approximately $1.4 million and a grant of an aggregate
of 120,000 options at fair market value. In the Razorfish AS purchase, Razorfish
also agreed to repay certain capital contributions and loans over the next three
years.
Sunbather Limited
Razorfish, through Razorfish Limited, acquired in October 1998 substantially
all of the assets of Sunbather, a London-based new media company with experience
in interactive and digital television, from an administrator appointed for the
company. At the time of the acquisition, Sunbather had 11 employees and, in its
last completed fiscal year ended March 31, 1998, had approximately
(pound)565,000 ($908,000 based upon an average exchange rate for the fiscal year
ended March 31, 1998 of (pound)0.6078 = $1.00) in revenues.
Media
Razorfish acquired substantially all of the assets of Los Angeles-based
Media in August 1998. Media had eight employees at the time of the acquisition
and, in its last completed fiscal year ended December 31,
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1997, had approximately $322,000 in revenues. Media specialized in working with
film and record companies to deliver their messages and content through
computer-based entertainment. In February 2000, Razorfish issued an aggregate of
53,333 shares of Common Stock and made a cash payment of $1.0 million to the
former principals of Media in consideration for their agreement to amend their
respective acquisition agreements to remove the earn-out provisions contained
therein. In connection with this agreement, Razorfish is required to issue an
additional 26,667 shares of Common Stock on or about January 2, 2002.
Plastic
Razorfish acquired in June 1998 substantially all of the assets of San
Francisco-based Plastic, a new media company with strong technical expertise.
Razorfish acquired Plastic to expand its presence to California. At the time of
the acquisition, Plastic had 15 employees and had, in its last completed fiscal
year ended December 31, 1997, approximately $835K in revenues. In February 2000,
Razorfish issued an aggregate of 200,000 shares of Common Stock to the former
principals of Plastic in consideration for their agreement to amend their
respective acquisition agreements to remove the earn-out provisions contained
therein. In connection with this agreement, Razorfish is required to issue an
additional 100,000 shares of Common Stock on or about December 31, 2001.
CHBi
In May 1998, Razorfish acquired all of the outstanding stock of London-based
CHBi (now Razorfish Limited). Razorfish's acquisition of this new media company
was its first venture into the European markets. At the time of the acquisition,
CHBi had 26 employees and had, in its last completed fiscal year ended May 31,
1998, approximately (pound)835K ($1.3 million based upon an average exchange
rate for the fiscal year ended May 31, 1998 of (pound)0.6067 = $1.00) in
revenues. In February 2000, Razorfish issued an aggregate of 266,640 shares of
Common Stock to the former principals of CHBi in consideration for their
agreement to amend their respective acquisition agreements to remove a portion
of the earn-out provisions contained therein. In connection with this agreement,
the former CHBi principals have a call option arising on May 31, 2000 whereby
they may cause Razorfish to issue an additional 133,360 shares of Common Stock
in exchange for the removal of the final portion of the earn-out payment.
Razorfish has a corresponding put option arising on the same date.
Avalanche Systems
In January 1998, Razorfish, through its subsidiary, Avalanche Solutions,
acquired in a foreclosure sale substantially all of the assets of New York-based
Avalanche Systems, a new media company with capabilities in creative design.
Upon the closing of this transaction, Razorfish and the two founders of
Avalanche Systems owned all of the outstanding stock of Avalanche Solutions. The
two founders of Avalanche Solutions surrendered their stock to Razorfish after
the closing, and, as a result, Avalanche Solutions became a wholly owned
subsidiary of Razorfish. At the time of the acquisition, Avalanche Systems had
32 employees and had, in its last completed fiscal year ended December 31, 1997,
approximately $2.3 million in revenues.
Internal information systems
Razorfish continuously works to improve its internal communication systems
and production tools for creating and maintaining digital communications
solutions for its clients. During 1999, Razorfish upgraded MOM, its intranet
system, by adding new functions and faster, redundant hardware. MOM 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. These modules consist of
both internally developed packages and certain SAP packages for financials and
human resources and Evolve for resource and delivery management.
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. Razorfish has also successfully
combined networks from existing legacy networks and domains. These and other
internally developed technologies reduce development time and cost and increase
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productivity at Razorfish. Razorfish believes that these additional capabilities
will improve employee productivity, client service delivery and management of
its worldwide operations.
Competition
The Internet services market has grown dramatically in recent years and is
relatively new and highly competitive. Razorfish's competitors include:
. Strategy consulting firms, including Bain & Company, The Boston
Consulting Group, Inc. and McKinsey & Company;
. Internet service firms, including Scient Corporation, Viant Corporation,
Proxicom Inc., Lante Corporation, Sapient Corporation and USWeb;
. Technology consulting firms and integrators, including Andersen
Consulting, the major accounting firms, Diamond Technology Partners,
Inc., EDS and IBM; and
. In-house information technology, marketing and design service
departments of Razorfish's current and potential clients.
Many of Razorfish's competitors have longer operating histories, larger
client bases, longer relationships with their clients, greater brand or name
recognition and significantly greater financial, technical and marketing
resources. Several of these competitors may provide or intend to provide a
broader range of Internet-based solutions than Razorfish. 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 we can. In addition, competition may intensify because there are relatively
low barriers to entry into the Internet services market.
Razorfish believes that the principal competitive factors in this market, in
relative importance, are technical knowledge and creative skills, brand
recognition and reputation, reliability of the delivered solution, client
service and price. Razorfish believes that its ability to compete in its market
depends on its ability to attract and retain qualified professionals.
Intellectual property rights
Razorfish seeks to protect its intellectual property through a combination
of license agreements and trademark, service mark, copyright and trade secret
laws. Razorfish enters into confidentiality agreements with its employees and
clients and uses it best efforts to limit access to and distribution of
proprietary information licensed from third parties. In addition, Razorfish has
entered into non-competition agreements with certain of its key employees.
Razorfish pursues the protection of its trademarks in the United States and
internationally. It has obtained U.S. registration for the "Razorfish", "The
Blue Dot" and "Webspy" marks and has applied for registration of certain of its
other trademarks and servicemarks.
In addition, Razorfish licenses the "Razorfish" trademark and design logo
and "The Blue Dot" trademark on a royalty-free basis to Razorfish Studios.
Razorfish Studios produces and publishes on-line content, including art,
computer games, and literature, as well as screensavers, audio recordings, books
and films. Razorfish Studios also manages artists and provides management
consulting to artists. Because the "Razorfish" trademark and design logo are
licensed to Razorfish Studios, Razorfish's name and reputation could be
materially and adversely affected by content published or actions taken by
Razorfish Studios. However, the license permits Razorfish to terminate the
license in the event Razorfish Studios takes any action that denigrates the
Razorfish trademark or design logo.
Razorfish's efforts to protect its intellectual property rights could be
inadequate to deter misappropriation of proprietary information. For example,
Razorfish may not detect unauthorized use of its intellectual property. In
addition, the legal status of intellectual property on the Internet is currently
subject to various uncertainties. See "Factors Affecting Future Operating
Results--Misappropriation of our trademarks and other proprietary rights could
harm our reputation, affect our competitive position and cost us money" and
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"Factors Affecting Future Operating Results--Our business is subject to U.S. and
foreign government regulation of the Internet."
U.S. and foreign government regulation
In 1999 Congress passed legislation that regulates certain aspects of the
Internet, including on-line content, copyright infringement, user privacy,
taxation, access charges, liability for third-party activities and jurisdiction.
In addition, federal, state, local and foreign governmental organizations also
are considering, and may consider in the future, other legislative and
regulatory proposals that would regulate the Internet. Areas of potential
regulation include libel, pricing, quality of products and services and
intellectual property ownership.
The European Union has recently enacted directives affecting business on the
Internet, in the fields of privacy and the transfer of personal data, distance
selling, advertising, and electronic signatures, to name a few. In addition,
several new proposals for Directives related to the Internet are likely to be
adopted in the near future relating for example to copyright infringement, the
patenting of software, the recognition of electronic contracts, the liability of
intermediaries for third party content, the uniform imposition of value added
tax on e-commerce transactions, electronic money and distance sales of financial
services. These directives will complement the existing general EU rules already
applicable to E-commerce in fields such as commercial piracy (of copyrights,
trademarks and patents), consumer protection (e.g., relating to unfair contract
terms, product liability, and warranties for the sale of goods), and taxation.
It is not known how courts will interpret both existing and new laws.
Therefore, Razorfish is uncertain as to how new laws or the application of
existing laws will affect its business. In addition, Razorfish's 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.
Employees
As of December 31, 1999, Razorfish had 1,355 employees, approximately 60% of
which are based in the US and approximately 40% of which are based in Europe.
Approximately 1,000 of Razorfish's total employees are billable employees.
Razorfish's continuing success will depend, in large part, on its ability to
attract, motivate and retain highly qualified employees. Competition for such
personnel is intense, and Razorfish may not be able to retain its senior
management or other key personnel in the future. Razorfish believes it maintains
high employee retention rates as compared to industry averages by paying
competitive salaries, granting stock options and other awards and reimbursing
employees for tuition expenses in connection with information technology-related
coursework. Employees also may temporarily transfer to another of Razorfish's
domestic or European offices.
Razorfish's employees are not represented by any union and, except for
senior management and certain other employees, are retained on an at-will basis.
However, the regulations of certain European countries in which Razorfish
operates, including Sweden, may make it difficult for Razorfish to terminate
certain of those at-will employees. In addition, those regulations govern the
amount of vacation time that must be given to employees, which is significantly
more vacation than in the United States. Razorfish considers its relations with
its employees to be satisfactory.
Factors Affecting Future Operating Results
The loss of our professionals would make it difficult to complete existing
client engagements and bid for new client engagements, which could adversely
affect our business and results of operations.
Our business is labor intensive, and our success depends on identifying,
hiring, training and retaining professionals. If a significant number of our
current employees or any of our senior managers or key project
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managers leave, we may be unable to complete or retain existing client
engagements or bid for new client engagements of similar scope and revenue. We
have entered into employment agreements and non-competition agreements with some
of our senior managers, but these key personnel may still leave us or compete
with us. In addition, a court might not enforce the non-competition provisions
of these agreements. Even if we retain our current employees, our management
must continually recruit talented professionals in order for our business to
grow. These professionals must have skills in business strategy, marketing,
branding, technology and creative design. There is currently a shortage of
qualified personnel in the information technology services market, and this
shortage will likely continue. We compete intensely with our competitors for
qualified personnel. An inability to attract, motivate and retain qualified
professionals, could adversely affect our business and results of operations.
Our revenues are difficult to predict because we derive them from fees generated
on a project-by-project basis.
We derive our revenues primarily from fees for services generated on a
project-by-project basis. These projects vary in size and scope. Therefore, a
client that accounts for a significant portion of our revenues in a given period
might not generate a similar amount of revenues, if any, in subsequent periods.
In addition, after we complete a project, we can have no assurance that the
client will retain us in the future.
Many of our clients can terminate their agreements with us, whether time and
materials or fixed-fee based, on 30-days' prior written notice. If our clients
terminate, or fail to renew, existing agreements, our business, financial
condition and results of operations could suffer material harm.
See Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview" for a more complete description of our
sources of revenues and the impact of the nature of our business on our
financial condition.
Our engagements could be unprofitable if we do not perform fixed-price,
fixed-time contracts efficiently.
Some of our engagements may be unprofitable and we may experience losses if
our actual costs for fixed-price, fixed time engagements exceed the estimated
costs. Historically, i-Cube had undertaken client engagements on a fixed-price,
fixed-time basis, and Razorfish also has derived a portion of its revenues from
fixed price, fixed-time contracts. When working on that basis, we agree with the
customer on a statement of work. We warrant that we will deliver the specified
work at a specified time at a fixed price. In making proposals for fixed-price,
fixed-time contracts, we estimate the time and money required to complete the
client engagement. These estimates reflect judgments about the complexity of the
engagement and the efficiency of our methods, technologies and IT professionals
when applied to the client engagement. Unexpected delays and costs may arise,
often outside of our control. To remedy these delays, we may sometimes need to
devote unanticipated additional resources to complete some of our client
engagements. Devoting extra resources reduces the profitability of the
contracts, and can even lead to losses. The losses or diminished profitability
on fixed-fee, fixed-time contracts could materially harm our business, financial
condition and results of operations.
A decrease in the number or size of one client engagements may cause our results
to fall short of investors' expectations and adversely affect the price of our
Common Stock.
A high percentage of our expenses, including those related to employee
compensation and equipment, are relatively fixed. If the number or average size
of our client engagements decreases in any quarter, then our revenues and
operating results may also decrease.
If our operating results fall short of investors' expectations, the trading
price of our Common Stock could decrease materially, even if the quarterly
results do not represent any longer-term problems. See Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Quarter-to-quarter fluctuations in margins" for additional factors
that may cause variations in our quarterly results.
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Our recent acquisitions have created financial and other challenges, which, if
not addressed or resolved, could harm our business.
We have experienced financial, operational and managerial challenges in
integrating i-Cube and other recently acquired companies. Razorfish completed
five acquisitions during 1998, six acquisitions in 1999, including the
acquisition of i-Cube in November 1999.
Our management must devote significant time and attention to the integration
of technology, operations and personnel as a result of these acquisitions, and
we cannot assure that our ability to service current clients and win new clients
will not suffer as a result. In addition, our management faces the difficult and
potentially time consuming challenges of implementing uniform standards,
controls, procedures and policies throughout our U.S. and European offices.
We could also experience financial or other setbacks if i-Cube or any of the
other acquired businesses experienced problems in the past of which our
management does not yet know. For example, if an acquired business had
dissatisfied customers or performance problems, our reputation could suffer as a
result of our association with that business. Our management is unaware of any
material legal claims against any 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 suffer material and adverse harm. See Item 1 -
"Business--i-Cube acquisition," "Business--Spray acquisition" and
"Business--Other acquisitions" for descriptions of the acquisitions we have
completed.
We may be unable to implement our acquisition growth strategy, which could harm
our business and competitive position in the industry.
Our business strategy includes making acquisitions of other IT companies,
including digital communications solutions providers, technology integrators and
web design or consulting firms. Our continued growth will depend on our ability
to identify and acquire companies that complement or enhance our business on
acceptable terms. We may not be able to complete or identify future acquisitions
or realize the anticipated results of future acquisitions. Some of the risks
that we may encounter in implementing our acquisition growth strategy include:
. expenses and difficulties in identifying potential targets and the costs
associated with incomplete acquisitions;
. higher prices for acquired companies because of greater competition for
attractive acquisition targets;
. expenses, delays and difficulties of integrating the acquired company
into our existing organization;
. dilution of the interest of existing stockholders if we sell stock to
the public to raise cash for acquisitions;
. diversion of management's attention;
. expenses of amortizing the acquired company's intangible assets;
. impact on our financial condition due to the timing of the acquisition;
and
. expense of any undisclosed or potential legal liabilities of the
acquired company.
If realized, any of these risks could have a material adverse effect on our
business, results of operations and financial condition.
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Our continued growth may further strain our resources, which could hurt our
business and results of operations.
Our recent growth has strained our managerial and operational resources. A
key part of our strategy is to grow, both by hiring more personnel and by
acquiring companies, which may continue to strain our managerial and operational
resources. We cannot assure you that our managers will be able to manage our
growth effectively. To manage future growth, our management must continue to
improve our operational and financial systems, procedures and controls and
expand, train, retain and manage our employee base. If our systems, procedures
and controls are inadequate to support our operations, our expansion would halt,
and we could lose our opportunity to gain significant market share. Any
inability to manage growth effectively could materially harm our business,
results of operations and financial condition.
We may have difficulty in managing our international operations and expansion,
which could adversely affect our business and results of operations.
A key element of our strategy is to expand our business into international
markets. In addition to our domestic operations, we have operations in seven
European cities: London, England; Stockholm, Sweden; Oslo, Norway; Helsinki,
Finland; Amsterdam, the Netherlands; Hamburg and Mannheim, Germany. Our
management may have difficulty managing and expanding our international
operations because of distance, as well as language and cultural differences.
Our management cannot assure you that they will be able to market and operate
our services successfully in foreign markets.
Other risks related to our international operations include:
. difficulties arising from staffing and managing foreign operations;
. legal and regulatory requirements of different countries, such as
differing tax or labor laws; and
. potential political and economic instability.
The materialization of any of these risks could materially and adversely
affect our international and domestic businesses, results of operations and
financial condition.
Historically, we generated a large part of our revenues from a small number of
clients, and if that trend re-occurs our financial condition could be adversely
impacted.
Historically, we derived a significant portion of our revenues from a
limited number of large clients. Although no client accounted for more than
10.0% of Razorfish's revenues in 1999 or 1998, in 1997 Salt River Project
accounted for approximately 13.8% of revenues. If the bulk of our revenues is
generated from a small number of clients again, there is a risk that our
financial condition could be adversely impacted. Any cancellation, deferral or
significant reduction in work performed for principal clients or a significant
number of smaller clients, could materially harm our business, financial
condition and results of operations. See Item 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview" and Item -
"Business--Clients" for more information relating to our clients.
We compete in a new and highly competitive market that has low barriers to
entry.
We compete in the information technology services market which is relatively
new and intensely competitive. We expect competition to intensify as the market
evolves. We compete with:
. strategic consulting firms;
. Internet service firms;
. technology consulting firms and integrators; and
. in-house information technology, marketing and design departments of our
clients and potential clients.
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Many of our competitors have longer operating histories, larger client
bases, longer relationships with clients, greater brand or name recognition and
significantly greater financial, technical, marketing and public relations
resources than we have.
Relatively few barriers prevent competitors from entering the information
technology services market. As a result, new market entrants pose a threat to
our business. We do not own any patented technology that prevents or discourages
competitors from entering the information technology services market. Existing
or future competitors may develop or offer services that are comparable or
superior to ours at a lower price, which could materially harm our business,
results of operations and financial condition. See Item 1 - "Business--Industry
background" and "Business--Competition" for a more complete description of the
industry in which we compete, a list of our competitors and the competitive
factors within our industry.
We must maintain our reputation and expand our name recognition to remain
competitive.
We believe that establishing and maintaining a good reputation and name
recognition is critical for attracting and expanding our targeted client base.
We also believe that the importance of reputation and name recognition will
increase due to the growing number of information technology service providers.
If our reputation is damaged or if potential clients do not know what services
we provide, we may become less competitive or lose our market share. Promotion
and enhancement of our name will depend largely on our success in providing high
quality services and end-to-end digital communications solutions, which we
cannot ensure. If clients do not perceive our services to be effective or of
high quality, our brand name and reputation could be materially and adversely
affected.
In addition, we license two trademarks and our design logo to Razorfish
Studios, Inc., a company controlled by Communicade and Messrs. Dachis and
Kanarick. Because we license the "Razorfish" trademarks and design logo to
Razorfish Studios, content published or actions taken by Razorfish Studios could
materially and adversely affect our name and reputation.
Misappropriation of our trademarks and other proprietary rights could harm our
reputation, affect our competitive position and cost money.
We believe our trademarks and other proprietary rights are important to our
success and competitive position. If we cannot protect our trademarks and other
proprietary rights against unauthorized use by others, our reputation among
existing and potential clients could be damaged and our competitive position
adversely affected. We have registered certain of our trademarks in the United
States and abroad. We use our best efforts to limit access to and distribution
of our proprietary information, as well as proprietary information licensed from
third-parties. We cannot ensure that these strategies will be adequate to deter
misappropriation of our proprietary information and material.
Our strategies to deter misappropriation could be inadequate in light of the
following risks:
. foreign countries may not recognize our proprietary rights or may fail
to protect those rights adequately;
. competitors could misappropriate our proprietary information or
materials without detection; and
. non-competition and confidentiality agreements signed by our key
employees may prove unenforceable.
If any of these risks materialize, we could be required to spend significant
amounts to defend our proprietary rights and our managerial resources could be
diverted. In addition, our trademarks and other proprietary rights may decline
in value or not be enforceable. See Item 1 - "Business--Intellectual property
rights" for more information concerning our intellectual property.
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We need to keep pace with changing communications technologies to provide
effective digital communications solutions.
Our success depends on our ability to keep pace with the rapid changes
occurring in communications technologies and the new and improved devices that
result from these changes. If we do not respond quickly and cost-effectively to
changing communications technologies and devices, our services may become less
competitive, and we might lose our market share. For example, if the Internet is
rendered obsolete or less important by faster, more efficient technologies, we
must be prepared to offer non-Internet-based solutions or risk losing current
and potential clients. In addition, if mobile phones, pagers, personal digital
assistants or other devices become important aspects of digital communications
solutions, we will need to have the technological expertise to incorporate them
into our solutions.
Our business depends on continued growth in the use of the Internet.
Our future success depends on continued growth in the use of the Internet
because we primarily use Internet-based technology to create our solutions. If
businesses do not consider the Internet a viable commercial medium, our client
base may not grow. The adoption of the Internet for commerce and communications,
particularly by those individuals and companies that have historically relied
upon alternative means of commerce and communication, generally requires the
understanding and acceptance of a new way of conducting business and exchanging
information. In particular, companies that have already invested substantial
resources in other means of conducting commerce and exchanging information may
be particularly reluctant or slow to adopt a new, Internet-based strategy that
may make their existing personnel and infrastructure obsolete.
In addition, our business may be indirectly impacted if the number of users
of the Internet does not increase or if commerce over the Internet does not
become more accepted and widespread. The Internet may lose its viability as a
commercial marketplace due to consumers' actual or perceived lack of security of
information, such as credit card numbers, governmental regulation and
uncertainty regarding intellectual property ownership. Use of the Internet may
also be affected if the infrastructure of the Internet is not developed or
maintained. Published reports have indicated that capacity constraints caused by
growth in the use of the Internet may impede further development of the Internet
to the extent that users experience delays, transmission errors and other
difficulties. If the necessary infrastructure, products, services or facilities
are not developed, or if the Internet does not become a viable and widespread
commercial medium, our business, results of operations and financial condition
could be materially and adversely affected.
Our business is subject to U.S. and foreign government regulation of the
Internet.
State, local and federal governments in the U.S. and local and national
governments in the European Union have recently passed legislation relating to
the Internet. Because these laws are still being implemented, we are not certain
how they will affect our business. This new legislation may indirectly affect us
through its impact on our clients and potential clients. In addition, U S and
foreign governmental bodies are considering, and may consider in the future,
other legislative proposals to regulate the Internet. We cannot predict if or
how any future legislation would impact our business, results of operations or
financial condition. See "Business--U.S. and foreign government regulation" for
a more complete description of the regulations that govern our industry.
The conversion to the euro may adversely affect our business in Europe.
Because of our European operations, we face risks as a result of the
conversion by some of the European Union member states of their currencies to
the euro. The conversion process commenced on January 1, 1999. The conversion
rates between the member states' currencies and the euro are fixed by the
Council of the European Union. We are unsure as to whether the conversion to the
euro will have an adverse impact on our business, but potential risks include
(1) the costs of modifying our software and information systems and (2) changes
in the conduct of business and in the principal European markets for our
products and services. See Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Currency fluctuation and the euro
conversion" for a more complete description of the impact of the conversion to
the euro on our financial condition.
20
<PAGE>
Our stock price has been, and may continue to be, volatile.
The trading price of our stock has been volatile in recent months, and this
volatility may continue in the future. Wide fluctuations in our trading price or
volume could be caused by:
. quarterly variations in our operating results;
. investor perception of our company and the information technology
services market in general;
. announcements or implementation of technological innovations;
. announcements or implementation by us or our competitors of new products
or services;
. financial estimates by securities analysts; and
. general economic and information technology services market conditions.
In addition, the stock market in general, and the market for
Internet-related stocks in particular, has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of such companies. If investor interest in Internet stocks declines,
the price for our Common Stock could drop suddenly and significantly, even if
our operating results are positive. If the trading volume of our Common Stock
experiences significant changes, the price of our Common Stock could be
adversely affected. Declines in the trading or price of our Common Stock could
also materially and adversely affect employee morale and retention, our access
to capital and other aspects of our business.
Future sales of our common stock in the public market could adversely affect our
stock price and our ability to raise funds in new equity offerings.
No prediction can be made as to the effect, if any, that future sales of
shares of common stock or the availability for future sale of shares of common
stock or securities convertible into or exercisable for our common stock will
have on the market price of common stock prevailing from time to time. Sale, or
the availability for sale, of substantial amounts of common stock by existing
stockholders under Rule 144, through the exercise of registration rights or the
issuance of shares of common stock upon the exercise of stock options or
warrants or the conversion of our convertible preferred stock, or the perception
that such sales or issuances could occur, could adversely affect prevailing
market prices for our common stock and could materially impair our future
ability to raise capital through an offering of equity securities.
Our charter documents could make it more difficult for a third party to acquire
us.
Our Certificate of Incorporation and By-laws are designed to make it
difficult for a third party to acquire control of us, even if a change in
control would be beneficial to stockholders. For example, our Certificate of
Incorporation authorizes our Board of Directors to issue up to 10,000,000 shares
of "blank check" preferred stock. Without stockholder approval, the Board of
Directors has the authority to attach special rights, including voting and
dividend rights, to this preferred stock. With these rights, preferred
stockholders could make it more difficult for a third party to acquire our
company.
Our By-laws do not permit any person other than the Board of Directors or
certain executive officers to call special meetings of the stockholders. In
addition, we must receive a stockholders' proposal for an annual meeting within
a specified period for that proposal be included on the agenda. Because
stockholders do not have the power to call meetings and are subject to timing
requirements in submitting stockholder proposals for consideration at an annual
or special meeting, any third-party takeover not supported by the Board of
Directors would be subject to significant delays and difficulties.
21
<PAGE>
Item 2. Properties
Razorfish's headquarters are located in a leased facility in New York City
consisting of approximately 26,000 square feet of office space. The leases for
this office space expire on December 31, 2001. Razorfish also leases additional
office space in New York, Los Angeles, San Francisco, Boston, London, Stockholm,
Oslo, Helsinki, Amsterdam, Mannheim and Hamburg. Razorfish believes that its
existing facilities are adequate to meet current requirements, and that suitable
additional or substitute space will be available as needed.
Item 3. Legal Proceedings
In June 1999, a Swedish company, Razor AB, filed a trademark infringement
action in Stockholm against Razorfish AB, Razorfish's wholly owned subsidiary,
alleging that the two trade names, Razor and Razorfish, are confusingly similar,
and therefore, Razorfish was infringing Razor's rights under Swedish law.
Razorfish has settled this suit for approximately SEK 750,000 (approximately
$86,800 based upon the March 27, 2000 exchange rate of SEK8.64013 = $1.00).
On March 17, 2000, a former consultant to Avalanche Solutions, Inc., a
majority-owned subsidiary of Razorfish, commenced a legal action against
Razorfish and other defendants alleging fraud, violation of New York General
Business Law Sections 339-a and 352-c, and violation of Rule 10b-5 promulgated
under the Securities Exchange Act of 1934. Razorfish is reviewing this action
and believes that the allegations are baseless and without merit in law or fact.
Razorfish cannot assure you, however, that this matter will be resolved in its
favor.
Item 4. Submission Of Matters To A Vote Of Security Holders
Razorfish held a special meeting of its stockholders on November 2, 1999 at
which four proposals were submitted to a vote. The proposals and the resulting
votes were as follows:
. the issuance of shares of Razorfish's Common Stock to the stockholders
of i-Cube in connection with the merger of i-Cube with and into a
wholly-owned subsidiary of Razorfish (see Item 1 - Business-i-Cube
Acquisition) (votes for: 24,085,082, against: 9,698, abstaining: 6,986);
. an amendment to the Certificate of Incorporation of Razorfish increasing
the number of authorized shares of Common Stock by 21,356,655 (the
maximum number of shares to be issued in connection with the i-Cube
merger) from 29,999,950 to 51,356,605 (votes for: 24,075,499, against:
9,473, abstaining: 16,794);
. an amendment to the 1999 Stock Option Plan to (1) increase the number of
shares of Common Stock authorized for issuance by 2,640,079 to 3,562,406
and (2) limit to 500,000 the number of options and stock appreciation
rights that may be awarded to an employee in any one fiscal year (votes
for: 23,291,084, against: 800,421, abstaining: 10,261); and
. an amendment to the Certificate of Incorporation further incrasing the
number of authorized shares of Common Stock from 51,356,605 to
200,000,000 shares for use in connection with acquisitions and for other
corporate purposes (votes for: 23,200,128, against: 234,198, abstaining:
667,440).
22
<PAGE>
PART II
Item 5. Market For Registrant's Common Equity And Related Stockholder
Matters
Razorfish's Common Stock commenced trading on April 27, 1999 on The Nasdaq
National Market under the symbol "RAZF". As of March 22, 2000, there were
approximately 180 holders of record of Razorfish's Common Stock.
The following table presents for the periods indicated the high and low bid
prices for the Common Stock in 1999, as reported by the Nasdaq National Market.
Price Range of
Common Stock
---------------
High Low
------ ---------
Second Quarter (from April 27).. $ 25.75 $ 13.0938
Third Quarter................... $ 22.25 $ 12.50
Fourth Quarter.................. $ 48.187 $ 20.5938
Razorfish's Board of Directors has never declared or paid any dividends on
the Common Stock and does not expect to pay dividends in the foreseeable future.
Razorfish's current policy is to retain all of its earnings to finance future
growth and acquisitions. Future dividends, if any, will be at the discretion of
our board of directors and will depend upon, among other things, our operations,
capital requirements and surplus, general financial condition, contractual
restrictions and such other factors as our board of directors may deem relevant.
Recent Sales of Unregistered Securities
On December 1, 1999, Razorfish issued 180,000 shares of Common Stock to Ms.
Terry Swack in exchange for all of the issued and outstanding shares of common
stock of TSDesign. 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 the transaction was made,
without general solicitation or advertising, to a sophisticated investor with
access to all relevant information necessary to evaluate this investment and who
represented to Razorfish that the shares were being acquired for investment.
On December 1, 1999, Razorfish issued 1,250,000 shares of Common Stock to
Lee Hunt in exchange for all of the issued and outstanding shares of common
stock of Lee Hunt. 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 the transaction was made,
without general solicitation or advertising, to a sophisticated investor with
access to all relevant information necessary to evaluate this investment and who
represented to Razorfish that the shares were being acquired for investment.
On September 16, 1999, Razorfish issued 1,312,000 shares of Common Stock to
the sole stockholder of Fuel, Inc. and Tonga, Inc in exchange for all of the
issued and outstanding shares of common stock of Fuel and Tonga owned by such
shareholder. 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 the transaction was made,
without general solicitation or advertising, to a sophisticated investor with
access to all relevant information necessary to evaluate this investment and who
represented to Razorfish that the shares were being acquired for investment.
On April 30, 1999, Razorfish granted to four employees options to purchase
an aggregate of 120,000 shares of Common Stock in consideration for their
respective interests in certain subsidiaries of Spray. Exemption from
registration for this transaction was claimed pursuant to Regulation S of the
Securities Act regarding transactions by the issuer not involving a public
offering, in that this transaction was made, without general solicitation or
advertising, to a sophisticated investor located outside the United States with
access to all relevant information necessary to evaluate this investment and who
represented to Razorfish that the options were being acquired for investment.
23
<PAGE>
On February 3, 1999, Razorfish issued 3,953,620 shares of Common Stock to
Communicade for a purchase price of $25,303,168. Exemption from registration for
this transaction was claimed pursuant to Section 4(2) of the Securities Act
regarding transactions by the issuer not involving a public offering, in that
this transaction was made, without general solicitation or advertising, to a
sophisticated investor with access to all relevant information necessary to
evaluate this investment and who represented to Razorfish that the shares were
being acquired for investment.
On January 5, 1999, Razorfish issued an aggregate of 19,762,068 shares of
Common Stock and in February 1999 an aggregate of 50 shares of Class B Common
Stock to Spray Ventures and Communicade in exchange for all of the issued and
outstanding shares of stock of Spray and warrants exercisable for an additional
138 shares of stock of Spray. Exemption from registration for 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 these investments and who represented to Razorfish that the shares were
being acquired for investment.
Additionally, Razorfish granted stock options in 1999 to certain of its
employees and consultants pursuant to its 1997 Stock Option and Incentive Plan
and its 1999 Stock Incentive Plan. Prior to registration of its stock options
and the shares of stock to be issued upon exercise thereof under such plans on
Form S-8 filed with the Securities and Exchange Commission on April 29, 1999,
Razorfish issued in 1999 an aggregate of 1,242,200 options and 12,252 shares of
Common Stock on exercise of previously granted options to employees and
consultants in reliance on Rule 701 promulgated under the Securities Act.
24
<PAGE>
Item 6. Selected Financial Data
Selected Consolidated Financial Information
You should read the following selected consolidated financial information in
conjunction with Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Razorfish's consolidated financial
statements and the notes thereto included elsewhere in this Form 10-K. All
amounts for all periods presented have been restated to reflect the acquisitions
of i-Cube in November, 1999 and Lee Hunt and TSDesign in December, 1999, which
were accounted for as a pooling of interests. The historical results are not
necessarily indicative of the operating results to be expected in the future.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands, except share and per share data)
Statement of Operations
Information:
<S> <C> <C> <C> <C> <C>
Revenues ................... $ 22,286 $ 32,438 $ 56,169 $ 83,863 $ 170,179
Project personnel costs .... 10,451 16,015 27,518 44,154 81,042
--------- --------- --------- --------- ---------
Gross profit ............... 11,835 16,423 28,651 39,709 89,137
Sales and marketing ........ 1,194 2,095 4,038 6,281 12,567
General and administrative . 6,779 11,474 16,345 22,516 48,508
Merger-related costs ....... - - - 786 24,566
Non-cash compensation expense - - 79 1,937 189
Amortization of intangibles - - - 109 3,532
--------- --------- --------- --------- ---------
Income (loss) from operations 3,862 2,854 8,189 8,080 (225)
Other income, net .......... 78 57 79 838 3,753
--------- --------- --------- --------- ---------
Income before income taxes . 3,940 2,911 8,268 8,918 3,528
Provision for income taxes . 1,498 1,100 3,287 4,843 18,060
--------- --------- --------- --------- ---------
Net income (loss) .......... $ 2,442 $ 1,811 $ 4,981 $ 4,075 $ (14,532)
========= ========= ========= ========= =========
Net income (loss) per share:
Basic .................... 0.05 0.04 0.11 0.08 (0.17)
Diluted .................. 0.05 0.03 0.10 0.07 (0.17)
Weighted average common shares
outstanding
Basic .................... 49,229 49,254 46,192 50,054 83,129
Diluted .................. 51,569 51,824 51,360 58,113 83,129
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousand)
Balance Sheet Information:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents 3,784 5,526 13,037 36,628 98,798
Total assets ............. 12,182 16,886 35,410 75,831 251,590
Long-term obligations .... 554 654 2,750 6,820 1,760
Stockholders' equity ..... 2,545 4,937 10,779 45,807 198,353
</TABLE>
25
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
You should read the following discussion and analysis in conjunction with
Razorfish's consolidated financial statements and notes thereto included
elsewhere in this Form 10-K. This Form 10-K 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 Form 10-K.
Factors that could cause or contribute to such differences include those set
forth in the section entitled "Factors Affecting Future Operating Results," as
well as those discussed elsewhere in this Form 10-K.
Unless otherwise indicated, all references to Razorfish refer to Razorfish,
and subsequent to their acquisition or formation, its subsidiaries.
Overview
Razorfish is a leading provider of global digital solutions. Digital
solutions are business solutions that use digital technologies to enhance
communications and commerce between businesses and their consumers, suppliers,
employees and other partners. Razorfish provides an integrated, end-to-end
solution. Razorfish's strategy, creative and technology professionals carry out
every aspect of a solution from strategic consulting to design of information
architectures and user-interfaces to integration of backend Enterprise Resource
Planning (ERP) and legacy systems. These digital solutions utilize a wide
variety of platforms, including the World Wide Web, wireless, broadband and
satellite communications and a variety of digital devices and information
appliances, including desktop PCs, mobile phones, pagers and personal digital
assistants. Razorfish thereby creates for its clients digital solutions designed
to help them re-architect their traditional business models and identify and
improve communications and commerce opportunities.
Razorfish's derives substantially all of its revenues from fees for services
generated on a project-by-project basis. Razorfish's services are provided on
both a fixed-time, fixed-price basis and on a time and materials basis.
Historically, Razorfish has not operated on a retainer basis; however, in the
future, Razorfish may utilize such arrangements.
Razorfish recognizes revenues for both time and materials-based arrangements
and fixed-time, fixed-price arrangements on the percentage-of-completion method
of accounting based on the ratio of costs incurred to total estimated costs. In
developing the fixed price of a project, Razorfish follows a process that
assesses the technical complexity of the project, the nature of the work, the
functions to be performed and the resources required to complete the engagement.
Razorfish periodically reassesses its estimated costs for each project, and
provisions for estimated losses on unfinished projects are recorded in the
period in which such losses are determined. To date, such losses have not been
significant. Revenues exclude reimbursable expenses charged to clients.
Agreements entered into in connection with time and materials projects are
generally terminable by the client upon 30-days' prior written notice, and
clients are required to pay Razorfish for all time, materials and expenses
incurred by Razorfish through the effective date of termination. Agreements
entered into in connection with fixed-time, fixed-price projects, are generally
terminable by the client upon payment for work performed and the next progress
payment due. If clients terminate existing agreements or if Razorfish is unable
to enter into new engagements, Razorfish's business, financial condition and
results of operations could be materially and adversely affected. In addition,
because a proportion of Razorfish's expenses are relatively fixed, a variation
in the number of client engagements can cause significant variations in
operating results from quarter to quarter.
Razorfish's projects vary in size and scope; therefore, a client that
accounts for a significant portion of Razorfish's revenues in one period may not
generate a similar amount of revenue in subsequent periods. No client accounted
for more than 10.0% of Razorfish's revenues in 1999 or 1998, and in 1997 one
client accounted for approximately 13.8% of revenues. Razorfish does not believe
that it will derive a significant portion of its revenues from a limited number
of clients in the near future. However, there is a risk that the source of
Razorfish's revenues may be generated from a small number of clients. These
clients may not retain Razorfish in the future. Any cancellation, deferral or
significant reduction in work performed for these principal clients or a
26
<PAGE>
significant number of smaller clients could have a material adverse affect on
Razorfish's business, financial condition and results of operations.
Operating and other expenses
Razorfish's project personnel costs consist primarily of compensation and
related costs of personnel dedicated to customer assignments. Project personnel
costs also include fees paid to subcontractors for work performed in connection
with projects and non-reimbursed project travel expenses.
Razorfish's selling and marketing costs consist primarily of compensation
and related costs of sales and marketing personnel, travel expenses, and
marketing programs and promotion costs.
Razorfish's general and administrative costs consist primarily of
compensation and related costs of the management and administrative functions,
including finance and accounting, human resources and internal information
technology, and the costs of Razorfish's facilities and other general corporate
expenses.
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 incurred approximately $79,000, $1,937,000 and $189,000 in
1997, 1998 and 1999, respectively, in non-cash compensation expense relating to
the grant of certain options to employees in 1997 and 1998.
Acquisitions
Razorfish completed six acquisitions during 1999. In January 1999, Razorfish
acquired all of the capital stock of Spray and certain of its subsidiaries for
50% of Razorfish's Common Stock on a fully diluted basis (after giving effect to
this acquisition). The acquisition of Spray was accounted for using the purchase
method of accounting. The operating results of Spray have been included in
Razorfish's consolidated financial statements since January 5, 1999.
In the second quarter, 1999, Razorfish purchased the remaining 15% of
Razorfish Oy, its Finnish subsidiary, approximately 24% of Razorfish AG, its
German subsidiary, and 15% of Razorfish AS, its Norwegian subsidiary, for a
total of approximately $1.4 million and a grant of an aggregate of 120,000 stock
options with an exercise price equal to the fair market value of the Common
Stock on the date of grant. In the Razorfish AS purchase, Razorfish also agreed
to repay certain capital contributions and loans over the next three years. In
October 1999, Razorfish purchased the remaining minority interests of Razorfish
AS in exchange for a grant of 88,500 stock options with an exercise price equal
to the fair market value of the Common Stock on the date of grant.
Razorfish acquired substantially all of the assets of Electrokinetics in
June 1999 in exchange for approximately $847,000 in cash, and all of the capital
stock of Fuel and Tonga in September 1999 in exchange for 1,312,000 shares of
Razorfish's Common Stock and $750,000 in cash. Each of these acquisitions was
accounted for using the purchase method of accounting; accordingly, the results
of operations of Electrokinetics and Fuel and Tonga were included in Razorfish's
results beginning on the respective dates of acquisition. The Fuel and Tonga
purchase agreement calls for a stock or cash earn-out payment to the former
stockholder based upon the achievement of certain revenue levels for 1999.
In November 1999, Razorfish acquired all of the outstanding capital stock of
i-Cube, a Boston-based provider of electronic business and transformation
services for complex IT environments, in exchange for 36,069,224 shares of
Common Stock and the assumption of options to purchase approximately 12,103,000
shares of Common Stock. This acquisition was accounted for using the pooling of
interests method of accounting and accordingly, the historic consolidated
financial statements of Razorfish prior to the acquisition have been restated to
reflect the combined financial position and results of operations and cash flows
of Razorfish and i-Cube.
27
<PAGE>
In December 1999, Razorfish acquired all of the outstanding capital stock of
Lee Hunt in exchange for 1,250,000 shares of Common Stock. Also in December
1999, Razorfish acquired all of the outstanding capital stock of TSDesign in
exchange for 180,000 shares of Common Stock. Both of these acquisitions have
been accounted for using the pooling of interests method of accounting and
accordingly, the historic consolidated financial statements of Razorfish prior
to these acquisition have been restated to reflect the combined financial
position and results of operations and cash flows of Razorfish and Lee Hunt and
TSDesign.
Razorfish completed five acquisitions during 1998. In May 1998, Razorfish
acquired all of the capital stock of CHBi, a London-based new media company.
Razorfish acquired substantially all of the assets of:
(1) Avalanche Systems, a New York-based new media company, in January 1998;
(2) Plastic, a San Francisco-based new media company, in June 1998,
(3) Media, a Los Angeles-based new media entertainment consultant, in July
1998; and
(4) Sunbather, a London-based new media company, in October 1998.
Each of the acquisitions completed by Razorfish in 1998 were accounted for
using the purchase method of accounting; accordingly, the results of operations
of each acquired company were included in Razorfish's results beginning on the
respective date of each acquisition. (See Note 2 to Razorfish's consolidated
financial statements.)
The following unaudited pro forma consolidated results of operations
reflects the results of operations for the years ended December 31, 1997, 1998
and 1999, as if the aforementioned 1998 acquisitions had occurred on January 1,
1997, as if the aforementioned 1999 acquisitions had occurred on January 1, 1998
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 January 1, 1998 and may not be
indicative of future operating results.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Pro forma:
Revenues ................... $ 70,364 $ 108,086 $ 174,087
Net income (loss) .......... (1,004) 180 (14,092)
Basic net (loss) per share . (0.02) 0.00 (0.17)
Diluted net (loss) per share (0.02) 0.00 (0.17)
</TABLE>
Seasonality
In general, the laws of the European countries in which Razorfish operates
mandate that all employees receive significantly more vacation days than in the
United States. For example, in Sweden, each employee must receive a minimum of
25 days paid vacation per year. These vacations are typically taken in the third
quarter, resulting in declining revenues during this period due to a reduction
in both billable hours and client demand.
Quarter-to-quarter fluctuations in margins
Razorfish's operating results and quarter-to-quarter margins may fluctuate
in the future as a result of many factors, some of which are beyond Razorfish's
control. Historically, Razorfish's quarterly margins have been impacted by:
. the number of client engagements undertaken or completed;
. a change in the scope of ongoing client engagements;
. seasonality;
28
<PAGE>
. a shift from fixed-fee to time and materials-based contracts;
. the number of days during the quarter;
. utilization rates of employees;
. marketing and business development expenses;
. charges relating to strategic acquisitions;
. pricing changes in the information technology services market; and
. economic conditions generally or in the information technology services
market.
Razorfish expects this trend to continue.
Results of operations
The following table sets forth certain consolidated statement of operations
data of Razorfish both in millions and as a percentage of revenues for the
periods indicated:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------
1997 1998 1999
------------------- --------------------- ------------------
Percent of Percent of Percent of
Amount revenues Amount revenues Amount revenues
------ ---------- ------ ---------- ------ ----------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues ........................ $56.2 100% $83.9 100% $170.2 100%
Project personnel costs ......... 27.5 49% 44.2 53% 81.0 48%
----- --- ----- ------ ------ -----
Gross profit .................... 28.7 51% 39.7 47% 89.2 52%
Sales and marketing ............. 4.0 7% 6.3 8% 12.6 7%
General and administrative ...... 16.3 29% 22.5 27% 48.5 28%
Merger-related costs ............ - 0% 0.8 1% 24.6 14%
Non-cash compensation expense ... 0.1 0% 1.9 2% 0.2 0%
Amortization of intangibles ..... - 0% 0.1 0% 3.5 2%
----- --- ----- ------ ------- -----
Income (loss) from operations ... 8.2 15% 8.1 10% (0.2) 0%
Other income, net ............... 0.1 0% 0.8 1% 3.7 2%
Income (loss) before income taxes 8.3 15% 8.9 11% 3.5 2%
Provision for income taxes ...... 3.3 6% 4.8 6% 18.0 11%
----- --- ----- ------ ------- -------
Net income (loss) ............... 5.0 9% 4.1 5% (14.5) 9%
===== === ===== ====== ======= =======
</TABLE>
Year ended December 31, 1999 compared to year ended December 31, 1998
Revenues
Razorfish's revenues increased $86.3 million, or 103%, to $170.2 million for
the year ended December 31, 1999 from $83.9 million for the year ended December
31, 1998. This increase in revenues was attributable to an increased volume of
projects from new customers, the leveraging of existing client relationships to
obtain repeat business, increases in Razorfish's billing rates and the impact of
the purchase acquisitions that were completed in 1998 and 1999.
Project personnel costs
Razorfish's project personnel costs increased $36.8 million, or 83%, to
$81.0 million for 1999 from $44.2 million for 1998. As a percentage of revenues,
project personnel costs decreased to 48% during 1999 from 53% during 1998. The
increase in project personnel costs in absolute dollar terms was a result of the
hiring of additional and more experienced personnel required to deliver
Razorfish's services. The decrease in project personnel costs as a percentage of
revenues was the result of increased billing rates during 1999 without a
corresponding increase in the project personnel headcount required to deliver
the services.
Sales and marketing
Razorfish's sales and marketing expenses increased $6.3 million, or 100%, to
$12.6 million for 1999 from $6.3 million in 1998. As a percentage of net
revenues, these costs decreased from 8% in 1998 to 7% in 1999. The increase in
selling and marketing costs in absolute dollars was primarily attributable to
increased spending on promotional activities and increases in selling and
marketing personnel.
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General and administrative
Razorfish's general and administrative expenses increased $26.0 million, or
116%, to $48.5 million in 1999 from $22.5 million in 1998. As a percentage of
revenues, general and administrative expenses increased to 28% during 1999 from
27% in 1998. The increase in general and administrative expenses in absolute
dollar terms and as a percentage of revenues was attributable to an increase in
general and administrative personnel and increases in facilities and
infrastructure costs required due to Razorfish's rapid growth.
Merger-related Costs
Razorfish completed its merger with i-Cube in November 1999 and its mergers
with Lee Hunt and TSDesign during December 1999. In addition, prior to the
merger with Razorfish, i-Cube had completed its merger with Tomorrow's
Technology Today in May 1999 and its merger with Conduit Communications in June
1999. Costs directly associated with these mergers aggregating $24.6 million
were charged to operations upon consummation of the mergers. Merger-related
costs included $12.6 million in consulting and investment banking fees; $4.8
million for integration related activities, $3.3 million in legal, accounting,
printing and filing fees; lease termination and related costs aggregating $1.8
million; severance and retention costs of $1.7 million and other costs totaling
$0.4 million. Merger-related costs in 1998 consisted mainly of amounts related
to acquisitions completed by i-Cube before the merger with Razorfish.
Non-cash compensation expense
Non-cash compensation expense decreased to $0.2 million in 1999 from
approximately $1.9 million in 1998. This expense decreased as a result of the
one time non cash compensation expense of $1.8 million that was incurred in the
second quarter of 1998 as a result of the grant of fully vested options to
purchase 1,000,000 shares of Common Stock at an exercise price below the fair
market value of the Common Stock on the date of grant.
Amortization of Intangibles
Amortization of intangibles for Razorfish was approximately $3.5 million in
1999 compared to $0.1 million in 1998. This increase in amortization of
intangibles was due to the goodwill resulting from the acquisitions completed
during 1999 and the full year impact of the acquisitions completed in 1998.
Income taxes
Razorfish had income taxes of $18.0 million on a pre-tax profits of $3.5
million during 1999. The effective income tax rate was 512% during 1999. Income
taxes for the period differed significantly from previous periods due to the
write-off during 1999 of a deferred tax asset of $9.4 million in connection with
merger-related tax restructuring activities and the non-deductibility of certain
merger-related charges in relation to the acquisitions completed using the
pooling of interests method of accounting. The differences in the effective tax
rates during 1999 and 1998 from the federal and state statutory rates are
primarily the result of non-tax deductible expenses, including compensation
charges incurred in connection with the grant of incentive stock options in 1999
and 1998, amortization of intangibles in connection with the purchase
acquisitions completed in 1999 and 1998 and certain merger-related charges in
relation to the acquisitions completed using the pooling of interests method of
accounting.
Year ended December 31, 1998 compared to year ended December 31, 1997
Revenues
Razorfish's revenues increased $27.7 million, or 49%, to $83.9 million for
the year ended December 31, 1998 from $56.2 million for the year ended December
31, 1997. This increase in revenues was attributable to an increased volume of
projects from new customers and the leveraging of existing client relationships
to obtain repeat business.
Project personnel costs
Razorfish's project personnel costs increased $16.7 million, or 61%, to
$44.2 million for 1998 from $27.5 million for 1997. As a percentage of revenues,
project personnel costs increased to 53% during 1998 from 49% during 1997. The
increase in project personnel costs in absolute dollar and percentage terms was
a result of the hiring of additional and more experienced personnel required to
deliver Razorfish's services.
30
<PAGE>
Sales and marketing
Razorfish's sales and marketing expenses increased $2.3 million, or 58%, to
$6.3 million for 1998 from $4.0 million in 1997. As a percentage of revenues,
sales and marketing expenses increased from 7% in 1997 to 8% in 1998. The
increase in selling and marketing costs in absolute dollar and percentage terms
was primarily attributable to increased spending on promotional activities and
increases in selling and marketing personnel.
General and administrative
Razorfish's general and administrative expenses increased $6.2 million, or
38%, to $22.5 million in 1998 from $16.3 million in 1997. As a percentage of
revenues, general and administrative expenses decreased to 27% during 1998 from
29% in 1997. The increase in general and administrative costs in absolute
dollars was primarily attributable to an increase in general and administrative
personnel. The decline in general and administrative costs as a percentage of
revenues reflects a decline in administrative staff as a percentage of total
staff and more efficient space utilization of the Razorfish's facilities in
1998.
Amortization of Intangibles
Amortization of intangibles for Razorfish was approximately $0.1 million in
1998 compared to none for 1997. This increase in amortization of intangibles was
due to the goodwill resulting from the five acquisitions completed during 1998.
Non-cash compensation expense
Non-cash compensation expense increased to $1.9 million in 1998 from
approximately $0.1 million in 1997. This increase was due, primarily, to a
one-time compensation charge of $1.8 million that was incurred in the second
quarter of 1998 as a result of the grant of fully vested options to purchase
1,000,000 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
employee of Razorfish pursuant to an employment agreement entered into by
Razorfish and the officer in connection with the acquisition by Razorfish of
Avalanche Systems. See Item 1 - "Business--Other acquisitions."
Income taxes
Razorfish had income taxes of $4.8 million on pre-tax profits of $8.9
million during 1998. During 1997, Razorfish had income taxes of $3.3 million on
pre-tax profits of $8.3 million. The differences in the effective tax rates
during 1998 from the federal and state statutory rates are primarily the result
of non-tax deductible expenses, including compensation charges incurred in
connection with the grant of incentive stock options, the effects of changing
from a Subchapter S corporation to a Subchapter C corporation, and amortization
of intangibles in connection with the purchase acquisitions completed in 1998.
Quarterly results of operations
The following table sets forth unaudited quarterly statement of operations
data of Razorfish in millions for each of the four quarters during the two years
ended December 31, 1999. In management's opinion, this unaudited information has
been prepared on the same basis as the audited annual financial statements and
includes all adjustments (consisting only of normal recurring adjustments)
necessary for fair presentation of the unaudited information for the quarters
presented. You should read this information in conjunction with the consolidated
audited financial statements, including the notes thereto, included elsewhere in
this Form 10-K. The results of operations for an quarter are not necessarily
indicative of results that Razorfish may achieve for any subsequent periods.
31
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<TABLE>
<CAPTION>
Quarters ended
----------------------------------------------------------------------------------------
March June Sept. Dec. March June Sept. Dec.
31, 30, 30, 31, 31, 30, 30, 31,
1998 1998 1998 1998 1999 1999 1999 1999
----- ----- ----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues..................... 18.1 22.0 21.2 22.5 32.6 40.0 44.9 52.7
Project personnel costs..... 9.5 11.5 11.3 11.8 15.7 19.6 21.3 24.5
Gross profit................ 8.6 10.5 9.9 10.7 16.9 20.4 23.6 28.2
Sales and marketing......... 1.3 1.5 1.7 1.8 2.2 2.7 3.6 4.0
General and administrative.. 4.8 5.7 6.0 6.0 8.9 10.9 12.9 15.7
Merger-related costs........ - 0.8 - - - 3.5 - 21.2
Non-cash compensation expense - 1.7 0.1 - - - 0.1 -
Amortization of intangibles. - - - 0.1 0.8 0.8 0.9 1.0
---- ---- ---- ---- ---- ---- ---- -----
Income (loss) from opeations 2.5 0.8 2.1 2.8 5.0 2.5 6.1 (13.7)
Other income, net........... - - 0.4 0.3 0.4 0.9 1.2 1.2
---- ---- ---- ---- ---- ---- ---- -----
Income (loss) before income taxes 2.5 0.8 2.5 3.2 5.4 3.4 7.3 (12.5)
Provision for income taxes 0.9 0.3 1.6 2.2 2.3 1.6 3.7 10.5
Net income (loss)........... 1.6 0.5 0.9 0.9 3.1 1.8 3.6 (23.0)
==== ==== ==== ==== ==== ==== ==== =====
</TABLE>
Liquidity and capital resources
Prior to its initial public offering, Razorfish relied on borrowings under
lines of credit provided by Omnicom to finance its working capital requirements
and capital expenditures. (See "Lines of credit and other financings" below.) In
1999, Razorfish met its working capital requirements through cash generated from
the proceeds of its initial public offering that was completed in April 1999.
During 1999, i-Cube met its working capital requirements through cash
generated from operations and from the proceeds of its initial public offering
that was completed in June 1998. Prior to its initial public offering, i-Cube
met its working capital requirements through cash generated from operations.
Razorfish believes that cash generated by operations combined with the
proceeds of its initial public offering will be sufficient to meet its working
capital needs for the next twelve months.
Net cash provided by (used in) operating activities
Razorfish's net cash used by operating activities was $6.9 million for 1999
compared to cash provided by operating activities of $9.1 million for 1998. Net
cash provided by operating activities was approximately $8.9 million for 1997.
Cash used by operating activities was mainly due to the loss from operations of
$14.5 million for the year, an addback of $6.9 million for depreciation and
non-cash compensation expense and an increase in accounts receivable and
unbilled revenues of $17.3 million and $12.3 million, respectively, which was
partially offset by an increase in accounts payable and accrued expenses of
$27.6 million. Net cash provided by operating activities in 1998 was primarily
due to net income of $4.1 million, an addback of $4.0 million for depreciation
and amortization and non-cash compensation expense, as well as an increase in
accounts payable and accrued expenses of $4.1 million. These amounts were
partially offset by an increase in unbilled revenues of $2.3 million and a
decrease in deferred revenues of $3.8 million. Net cash provided by operating
activities in 1997 was primarily due to net income of $4.9 million, an increase
in deferred revenues of $3.3 million, as well as an increase in accounts payable
and accrued expenses of $4.0 million. These amounts were partially offset by an
increase in accounts receivable of $4.0 million.
Net cash provided by (used in) investing activities
Razorfish's net cash used in investing activities was $6.2 million in 1999
compared to cash used in investing activities of $15.8 million for 1998 and
approximately $5.4 million for 1997. Net cash used in investing activities for
1999 was primarily due to the sale of marketable securities of $8.4 million
offset by purchases of capital equipment of $9.3 million and $3.1 million used
for acquisitions during the period. Net cash used in investing activities in
1998 was primarily used for the acquisition of five companies during this period
of $4.6 million and the purchase of marketable securities of $10.8 million. Net
cash used in investing activities in 1997 was primarily used for the purchase of
computer equipment, furniture and fixtures and leasehold improvements of $5.5
million.
Net cash provided by financing activities
Razorfish's net cash provided by financing activities was $75.6 million for
1999. Net cash provided by financing activities was $30.3 million and
approximately $4.1 million for 1998 and 1997, respectively. The
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increase in 1999 was primarily the result of proceeds of $48.3 million from
Razorfish's initial public offering completed in April 1999 and proceeds of
$25.3 million from the exercise of Communicade's 10% option in February 1999.
(See "Lines of credit and other financings" below.) The increase in 1998 was
primarily the result of proceeds of $27.9 million from i-Cube's initial public
offering completed in June 1998.
Capital expenditures, earn-out payments and rent expenses
Razorfish's capital expenditures for 1999 were approximately $9.3 million
compared to approximately $2.9 million for 1998. Capital expenditures were
approximately $5.5 million for 1997. The increase in capital expenditures during
1999 was due primarily to leasehold improvements made to Razorfish's leased
office space and to purchase computer hardware and software and furniture and
fixtures. Razorfish does not have any material commitments for capital
expenditures for the foreseeable future. In 1999, Razorfish made payments of
approximately $0.3 million in connection with earn-out arrangements under
certain acquisition agreements entered into in 1998. Razorfish may make
additional payments in subsequent years pursuant to these agreements.
Lines of credit and other financings
In September 1996, Razorfish entered into a Shareholders Agreement with
Communicade (f/k/a JWL Associates Corp.), a wholly owned subsidiary of Omnicom,
and Messrs. Dachis and Kanarick, pursuant to which Omnicom agreed that, as long
as it was a shareholder of Razorfish, it would provide Razorfish with a line of
credit of up to $2.0 million for working capital purposes and a financing line
of credit in connection with Razorfish's acquisition of "new media" companies.
The Shareholders Agreement terminated upon the effectiveness of a new
Stockholders Agreement entered into by Razorfish, Communicade, Spray Ventures
and Messrs. Dachis and Kanarick in connection with the acquisition of Spray.
Pursuant to the terms of the Stockholders Agreement, Communicade provided the
working capital line of credit and the acquisition line of credit to Razorfish
on the same terms and conditions as were set forth in the Shareholders
Agreement. Razorfish repaid all outstanding amounts under the working capital
line of credit in February 1999 with the proceeds from the exercise of the 10%
option by Communicade described below. Razorfish repaid all outstanding amounts
under the acquisition line of credit in April 1999 with the proceeds of its
initial public offering. At the time Razorfish repaid this debt, there was a
total of $4.0 million outstanding and the applicable interest rate was 5.95%.
The Stockholders Agreement terminated on the closing of its initial public
offering; accordingly, Razorfish no longer has available any line of credit.
Pursuant to the terms of the Stockholders Agreement, Communicade was granted
an option to purchase from Razorfish the number of shares of Common Stock equal
to 10% of Razorfish's Common Stock on a fully diluted basis on the date the
option is exercised. The purchase price per share upon exercise of the 10%
option was equal to 80% of the price per share sold in Razorfish's initial
public offering. In February 1999, Communicade exercised this option and
purchased 3,953,620 shares of Common Stock. The aggregate purchase price that
Communicade paid for these shares was approximately $25.3 million.
At December 31, 1998, Spray had a loan of SEK 23,576,000 ($2.8 million based
upon the December 31, 1998 exchange rate of SEK 8.1023 = $1.00) due to Spray
Ventures. The terms and conditions of this loan were the same as Razorfish's
borrowings from Omnicom. Razorfish repaid this loan in February 1999 with the
proceeds of the 10% option.
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. Revenues from the
operations of its European subsidiaries are currently denominated primarily in
the applicable local currencies. Razorfish does not plan to repatriate such
revenues to the United States in the foreseeable future. Historically, Razorfish
has not experienced any material changes in quarter-to-quarter operating results
due to currency fluctuations. However, no assurance can be given that quarterly
results will not be impacted in the future, for financial reporting purposes
only, due to the conversion into dollars of non-dollar denominated revenues.
Eleven of the fifteen member states of the European Union have agreed to
adopt the euro as their common legal currency. On January 1, 1999, these members
began the process of converting their native
33
<PAGE>
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, two of the countries in which Razorfish
operates, 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.
Razorfish's management does not believe that the conversion to the euro will
have a material or adverse impact on its business.
Year 2000
In late 1999, Razorfish completed the implementation of its plans to become
Year 2000 ready, through the final remediation and testing of its systems. As a
result of those planning and implementation efforts, Razorfish has not
experienced any significant disruptions in mission critical information
technology and non-information technology systems and believes those systems
successfully responded to the Year 2000 date change. Razorfish is not aware of
any material problems resulting from Year 2000 issues, either with its services
or internal systems, or with the products and services of third parties.
Razorfish will continue to monitor its mission critical computer applications
and those of its suppliers and vendors throughout the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" which establishes accounting and reporting standards of derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. In July 1999, the FASB approved SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133", which amends SFAS No. 133 to be
effective for all fiscal quarters beginning after June 15, 2000. Razorfish does
not expect the adoption of this standard to have a material effect on its
operations, financial position or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements
which provides guidance related to revenue recognition based on interpretations
and practices followed by the SEC. SAB 101 was effective the first fiscal
quarter of fiscal years beginning after December 15, 1999 and requires companies
to report any changes in revenue recognition as a cumulative change in
accounting principle at the time of implementation in accordance with Accounting
Principles Board Opinion 20, "Accounting Changes". In March 2000, the SEC issued
SAB 101A, "Amendment: Revenue Recognition in Financial Statements," which delays
implementation of SAB 101 until Razorfish's second fiscal quarter of 2000.
Razorfish will adopt SAB 101 and is currently in the process of evaluating the
impact, if any, SAB 101 will have on its financial position or results of
operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Razorfish's exposure to market risk is expected to be confined principally
to its short-term available-for-sale securities, which have short maturities
and, therefore, minimal and immaterial market risk.
Razorfish expects to invest in equity securities of privately held companies
for business and strategic purposes. For investments in which no public market
exists, Razorfish's policy will be to regularly review the operating
performance, recent financing transactions and cash flow forecasts for such
companies in assessing the
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<PAGE>
net realizable values of the securities of these companies. Razorfish expects to
identify and record impairment losses on long-lived assets when events and
circumstances indicate that such assets might be impaired.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements, Financial Schedules, and the Report
of the Independent Accountants which appear in Item 14 of this Annual Report on
Form 10-K and the Supplementary Financial Information which appears in Item 7 of
this Annual Report on Form 10-K are incorporated by reference herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
In November 1999, Razorfish changed its independent accountants from Arthur
Andersen LLP to PricewaterhouseCoopers LLP. Razorfish's Audit Committee
recommended and its Board of Directors approved the appointment of
PricewaterhouseCoopers LLP as its independent accountants.
During the fiscal years ended 1997 and 1998 and any subsequent interim
period, there were no disagreements with Arthur Andersen on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures, which disagreements, if not resolved to the satisfaction of
Arthur Andersen, would have caused them to make reference to the subject matter
of the disagreement in its reports. Arthur Andersen's report on Razorfish's
financial statements for the fiscal years ended December 31, 1998 and 1997 did
not contain an adverse opinion or disclaimer of opinion, nor were they qualified
or modified as to uncertainty, audit scope or accounting principle.
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<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The section labeled "Proposal No.1 Election of Directors" of the
Registrant's definitive Proxy Statement, which will be filed with the Securities
and Exchange Commission within 120 days after December 31, 1999, for the
Registrant's annual meeting of stockholders is incorporated herein by reference.
Item 11. Executive Compensation
The section labeled "Proposal No.1 Election of Directors" of the
Registrant's definitive Proxy Statement, which will be filed with the Securities
and Exchange Commission within 120 days after December 31, 1999, for the
Registrant's annual meeting of stockholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The section labeled "Proposal No.1 Election of Directors" of the
Registrant's definitive Proxy Statement, which will be filed with the Securities
and Exchange Commission within 120 days after December 31, 1999, for the
Registrant's annual meeting of stockholders is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The section labeled "Certain Relationships and Related Transactions" of the
Registrant's definitive Proxy Statement, which will be filed with the Securities
and Exchange Commission within 120 days after December 31, 1999, for the
Registrant's annual meeting of stockholders is incorporated herein by reference.
36
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as a part of this Annual Report on Form 10-K:
1. Financial Statements
The following documents are filed as part of this Annual Report on Form
10-K:
. Report of Independent Accountants;
. Consolidated Balance Sheets as of December 31, 1998 and 1999;
. Consolidated Statements of Operations for the years ended December
31, 1997, 1998 and 1999;
. Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1998 and 1999;
. Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1998 and 1999; and
. Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
None of the schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are required
under the related instructions, and therefore such schedules are inapplicable
and have been omitted.
3. Exhibits.
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger, dated as of August 10, 1999, by and
between Razorfish, Razorfish Merger Sub and i-Cube.(2)
3.1 Certificate of Incorporation of Razorfish, Inc. (the "Company"),
as amended.(2)
3.2 By-laws of Razorfish.(1)
4.1 Stockholders Agreement, dated as of October 1, 1998, among
Razorfish, Spray Ventures, Communicade, Jeffrey A. Dachis and
Craig M. Kanarick.(1)
4.2 Amendment to Stockholders Agreement, dated February 3, 1999, among
Razorfish, Spray Ventures, Communicade, Jeffrey A. Dachis and
Craig M. Kanarick.(1)
4.6 Regisration Rights Agreement, dated March 30, 1999, between
Razorfish and Communicade Inc.(1)
4.7 Specimen Common Stock Certificate of Razorfish.(1)
10.1 The Amended and Restated 1997 Stock Option and Incentive Plan.(1)
10.2 1999 Amended and Restated Stock Incentive Plan.(2)
10.3 Employment Agreement, dated September 18, 1996, between Razorfish
and Jeffrey A. Dachis.(1)
10.4 Non-competitive Agreement, dated Septemeber 18, 1996, between
Razorfish and Jeffrey A. Dachis.(1)
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Exhibit No. Description
- ----------- -----------
10.5 Employment Agreement, dated September 18, 1996, between
Razorfish and Craig M. Kanarick(1)
10.6 Non-competitive Agreement, dated September 18, 1996, between
Razorfish and Craig M. Kanarick.(1)
10.7 Employment Agreement, dated June 19, 1997, between Razorfish and
Jean-Philippe Maheu.(1)
10.8 Employment Agreement, dated June 1, 1997, between Razorfish and
Evan Orensten.(1)
10.9 Employment Agreement, dated October 1, 1998, between Razorfish
and Per Bystedt.(1)
10.10 Employment Agreement, dated October 1, 1998, between Razorfish
and Jonas Svensson.(1)
10.11 Employment Agreement, dated August 10, 1999, between Razorfish and
Michael Pehl.
10.12 Letter Agreement, dated as of August 9, 1999, between Razorfish
and Lawrence P. Begley.
10.13 Lease Agreement, dated October 28, 1996, between Razorfish and
Man Yun Real Estate Corporation.(1)
10.14 Lease Agreement, dated April 30, 1997, between Razorfish and Man
Yun Real Estate Corporation.(1)
10.15 Lease Agreement, dated December 23, 1998, between C.H.B.I.
Razorfish Limited and the Mayor and Commonality and Citizens of
the City of London.(1)
10.16 Lease Agreement, dated March 10, 1998, between J&R Bechelli and
Alpha Online, Inc., as amended by letter dated February 9,
1999.(1)
10.17 Lease Agreement No. 731 100, dated April 12, 1996, between Spray
(f/k/a Spray Interative Media Agency AB) and Bojner Estate AB
("Boyner") and the English translation thereof.(1)
10.18 Lease Agreement No. 741 100, dated September 30, 1997, between
Spray (f/k/a Spray Interative Media Agency AB) and Bojner Estate
AB ("Bojner") and the English translation thereof.(1)
10.19 Lease Contract No. 01009 001 024 ("Trygg-Hansa Lease"), dated
April 30, 1998, between Spray and Trygg-Hansa ("Trygg-Hansa")
and the English translation thereof.(1)
10.20 Supplement No. 1, dated April 30, 1998, to Trygg-Hansa Lease and
the English translation thereof.(1)
10.21 Supplement No. 2, dated August 18, 1998, to Trygg-Hansa Lease
and the English translation thereof.(1)
10.22 Personal Guarantee for Premises, dated April 29, 1998, made by
Lars T. Andersson and per Bystedt in favor of Trygg-Hansa with
respect to Trygg-Hansa Lease and the English translation
thereof.(1)
10.23 Personal Guarantee for Premises, dated April 29, 1998, made by
Johan Ihrfelt and Jonas Svensson in favor of Trygg-Hansa with
respect to Trygg-Hansa Lease and the English translation
thereof.(1)
10.24 Rent Contract Covering Business Premises, dated February 3,
1998, between Spray Interactive Media AB and DEGI Deutsche
Gesellschaft fur Immobilienfonds mbH and the English translation
thereof.(1)
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Exhibit No. Description
- ----------- -----------
10.25 Rental Agreement for Office Space No. 910539, dated April 25,
1997, between Spray Interactive Media Oy and Valtion
Kiinteistolaitos (State real property Authority)/Uusimaa ("State
Real Property Authority") and the English translation
thereof.(1)
10.26 Rental Agreement for Office Space No. 910539, dated May 14,
1997, between Spray Interactive Media Oy and State Real Property
Authority and the English translation thereof.(1)
10.27 Lease Contract, dated June 17, 1998, between Spray
Geelmuyden.Kiese A.S. and Kongensgate 2 ANS and the English
translation thereof.(1)
10.28 Subscription and Exchange Agreement, dated as of October 1,
1998, among Razorfish, Spray Ventures AB and Communicade.(1)
10.29 First Amendment to the Subscription and Exchange Agreement,
dated November 25, 1998, among Razorfish, Spray Ventures AB,
Spray Network AB and Communicade.(1)
10.30 Second Amendment to the Subscription and Exchange Agreement,
dated December 10, 1998, among Razorfish, Spray Ventures AB,
Spray Network AB and Communicade.(1)
10.31 Stock Purchase Agreement, dated as of October 1, 1998, among
Communicade, Jeffrey A. Dachis and Craig M. kanarick.(1)
10.32 Stock Purchase Agreement, dated October 23, 1998, among
Communicade and Spray Ventures AB.(1)
10.33 Amendment to Stock Purchase Agreement, dated December 10, 1998,
between Communicade and Spray Ventures AB.(1)
10.34 Loan Agreement, dated September 18, 1996, between Razorfish and
Omnicom Finance Inc.(1)
10.35 Forms of Voting Agreements.(2)
10.36 Letter Agreement dated August 8, 1995 between i-Cube and Silicon
Valley Bank.(2)
10.37 Promissory Note dated August 8, 1998 between i-Cube and Silicon
Valley Bank.(2)
10.38 Commercial Security Agreement dated August 8, 1995 between
i-Cube and Silicon Valley Bank.(2)
10.39 Negative Pledge Agreement dated August 8, 1995 between i-Cube
and Silicon Valley Bank.(2)
10.40 Letter Agreement dated October 7, 1996 between i-Cube and
Silicon Valley Bank.(2)
10.41 Promissory Note dated July 31, 1997 between i-Cube and Silicon
Valley Bank.(2)
10.42 Loan Modification Agreements between Registrant and Silicon
Valley Bank dated August 6, 1996, August 7, 1996 and August 28,
1997, respectively.(2)
10.43 Lease Agreement dated november 20, 1996 between i-Cube,
RR&C Development Company and Patrician Associates, Inc.(2)
10.44 Lease Agreement dated as of July 14, 1995 between i-Cube and
Riverfront Office Park Joint Venture.(2)
39
<PAGE>
Exhibit No. Descritption
- ---------- ------------
10.45 Amendment No. 1 to Lease Agreement dated as of July 14, 1995
between i-Cube and Riverfront Office Park Joint Venture.92)
10.46 Sublease dated as of June 19, 1995 between i-Cube and MathSoft
Inc.(2)
18.1 Letter re: Change in Certifying Accountant.(3)
21.1 Subsidiaries of Razorfish.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
(1) Filed as an exhibit to Razorfish's Registration Statement on Form S-1 or
amendments thereto declared effective by the Securities and Exchange
Commission on April 26, 1999 (File No. 333-71043) and incorporated herein by
reference.
(2) Filed as an exhibit to Razorfish's Registration Statement on Form S-4 or
amendments thereto declared effective by the Securities and Exchange
Commission on October 1, 1999 (File No. 333-87031) and incorporated herein
by reference.
(3) Filed as an exhibit to Razorfish's Report on Form 8-K/A that was filed with
the Securities and Exchange Commission on December 10, 1999 and incorporated
herein by reference.
(b) Reports on Form 8-K:
The following reports on Form 8-K have been filed with the Securities and
Exchange Commission:
Form 8-K filed November 12, 1999, attaching the press release issued
regarding the completion of the acquisition of i-Cube;
Form 8-K filed November 16, 1999, relating to the acquisition of i-Cube and
attaching the Agreement and Plan of Merger, dated August 10, 1999, with respect
thereto, and incorporating by reference to Razorfish's Registration Statement on
Form S-4 as filed with and declared effective by the Securities and Exchange
Commission on October 1, 1999 (File No. 333-87031) certain i-Cube audited
financial statements and unaudited pro forma pooled financial information;
Form 8-K filed December 1, 1999, relating to the change in Razorfish's
certifying public accountants from Arthur Anderson LLP to PricewaterhouseCoopers
LLP;
Form 8-K filed December 15, 1999, relating to the acquisition of Lee Hunt,
and attaching the Agreement and Plan of Merger, dated November 30, 1999, and a
press release of Razorfish, each with respect thereto;
Form 8-K/A filed November 18, 1999, amending the Form 8-K filed September
16, 1999, relating to the acquisition of Fuel and Tonga, and attaching certain
audited financial statements of Fuel and Tonga and unaudited pro forma condensed
combined financial information; and
Form 8-K/A filed December 10, 1999, amending the Form 8-K filed December 1,
1999, relating to the change in Razorfish's auditors, and attaching the letter
from Arthur Anderson to the Securities and Exchange Commission in compliance
with Item 304 of Regulation S-K.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
RAZORFISH INC.
By:/s/ JEFFREY A. DACHIS
----------------------
Jeffrey A. Dachis
President and Chief Executive Officer
(Principal Executive Officer)
Date: April 5, 2000
41
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of Razorfish, Inc:
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, stockholders' equity and cash flows present fairly, in all
material respects, the financial position of Razorfish, Inc. and subsidiaries at
December 31, 1999 and December 31, 1998, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1999 in conformity with accounting principles generally accepted in the United
States. 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. The consolidated financial statements give
retroactive effect to the merger of the Company and International Integration
Incorporated, Lee Hunt Associates, Inc. and TS Design, Inc. in transactions
accounted for as a pooling of interests, as described in Note 2 to the
consolidated financial statements. We did not audit the financial statements of
Razorfish, Inc. prior to its above mentioned mergers, which statements reflect
total assets of $12,085,000 as of December 31, 1998, and total revenues of
$13,843,000 and $3,618,000 for each of the two years in the period ended
December 31, 1998. Those statements were audited by other auditors whose report
thereon has been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for Razorfish, Inc. as of and for the periods
described above, is based solely on the report of the other auditors. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits and the report of other auditors provide a reasonable
basis for the opinion expressed above.
Boston, Massachusetts PricewaterhouseCoopers LLP
February 15, 2000
F-1
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
------------
1998 1999
-------- --------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 36,628 $ 98,798
Short-term investments........................................................ 8,353 --
Accounts receivable, net of allowance for doubtful accounts of $406 and
$1,416, at December 31, 1998 and 1999, respectively 9,883 30,420
Unbilled revenues................................................................ 3,343 15,667
Prepaid expenses and other current assets........................................ 1,776 3,731
Deferred tax assets.............................................................. 1,005 1,225
Due from affiliate............................................................... 601 3,523
-------- --------
Total current assets........................................................ 61,589 153,364
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of 9,268 15,428
$3,828 and $6,914 at December 31, 1998 and 1999, respectively
INTANGIBLES, net of accumulated amortization of $109 and $3,641, at December 31,
1998 and 1999, respectively 3,463 79,233
DEFERRED REGISTRATION COSTS........................................................... 564 --
LOAN TO AFFILIATE..................................................................... -- 2,250
OTHER ASSETS.......................................................................... 947 1,315
-------- --------
Total assets................................................................ $ 75,831 $251,590
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Due to affiliates................................................................ $ 703 $ 97
Accounts payable and accrued expenses............................................ 12,746 36,086
Income taxes payable............................................................. 751 9,132
Deferred revenues................................................................ 5,443 2,464
Deferred rent.................................................................... 273 604
Current portion of long-term obligations......................................... 1,592 682
Deferred tax liabilities......................................................... 1,199 --
------ -------
Total current liabilities................................................... 22,707 49,065
LONG-TERM OBLIGATIONS................................................................. 6,820 1,760
DEFERRED TAX LIABILITY................................................................ 191 191
OTHER LIABILITIES..................................................................... 306 2,221
------ --------
Total liabilities........................................................... 30,024 53,237
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Preferred stock $.01 par value, 10,000,000 shares authorized; none issued
or outstanding................................................................ -- --
Common stock:
Class A $.01 par value; 200,000,000 shares authorized; 52,704,336 and
88,811,621 issued at December 31, 1998 and 1999, respectively................. 527 888
Class B, $.01 par value; 50 shares authorized; 0 and 50 issued and outstanding at -- --
December 31, 1998 and 1999, respectively
Receivable from stockholder...................................................... (533) (533)
Additional paid-in capital....................................................... 32,809 200,297
Accumulated other comprehensive income........................................... 189 6
Retained earnings (deficit)...................................................... 12,815 (1,717)
Treasury stock at cost; 0 and 73,584 shares at December 31, 1998 and
1999, respectively............................................................ -- (588)
------ --------
Total stockholders' equity........................................................ 45,807 198,353
------- --------
Total liabilities and stockholders' equity.................................. $75,831 $251,590
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues .................................. $56,169 $ 83,863 $170,179
Project personnel costs ................... 27,518 44,154 81,042
------- -------- --------
Gross profit ......................... 28,651 39,709 89,137
Sales and marketing .................... 4,038 6,281 12,567
General and administrative ............. 16,345 22,516 48,508
Merger related costs ................... -- 786 24,566
Non-cash compensation expense .......... 79 1,937 189
Amortization of intangibles ............ -- 109 3,532
------- -------- --------
Income (loss) from operations ............. 8,189 8,080 (225)
Other income, net ......................... 79 838 3,753
------- -------- --------
Income before income taxes ........ 8,268 8,918 3,528
Provision for income taxes ................ 3,287 4,843 18,060
------- -------- --------
Net income (loss) .................... $ 4,981 $ 4,075 $(14,532)
======= ======== ========
Earnings (loss) per share:
Basic ........................... $ 0.11 $ 0.08 $ (0.17)
======= ======== ========
Diluted ......................... $ 0.10 $ 0.07 $ (0.17)
======= ======== ========
Weighted average common shares outstanding:
Basic ........................... 46,192 50,054 83,129
======= ======== ========
Diluted ......................... 51,360 58,113 83,129
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Class A Class B Additional
Common Stock Common Stock Treasury Stock Paid-in
Shares Amount Shares Amount Shares Amount Capital
------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C><C> <C> <C>
Balance at December 31, 1996 18,181,812 $182 - - - - $ 173
Pooling of interests with 26,136,462 261 - - - - 525
International Integration, Inc.
Pooling of interests with TS Design, Inc. 180,000 2 - - - - 2
Pooling of interests with Lee Hunt
Associates, Inc. 1,250,000 12 - - - - 80
--------------------------------------------------------------------------
Balance at December 31, 1996 as restated 45,748,274 457 - - - - 780
Common stock issued to employees 960,761 10 - - - - 684
Common stock option compensation - - - - - - 66
Tax benefit due to stock option exercise - - - - - - 590
Acquisition of treasury stock - - - - (5,252) $ (7) (1)
Unrealized gain on marketable securities - - - - - - -
Foreign currency translation adjustment - - - - - - -
Net income - - - - - - -
--------------------------------------------------------------------------
Balance at December 31, 1997 46,709,035 467 - - (5,252) (7) 2,119
Acquisition of treasury stock - - - - 1,000 (500) -
Common stock issued to employees 1,436,552 14 - - 4,252 507 515
Common stock option compensation - - - - - - 1,937
Tax benefit due to stock option exercise - - - - - - 342
Proceeds from common stock offering 4,558,750 46 - - - - 27,831
Unrealized gain on marketable securities - - - - - - -
Foreign currency translation adjustment - - - - - - -
Capital contribution - - - - - - 65
Net income - - - - - - -
--------------------------------------------------------------------------
Balance at December 31, 1998 52,704,336 527 - - - - 32,809
Acquisition of treasury stock - - - - (73,584) (588) -
Common stock issued to employees 4,101,732 41 - - - - 7,871
Common stock option compensation - - - - - - 109
Tax benefit due to stock option - - - - - - 1,375
Proceeds from common stock offering 6,900,000 69 - - - - 48,253
Foreign currency translation adjustment - - - - - - -
Shares issued in connection with the
exercise of stock options by 3,953,620 40 - - - - 25,263
Shares issued in connection with the
purchase of Spray Network AB 19,762,068 198 50 - - - 54,742
Shares issued in connection with the
purchase of Fuel/Tonga, Inc. 1,312,000 13 - - - - 20,077
Shares issued in connection with the
purchase of Conduit Communications, 77,865 - - - - - 9,798
Net loss - - - - - - -
--------------------------------------------------------------------------
Balance at December 31, 1999 88,811,621 $888 50 - (73,584) $(588) $ 200,297
==========================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share data)
<TABLE>
<CAPTION>
Accumulated Note
Retained Other Receivable Total
Earnings Comprehensive From Stockholders
(Deficit) Income Stockholder Equity
--------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996................. $ (74) - - $ 281
Pooling of interests with................. 3,690 $6 - 4,482
Internatiional Integration, Inc.
Pooling of interests with TS Design Inc... (91) - - (87)
Pooling of interests with Lee Hunt........ -
Associates, Inc.......................... 234 (65) - 261
-------- ----- --------- --------
Balance at December 31, 1996 as restated..... 3,759 (59) - 4,937
Common stock issued to employees.......... - - $ (533) 161
Common stock option compensation.......... - - - 66
Tax benefit due to stock option exercise.. - - - 590
Acquisition of treasury stock............. - - - (8)
Unrealized gain on marketable securities.. - 51 - 51
Foreign currency translation adjustment... - 1 - 1
Net income................................ 4,981 - - 4,981
-------- ----- --------- --------
Balance at December 31, 1997................. 8,740 (7) (533) 10,779
Acquisition of treasury stock............. - - - (500)
Common stock issued to employees.......... - - - 1,036
Common stock option compensation.......... - - - 1,937
Tax benefit due to stock option exercise.. - - - 342
Proceeds from common stock offering....... - - - 27,877
Unrealized gain on marketable securities.. - 30 - 30
Foreign currency translation adjustment... - 166 - 166
Capital contribution...................... - - - 65
Net income................................ 4,075 - - 4,075
-------- ----- --------- --------
Balance at December 31, 1998................. 12,815 189 (533) 45,807
Acquisition of treasury stock............. - - - (588)
Common stock issued to employees.......... - - - 7,912
Common stock option compensation.......... - - - 109
Tax benefit due to stock option exeercise. - - - 1,375
Proceeds from common stock offering....... - - - 48,322
Foreign currency translation adjustmen.... - (183) - (183)
Shares issued in connection with the
exercise of stock options by Communicade.. - - - 25,303
Shares issued in connection with the
purchase of Spray Network, AB............. - - - 54,940
Shares issued in connection with the
purchase of Fuel/Tonga, Inc............... - - - 20,090
Shares issued in connection with the
purchase of Conduit Communications, Inc... - - - 9,798
Net loss.................................. (14,532) - - (14,532)
-------- ----- --------- --------
Balance at December 31, 1999................. $ (1,717) $6 $ (533) $ 198,353
======== ===== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................... $ 4,981 $ 4,075 $(14,532)
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Allowance for doubtful accounts....................................... 135 67 1,010
Depreciation and amortization......................................... 1,064 2,015 6,803
Non-cash common stock option compensation............................. 66 1,937 109
Loss on disposal of fixed assets...................................... 221 -- --
Non-cash capital contribution......................................... -- 65 --
Tax benefit due to stock option exercise.............................. 590 342 1,375
Increase in deferred tax assets....................................... (349) (431) (220)
Change in operating assests and liabilities, net of acquisitions:
Decrease (increase) in accounts receivable............................ (4,063) 1,551 (17,305)
Increase in employee receivable................................... (141) -- --
Increase in unbilled revenues......................................... (1,149) (2,263) (12,324)
Increase in prepaid expenses and other current assets................. (566) (310) (1,955)
Increase in due from affiliate........................................ -- (601) (2,922)
Increase in other assets.............................................. (40) (59) (368)
Increase in accounts payable and accrued expenses..................... 4,048 4,108 27,584
Increase (decrease) in deferred revenues.............................. 3,270 (3,831) (2,979)
Increase (decrease) in deferred tax liabilities....................... 779 1,196 (1,199)
Increase (decrease) in income taxes payable........................... (201) 707 8,381
Increase in deferred rent............................................. 187 86 331
Increase (decrease) in other liabilities.............................. 89 (58) 1,915
Increase (decrease) in due to related party........................... -- 500 (606)
------ ------ -------
Net cash provided by (used in) operating activities................. 8,921 9,096 (6,902)
------- ------- ----------------
CASH FLOWS FROM
Capital expenditures.................................................. (5,544) (2,946) (9,284)
Proceeds from sale of fixed assets.................................... 25 -- --
Proceeds from sale of marketable securities........................... 201 2,500 8,353
Purchase of marketable securities..................................... (100) (10,802) --
Loan to affiliate..................................................... -- -- (2,250)
Acquisitions of subsidiaries, net of cash acquired...................... -- (4,561) (3,055)
------- ------- ------
Net cash (used in) provided by investing activities................. (5,418) (15,809) (6,236)
------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred registration costs............................................. -- (564) 564
Proceeds (payments) from/to long-term obligations....................... 3,929 2,494 (5,970)
Proceeds (payments) from/to officer's loan.............................. 42 (53) --
Proceeds from common stock offerings.................................. -- 27,877 48,322
Proceeds from exercise of Communicade's 10% option.................... -- -- 25,303
Proceeds from exercise of stock options .............................. 161 1,036 7,912
Acquisition of treasury stock........................................... (8) (500) (588)
------ ------- -------
Net cash provided by financing activities........................... 4,124 30,290 75,543
------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS.............. (44) 14 (235)
------- ------- -------
Net increase in cash and cash equivalents........................... 7,583 23,591 62,170
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................ 5,454 13,037 36,628
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................. $ 13,037 $36,628 $ 98,798
========= ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
RAZORFISH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Razorfish, Inc. (''Razorfish''), together with its wholly owned subsidiaries
(the ''Company''), is a leading provider of global digital solutions. Digital
solutions are business solutions that use digital technologies to enhance
communications and commerce between businesses and their consumers, suppliers,
employees, and other partners. These digital solutions utilize a wide variety of
platforms, including the World Wide Web, wireless, broadband, and satellite
communications and a variety of digital devices and information appliances,
including desktop PCs, mobile phones, pagers, personal digital assistants, and
backend ERP and legacy systems. The Company thereby creates for its clients
digital solutions and designs to help them fundamentally re-architect their
business models and identify and improve communications and commerce
opportunities. Razorfish currently has offices in New York, Boston, Los Angeles,
San Francisco, Amsterdam, Hamburg, Helsinki, London, Mannheim, Oslo, and
Stockholm.
On January 12, 2000, the Board of Directors authorized a 2-for-1 stock split
of the Company's Class A common stock effected as a 100% stock dividend on
January 27, 2000 for stockholders of record on January 20, 2000. All references
in the accompanying consolidated financial statements and footnotes have been
retroactively restated to give effect to this stock split.
A summary of the Company's significant accounting policies follows:
(a) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions, specifically for the allowance for doubtful accounts for accounts
receivable, the useful lives of fixed assets and intangible assets and the
estimates for percentage of completion for revenue recognition, 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.
(b) Principles of Consolidation
The consolidated financial statements reflect the operations of Razorfish
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(c) Foreign Currency Translation
All assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at fiscal year-end exchange rates. Income and expense items are
translated at average exchange rates prevailing during the year. The resulting
translation adjustments are recorded as a component of stockholders' equity in
the accompanying consolidated financial statements.
(d) Revenue Recognition
Revenues are recognized for time and materials-based arrangements and
fixed-fee arrangements on the percentage-of-completion method of accounting
based on the ratio of costs incurred to total estimated costs. The cumulative
impact of any revision in estimates of the cost to complete and losses on
projects in process are reflected in the period in which they become known.
Revenues exclude reimbursable expenses charged to customers. Revenues from
maintenance contracts are deferred and recognized ratable over the contractual
periods during which services are performed.
Unbilled revenues represent labor costs incurred and estimated earnings, and
production in excess of contractual billings to-date. Deferred revenues
represent billings of production and other client reimbursable out-of-pocket
costs in excess of revenues recognized to-date.
F-7
<PAGE>
(e) Significant Customers and Concentration of Credit Risk
For the years ended December 31, 1998 and 1999, no client accounted for more
than 10% of revenue. For the year ended December 31, 1997 one client accounted
for 14% of total revenues.
Financial instruments that subject the Company to credit risks consist
primarily of trade accounts receivable. 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. As of December 31, 1998, approximately
12% of the Company's accounts receivable were due from one client. As of
December 31, 1999 no client accounted for more than 10% of the Company's
accounts receivable.
(f) Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of
less than three months when purchased. At December 31, 1998 and 1999, cash and
cash equivalents include overnight repurchase agreements of $12,525 and $6,100,
respectively. Due to the short-term nature of these agreements, the Company does
not take possession of the underlying collateral, U.S. Government Agency notes,
which are held by the bank.
The Company invests in only high quality, short-term investments, all of
which are classified as available for sale at December 31, 1998. Short-term
investments are recorded at fair market value, which approximates cost. The cost
of securities sold is based on the specific identification method. Gross
realized and unrealized gains or losses were not significant as of December 31,
1998. All available for sale securities have maturities of less than one year.
The Company did not hold any available for sale securities at December 31, 1999.
(g) Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Leasehold improvements and equipment held under capital leases
are amortized utilizing the straight-line method over the lesser of the
estimated useful life of the asset or the lease term. Upon retirement or
disposal, the cost of the disposed asset and the related accumulated
depreciation are removed from the accounts and any gain or loss is reflected in
income. The Company provides for depreciation of other fixed assets over their
estimated useful lives, using the straight-line method, as follows:
<TABLE>
<CAPTION>
Asset Classification Estimated Useful Life
-------------------- ---------------------
<S> <C>
Building........................................... 20 years
Computers and equipment............................ 3-8 years
Furniture and fixtures............................. 5 years
</TABLE>
(h) 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.
Customer lists and work force are being amortized over a period of 6 years and
16 years, respectively. 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.
(i) Accounting for Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." This statement establishes financial
accounting and reporting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used, and for long-lived assets and certain identifiable intangibles to
be disposed of. Management has performed a review of all long-lived assets and
has determined that no impairment of the respective carrying value has occurred
as of December 31, 1998 and 1999.
F-8
<PAGE>
(j) Stock-Based Compensation
In 1996, the Company adopted the provisions of SFAS No. 123, ''Accounting
for Stock-Based Compensation,'' and elected to continue the accounting set forth
in Accounting Principles Board No. 25, ''Accounting for Stock Issued to
Employees,'' and to provide the necessary pro forma disclosures as if the fair
value method had been applied (Note 11).
(k) Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted EPS
is computed using the weighted average number of common shares outstanding plus
the dilutive effect of common stock equivalents using the treasury stock method.
(l) 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.
(m) Comprehensive Income
The Company accounts for comprehensive income (loss) under SFAS No. 130,
''Reporting Comprehensive Income.'' This statement 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 December 31,
--------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net income (loss)........................... $ 4,981 $ 4,075 $(14,532)
Unrealized gain on marketable securities 51 30 --
Foreign currency translation adjustment..... 1 166 (183)
-------- ------- --------
Comprehensive income (loss)............ $ 5,033 $ 4,271 $(14,715)
======== ======= ========
</TABLE>
(n) Segment Reporting
The Company discloses business segments under SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
established standards for the way public business enterprises report information
about operating segments in annual financial statements, and required those
enterprises to report selected information about operating segments in interim
financial statements. It also required disclosures about products and services,
geographic areas, and major customers.
The Company is a provider of global digital solutions. The Company evaluated
its business activities that are regularly reviewed by executive management and
Board of Directors for which discrete financial information is available. As a
result of this evaluation, the Company determined that it has one operating
segment.
F-9
<PAGE>
A summary of the Company's operations by geographical area for the years
ended December 31, 1997, 1998 and 1999 and as of December 31, 1998 and 1999 is
presented below:
<TABLE>
<CAPTION>
United States Europe Consolidated
------------- ------ ------------
<S> <C> <C> <C> <C>
Revenues for the year ended December 31,
1997 $ 40,149 $16,020 $ 56,169
1998 $ 62,062 $21,801 $ 83,863
1999 $109,692 $60,487 $170,179
Long-lived assets at December 31,
1998 $ 9,368 $ 4,874 $ 14,242
1999 $ 89,180 $ 9,046 $ 98,226
</TABLE>
(o) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, ''Accounting for Derivatives and Hedging Activities, which establishes
accounting and reporting standards of derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
This statement is effective for all quarters of fiscal years beginning after
June 15, 1999. In July 1999, the FASB issues SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB No. 133," which amends SFAS No. 133 to be effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. 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.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial
Statements which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 was effective the
first fiscal quarter of fiscal years beginning after December 15, 1999 and
requires companies to report any changes in revenue recognition as a cumulative
change in accounting principle at the time of implementation in accordance with
Accounting Principles Board Opinion 20, "Accounting Changes". In March 2000, the
SEC issued SAB 101A, "Amendment: Revenue Recognition in Financial Statements,"
which delays implementation of SAB 101 until Razorfish's second fiscal quarter
of 2000. Razorfish will adopt SAB 101 and is currently in the process of
evaluating the impact, if any, SAB 101 will have on its financial position or
results of operations.
(p) Reclassifications
Certain prior year amounts have been reclassified to conform to current
year presentation.
2. ACQUISITIONS
Avalanche Solutions, Inc. and Avalanche Systems, Inc.
In January 1998, the Company purchased a 66 2/3% ownership interest of a
newly formed corporation, Avalanche Solutions, Inc. (''Avalanche Solutions'').
In connection with this transaction, Avalanche Solutions acquired substantially
all of the assets of Avalanche Systems, Inc. (''Avalanche Systems'') from Fleet
Bank National Association and Fleet Bank Capital Corporation in a foreclosure
sale. These assets were seized from Avalanche Systems, whose stockholders were
the founders and holders of the remaining 33 1/3% of the capital stock of
Avalanche Solutions. In April 1998, the founders of Avalanche Solutions
surrendered their aggregate 33 1/3% ownership interest in Avalanche Solutions to
the Company. The total cash consideration for all stock and net assets acquired
was approximately $1,294.
These acquisitions have been accounted for under the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
tangible and intangible assets acquired and liabilities assumed on the basis of
their respective fair values on the respective acquisition dates. As a result of
these acquisitions, the Company has recorded goodwill of approximately $789,
which is the excess cost of net assets acquired and is being amortized over a
useful life of 20 years.
F-10
<PAGE>
Furthermore, the Company entered into an employment agreement with one of
the former of Avalanche Solutions. The employment agreement has a term through
December 2001 and includes a signing bonus and base compensation. In addition,
this former shareholder received fully vested options to purchase 1,000,000 and
26,912 shares of Common Stock of the Company at an exercise price of $0.50 and
$5.00, respectively, per share. This former shareholder is an executive officer
of Razorfish. In December 1998, he exercised options to purchase 1,000,000
shares of Common Stock for an aggregate purchase price of $500. In the opinion
of management, based upon a third-party valuation using the Black-Scholes Option
Pricing Model, the exercise price was deemed to be lower than the fair market
value per share of the Company's Common Stock at the grant date and, as such,
the Company recorded compensation expense of $1,865 for the year ended December
31, 1998.
CHBi Limited
In May 1998, the Company acquired all of the outstanding stock of
London-based CHBi Limited and, concurrently with the acquisition, CHBi Limited
changed its name to CHBi Razorfish Ltd. The Company paid total cash
consideration of approximately $2,028 for the purchase of CHBi Limited. The
acquisition has been accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the tangible and
intangible net assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date. As a result of this acquisition,
the Company has recorded goodwill of approximately $1,972, which is the excess
cost of net assets acquired and is being amortized over a useful life of 20
years. Furthermore, the CHBi Limited Purchase Agreement calls for certain cash
earn-out payments to the former stockholders based upon the achievement of
targeted operating performance of CHBi Razorfish Ltd. through May 2001. In
November 1999, Razorfish paid $316 as the first earn-out payment which resulted
in additional purchase price and an adjustment to goodwill. Future earn-out
payments, if any, will be recorded as additional purchase price and will result
in 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 $686
in cash. The acquisition of the assets has been accounted for under the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the tangible and intangible net assets acquired and liabilities assumed on the
basis of their respective fair values on the acquisition date. As a result of
this acquisition, the Company has recorded goodwill of approximately $305, which
is the excess cost of net assets acquired and is being amortized over a useful
life of 20 years. Furthermore, the Plastic Purchase Agreement calls for certain
cash earn-out payments to the former stockholders based upon the achievement of
targeted operating performance of Razorfish San Francisco through December 2001.
No earn-out amounts have been earned to date. Future earn-out payments, if any,
will be recorded as additional purchase price and will result in an adjustment
to goodwill.
Media
In July 1998, the Company formed a subsidiary, Razorfish Los Angeles, Inc.
(''Razorfish Los Angeles''), which acquired substantially all of the net assets
of Titus Anspach Group, LLC d/b/a Media (''Media''). In consideration for the
net assets acquired, the Company paid approximately $256 in cash. The
acquisition of the assets has been accounted for under the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
tangible and intangible assets acquired and liabilities assumed on the basis of
their respective fair values on the acquisition date. As a result of this
acquisition, the Company has recorded goodwill of approximately $223, which is
the excess cost of net assets acquired and is being amortized over a useful life
of 20 years. Furthermore, the Media Purchase Agreement calls for certain cash
earn-out payments to the former stockholders based upon the achievement of
targeted operating performance of Razorfish Los Angeles through December 2001.
No earn-out amounts have been earned to date. Future earn-out payments, if any,
will be recorded as additional purchase price and will result in an adjustment
to goodwill.
Sunbather
In October 1998, the Company acquired substantially all of the assets of
London-based Sunbather Limited (''Sunbather''), from an administrator appointed
for Sunbather. The net assets were acquired for cash consideration of
approximately $290. This acquisition has been accounted for under the purchase
method of
F-11
<PAGE>
accounting, and accordingly, the purchase price has been allocated to the
tangible and intangible assets acquired and liabilities assumed on the basis of
their respective fair values on the acquisition date. As a result of this
acquisition the Company recorded goodwill of approximately $272, which is the
excess cost of net assets acquired and is being amortized over a useful life of
20 years.
Spray Network AB
In January 1999, the Company acquired all of the issued and outstanding
shares of capital stock of Spray Network AB (''Spray'') from Spray Ventures AB
and Communicade Inc. (''Communicade'', a wholly owned subsidiary of Omnicom
Group, Inc.) in exchange for an aggregate of 19,762,068 shares of the Company's
Common Stock and 50 shares of the Company's non-voting Class B Common Stock (the
''Spray Acquisition''). In addition, Communicade received an option to purchase
up to 10% of Razorfish common stock pursuant to a Stockholders Agreement. The
shares of Common Stock issued represented 50% of the shares of the Company's
Common Stock on a fully diluted basis immediately following the Spray
Acquisition. As a result of this acquisition the Company recorded goodwill of
approximately $45,604, which is the excess cost of net assets acquired and is
being amortized over a useful life of 20 years. The Company allocated purchase
price of $7,600 to customer lists which is being amortized over a useful life of
16 years and allocated purchase price of $900 to workforce which is being
amortized over a useful life of 6 years.
In addition, simultaneously with the Spray Acquisition, Messrs. Dachis and
Kanarick, the founders of Razorfish, sold 727,272 shares of Common Stock to
Communicade, which represented 4% of the outstanding shares of Common Stock on a
fully-diluted basis at the time of purchase. In addition, the Company entered
into employment agreements with certain executives of Spray Network AB.
Razorfish AB Subsidiaries
In the second quarter, 1999, Razorfish purchased the remaining 15% of
Razorfish Oy, its Finnish subsidiary, approximately 24% of Razorfish AG, its
German subsidiary, and 15% of Razorfish AS, its Norwegian subsidiary for a total
of $1,370 and a grant of 120,000 stock options with an exercise price equal to
the fair market value of the Company's Class A common stock on the date of
grant. In the Razorfish AS purchase, Razorfish also agreed to repay certain
capital contributions and loans over the next three years. In October 1999,
Razorfish purchased the remaining minority interests of Razorfish AS in exchange
for a grant of 88,500 stock options with an exercise price equal to the fair
market value of the Company's Class A common stock on the date of the grant.
Electrokinetics, Inc.
In June 1999, the Company acquired substantially all of the assets of the
New York-based company, Electrokinetics, Inc. In consideration for the assets
acquired, the Company paid approximately $847 in cash. In addition, the Company
entered into employment agreements with certain executives of Electrokinetics,
Inc. As a result of this acquisition the Company recorded goodwill of
approximately $654, which is the excess cost of net assets acquired and is being
amortized over a useful life of 20 years.
Fuel Inc./Tonga Inc.
On September 16, 1999, Razorfish acquired all of the outstanding stock of
Los Angeles-based Fuel, Inc. and Tonga, Inc. Under the terms of the acquisition,
Razorfish issued 1,312,000 shares of its Common Stock and paid $750 in cash to
Fuel and Tonga's sole stockholder in exchange for the entire equity interest in
Fuel and Tonga. The Fuel and Tonga purchase agreement calls for a stock or cash
earn-out payment to the former stockholder, based upon the achievement of
certain revenue levels for 1999. As a result of this acquisition the Company
recorded goodwill of approximately $21,484, which is the excess cost of net
assets acquired and is being amortized over a useful life of 20 years.
F-12
<PAGE>
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 acquired and liabilities assumed on the basis of their
respective fair values on the respective acquisition dates. Costs in excess of
net assets acquired were recorded as intangible assets as follows:
<TABLE>
<CAPTION>
Avalanche
---------
Systems/
--------
Avalanche CHBi Electro-
--------- ---- --------
Spray Solutions Limited Plastic Media Sunbather Fuel/Tonga kinetics
----- --------- ------- ------- ----- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accounts receivable ............. $ 1,725 $ 86 $ 463 $238 $ -- $ -- $ 426 $ 55
Fixed assets .................... 1,436 -- 44 133 33 18 593 204
Other assets .................... 3,359 419 -- 10 -- -- 273 21
Intangible assets ............... 54,104 789 2,288 305 223 272 21,484 654
Current liabilities ............. (5,684) -- (451) -- -- -- (1,936) (87)
-------- ------ ------- ---- ---- ------- ------- -----
Total purchase price......... $ 54,940 $1,294 $ 2,344 $686 $256 $ 290 $20,840 $847
======== ====== ======= ==== ==== ======= ======= ====
</TABLE>
On November 2, 1999, Razorfish acquired all of the outstanding common stock
of International Integration Inc., "i-Cube". This acquisition was completed by
the exchange of 0.875 shares of Razorfish Class A Common Stock for each share of
i-Cube common stock that was outstanding immediately prior to the acquisition.
Razorfish issued a total of 36,069,224 shares of Common Stock to the former
i-Cube stockholders and assumed options to purchase approximately 12,103,000
shares of Common Stock in connection with this transaction.
On December 1, 1999, Razorfish acquired all of the outstanding capital stock
of TS Design, Inc. in exchange for 180,000 shares of Razorfish Class A Common
Stock.
On December 1, 1999, Razorfish acquired all of the outstanding capital stock
of Lee Hunt Associates, Inc. in exchange for 1,250,000 shares of Razorfish Class
A Common Stock.
The acquisitions of i-Cube, TS Design, Inc., and Lee Hunt Associates, Inc.
were accounted for as a pooling of interests. The Company's historical
consolidated financials have been restated to reflect the combined financial
position and results of operations and of cash flows of Razorfish, i-Cube, TS
Design, Inc., and Lee Hunt Associates, Inc. for all periods presented.
The results of operations for Razorfish, i-Cube, TS Design, and Lee Hunt on
a separate company basis for the periods preceding the acquisitions are
summarized below:
<TABLE>
<CAPTION>
For the 9 Months
Years Ended Ended
December 31, September 30,
-------------------- -------------
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
Revenues:
Razorfish $ 3,618 $13,843 $46,468
i - Cube 38,850 56,793 57,047
TS Design, Inc. 649 1,298 1,282
Lee Hunt Associates, Inc. 13,052 11,929 12,677
------- ------- --------
Combined $56,169 $83,863 $117,474
Net income (loss):
Razorfish $ 297 $ (1) $ 2,071
i - Cube 4,678 5,546 6,250
TS Design, In (151) 228 238
Lee Hunt Associates, Inc. 157 (1,698) (79)
------- ------- --------
Combined $ 4,981 $ 4,075 $ 8,480
======= ======= ========
</TABLE>
F-13
<PAGE>
Pro forma results of operations
The following unaudited pro forma consolidated results of operations
reflects the results of operations for the years ended December 31, 1997, 1998
and 1999, as if the aforementioned 1998 acquisitions had occurred on January 1,
1997, as if the aforementioned 1999 acquisitions had occurred on January 1, 1998
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 January 1, 1998 and may not be
indicative of future operating results.
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Pro forma:
Revenues....................... $70,364 $108,086 $174,087
Net income (loss).............. (1,004) 180 (14,092)
Basic net income (loss) per share . (0.02) 0.00 (0.17)
Diluted net income (loss) per share (0.02) 0.00 (0.17)
</TABLE>
3. RELATED PARTY TRANSACTIONS
Agreements with Omnicom
In September 1996, Omnicom Group, Inc. (''Omnicom'') purchased an aggregate
of 7,272,728 shares of Common Stock from Messrs. Dachis and Kanarick, for an
aggregate purchase price of $3,500 in cash and three additional earn-out
payments pursuant to the terms of a Stock Purchase Agreement (the ''Purchase
Agreement''). The earn-out payments were paid in February 1998, January 1999,
and March 1999 in the amounts of $1,300, $600, and $1,700, respectively. The
amounts of the February 1998 and March 1999 payments were derived from
Razorfish's Annual Revenues (as defined in the Purchase Agreement) and profit
before taxation for the relevant year. The amount of the payment in January 1999
was the result of an adjustment made to the aggregate purchase price pursuant to
a side letter entered into between Messrs. Dachis and Kanarick and Communicade
(f/k/a JWL Associates Corp.). Simultaneously with the execution of the Purchase
Agreement, the Company entered into a Shareholders Agreement with Communicade.
The Shareholders Agreement restricted the transfer of shares of Common Stock by
the parties and provided that certain actions require the consent of the
Communicade appointed director. In addition, the Shareholders Agreement also
stipulated that Omnicom Finance Inc. (''Omnicom Finance'') would provide the
Company with a line of credit for working capital purposes of up to $2,000 and
additional financing for the purpose of funding the Company's acquisition of
''new media companies,'' as defined, provided that Communicade remained a
shareholder of the Company. Both of these lines of credit were available upon
the execution of the Shareholders Agreement.
Amounts borrowed under the working capital line of credit bear no interest
on the first $1,000 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 6.00% as of December 31, 1998. As
the first $1,000 outstanding under the working capital line of credit is
non-interest bearing, the Company has imputed interest on the outstanding
amounts based upon a weighted average imputed interest rate of 6.50%. As such,
the Company recorded a charge to interest expense and a capital contribution of
approximately $65 for the year ended December 31, 1998. Imputed interest in all
previous periods was deemed to be immaterial by the Company. All outstanding
amounts were secured by a priority lien on all of the Company's assets.
The Company had $1,100 of the working capital line of credit outstanding as
of December 31, 1998 and is included in long-term obligations. In addition, the
Company had $3,900 of the acquisition funding outstanding as of December 31,
1998 in connection with the acquisition of ''new media companies.'' There were
no amounts outstanding as of December 31, 1999. See Note 8 for the terms of the
acquisition line of credit.
In connection with the Spray acquisition, the Shareholders Agreement
terminated and was replaced by a Stockholders Agreement. Pursuant to the terms
of the Stockholders Agreement, Omnicom Finance is to provide
F-14
<PAGE>
the working capital line of credit and the acquisition line of credit to the
Company on the same terms and conditions as set forth in the Shareholders
Agreement. The principal under any loan under the acquisition line of credit is
payable quarterly in equal installments over a seven-year period.
In April 1999, the Company established an investment account with Omnicom
under which Omnicom pays the Company a market interest rate on all cash invested
in this account. As of December 31, 1999, the balance invested in this account
was $47,081 at an investment interest rate of 5.6%.
Communicade 10% Option
Pursuant to the Stockholders Agreement, in the event of an initial public
offering of the Company's Common Stock, Communicade had the right, but not the
obligation, to purchase from the Company up to such number of shares of Company
Common Stock as equaled 10% of the then issued and outstanding shares of
Razorfish's Common Stock on a fully diluted basis at the time the option was
exercised (the ''Option Shares''). The purchase price per share of the 10%
option was equal to 80% of the price per share sold in Razorfish's initial
public offering of $6.40. Communicade exercised the 10% option in February 1999
by sending a written notice to the Company indicating its desire to purchase
such Option Shares. If Communicade had not provided notice within a specified
time in accordance with the terms of the Stockholders Agreement, the 10% option
would have terminated. Such Option Shares are restricted as to their resale in
accordance with the terms of the new Stockholders Agreement.
Razorfish Studios
The Company conducts business with Razorfish Studios (''Studios''). The
majority of Studios' common stock is owned by three of the majority stockholders
of the Company and certain of these stockholders also hold executive positions
at Studios. On October 17, 1997, the Company assigned to Studios all of its
right, title, and interest in and to certain digital media properties owned by
the Company. The cost and fair value of such properties were deemed to be
immaterial by the Company's management and as such, there was no material effect
on the Company's consolidated financial statements.
The Company also provides certain overhead and administrative functions for
Studios for which the Company is reimbursed. In addition, the Company has
provided certain design and consulting services to Studios at discounted billing
rates. The total revenue earned was not material to the accompanying
consolidated statements of operations. Amounts owed to the Company from Studios
for services rendered, reimbursable expenses, and advances totaled $601 and
$3,523, respectively, as of December 31, 1998 and 1999. Amounts owed to
Razorfish Studios from the Company were $0 and $97, respectively as of December
31, 1998 and 1999. 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.
In August 1999, Razorfish entered into a Convertible Note Purchase Agreement
with Razorfish Studios pursuant to which Razorfish purchased from Razorfish
Studios a convertible promissory note (the ''Note'') in the principal amount of
$2,250. The Note matures on the earlier of (i) August 2, 2002, and (ii) the date
of closing of Razorfish Studios' first firm commitment underwritten public
offering pursuant to an effective Registration Statement under the Securities
Act of 1933. Razorfish Studios has agreed to pay interest on the unpaid
principal at the rate of six percent (6%) per annum. At Razorfish's option, the
Note may be converted into shares of Razorfish Studios common stock, par value
$.01, at the rate of one (1) share of Razorfish Studios common stock per Three
Dollars ($3.00) outstanding under the Note at the time of Razorfish's conversion
request. Razorfish may convert all or part of the outstanding amount of
principal and interest due on the Note. Messrs. Dachis and Kanarick have
guaranteed personally repayment of the Note.
Notes from Stockholders and Executives
During 1997, the Company received a note for $533 from a stockholder for the
exercise of 700,000 stock options. The note is due in October 2000. Interest
accrued at 8.5%, is payable at maturity, and the associated interest receivable
is included in other assets in the accompanying Consolidated Balance Sheets.
F-15
<PAGE>
In 1997, the Company received notes for $230 from stockholders due in April
2002. These notes carry interest at a rate of 5.0% per annum. The notes were for
the sale of a property occupied by a tenant unrelated to the Company.
In 1998, the Company granted an option to acquire one of its subsidiaries to
parties related to three of its executives. The subsidiary's sole activity is
the ownership of property together with a non-recourse bank loan of
approximately $1,400. The exercise price of the option was set at the fair
market value of approximately $403 and expires in May 2001. At December 31, 1998
and 1999, $1,373 and $1,250 was outstanding under the loan.
Repurchase of Treasury Shares
In December 1998, the Company repurchased 1,000,000 shares of Common Stock
from two of the Company's principal stockholders, for $0.50 per share, pursuant
to an agreement between the Company and the stockholders. The resulting $500 due
to the stockholders as of December 31, 1998, is non-interest bearing and was due
and paid in full in March 1999.
4. SHORT-TERM INVESTMENTS
The following is a summary of investments classified as current assets at
December 31, 1998. The Company did not hold any short-term investments at
December 31, 1999.
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C>
Corporate debt securities....................... $1,236
U.S. Government securities...................... 7,227
------
Total...................................... $8,353
======
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
---- ----
<S> <C> <C>
Computer equipment.............................. $ 6,271 $11,953
Equipment under capital leases.................. 1,490 1,456
Furniture and fixtures.......................... 2,573 3,149
Building........................................ 1,944 1,965
Leasehold improvements.......................... 818 3,819
Total property and equipment............... 13,096 22,342
Less--Accumulated depreciation and amortization.. (3,828) (6,914)
------- -------
Property and equipment, net................ $ 9,268 $15,428
======= =======
</TABLE>
Depreciation and amortization aggregated $1,064, $1,906 and $3,271,
respectively, for the years ended December 31, 1997, 1998, and 1999.
Accumulated amortization at December 31, 1998 and 1999 was 376 and 445.
F-16
<PAGE>
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
---- ----
<S> <C> <C>
Goodwill................................... $3,572 $74,374
Customer lists............................. -- 7,600
Workforce.................................. -- 900
------ -------
Total intangible assets............... 3,572 82,874
Less--Accumulated amortization............. (109) (3,641)
------ -------
Intangible assets, net................ $3,463 $79,233
====== =======
</TABLE>
Amortization aggregated $109 and $3,532 for the years ended December 31,
1998 and 1999, respectively.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
---- ----
<S> <C> <C>
Accounts payable................................... $ 5,205 $20,011
Accrued payroll and other payroll expenses......... 3,883 7,569
Accrued professional fees.......................... 649 541
Accrued other...................................... 3,009 7,965
------- -------
Total......................................... $12,746 $36,086
======= =======
</TABLE>
8. LONG-TERM DEBT AND CREDIT ARRANGEMENTS
The Company had a working capital line of credit ("working capital line")
with a financial institution under which the Company could borrow the lesser of
$5,000 or 75% of eligible accounts receivable, as defined in the agreement. The
interest rate on all borrowings under the working capital line was prime (7.75%
at December 31, 1998). The Company was required to comply with certain
operational and financial covenants under the agreement if there were borrowings
under the credit line. The agreement also provided for a $4,000 submit for
foreign exchange transactions and the issuance of letters of credit of up to
$4,000. The unsecured working capital line expired in September 1999. There were
no borrowings under this line of credit at December 31, 1998.
In May 1998, the Company entered into a loan agreement with a major
financial institution for $1,400 for the purchase of a building currently
occupied by the Company. The principal balance is payable over 12 years in
quarterly installments and bears interest at LIBOR +2% (9.25% at December 31,
1999). These quarterly installments increase throughout the term of the loan.
The Company is required to comply with certain financial covenants under this
loan agreement. At December 31, 1999, the Company was in compliance with these
requirements. At December 31, 1998 and 1999, $1,400 and $1,250, respectively
were outstanding under the loan agreement which is collateralized by the
building.
The Company assumed $230 of convertible employee loans which are
transferable into the Company's Class A common stock upon conversion. These
loans bear no interest and are due in full on the 20th anniversary of the date
of the loan, provided they have not been converted. As of December 31, 1998,
$230 was outstanding under these loan notes. During 1999, all loans were
converted into Class A common stock.
F-17
<PAGE>
Long-term debt and capital lease obligations consist of the following at
December 31, 1998 and 1999:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
---- ----
<S> <C> <C>
Capital lease obligations..... $ 1,041 $ 838
Loan agreements .............. 7,371 1,604
------- ------
8,412 2,442
Less--current maturities...... 1,592 682
------- ------
Total.................... $ 6,820 $1,760
======= ======
</TABLE>
Maturities of long-term debt and capital leases are as follows:
<TABLE>
<S> <C>
2000 ...................... $ 739
2001 ...................... 580
2002 ...................... 212
2003 ...................... 113
2004 ...................... 125
Thereafter ................... 765
------
2,354
Less--interest................ 92
------
Total.................... $2,442
======
</TABLE>
9. INCOME TAXES
Income (loss) before income taxes and the components of the income tax
provision (benefit) are as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Income (loss) before income taxes
Domestic $7,689 $8,562 $ 2,046
International 579 356 1,482
------ ------ ------
Total income (loss) before income taxes $8,268 $8,918 $ 3,528
====== ====== ======
Provision for (benefit from) income taxes:
Current
Federal 2,052 2,944 $ 16,056
State and local 587 907 1,239
International 218 94 2,184
Deferred
Federal 293 695 (1,211)
State and local 137 203 (208)
International - - -
------ ------ ------
Total income tax provision $3,287 $4,843 $ 18,060
====== ====== ========
</TABLE>
Deferred U.S. income taxes have not been provided on basis differences
related to investments in certain foreign subsidiaries and affiliates. These
basis differences consist primarily of undistributed earnings considered
permanently invested in the business.
F-18
<PAGE>
The tax effects of temporary differences that give rise to a significant
portion of the net deferred income tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
---- ----
<S> <C> <C>
Net current deferred income tax assets (liabilities)
Accrual to cash adjustments $ (29) $ -
Allowances for accounts receivable 66 368
Nondeductible accruals 939 606
Other (1,170) 251
------- ------
Total net current deferred income tax assets (liabilities) $ (194) $1,225
------- ------
Net noncurrent deferred income tax assets (liabilities)
Accrual to cash adjustments (2) (2)
Depreciation (189) (189)
------- ------
Total net noncurrent deferred income tax assets (liabilities) (191) $ (191)
------- ------
Total net deferred income tax assets (liabilities) (385) $1,034
======= ======
</TABLE>
Deferred tax assets reflect the net tax effects of the tax credits, net
operating loss carryforwards and temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and amounts
used for income tax purposes. The ultimate realization of the deferred tax
assets is dependent upon the generation of sufficient future U.S. taxable
income. Based on the level of the deferred tax assets as of December 31, 1999,
the level of historical U.S. taxable income, and projections of future taxable
income, management has determined that the Company will be able to realize these
net deferred tax assets in future years.
A reconciliation of the difference between the statutory U.S. Federal income
tax rate and the Company's effective tax rate follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0 % 35.0%
State taxes, net of federal benefit 6.0% 7.9 % 11.4%
International operations - 0.2% 7.3%
Effect of change from S Corporation - 5.6% -
Incentive stock option expense - 2.2% -
Research and development credit (0.8)% (1.0)% (13.3)%
Other 0.8% 4.4% 5.3%
Disallowed expenses - 0.7% 162.1%
Deferred tax asset write-off - - 270.4%
Intangible amortization - 0.3% 33.6%
---- ----- -----
Effective tax rate 40.0% 54.3% 511.8%
==== ===== =====
</TABLE>
The deferred tax asset write-off relates to a benefit associated with the
International Integrated Incorporation merger with Conduit Communications which
can no longer be anticipated for accounting purposes after the Razorfish, Inc.
merger with International Integrated Incorporation.
F-19
<PAGE>
10. EARNINGS PER SHARE
The following table reconciles the denominator of the diluted earnings per
share computation as shown on the Consolidated Statements of Operations.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Diluted EPS Computation
Basic common shares outstanding....... 46,192 50,054 83,129
Effect of common stock options........ 5,168 8,059 -
------ ------ ------
Diluted common and common
equivalent shares................... 51,360 58,113 83,129
======= ====== ======
</TABLE>
Diluted EPS for the year ended December 31, 1999 does not include the impact
of 8,450,000 Class A common stock options, as the effect of their inclusion
would be anti-dilutive.
Options to purchase shares of the Company's common stock of 1,138,000,
439,000, and 362,000 for the years ended December 31, 1997, 1998, and 1999,
respectively, were outstanding during the respective periods but were not
included in the computation of diluted EPS because the exercise price of the
options was greater than or equal to the average market price of the common
stock for the periods reported.
11. STOCKHOLDERS' EQUITY
Common Shares
In connection with a 1-for-2 reverse stock split effected in March 1999, the
Board of Directors authorized 30,000,000 shares of common stock, of which
29,999,950 shares have been designated as Class A Common Stock and 50 shares
have been designated as Class B Common Stock. In connection with the acquisition
of i-Cube in November 1999, the Board of Directors authorized and increased the
number of Class A Common stock from 29,999,900 to 200,000,000 shares.
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 ''1997 Stock Option Plan''),
and Stock Grant Agreements entered into by the Company and each such employee.
The Company issued the shares in consideration for services rendered to the
Company by such employees and as such, the Company recorded compensation expense
of $13 for the year ended December 31, 1997, based upon a third-party valuation
of the fair market value of the Company's Common Stock. Each Stock Grant
Agreement also provided that each of the employees enter into a Stock
Restriction Agreement with the Company. The Stock Restriction Agreement provides
that the holder of the shares of Common Stock will not sell, assign, pledge or
otherwise transfer the shares without the written consent of the Company. In
addition, the Company has a right of first refusal to purchase any shares of
Common Stock that the holder desires to sell.
In January 1999, the Company sent notice to Omnicom that it was
substantially prepared to make the initial filing of the Registration Statement
with the Securities and Exchange Commission in connection with an initial public
offering of its Common Stock. Omnicom Group, Inc. sent a written notice to the
Company indicating its desire to exercise its option to purchase 10% of the
then-issued and outstanding shares of Common Stock. As such, the Company issued
3,953,620 shares of common stock for total proceeds of $25,303.
The Company completed its Initial Public Offering ("IPO") of 6,000,000
shares of its Class A common stock on April 26, 1999. Additionally, the
underwriters elected to exercise their options to purchase 900,000 shares of
Class A common stock from the Company to cover over-allotments. The net proceeds
to the Company from the subscribed and over-allotment shares were $48,322, after
deduction of offering expenses of $6,878.
On June 23, 1998, i-Cube completed it's IPO of 2,187,500 shares of its
common stock. Additionally, the underwriters elected to exercise their option to
purchase 91,875 shares of common stock from the Company to cover
over-allotments. The net proceeds to the Company from the subscribed and
over-allotment shares were $28,877, after deduction of offering expenses of
$3,383.
F-20
<PAGE>
Stock Splits
On February 24, 1997, the Board of Directors authorized a 30,000-for-1 stock
split of the Company's common stock. On April 30, 1998, the Board of Directors
authorized a 1.515151-for-1 stock split of the Company's common stock. On
December 14, 1998 the Board of Directors authorized a 2-for-1 stock split of the
Company's common stock. On March 4, 1999, the Board of Directors authorized a
1-for-2 reverse stock split of the Company's common stock and common stock
options under the 1997 Plan and 1999 Plan and changed the authorized share
capital to 40,000,000 (10,000,000 preferred, 29,999,950 Class A Common and 50
Class B Common.) In connection with the split, each holder of the Company's
common stock options amended their respective option agreement to waive their
right to have their options split effected under this stock split and the
Company obtained the consent of the holders of substantially all of the
Company's common stock options for the reverse stock split. On January 12, 2000,
the Board of Directors authorized a 2-for-1 stock split of the Company's Class A
common stock and Class A common stock options effected as a 100% stock dividend
on January 27, 2000 for stockholders of record on January 20, 2000. All
references in the accompanying consolidated financial statements and footnotes
have been retroactively restated to give effect to these stock splits.
Stock Plans
Under terms of the Company's incentive stock option plans, employees,
directors, and consultants may be granted options to purchase the Company's
common stock at no less than 100% of the market price on the date the option is
granted (110% of fair market value for incentive stock options granted to
holders of more than 10% of the voting stock of the Company). Options generally
vest over three or four years and have a maximum term of 10 years. Certain of
the plans also provide for the granting of stock appreciation rights ("SARs").
No SARs have been granted to date.
During 1999, i-Cube, which was acquired by the Company in November 1999 and
accounted for as a pooling of interests, had established a qualified employee
stock purchase plan ("ESPP") where certain eligible employees had the right to
participate in the purchase of designated shares of the Company's common stock
at a price equal to the lower of 85% of the closing price at the beginning or
end of the offering period. The offering period commenced on January 1, 1999 and
closed on October 22, 1999. The Company issued 37,000 shares of common stock
pursuant to this plan at a price of $8.01 per share.
Information related to all stock options granted by the Company is as follows:
<TABLE>
<CAPTION>
Weighted-
Weighted- average
average exercise price
Number of exercise Options of options
shares price exercisable exercisable
--------- ----- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1996 8,757,794 $0.81 3,568,022 $0.45
Granted ..................... 5,013,731 1.63
Exercised ................... (960,761) 0.82
Forfeited/canceled .......... (752,612) 1.24
--------- -----
Outstanding, December 31, 1997 12,058,152 1.12 4,708,426 $0.66
Granted ..................... 2,644,482 4.94
Exercised ................... (1,436,552) 0.40
Forfeited/canceled .......... (439,100) 2.85
--------- -----
Outstanding, December 31, 1998 12,826,982 2.08 6,464,650 $1.12
Granted ..................... 9,803,486 17.85
Exercised ................... (4,101,732) 1.83
Forfeited/canceled .......... (1,091,718) 6.46
--------- -----
Outstanding, December 31, 1999 17,437,018 $10.02 6,537,042 $2.23
========== ======
</TABLE>
F-21
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------- -------------------
Number Weighted- Weighted- Number Weighted
Range of outstanding average average Exercisable average
exercise at December 31, remaining exercise at December 31, exercise
prices 1999 contractual price 1999 price
-------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
$0.01 -$0.50 1,010,858 6.98 years $0.43 560,101 $0.37
0.67 - 1.15 3,827,042 6.39 1.13 3,591,575 1.13
1.26 - 9.50 4,401,852 8.24 4.59 1,964,241 3.00
9.58 - 17.44 5,208,402 9.41 11.35 376,625 11.40
17.63 - 39.75 1,885,740 9.74 31.30 44,500 20.59
40.00 - 48.19 1,103,124 9.95 40.74 -- --
- ---------------- --------- ---- ------ --------- -----
$ 0.01 - $48.19 17,437,018 8.38 years $10.02 6,537,042 $2.23
=============== ========== ========== ====== ========= =====
</TABLE>
The exercise price for each of the above grants was determined by the Board
of Directors of the Company to be equal to the fair market value of the common
stock on the day of grant (110% of the fair market value for incentive stock
option grants to holders of more than 10% of the voting stock of the Company).
Prior to the IPO, in reaching this determination at the time of each such grant,
the Board considered a broad range of factors including the illiquid nature of
an investment in the Company's common stock, the Company's historical financial
performance, and the Company's future prospects. Subsequent to the IPO, the
exercise prices are equal to the closing prices of the Company's stock as
reported by Nasdaq exchange on the date of grant. Pursuant to the required pro
forma disclosure under the fair value method of estimating compensation cost,
the Company has estimated the fair value of its stock option grants by using the
Black-Scholes option pricing method with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected option term (years)........... 5.0 5.0 3.0
Risk-free interest rate (%)............ 5.9 5.0 5.5
Expected volatility (%)................ 25.8 58.7 80.1
Dividend yield (%)..................... ---- ---- ----
Weighted average fair value of
options granted...................... $ 0.50 $ 2.71 $10.21
</TABLE>
The Company applies APB Opinion No. 25 and the related Interpretations.
Accordingly, no compensation cost has been recognized for option grants. Had
compensation cost for these awards been determined based on the fair value at
the grant dates consistent with the method prescribed by SFAS No. 123, the
Company's net income would have been adjusted to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------
1997 1998 1999
---- ---- ----
Net income (loss)
<S> <C> <C> <C>
As reported...................................... $4,981 $4,075 $(14,532)
Compensation expense for stock options............. 2,034 3,484 13,267
------ ------ ----------
Pro forma net income (loss)........................ $2,947 $ 591 $(27,799)
====== ====== ==========
Basic earnings (loss) per share as reported.......... $ 0.11 $ 0.08 $ (0.17)
Pro forma basic earnings (loss) per share............ $ 0.06 $ 0.01 $ (0.33)
Diluted earnings (loss) per share as reported........ $ 0.10 $ 0.07 $ (0.17)
Pro forma diluted earnings (loss) per share.......... $ 0.06 $ 0.01 $ (0.33)
</TABLE>
F-22
<PAGE>
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its facilities under operating lease agreements. The
following are the future minimum lease payments under operating leases as of
December 31, 1999:
<TABLE>
<S> <C>
2000 ...................... $ 8,115
2001 ...................... 8,780
2002 ...................... 7,472
2003 ...................... 4,282
2004 ...................... 1,221
Thereafter ................ 1,554
--------
Total.................... $ 31,424
========
</TABLE>
Rent expense was approximately $1,817, $2,447, and $5,125 for the years
ended December 31, 1997, 1998, and 1999, respectively.
Employment Agreements
From September 1996 through July 1998, the Company entered into various
employment agreements with certain senior executives, the expirations of which
extend through 2001. The aggregate minimum base salaries under these agreements
are approximately $1,041 for each of the years ended December 31, 2000 and 2001
for those agreements with terms in excess of one year at December 31, 1999.
In January 1999, the Company entered into various employment agreements with
certain senior executives of Spray Network AB, the expirations of which extend
through December 31, 2001. The aggregate minimum base salaries under these
agreements are approximately $435 for each of the years ended December 31, 2000
and 2001.
During 1999, Razorfish entered into various employment agreements with
certain senior executives of i-Cube which became effective upon consummation of
the merger with i-Cube. The aggregate minimum base salary under these agreements
is approximately $300. The initial term of the agreement is one year and the
agreement automatically renews for successive one-year terms unless terminated
by either party 60 days prior to the then-current term.
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.
13. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan (the "401(k) Plan") covering all
of its eligible employees in the United States. The 401(k) Plan is qualified
under Section 401(k) of the Internal Revenue Code of 1986. Employees may begin
participation on quarterly enrollment dates provided that they have reached 18
years of age. The Company may make matching and/or profit sharing contributions
to the 401(k)Plan at its discretion. The Company did not contribute to the 401k
Plan during 1997. The Company contributed $129 and $219 to the 401(k) Plan
during 1998 and 1999, respectively.
14. SUPPLEMENTARY INFORMATION
During 1997, 1998, and 1999, the Company paid interest of $247, $215, and $197,
respectively.
F-23
<PAGE>
During 1997, 1998, and 1999, the Company paid $2,267, $3,811,and $5,958,
respectively, for income taxes.
The Company entered into obligations under capital leases of $398, and $0 for
the periods ended December 31, 1998 and 1999, respectively.
The fair market value of Class A common stock issued for acquisitions during the
year ended December 31, 1999 was $84,828. There was no stock issued for
acquisitions during the years ended December 31, 1997 or 1998.
15. SUBSEQUENT EVENTS
In January 2000, Razorfish acquired Qb International Holding AB, an
IT/strategic consulting firm that specialized in complex projects in e-service,
management information, customer services and intranet solutions. Razorfish
issued a total of 407,640 shares of common stock in connection with this
transaction.
On March 17, 2000, a legal action was commenced against the Company by a
former consultant of a wholly owned subsidiary for, amongst other things, breach
of contract. The Company is reviewing the action and believes that the
allegations are baseless and without merit in law or fact. No assurance can be
given, however, that this matter will be resolved in the Company's favor.
In February 2000, Razorfish issued an aggregate of 53,333 shares of Common
Stock and made a cash payment of $1.0 million to the former principals of Media
in consideration for their agreement to amend their respective acquisition
agreements to remove the earn-out provisions contained therein. In connection
with this agreement, Razorfish is required to issue an additional 26,667 shares
of Common Stock on or about January 2002.
In February 2000, Razorfish issued an aggregate of 200,000 shares of Common
Stock to the former principals of Plastic in consideration for their agreement
to amend their respective acquisition agreements to remove the earn-out
provisions contained therein. In connection with this agreement, Razorfish is
required to issue an additional 100,000 shares of Common Stock on or about
December 2001.
In February 2000, Razorfish issued an aggregate of 266,640 shares of Common
Stock to the former principals of CHBi in consideration for their agreement to
amend their respective acquisition agreements to remove a portion of the
earn-out provisions contained therein. In connection with this agreement, the
former CHBi principals have a call option arising on May 31, 2000 whereby they
may cause Razorfish to issue an additional 133,360 shares of Common Stock in
exchange for the removal of the final portion of the earn-out payment. Razorfish
has a corresponding put option arising on the same date.
F-24
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger, dated as of August 10, 1999, by and
between Razorfish, Razorfish Merger Sub and i-Cube.(2)
3.1 Certificate of Incorporation of Razorfish, Inc. (the "Company"),
as amended.(2)
3.2 By-laws of Razorfish.(1)
4.1 Stockholders Agreement, dated as of October 1, 1998, among
Razorfish, Spray Ventures, Communicade, Jeffrey A. Dachis and
Craig M. Kanarick.(1)
4.2 Amendment to Stockholders Agreement, dated February 3, 1999, among
Razorfish, Spray Ventures, Commuicade, Jeffrey A. Dachis and
Craig M. Kamaarick.(1)
4.6 Registration Rights Agreement, dated March 30, 1999, between
Razorfish and Communicade Inc.(1)
4.7 Specimen Common Stock Certificate of Razorfish.(1)
10.1 The Amended and Restated 1997 Stock Option and Incentive Plan.(1)
10.2 1999 Amended and Restated Stock Incentive Plan.(2)
10.3 Employment Agreement, dated September 18, 1996, between Razorfish
and Jeffrey A. Dachis.(1)
10.4 Non-competitive Agreement, dated Septemeber 18, 1996, between
Razorfish and Jeffrey A. Dachis.(1)
10.5 Employment Agreement, dated September 18, 1996, between
Razorfish and Craig M. Kanarick(1)
10.6 Non-competitive Agreement, dated September 18, 1996, between
Razorfish and Craig M. Kanarick.(1)
10.7 Employment Agreement, dated June 19, 1997, between Razorfish and
Jean-Philippe Maheu.(1)
10.8 Employment Agreement, dated June 1, 1997, between Razorfish and
Evan Orensten.(1)
10.9 Employment Agreement, dated October 1, 1998, between Razorfish
and Per Bystedt.(1)
10.10 Employment Agreement, dated October 1, 1998, between Razorfish
and Jonas Svensson.(1)
10.11 Employment Agreement, dated August 10, 1999, between Razorfish and
Michael Pehl.
10.12 Letter Agreement, dated as of August 9, 1999, between Razorfish
and Lawrence P. Begley.
10.13 Lease Agreement, dated October 28, 1996, between Razorfish and
Man Yun Real Estate Corporation.(1)
10.14 Lease Agreement, dated April 30, 1997, between Razorfish and Man
Yun Real Estate Corporation.(1)
i
<PAGE>
Exhibit No. Description
- ----------- -----------
10.15 Lease Agreement, dated December 23, 1998, between C.H.B.I.
Razorfish Limited and the Mayor and Commonality and Citizens of
the City of London.(1)
10.16 Lease Agreement, dated March 10, 1998, between J&R Bechelli and
Alpha Online, Inc., as amended by letter dated February 9,
1999.(1)
10.17 Lease Agreement No. 731 100, dated April 12, 1996, between Spray
(f/k/a Spray Interative Media Agency AB) and Bojner Estate AB
("Bojner") and the English translation thereof.(1)
10.18 Lease Agreement No. 741 100, dated September 30, 1997, between
Spray (f/k/a Spray Interactive Media AB) and Bojner
and the English translation thereof.(1)
10.19 Lease Contract No. 01009 001 024 ("Trygg-Hansa Lease"), dated
April 30, 1998, between Spray and Trygg-Hansa ("Trygg-Hansa")
and the English translation thereof.(1)
10.20 Supplement No. 1, dated April 30, 1998, to Trygg-Hansa Lease and
the English translation thereof.(1)
10.21 Supplement No. 2, dated August 18, 1998, to Trygg-Hansa Lease
and the English translation thereof.(1)
10.22 Personal Guarantee for Premises, dated April 29, 1998, made by
Lars T. Andersson and per Bystedt in favor of Trygg-Hansa with
respect to Trygg-Hansa Lease and the English translation
thereof.(1)
10.23 Personal Guarantee for Premises, dated April 29, 1988, made by
Johan Ihrfelt and Jonas Svensson in favor of Trygg-Hansa with
respect to Trygg-Hansa Lease and the English translation
thereof.(1)
10.24 Rent Contract Covering Business Premises, dated February 3,
1998, between Spray Interactive Media AB and DEGI Deutsche
Gesellschaft fur Immobilienfonds mbH and the English translation
thereof.(1)
10.25 Rental Agreement for Office Space No. 910539, dated April 25,
1997, between Spray Interactive Media Oy and Valtion
Kiinteistolaitos (State real property Authority)/Uusimaa ("State
Real Property Authority") and the English translation
thereof.(1)
10.26 Rental Agreement for Office Space No. 910539, dated May 14,
1997, between Spray Interactive Media Oy and State Real Property
Authority and the English translation thereof.(1)
10.27 Lease Contract, dated June 17, 1998, between Spray
Geelmuyden.Kiese A.S. and Kongensgate 2 ANS and the English
translation thereof.(1)
10.28 Subscription and Exchange Agreement, dated as of October 1,
1998, among Razorfish, Spray Ventures AB and Communicade.(1)
10.29 First Amendment to the Subscription and Exchange Agreement,
dated November 25, 1998, among Razorfish, Spray Ventures AB,
Spray Network AB and Communicade.(1)
10.30 Second Amendment to the Subscription and Exchange Agreement,
dated December 10, 1998, among Razorfish, Spray Ventures AB,
Spray Network AB and Communicade.(1)
10.31 Stock Purchase Agreement, dated as of October 1, 1998, among
Communicade, Jeffrey A. Dachis and Craig M. Kanarick.(1)
ii
<PAGE>
Exhibit No. Description
----------- -----------
10.32 Stock Purchase Agreement, dated October 23, 1998, among
Communicade and Spray Ventures AB.(1)
10.33 Amendment to Stock Purchase Agreement, dated December 10, 1998,
between Communicade and Spray Ventures AB.(1)
10.34 Loan Agreement, dated September 18, 1996, between Razorfish and
Omnicom Finance Inc.(1)
10.35 Forms of Voting Agreements.(2)
10.36 Letter Agreement dated August 8, 1995 between i-Cube and Silicon
Valley Bank.(2)
10.37 Promissory Note dated August 8, 1995 between i-Cube and Silicon
Valley Bank.(2)
10.38 Commercial Security Agreement dated August 8, 1995 between
i-Cube and Silicon Valley Bank.(2)
10.39 Negative Pledge Agreement dated August 8, 1995 between i-Cube
and Silicon Valley Bank.(2)
10.40 Letter Agreement dated October 7, 1996 between i-Cube and
Silicon Valley Bank.(2)
10.41 Promissory Note dated July 31, 1997 between i-Cube and Silicon
Valley Bank.(2)
10.42 Loan Modification Agreements between Registrant and Silicon
Valley Bank dated August 6, 1996, August 7, 1996 and August 28,
1997, respectively.(2)
10.43 Lease Agreement dated november 20, 1996 between i-Cube,
RR&C Development Company and Patrician Associates, Inc.(2)
10.44 Lease Agreement dated as of July 14, 1995 between i-Cube and
Riverfront Office Park Joint Venture.(2)
10.45 Amendment No. 1 to Lease Agreement dated as of July 14, 1995
between i-Cube and Riverfront Office Park Joint Venture.(2)
10.46 Sublease dated as of June 19, 1995 between i-Cube and MathSoft
Inc.(2)
18.1 Letter re: Change in Certifying Accountant.(3)
21.1 Subsidiaries of Razorfish
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
(1) Filed as an exhibit to Razorfish's Registration Statement on Form S-1 or
amendments thereto declared effective by the Securities and Exchange
Commission on April 26, 1999 (File No. 333-71043) and incorporated herein by
reference.
(2) Filed as an exhibit to Razorfish's Registration Statement on Form S-4 or
amendments thereto declared effective by the Securities and Exchange
Commission on October 1, 1999 (File No. 333-87031) and incorporated herein
by reference.
(3) Filed as an exhibit to Razorfish's Report on Form 8-K/A that was filed with
the Securities and Exchange Commission on December 10, 1999 and incorporated
herein by reference.
iii
<PAGE>
Exhibit 10.11
EMPLOYMENT AGREEMENT
AGREEMENT made and entered into in New York, New York by and between
Razorfish, Inc. (the "Company"), a Delaware corporation with its principal place
of business at 107 Grand Street, New York, New York, 10013 and Michael Pehl 18
Page Road, Lincoln, Massachusetts 01773 (the "Executive"). This Agreement shall
be effective on the Closing Date, as defined in that certain Agreement and Plan
of Merger (the "Agreement and Plan of Merger") dated as of August 10, 1999,
among the Company, Razorfish Merger Sub, Inc. and International Integration
Incorporated a/k/a i-Cube (the "Effective Date").
WHEREAS, subject to the terms and conditions hereinafter set forth, the
Company wishes to employ the Executive as its Chief Operating Officer and the
Executive wishes to accept such employment;
NOW, THEREFORE, in consideration of the foregoing premise and the mutual
promises, terms, provisions and conditions set forth in this Agreement, the
parties hereby agree:
1. Employment. Subject to the terms and conditions set forth in this
----------
Agreement, the Company hereby offers, and the Executive hereby accepts,
employment.
2. Term. Subject to earlier termination as hereafter provided, the
----
Executive's employment hereunder shall be for a term of one (1) year, commencing
as of the Effective Date of this Agreement, and shall automatically renew
thereafter for successive periods of one (1) year each unless either party
notifies the other in writing at least sixty (60) days prior to the end of the
then-current term that this Agreement is no longer to be extended. The term of
this Agreement, as from time to time the same may be renewed, is hereafter
referred to as "the term of this Agreement" or "the term hereof".
3. Capacity and Performance.
------------------------
a. During the term hereof, the Executive shall serve the Company as its
Chief Operating Officer, reporting to the Chief Executive Officer of the Company
(the "CEO").
b. During the term hereof, the Executive shall be employed by the
Company on a full-time basis and shall perform such duties as are intrinsic to
his position and such other duties and responsibilities consistent with his
position as may reasonably be designated from time to time by the CEO.
c. During the term hereof, the parties acknowledge that it is
anticipated that the Executive shall work in New York City, on average,
approximately two (2) days of each business week.
d. During the term hereof, the Executive shall devote substantially all
of his business time and his best efforts, business judgment, skill and
knowledge exclusively to the advancement of the business and interests of the
Company and to the discharge of his duties and responsibilities hereunder.
4. Compensation and Benefits. As compensation for all services performed by
-------------------------
the Executive during his employment:
a. Base Salary. During the term hereof, the Company shall pay the
-----------
Executive a base salary at the rate of not less than Three Hundred Thousand
Dollars ($300,000) per annum, payable in accordance with the payroll practices
of the Company for its executives and subject to increase from time to time by
the Board of Directors of the Company (the "Board"), in its sole discretion.
Such base salary, as from time to time increased, is hereafter referred to as
the "Base Salary".
1
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b. Bonus Compensation.
------------------
(i) In the event that the Effective Date occurs prior to December
31, 1999, the Executive will be deemed to have earned an annual bonus for 1999
equal to that portion of his target of seventy-five percent (75%) of the Base
Salary as is determined in accordance with the terms and conditions of the
International Integration Inc. ("i-Cube") bonus plan in effect immediately prior
to the Effective Date (the "i-Cube Plan") to have accrued in accordance with
such i-Cube Plan.
(ii) During the term hereof after 1999, the Executive shall be
eligible from time to time to receive bonuses or to participate in profit
sharing in such amounts as are determined by the Compensation Committee of the
Board to be appropriate for similarly situated executives of the Company.
Eligibility will be determined through a review process that will consider
Executive's work performance and contribution to the Company, and the Company's
performance, as determined by, and at the discretion of the Board. The Company
will conduct Executive performance reviews in accordance with the Company policy
in effect from time to time.
c. Stock Options.
-------------
(i) The Company hereby acknowledges that the Executive has been
granted by i-Cube options (the "Executive Options") to purchase one million four
hundred ninety-one thousand five hundred (1,491,500) shares of i-Cube common
stock (the "Common Stock").
(ii) The Executive Options held by the Executive as of the Closing
Date shall be converted at the Exchange Ratio (as such term is defined in the
Agreement and Plan of Merger) into options to purchase shares of Razorfish
common stock in accordance with the terms and conditions of the Agreement and
Plan of Merger.
(iii) The following sets forth the vesting schedule of the Executive
Options:
(A) one million one hundred ninety-three (1,193,376) Executive
Options are vested as of the Effective Date;
(B) two hundred twenty-three thousand one hundred twenty-four
(223,124) Executive Options shall vest as of the Effective Date; and
(C) seventy-five thousand (75,000) Executive Options shall vest
in equal ratable installments of nine thousand three hundred seventy-five
(9,375) Executive Options every six (6) months for the period of four (4) years
immediately following the Effective Date.
(iv) Except as expressly set forth in this paragraph 4.c, the
Executive Options shall be subject to all terms and conditions of the i-Cube
stock option plan as the same shall be adopted and implemented by the Company.
d. Vacations. During the term hereof, the Executive shall be entitled to
---------
four (4) weeks of paid vacation per annum accrued in accordance with and
otherwise subject to the Company's vacation policies for similarly situated
executives, to be taken at such times and intervals as shall be determined by
the Executive, subject to the reasonable business needs of the Company. In the
event of any termination of this Agreement for any reason, the Executive shall
be entitled to cash compensation for vacation time not used as of the date of
termination ("Final Vacation Pay").
2
<PAGE>
e. Other Benefits. During the term hereof and subject to any
--------------
contribution therefor generally required of executives of the Company, the
Executive shall be entitled to participate in any and all employee benefit plans
from time to time in effect for executives of the Company generally. Such
participation shall be subject to the terms of the applicable plan documents and
generally applicable Company policies.
f. Business Expenses. The Company shall pay or reimburse the Executive
-----------------
for all reasonable business expenses incurred or paid by the Executive in the
performance of his duties and responsibilities hereunder, subject to any expense
policies adopted by the Company with respect to similarly situated executives
and further subject to such reasonable substantiation and documentation as may
be specified by the Company from time to time. The Company shall pay or
reimburse the Executive for all reasonable travel expenses associated with his
travel between Boston and other cities, and New York City, to enable him to
attend to his duties or responsibilities at the Company's offices in New York
City, and the Company shall also maintain, and pay or reimburse the Executive
for all expenses associated with locating and renting a furnished apartment in
New York City (including reasonable brokerage fees, rental and security
deposits) for his use during the term of his employment with the Company,
provided, however, that monthly rent expenses associated therewith, in the
aggregate shall not exceed Four Thousand Dollars ($4,000) per month without the
prior approval of the Company.
5. Termination of Employment and Severance Benefits. Notwithstanding the
------------------------------------------------
provisions of Section 2 hereof, the Executive's employment hereunder shall
terminate under the following circumstances:
a. Death. In the event of the Executive's death during the term hereof,
-----
the Executive's employment hereunder shall immediately and automatically
terminate. In that event, the Company shall pay to the Executive's designated
beneficiary or, if no beneficiary has been designated by the Executive, to his
estate, any earned and unpaid Base Salary, any Final Vacation Pay, reimbursement
for any documented business expenses reimbursable under Section 4.f above, and
any bonus compensation that is earned but unpaid, pro-rated through the date of
his death.
b. Disability.
----------
(i) The Company may terminate the Executive's employment hereunder,
upon notice to the Executive, in the event that the Executive becomes
disabled during his employment hereunder through any illness, injury,
accident or condition of either a physical or psychological nature and, as a
result, is unable to perform substantially all of his duties and
responsibilities hereunder for one hundred and eighty (180) days during any
period of three hundred and sixty-five (365) consecutive days. If the
Company terminates the Executive's employment pursuant to this Section 5.b,
the Executive shall receive any Base Salary earned and unpaid through the
date of termination, any Final Vacation Pay, reimbursement for any
documented business expenses reimbursable under Section 4.f above, and any
bonus compensation that is earned but unpaid, pro-rated through the date of
termination.
(ii) The Board may designate another employee to act in the
Executive's place during any period of the Executive's disability.
Notwithstanding any such designation, the Executive shall continue to
receive the Base Salary in accordance with Section 4.a and benefits in
accordance with Section 4.d, to the extent permitted by the then-current
terms of the applicable benefit plans, until the Executive becomes eligible
for disability income benefits under the Company's disability income plan,
if any, or until the termination of his employment, whichever shall first
occur.
(iii) While receiving disability income payments under the Company's
disability income plan, if any, the Executive shall be entitled to receive
the difference between the Base Salary
3
<PAGE>
and such disability income payments and shall continue to participate in
Company benefit plans in accordance with Section 4.d, until the termination
of his employment.
(iv) If any question shall arise as to whether during any period the
Executive is disabled through any illness, injury, accident or condition of
either a physical or psychological nature so as to be unable to perform
substantially all of his duties and responsibilities hereunder, the
Executive may, and at the request of the Company shall, submit to a medical
examination by a physician selected by mutual agreement of the Company and
the Executive or his duly appointed guardian, if any, to determine whether
the Executive is so disabled and such determination shall for the purposes
of this Agreement be conclusive of the issue.
c. By the Company for Cause. The Company may terminate the Executive's
------------------------
employment hereunder for Cause at any time upon notice to the Executive setting
forth in reasonable detail the nature of such Cause. The following, as
determined by the Board in its reasonable judgment, shall constitute Cause for
termination: (i) the Executive's conviction of or plea of nolo contendere to a
felony or other crime involving moral turpitude; (ii) the Executive's fraud,
theft, embezzlement, other material dishonesty or a material breach of a
fiduciary duty owed to the Company; (iii) the Executive's willful failure to
perform (other than by reason of disability), or gross neglect in the
performance of, his duties and responsibilities to the Company hereunder;
provided, however, that the Company may terminate Executive's employment
- -------- -------
hereunder for "Cause" within the meaning of clauses (iii) above only upon thirty
(30) days' prior written notice to the Executive during which period the
Executive may cure the breach or neglect provided that such breach or neglect is
reasonably capable of being cured. Upon termination of Executive's employment
for Cause in accordance with this Section 5.c, the Company shall have no further
obligation or liability to the Executive, other than for Base Salary earned and
unpaid at the date of termination, any Final Vacation Pay, and reimbursement for
documented business expenses reimbursable under Section 4.f above.
d. By the Company Other than for Cause. The Company may terminate the
-----------------------------------
Executive's employment hereunder other than for Cause at any time upon notice to
the Executive. In the event of such termination, then for a period of one (1)
year following the date of termination, the Company shall continue to pay the
Executive the Base Salary at the rate in effect on the date of termination (the
"Severance Payments") and shall continue to pay the cost of the Executive's
participation and that of his eligible dependents in its group health and any
other health-related plans, provided that the Executive is entitled to continue
such participation under applicable law and plan terms. In the event of
termination under this Section 5.d, the Company also shall pay the Executive a
lump sum payment equal to the sum of any Final Vacation Pay, any documented
business expenses reimbursable under Section 4.f above, and any bonus
compensation that is earned and unpaid, pro-rated through the date of
termination. All Severance Payments under this Section 5.d will be in the form
of salary continuation, payable in accordance with the normal payroll practices
of the Company, and will begin at the Company's next regular payroll period
following the date of termination of the Executive's employment.
e. By the Executive for Good Reason. The Executive may terminate his
--------------------------------
employment hereunder for Good Reason, upon notice to the Company setting forth
in reasonable detail the nature of such Good Reason. The following shall
constitute Good Reason for termination by the Executive: (i) failure of the
Company to continue the Executive in the position of Chief Operating Officer;
(ii) substantive diminution in the nature or scope of the Executive's
responsibilities, duties or authority; (iii) willful failure of the Company to
provide the Executive all compensation and other benefits and perquisites set
forth in Section 4 hereof, and (iv) any requirement by the Company that the
Executive work in New York City, on average, more than two days each business
week; provided, however, that the Executive shall only be entitled to terminate
his employment hereunder for Good Reason after providing the Company thirty (30)
days' notice during which the Company may endeavor to cure any such failure
described in paragraphs 5(e)(i), 5(e)(ii), 5(e)(iii) and 5(e)(iv) above and
which failure is capable of cure. In the event of termination in accordance with
this Section 5.e, the Executive shall be entitled to receive all pay and
benefits to which he would have been entitled had his employment terminated in
accordance with Section 5.d hereof.
4
<PAGE>
6. Survival of Provisions. Provisions of this Agreement shall survive
----------------------
termination if so provided herein or if necessary or desirable to accomplish the
purposes of other surviving provisions, including without limitation the
obligations of the Executive under Sections 7, 8 and 9 hereof.
7. Confidential Information.
------------------------
a. The Executive shall never use or disclose to any Person (except as
required by applicable law or for the proper performance of his duties and
responsibilities to the Company) any Confidential Information obtained by the
Executive incident to his employment with the Company. The Executive understands
that this restriction shall continue to apply after his employment terminates,
regardless of the reason for such termination.
b. All documents, records, tapes and other media of every kind and
description relating to the business, present or otherwise, of the Company and
any copies, in whole or in part, thereof (the "Documents"), whether or not
prepared by the Executive, shall be the sole and exclusive property of the
Company. The Executive shall safeguard all Documents and shall surrender to the
Company at the time his employment terminates, or at such earlier time or times
as the Board or its designee may specify, all Documents then in the Executive's
possession or control.
8. Assignment of Rights to Intellectual Property. The Executive shall
---------------------------------------------
promptly and fully disclose all Intellectual Property to the Company. The
Executive hereby assigns and agrees to assign to the Company (or as otherwise
directed by the Company) the Executive's full right, title and interest in and
to all Intellectual Property. The Executive agrees to execute any and all
applications for domestic and foreign patents, copyrights or other proprietary
rights and to do such other acts (including without limitation the execution and
delivery of instruments of further assurance or confirmation) requested by the
Company to assign the Intellectual Property to the Company and to permit the
Company to enforce any patents, copyrights or other proprietary rights to the
Intellectual Property. All copyrightable works that the Executive creates shall
be considered "work made for hire".
9. Restricted Activities. The Executive agrees that some restrictions on his
---------------------
activities during and after his employment are necessary to protect the
goodwill, Confidential Information and other legitimate interests of the
Company:
a. While the Executive is employed by the Company and for six (6) months
after his employment terminates (the "Non-Competition Period"), the Executive
shall not, directly or indirectly, whether as owner, partner, investor,
consultant, agent, employee, co-venturer or otherwise, compete with the business
of the Company throughout the world. For purposes of this Section 9, the
business of the Company shall mean the Products of the Company at the time the
Executive's employment terminates.
b. The Executive further agrees that while he is employed by the Company
and during the Non-Competition Period, the Executive will not solicit for hire
any employee of the Company; assist in such solicitation by any Person;
encourage any such employee to terminate his or her relationship with the
Company; or solicit or encourage any customer of the Company to terminate its
relationship with the Company.
10.Enforcement of Covenants. The Executive acknowledges that he has
------------------------
carefully read and considered all the terms and conditions of this Agreement,
including the restraints imposed upon him pursuant to Sections 7, 8 and 9
hereof. The Executive agrees that said restraints are necessary for the
reasonable and proper protection of the Company and that each of the restraints
is reasonable in respect to subject matter, length of time and geographic area.
The Executive further acknowledges that, were he to breach any of the covenants
contained in Sections 7, 8 or 9 hereof, the damage to the Company would be
irreparable. The Executive therefore agrees that the Company, in addition to any
other remedies available to it, shall be entitled to
5
<PAGE>
preliminary and permanent injunctive relief against any breach by the Executive
of any of said covenants, without having to post bond. The parties further agree
that, in the event that any provision of Section 7, 8 or 9 hereof shall be
determined by any court of competent jurisdiction to be unenforceable by reason
of its being extended over too great a time, too large a geographic area or too
great a range of activities, such provision shall be deemed to be modified to
permit its enforcement to the maximum extent permitted by law.
11. Conflicting Agreements. The Executive hereby represents and warrants
----------------------
that the execution of this Agreement and the performance of his obligations
hereunder will not breach or be in conflict with any other agreement to which
the Executive is a party or is bound and that the Executive is not now subject
to any covenants against competition or similar covenants that would affect the
performance of his obligations hereunder. The Executive will not disclose to or
use on behalf of the Company any proprietary information of a third party
without such party's consent.
12. Indemnification. The Company shall indemnify the Executive to the extent
---------------
provided in its then current Articles or By-Laws. The Executive agrees to
promptly notify the Company of any actual or threatened claim arising out of or
as a result of his employment with the Company.
13. Definitions. Words or phrases which are initially capitalized or are
-----------
within quotation marks shall have the meanings provided in this Section 13 and
as provided elsewhere herein. For purposes of this Agreement, the following
definitions apply:
a. "Confidential Information" means any and all information of the
Company that is not generally known by others with whom it competes or does
business, or with whom it plans to compete or do business. Confidential
Information includes without limitation such information relating to (i) the
development, research, testing, manufacturing, marketing and financial
activities of the Company, (ii) the Products, (iii) the costs, sources of
supply, financial performance and strategic plans of the Company, (iv) the
identity and special needs of the customers of the Company and (v) the people
and organizations with whom the Company has business relationships and those
relationships. Confidential Information also includes comparable information
that the Company has received from customers and others under an understanding
that it would not be disclosed.
c. "Intellectual Property" means inventions, discoveries, developments,
methods, processes, compositions, works, concepts and ideas (whether or not
patentable or copyrightable or constituting trade secrets) conceived, made,
created, developed or reduced to practice by the Executive (whether alone or
with others, whether or not during normal business hours or on or off Company
premises) during the Executive's employment that relate to either the Products
or any prospective activity of the Company in active development.
d. "Person" means an individual, a corporation, an association, a
partnership, an estate, a trust and any other entity or organization, other than
the Company.
e. "Products" mean all products planned, researched, developed, tested,
manufactured, sold, licensed, leased or otherwise distributed or put into use by
the Company, together with all services provided or in active planning (if such
planning is known to the Executive) by the Company, during the Executive's
employment.
14. Withholding. All payments made by the Company under this Agreement shall
-----------
be reduced by any tax or other amounts required to be withheld by the Company
under applicable law.
15. Assignment. Neither the Company nor the Executive may make any
----------
assignment of this Agreement or any interest herein, by operation of law or
otherwise, without the prior written consent of the other; provided, however,
that the Company may assign its rights and obligations under this Agreement
without the consent of the Executive to a Person with whom the Company shall
hereafter affect a reorganization, consolidation or merger or to whom the
Company transfers all or substantially all of its properties or assets.
6
<PAGE>
This Agreement shall inure to the benefit of and be binding upon the Company and
the Executive, their respective successors, executors, administrators, heirs and
permitted assigns.
16. Severability. If any portion or provision of this Agreement shall to any
------------
extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
17. Waiver. No waiver of any provision hereof shall be effective unless
-----
made in writing and signed by the waiving party. The failure of either party to
require the performance of any term or obligation of this Agreement, or the
waiver by either party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.
18. Notices. Any and all notices, requests, demands and other
-------
communications provided for by this Agreement shall be in writing and shall be
effective when delivered in person or deposited in the United States mail,
postage prepaid, registered or certified, and addressed to the Executive at his
last known address on the books of the Company or, in the case of the Company,
at its principal place of business, attention of the CEO, or to such other
address as either party may specify by notice to the other actually received.
19. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties and supersedes all prior communications, agreements and
understandings, written or oral, with respect to the terms and conditions of the
Executive's employment.
20. Amendment. This Agreement may be amended or modified only by a written
---------
instrument signed by the Executive and by an authorized representative of the
Company.
21. Arbitration. Any dispute, controversy or claim between the parties
-----------
arising out of this Agreement shall be settled by expedited arbitration
conducted in New York City in accordance with the American Arbitration
Association National Rules for the Resolution of Employment Disputes (the
"Rules") and the laws of the State of New York. In the event that a party
requests arbitration, it shall serve on the other party (the "Non-Requesting
Party") a written demand for arbitration stating the substance of the
controversy, dispute or claim, the contention of the party requesting
arbitration and the name and address of the arbitrator appointed by it. The
Non-Requesting Party, within twenty (20) days of such demand, shall accept the
arbitrator or appoint a second arbitrator and notify the other party of the name
and address of this second arbitrator so selected, in which case the two
arbitrators shall appoint a third. The decision or award of the single
arbitrator or, in the case of three arbitrators, the decision or award of any
two arbitrators, shall be final and binding upon the parties. In the event that
the two arbitrators fail in any instance to appoint a third arbitrator within
twenty (20) days of the appointment of the second arbitrator, either arbitrator
or any party to the arbitration may apply to the American Arbitration
Association for appointment of the third arbitrator in accordance with the
Rules. Should the Non-Requesting Party (upon whom a demand for arbitration has
been served) fail or refuse to accept the arbitrator appointed by the other
party or to appoint an arbitrator within twenty (20) days, the single arbitrator
shall have the right to decide alone, and such arbitrator's decision or award
shall be final and binding upon the parties. The decision of the arbitrator or
arbitrators shall be in writing and shall set forth the basis therefor. The
parties shall abide by all awards rendered in the arbitration proceedings, and
all such awards may be enforced and executed upon in any court having
jurisdiction over the party against whom enforcement of such award is sought.
The parties involved in the dispute shall divide equally the administrative
charges, arbitrator's fees and related expenses of the arbitration, but each
party shall pay its own legal fees incurred in connection with such arbitration.
The foregoing, however, shall not limit the right of either party to seek
equitable relief from any court of competent jurisdiction. For the purposes
hereof, the Executive hereby submits to the jurisdiction of the federal and
state courts in New York and notice of demand, process and/or summons in
connection with legal
7
<PAGE>
proceedings, may be served upon Employee by registered or certified mail in
accordance with paragraph 18 with the same effect as if personally served.
22. Headings. The headings and captions in this Agreement are for
--------
convenience only and in no way define or describe the scope or content of any
provision of this Agreement.
23. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be an original and all of which together shall
constitute one and the same instrument.
24. Governing Law. This Agreement shall be construed and enforced under, and
-------------
be governed in all respects by, the laws of the State of New York, without
regard to the conflict of laws principles thereof.
IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument
by the Company, by its duly authorized representative, and by the Executive, as
of the effective date hereof
THE EXECUTIVE THE COMPANY
/s/ Michael Pehl /s/ Jeffrey A. Dachis
- ----------------- ----------------------
Michael Pehl By: Jeffrey A. Dachis
Its: Chief Executive Officer
8
<PAGE>
EXHIBIT 10.12
August 9, 1999
Larry Begley
c/o International Integration Incorporated
101 Main Street
Cambridge, MA 02142
Re: Offer of Employment
Dear Larry:
I am pleased to confirm the terms of your employment with Razorfish, Inc.
("Razorfish"). Your title shall be Executive Vice President, Finance & Chief
Financial Officer and you shall work at Razorfish's New York offices not less
than two (2) days per week.
The term of your employment shall commence as of the Closing Date (as such
term is defined in the Agreement and Plan of Merger by and between Razorfish and
International Integration Incorporated ("i-Cube")) and shall continue in effect
for a period of one (1) year (the "Initial Term") unless terminated by Razorfish
for cause (as such term shall be defined in a more formal agreement between you
and Razorfish). Following conclusion of the Initial Term, the term of your
employment will be extended automatically for successive one-year periods unless
either party gives written notice to the other of termination or non-renewal,
for any reason, at least thirty (30) days prior to the end of the then-current
term.
Your salary shall be at an annual rate of Two Hundred and Eighty Thousand
Dollars ($280,000). Any options to purchase shares of i-Cube Common Stock held
by you as of the Closing Date shall be converted at the Exchange Ratio (as such
term is defined in the Agreement and Plan of Merger) into options to purchase
shares of Razorfish Common Stock in accordance with terms and conditions of the
Agreement and Plan of Merger.
In the event that the Closing Date occurs prior to December 31, 1999, you
will be eligible to receive a bonus for 1999 pursuant to the terms and
conditions of the i-Cube bonus plan in effect immediately prior to the Closing
Date as administered by the Chief Executive Officer of Razorfish in consultation
with the Chief Operating Officer.
<PAGE>
Jeff Dachis
President/CEO
In the event Razorfish terminates your employment without cause after the
Initial Term, you shall be entitled to continue to receive your annual salary
for the longer of: (i) the period of time remaining in the then-current term; or
(ii) six months.
It is our mutual intention to enter into a formal agreement with respect to
the matters set forth herein on such terms and conditions as are customary in
the so-called "New Media" industry. However, until such time as a more formal
agreement is concluded, this letter shall constitute the exclusive understanding
between us.
We look forward to your joining us.
Very truly yours,
RAZORFISH, INC.
Jeff Dachis
President/CEO
ACKNOWLEDGED AND AGREED:
- ---------------------------------
Larry Begley
<PAGE>
Exhibit 21.1
List of Subsidiaries
Name of Subsidiary Jurisdiction of Incorporation
- ------------------ -----------------------------
International Integration Incorporated Delaware, U.S.A.
("i-Cube")
International Integration Securities Corp. Massachusetts, U.S.A.
International Integration Holding B.V. The Netherlands
International Integration B.V. The Netherlands
International Integration GmbH Germany
International Integration European Holding Co. Delaware, U.S.A.
Tomorrow's Technology Today, Inc. Massachusetts, U.S.A.
International Integration R&C Holding Co. Delaware, U.S.A.
Reportsent Company Limited United Kingdom
Conduit Corporation Limited United Kingdom
Entropy CMG II Limited United Kingdom
Conduit, Inc. Massachusetts, U.S.A.
Conduit Comm. B.V. The Netherlands
Conduit Business Information Ltd. United Kingdom
Avalanche Solutions, Inc. New York, U.S.A.
Razorfish Limited United Kingdom
Razorfish San Francisco, Inc. California, U.S.A.
Razorfish Los Angeles, Inc. California, U.S.A.
TSDesign, Inc. Massachusetts, U.S.A.
Razorfish AB Sweden
Confutera 5011 AB Sweden
Spray Learning AB Sweden
Spray Services AB Sweden
Tetre IT - Management AB Sweden
Spray Network U.S.A., Inc. Delaware, U.S.A.
Tetre Workgroup Solutions AB Sweden
Spray Media Agency AB Sweden
Tetre New Media AB Sweden
Spray Research AB Sweden
Spray Interactive Development AB Sweden
Razorfish Oy Finland
Razorfish AG Germany
Razorfish AS Norway
Fuel, Inc. California, U.S.A.
Tonga, Inc. California, U.S.A.
Lee Hunt Associates, Inc. New York, U.S.A.
Razorfish Ventures, Limited New York, U.S.A.
Razorfish Finance, Inc. New York, U.S.A.
Razorfish New York, Inc. New York, U.S.A.
Razorfish Technologies, Inc. New York, U.S.A.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 333-77373, 333-90495, 333-30410) of Razorfish,
Inc. of our report dated February 15, 2000 relating to the financial statements,
which appears in this Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 5, 2000
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of Razorfish, Inc. and subsidiaries, of our report
dated March 5, 1999 included in Razorfish, Inc. and subsidiaries Registration
Statement on Form S-1 (File No. 333-71043). It should be noted that we have not
audited any financial statements of the company subsequent to December 31, 1998
or performed any audit procedures subsequent to the date of our report.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
April 5, 2000
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<RESTATED>
<S> <C>
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0
0
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