<PAGE>
As filed with the Securities and Exchange Commission on September 29, 1999
Registration Statement No. 333-83501
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
Amendment No. 3
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
NaviSite, Inc.
(Exact name of registrant as specified in its charter)
-------------------
<TABLE>
<S> <C>
Delaware 7379 52-2137343
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction Classification Code Number) Identification No.)
of incorporation or
organization)
</TABLE>
NaviSite, Inc.
100 Brickstone Square
Andover, Massachusetts 01810
(978) 552-3300
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
-------------------
Joel B. Rosen
Chief Executive Officer
NaviSite, Inc.
100 Brickstone Square
Andover, Massachusetts 01810
(978) 552-3300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-------------------
Copies to:
<TABLE>
<S> <C>
Peter B. Tarr, Esq.
David T. Brewster, Esq. Joseph E. Mullaney III, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP Hale and Dorr LLP
One Beacon Street 60 State Street
Boston, Massachusetts 02108 Boston, Massachusetts 02109
(617) 573-4800 (617) 526-6000
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
-------------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 29, 1999
[NAVISITE LOGO APPEARS HERE]
5,500,000 Shares
Common Stock
NaviSite, Inc. is offering 5,500,000 shares of its common stock. This is
NaviSite's initial public offering. The common stock has been approved for
quotation on the Nasdaq National Market under the symbol "NAVI." We anticipate
that the initial public offering price will be between $10.00 and $12.00 per
share.
At the request of NaviSite, the underwriters have reserved at the initial
public offering price up to 550,000 shares of common stock for sale to
officers, directors, employees and business associates of NaviSite and up to
825,000 shares of common stock for sale to stockholders of CMGI, Inc.
--------------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 7.
--------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price........................................... $ $
Underwriting Discounts and Commissions.......................... $ $
Proceeds to NaviSite............................................ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
NaviSite has granted the underwriters a 30-day option to purchase up to an
additional 825,000 shares of common stock to cover over-allotments. BancBoston
Robertson Stephens Inc. expects to deliver the shares of common stock to
purchasers on , 1999.
--------------
BancBoston Robertson Stephens
Hambrecht & Quist
FAC/Equities
The date of this prospectus is October , 1999.
<PAGE>
The inside front cover page also contains the following:
<TABLE>
<S> <C>
We help companies cost- . . . and less worry.
effectively run their Internet [Customer logos
applications with greater superimposed over
speed, reliability and NaviSite logo]
efficiency. . .
Integrated application services
to match customers' process life cycle.
[The following words appear inside an arrow pointing downwards and
arcing towards the left:]
</TABLE>
Rent
Deploy
Advise
Host
Manage
Support
<PAGE>
The inside front cover page contains the following:
[Centered on the lower third of the page, a picture of the control room in
a NaviSite data center. Directly above it, covering the top two-thirds of the
page, is the NaviSite logo with the following text super-imposed on top of it:]
NaviSite, Inc., an Internet application service provider, offers Web site
and Internet application hosting and management services. Our offerings, high
level of customer service and state-of-the-art infrastructure allow us to offer
service levels that we believe are among the most comprehensive in the
industry. With our services, customers can focus on their core competencies,
assured that their Web sites and Internet applications are being managed 24-
hours-a-day, seven-days-a-week.
<PAGE>
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus.
Until , 1999 (25 days after the date of this prospectus), all dealers
that buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This requirement is in
addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 4
Risk Factors............................................................. 7
Forward Looking Statements............................................... 17
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Dilution................................................................. 21
Selected Consolidated Financial Data..................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 23
Business................................................................. 34
Management............................................................... 45
Certain Transactions..................................................... 54
Ownership of Principal Stockholders and Management....................... 60
Description of Capital Stock............................................. 62
Shares Eligible For Future Sale.......................................... 66
Underwriting............................................................. 68
Legal Matters............................................................ 70
Experts.................................................................. 70
Where You Can Find Additional Information................................ 70
Index to Financial Statements............................................ F-1
</TABLE>
---------------------
Industry data included in this prospectus has been obtained from third
parties and has not been independently verified by us.
"NaviSite" and the NaviSite logo are service marks of our company for which
service mark applications are pending. This prospectus also contains
trademarks, trade names and service marks of other companies which are the
property of their respective owners.
3
<PAGE>
SUMMARY
Because this is only a summary, it does not contain all of the information
that may be important to you. You should read this entire prospectus, including
"Risk Factors" and our consolidated financial statements and the accompanying
notes appearing elsewhere in this prospectus, before deciding to invest in our
common stock.
NaviSite, Inc.
NaviSite is an Internet application service provider offering Web site and
application hosting and management services. Our Internet application service
offerings allow businesses to outsource the deployment, configuration, hosting,
management and support of their Web sites and Internet applications in a cost-
effective and rapid manner. Our focus on enhanced management services, beyond
basic co-location services, allows us to meet the expanding needs of businesses
as their Web sites and Internet applications become more complex. We also
provide our customers with access to our state-of-the-art data centers and the
benefit of our direct private transit Internet connections to major Internet
backbone providers. We only use direct private transit Internet connections,
which differentiates our network infrastructure from that of most of our
competitors. These connections increase reliability and download speeds. Our
enhanced, integrated services enable our clients to realize the following key
benefits.
. Cost-Effective Application Services. Our scalable infrastructure,
repeatable Internet application services and hosting and management
expertise enable us to offer our customers application services on a
cost-effective basis.
. Rapid Deployment. We are able to rapidly deploy Internet applications,
allowing our customers to quickly launch Web sites and Internet
applications, often in a matter of weeks.
. High-Performance, World-Class Infrastructure. Our infrastructure has
been designed expressly to meet the more demanding technical
requirements of increasingly sophisticated Web sites and Internet
applications.
The scalability of our infrastructure and cost-effectiveness of our
services allow us to offer a comprehensive suite of services to meet the
current and future hosting and management needs of our customers. Our suite of
service offerings includes:
. Web site and Internet application hosting, enabling access to our
state-of-the-art data centers, bandwidth and basic back-up, storage and
monitoring services;
. Enhanced server management, providing custom reporting, hardware
options, load balancing and mirroring, system security, advanced back-
up options, remote management and the services of our business solution
managers;
. Specialized application management, providing management of e-commerce
and other sophisticated applications and their underlying services,
including ad-serving, streaming, databases and transaction processing;
and
. Application rentals and related consulting and other professional
services.
Since our inception, we have experienced operating losses and negative cash
flows for each quarterly and annual period. We expect to continue to incur
operating losses for at least the next three years. In addition, the market we
serve is highly competitive, and our revenue could be adversely affected by
increased competition. To date, a material portion of our revenue has been
derived from CMGI, Inc. and entities in which CMGI holds an equity interest.
CMGI and these CMGI affiliates accounted for 62% of our revenue for the quarter
ended July 31, 1999 as compared to 90% of our revenue for the quarter ended
July 31, 1998.
4
<PAGE>
The dramatic growth in Internet usage in recent years, combined with the
Internet's enhanced functionality, accessibility and security, has made the
Internet increasingly attractive to businesses as a medium for communication
and commerce. As more businesses have incorporated the Internet into their
business strategy, a growing number of them have chosen to outsource Internet
application development, implementation and support, particularly the hosting
and management of their Web sites and Internet applications. Forrester
Research, Inc., a leading market research firm, has estimated that the market
for managed Web site hosting in the United States will grow from less than $1.0
billion in 1998 to over $14.0 billion in 2003. In January 1998, Forrester
Research estimated that the market for branded application outsourcing services
in the United States will grow to $21.1 billion by 2001.
Our objective is to be the leading Internet application service provider.
We plan to achieve this goal by continuing to enhance and leverage our
expertise, service offerings and infrastructure to provide customers with
integrated, reliable and secure Internet-based business solutions. Key elements
of our strategy are to:
. expand and vary the applications and management services we offer to
our customers;
. offer multiple service levels to customers;
. increase awareness of the NaviSite brand and associate it with the
highest quality solutions and service;
. maintain the competitive advantage that our infrastructure and
expertise provide;
. continue to leverage and develop key industry relationships;
. take advantage of foreign market opportunities; and
. continue to pursue focused, complementary acquisitions.
CMGI will own approximately 70.9% of our outstanding common stock upon
completion of this offering. Accordingly, CMGI will have the power, acting
alone, to elect a majority of our board of directors and will have the ability
to determine the outcome of any corporate actions requiring stockholder
approval, regardless of how our other stockholders may vote. CMGI may exercise
its voting power by written consent, without convening a meeting of the
stockholders, meaning that CMGI will be able to effect a sale or merger of
NaviSite without prior notice to, or the consent of, our other stockholders.
CMGI's ownership may have the effect of delaying, deferring or preventing a
change in control of NaviSite. CMGI's interests could conflict with the
interests of our other stockholders.
--------------------
We were incorporated in Delaware in December 1998. At that time, we
received a contribution of assets from our predecessor, NaviSite Internet
Services Corporation. NaviSite Internet Services Corporation was incorporated
in Delaware in February 1997 under the name CMG Information Technology, Inc.
and changed its name to NaviSite Internet Services Corporation in May 1997. Our
principal investors include CMGI, Dell Computer Corporation and Microsoft
Corporation.
Our principal executive offices are located at 100 Brickstone Square,
Andover, Massachusetts 01810, and our telephone number is (978) 552-3300. Our
Web site address is www.navisite.com. The information on our Web site is not
incorporated by reference into this prospectus and should not be considered as
part of this prospectus.
--------------------
Except as otherwise noted, all information in this prospectus:
. gives effect to the conversion of all convertible preferred stock
outstanding as of July 31, 1999 into an aggregate of 20,746,835 shares
of common stock upon completion of this offering; and
. assumes no exercise of the underwriters' over-allotment option.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by NaviSite..... 5,500,000 shares
Common stock to be outstanding after
this offering...................... 26,316,173 shares
Use of proceeds...................... For enhancement and expansion of our
network infrastructure, expansion of
sales and marketing efforts, enhancement
of application management and technical
expertise, possible acquisitions of
complimentary businesses and
technologies and working capital and
general corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol........ NAVI
</TABLE>
Summary Consolidated Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended July 31,
-----------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Statement of Operations Data:
Total revenue........................................ $3,361 $4,029 $10,519
Gross profit (loss).................................. (133) (4,847) (9,819)
Loss from operations................................. (947) (9,076) (24,150)
Net loss............................................. (948) (9,172) (24,532)
Net loss applicable to common stockholders........... (948) (9,172) (24,704)
Net loss per share................................... $(0.24) $(1.14) $ (7.41)
Basic and diluted weighted average number of common
shares outstanding................................. 4,000 8,017 3,332
Unaudited pro forma basic and diluted net loss per
share.............................................. $ (1.51)
Pro forma weighted average number of basic and
diluted shares outstanding......................... 16,407
</TABLE>
The following table is a summary of our balance sheet at July 31, 1999 (i)
on an actual basis, (ii) on a pro forma basis after giving effect to the
conversion of all outstanding shares of convertible preferred stock into shares
of common stock and (iii) on a pro forma as adjusted basis to reflect the sale
of 5,500,000 shares of common stock at an assumed initial public offering price
of $11.00 per share, after deducting underwriting discounts and commissions and
estimated offering expenses payable by us.
<TABLE>
<CAPTION>
July 31, 1999
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Balance Sheet
Data:
Cash and
equivalents.... $ 3,352 $ 3,352 $58,017
Working capital
(deficit)...... (1,355) (1,355) 53,310
Total assets..... 21,111 21,111 75,776
Total
stockholders'
equity
(deficit)...... (4,369) 11,052 65,717
</TABLE>
6
<PAGE>
RISK FACTORS
You should carefully consider the following risks before making an
investment decision. Our financial condition and operating results could be
materially adversely affected by any of the risks set forth below. The market
price of our common stock could decline due to any of these risks, and you
could lose all or part of your investment. You also should refer to the other
information set forth in this prospectus, including our consolidated financial
statements and the accompanying notes appearing elsewhere in this prospectus.
Risks Related to Our Company and Our Operations
We have a history of operating losses and expect future losses
We cannot assure you that we will ever achieve profitability on a quarterly
or annual basis or, if we achieve profitability, that it will be sustainable.
We were organized in 1996 by CMGI, Inc., formerly known as CMG Information
Services, Inc., to support the networks and host the Web sites of CMGI and a
number of CMGI affiliates. It was not until the Fall of 1997 that we began
providing Web site hosting and Internet application management services to
companies unaffiliated with CMGI. Since our inception in 1996, we have
experienced operating losses and negative cash flows for each quarterly and
annual period. As of July 31, 1999, we had an accumulated deficit of $34.7
million. The income potential of our business is unproven, and our limited
operating history makes it difficult to evaluate our prospects. We anticipate
increased expenses as we continue to expand and improve our infrastructure,
invest in additional applications, enhance our application management
expertise, expand our sales and marketing efforts and pursue additional
industry relationships. As a result, we expect to incur operating losses for at
least the next three years.
Fluctuations in our quarterly operating results may negatively impact our stock
price
Our quarterly operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are outside our control.
These factors include:
. the demand for and market acceptance of our Web site and Internet
application hosting and management services;
. our ability to develop, market and introduce new services on a timely
basis;
. downward price adjustments by our competitors;
. changes in the mix of services provided by our competitors;
. technical difficulties or system downtime affecting the Internet
generally or our hosting operations specifically;
. our ability to meet any increased technological demands of our
customers;
. the amount and timing of costs related to our marketing efforts and
service introductions; and
. economic conditions specific to the Internet application service
provider industry.
Our operating results for any particular quarter may fall short of our
expectations or those of investors or securities analysts. In this event, the
market price of our common stock would be likely to fall.
Our principal stockholder will continue to control us and may have interests
that conflict with those of our other stockholders
As of August 31, 1999, CMGI, through its ownership of NaviSite Internet
Services Corporation, beneficially owned approximately 89.6% of our outstanding
common stock and, upon completion of this offering, will beneficially own
approximately 70.9% of our outstanding common stock. Accordingly, CMGI will
continue to have the power, acting alone, to elect a majority of our board of
directors and will have the ability to determine the outcome of any corporate
actions requiring stockholder approval, regardless of how our other
7
<PAGE>
stockholders may vote. Under Delaware law, CMGI may exercise its voting power
by written consent, without convening a meeting of the stockholders, meaning
that CMGI will be able to effect a sale or merger of NaviSite without prior
notice to, or the consent of, our other stockholders. CMGI's interests could
conflict with the interests of our other stockholders. The possible need of
CMGI to maintain control of NaviSite in order to avoid becoming a registered
investment company could influence future decisions by CMGI as to the
disposition of any or all of its ownership position in NaviSite. CMGI would be
subject to numerous regulatory requirements with which it would have difficulty
complying if it were required to register as an investment company. As a
result, CMGI may be motivated to maintain at least a majority ownership
position in NaviSite, even if other stockholders of NaviSite might consider a
sale of control of NaviSite to be in their best interests. As long as it is a
majority stockholder, CMGI has contractual rights to purchase shares in any
future financing of NaviSite, other than this offering, sufficient to maintain
its majority ownership position. CMGI's ownership may have the effect of
delaying, deferring or preventing a change in control of our company or
discouraging a potential acquiror from attempting to obtain control of us,
which in turn could adversely affect the market price of our common stock.
A significant portion of our revenue is generated by CMGI and companies
affiliated with CMGI, and the loss of this revenue would substantially impair
the growth of our business
A significant portion of our revenue currently is generated by services
provided to CMGI and CMGI affiliates, and we anticipate that we will continue
to receive a significant portion of our revenue in the future from CMGI and
CMGI affiliates. CMGI and CMGI affiliates accounted for 96% of our revenue in
fiscal 1998 and 67% of our revenue in fiscal 1999. We cannot assure you that
revenues generated by CMGI and CMGI affiliates will continue or that we will be
able to secure business from unaffiliated customers to replace these revenues
in the future. The loss of revenue from CMGI and CMGI affiliates, or our
inability to replace this operating revenue, would substantially impair the
growth of our business. A more detailed discussion of our customer
relationships with CMGI and its affiliates is included in this prospectus under
the headings "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview" and "Certain Transactions--Relationship and
Transactions between NaviSite and CMGI, Inc."
Our ability to grow our business would be substantially impaired if we were
unable to obtain, on commercially reasonable terms, certain equipment that is
currently provided under leases executed or guaranteed by CMGI
Certain of the equipment that we use or provide to our customers for their
use in connection with our services is provided under leases executed or
guaranteed by CMGI. If CMGI discontinues this practice, which it could do at
any time, we or our customers would have to obtain this equipment directly, and
we cannot assure you that we or our customers could do so on similar financial
terms. Our ability to grow our business would be substantially impaired if we
or our customers were unable to obtain this equipment on commercially
reasonable terms. A more detailed discussion of our other arrangements with
CMGI and its affiliates is included in this prospectus under the heading
"Certain Transactions--Relationship and Transactions between NaviSite and CMGI,
Inc."
If the growth of the market for Internet commerce and communication does not
continue, there may be insufficient demand for our services, and as a result,
our business strategy may not be successful
The increased use of the Internet for retrieving, sharing and transferring
information among businesses and consumers has developed only recently, and the
market for the purchase of products and services over the Internet is new and
emerging. If acceptance and growth of the Internet as a medium for commerce and
communication does not continue, our business strategy may not be successful
because there may not be a continuing market demand for our Web site and
Internet application hosting and management services. In addition, in order for
the market for our services to grow, consumers who have historically purchased
and communicated through traditional means must elect to purchase products and
services and conduct their communication online. These transitions must
continue to ensure a growing market for our Web site and Internet application
hosting and management services.
8
<PAGE>
Our growth could be substantially limited if the market for Internet
application services fails to develop or if we cannot achieve broad market
acceptance
The market for Internet application services has only developed recently
and is evolving rapidly. There is significant uncertainty as to whether the
Internet application service market will ultimately prove to be viable or, if
it becomes viable, that it will continue to grow. Historically, businesses have
been reluctant to outsource the hosting and management of sophisticated
applications and have considered third-party service vendors to be unequipped
to manage Internet applications critical to their businesses. If the market for
outsourced system and network management of Web sites and Internet applications
fails to develop, or develops more slowly than we expect, or if our Web site
and Internet application hosting and management services do not achieve broad
market acceptance, our growth could be substantially limited.
Our ability to successfully market our services could be substantially impaired
if we are unable to deploy new Internet applications or if new Internet
applications deployed by us prove to be unreliable, defective or incompatible
We cannot assure you that we will not experience difficulties that could
delay or prevent the successful development, introduction or marketing of
Internet application services in the future. If any newly introduced Internet
applications suffer from reliability, quality or compatibility problems, market
acceptance of our services could be greatly hindered and our ability to attract
new customers could be adversely affected. We cannot assure you that new
applications deployed by us will be free from any reliability, quality or
compatibility problems. If we incur increased costs or are unable, for
technical or other reasons, to host and manage new Internet applications or
enhancements of existing applications, our ability to successfully market our
services could be substantially impaired.
The market we serve is highly competitive, and as an early stage company, we
may lack the financial and other resources, expertise or capability needed to
capture increased market share
We compete in the Internet application service market. This market is
rapidly evolving, highly competitive and likely to be characterized by an
increasing number of market entrants and by industry consolidation. We believe
that participants in our market must grow rapidly and achieve a significant
presence to compete effectively. As an early stage company, our business is not
as developed as that of many of our competitors. For example, our facilities
currently have limited growth capacity and we have a significantly smaller
number of customers than many of the companies that compete in our market. We
estimate that the growth capacity of our facilities may be sufficient only for
the next two years. Insufficient growth capacity in our facilities could impair
our ability to achieve rapid growth through an increase in our customer base.
Moreover, many of our competitors have substantially greater financial,
technical and marketing resources, greater name recognition and more
established relationships in the industry than we have. We may lack the
financial and other resources, expertise or capability needed to capture
increased market share in this environment in the future. A more detailed
discussion regarding the competition we face is included in this prospectus
under the heading "Business--Competition."
Any interruptions in, or degradation of, our private transit Internet
connections could result in the loss of customers or hinder our ability to
attract new customers
Our customers rely on our ability to move their digital content as
efficiently as possible to the people accessing their Web sites and Internet
applications. We utilize our direct private transit Internet connections to
major backbone providers as a means of avoiding congestion and resulting
performance degradation at public Internet exchange points. We rely on these
telecommunications network suppliers to maintain the operational integrity of
their backbones so that our private transit Internet connections operate
effectively. Any interruptions in, or degradation of, our private transit
Internet connections could result in the loss of customers or hinder our
ability to attract new customers.
9
<PAGE>
Increased costs associated with our private transit Internet connections could
result in the loss of customers or significant increases in our operating costs
Our private transit Internet connections are already more costly than
alternative arrangements commonly utilized to move Internet traffic. If our
providers increase the pricing associated with utilizing their bandwidth, we
may be required to identify alternative methods to distribute our customers'
digital content. We cannot assure you that our customers will continue to be
willing to pay the higher costs associated with direct private transit or that
we could effectively move to another network approach. If we are unable to
access alternative networks to distribute our customers' digital content on a
cost-effective basis or to pass any additional costs on to our customers, our
operating costs would increase significantly.
If we are unable to maintain existing and develop additional relationships with
Internet application software vendors, the sale, marketing and provision of our
Internet application services may be unsuccessful
We believe that to penetrate the market for our Web site and Internet
application hosting and management services we must maintain existing and
develop additional relationships with industry-leading Internet application
software vendors and other third parties. We license or lease our software
applications from Internet application software vendors. The loss of any of
these applications could materially impair our ability to provide services to
our customers or require us to obtain substitute software applications of lower
quality or performance standards or at greater cost. In addition, because we
generally license applications on a non-exclusive basis, our competitors may
license and utilize the same software applications. In fact, many of the
companies with which we have strategic relationships currently have, or could
enter into, similar license agreements with our competitors or prospective
competitors. We cannot assure you that software applications will continue to
be available to us from Internet application software vendors on commercially
reasonable terms. If we are unable to identify and license software
applications which meet our targeted criteria for new application
introductions, we may have to discontinue or delay introduction of services
relating to these applications.
We purchase key components of our infrastructure from a limited number of
suppliers, and our inability or failure to obtain these components in a timely
manner could result in sustained equipment failure and a loss of revenue
We purchase from a limited number of suppliers key components of our
infrastructure, including networking equipment, that are available only from
limited sources in the quantities and with the quality that we demand. For
example, we purchase most of the routers and switches used in our
infrastructure from Cisco Systems Inc. and most of the intelligent Web
switching technology from ArrowPoint Communications Inc. We cannot assure you
that we will have the necessary hardware or parts on hand or that our suppliers
will be able to provide them in a timely manner in the event of equipment
failure. Our inability or failure to obtain the necessary hardware or parts on
a timely basis could result in sustained equipment failure and a loss of
revenue due to customer loss or claims for service credits under our service
level guarantees.
Our inability to scale our infrastructure or otherwise manage our anticipated
growth and the related expansion of our operations could result in decreased
revenue and continued operating losses
We have experienced rapid growth in our service offerings and our customer
base. As of July 31, 1998, we were a Web site hosting provider with
approximately 51 customers. As of July 31, 1999, we were providing Web site and
Internet application hosting and management services to approximately 126
customers. In order to service our growing customer base, we will need to
continue to improve and expand our network infrastructure, in particular
through the expansion of one of our existing data centers and the construction
of new data centers. The ability of our network to connect and manage a
substantial number of customers at high transmission speeds while maintaining
superior performance is largely unproven. If our network infrastructure is not
scalable, we may not be able to provide our services to additional customers,
which would result in decreased revenue.
10
<PAGE>
In addition, between July 31, 1998 and July 31, 1999, we increased the
number of our employees from 86 to 201. This growth has placed, and likely will
continue to place, a significant strain on our financial, management,
operational and other resources. To effectively manage our anticipated growth,
we will be required to continue to enhance our operating and financial
procedures and controls, to upgrade or replace our operational, financial and
management information systems and to attract, train, motivate, manage and
retain key employees. If we are unable to effectively manage our rapid growth,
we could experience continued operating losses.
You may experience additional dilution because our historical source of funding
is expected to change, and other funding may not be available to us on
favorable terms, if at all
CMGI has historically funded our operations as needed, increasing our
obligations to CMGI and allowing us to maintain a zero-balance cash account. We
expect this source and manner of funding to continue until completion of this
offering. At that time, we expect that our net obligations to CMGI, together
with all convertible preferred stock held by CMGI, will be converted into
common stock at a ratio of ten shares of common stock for each outstanding
share of preferred stock. We do not expect to borrow funds from CMGI after
completion of this offering.
After completion of, and the application of the net proceeds from, this
offering, we may need to raise additional funds. We cannot assure you that
additional financing will be available on terms favorable to us, if at all. If
adequate funds were not available or were not available on acceptable terms,
our ability to respond to competitive pressures would be significantly limited.
Moreover, if additional funds are raised through the issuance of equity or
convertible debt securities, your percentage ownership in us will be reduced,
and you may experience additional dilution.
Our network infrastructure could fail, which would damage our ability to
provide guaranteed levels of service and could result in significant operating
losses
To provide our customers with guaranteed levels of service, we must operate
our network infrastructure on a 24-hour-a-day, seven-day-a-week basis without
interruption. In order to operate in this manner, we must protect our network
infrastructure, equipment and customer files against damage from human error,
natural disasters, unexpected equipment failure, power loss or
telecommunications failures, sabotage or other intentional acts of vandalism.
Even if we take precautions, the occurrence of a natural disaster, equipment
failure or other unanticipated problem at one or more of our data centers could
result in interruptions in the services we provide to our customers. We cannot
assure you that our disaster recovery plan will address all, or even most, of
the problems we may encounter in the event of such a disaster.
We have experienced service interruptions in the past, and any future
service interruptions could:
. require us to spend substantial amounts of money to replace equipment
or facilities;
. entitle customers to claim service credits under our service level
guarantees;
. cause customers to seek damages for losses incurred; or
. make it more difficult for us to attract new customers or enter into
additional strategic relationships.
Any of these occurrences could result in significant operating losses.
The misappropriation of our proprietary rights could result in the loss of our
competitive advantage in the market
We rely on a combination of trademark, service mark, copyright and trade
secret laws and contractual restrictions to establish and protect our
proprietary rights. We do not own any patents that would prevent or inhibit
competitors from using our technology or entering our market. We cannot assure
you that the contractual arrangements or other steps taken by us to protect our
proprietary rights will prove sufficient to
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<PAGE>
prevent misappropriation of our proprietary rights or to deter independent,
third-party development of similar proprietary assets. In addition, we provide
our services in other countries where the laws may not afford adequate
protection for our proprietary rights. If our proprietary rights are
misappropriated, we may lose our competitive advantage in the market.
Third-party infringement claims against our technology suppliers, our customers
or us could result in disruptions in service, the loss of customers or costly
and time consuming litigation
We license or lease most technologies used in the Internet application
services that we offer. Our technology suppliers may become subject to third-
party infringement claims which could result in their inability or
unwillingness to continue to license their technology to us. We expect that we
and our customers increasingly will be subject to third-party infringement
claims as the number of Web sites and third-party service providers for Web-
based businesses grows. In addition, we have received notices alleging that our
service marks infringe the trademark rights of third parties. We cannot assure
you that third parties will not assert claims against us in the future or that
these claims will not be successful. Any infringement claim as to our
technologies or services, regardless of its merit, could result in delays in
service, installation or upgrades, the loss of customers or costly and time-
consuming litigation, or require us to enter into royalty or licensing
agreements.
The loss of key officers and personnel could impair our ability to successfully
execute our business strategy, because we substantially rely on their
experience and management skills, or could jeopardize our ability to continue
to provide service to our customers
We believe that the continued service of key personnel, including Joel B.
Rosen, our recently elected Chief Executive Officer, and Robert B. Eisenberg,
our founder and President, is a key component of the future success of our
business. None of our key officers or personnel is currently a party to an
employment agreement with us. This means that any officer or employee can
terminate his or her relationship with us at any time. In addition, we do not
carry life insurance for any of our key personnel to insure our business in the
event of their death. The loss of any of our key officers or personnel could
impair our ability to successfully execute our business strategy, because we
substantially rely on their experience and management skills.
In addition, the loss of key members of our sales and marketing teams or
key technical service personnel could jeopardize our positive relations with
our customers. Any loss of key technical personnel would jeopardize the
stability of our infrastructure and our ability to provide the guaranteed
service levels our customers expect.
If we fail to attract and retain additional skilled personnel, our ability to
provide Web site and Internet application management and technical support may
be limited, and as a result, we may be unable to attract customers and grow our
business
We believe that our ability to attract, train, motivate and retain highly
skilled technical, managerial and sales personnel, particularly in the areas of
Web site and Internet application management and technical support, is
essential to our future success. Our business requires individuals with
significant levels of Internet application expertise, in particular to win
consumer confidence in outsourcing the hosting and management of mission-
critical applications. Competition for such personnel is intense, and qualified
technical personnel are likely to remain a limited resource for the foreseeable
future. Locating candidates with the appropriate qualifications, particularly
in the desired geographic location, can be costly and difficult. We may not be
able to hire the necessary personnel to implement our business strategy, or we
may need to provide higher compensation to such personnel than we currently
anticipate. If we fail to attract and retain sufficient numbers of highly
skilled employees, our ability to provide Web site and Internet application
management and technical support may be limited, and as a result, we may be
unable to attract customers and grow our business.
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<PAGE>
Any future acquisitions we make of companies or technologies may result in
disruptions to our business or distractions of our management due to
difficulties in assimilating acquired personnel and operations
Our business strategy contemplates future acquisitions of complementary
businesses or technologies. If we do pursue additional acquisitions, our risks
may increase because our ongoing business may be disrupted and management's
attention and resources may be diverted from other business concerns. In
addition, through acquisitions, we may enter into markets or market segments in
which we have limited prior experience.
Once we complete an acquisition, we will face additional risks. These risks
include:
. difficulty assimilating acquired operations, technologies and
personnel;
. inability to retain management and other key personnel of the acquired
business; and
. changes in management or other key personnel that may harm
relationships with the acquired business's customers and employees.
In addition, for at least the next two years, our acquisitions must be
accounted for using the purchase method of accounting, which could result in
unfavorable accounting for our acquisitions. We cannot assure you that any
acquisitions will be successfully identified and completed or that, if one or
more acquisitions are completed, the acquired business, assets or technologies
will generate sufficient revenue to offset the associated costs or other
adverse effects.
The international market for our services is unproven, and as a result, the
revenue generated by any current or future international operations may not be
adequate to offset the expense of establishing and maintaining those operations
One component of our long-term strategy is to expand into international
markets. The international market for Web site and Internet application hosting
and management services is unproven, and we cannot assure you that we will be
able to market, sell and provide our services successfully outside the United
States. We could suffer significant operating losses if the revenue generated
by any current or future international data center or other operations is not
adequate to offset the expense of establishing and maintaining those
international operations.
We face risks inherent in doing business in international markets which could
adversely affect the success of our international operations
There are risks inherent in doing business in international markets,
including different regulatory requirements, trade barriers, challenges in
staffing and managing foreign operations, currency risk, different technology
standards, different tax structures which may adversely impact earnings,
different privacy, censorship and service provider liability standards and
regulations and foreign political and economic instability, any of which could
adversely affect the success of our international operations.
Problems relating to the "Year 2000 issue" could disrupt our operations,
resulting in lost revenue and increased operating costs
Because we offer computer-related services and because of the business-
critical nature of many of our customers' applications, our risk of lawsuits
related to Year 2000 issues is likely to be greater than that of companies in
some other industries. Our worst case scenario regarding the Year 2000 issue
involves the complete or partial failure of one or more computer systems or
software products that underlie or comprise our services. A failure of this
kind could cause service interruptions or disruptions for one or more of our
customers. This scenario could arise as a result of a failure by us or our
product or service vendors to identify or effectively address Year 2000
problems in these systems or products. For example, Year 2000 patches provided
to us by key software or hardware vendors for customer servers or network
devices could fail, causing customer outages or degraded network performance.
Alternatively, patches provided by third parties for our desktop computers
could fail, impeding network access or compromising network performance.
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<PAGE>
We confront the Year 2000 problem in several contexts:
Our Facilities and Services. Because our network infrastructure
incorporates components from multiple hardware and software providers, we may
be unable to determine whether any of these components will cause unexpected
Year 2000 problems or whether different components will interact in a way that
causes malfunctions. In most cases, we do not independently verify through
testing the Year 2000 compliance of vendors' products, and we cannot offer any
assurance that vendors' guarantees, if and when provided, are true or
sufficient or that we will not encounter Year 2000 compliance problems
associated with those products. While we expect that our network infrastructure
and all other material components of our facilities will be Year 2000 compliant
on or before December 1, 1999, we cannot assure you that we will meet this goal
or that we will not discover any compliance problems in the future. Our failure
to adequately address Year 2000 compliance issues in our network infrastructure
could result in claims of mismanagement, misrepresentation or breach of
contract and related litigation, which could be costly and time-consuming for
us to defend.
Our Customers. We also face risks from customer-provided hardware or
software that we host in our data centers. The failure of our customers and
third-party providers to ensure that this hardware and software is Year 2000
compliant could result in unforeseen problems within our network
infrastructure, which could result in lost revenue and increased operating
costs. In addition, we cannot give any assurances that our customers will
upgrade their internal networks which interface with our network infrastructure
or will otherwise provide appropriate remediation for Year 2000 compliance.
Our Suppliers. We cannot assure you that we will be able to provide our
services and maintain our operations if we are unable to obtain products,
services or systems that are Year 2000 compliant when we need them. In
addition, if vendors and service providers cannot deliver their products
because of their own Year 2000 compliance problems, we could experience
increased operating costs and lost revenue.
Information on our state of readiness, costs and contingency plans
regarding the Year 2000 issue is included in this prospectus under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Considerations."
Risks Related to the Internet Industry
The emergence and growth of a market for our Internet application services will
be impaired if third parties do not continue to develop and improve the
Internet infrastructure
The recent growth in the use of the Internet has caused frequent periods of
performance degradation, requiring the upgrade of routers and switches,
telecommunications links and other components forming the infrastructure of the
Internet by Internet service providers and other organizations with links to
the Internet. Any perceived degradation in the performance of the Internet as a
means to transact business and communicate could undermine the benefits and
market acceptance of our Web site and Internet application hosting and
management services. Our services are ultimately limited by, and dependent
upon, the speed and reliability of hardware, communications services and
networks operated by third parties. Consequently, the emergence and growth of
the market for our Internet application services will be impaired if
improvements are not made to the entire Internet infrastructure to alleviate
overloading and congestion.
We could be subject to increased operating costs, as well as claims, litigation
or other potential liability, in connection with risks associated with Internet
security and the security of our systems
A significant barrier to the growth of e-commerce and communications over
the Internet has been the need for secure transmission of confidential
information. Several of our Internet application services utilize encryption
and authentication technology licensed from third parties to provide the
protections necessary to effect secure transmission of confidential
information. We also rely on security systems designed by third parties and the
personnel in our network operations centers to secure our data centers. Any
unauthorized access,
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<PAGE>
computer viruses, accidental or intentional actions and other disruptions could
result in increased operating costs. For example, we may incur significant
costs to protect against these interruptions and the threat of security
breaches or to alleviate problems caused by such interruptions or breaches, and
we expect to expend significant financial resources in the future to equip our
new and existing data centers with state-of-the-art security measures. If a
third party were able to misappropriate a consumer's personal or proprietary
information, including credit card information, during the use of an
application solution provided by us, we could be subject to claims, litigation
or other potential liability.
We may become subject to burdensome government regulation and legal
uncertainties that could substantially impair the growth of our business or
expose us to unanticipated liabilities
It is likely that laws and regulations directly applicable to the Internet
or to Internet application service providers may be adopted. These laws may
cover a variety of issues, including user privacy and the pricing,
characteristics and quality of products and services. The adoption or
modification of laws or regulations relating to commerce over the Internet
could substantially impair the growth of our business or expose us to
unanticipated liabilities. Moreover, the applicability of existing laws to the
Internet and Internet application service providers is uncertain. These
existing laws could expose us to substantial liability if they are found to be
applicable to our business. For example, we provide services over the Internet
in many states in the United States and in the United Kingdom, and we
facilitate the activities of our customers in these jurisdictions. As a result,
we may be required to qualify to do business, be subject to taxation or be
subject to other laws and regulations in these jurisdictions, even if we do not
have a physical presence, employees or property there.
We may be subject to legal claims in connection with the information
disseminated through our network which could have the effect of diverting
management's attention and require us to expend significant financial resources
As an Internet application service provider, we may face potential direct
and indirect liability for claims of defamation, negligence, copyright, patent
or trademark infringement, violation of securities laws and other claims based
on the nature and content of the materials disseminated through our network.
For example, lawsuits may be brought against us claiming that content
distributed by some of our current or future customers may be regulated or
banned. In these and other instances, we may be required to engage in
protracted and expensive litigation which could have the effect of diverting
management's attention and require us to expend significant financial
resources. Our general liability insurance may not necessarily cover any of
these claims or may not be adequate to protect us against all liability that
may be imposed.
In addition, on a limited number of occasions in the past, businesses,
organizations and individuals have sent unsolicited commercial e-mails from
servers hosted at our facilities to massive numbers of people, typically to
advertise products or services. This practice, known as "spamming," can lead to
complaints against service providers that enable such activities, particularly
where recipients view the materials received as offensive. We have in the past
received, and may in the future receive, letters from recipients of information
transmitted by our customers objecting to such transmission. Although we
prohibit our customers by contract from spamming, we cannot assure you that our
customers will not engage in this practice, which could subject us to claims
for damages.
Risks Related to this Offering
There is no prior public market for our common stock, and you may not be able
to resell shares of our common stock for a profit
Prior to this offering, there has been no public market for our common
stock. We, together with the underwriters, will determine the initial public
offering price, and this price may not be the price at which the common stock
will trade after this offering. The market price of the common stock may
decline below the initial public offering price. Although the common stock will
be quoted on the Nasdaq National Market, an
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<PAGE>
active trading market may not develop after this offering. We cannot assure
you of the extent to which investor interest in NaviSite will lead to the
development of an active trading market or how liquid that market may become.
A more detailed discussion of factors to be considered in determining the
initial public offering price is included in this prospectus under the heading
"Underwriting."
The market price of our common stock may experience extreme price and volume
fluctuations
The market price of the common stock may fluctuate substantially due to a
variety of factors, including:
. any actual or anticipated fluctuations in our financial condition and
operating results;
. public announcements concerning us or our competitors, or the Internet
industry;
. the introduction or market acceptance of new service offerings by us
or our competitors;
. changes in industry research analysts' earnings estimates;
. changes in accounting principles;
. sales of our common stock by existing stockholders; and
. the loss of any of our key personnel.
In addition, the stock market has experienced extreme price and volume
fluctuations. The market prices of the securities of technology and Internet-
related companies have been especially volatile. This volatility has often
been unrelated to the operating performance of particular companies. In the
past, securities class action litigation has often been brought against
companies that experience volatility in the market price of their securities.
Whether or not meritorious, litigation brought against us could result in
substantial costs and a diversion of management's attention and resources.
If our existing stockholders sell a substantial number of shares of our common
stock in the public market, the market price of our common stock will likely
fall
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, including shares issuable upon the
exercise of outstanding options, the market price of our common stock will
likely fall. CMGI, Dell and Microsoft will directly own approximately 70.9%,
4.2% and 3.8%, respectively, of the outstanding shares of our common stock
upon completion of this offering and will have registration rights which will
permit them to sell all of these shares in the public market approximately 180
days after completion of this offering. These sales also might make it more
difficult for us to sell equity securities in the future at a time and price
that we deem appropriate. After this offering, we will have outstanding
26,316,173 shares of common stock. Of these shares, the 5,500,000 shares being
offered in this offering will be freely tradeable. Our directors, executive
officers and substantially all of our other stockholders have agreed that they
will not sell, directly or indirectly, any common stock without the prior
written consent of BancBoston Robertson Stephens Inc. for a period of 180 days
after the completion of this offering. However, BancBoston Robertson Stephens
Inc. may, in its sole discretion and at any time or from time to time, without
notice, release all or any portion of the securities subject to the lock-up
agreements. Additional information regarding the market for our common stock
is included in this prospectus under the headings "Shares Eligible for Future
Sale" and "Underwriting."
We may spend a substantial portion of the net proceeds of this offering in
ways with which you may not agree
We plan to use the net proceeds of this offering for investment in the
growth of our business, including enhancement and expansion of our network
infrastructure, expansion of our sales and marketing efforts, including the
hiring of additional personnel, enhancement of our application management and
technical expertise and possible acquisitions of complementary businesses and
technologies, and for working capital and general corporate purposes. Our
management will have broad discretion to allocate the net proceeds from this
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<PAGE>
offering. As a result, investors in this offering will be relying upon
management's judgment with only limited information about its specific
intentions regarding the use of proceeds. We cannot assure you that the
proceeds will be invested to yield a favorable return. Additional information
regarding the ways in which we intend to spend the proceeds of this offering is
included in this prospectus under the heading "Use of Proceeds."
Investors in this offering will experience immediate and substantial dilution
of their investment
The initial public offering price is expected to be substantially higher
than the book value per share of the outstanding common stock. You will
therefore incur immediate and substantial dilution in the amount of $8.53 per
share based upon an assumed initial public offering price of $11.00 per share.
In addition, to the extent outstanding stock options are exercised, you will
incur further dilution. Additional information regarding the dilution to
investors in our initial public offering is included in this prospectus under
the heading "Dilution."
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements which involve risks and
uncertainties. These forward-looking statements are often accompanied by words
such as "believes," "anticipates," "plans," "expects" and similar expressions.
These statements include, without limitation, statements about the market
opportunity for Web site and Internet application hosting and management
services, our business strategy, competition and expected expense levels. Our
actual results could differ materially from those expressed or implied by these
forward-looking statements as a result of various factors, including the risk
factors described above and elsewhere in this prospectus.
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<PAGE>
USE OF PROCEEDS
We expect to receive net proceeds from the sale of the 5,500,000 shares of
common stock offered by us of approximately $54.7 million, or $63.1 million if
the over-allotment option granted to the underwriters is exercised in full,
based on an assumed initial public offering price of $11.00 per share, and
after deducting underwriting discounts and commissions and estimated offering
expenses payable by us.
The principal purposes of this offering are:
. to increase our equity capital;
. to facilitate future access by us to public equity markets;
. to provide increased visibility and credibility in the marketplace;
and
. to enhance our ability to use common stock as consideration for
acquisitions and as a means of attracting and retaining key employees.
We currently intend to use the net proceeds of this offering for the
following:
. enhancement and expansion of our network infrastructure;
. expansion of our sales and marketing efforts, including the hiring of
additional personnel;
. enhancement of our application management and technical expertise; and
. working capital and general corporate purposes.
In addition, we may also use a portion of the net proceeds of this offering
for the acquisition of businesses or technologies that are complementary to
those we currently possess. While we evaluate these types of opportunities from
time to time, there are currently no agreements with respect to any specific
acquisitions.
We have not yet determined the actual expected expenditures and therefore
cannot estimate the amounts to be used for each purpose set forth above. The
amounts and timing of these expenditures will vary significantly depending upon
a number of factors, including, but not limited to, the availability of
construction financing, the success and timing of our hiring efforts, the
amount of cash generated by our operations and the market response to our Web
site and Internet application hosting and management services. Accordingly, our
management will retain broad discretion as to the allocation of the proceeds of
this offering.
Pending use of the net proceeds as described above, we intend to invest the
net proceeds of this offering in short-term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock, and
we do not currently intend to pay any cash dividends on the common stock in the
foreseeable future. We expect to retain future earnings, if any, to fund the
development and growth of our business. Future dividends, if any, will be
determined by our board of directors. As a result of not collecting a dividend,
there is a risk that stockholders will not experience a positive return on
their investment unless they sell their shares of common stock at a profit.
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CAPITALIZATION
The following table is a summary of our balance sheet at July 31, 1999:
. on an actual basis;
. on a pro forma basis after giving effect to the conversion of all
outstanding shares of convertible preferred stock into shares of common
stock; and
. on a pro forma as adjusted basis to reflect the sale of 5,500,000
shares of common stock at an assumed initial public offering price of
$11.00 per share, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us.
This information should be read in conjunction with the section of this
prospectus with the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the accompanying notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
July 31, 1999
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Series C Convertible Redeemable Preferred Stock,
par value $0.01 per share: 1,095,472 shares
authorized, issued and outstanding (actual);
no shares authorized, issued or outstanding
(pro forma and pro forma as adjusted)......... $ 8,088 $ -- $ --
Series D Convertible Redeemable Preferred Stock,
par value $0.01 per share: 993,243 shares
authorized, issued and outstanding (actual);
no shares authorized, issued or outstanding
(pro forma and pro forma as adjusted)......... 7,333 -- --
------- ------- -------
Total redeemable preferred stock.............. 15,421 -- --
------- ------- -------
Stockholders' equity (deficit):
Series A Convertible Preferred Stock, par
value $0.01 per share: 1,323,953 shares
authorized, issued and outstanding (actual);
no shares authorized, issued or outstanding
(pro forma and pro forma as adjusted)....... 13 -- --
Series B Convertible Preferred Stock, par
value $0.01 per share: 1,000,000 shares
authorized; 541,859 issued and outstanding
(actual); no shares authorized, issued or
outstanding (pro forma and pro forma as
adjusted)................................... 5 -- --
Common stock, par value $0.01 per share:
30,000,000 shares authorized (actual and pro
forma); 150,000,000 shares authorized (pro
forma as adjusted); 69,338 shares issued and
outstanding (actual); 20,816,173 and
26,316,173 shares issued and outstanding
(pro forma and pro forma as adjusted,
respectively)............................... 1 208 263
Additional paid-in capital...................... 30,291 45,523 100,133
Accumulated deficit............................. (34,679) (34,679) (34,679)
------- ------- -------
Total stockholders' equity (deficit).......... (4,369) 11,052 65,717
------- ------- -------
Total capitalization....................... $11,052 $11,052 $65,717
======= ======= =======
</TABLE>
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The number of shares of common stock set forth in the table above as
outstanding after the completion of this offering excludes:
. 2,430,662 shares of common stock issuable upon exercise of stock
options outstanding under the NaviSite, Inc. 1998 Equity Incentive
Plan as of July 31, 1999, with a weighted average exercise price of
$2.54 per share; and
. 50,000 shares of common stock issuable upon exercise of stock options
outstanding under the NaviSite, Inc. 1998 Director Stock Option Plan
as of July 31, 1999, with a weighted average exercise price of $0.34
per share.
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DILUTION
Our pro forma net tangible book value as of July 31, 1999 was $10,258,000,
or $0.49 per share of common stock. Pro forma net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by 20,816,173, the pro forma number of shares of common stock
outstanding as of July 31, 1999. Pro forma net tangible book value dilution per
share represents the difference between the amount per share paid by new
investors purchasing shares of common stock in this offering and the pro forma
net tangible book value per share of common stock immediately after completion
of this offering on a pro forma as adjusted basis. After giving effect to the
sale of the 5,500,000 shares of common stock offered by us at an assumed
initial public offering price of $11.00 per share of common stock, and after
deducting underwriting discounts and commissions and estimated offering
expenses payable by us, our pro forma net tangible book value as of July 31,
1999 would have been $64,923,000, or $2.47 per share of common stock. This
represents an immediate increase in net tangible book value of $1.98 per share
of common stock to existing stockholders and an immediate dilution in pro forma
net tangible book value of $8.53 per share of common stock to new investors
purchasing shares of common stock in this offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $11.00
Pro forma net tangible book value per share as of July 31, 1999... $0.49
Increase per share attributable to new investors.................. 1.98
-----
Pro forma net tangible book value per share after this offering... 2.47
------
Dilution per share to new investors............................... $ 8.53
======
</TABLE>
The following table summarizes, on a pro forma basis as of July 31, 1999,
the number of shares of common stock purchased from us, the total cash
consideration paid and the average price per share paid to us by the existing
stockholders and by new investors purchasing shares of common stock in this
offering, before deducting underwriting discounts and commissions and estimated
offering expenses payable by us.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 20,816,173 79% $ 45,903,000 43% $ 2.21
New investors............ 5,500,000 21 60,500,000 57 $11.00
---------- ----- ------------ -----
Total.................. 26,316,173 100.0% $106,403,000 100.0%
========== ===== ============ =====
</TABLE>
The foregoing tables and calculations assume no exercise of options
outstanding under our 1998 Equity Incentive Plan or our 1998 Director Stock
Option Plan. As of July 31, 1999, there were 2,480,662 shares of common stock
reserved for issuance upon exercise of outstanding options with a weighted
average exercise price of $2.49 per share. To the extent that any of these
options are exercised, there will be further dilution to new investors.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our consolidated financial statements and the accompanying notes appearing
elsewhere in this prospectus and with the section of this prospectus under the
heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Our statement of operations data for the years ended
July 31, 1997, 1998 and 1999 and our balance sheet data as of July 31, 1998 and
1999 are derived from our consolidated financial statements that have been
audited by KPMG LLP and appear elsewhere in this prospectus. Our statement of
operations data for the period from July 1, 1996 through July 31, 1996 and our
balance sheet data as of July 31, 1996 and 1997 are derived from our audited
consolidated financial statements that are not included herein. The selected
financial data set forth below for the years ended July 31, 1998 and July 31,
1999 reflect the acquisition by NaviSite of Servercast Communications, L.L.C.
in July 1998. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview." Historical results are not necessarily
indicative of the results to be expected in the future and results of interim
periods are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Period from
July 1, 1996 Year ended July 31,
through -------------------------
July 31, 1996 1997 1998 1999
------------- ------ ------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Revenue............................. $ -- $ -- $ 158 $ 3,461
Revenue, related parties............. -- 3,361 3,871 7,058
---- ------ ------- --------
Total revenue........................ -- 3,361 4,029 10,519
Cost of revenue...................... 6 3,494 8,876 20,338
---- ------ ------- --------
Gross profit (loss).................. (6) (133) (4,847) (9,819)
---- ------ ------- --------
Operating expenses:
Selling and marketing................ -- 347 2,530 6,888
General and administrative........... 21 467 1,412 4,823
Product development.................. -- -- 287 2,620
---- ------ ------- --------
Total operating expenses............. 21 814 4,229 14,331
---- ------ ------- --------
Loss from operations................. (27) (947) (9,076) (24,150)
Other income (expense):
Interest expense, net................ -- (1) (85) (347)
Other expense, net................... -- -- (11) (35)
---- ------ ------- --------
Net loss............................. (27) (948) (9,172) $(24,532)
Accretion of dividends on Series C
and D convertible redeemable
preferred stock.................... -- -- -- (172)
---- ------ ------- --------
Net loss applicable to common
stockholders....................... $(27) $ (948) $(9,172) $(24,704)
==== ====== ======= ========
Basic and diluted net loss per common
share.............................. $(0.24) $ (1.14) $ (7.41)
====== ======= ========
Basic and diluted weighted average
number of common shares
outstanding........................ 4,000 8,017 3,332
====== ======= ========
Unaudited pro forma basic and diluted
net loss per share................. $ (1.51)
========
Pro forma weighted average number of
basic and diluted shares
outstanding........................ 16,407
========
</TABLE>
<TABLE>
<CAPTION>
July 31,
---------------------------------
1996 1997 1998 1999
----- ------- -------- -------
(In thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C>
Cash and equivalents....................... $ -- $ -- $ -- $ 3,352
Working capital (deficit).................. (157) (2,566) (13,522) (1,355)
Total assets............................... 130 2,010 5,479 21,111
Debt to CMGI............................... 156 2,273 11,439 --
Total convertible redeemable preferred
stock.................................... -- -- -- 15,421
Stockholders' equity (deficit)............. (27) (895) (10,066) (4,369)
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
discussed in the forward-looking statements as a result of a number of factors,
including those set forth in the section of this prospectus under the heading
"Risk Factors" and elsewhere in this prospectus. The following information
should be read in conjunction with the "Selected Consolidated Financial Data"
and our consolidated financial statements and the accompanying notes, each of
which appears elsewhere in this prospectus.
Overview
We provide enhanced, integrated hosting and management services for
business Web sites and Internet applications. We also provide application
rentals to customers and developers and supply related consulting services. Our
Internet application service offerings allow businesses to outsource the
deployment, configuration, hosting, management and support of their Web sites
and Internet applications in a cost-effective and rapid manner. Our focus on
enhanced management services, beyond basic co-location services, allows us to
meet the expanding needs of businesses as their Web sites and Internet
applications become more complex. The cost for our services varies from
customer to customer based on the number of hosted or managed servers and the
nature and level of services provided.
We were incorporated in Delaware in December 1998 as a wholly owned
subsidiary of NaviSite Internet Services Corporation as part of a corporate
reorganization of NaviSite Internet Services Corporation. At that time, we
received a contribution of assets from NaviSite Internet Services Corporation
in exchange for 60,589 shares of our common stock and 1,323,953 shares of our
Series A convertible preferred stock. At the same time, NaviSite Internet
Services Corporation contributed the remainder of its assets to NaviNet, Inc.,
another newly formed subsidiary of NaviSite Internet Services Corporation. We
expect the NaviSite Internet Services Corporation reorganization to be
completed prior to the completion of this offering, at which time NaviSite
Internet Services Corporation will be merged with and into CMGI, leaving
NaviSite and NaviNet, Inc. as direct subsidiaries of CMGI.
Our predecessor, NaviSite Internet Services Corporation, was incorporated
in Delaware in February 1997 under the name CMG Information Technology, Inc.
and changed its name to NaviSite Internet Services Corporation in May 1997. We
commenced operations in July 1996, funded by CMGI, to support the networks and
host the Web sites of CMGI and a number of CMGI affiliates. CMGI affiliates
include all entities in which CMGI holds an equity interest. We began providing
Web site hosting and Internet application management services to companies
unaffiliated with CMGI in the Fall of 1997.
All financial information presented here refers only to NaviSite, including
the hosting and Internet application management segments of NaviSite Internet
Services Corporation, and does not include the financial condition or results
of operations of NaviNet, Inc., including the dial-up operations of NaviSite
Internet Services Corporation.
In July 1998, we acquired Servercast Communications, L.L.C., a Delaware
limited liability company and developer and integrator of Internet
applications, for $1.0 million in notes, plus bridge notes receivable of
$25,000 and $20,000 in acquisition costs. We acquired Servercast principally
for its expertise in online advertising, e-commerce, content management and
streaming media. The purchase price plus associated costs of the acquisition
were recorded as goodwill and are being amortized on a straight-line basis over
five years.
We intend to expand domestically and internationally and currently have two
new data centers under construction. In addition, we recently converted 3,200
square feet of office space at our current data center location in Andover,
Massachusetts into data center space. In May 1999, we executed a 12-year lease
for a new
23
<PAGE>
150,000 square foot facility located in Andover, Massachusetts, currently being
constructed to our specifications, which will include a new data center. We
anticipate that work will be completed on the new Massachusetts facility in the
Spring of 2000. Construction also has started on a new 66,000 square foot
facility located in San Jose, California, which will include a new data center.
In May 1999, we executed a seven-year lease for this facility, which should be
available for occupation in the Fall of 1999. The procurement, development and
equipping of these facilities will significantly increase our costs and
operating expenses.
Our corporate headquarters are currently shared with CMGI and several other
CMGI affiliates. CMGI allocates rent, facility maintenance and service costs
among these affiliates based upon headcount within each affiliate and within
each department of each affiliate. Services provided by CMGI include support
for enterprise services, rent and facilities, human resources and benefits and
Internet marketing and business development. Actual expenses could have varied
had we been operating on a stand-alone basis. Costs are allocated to us on the
basis of the fair market value for the facilities used and the services
provided. We intend to relocate our executive offices to our new facility, also
located in Andover, Massachusetts, upon completion of that facility, and upon
that relocation, we will no longer share space with CMGI.
We derive our revenue from a variety of services, including: Web site and
Internet application hosting, which includes access to our state-of-the-art
data centers, bandwidth and basic back-up, storage and monitoring services;
enhanced server management, which includes custom reporting, hardware options,
load balancing and mirroring, system security, advanced back-up options, remote
management and the services of our business solution managers; specialized
application management, which includes management of e-commerce and other
sophisticated applications and their underlying services, including ad-serving,
streaming, databases and transaction processing; and application rentals and
related consulting and other professional services. Revenue also includes
income from the rental of equipment to customers and one-time installation
fees. Revenue is recognized in the period in which the services are performed
and installation fees are recognized in the period of installation. Our
contracts generally are a one-year commitment.
Our revenue from sales to related parties principally consists of sales of
services to CMGI and other customers that are CMGI affiliates. In general, in
pricing the services provided to CMGI and its affiliates, we have: negotiated
the services and levels of service to be provided; calculated the price of the
services at those service levels based on our then-current, standard prices;
and, in exchange for customer referrals provided to us by CMGI, discounted
these prices by 10%. Additional information about sales of services to CMGI and
its affiliates is included in this prospectus under the heading "Certain
Transactions--Relationship and Transactions between NaviSite and CMGI, Inc.--
Other Transactions with CMGI and its Affiliates." In fiscal 1999, we sold
services to CMGI and 19 CMGI affiliates totaling approximately $7.1 million, or
67% of revenue. Two of these customers accounted for approximately 22% and 16%
of revenue, respectively. As of July 31, 1999, through its ownership of
NaviSite Internet Services Corporation, CMGI owned approximately 89.6% of our
outstanding common stock, with most of the balance owned by Dell Computer
Corporation and Microsoft Corporation.
Cost of revenue consists primarily of salaries and benefits for operations
personnel, bandwidth fees and related Internet connectivity charges, equipment
costs and related depreciation and costs to run our two data centers, such as
rent and utilities. We expect these costs to increase in dollar terms, but
decline on a percentage of revenue basis, with the growth of our overall
business. We also expect to achieve economies of scale as a result of spreading
more volume over fixed assets, increasing productivity and using new
technological tools.
Selling and marketing expenses consist primarily of salaries and related
benefits, commissions and marketing expenses such as advertising, product
literature, trade shows, marketing and direct mail programs. We expect selling
and marketing expenses to increase significantly in dollar terms, but decline
on a percentage of revenue basis, as we continue to invest in these areas to
promote brand recognition and to acquire new customers. We intend to accomplish
this by hiring additional sales and marketing personnel, opening additional
sales offices and increasing spending on public relations, advertising and
marketing programs.
24
<PAGE>
General and administrative expenses include the costs of financial, leasing
and administrative personnel, professional services and corporate overhead.
Also included are intercompany charges from CMGI for facilities, human resource
support and business development. We expect the dollar value of these expenses
to increase in future periods, but decline on a percentage of revenue basis, as
we hire additional personnel and incur additional costs related to the growth
of our business and our operations as a public company.
Product development expenses consist mainly of salaries and related costs.
Our product development staff focuses on Internet applications and network
architecture. This group identifies new Internet application software
offerings, incorporates these new offerings into our suite of service offerings
and positions these new offerings for marketing, sale and deployment. Our
product development group also identifies, selects and implements the various
technologies, including network storage and back-up, that provide the basic
infrastructure for both our internal network and the solutions we offer our
customers. As with sales and marketing, we believe that increased investment in
product development is critical to attaining our strategic objectives and
maintaining our competitive edge. We expect the dollar value of product
development expenses to increase significantly in future periods, but decline
on a percentage of revenue basis.
We have incurred significant net losses and negative cash flows from
operations since our inception and, as of July 31, 1999, had an accumulated
deficit of approximately $34.7 million. These losses primarily have been funded
by CMGI through the issuance of convertible preferred stock and convertible
debt and by equipment lease financing. We intend to continue to invest heavily
in sales, marketing, promotion, technology and infrastructure development as we
grow. As a result, we believe that we will continue to incur operating losses
and negative cash flows from operations for at least the next three years and
that the rate at which such losses will be incurred may increase.
Results of Operations
The following table sets forth the consolidated statement of operations
data for the periods indicated as a percentage of revenues:
<TABLE>
<CAPTION>
Year ended July 31,
-----------------------
1997 1998 1999
----- ------ ------
<S> <C> <C> <C>
Revenue:
Revenue............................................... 0.0% 3.9% 32.9%
Revenue, related parties.............................. 100.0 96.1 67.1
----- ------ ------
Total revenue......................................... 100.0 100.0 100.0
Cost of revenue....................................... 104.0 220.3 193.3
----- ------ ------
Gross profit (loss)................................... (4.0) (120.3) (93.3)
----- ------ ------
Operating expenses:
Selling and marketing................................. 10.3 62.8 65.5
General and administrative............................ 13.9 35.0 45.9
Product development................................... 0.0 7.1 24.9
----- ------ ------
Total operating expenses.............................. 24.2 104.9 136.3
----- ------ ------
Loss from operations.................................. (28.2) (225.2) (229.6)
Other income (expense):
Interest expense...................................... 0.0 (2.1) (3.3)
Other expense, net.................................... 0.0 (0.3) (0.3)
----- ------ ------
Total other income (expense).......................... 0.0 (2.4) (3.6)
----- ------ ------
Net loss.............................................. (28.2)% (227.6)% (233.2)%
===== ====== ======
</TABLE>
25
<PAGE>
Comparison of Fiscal Years Ended July 31, 1999 and 1998
Revenue
Total revenue increased 161% to approximately $10.5 million in fiscal 1999,
from approximately $4.0 million in fiscal 1998. The increase in revenue is due
to additional business with CMGI and CMGI affiliates and the increase in the
number of non-affiliated customers to 106 as of July 31, 1999 from 37 as of
July 31, 1998 (including customers of Servercast, acquired by us on July 1,
1998). Customers of Servercast accounted for $1,143,000, or 11%, of total
revenue in fiscal 1999.
Cost of Revenue
Cost of revenue increased 129% to approximately $20.3 million in fiscal
1999, from approximately $8.9 million in fiscal 1998. As a percentage of
revenue, cost of revenue decreased to 193% in fiscal 1999, from 220% in fiscal
1998. The dollar-value increase in each period is due primarily to the costs
associated with increased investment in our existing data centers. These costs
principally include labor and headcount expenses, additional equipment and
maintenance costs and increased bandwidth and connectivity charges.
Operating Expenses
Selling and Marketing. Selling and marketing expenses increased 172% to
approximately $6.9 million in fiscal 1999, from approximately $2.5 million in
fiscal 1998. This increase is due primarily to the development of NaviSite's
sales and marketing capability in connection with the commencement of sales to
unaffiliated customers. These costs primarily include salaries and commissions
and expenses for marketing programs, advertising and product literature.
General and Administrative. General and administrative expenses increased
242% to approximately $4.8 million in fiscal 1999, from approximately $1.4
million in fiscal 1998. The dollar-value increase in general and administrative
expenses is due to both an increase in salaries and related costs, to
approximately $1.7 million in fiscal 1999, from approximately $752,000 in
fiscal 1998, resulting from the hiring of additional administrative and finance
personnel to support our growing operations and an increase in intercompany
charges from CMGI to approximately $494,000 in fiscal 1999, from approximately
$161,000 in fiscal 1998, for human resource support, business development and
corporate overhead. Other expenses contributing to the dollar-value increase
include moving and rental costs associated with the occupation of our current
corporate headquarters and legal and professional fees, which increased to
approximately $1.1 million in fiscal 1999, from approximately $221,000 in
fiscal 1998, associated with: Year 2000 consultants and contract labor; legal
review of operating contracts, leases, option plans and the Navisite Internet
Services Corporation corporate reorganization; and accounting and finance
contract labor. General and administrative expenses associated with Servercast
(acquired by us on July 1, 1998) increased to approximately $517,000 in fiscal
1999, from approximately $19,000 in fiscal 1998.
Product Development. Product development expenses increased to $2.6 million
in fiscal 1999, from approximately $287,000 in fiscal 1998. This increase is
due primarily to the costs associated with an increase in product development
personnel by July 31, 1999 to 20, from one person at the inception of our
product development operations in 1998. This growth in product development
personnel reflects our increased service offerings and emphasis on application
services.
Interest Expense, net
Interest expense, net increased to approximately $347,000 in fiscal 1999,
from $85,000 in fiscal 1998. This increase is due primarily to the inclusion in
interest expense, net in fiscal 1999 of approximately $303,000 of interest on
intercompany debt at a rate of seven percent per annum pursuant to an
arrangement entered into between NaviSite and CMGI in the second half of fiscal
1998. Interest expense associated with the issuance of term notes in connection
with our acquisition, in July 1998, of Servercast totaled approximately $55,000
during fiscal 1999. Interest expense on long-term capital lease obligations is
also included in interest expense, net.
26
<PAGE>
Comparison of Fiscal Years Ended July 31, 1998 and 1997
Revenue
Total revenue increased 20% to approximately $4.0 million in fiscal 1998,
from approximately $3.4 million in fiscal 1997. Because NaviSite first sold its
services to unaffiliated customers in the Fall of 1997, almost all of
NaviSite's revenue in fiscal 1998 and fiscal 1997 came from CMGI and CMGI
affiliates. The dollar-value increase in revenue in fiscal 1998 from fiscal
1997 is due to a growth in revenue of approximately $510,000 from services
provided to affiliated customers and the addition of commercial customers with
revenue totaling $158,000. In fiscal 1998, three customers, all affiliates of
CMGI, accounted for 40%, 19% and 11% of revenue, respectively. In fiscal 1997,
these same three customers accounted for 46%, 28% and 14% of revenue,
respectively.
Cost of Revenue
Cost of revenue increased 154% to approximately $8.9 million in fiscal
1998, from approximately $3.5 million in fiscal 1997. As a percentage of
revenue, cost of revenue increased to 220%, from 104%, reflecting costs
associated with the build-out of the Andover data center and the opening of the
Scotts Valley data center in anticipation of future growth.
Operating Expenses
Selling and Marketing. Selling and marketing expenses increased to $2.5
million in fiscal 1998, from $347,000 in fiscal 1997. The increases are the
result of significant growth in our sales force and marketing group during this
period as we commenced sales to unaffiliated customers. Advertising costs and
significant initial costs for product literature also are components of the
increase in fiscal 1998 over fiscal 1997.
General and Administrative. General and administrative expenses increased
202% to approximately $1.4 million in fiscal 1998, from approximately $467,000
in fiscal 1997. These increases are the result of increased payroll and related
costs and professional fees required to support our growing operations.
Product Development. Product development expenses increased to $287,000 in
fiscal 1998 due to initial hiring in our product development group at its
inception in fiscal 1998. Product development expenses were zero in fiscal
1997. The introduction of product development personnel reflects our increased
service offerings and emphasis on application services.
Interest Expense, net
Interest expense, net increased to $85,000 in fiscal 1998, from $1,000 in
fiscal 1997. The increase in fiscal 1998 from fiscal 1997 is due primarily to
the inclusion in interest expense, net in fiscal 1998 of approximately $65,000
of interest on intercompany debt at a rate of seven percent per annum pursuant
to an arrangement entered into between NaviSite and CMGI in the second half of
fiscal 1998. Interest expense on long-term capital lease obligations is also
included in interest expense, net in fiscal 1998 and is the sole component of
interest expense, net in fiscal 1997.
Income Taxes
NaviSite is part of the CMGI consolidated group for tax purposes, and as
such, all benefits of federal tax losses from inception through July 31, 1999
have been used to the benefit of CMGI in its consolidated return. As a result,
NaviSite has no tax loss carryforwards or carrybacks as of July 31, 1999.
27
<PAGE>
Selected Unaudited Quarterly Results of Operations
The following table sets forth unaudited quarterly statements of operations
data for each of the six quarters in the 18-month period ended July 31, 1999.
In the opinion of management, the unaudited financial results include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of our results of operations for those periods. The quarterly
data should be read in conjunction with the audited consolidated financial
statements and the accompanying notes appearing elsewhere in this prospectus.
The results of operations for any quarter are not necessarily indicative of the
results of operations for any future period.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------
April 30, July 31, Oct. 31, Jan. 31, April 30, July 31,
1998 1998 1998 1999 1999 1999
--------- -------- -------- -------- --------- --------
Statement of Operations
Data: (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Revenue................ $ 28 $ 119 $ 490 $ 604 $ 958 $ 1,409
Revenue, related
parties.............. 1,024 1,074 1,178 1,562 2,025 2,293
------- ------- ------- ------- ------- -------
Total revenue......... 1,052 1,193 1,668 2,166 2,983 3,702
Cost of revenue......... 2,584 2,453 3,786 3,935 5,836 6,781
------- ------- ------- ------- ------- -------
Gross profit (loss).... (1,532) (1,260) (2,118) (1,769) (2,853) (3,079)
------- ------- ------- ------- ------- -------
Operating expenses:
Selling and marketing.. 762 1,106 1,429 1,112 1,856 2,491
General and
administrative....... 378 485 543 804 1,208 2,268
Product development.... 104 173 267 439 672 1,242
------- ------- ------- ------- ------- -------
Total operating
expenses............ 1,244 1,764 2,239 2,355 3,736 6,001
------- ------- ------- ------- ------- -------
Loss from operations.... (2,776) (3,024) (4,357) (4,124) (6,589) (9,080)
Other income (expense):
Interest expense, net
..................... (24) (57) (156) (39) (135) (17)
Other expense, net..... -- (11) 4 -- (40) 1
------- ------- ------- ------- ------- -------
Total other income
(expense)........... (24) (68) (152) (39) (175) (16)
------- ------- ------- ------- ------- -------
Net loss................ $(2,800) $(3,092) $(4,509) $(4,163) $(6,764) $(9,096)
======= ======= ======= ======= ======= =======
<CAPTION>
Percentage of Total Revenues
Three Months Ended
---------------------------------------------------------------
April 30, July 31, Oct. 31, Jan. 31, April 30, July 31,
1998 1998 1998 1999 1998 1999
--------- -------- -------- -------- --------- --------
Statement of Operations
Data:
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Revenue................ 2.7 % 10.0 % 29.4 % 27.9 % 32.1 % 38.1 %
Revenue, related
parties.............. 97.3 90.0 70.6 72.1 67.9 61.9
------- ------- ------- ------- ------- -------
Total revenue......... 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue......... 245.6 205.6 227.0 181.7 195.6 183.2
------- ------- ------- ------- ------- -------
Gross profit (loss).... (145.6) (105.6) (127.0) (81.7) (95.6) (83.2)
------- ------- ------- ------- ------- -------
Operating expenses:
Selling and marketing.. 72.4 92.7 85.7 51.3 62.2 67.3
General and
administrative....... 35.9 40.7 32.6 37.1 40.5 61.3
Product development.... 9.9 14.5 16.0 20.3 22.5 33.5
------- ------- ------- ------- ------- -------
Total operating
expenses............ 118.2 147.9 134.3 108.7 125.2 162.1
------- ------- ------- ------- ------- -------
Loss from operations ... (263.8) (253.5) (261.3) (190.4) (220.8) (245.3)
Other income (expense):
Interest expense, net
..................... (2.3) (4.8) (9.2) (1.8) (4.5) (0.4)
Other expense, net..... 0.0 (0.9) 0.2 0.0 (1.3) 0.0
------- ------- ------- ------- ------- -------
Total other income
(expense)........... (2.3) (5.7) (9.1) (1.8) (5.8) (0.4)
------- ------- ------- ------- ------- -------
Net loss................ (266.2)% (259.2)% (270.4)% (192.2)% (226.7)% (245.7)%
======= ======= ======= ======= ======= =======
</TABLE>
28
<PAGE>
Liquidity and Capital Resources
Since our inception, our operations have been funded primarily by CMGI
through the issuance of preferred stock and convertible debt.
Net cash used in operating activities amounted to $20.2 million, $7.9
million and $644,000 for fiscal 1999, fiscal 1998 and fiscal 1997,
respectively. The increase in cash used in operations has primarily been caused
by increasing net operating losses, which are partially offset by non-cash
depreciation and amortization charges included in the applicable net loss and
increases in accounts payable and accrued expenses.
Net cash used in investing activities amounted to $9.8 million, $1.2
million and $1.6 million during fiscal 1999, fiscal 1998 and fiscal 1997,
respectively. The net cash used for investing activities was utilized to
acquire property and equipment required to support the growth of the business
and to expand data center infrastructure.
Net cash provided by financing activities amounted to $33.3 million, $9.1
million and $2.2 million for fiscal 1999, fiscal 1998 and fiscal 1997,
respectively. Cash provided for financing activities included funds advanced
from CMGI, totaling $19.0 million, to fund our operations in 1999. In addition,
cash provided by financing activities in fiscal 1999 included $8.0 million in
net proceeds from the issuance of Series C convertible preferred stock to Dell
Computer Corporation and $7.2 million in net proceeds from the issuance of
Series D convertible preferred stock to Microsoft Corporation. Cash provided by
financing activities in fiscal 1998 and fiscal 1997 primarily was related to
funds advanced from CMGI to fund our operations. Our current interest rate for
our financing activities through CMGI is seven percent. Non-cash financing
transactions included capital lease financing for equipment and a software
vendor payable in fiscal 1999 and fiscal 1998.
CMGI has historically funded our operations as needed, increasing our
obligations to CMGI and allowing us to maintain a zero-balance cash account.
Customer and other receipts have been remitted to CMGI and have been applied to
reduce our obligations to CMGI. We have issued a secured convertible demand
note to CMGI in exchange for the cancellation of all outstanding intercompany
debt incurred by us to CMGI prior to April 30, 1999. This note also provides
for additional advances by CMGI to us after April 30, 1999. CMGI may elect to
convert amounts payable under the note into Series B convertible preferred
stock at any time. Additional intercompany debt accrues at a rate of seven
percent per year, compounded monthly until the day CMGI elects to convert the
debt into shares of Series B convertible preferred stock. The amount of each
borrowing represented by the note is convertible from time to time into the
number of shares of Series B convertible preferred stock equal to one-tenth of
the quotient of the aggregate amount of principal and interest to be so
converted, divided by the applicable conversion price for that fiscal quarter.
The conversion price applicable to advances made in any fiscal quarter,
except advances made in the fiscal quarter during which a qualified initial
public offering occurs and advances converted into Series B convertible
preferred stock in the same fiscal quarter in which they were made, is
determined by dividing our total enterprise value as of the fiscal quarter end
(as determined in good faith by our board of directors) by the number of shares
of common stock outstanding on a fully diluted, as-if-converted basis. Our
total enterprise value, and the conversion price applicable to advances made
under the note, has increased significantly since the fiscal quarter ended
January 31, 1999. For the fiscal quarter ended January 31, 1999, our enterprise
value was based on a discounted cash flow analysis. Our enterprise value for
the fiscal quarter ended April 30, 1999, however, was determined through arms'
length negotiations with, and subsequent sales of our Series C convertible
preferred stock and Series D convertible preferred stock to, two unaffiliated
third parties-Dell and Microsoft. While our business experienced certain
positive operating results during our fiscal quarter ended April 30, 1999,
including principally growth in our revenue from customers unaffiliated with
CMGI and growth in the total number of our customers and in our customers
unaffiliated with CMGI, we believe that the significant increase in our total
enterprise value for our fiscal quarter ended April 30, 1999 from that for our
fiscal quarter ended January 31, 1999 results primarily from the fact that our
total enterprise value for our fiscal quarter ended April 30, 1999 was
determined through arms' length negotiations with our two third-party
investors. The conversion prices for the Series B convertible preferred stock
issued upon conversion of advances made under the note in the fiscal quarter
ended April 30, 1999, the Series C convertible preferred stock and the Series D
preferred stock all are based on our enterprise value for the fiscal quarter
ended April 30, 1999.
29
<PAGE>
Under this note, intercompany debt in the aggregate amount of approximately
$10,761,000, representing $5,348,000 advanced during the quarter ended January
31, 1999 and an additional $5,413,000 advanced during the quarter ended April
30, 1999, in each case including interest accrued during the applicable fiscal
quarter, was converted into 490,332 shares of Series B convertible preferred
stock (based upon applicable conversion prices of $12.74 and $76.68,
respectively). Effective June 4, 1999, CMGI elected to convert intercompany
debt in the aggregate amount of approximately $3,952,000, representing funds
advanced subsequent to the quarter ended April 30, 1999, into 51,527 shares of
Series B convertible preferred stock (based upon a conversion price of $76.68).
Under the terms of the note, because CMGI elected to convert these advances
prior to the end of the fiscal quarter in which the advances were made, the
applicable conversion price was the conversion price in effect for the
immediately preceding fiscal quarter. As of the quarter ended July 31, 1999,
there was no outstanding intercompany debt. Upon the completion of this
offering, each issued and outstanding share of Series B convertible preferred
stock will convert into ten shares of common stock, or 5,418,590 shares of
common stock in the aggregate.
We expect that we will continue to borrow funds from CMGI under this
arrangement until completion of this offering and that the net obligations
incurred after the end of the fiscal quarter preceding completion, to the
extent outstanding, will be converted into common stock at the initial public
offering price. We do not expect to borrow funds from CMGI after completion of
this offering.
We have experienced a substantial increase in our expenditures since
inception consistent with our growth in operations and staffing. We anticipate
that expenditures will continue to increase for at least three years as we
accelerate the growth of our business. Additionally, we will continue to
evaluate investment opportunities in businesses that management believes will
complement our technologies and market strategies.
We currently anticipate that our available cash resources, together with
the net proceeds from this offering, will be sufficient to meet our anticipated
needs for working capital and capital expenditures for at least the twelve
months following the date of this prospectus. However, we may need to raise
additional funds in order to fund more rapid expansion, to develop new or
enhance existing services or products, to respond to competitive pressures or
to acquire complementary businesses, products or technologies. In addition, on
a long-term basis, NaviSite may require additional external financing for
working capital and capital expenditures through credit facilities, sales of
additional equity or other financing vehicles. If additional funds are raised
through the issuance of equity or convertible debt securities, the percentage
ownership of our stockholders will be reduced and our stockholders may
experience additional dilution. We cannot assure you that additional financing
will be available on terms favorable to us, if at all. If adequate funds are
not available or are not available on acceptable terms, our ability to fund our
expansion, take advantage of unanticipated opportunities, develop or enhance
services or products or otherwise respond to competitive pressures would be
significantly limited.
Quantitative and Qualitative Disclosure About Market Risk
We are exposed to market risk related to changes in interest rates. We
intend to invest excess cash balances in cash equivalents. We believe that the
effect, if any, of reasonably possible near-term changes in interest rates on
our financial position, results of operations and cash flows will not be
material.
Year 2000 Considerations
Currently, many installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to continue to function properly into the Year 2000 and beyond. We
recognize the need to assure that our operations will not be adversely impacted
by Year 2000 software and computer system failures. We confront the Year 2000
problem in several contexts:
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Our Facilities and Services. We are a hosting and application management
services provider and we rely on our network infrastructure, software and
hardware to provide our services. Because we offer computer-related services
and because of the business-critical nature of many of our customers'
applications, our risk of lawsuits related to Year 2000 issues is likely to be
greater than that of companies in some other industries. We currently have 13
full-time employees and consultants dedicated to completing our internal Year
2000 project plan. As of July 31, 1999, we have spent nearly $950,000 on our
Year 2000 compliance effort and we have budgeted up to an additional $650,000
to complete our internal Year 2000 project plan.
Our Year 2000 project plan consists of five phases:
. awareness, which consists of informing our employees, customers and
suppliers (orally and in writing) of the need to remediate computer
systems and software products relating to our operations;
. inventory, which is comprised of our efforts to identify and record the
computer systems and software products involved in the provision of our
service offerings and elsewhere in our operations;
. assessment, which is the process of isolating Year 2000 issues with the
systems and products identified in the inventory phase of our Year 2000
project plan and identifying necessary upgrades and replacements to
address these Year 2000 issues;
. remediation, which consists of implementing the necessary upgrades and
replacements identified in the assessment phase of our Year 2000
project plan; and
. contingency planning, which involves both the proactive visioning of
failures of computer systems and software products and of other adverse
impacts on our operations caused by the failure or inadequate
completion of one or more of the first four phases of our Year 2000
project plan and the suggestion and documentation of reasonable
solutions to resolve these potential failures.
We have substantially completed the awareness, inventory and assessment phases
of our Year 2000 project plan. We also continue to conduct awareness campaigns
as needed, update our inventory and conduct Year 2000 assessment on an ongoing
basis as new computer systems and software products are introduced to our data
centers or integrated into our operations. We intend to continue this ongoing
inventory and assessment process through at least December 31, 2000. The
awareness, inventory and assessment phases of our Year 2000 project plan
revealed to us a number of potential problems at the operating system and BIOS
levels with: hosted servers owned by both us and our customers; networked and
standalone desktop computers; and our network operations centers. In addition,
these phases of our plan revealed potential problems with hardware devices
utilized as part of our network infrastructure, including, for example,
routers. All of the revealed problems are ordinary and routine in nature, and
all are able to be remedied with standard software or hardware patches. In most
cases, if time permits, we test vendor software patches for Year 2000
compliance.
We anticipate completing the remediation and contingency planning phases by
December 1, 1999. The remediation phase of our Year 2000 project plan is
designed to remediate Year 2000 problems at the operating system and BIOS
levels as to computer systems used by customers for whom we provide management
services. A number of managed servers remain on our inventory for remediation.
The remediation of certain of these servers has been delayed as a result of
customer requests to postpone scheduled remediation based on the internal
business needs of those customers. We believe that remediation will continue
through December 1, 1999 because of these delays with customer server
remediation and the potential release by suppliers of new patches. As new
managed servers are brought on line through at least December 31, 1999, we will
certify Year 2000 compliance before these servers are installed. As described
in further detail below, our co-location customers have full responsibility for
remediating their own servers and applications, and all of our customers are
responsible for remediating their own application software and any desktop
computers used by them in connection with the services we provide. Year 2000
problems isolated to date with respect to our desktop computers, network
operations centers and network infrastructure have been substantially
remediated.
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The formal contingency planning phase of our Year 2000 project plan is
complete. We anticipate continuing to update our contingency plans as required,
at least through the end of the remediation phase of our Year 2000 project
plan.
Because our infrastructure incorporates components from different
providers, we may be unable to determine whether any of these components will
cause unexpected Year 2000 problems or whether different components will
interact in a way that causes malfunctions. While we expect that our network
infrastructure and all other material components of our facilities will not
experience any Year 2000-related failures, we cannot assure you that we will
not experience these failures or that we will not discover any compliance
problems in the future. Our failure timely and adequately to address Year 2000
compliance issues in our business could result in lost revenues and claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming for us to defend.
Our Customers. We also face risks from customer-provided computer systems
and application software that we host in our data centers that in many cases
has been customized by outside service providers or customer personnel. While
we inform our co-location customers that they are responsible for the Year 2000
compliance of their hosted computer systems and all customers that they are
responsible for the Year 2000 compliance of their own application software, we
cannot assure you that our customers will take the steps necessary to achieve
Year 2000 compliance. The failure of customers and third-party providers to
ensure that their hosted computer systems and application software is Year 2000
compliant could disrupt our operations, resulting in lost revenue and increased
operating costs. In addition, our customers maintain their internal operations
on networks which may be impacted by Year 2000 complications, which could in
turn affect our internal structure or our ability to provide services to them.
We cannot assure you that our customers will upgrade their internal networks or
otherwise provide appropriate remediation for Year 2000 compliance. In
addition, in the event that a significant number of our customers experience
Year 2000-related problems, whether due to our products or not, demand for
technical support and assistance may increase dramatically. In this case, our
costs for providing technical support may rise and the quality of our service
or our ability to manage incoming requests may be impaired.
Our Suppliers. In addition, we depend on software and hardware supplied by
numerous vendors to provide our application hosting and management services,
rental services and consulting services. We are currently seeking assurances
from our existing vendors that their products are Year 2000 compliant, and we
require that all new software application providers certify that they are Year
2000 compliant before we enter into agreements with them. However, because in
most cases we do not independently verify the Year 2000 compliance of vendors'
products, we cannot assure you that these vendors' guarantees are true or
sufficient or that we will not encounter Year 2000 compliance problems
involving their products.
We cannot assure you that we will be able to provide our services and
maintain our operations if we are unable to obtain products, services or
systems that are Year 2000 compliant when we need them. In addition, if vendors
and service providers cannot deliver their products because of their own Year
2000 compliance problems or as a result of systemic failures such as power
outages relating to the Year 2000, we could experience increased operating
costs and lost revenue.
Inflation
We believe that our revenues and results of operations have not been
significantly impacted by inflation during the past three fiscal years.
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Recent Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires the capitalization of certain internal costs
related to the implementation of computer software obtained for internal use.
NaviSite is required to adopt this standard in the first quarter of fiscal year
2000, and expects that the adoption of SOP 98-1 will not have a material impact
on its financial position or its results of operations.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting Costs of Start-Up Activities." Under SOP
98-5, the cost of start-up activities should be expensed as incurred. Start-up
activities are broadly defined as those one-time activities related to opening
a new facility, introducing a new product or service, conducting business in a
new territory, conducting business with a new class of customer, commencing
some new operation or organizing a new entity. SOP 98-5 is effective for the
Company's fiscal 2000 consolidated financial statements. NaviSite does not
expect its adoption to have a material impact on its financial position or
results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS 133
requires the recognition of all derivatives as either assets or liabilities in
the statement of financial position and the measurement of those instruments at
fair value. NaviSite is required to adopt this standard in the first quarter of
fiscal year 2001 pursuant to SFAS No. 137 (issued in June 1999), which delays
the adoption of SFAS 133 until that time. NaviSite expects that the adoption of
SFAS 133 will not have a material impact on the its financial position or its
results of operations.
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BUSINESS
Company Overview
NaviSite is an Internet application service provider offering Web site and
application hosting and management services. Our Internet application service
offerings allow businesses to outsource the deployment, configuration, hosting,
management and support of their Web sites and Internet applications in a cost-
effective and rapid manner. Our focus on enhanced management services, beyond
basic co-location services, allows us to meet the expanding needs of businesses
as their Web sites and Internet applications become more complex. We also
provide our customers with access to our state-of-the-art data centers and the
benefit of our direct private transit Internet connections to major Internet
backbone providers. We only use direct private transit Internet connections,
which differentiates our network infrastructure from that of most of our
competitors. These connections increase reliability and download speeds.
The scalability of our infrastructure and cost-effectiveness of our
solutions allow us to offer a comprehensive suite of services to meet the
current and future hosting and management needs of our customers. Our suite of
service offerings includes:
. Web site and Internet application hosting, which includes access to
our state-of-the-art data centers, bandwidth and basic back-up,
storage and monitoring services;
. Enhanced server management, which includes custom reporting, hardware
options, load balancing and mirroring, system security, advanced back-
up options, remote management and the services of our business
solution managers;
. Specialized application management, which includes management of e-
commerce and other sophisticated applications and their underlying
services, including ad-serving, streaming, databases and transaction
processing; and
. Application rentals and related consulting and other professional
services.
Industry Background
Growth of Business Use of the Internet. The dramatic growth in Internet
usage in recent years, combined with enhanced functionality, accessibility and
security, has made the Internet increasingly attractive to businesses as a
medium for communication and commerce. Forrester Research, Inc. has estimated
that the number of U.S. enterprise businesses online will increase from
approximately 1.8 million in 1998 to approximately 4.3 million in 2003.
As business use of the Internet grows, we believe those businesses which
are utilizing the Internet are seeking to identify and implement increasingly
sophisticated Internet applications. These new applications permit businesses
to:
. engage in business-to-business and business-to-consumer e-commerce;
. enhance business sales efforts through Web-based technologies such as
ad-serving and streaming;
. build and enhance customer relationships by providing Internet-based
customer service and technical support; and
. communicate and conduct business more rapidly and cost-effectively
with customers, suppliers and employees worldwide.
As a result, the proliferation of business Web sites and Internet
applications has created a strong demand for specialized information technology
support and application expertise.
Movement Toward Outsourcing. A growing number of businesses using the
Internet as part of their business strategy have chosen to outsource Internet
application development, implementation and support, particularly the hosting
and management of their Web sites and Internet applications. This follows an
overall movement toward outsourcing of information technology services.
According to Forrester Research, businesses
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in the United States are now spending approximately 25% of their overall
information technology budgets on outsourced services. The growth in outsourced
hosting and management of Web sites and Internet applications is driven by a
number of factors, including:
. the desire of businesses to improve the reliability, availability and
overall performance of their Web sites and Internet applications as
those applications increase in complexity and importance;
. the desire of businesses to reduce time to market;
. the challenges faced by businesses in hiring, training and retaining
application engineers and information technology employees with
Internet expertise;
. the increased costs associated with developing and maintaining
business networks and software applications; and
. deployment risk and the risk of technological obsolescence as they
attempt to capitalize on leading-edge technologies.
Forrester Research has estimated that the market for managed Web site
hosting in the United States will grow from less than $1.0 billion in 1998 to
over $14.0 billion in 2003. In January 1998, Forrester Research estimated that
the market for branded application outsourcing services in the United States
will grow to $21.1 billion by 2001.
Need for Providers of Enhanced, Integrated Hosting and Application
Management Services. Many businesses have outsourced hosting and management of
their Web sites and Internet applications. However, many Web site hosting
providers lack the requisite expertise to implement and manage increasingly
sophisticated Internet applications. Moreover, many of these providers lack the
scalable capacity, high-speed connectivity, monitoring capabilities and level
of reliability and availability which businesses demand. System integrators and
turnkey application developers often have the requisite expertise and resources
to supply businesses with highly customized application solutions, but these
solutions are expensive and time consuming to implement. Some businesses
attempt to reduce cost and shorten time to deployment by utilizing multiple
vendors, each of which provides only a partial solution. This has created
significant opportunity for an application service provider which can offer Web
site and Internet application deployment, configuration, hosting, management
and support.
The NaviSite Solution
We provide a range of integrated, scalable Web site and Internet
application hosting and management services that can be deployed in a cost-
effective and rapid manner. Our Internet application service offerings allow
customers to outsource the deployment, configuration, hosting, management and
support of Web sites and Internet applications. Our focus on enhanced
management services, beyond basic co-location services, allows us to meet the
expanding needs of businesses as their Web sites and Internet applications
become more complex. Key components of our services include:
Cost-Effective Application Services. The scalable nature of our
infrastructure, the repeatability of our Internet application services and our
hosting and management expertise allow us to provide our customers with Web
site and Internet application hosting and management services on a cost-
effective basis. We believe that our customers would otherwise be required to
make significant expenditures to replicate our performance, reliability and
expertise either internally or by using outside vendors.
Rapid Deployment. We offer our customers the ability to rapidly deploy
Internet applications, often in a matter of weeks, instead of months. We
believe that we can deploy sophisticated Internet applications much more
rapidly than businesses can deploy the same applications in-house. Moreover,
our Internet application solutions can be deployed more rapidly than highly
customized applications. This is crucial as our customers develop a Web
presence and need to have their Web sites and Internet applications online as
quickly as possible.
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High-Performance, World-Class Infrastructure. Our infrastructure has been
designed expressly to meet the more demanding technical requirements of
sophisticated Web sites and Internet applications and to provide capacity ahead
of customer demand. We believe that this approach to capacity facilitates the
high-speed data transmission, reliability and availability which our customers'
Web sites and Internet applications demand. In addition, our direct private
transit Internet connections to major Internet backbone providers increase
reliability and download speeds and differentiate our network infrastructure
from that of most of our competitors. Our high-performance infrastructure
together with our trained and experienced staff enable us to offer levels of
service which are backed by guarantees which we believe are among the highest
and most comprehensive in the industry.
Strategy
NaviSite's objective is to be the leading Internet application service
provider. We plan to achieve this goal by continuing to enhance and leverage
our expertise, service offerings and infrastructure to provide customers with
integrated, reliable and secure Internet-based business solutions. Key
components of our strategy include:
Expand Our Suite of Internet Applications. We intend to both increase the
number and vary the kind of applications and application management services we
offer and increase revenue from application rentals. We continue to introduce
Internet business applications which enable customers to develop a Web-based
business presence. Currently, we offer our customers e-commerce and other
sophisticated applications and their underlying services, including ad-serving,
streaming, databases and transaction processing. We focus on application
services which are repeatable, meaning services that we can provide to
customers with minimal additional customization and integration. We believe
that this repeatability decreases our time to market, reduces our operating
risks and produces a higher return on our investment.
Offer Multiple Service Levels to Meet the Evolving Needs of Customers. We
offer multiple service levels to customers so that we can meet their needs for
Internet application services at each stage in the development of their Web-
based operations. For example, a customer initially may use our Web site or
Internet application hosting services or enhanced server management. Later, as
its operations grow and the Internet becomes more of an integral part of its
business strategy, the customer may use our specialized application management
services or application rentals. We believe we have created a competitive
advantage by offering multiple service levels to meet the evolving needs of
customers.
Increase Brand Awareness. We intend to increase awareness of the NaviSite
brand in key business markets and associate the NaviSite brand with the highest
quality Web site and Internet application hosting and management services, high
performance, world-class infrastructure and superior customer service. We
believe that this awareness and association is essential to the continued
expansion of our customer base. We plan to aggressively build the NaviSite
brand through our industry relationships and the use of marketing and co-
marketing programs.
Enhance Our Expertise and Technological Capabilities. We have acquired, and
intend to continue to enhance, the expertise and technological capabilities
required to conduct and grow our business ahead of customer demand. This means
hiring and training application experts before introducing a new application to
customers. This also means expanding existing data centers, adding data
centers, keeping current with key technological trends and increasing
bandwidth. We intend to enhance our expertise by training existing personnel
and by hiring and retaining new application service professionals. We believe
the combination of our Web site and Internet application hosting and management
expertise and our scalable infrastructure provide us with a competitive
advantage.
Continue to Develop and Leverage Industry Relationships. We believe our
industry relationships with Internet application software vendors and
developers, application and system integrators, hardware suppliers and others
provide us with enhanced market opportunities. Through these relationships, we
purchase, license or
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lease services or products to expand our application service offerings or
infrastructure. We also intend to expand our channel sales capability by
working with an increasing number of system integrators and Internet
application software developers and providers. By leveraging our current and
future industry relationships, we intend to not only increase our market
visibility and credibility but also offer our clients more fully integrated
Web site and Internet application hosting and management services.
Access Foreign Markets. We continually assess the need for foreign
operations based on opportunities in specific geographic locations. We
currently have data center capacity in Europe through a bilateral agreement
for Internet hosting services with Planet Online. This arrangement was
established to meet the overseas demands of existing domestic customers. As
the needs of our existing and prospective customers evolve, we intend to take
advantage of foreign market opportunities as they arise.
Pursue Strategic Acquisitions. As opportunities arise, we intend to
continue to pursue strategic acquisitions that can provide complementary
capabilities, technical personnel, established customer relationships and
geographic presence in domestic and international markets.
Services
We offer a comprehensive suite of services to meet the current and future
hosting and management needs of our customers.
Web Site and Internet Application Hosting. Our Web site and Internet
application hosting services provide customers with access to our state-of-
the-art data centers, bandwidth and basic back-up, storage and monitoring
services. Customers are able to access their servers 24-hours-a-day, seven-
days-a-week. These co-located servers are securely housed in separate,
limited-access rooms in our data centers. In fiscal 1999, approximately 17% of
our revenue was derived from basic co-location customers to which we provide
no enhanced or specialized management services.
Web Site and Application Management. We provide both enhanced server
management and specialized application management. Both types of management
services permit us to provide customers with comprehensive problem-solving
solutions, from identification to resolution to post-resolution analysis. To
provide these services, our trained technical personnel utilize advanced
network monitoring and management tools for Web site and application
troubleshooting, together with internal policies and procedures designed to
ensure rapid, effective solutions to technical problems.
Our enhanced server management services include custom reporting, hardware
options, load balancing and mirroring, system security, advanced back-up
options, remote management and the services of our business solution managers.
We also provide specialized application management services for select
software applications, such as:
. ad-serving, which allows customers to conduct advertising and
profiling over the Internet; and
. e-commerce, which enables customers to implement online stores,
customer ordering, payment and fulfillment.
Application Rentals. We offer Internet application rentals to customers
and application developers who need to access sophisticated Internet
applications or application components which can be customized by developers
as part of a complete software solution. Often, obtaining a full license for
these applications is too expensive for customers or application developers,
especially for short-term or single-project use. In addition, these
applications may require experienced personnel to deploy and configure them.
Applications which we currently offer to customers on a rental basis include
Engage Technologies, Inc.'s ad-serving application and a number of Oracle
Corporation's database applications. Internet application components that we
offer to application developers include streaming, personalization,
statistical reporting and imaging services.
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Professional Services. We supply consulting and other professional services
to our customers. These services include network and system configuration and
architecture, project implementation, bandwidth planning and, in limited cases,
basic software development and system integration.
Sales and Marketing
Our sales and marketing objective is to leverage our Web site and Internet
application hosting and management expertise to become the leading provider of
Internet application services. We have developed a sales and marketing strategy
that initially has targeted businesses that have adopted the Internet as an
integral part of their business strategy. We intend to increasingly target more
traditional enterprises as they incorporate the Internet into their business
models.
Our sales efforts focus on direct sales, as well as channel sales through
various industry relationships. We plan to establish a leading position in our
target markets by aggressively expanding our sales force, continuing to
establish and leverage industry relationships to increase channel sales and
expanding our marketing staff.
Direct Sales. Our direct sales professionals include:
. sales representatives, who conduct sales campaigns, identify targeted
prospects, oversee sales territories and manage customer
relationships;
. sales engineers, who discuss with prospective customers their Web site
and Internet application hosting and management needs and technical
requirements; and
. telesales representatives, who qualify customer leads.
Our direct sales teams currently are located in: Andover, Massachusetts;
New York, New York; and San Jose and Los Angeles, California. We plan to expand
our sales force to provide geographic presence in other key markets.
Channel Sales. We have developed important industry relationships to
enhance our channel sales and marketing capabilities. In 1998, we began
pursuing channel sales relationships through our Alliance Partner Program. We
also have generated leads or referrals on an informal basis from application
and system integrators and Internet application software vendors. We intend to
continue to leverage our industry relationships to develop customer referrals,
mutual referral relationships, enhanced service offerings, and in some cases,
co-selling and cross-selling opportunities. Although our industry relationships
have not yet matured into significant sources of new customers, we expect these
relationships to generate more referrals and leads in the future.
Marketing. Our marketing group is responsible for corporate and product
marketing, product management, corporate communications, public relations, lead
generation and marketing communications. As with our sales approach, our
overall marketing strategy focuses on supporting both direct sales and channel
sales. The key goals for our current marketing efforts are to establish a
national and local awareness of the NaviSite brand and our services, position
ourselves as a leading Web site and Internet application hosting and management
partner, develop and enhance channel sales relationships and demonstrate to
potential customers how our services differentiate us from our competition. Our
marketing efforts include:
. comprehensive lead generation through telemarketing, direct marketing,
direct mail programs, electronic and print advertising, seminars and
targeted shows and events;
. interactive, online marketing programs;
. marketing communications and public relations materials to sustain
press coverage in both trade and business publications;
. market development activities targeted to Web site design firms,
Internet application developers and consultants;
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. lead generation, referrals, mutual Web site links or co-marketing
through industry relationships with technology vendors such as Cisco
Systems Inc., Oracle Corporation, BMC Software Distribution, Inc., EMC
Corporation and ArrowPoint Communications, Inc.; and
. strategic marketing relationships with Dell and Microsoft, which are
principal stockholders of NaviSite.
We expect to make significant investments in these and other marketing
programs to increase awareness of the NaviSite brand. We also intend to
continue to leverage our advantageous relationship with CMGI as a source of
lead generation and referrals for our services.
Industry Relationships
In our sales and marketing efforts, we are pursuing industry relationships
targeted by our Alliance Partner Program.
Web and Application Developers. We have developed relationships with
multiple small- to medium-sized Web site design firms, Internet application
developers, consultants and other similar companies that have established
relationships with our target customers. These companies generally lack the
infrastructure and expertise needed to offer their customers a complete, cost-
effective solution and, as a result, turn to us to provide hosting and
management services and expertise to enhance their own product and service
offerings. These relationships provide us with greater market reach through
referrals, without the related overhead costs. In return, we offer these
companies discounts on our services, participation in networking events and
trade shows, joint marketing and promotional campaigns and Web site linkage.
Application and System Integrators. We have developed relationships with
several high-end network integration companies and system integrators from whom
we receive assistance with complex development, integration and project
management and for whom we provide application hosting and management
solutions. These relationships enable us to deliver more comprehensive Internet
application solutions to meet the needs of our customers.
Internet Application Software Vendors. We have developed relationships with
some of the leading Internet application software vendors. We target Internet
application software vendors with brand name recognition and established sales
and support channels. These relationships are mutually beneficial, providing us
with additional applications to sell or rent to our customers and the software
vendors with a distribution channel for their applications. We also benefit
from cross-selling and co-marketing opportunities and specialized product
training to enhance our application management expertise.
Customers
We were organized in 1996 by CMGI to support the networks and host the Web
sites of CMGI and a number of CMGI affiliates. In the Fall of 1997, we began
supplying Web site hosting and management services to companies unaffiliated
with CMGI. As of July 31, 1999, we had approximately 126 customers, up from 51
as of July 31, 1998. CMGI and CMGI affiliates accounted for 62% of our revenue
for the quarter ended July 31, 1999 as compared to 90% of our revenue for the
quarter ended July 31, 1998. CMGI and CMGI affiliates accounted for 15% of our
customer base as of July 31, 1999 as compared to 27% of our customer base as of
July 31, 1998.
A representative list of our customers as of July 31, 1999 includes:
AltaVista Company; Ancestry.com, Inc.; Catalog City, Inc.; Engage Technologies,
Inc.; FairMarket, Inc.; Furniture.com, Inc.; Planet Direct Corporation; Raging
Bull, Inc.; Send.com; ThingWorld.com; and TribalVoice.
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Product Development
Our product development staff focuses on Internet applications and network
architecture. This group identifies new Internet applications, incorporates
these applications into our suite of service offerings and positions them for
marketing, sale and rapid deployment. We focus on Internet applications that
permit us to offer our customers repeatable, scalable services. Our goal is to
introduce services capable of utilization by a large number of customers,
maximizing revenue production and minimizing the incremental operating cost for
each additional customer utilizing that service. As new applications are
introduced, our personnel integrate the application into our management and
billing systems, provide technical documentation and training and ensure the
security of the offering. This process is critical to our ability to provide
integrated, scalable applications to our customers and is designed to result in
increased operating margins, faster product delivery and improved customer
service.
Our product development group also identifies, selects and implements the
various technologies, including network storage and back-up, that provide the
basic infrastructure for both our internal network and the solutions we offer
our customers.
Customer Service and Support
We believe customer service and support is critical to our future success
and growth. Our customer care staff is focused on direct and indirect customer
service and support. We have developed a customized, life-cycle project
management approach to our operations. For some of our customers, we assign a
single business solutions manager who services the customer from deployment
through the entire customer relationship. This approach is designed to enhance
our responsiveness to customer requests, problem troubleshooting and technology
upgrades. In servicing and supporting our customers, we utilize a number of
state-of-the-art automated systems, including a knowledge-based problem-
resolution and trouble-ticketing system, an enterprise system monitoring
platform, sophisticated data storage, an enterprise tape backup system and a
corporate intranet with a built-in document management and source control
system. We believe that our approach to customer service and support and our
ability to rapidly respond to customer needs provides us with a significant
competitive advantage.
Network Infrastructure, Technology and Operations
NaviSite entered the Internet application service market with the advantage
of a well developed infrastructure established by CMGI to support CMGI and a
number of its affiliates. We have differentiated our infrastructure from
competing application service providers through our direct private transit
Internet connections to five major Internet backbone providers. We designed our
infrastructure specifically to provide superior performance for our Web site
and Internet application hosting and management services, including multi-level
network redundancy to provide the highest levels of network uptime, reliable
and customized network security and fast, guaranteed response time and
availability of customers' content, which we deliver through our private
transit Internet connections. Our infrastructure is also designed to scale to
support continued growth. We believe that our sophisticated and highly
redundant infrastructure provides us with a competitive advantage over other
hosting vendors and most Internet service providers. Key elements of our
infrastructure include:
Data Centers. Our strategy is to build a select number of high performance
data centers in order to provide our customers with a critical mass of
expertise in Internet applications and management services from each data
center, while capturing the benefits of centralized infrastructure and
staffing. We currently have data centers located in Andover, Massachusetts and
Scotts Valley, California. These state-of-the-art data centers incorporate
technically sophisticated components and are designed to be completely fault-
tolerant. The components used in our data centers include Cisco redundant core
routers, Cisco redundant core switching hubs and secure, virtual local area
networks. We obtain the equipment and tools necessary for our data center
operations, including our infrastructure hardware, networking and software
products from industry leaders such as ArrowPoint Communications, Cisco
Systems, Compaq Computer Corporation, Dell, EMC and Oracle.
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We are adding new data centers, including an additional data center in
Andover and a new data center in San Jose, California. Construction is
currently underway at both of these new sites.
Private Transit Internet Connectivity. Our use of direct private transit
Internet connections to five major Internet backbone providers differentiates
our network infrastructure from that of our competitors. We have redundant
high-capacity Internet connections to UUNet, CERFnet and MCI on the East Coast
and UUNet, BBN, MCI and SprintLink on the West Coast. We have deployed direct
private transit Internet connections specifically to avoid congestion and data
loss at public Internet exchange points and the resulting degradation of
performance. Our private transit system enables us to provide fast, reliable
access for our customers' Web sites and Internet applications. Because we have
direct private transit links to Internet providers, we can directly monitor the
capacity of all of our connections and guarantee that we will have the
aggregate bandwidth to move large quantities of data at high transmission
speeds. Our private transit Internet connections also enable us to more
effectively launch new applications, such as streaming, which require high
bandwidth availability and run more effectively in a private transit model.
Service Level Guarantees. The combination of our state-of-the-art
infrastructure, our customer-focused operations group and our hosting and
management expertise enable us to offer our customers service levels backed by
guarantees that we believe are among the highest and most comprehensive in the
industry. For example, we offer our customers 99.99% guarantees for network
segments, our facility and facility components. These guarantees translate into
no more than five minutes of consecutive, unscheduled downtime per month.
Network Security. Our network incorporates host-based security with
CheckPoint back-end firewalls and Cisco router access control lists, as well as
SecurID token-based authentication. In addition to these physical security
measures, we have a formal security policy in place, including employee
training, that governs all facets of our business and guidelines governing
internal and external access to information housed in our network system.
Network Operations Centers. Each NaviSite data center has its own network
operations center on site. Each network operations center is fully staffed 24-
hours-a-day, seven-days-a-week with Windows NT, UNIX, application and support
personnel. Our network operations centers perform first-level problem
identification and resolution. The design of our network operations centers
allows network engineers and support personnel to be promptly alerted to
problems, and we have established procedures for rapidly resolving any
technical issues that arise. Network management and monitoring tools
continuously monitor the network and server performance.
Competition
We compete in the Internet application service market. This market is
evolving rapidly, is highly competitive and is likely to be characterized by an
increasing number of market entrants and by industry consolidation. Because
there are no substantial barriers to entry, we expect that we will face
competition from both existing competitors and new market entrants in the
future. We believe that participants in this market must grow rapidly and
achieve a significant presence to compete effectively. We believe that the
primary competitive factors determining success in our market include:
. a state-of-the-art infrastructure providing availability, speed,
scalability and security;
. Web site and Internet application hosting and management expertise;
. fast and reliable Internet connectivity;
. a reputation for high-quality service and superior customer service
and support;
. numerous and diverse service offerings and timely addition of value-
added services;
. brand recognition;
. competitive pricing; and
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. adequate capital to permit continued investment in infrastructure,
customer service and support and sales and marketing.
As an early stage company, we may lack the financial and other resources,
expertise or capabilities to capture increased market share in this environment
in the future.
Our current and prospective competitors include:
. other providers of co-location or high-end Web site hosting and
related services, including AboveNet Communications, Inc., Digex
Corporation, Exodus Communications, Inc., Frontier GlobalCenter Inc.,
Globix Corporation, Interliant, Inc. and a large number of local and
regional hosting providers;
. national and regional Internet service providers, including Concentric
Network Corporation, MindSpring Enterprises, Inc., PSINet Inc., UUNet,
WorldCom and Verio Inc.;
. companies that focus on customized Internet application services,
including AppNet Systems, Inc., CORIO, Inc., IBM Global Services,
USinternetworking, Inc. and USWeb/CKS;
. application developers and Internet application software vendors,
including Open Market, Inc., DoubleClick Inc. and broadcast.com inc.;
. large system integrators and information technology outsourcing firms,
including Electronic Data Systems Corporation and International
Business Machines Corporation; and
. global telecommunications companies, including AT&T Corp., MCI
WorldCom, Inc. and Sprint Corporation, and regional and local
telecommunications companies, including MediaOne Group, Inc. and
regional Bell operating companies, such as Bell Atlantic Corporation.
Many of these competitors have substantially greater financial, technical
and marketing resources, larger customer bases, longer operating histories,
greater name recognition and more established relationships in the industry
than we have. As a result, many of these competitors may be able to develop and
expand their network infrastructures and service offerings more rapidly, adapt
to new or emerging technologies and changes in customer requirements more
quickly, take advantage of acquisitions and other opportunities more readily,
devote greater resources to the marketing and sale of their services and adopt
more aggressive pricing policies than we can. Because of these competitive
factors and due to our comparatively small size and our lack of financial
resources, we may be unable to successfully compete in the Internet application
service market.
In addition, we believe that there will be continued consolidation within
the Internet application service market in which we compete. Our competitors
may consolidate with one another, or acquire software application vendors or
technology providers, enabling them to more effectively compete with us. This
consolidation could affect prices and other competitive factors in ways which
would impede our ability to compete successfully in the Internet application
service market.
Proprietary Rights
We rely on a combination of trademark, service mark, copyright and trade
secret laws and contractual restrictions to establish and protect our
proprietary rights and promote our reputation and the growth of our business.
We do not own any patents that would prevent or inhibit competitors from using
our technology or entering our market. While it is our practice to require all
of our employees, consultants and independent contractors to enter into
agreements containing non-disclosure, non-competition and non-solicitation
restrictions and covenants, and while our agreements with some of our customers
and suppliers include provisions prohibiting or restricting the disclosure of
proprietary information, we can not assure you that these contractual
arrangements or the other steps taken by us to protect our proprietary rights
will prove sufficient to prevent misappropriation of our proprietary rights or
to deter independent, third-party development of similar proprietary assets. In
addition, we provide our services in other countries where the laws may not
afford adequate protection for our proprietary rights.
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We license or lease most technologies used in our Internet application
services. Our technology suppliers may become subject to third-party
infringement claims which could result in their inability or unwillingness to
continue to license their technology to us. The loss of certain of our
technologies could impair our ability to provide services to our customers or
require us to obtain substitute technologies of lower quality or performance
standards or at greater cost. We expect that we and our customers increasingly
will be subject to third-party infringement claims as the number of Web sites
and third-party service providers for Web-based businesses grows. In addition,
we have received notices alleging that our use of our service marks infringes
the trademark rights of third parties. Although we do not believe that any of
these allegations have merit, or that our technologies or services otherwise
infringe the proprietary rights of any third parties, we cannot assure you that
third parties will not assert claims against us in the future or that these
claims will not be successful. Any infringement claim as to our technologies or
services, regardless of its merit, could be time-consuming, result in costly
litigation, cause delays in service, installation or upgrades, adversely impact
our relationships with suppliers or customers or require us to enter into
royalty or licensing agreements.
Government Regulation
While there currently are few laws or regulations directly applicable to
the Internet or to Internet application service providers, due to the
increasing popularity of the Internet and Web-based applications it is likely
that such laws and regulations may be adopted. These laws may cover a variety
of issues including, for example, user privacy and the pricing, characteristics
and quality of products and services. The adoption or modification of laws or
regulations relating to commerce over the Internet could substantially impair
the future growth of our business or expose us to unanticipated liabilities.
Moreover, the applicability of existing laws to the Internet and Internet
application service providers is uncertain. These existing laws could expose us
to substantial liability if they are found to be applicable to our business.
For example, we provide services over the Internet in many states in the United
States and in the United Kingdom, and we facilitate the activities of our
customers in those jurisdictions. As a result, we may be required to qualify to
do business, be subject to taxation or be subject to other laws and regulations
in these jurisdictions, even if we do not have a physical presence or employees
or property there. The application of existing laws and regulations to the
Internet or our business, or the adoption of any new legislation or regulations
applicable to the Internet or our business, could materially adversely affect
our financial condition and operating results.
Employees
As of August 31, 1999, we had 217 employees. Of these employees, 110 were
principally engaged in operations, 53 were principally engaged in sales and
marketing, 21 were principally engaged in product development and 33 were
principally engaged in finance and administration. None of our employees is
party to a collective bargaining agreement and we believe our relationship with
our employees is good. We also employ consultants and independent contractors
on a regular basis to assist in the completion of projects and we outsource our
direct telemarketing sales force. It is our practice to require all of our
employees, consultants and independent contractors to enter into agreements
containing non-disclosure, non-competition and non-solicitation restrictions or
covenants.
Facilities
Existing Facilities. Our executive offices are located at 100 Brickstone
Square, Andover, Massachusetts and occupy approximately 17,800 square feet of
the space leased by CMGI at that location. We also occupy approximately 22,000
square feet at 300 Federal Street, Andover, Massachusetts, pursuant to an
agreement that expires in 2007. Part of this facility is utilized for our East
Coast data center, which we recently expanded. We believe that this facility
has sufficient growth capacity for approximately the next 10 months.
We also occupy approximately 14,100 square feet at 1700 Greens Hill Road,
Scotts Valley, California, part of which is utilized for our West Coast data
center, pursuant to an agreement that expires in 2002. We believe that this
facility has sufficient growth capacity for approximately the next six months.
We do not have any current intention to expand the Scotts Valley facility.
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In addition, we occupy four offices at 304 Park Avenue South, 11th Floor,
New York, New York, pursuant to an agreement that expires in March 2001. This
office space is utilized by sales and marketing personnel.
New Facilities. In May 1999, we executed a 12-year lease for a new 150,000
square foot facility located at 400 Minuteman Road, Andover, Massachusetts,
which is currently being constructed to our specifications. Part of this
facility will be utilized for a new data center. We anticipate that work will
be completed on the new Massachusetts facility in the Spring of 2000, and we
believe that this facility will have sufficient growth capacity for at least
the next two years. Construction also has started on a new 66,000 square foot
facility located in the Valley Technology Centre, 2720 Zanker Road, San Jose,
California, part of which will be utilized for a new data center. This facility
should be available for occupation in the Fall of 1999. In May 1999, we
executed a seven-year lease for this facility.
We believe that upon completion of the two new facilities currently under
construction, our facilities will be adequate for at least the next two years
and that we will be able to obtain additional space as needed on commercially
reasonable terms.
Legal Proceedings
NaviSite is not currently a party to any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The executive officers and directors of NaviSite, and their ages and
positions with NaviSite as of August 31, 1999, are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
- ---- --- -----------
<S> <C> <C>
Joel B. Rosen............. 41 Chief Executive Officer and Director
Robert B. Eisenberg....... 48 President and Director
Kenneth W. Hale........... 46 Chief Financial Officer, Treasurer and Secretary
Thomas W. Culver.......... 52 Vice President, Operations
Barbara H. Fortier........ 44 Vice President, Facilities
Peter C. Kirwan, Jr....... 35 Chief Technology Officer
Jonathan Rodin............ 41 Vice President, Product Development
Jay S. Seaton............. 45 Vice President, Marketing
J. Andrew Sherman......... 44 Vice President, Sales
David S. Wetherell........ 45 Chairman of the Board of Directors
Craig D. Goldman.......... 55 Director
Andrew J. Hajducky III.... 45 Director
Stephen D.R. Moore........ 48 Director
</TABLE>
Joel B. Rosen has served as our Chief Executive Officer and as one of our
Directors since April 1999. From January 1996 to August 1998, Mr. Rosen served
as Executive Vice President of Aspen Technology, Inc., a publicly traded
enterprise software and services provider, where he was responsible for
managing two of Aspen Technology's three business units. From August 1988 to
January 1996, Mr. Rosen held several management positions within Aspen
Technology, including Director of Marketing, Vice President of Marketing and
Senior Vice President of Marketing and New Businesses. From 1984 to 1988, Mr.
Rosen was a Consultant and Manager at Bain & Company.
Robert B. Eisenberg founded NaviSite in July 1996 while an employee of
CMGI, Inc. He has served as our President and as one of our Directors since our
predecessor was incorporated as a separate entity in February 1997, and also
served as our Chief Executive Officer from February 1997 to April 1999. From
March 1995 to July 1996, Mr. Eisenberg served as Vice President of Information
Technology at MediaOne Group, Inc. (formerly Continental Cablevision), a cable
television provider. From September 1991 to March 1995, Mr. Eisenberg served as
the Director of Information Technology at New England Business Services, Inc.,
a provider of business forms and software for small businesses.
Kenneth W. Hale has served as our Chief Financial Officer since March 1997
and as our Treasurer and Secretary since March 1998. From May 1989 to September
1996, Mr. Hale served as Chief Financial Officer and Treasurer of
Media/Communications Partners, a telecommunications and media venture capital
firm, where he was responsible for overseeing the financial management of
multiple venture capital funds and related entities. From June 1980 to April
1989, Mr. Hale was a Senior Manager, Audit and Tax, at Ernst & Whinney, which
merged with Arthur Young & Co. to form Ernst & Young LLP. Mr. Hale is a
Certified Public Accountant.
Thomas W. Culver has served as our Vice President of Operations since June
1999. From June 1997 to May 1999, Mr. Culver worked as an independent
consultant. From September 1995 to June 1997, Mr. Culver served as Group
Manager of Information Technology at Paymentech, Inc., formerly known as First
USA Paymentech, a national credit card payment processor, where he was
responsible for systems development, database and systems administration and
operations. From October 1986 to September 1995, Mr. Culver was Chief
Information Officer of DMGT Corp., a credit card payment processor, where he
managed the information technology department.
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Barbara H. Fortier has served as our Vice President of Facilities since
June 1999 and served as our Vice President of Operations from July 1997 to June
1999. From November 1995 to June 1997, Ms. Fortier served as Senior Manager of
Communications at Staples, Inc., a national retailer of office supplies, where
she was responsible for all telecommunications services, local area networking
and wide area networking services. From January 1993 to November 1995, Ms.
Fortier served as Communications Manager at New England Business Services,
Inc., a provider of business forms and software for small businesses.
Peter C. Kirwan, Jr. has served as our Chief Technology Officer since July
1998. In the five years prior to joining NaviSite, Mr. Kirwan was an
entrepreneur in the commercial Internet field, founding two Internet service
providers. The first, Media Access Systems, Inc., was a New York based Internet
service provider focusing on high-speed business Internet connections and one
of the first companies to provide Web server hosting in the United States. The
second, Servercast Communications, L.L.C., focused exclusively on application
management and hosting and was acquired by NaviSite in July 1998.
Jonathan Rodin has served as our Vice President of Product Development
since February 1999. From October 1997 to July 1998, Mr. Rodin served as Vice
President of Engineering at ADSmart Corporation, a developer and marketer of
online ad sales and ad-serving solutions and a subsidiary of CMGI. From July
1991 to September 1997, Mr. Rodin served as the Vice President of Engineering
at FTP Software, Inc., an independent vendor of software and related
applications for the personal computer market.
Jay S. Seaton has served as our Vice President of Marketing since December
1997. From November 1996 to December 1997, Mr. Seaton served as Vice President
of Sales and Marketing at Radnet, Inc., a provider of application tools. From
June 1991 to November 1996, Mr. Seaton served as Director of Marketing and
Product Management at Banyan Systems Incorporated, a provider of distributed
networking software.
J. Andrew Sherman has served as our Vice President of Sales since August
1997. From March 1996 to August 1997, Mr. Sherman served as Vice President of
U.S. Sales for Fulcrum Technologies Inc., a software firm focused on providing
knowledge management capabilities to large enterprises on intranet platforms.
From September 1994 to March 1996, Mr. Sherman served as Regional Manager at
Sybase, Inc., a database and application development tools company. Prior to
1994, Mr. Sherman also held senior positions at Apple Computer, Inc. and MCI
WorldCom, Inc.
David S. Wetherell has served as a Director and Chairman of the Board of
Directors of NaviSite since February 1997. Mr. Wetherell has served as Chairman
of the Board, President, Chief Executive Officer and Secretary of CMGI, Inc.
since 1986 and as a member of CMG@Ventures I, LLC, a venture capital firm
subsidiary of CMGI, and President of CMG@Ventures, Inc., the managing partner
of CMG@Ventures I, LLC, since January 1995. He is also a managing member of
CMG@Ventures II, LLC, CMG@Ventures III, LLC and @Ventures Management, LLC,
which also are strategic investment and development venture capital
subsidiaries or CMGI affiliates. From 1982 until joining CMGI in 1986, Mr.
Wetherell was a co-founder and President of Softrend, Inc., a microcomputer
software publisher. Mr. Wetherell is also the founder of BookLink Technologies,
Inc., a CMGI subsidiary that was sold to America Online, Inc. in 1994. Mr.
Wetherell also serves as the Chairman of the Board of Directors of Engage
Technologies, Inc., a subsidiary of CMGI.
Craig D. Goldman has served as a Director of NaviSite since March 1998. Mr.
Goldman has served as President and Chief Executive Officer for Cyber
Consulting Services Corp., a technology consulting firm, since March 1996. From
October 1991 to March 1996, Mr. Goldman served with Chase Manhattan Bank as
Senior Vice President and Chief Information Officer. Mr. Goldman served with
Chase Manhattan Bank as Senior Vice President, Technology and Operations from
March 1988 to October 1991, after having started with Chase Manhattan in June
1985. Mr. Goldman also serves as a director of CMGI, Inc., Engage Technologies,
Inc. and PRT Group Inc.
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Andrew J. Hajducky III has served as a Director of NaviSite since February
1997. Mr. Hajducky has served as the Chief Financial Officer and Treasurer of
CMGI, Inc. since October 1995 and as a member of CMG@Ventures I, LLC, a venture
capital firm subsidiary of CMGI, since January 1995. He is also a managing
member of CMG@Ventures II, LLC, CMG@Ventures III, LLC and @Ventures Management,
LLC, which are strategic investment and development venture capital
subsidiaries or CMGI affiliates. From 1990 to October 1995, Mr. Hajducky was
the Entrepreneurial Services Partner of the Merger and Acquisition division of
the public accounting firm of Ernst & Young LLP. From 1983 through 1990, he
held various positions with Arthur Young & Co., which merged with Ernst &
Whinney to form Ernst & Young LLP. Previously, Mr. Hajducky was the Chief
Financial Officer of Mountain International Company/AccuTel, Inc., a
telecommunications and software company. Mr. Hajducky is a Certified Public
Accountant. Mr. Hajducky also serves as a director of Engage Technologies, Inc.
Stephen D.R. Moore has served as a Director of NaviSite since August 1999.
Mr. Moore has served as Chairman and Chief Executive Officer of Stream
International Inc., a provider of outsourced technical support services, since
January 1997. From April 1995 to September 1996, Mr. Moore served as President,
and from September 1996 to January 1997, he served as Chief Operating Officer
of Stream Holdings Inc., a software services firm. Prior to that time, Mr.
Moore served as President of Corporate Software, Inc., an outsource technical
support provider, from May 1992 to April 1995, after having served as its Vice
President, European Operations.
Each executive officer of NaviSite is elected by, and serves at the
discretion of, the board of directors. Each executive officer serves for a term
of one year. There are no family relationships among any of the directors or
executive officers of NaviSite.
Board Committees
NaviSite's board of directors has an audit committee and a compensation
committee. The audit committee determines our accounting policies and practices
and financial reporting and internal control structures, recommends to the
board of directors the appointment of independent auditors to audit our
financial statements each year and confers with the auditors and oversees our
officers for purposes of reviewing our system of internal accounting and
financial controls. The audit committee consists of Messrs. Goldman, Moore and
Hajducky.
The compensation committee of the board of directors is responsible for
determining salaries, incentives and other forms of compensation for officers
and other key employees of NaviSite and administers our incentive compensation
and benefit plans. The compensation committee consists of Messrs. Goldman,
Moore and Wetherell.
Director Compensation
We do not currently pay any cash compensation to members of our board for
attending meetings of the board of directors or committee meetings, but we do
reimburse directors for their reasonable travel expenses incurred in connection
with attending these meetings. Any board member who is not also an officer or
employee of NaviSite, any subsidiary of NaviSite or CMGI is entitled to non-
statutory stock options under our 1998 Director Stock Option Plan.
NaviSite has reserved for issuance 125,000 shares of common stock under the
1998 Director Stock Option Plan. Commencing on December 28, 1998, the date that
the Director Stock Option Plan was adopted, each non-employee director of
NaviSite is entitled to receive, upon the date of his or her election, a non-
statutory option to purchase 25,000 shares of common stock, with the exception
of Craig Goldman, who was granted an option to purchase 50,000 shares of common
stock pursuant to the terms of the Director Stock Option Plan. Each automatic
grant will have an exercise price equal to the fair market value of the common
stock at the time of grant and will have a maximum term of ten years, subject
to earlier termination following the optionee's cessation of service on
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the board of directors. Each automatic option grant will vest and become
exercisable with respect to 5,000 shares of common stock on the first
anniversary of the date of the grant, with the exception of the grant to Mr.
Goldman, whose option vested and became exercisable as to 10,000 shares on the
date of grant. The remaining option grant will become exercisable with respect
to an additional 5,000 shares (10,000 shares with respect to Mr. Goldman) on
the date of each annual stockholders' meeting at which the option holder is re-
elected as a director. No options will be granted under the Director Stock
Option Plan after December 28, 2008. As of August 31, 1999, options to purchase
75,000 shares of common stock were outstanding under the Director Stock Option
Plan. Options for 50,000 shares were granted with an exercise price of $0.34
per share, and options for the remaining 25,000 shares were granted at an
exercise price per share equal to the per share public offering price set forth
on the cover page of this prospectus.
Prior to the closing of this offering, we intend to terminate the 1998
Director Stock Option Plan and approve and adopt the 1999 Stock Option Plan for
Non-Employee Directors. A total of 250,000 shares of our common stock will be
issuable under the new plan. Our directors who are not NaviSite employees or
otherwise affiliates, employees or designees of an institutional or corporate
investor that owns more than 5% of our outstanding common stock will be
eligible to receive non-statutory stock options under the plan. Under the new
plan:
. we will grant an initial option to acquire 25,000 shares of our common
stock to each eligible director who is elected a director for the
first time after the plan is adopted on the date of that election;
. our board may, in its discretion, grant initial options to eligible
directors first elected to our board prior to approval of the new plan
by our stockholders on the date stockholder approval is obtained; and
. we also will grant an initial option to acquire 25,000 shares of our
common stock to each director who
. ceases being an affiliate, employee or designee of an
institutional or corporate investor that owns more than 5% of our
outstanding common stock and
. is not otherwise an employee of us or any of our subsidiaries but
. remains as a member of our board on the date the director's
affiliate, employee or designee status ceases.
We also will grant to eligible directors an additional option for the purchase
of 6,250 shares of our common stock on the first, and each subsequent,
anniversary of the grant of each director's initial option if the director is
still serving as one of our directors on that anniversary date. Our board has
discretion to increase to up to 100,000 shares the number of shares of common
stock subject to any initial option or additional option covering any vesting
period of up to 48 months that may be granted to an eligible director after the
date of the increase.
The per share exercise price of options granted under the new plan will be
equal to the closing price of our common stock on a national securities
exchange or as quoted on the Nasdaq National Market, the average of the closing
bid and asked prices of our common stock in the over-the-counter market or the
fair market value of our common stock as determined by our board. Each initial
option granted under the new plan will vest and become exercisable as to 1/48th
of the number of shares originally subject to the option on each monthly
anniversary date of the date of grant if the optionee is still serving as a
director on that monthly anniversary date. Each additional option granted under
the new plan will vest and become exercisable as to 1/12th of the number of
shares originally subject to the option on each monthly anniversary date of the
date of grant commencing on the 37th monthly anniversary date if the optionee
is still serving as a director on that monthly anniversary date. All
outstanding options granted under the new plan immediately become exercisable
in full upon a change in control of NaviSite.
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Executive Compensation
The following table sets forth all compensation earned during the fiscal
year ended July 31, 1999 by our Chief Executive Officer and our other four most
highly compensated executive officers whose total annual salary and bonuses
exceeded $100,000 in fiscal 1999. All numbers below relating to shares of CMGI
common stock underlying options to purchase CMGI common stock give effect to
two two-for-one stock splits of CMGI's common stock, effective January 11, 1999
and May 27, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
-------------------- ---------------------------
Securities All Other
Name and Principal Position Salary Bonus Company Underlying Options Compensation
- --------------------------- ---------- --------- -------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Joel B. Rosen(1) ....... $ 56,061 $ 25,000 NaviSite 534,166 $ --
Chief Executive CMGI 100,000
Officer
Robert B. Eisenberg(2).. 133,033 35,500 CMGI 32,000 2,563(3)
President
Barbara H. Fortier(4)... 110,000 20,000 CMGI 16,000 2,219(3)
Vice President,
Facilities
Jay S. Seaton........... 130,668 10,000 CMGI 8,000 1,754(3)
Vice President,
Marketing
J. Andrew Sherman....... 137,500 -- CMGI 16,000 140,520(5)
Vice President, Sales
</TABLE>
- --------
(1) Mr. Rosen was appointed Chief Executive Officer in April 1999.
(2) Mr. Eisenberg served as our Chief Executive Officer from February 1997 to
April 1999.
(3) Represents the amount of matching contributions made by NaviSite under the
CMGI 401(k) plan.
(4) Ms. Fortier served as our Vice President, Operations from July 1997 to June
1999.
(5) Includes $137,186 in commission payments and $3,334 of matching
contributions made by NaviSite under the CMGI 401(k) plan.
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Stock Option Grants
The following table sets forth information regarding options granted to the
executive officers named in the "Summary Compensation" table appearing above
during the fiscal year ended July 31, 1999. The exercise price per share of
each option is equal to the fair market value of the common stock of NaviSite
or CMGI, as applicable, on the date of grant as determined by the board of
directors. Potential realizable values set forth in the table are net of the
exercise price but before taxes associated with the exercise, are calculated
based on rules of the Securities and Exchange Commission and do not represent
an estimate or projection of future common stock prices. Actual gains, if any,
on stock option exercises are dependent on the future performance of NaviSite's
or CMGI's common stock, as applicable, overall stock market conditions and the
option-holders' continued employment with NaviSite through the vesting period.
The potential realizable values reflected in the table may not necessarily be
achieved. We have never granted any stock appreciation rights.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants (1)
------------------------------------------
Potential Realizable
Value at Assumed
Percent of Annual Rates of
Number of Total Stock Price
Securities Options Appreciation for
Underlying Granted to Exercise Option Term
Options Employees in Price Per Expiration ---------------------
Name Company Granted Fiscal Year Share Date 5% 10%
---- -------- ---------- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Joel B. Rosen........... NaviSite 534,166 37.24% $ 7.40 4/20/04 $1,092,094 $2,413,241
CMGI 100,000 3.00 123.38 4/21/04 3,408,762 7,532,472
Robert B. Eisenberg..... CMGI 32,000 .97 10.00 9/14/03 88,410 195,363
Barbara H. Fortier...... CMGI 16,000 .48 10.00 9/14/03 44,205 97,682
Jay S. Seaton........... CMGI 8,000 .24 10.00 9/14/03 22,103 48,841
J. Andrew Sherman....... CMGI 16,000 .48 10.00 9/14/03 44,205 97,682
</TABLE>
- --------
(1) The term of each option is five years from the date of grant. With respect
to each option grant, 25% of the option vests and becomes exercisable
after the first year and the remaining 75% of the option vests and becomes
exercisable in equal monthly tranches over the 36 months thereafter. Share
numbers, prices and dollar values relating to CMGI's common stock give
effect to two two-for-one stock splits, effective January 11, 1999 and May
27, 1999.
50
<PAGE>
The following table sets forth information concerning options to purchase
common stock exercised by the executive officers named in the "Summary
Compensation Table" appearing above during the fiscal year ended July 31, 1999
and the number and value of unexercised options held as of July 31, 1999. None
of these executive officers exercised any options in fiscal 1999. Share numbers
and values set forth below relating to CMGI's common stock give effect to two
two-for-one stock splits, effective January 11, 1999 and May 27, 1999.
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options at
Options at July 31, 1999 July 31, 1999 (1)
------------------------- -------------------------
Name Company Exercisable Unexercisable Exercisable Unexercisable
---- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Joel B. Rosen........... NaviSite 0 534,166 $ -- $1,922,998
CMGI 0 100,000 -- --
Robert B. Eisenberg..... NaviSite 224,999 75,001 2,472,739 824,261
CMGI 0 32,000 -- 2,630,000
CMGI 6,667 45,001 599,197 4,044,465
NaviNet 174,999 0 286,998 --
Barbara H. Fortier...... NaviSite 37,500 37,500 411,984 411,984
CMGI 0 16,000 -- 1,315,000
NaviNet 23,437 0 38,437 --
Jay S. Seaton........... NaviSite 39,582 60,418 428,594 654,207
CMGI 0 8,000 -- 657,500
J. Andrew Sherman....... NaviSite 49,999 50,001 549,301 549,323
CMGI 0 16,000 -- 1,315,000
NaviNet 31,249 0 51,248 --
</TABLE>
- --------
(1) The value of unexercised in-the-money options is based upon the per share
fair market value of the underlying stock on the date of exercise, minus
the per share exercise price of the option, multiplied by the number of
shares of stock underlying the option. With respect to the NaviSite
options, the value of unexercised in-the-money options is based upon an
assumed initial public offering price of $11.00 per share, minus the
applicable option exercise price, multiplied by the number of shares of
common stock underlying the option. With respect to the CMGI options, the
value of unexercised in-the-money options is based on the difference
between $92.19, which was the closing price of CMGI common stock on July
31, 1999, and the applicable option exercise price. With respect to the
NaviNet options, the value of unexercised in-the-money options is based on
the difference between $1.65, which was the fair market value per share of
the NaviNet common stock on July 31, 1999, as determined by an independent
third-party valuation consultant, and the applicable option exercise
price.
Employment and Non-Competition Agreements
None of our executive officers has an employment agreement, although all of
our executive officers have entered into agreements that contain non-
disclosure, non-competition and non-solicitation restrictions and covenants,
including a provision prohibiting these officers from competing with NaviSite
during their employment with us and for a period of 12 months after termination
of their employment with us.
In addition, each executive officer is party to an offer letter with CMGI
which sets forth his or her annual salary, annual bonus eligibility, option
grants and other benefits. Joel Rosen's offer letter, dated April 14, 1999,
provides that if he is terminated without cause or there is a substantive
change in his job title, responsibilities or location of employment, or a
reduction in his compensation, following a change of control of either NaviSite
or CMGI, then his options to purchase 534,166 shares of NaviSite common stock
and 100,000 shares of CMGI common stock will immediately become fully vested
and exercisable. Upon completion of this offering, NaviSite is assuming the
obligations applicable to NaviSite under these offer letters.
51
<PAGE>
1998 Equity Incentive Plan
NaviSite has reserved 5,562,212 shares of common stock for issuance under
the NaviSite 1998 Equity Incentive Plan, as amended as of August 18, 1999.
Under the Equity Incentive Plan, NaviSite is authorized to grant incentive
stock options, non-statutory stock options, stock appreciation rights and
restricted stock awards to employees, directors and consultants of NaviSite, or
any affiliate, who is capable of contributing significantly to our successful
performance. In general, options granted pursuant to the 1998 Equity Incentive
Plan are exercisable within four years of the original grant date. The board of
directors or an appropriate committee of the board has the right, at its
discretion, to accelerate the vesting of any award or provide for cash payments
to the participants in exchange for their awards upon a change of control of
NaviSite. Options are not assignable or transferable except by will or the laws
of descent or distribution. Our board of directors may amend, suspend or
terminate the Equity Incentive Plan at any time, subject to any required
stockholder approval.
As of August 31, 1999, options to purchase an aggregate of 2,564,161 shares
of common stock at a weighted average exercise price of $3.03 per share were
outstanding under the Equity Incentive Plan. As of August 31, 1999, we had not
granted any stock appreciation rights or issued any shares of restricted stock
under the Equity Incentive Plan.
1999 Employee Stock Purchase Plan
The 1999 Employee Stock Purchase Plan is expected to be adopted by our
board of directors and approved by our stockholders in September 1999, to be
effective upon completion of this offering. The 1999 Employee Stock Purchase
Plan provides for the issuance of a maximum of 50,000 shares of our common
stock.
The 1999 Employee Stock Purchase Plan will be administered by the
compensation committee. All employees of NaviSite who have been employed by us
for at least six months and whose customary employment is for more than 20
hours per week and for more than five months in any calendar year are eligible
to participate in the 1999 Employee Stock Purchase Plan. Employees who would
own five percent or more of the total combined voting power or value of
NaviSite's stock immediately after having subscribed for shares under the 1999
Employee Stock Purchase Plan may not participate in the 1999 Employee Stock
Purchase Plan. To participate in the 1999 Employee Stock Purchase Plan, an
employee must authorize us to deduct an amount (not less than one percent nor
more than 10% of a participant's total cash compensation) from his or her pay
during quarterly payment periods. At the end of each quarterly payment period,
except for the first quarterly payment period following this offering, the
participant's funds are used to purchase shares of our common stock at a price
equal to 85% of the lesser of the last reported sale price of the common stock
on the first or last business day of the payment period. With respect to the
first quarterly payment period following this offering, the price will be equal
to 85% of the lesser of the per share public offering price set forth on the
cover page of this prospectus or the last reported sale price of the common
stock on the last business day of the payment period.
401(k) Plan
NaviSite is a participating employer in the 401(k) defined contribution
profit sharing savings and retirement plan sponsored by CMGI. All NaviSite
employees who are at least 21 years of age and have satisfied the necessary
service eligibility requirements, except for nonresident aliens with no United
States source of income, are eligible to participate in the plan. Under our
401(k) plan, a participant employee may elect to reduce his or her current
compensation by up to the lower of 15% or the statutorily prescribed limit
($10,000 in 1999) and have the amount of the reduction contributed to the plan
on the employee's behalf as salary deferral contributions. The 401(k) plan
permits additional discretionary matching contributions by us with respect to
our employees' pre-tax contributions up to the first six percent of each
employee's salary contributed to the plan. The 401(k) plan also permits us to
make discretionary profit sharing contributions to the plan on behalf of our
employees. All contributions to the 401(k) plan by or on behalf of employees
are subject to aggregate annual limits prescribed by the Internal Revenue
Service.
52
<PAGE>
Deferred Compensation Plan
A Deferred Compensation Plan is expected to be adopted by our board of
directors prior to the completion of this offering. Under the terms of the
deferred compensation plan, NaviSite employees who are selected by our board of
directors (as well as certain of our employees who previously participated in a
deferred compensation plan sponsored by CMGI) will be able to elect to defer a
portion of their compensation for the following calendar year. Participants in
the plan will be able to defer up to 25% of their salary and 100% of their
bonus compensation, which amounts will be paid out at a later date at the
participant's election. NaviSite also may make discretionary contributions to a
participant's account, to which the participant generally will become entitled
after five years of service with us. NaviSite will maintain a bookkeeping
account to track deferred amounts, which amounts will be credited with gains or
losses based on the performance of deemed investment alternatives made
available to participants under the plan.
Compensation Committee Interlocks and Insider Participation
Prior to this offering, we had no separate compensation committee or other
board committee performing equivalent functions. These functions were performed
by our board of directors, which consisted of Joel B. Rosen and Robert B.
Eisenberg, our Chief Executive Officer and President, respectively, David S.
Wetherell, Chairman of the Board, President, Chief Executive Officer and
Secretary of CMGI, Craig D. Goldman, a director of CMGI, and Andrew J. Hajducky
III, Chief Financial Officer and Treasurer of CMGI.
53
<PAGE>
CERTAIN TRANSACTIONS
Relationship and Transactions between NaviSite and CMGI, Inc.
Our predecessor was incorporated in February 1997 as a wholly owned
subsidiary of CMGI. As of August 31, 1999, CMGI owned approximately 89.6% of
our common stock, including shares of convertible preferred stock held by CMGI
indirectly through our predecessor. CMGI will directly own approximately 70.9%
of our common stock upon completion of this offering.
CMGI has the power to elect our entire board of directors and to approve or
disapprove any corporate transactions or other matters submitted to our
stockholders for approval, including the approval of mergers or other
significant corporate transactions. CMGI may exercise its voting power by
written consent, without convening a meeting of the stockholders, meaning that
CMGI will be able to effect a sale or merger of NaviSite without prior notice
to, or the consent of, our other stockholders. CMGI also holds a majority
equity ownership position in many of our customers.
NaviSite and CMGI have entered into or, upon or prior to completion of this
offering, will enter into the present and prospective arrangements and
transactions described below. These agreements were or will be negotiated
between CMGI, as a corporate parent, and NaviSite, its subsidiary, and
therefore are not the result of negotiations between independent parties.
NaviSite and CMGI intend that these agreements and the transactions provided
for in these agreements, taken as a whole, accommodate their respective
interests in a manner that is fair to both NaviSite and CMGI. However, because
of the complex nature of the various relationships among NaviSite, CMGI and
various CMGI affiliates, we cannot assure you that each of the agreements
described below, or the transactions provided for in these agreements, were or
will be effected on terms at least as favorable to NaviSite as NaviSite could
have obtained from unaffiliated third parties.
NaviSite and CMGI or its affiliates may enter into additional or modified
arrangements and transactions in the future. NaviSite, CMGI or its affiliates,
as the case may be, will negotiate the terms of such arrangements and
transactions. Upon or prior to completion of this offering, NaviSite expects to
adopt a policy that all future arrangements between NaviSite and CMGI or its
affiliates, other than routine commercial transactions entered into in the
ordinary course of business, will be on terms that NaviSite believes are no
less favorable to it than the terms NaviSite believes would be available from
unaffiliated parties and must be approved by a majority of NaviSite's directors
who are not employees of CMGI (even though such directors may be less than a
quorum).
The following is a summary of the material arrangements and transactions
between NaviSite and CMGI or its affiliates.
Leases and Lease Guarantees
In connection with our execution of three of our real property leases, CMGI
has provided our landlords with guarantees of all of our obligations under the
leases. In connection with the execution of the lease for our Scotts Valley,
California facility, CMGI guaranteed the full performance of all of our
obligations through the expiration of the lease term. In connection with the
execution of the lease for our new Andover, Massachusetts facility, CMGI
executed an unconditional guaranty of the lease and an accompanying letter of
credit to ensure the full and punctual payment, as well as performance of all
of our obligations, under the lease. CMGI will be released from the Andover
guaranty upon the occurrence of the earlier of the closing of this offering or
the date on which we occupy the premises and begin to pay rent. CMGI also
executed an unconditional and irrevocable guaranty in connection with the
execution of the lease for our new facility in San Jose, California. CMGI will
be released from the San Jose lease guaranty within 15 days of the later of the
closing of this offering and the landlord's receipt of a letter of credit, in
the form specified in the guaranty, in the amount of approximately $2.4
million.
In addition, certain of the equipment that we use or provide to our
customers for their use in connection with our services is provided under
leases executed or guaranteed by CMGI. If CMGI discontinues this
54
<PAGE>
practice, which it could do at any time, we or our customers would have to
obtain this equipment directly, and we cannot assure you that we or our
customers could do so on similar financial terms.
Debt Conversion
We have issued a secured convertible demand note to CMGI in exchange for
the cancellation of all intercompany debt incurred by us to CMGI subsequent to
the conversion of CMGI debt into Series A convertible preferred stock and prior
to April 30, 1999. This note also provides for additional advances by CMGI to
us after April 30, 1999. CMGI may elect to convert amounts payable under the
note into Series B convertible preferred stock at any time. Additional
intercompany debt incurred after April 30, 1999 accrues interest at a rate of
seven percent per year, compounded monthly until the day CMGI elects to convert
the debt into shares of Series B convertible preferred stock. The amount of
each borrowing represented by the note is convertible from time to time into
the number of shares of Series B convertible preferred stock equal to one-tenth
of the quotient of:
. the aggregate amount of principal and interest to be so converted,
divided by
. the applicable conversion price for that fiscal quarter.
The conversion price applicable to advances made in any fiscal quarter,
except advances made in the fiscal quarter during which a qualified initial
public offering occurs and advances converted into Series B convertible
preferred stock in the same fiscal quarter in which they were made, is
determined by dividing our total enterprise value as of the fiscal quarter end,
as determined in good faith by our board of directors, by the number of shares
of common stock outstanding on a fully diluted, as-if-converted basis. It is
expected that all debt due to CMGI prior to the closing of this offering will
be converted into Series B convertible preferred stock no later than the
closing of this offering. Each share of Series B convertible preferred stock
issued and outstanding will convert into ten shares of common stock upon the
completion of this offering.
Under this note, intercompany debt in the aggregate amount of approximately
$10,761,000, representing $5,348,000 advanced during the quarter ended January
31, 1999 and an additional $5,413,000 advanced during the quarter ended April
30, 1999, in each case including interest accrued during the applicable fiscal
quarter, was converted into 490,332 shares of Series B convertible preferred
stock (based upon applicable conversion prices of $12.74 and $76.68,
respectively). Effective June 4, 1999, CMGI elected to convert intercompany
debt in the aggregate amount of approximately $3,952,000, representing funds
advanced subsequent to the quarter ended April 30, 1999, into 51,527 shares of
Series B convertible preferred stock (based upon a conversion price of $76.68).
Under the terms of the note, because CMGI elected to convert these advances
prior to the end of the fiscal quarter in which the advances were made, the
applicable conversion price was the conversion price in effect for the
immediately preceding fiscal quarter. As of the quarter ended July 31, 1999,
there was no outstanding intercompany debt. Upon the completion of this
offering, the 541,859 shares of Series B convertible preferred stock issued and
outstanding will convert into 5,418,590 shares of common stock.
We expect to borrow additional amounts from CMGI to fund our operations
prior to the closing of this offering. To the extent that additional advances
are made during the fiscal quarter in which the closing of this offering
occurs, such borrowings and accrued interest, net of any repayments, will be
converted into additional shares of common stock at the initial public offering
price upon the closing of this offering.
This note is secured by all of our intellectual property and other assets,
whether now owned or hereafter acquired, under the terms of an intellectual
property security agreement and a security agreement between us and CMGI.
Facilities and Administrative Support Agreement
Upon or prior to completion of this offering, we will enter into a
facilities and administrative support agreement with CMGI under which CMGI will
continue to make available to us space at its headquarters in Andover,
Massachusetts and will provide various services to us, including: accounting,
systems and related services; rent and facilities; human resources and
benefits; and Internet marketing and business development.
55
<PAGE>
Under this agreement, CMGI also will agree to make available to us at least
17,800 square feet of space at its headquarters until completion of our new
Andover, Massachusetts facility. We intend to relocate our executive offices to
our new facility upon completion of that facility.
The initial term of this agreement will be one year from the date of the
agreement, with automatic renewals at the end of the initial term and each
renewal term for successive one-year periods. Either party will be permitted to
terminate the facilities and administrative support agreement upon prior
written notice. The facilities and administrative support agreement will
automatically terminate upon the date CMGI owns less than 50% of our
outstanding common stock.
The fees payable by us for the availability of space and other services are
typically determined through an allocation of CMGI's costs based upon the
proportion of our employee headcount to the total headcount of CMGI and other
CMGI affiliates located in the same facility or using the same services. Under
the facilities and administrative support agreement, we will pay CMGI a monthly
fee reflecting the cost of the services provided by CMGI based on the total
number of our employees and consultants on the last day of that month.
In fiscal 1997, fiscal 1998 and fiscal 1999, we paid CMGI $48,000, $289,000
and $1,346,000, respectively, for services similar to those to be provided
under the facilities and administrative support agreement.
Tax Allocation Agreement
Upon or prior to completion of this offering, we will enter into a tax
allocation agreement with CMGI to allocate responsibilities, liabilities and
benefits relating to taxes. We will be required to pay our share of income
taxes shown as due on any consolidated, combined or unitary tax returns filed
by CMGI for tax periods ending on or before or including the date as of which
we will no longer be a member of CMGI's group for federal, state or local tax
purposes, as the case may be. CMGI will indemnify us against liability for all
taxes in respect of consolidated, combined or unitary tax returns for periods
as to which CMGI is filing group returns which include us. Accordingly, any
redetermined tax liabilities for those periods will be the responsibility of
CMGI, and any refunds or credits of taxes attributable to us or our
subsidiaries in respect of consolidated, combined or unitary tax returns for
those periods will be for the account of CMGI. We will be responsible for
filing any separate tax returns for any taxable period and will be responsible
for any tax liabilities, and entitled to any refunds or credits of taxes, with
respect to separately filed tax returns. We will indemnify CMGI against any tax
liability with respect to separately filed tax returns.
Neither CMGI nor us will have any obligation to make any payment to the
other party for the use of the other party's tax attributes, such as net
operating losses. However, if one party realizes a windfall tax benefit because
of an adjustment to items on the other party's tax return, the party that
realizes the windfall tax benefit will be required to pay to the other party
the actual incremental tax savings it has realized. For example, if an expense
deducted by CMGI for a period prior to the closing date were disallowed and
required to be capitalized by us for a period after the closing date, thereby
generating future depreciation deductions to us, we would be required to pay to
CMGI any incremental tax savings as a result of the depreciation deductions
when those tax savings are actually realized by us.
Each of NaviSite and CMGI has control of any audit, appeal, litigation or
settlement of any issue raised with respect to a tax return for which it has
filing responsibility. Payments of claims under the agreement must be made
within 30 days of the date that a written demand for the claim is delivered.
Interest accrues on payments that are not made within 10 days of the final due
date at the rate applicable to underpayments of the applicable tax. Any dispute
concerning the calculation or basis of determination of any payment provided
under the tax allocation agreement will be resolved by a law firm or "big five"
accounting firm selected and paid for jointly by the parties.
Investor Rights Agreement
Upon or prior to completion of this offering, we will enter into an
investor rights agreement with CMGI under which we will grant CMGI registration
rights and rights to purchase shares to maintain its majority
56
<PAGE>
ownership. Under this agreement, CMGI and its assignees will have the right to
demand, on up to two occasions, that NaviSite register the sale of all or part
of their shares of our common stock having an aggregate value of at least $10.0
million under the Securities Act. In addition, at any time after we become
eligible to file a registration statement on Form S-3 under the Securities Act,
CMGI and its assignees will have the right to request, on up to five occasions,
that we effect a registration of their shares of our common stock having an
aggregate value of at least $2.5 million on Form S-3. CMGI and its assignees
also are entitled to include shares of our common stock in a registered
offering by us of our securities for our own account, subject to the
underwriters' right to reduce the number of included shares. We will pay all
costs associated with the registration of shares by us pursuant to this
agreement, other than underwriting discounts and commissions and various other
expenses.
Also under this agreement, until such time as CMGI, or any permitted
transferee, owns less than a majority of voting power of the outstanding shares
of our capital stock, we will permit CMGI, or the transferee, to purchase a
portion of any shares that we may in the future issue so that CMGI or the
transferee will maintain its majority ownership position. Any such purchases
will be at the same price as is paid by third parties for the shares. This
right is transferable by CMGI to any party that acquires directly from CMGI
shares of common stock representing at least a majority of the outstanding
shares of our common stock.
Other Transactions with CMGI and its Affiliates
We have agreements with numerous CMGI affiliates under which we provide
these affiliates with Web site and Internet application hosting services,
together with enhanced server management for both Web sites and Internet
applications and specialized application management services. We also rent
sophisticated software applications to a number of these affiliates and provide
consulting services to each of these affiliates on an as-needed basis.
Our existing service agreements with CMGI affiliates are routine commercial
transactions entered into in the ordinary course of our business. We anticipate
that we will continue to enter into routine commercial transactions with CMGI
and its affiliates in the future. Currently, however, we have no long-term
contracts, right-of-first-refusal arrangements, business opportunity allocation
agreements or other material contractual arrangements or understandings with
CMGI or any of its affiliates regarding the continued sale of our services to
CMGI or its affiliates.
In general, in pricing the services provided to CMGI and its affiliates, we
have: negotiated the services and levels of service to be provided; calculated
the price of the services at those service levels based on our then-current,
standard prices; and discounted these prices by 10%. This pricing policy is not
dictated by or provided for in any contractual arrangement. The discounts we
provide to CMGI and its affiliates, which also are available to industry
partners and other parties engaged in co-marketing or referral arrangements
with us, are afforded to CMGI and, at CMGI's direction, its affiliates because
of CMGI's customer referral relationship with us. Although there are no
agreements to this effect between us and CMGI, we expect both our customer
referral relationship with CMGI and the discounted pricing for services
provided to CMGI and its affiliates to continue after completion of this
offering.
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<PAGE>
The chart set forth below lists the CMGI affiliates from which we derived
revenue in excess of $60,000 in each of the last three fiscal years and the
revenue derived from these CMGI affiliates for the fiscal years ended July 31,
1997, 1998 and 1999, as applicable. Our total revenue was $3,361,000,
$4,029,000 and $10,519,000, for the fiscal years ended July 31, 1997, 1998 and
1999, respectively.
<TABLE>
<CAPTION>
Name of affiliate Fiscal 1997(1) Fiscal 1998(1) Fiscal 1999(1)
----------------- -------------- -------------- --------------
<S> <C> <C> <C>
Planet Direct Corporation......... $1,545,948 $1,593,618 $2,307,534
Engage Technologies, Inc.......... 949,046 751,714 1,721,736
ADSmart Corporation............... 456,673 430,248 476,787
InfoMation........................ 158,059 350,312 397,658
Ancestry.com, Inc................. -- -- 535,940
ZineZone Corp.(2)................. -- 117,946 231,218
Vicinity Corporation.............. 236,004 137,226 204,535
Raging Bull, Inc.................. -- -- 288,711
ThingWorld.com.................... -- 66,080 178,190
CMG Direct Corporation(3)......... -- 191,300 115,280
Furniture.com, Inc................ -- -- 213,684
Universal Learning Technology..... -- -- 104,316
MotherNature.com, Inc............. -- -- 88,985
PlanetAll.com, Inc.(4)............ -- 182,495 --
NextMonet.com, Inc. .............. -- -- 63,435
</TABLE>
- --------
(1) Dashes indicate periods in which the listed customers were not CMGI
affiliates, but do not indicate that no revenues were derived in those
periods.
(2) Known as Password Internet Publishing Corp. until February 1999.
(3) All of the issued and outstanding capital stock of CMG Direct Corporation
was sold by CMGI to Marketing Services Group, Inc. in May 1999. CMGI holds
approximately 18% of the outstanding common stock of Marketing Services
Group.
(4) Effective as of August 1998, PlanetAll is no longer a CMGI affiliate.
We also have provided services to CMGI and other CMGI affiliates, including
Lycos, Inc., Nascent Technologies, Inc., NaviNet, Inc., On-Demand Solutions,
Inc., SalesLink Corporation and TicketsLive Corporation. Aggregate sales to
CMGI and these affiliates totaled $15,750, $50,560 and $130,218 for fiscal
1997, fiscal 1998 and fiscal 1999, respectively.
In addition, subsequent to the end of fiscal 1999, CMGI acquired a
controlling interest in AltaVista Company, one of our customers. Our aggregate
sales to AltaVista in fiscal 1999 were $336,625.
Servercast Communications, L.L.C. Acquisition
Term Notes
In connection with our acquisition in July 1998 of Servercast, we issued
four term notes to the members of Servercast in the aggregate principal amount
of $1.0 million, payable on or before January 2, 2000, in exchange for all of
the membership interests in Servercast. CMGI has guaranteed the payment of each
of these term notes. CMGI's guarantee will terminate upon the earliest to occur
of (i) the closing of this offering, (ii) the sale of NaviSite to an acquiror
with a net worth of at least $15 million and (iii) the payment by us of all
amounts owed under the term notes.
One of these term notes, in the principal amount of $279,100, was issued to
Peter C. Kirwan, Jr., our Chief Technology Officer, in exchange for his 27.91%
membership interest in Servercast. The note bears interest at the rate of 5.5%
per year (calculated on the basis of a 365-day year and the actual number of
days elapsed). The note provides that accrued interest will be paid in three
equal installments of $7,675.25 each, to be paid on January 2, 1999, July 2,
1999 and January 2, 2000. The first and second scheduled payments of
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<PAGE>
$7,675.25 each were made in full on January 2, 1999 and July 2, 1999,
respectively. Mr. Kirwan has agreed that payment of accrued interest or
principal may be offset by claims for indemnification that we may have pursuant
to the terms of the related purchase agreement and that 20% of any principal
amount paid prior to July 1, 2000 shall be delivered into an escrow fund for
the purpose of funding Mr. Kirwan's indemnification obligations to us.
Bonus Agreement
In connection with our acquisition of Servercast, we also entered into a
bonus agreement dated as of July 1, 1998 with Mr. Kirwan. The bonus agreement
provides that Mr. Kirwan will receive an incentive bonus payment if established
targets are met relating to the revenues and operating losses of Servercast for
the one-year period ended July 1, 1999. The maximum amount which Mr. Kirwan
could receive pursuant to the bonus agreement is $231,187. Pursuant to the
terms of the bonus agreement and the related purchase agreement, 20% of any
bonus amount due to Mr. Kirwan as of July 1, 1999 shall be delivered into the
escrow fund described above. In order to be eligible for the incentive bonus
and the return of any escrowed amount, Mr. Kirwan must remain an employee of
NaviSite through July 1, 1999 and July 1, 2000, respectively, unless he either
terminates his employment with just cause or is terminated by us without cause,
in which case he remains entitled to any bonus payments or escrowed amounts
due. Mr. Kirwan remains an employee of NaviSite, and we are currently in the
process of comparing actual revenues and operating losses against the targets
established in the bonus agreement to determine any bonus payment due to Mr.
Kirwan as of July 1, 1999.
Pursuant to the bonus agreement, we also granted Mr. Kirwan non-statutory
stock options to purchase 50,000 shares of our common stock, at an exercise
price of $0.93 per share. One fourth, or 12,500, of the options vested and
became fully exercisable on July 1, 1999, and the remainder vest ratably at the
end of each month for 36 months, provided that Mr. Kirwan continues to be
employed by us.
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<PAGE>
OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Except as indicated by the footnotes below,
we believe, based on the information furnished to us, that the persons and
entities named in the tables below have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them,
subject to applicable community property laws. Percentage of outstanding shares
of NaviSite common stock is based on 20,816,173 shares of common stock
outstanding as of August 31, 1999, and 26,316,173 shares of common stock
outstanding upon completion of this offering. Percentage of outstanding shares
of CMGI common stock is based on 114,582,987 shares of common stock outstanding
as of August 26, 1999. In computing the number of shares of common stock
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of August 31, 1999 are
deemed outstanding. These shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of any other person.
Principal Stockholders
The following table sets forth information with respect to the beneficial
ownership of our common stock by our principal stockholders as of August 31,
1999 and as adjusted to reflect the sale of the shares of common stock offered
in this offering. The outstanding shares of common stock shown as held by CMGI
include shares issuable upon completion of the corporate reorganization of
NaviSite Internet Services Corporation and conversion of convertible preferred
stock held by CMGI as of August 31, 1999.
<TABLE>
<CAPTION>
Percentage of
Outstanding
Shares
Number of Shares -----------------
of Common Stock Before After
Name and Address of Beneficial Owner Beneficially Owned Offering Offering
- ------------------------------------ ------------------ -------- --------
<S> <C> <C> <C>
CMGI, Inc. ............................... 18,658,120 89.6% 70.9%
100 Brickstone Square
Andover, Massachusetts 01810
Dell Computer Corporation ................ 1,095,472(1) 5.3 4.2
One Dell Way
Round Rock, Texas 78682
Microsoft Corporation .................... 993,243 4.8% 3.8%
1 Microsoft Way
Redmond, Washington 98052-8300
</TABLE>
- --------
(1) Consists of shares held of record by Dell USA L.P., a subsidiary of Dell
Computer Corporation.
60
<PAGE>
Management
The tables below set forth information known to us regarding both the
beneficial ownership of our common stock as of August 31, 1999 and as adjusted
to reflect the sale of the shares of common stock in this offering and the
beneficial ownership of common stock of CMGI as of August 31, 1999 by:
. each of our directors;
. each of our executive officers named in the "Summary Compensation
Table" appearing above; and
. all of our directors and executive officers as a group.
Unless otherwise indicated, the address of each beneficial owner listed below
is c/o NaviSite, Inc., 100 Brickstone Square, Andover, Massachusetts 01810. The
columns labeled "Number of Shares Subject to Options" in each of the tables
below reflect the number of shares issuable upon the exercise of options
exercisable within 60 days of August 31, 1999. Asterisks represent beneficial
ownership of less than one percent of the common stock. In addition, the CMGI
share numbers reflect two two-for-one stock splits, effective January 11, 1999
and May 27, 1999.
<TABLE>
<CAPTION>
NaviSite Common Stock
----------------------------------------------------
Number of
Shares Percentage of Percentage of
Subject Outstanding Outstanding
Number of to Shares Before Shares After
Name Shares Options Offering Offering
---- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Joel B. Rosen............ 0 0 * *
Robert B. Eisenberg...... 0 243,749 1.1% *
Barbara H. Fortier....... 0 42,187 * *
Jay S. Seaton............ 0 45,833 * *
J. Andrew Sherman........ 0 56,250 * *
David S. Wetherell....... 18,658,120 (1) 0 89.6 70.9%
Craig D. Goldman......... 0 10,000 * *
Andrew J. Hajducky III... 18,658,120 (1) 0 89.6 70.9
Stephen D.R. Moore....... 0 0 * *
All current directors and
executive officers as a
group (13 persons)..... 18,658,120 (1) 474,581 89.9% 70.1%
</TABLE>
<TABLE>
<CAPTION>
CMGI Common Stock
-------------------------------------
Number of
Shares
Subject Percentage of
Number of to Common
Name Shares Options Stock
---- --------- --------- -------------
<S> <C> <C> <C>
Joel B. Rosen........................... 0 0 *
Robert B. Eisenberg..................... 1,142 20,335 *
Barbara H. Fortier...................... 548 4,333 *
Jay S. Seaton........................... 0 2,167 *
J. Andrew Sherman....................... 484 4,333 *
David S. Wetherell...................... 8,466,336 (2) 2,305,888 9.2%
Craig D. Goldman........................ 120,000 75,200 *
Andrew J. Hajducky III.................. 20,752 106,997 *
Stephen D.R. Moore...................... 0 0 *
All current directors and executive
officers as a group (13 persons)...... 8,610,144 (2) 2,526,836 9.5%
</TABLE>
- --------
(1) Consists of shares owned by CMGI on an as-converted basis. Messrs.
Wetherell and Hajducky disclaim beneficial ownership of all 18,658,120
shares owned by CMGI.
(2) Includes 1,701,732 shares held in trust for the benefit of Mr. Wetherell's
minor children and 23,372 shares held by Mr. Wetherell and his wife as
trustees for the David S. Wetherell Charitable Trusts. Mr. Wetherell
disclaims beneficial ownership of the 1,725,104 shares held in trust for
his children and as trustee for the charitable trust.
61
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and various provisions of
our revised certificate of incorporation and our revised by-laws is a summary.
Statements contained in this prospectus relating to such provisions are not
necessarily complete, and reference is made to the revised certificate of
incorporation and the revised by-laws that will become effective upon the
completion of this offering, copies of which have been filed with the
Securities and Exchange Commission as exhibits to our registration statement of
which this prospectus constitutes a part.
Upon completion of this offering, our authorized capital stock will consist
of 150,000,000 shares of common stock, par value $0.01 per share, and 5,000,000
shares of preferred stock, par value $0.01 per share.
Common Stock
As of August 31, 1999, there were 20,816,173 shares of common stock
outstanding, held of record by four stockholders. Upon completion of this
offering, there will be 26,316,173 shares of common stock outstanding. In
addition, as of August 31, 1999, there were outstanding stock options for the
purchase of a total of 2,639,161 shares of common stock. Shares of common stock
have the following rights, preferences and privileges:
Voting Rights. Each outstanding share of common stock is entitled to one
vote on all matters submitted to a vote of NaviSite's stockholders, including
the election of directors. There are no cumulative voting rights, and therefore
the holders of a plurality of the shares of common stock voting for the
election of directors may elect all of NaviSite's directors standing for
election.
Dividends. Holders of common stock are entitled to receive dividends at the
same rate if and when dividends are declared by NaviSite's board of directors
out of assets legally available for the payment of dividends, subject to
preferential rights of any outstanding shares of preferred stock.
Liquidation. In the event of a liquidation, dissolution or winding up of
the affairs of NaviSite, whether voluntary or involuntary, after payment of the
debts and other liabilities of NaviSite and making provision for the holders of
any outstanding shares of preferred stock, the remaining assets of NaviSite
will be distributed ratably among the holders of shares of common stock.
Rights and Preferences. The common stock has no preemptive, redemption,
conversion or subscription rights. The rights, powers, preferences and
privileges of holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of preferred
stock that we may designate and issue in the future.
Fully Paid and Nonassessable. All outstanding shares of common stock are,
and the shares of common stock to be issued pursuant to this offering will be,
fully paid and nonassessable.
Preferred Stock
Upon completion of this offering, it is expected that all outstanding
shares of preferred stock will be converted into common stock. Pursuant to the
terms of our revised certificate of incorporation, the board of directors will
be authorized, subject to any limitations prescribed by Delaware law, without
further stockholder approval, to issue from time to time up to an aggregate of
5,000,000 shares of preferred stock, in one or more classes or series, and to
fix the voting powers, full or limited, or no voting powers, and the
distinctive designations, preferences and relative, participating, optional or
other special rights and the qualifications, limitations or restrictions of
these rights, of the shares of each such class or series. The board of
directors is authorized to issue preferred stock with voting, conversion and
other rights and preferences that could adversely affect the voting power or
other rights of the holders of common stock.
62
<PAGE>
We have no current plans to issue any preferred stock. However, the
issuance of preferred stock or of rights to purchase preferred stock could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, a majority of our
outstanding common stock.
Registration Rights
Under the terms of the Series C and the Series D convertible preferred
stock purchase agreements entered into between us and each of the Series C
stockholder and the Series D stockholder, respectively, effective upon
completion of this offering, assuming the conversion of the preferred stock
held by the Series C stockholder and the Series D stockholder into common
stock, these stockholders, together with their permitted assignees,
collectively the holders of an aggregate of 2,088,715 shares of our common
stock, will have the right to register some or all of their shares under the
Securities Act under specified conditions. At any time after the six-month
anniversary of the closing of this offering, the holders of at least 50% of the
Series C shares or at least 50% of the Series D shares, as applicable, are
entitled to demand that we file a registration statement under the Securities
Act covering the registration of some or all of their shares, subject to
specified limitations. Under these demand registration rights, we are only
obligated to effect two registrations for each of the Series C stockholder,
together with its permitted assignees, and the Series D stockholder, together
with its permitted assignees. In addition, pursuant to the terms of the Series
C convertible preferred stock purchase agreement and the Series D convertible
preferred stock purchase agreement, after the completion of this offering, the
Series C and Series D stockholders will have unlimited incidental registration
rights in the event that we propose to register any shares of common stock
under the Securities Act, either for our own account or for the account of
other security holders. The Series C and Series D stockholders having
incidental registration rights are entitled to receive notice of any such
registration and are entitled to include their shares in the registration,
subject to specified limitations.
In addition, at any time after the earlier of the one-year anniversary of
the closing of this offering or such time as we become eligible to file a
registration statement on Form S-3, the holders of at least 50% of the Series C
shares or at least 50% of the Series D shares, as applicable, are entitled to
require us to file a registration statement on Form S-3 covering their shares
of common stock. We will not be obligated to effect more than two Form S-3
registrations on behalf of either the Series C stockholder or the Series D
stockholder. These registration rights are subject to customary conditions and
limitations, including the right of the underwriters of an offering to limit
the number of shares of common stock held by security holders with registration
rights to be included in that registration. We also may defer a request for
registration for a period of not more than 90 days, subject to specified
conditions, if our board of directors determines that the requested
registration would be materially detrimental to us and our stockholders. We
generally are required to bear all of the expenses of all of the registrations
effected under the convertible preferred stock purchase agreements, excluding
underwriting discounts and commissions.
The registration of any of the shares of common stock held by stockholders
with registration rights would result in these shares becoming freely tradeable
without restriction under the Securities Act immediately upon effectiveness of
that registration statement. Information regarding the registration rights of
CMGI is included in this prospectus under the heading "Certain Transactions--
Relationship and Transactions Between NaviSite and CMGI, Inc.--Investor Rights
Agreement."
Participation Rights
Under the terms of the Series C convertible preferred stock purchase
agreement and the Series D convertible preferred stock purchase agreement
entered into between us and each of the Series C stockholder and the Series D
stockholder, respectively, we agreed that, in connection with certain
underwritten public offerings of our common stock, which would include this
offering assuming the conversion of the preferred stock held by the Series C
and the Series D stockholders into common stock, we would use all commercially
reasonable efforts to require that the underwriters offer to each of the Series
C stockholder and the Series D stockholder shares of the common stock to be
sold in the offering. Under these agreements, each of the Series C stockholder
and the Series D stockholder would be permitted to purchase, at the gross price
per share
63
<PAGE>
negotiated by us with the underwriters of the offering as reflected in the
final prospectus, up to an aggregate of 0.5% of the outstanding shares of our
common stock on a fully diluted basis, after giving effect to the sale of
shares of common stock in the offering. In connection with an offering to which
these participation rights are applicable, we agreed to deliver or cause to be
delivered a copy of the preliminary prospectus for the offering to both the
Series C stockholder and the Series D stockholder simultaneously with the
distribution of same to the public at large by the underwriters. The Series C
stockholder and the Series D stockholder each then are entitled to exercise its
respective right of participation by delivering written notice to us not later
than five business days prior to the pricing of the offering. The underwriters
of the offering then are entitled to reduce the number of shares of common
stock to be offered to the Series C stockholder and the Series D stockholder to
the extent deemed necessary in the underwriters' reasonable judgment to ensure
the success of such offering or to comply with applicable rules and
regulations. Because, notwithstanding our commercially reasonable efforts, it
is not possible under applicable law to sell shares to the Series C stockholder
and Series D stockholders in this offering, the Series C stockholder and the
Series D stockholder have waived their respective rights to participate.
Delaware Anti-Takeover Statute
Our revised certificate of incorporation contains a provision expressly
electing not to be governed by Section 203 of the Delaware General Corporation
Law. In general, Section 203 restricts some business combinations involving
interested stockholders or their affiliates. An interested stockholder is
defined as any person or entity that is the beneficial owner of at least 15% of
a corporation's voting stock or is an affiliate or associate of the corporation
or the owner of 15% or more of the outstanding voting stock of the corporation
at any time in the past three years. Because of this election, Section 203 will
not apply to us.
Limitation of Liability and Indemnification
Our revised certificate of incorporation limits the liability of our
directors to the maximum extent permitted by Delaware law. Delaware law
provides that directors will not be personally liable for monetary damages for
breach of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This provision has no effect on any non-monetary remedies that may be available
to us or our stockholders, nor does it relieve us or our officers or directors
from compliance with federal or state securities laws.
Our revised certificate of incorporation also generally provides that we
will indemnify, to the fullest extent permitted by Section 145 of the Delaware
General Corporation Law, any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit,
investigation, administrative hearing or any other proceeding by reason of the
fact that he or she is or was a director or officer of ours, or is or was
serving at our request as a director, officer, employee or agent of another
entity, against expenses incurred by him or her in connection with that
proceeding. An officer or director will not be entitled to indemnification by
us if:
. the officer or director did not act in good faith and in a manner
reasonably believed to be in, or not opposed to, our best interests;
or
. with respect to any criminal action or proceeding, the officer or
director had reasonable cause to believe his or her conduct was
unlawful.
In addition, we plan to enter into indemnification agreements with our
directors containing provisions which may require us, among other things, to
indemnify our directors against various liabilities that may arise by virtue of
their status or service as directors and to advance their expenses incurred as
a result of any
64
<PAGE>
proceeding against them as to which they could be indemnified. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling NaviSite pursuant to
the foregoing provisions or otherwise, NaviSite has been informed that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
NaviSite's revised certificate of incorporation also permits NaviSite to
secure insurance on behalf of any officer or director for any liability arising
out of his or her actions in such capacity, regardless of whether our revised
certificate of incorporation would otherwise permit indemnification for that
liability. Our officers and directors are currently insured under a policy
procured by CMGI that provides coverage against losses arising from claims
against them for any actual or alleged act, omission, misstatement, misleading
statement, neglect, error or breach of duty by them in their capacity as
officers or directors of NaviSite. We also have obtained our own liability
insurance for our officers and directors effective as of September 20, 1999.
At the present time, there is no pending litigation or proceeding involving
any director, officer, employee or agent of NaviSite in which indemnification
will be required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is BankBoston, N.A.
65
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Effect of Sales of Shares
Prior to this offering, no public market existed for our common stock, and
we can make no prediction as to the effect, if any, that sales of shares of
common stock or the availability of shares of our common stock for sale will
have on the market price of the common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of our common stock in the public
market, or the perception that such sales occur, could adversely affect the
market price of our common stock and could impair our future ability to raise
capital through an offering of our equity securities.
Sale of Restricted Shares
Upon completion of this offering, based upon the number of shares
outstanding as of August 31, 1999, we will have an aggregate of 26,316,173
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Of these
outstanding shares, the 5,500,000 shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
except that any shares purchased by our "affiliates," as that term is defined
in Rule 144 under the Securities Act, generally only may be sold in compliance
with the limitations of Rule 144 described below. All of the remaining
20,816,173 shares of common stock that will be outstanding after this offering
will be "restricted securities" as that term is defined under Rule 144.
Restricted securities may be sold in the public market only if they qualify for
an exemption from registration under Rule 144, including Rule 144(k), or Rule
701 under the Securities Act.
Lock-Up Agreements
Our directors, executive officers and substantially all of our other
stockholders, holding 20,766,173 shares in the aggregate, have agreed that they
will not sell, directly or indirectly, any shares of common stock without the
prior written consent of BancBoston Robertson Stephens Inc. for a lock-up
period of 180 days from the date of this prospectus. Upon expiration of the
lock-up period, 180 days after the date of this prospectus, 19,338 shares will
be available for resale to the public in accordance with Rule 144, including
Rule 144(k), or Rule 701.
Rule 144
In general, under Rule 144 as currently in effect, commencing 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year is entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which is
expected to be approximately 263,162 shares upon completion of this
offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of
a notice on Form 144 with respect to such sale, subject to the
restrictions specified in Rule 144.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about us.
Commencing 90 days after the date of this prospectus, 50,000 shares not subject
to a lock-up agreement will be available for resale to the public in accordance
with Rule 144.
Rule 144(k)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years is entitled to sell such
shares under Rule 144(k) without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, Rule 144(k) shares may be sold immediately upon
completion of this offering. Immediately upon completion of this offering, no
outstanding shares may be sold under Rule 144(k).
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<PAGE>
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchase shares from us in
connection with a compensatory stock plan or other written agreement are
eligible to resell such shares 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance with various
restrictions, including the holding period, contained in Rule 144.
Stock Options
As of August 31, 1999, options to purchase a total of 2,639,161 shares of
common stock were outstanding, of which 690,426 were then exercisable. Upon
completion of this offering, we intend to file a registration statement to
register for resale an aggregate of 5,937,212 shares of common stock reserved
or anticipated to be reserved for issuance under our 1998 Equity Incentive
Plan, our 1998 Director Stock Option Plan, our 1999 Stock Option Plan for Non-
Employee Directors and our 1999 Employee Stock Purchase Plan. That registration
statement will become effective immediately upon filing. Accordingly, shares
covered by that registration statement will become eligible for sale in the
public markets, subject to vesting restrictions, Rule 144 volume limitations
applicable to our affiliates or the lock-up agreements with BancBoston
Robertson Stephens Inc. Holders of options to purchase 2,440,411 shares of
common stock have entered into lock-up agreements.
We have agreed not to sell or otherwise dispose of any shares of common
stock during the 180-day period following the date of the prospectus, except we
may issue and grant options to purchase shares of common stock under the 1998
Equity Incentive Plan, the 1998 Director Stock Option Plan, the 1999 Stock
Option Plan for Non-Employee Directors and the 1999 Employee Stock Purchase
Plan. In addition, we may issue shares of common stock in connection with an
acquisition of another company if the terms of such issuance provide that the
common stock so issued shall not be resold prior to the expiration of the 180-
day lock-up period.
Registration Rights
Upon completion of this offering, under specified circumstances and subject
to customary conditions, the holders of an aggregate of 20,746,835 shares of
our common stock, including CMGI, which will directly own approximately
18,658,120 shares upon completion of this offering, or their permitted
assignees, will be entitled to rights with respect to the registration under
the Securities Act of some or all of their shares, subject to the 180-day lock-
up period described above. Under the agreements providing for these
registration rights, these stockholders are subject to lock-up periods of not
more than 180 days following the date of this prospectus or any subsequent
prospectus. A more detailed discussion of these registration rights is included
in this prospectus under the headings "Certain Transactions--Relationship and
Transactions Between NaviSite and CMGI, Inc.--Investor Rights Agreement" and
"Description of Capital Stock--Registration Rights."
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<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC and FAC/Equities, a
division of First Albany Corporation, have severally agreed with us, subject to
the terms and conditions of the underwriting agreement, to purchase from us the
number of shares of common stock set forth opposite their names below. The
underwriters are committed to purchase and pay for all shares if any are
purchased.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
BancBoston Robertson Stephens Inc..................................
Hambrecht & Quist LLC..............................................
FAC/Equities, a division of First Albany Corporation ..............
---
Total...........................................................
===
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price on the
cover page of this prospectus and to some dealers at that price less a
concession of not in excess of $ per share, of which $ may be reallowed
to other dealers. After this offering, the public offering price, concession
and reallowance to dealers may be reduced by the representatives. This
reduction will not change the amount of proceeds to be received by us as stated
on the cover page of this prospectus. The common stock is offered by the
underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 825,000 additional shares of common stock at the same price per
share as we will receive for the 5,500,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment to purchase approximately
the same percentage of the additional shares that the number of shares of
common stock to be purchased by it shown in the above table represents as a
percentage of the 5,500,000 shares offered in this offering. If purchased,
these additional shares will be sold by the underwriters on the same terms as
those on which the 5,500,000 shares are being sold. We will be obligated,
pursuant to the option, to sell shares to the extent the option is exercised.
The underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the shares of common stock offered hereby. If this
option is exercised in full, the total price to the public, underwriting
discounts and commissions and proceeds to us will be $ , $ and $ ,
respectively. The underwriting discount and commission per share is equal to
the public offering price per share of common stock less the amount paid by the
underwriters to us per share of common stock.
NaviSite estimates total expenses payable by us in connection with this
offering, other than the underwriting discounts and commissions referred to
above, will be approximately $1.6 million.
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and us against various civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements. Each executive officer and director and substantially
all of our stockholders have agreed, during the period of 180 days after the
date of this prospectus, subject to various exceptions, not to offer to sell,
contract to sell, or otherwise sell, dispose of, loan, pledge or grant any
rights with respect to any shares of common stock or any options or warrants to
purchase any shares of common stock, or any securities convertible into or
exchangeable for shares of common stock owned as of the date of this prospectus
or thereafter acquired directly by these holders or with respect to which they
have the power of disposition, without the prior written consent of BancBoston
Robertson Stephens Inc. However, BancBoston Robertson Stephens Inc. may, in its
sole discretion and at any time or from time to time, without notice, release
all or any
68
<PAGE>
portion of securities subject to the lock-up agreements. There are no existing
agreements between the representatives and any of our stockholders who have
executed a lock-up agreement providing consent to the sale of shares prior to
the expiration of the lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of BancBoston Robertson Stephens Inc.,
subject to various exceptions:
. consent to the disposition of any shares held by stockholders subject
to lock-up agreements prior to the expiration of the lock-up period; or
. issue, sell, contract to sell, or otherwise dispose of, any shares of
common stock, any options to purchase any shares of common stock or any
securities convertible into, exercisable for or exchangeable for shares
of common stock other than our sale of shares in this offering, the
issuance of our common stock upon the exercise of outstanding options,
the issuance of options under existing stock option and incentive plans
provided the options do not vest prior to the expiration of the lock-up
period and the issuance of our common stock in connection with an
acquisition of another company if the terms of such issuance provide
that the common stock so issued shall be subject to the terms of the
lock-up agreement. Please refer to the information in this prospectus
under the heading "Shares Eligible for Future Sale."
The underwriters have advised us that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority.
Public Offering Price. Prior to this offering, there has been no public
market for the common stock. Consequently, the public offering price for the
common stock offered by this prospectus will be determined through negotiations
among the representatives and us. Among the factors to be considered in such
negotiations, the primary factors are prevailing market conditions, some of our
financial information, market valuations of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential, the present state of our development and other factors deemed
relevant.
Directed Share Program. The underwriters have reserved an aggregate of
275,000 shares of common stock to be issued by us and offered for sale in this
offering for purchase from the underwriters through a directed share program by
officers, directors and employees of NaviSite. An additional 275,000 shares of
common stock to be issued by us and offered for sale in this offering have been
reserved for purchase from the underwriters through a directed share program by
vendors, business partners, customers and potential customers of NaviSite. In
addition, the underwriters have reserved an aggregate of 825,000 shares of
common stock to be issued by us and offered for sale in this offering for
purchase from the underwriters through a directed share program by United
States stockholders of CMGI who hold at least 100 shares of CMGI stock as of
August 25, 1999 and who have access to the Internet and a personal e-mail
address. These sales will be at the initial public offering price. We cannot
assure you that any of the reserved shares will be so purchased. The number of
shares of common stock available for sale to the general public in this
offering will be reduced by the number of reserved shares sold. Any reserved
shares not purchased will be offered to the general public on the same basis as
the other shares offered in this offering.
The CMGI directed share program is being administered by Wit Capital
Corporation. Purchases of the reserved shares are to be made through an account
at Wit Capital in accordance with Wit Capital's procedures for opening an
account and transacting in securities. In addition, Wit Capital is an
underwriter of additional shares in the offering. A prospectus in electronic
format is being made available on a Web site maintained by Wit Capital. Other
than the prospectus in electronic format, the information on Wit Capital's Web
site and any information provided on any other Web site maintained by Wit
Capital is not part of this prospectus and has not been approved or endorsed by
NaviSite or any underwriter and should not be relied upon by prospective
investors.
Participation Rights. Assuming the conversion into common stock of our
preferred stock held by Dell and Microsoft, we have agreed to use all
commercially reasonable efforts to require that the underwriters offer to Dell
and Microsoft in this offering up to an aggregate of 0.5% of the outstanding
shares of our common
69
<PAGE>
stock, calculated on a fully diluted basis, after giving effect to the sale of
shares of common stock in this offering. Because, notwithstanding our
commercially reasonable efforts, it is not possible under applicable law to
sell shares to Dell and Microsoft in this offering, Dell and Microsoft have
waived their respective rights to participate.
Listing. The common stock has been approved for quotation on the Nasdaq
National Market under the symbol "NAVI."
Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Act, some persons participating in this
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, that may have the
effect of stabilizing or maintaining the market price of the common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of shares of common stock on
behalf of the underwriters for the purpose of fixing or maintaining the price
of the common stock. A "syndicate covering transaction" is the bid for or the
purchase of common stock on behalf of the underwriters to reduce a short
position incurred by the underwriters in connection with this offering. A
"penalty bid" is an arrangement permitting the representatives to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with this offering if the common stock originally sold by such
underwriter or syndicate member is purchased by the representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such underwriter or syndicate member. The representatives have advised us that
these transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, Boston, Massachusetts.
Various legal matters in connection with this offering will be passed upon for
the underwriters by Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of the Company as of July 31, 1998
and 1999, and for each of the years in the three-year period ended July 31,
1999, have been included in this prospectus and in the registration statement,
of which this prospectus is a part, in reliance on the reports of KPMG LLP,
independent auditors, appearing elsewhere herein, and upon the authority of
said firm as experts in auditing and accounting.
The financial statements of Servercast Communications, L.L.C., as of
December 31, 1997 and June 30, 1998, and for the period from inception
(February 6, 1997) through December 31, 1997 and for the six months ended June
30, 1998, have been included in this prospectus and in the registration
statement, of which this prospectus is a part, in reliance on the report of
KPMG LLP, independent auditors, appearing elsewhere herein, and upon the
authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered by this prospectus. This prospectus, which is part of the
registration statement, does not contain all of the information set forth in
the registration statement or the exhibits and schedules which are part of the
registration statement; certain parts of the registration statement are omitted
in accordance with the rules and regulations of the Securities and Exchange
Commission. For further information about us and the shares of our common stock
to be sold in this offering, please refer to the registration statement and the
exhibits and schedules which are part of the registration statement. Statements
in this prospectus regarding the contents of any contract or any other document
to which we refer are not necessarily complete, and in each instance where a
copy of the contract or other document has been filed as an exhibit to the
registration statement, we refer to the copy so filed. Each statement in this
prospectus regarding the contents of the referenced contract or other document
is qualified in all respects by our reference to the filed copy.
70
<PAGE>
You may read and copy any contract, agreement or other document referred to
in this prospectus and any portion of our registration statement or any other
information from our Securities and Exchange Commission filings at the
Securities and Exchange Commission's public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549. You can request copies of these documents, upon
payment of a duplicating fee, by writing to the Securities and Exchange
Commission. Please call the Securities and Exchange Commission at 1-800-SEC-
0330 for further information about the public reference rooms. Our Securities
and Exchange Commission filings, including our registration statement, are also
available to you on the Securities and Exchange Commission's Web site
(http://www.sec.gov). As a result of this offering, we will become subject to
the information and reporting requirements of the Securities Exchange Act of
1934, as amended, and will file periodic reports, proxy statements and other
information with the Securities and Exchange Commission.
We intend to furnish our stockholders with annual reports containing
audited financial statements and make available to our stockholders quarterly
reports for the first three quarters of each fiscal year containing unaudited
interim financial information.
71
<PAGE>
NAVISITE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
NaviSite, Inc.
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of July 31, 1998 and 1999.................. F-3
Consolidated Statements of Operations for the years ended July 31, 1997,
1998 and 1999........................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended July 31, 1997, 1998 and 1999...................................... F-5
Consolidated Statements of Cash Flows for the years ended July 31, 1997,
1998 and 1999 .......................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Servercast Communications, L.L.C.
Independent Auditors' Report.............................................. F-22
Balance Sheets as of December 31, 1997 and June 30, 1998.................. F-23
Statements of Operations for the period from inception (February 6, 1997)
through December 31, 1997 and for the six months ended June 30, 1998.... F-24
Statements of Members' Equity (Deficit) for the period from inception
(February 6, 1997) through December 31, 1997 and for the six months
ended June 30, 1998..................................................... F-25
Statements of Cash Flows for the period from inception (February 6, 1997)
through December 31, 1997 and for the six months ended June 30, 1998.... F-26
Notes to Financial Statements............................................. F-27
Unaudited Pro Forma Combined Condensed Financial Data for NaviSite, Inc.
and Servercast Communications, L.L.C.
Unaudited Pro forma Condensed Consolidated Statement of Operations for the
year ended July 31, 1998................................................ F-31
Notes To Unaudited Pro Forma Condensed Consolidated Statement of
Operations.............................................................. F-31
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
NaviSite, Inc.:
We have audited the accompanying consolidated balance sheets of NaviSite,
Inc. as of July 31, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the
years in the three-year period ended July 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NaviSite, Inc. as of July
31, 1998 and 1999, and the results of its operations and its cash flows for
each of the years in the three-year period ended July 31, 1999, in conformity
with generally accepted accounting principles.
KPMG LLP
/s/ KPMG LLP
August 27, 1999
Boston, Massachusetts
F-2
<PAGE>
NAVISITE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, Pro Forma
------------------ July 31,
1998 1999 1999
-------- -------- ---------
(In thousands, except
par value)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ -- $ 3,352
Accounts receivable, less allowance for
doubtful accounts of $7 and $262 at July 31,
1998 and 1999, respectively.................. 489 1,881
Due from CMGI................................. -- 77
Prepaid expenses.............................. 444 628
Deferred IPO costs............................ -- 831
-------- --------
Total current assets............................ 933 6,769
-------- --------
Property and equipment, net..................... 3,392 13,159
Deposits........................................ 157 389
Goodwill, net of accumulated amortization of $17
and $220 at July 31, 1998 and 1999,
respectively................................... 997 794
-------- --------
Total assets.................................... $ 5,479 $ 21,111
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Debt to CMGI.................................. $ 11,439 $ --
Accounts payable.............................. 728 2,224
Accrued expenses and deferred revenue......... 1,410 3,963
Capital lease obligations, current portion.... 61 229
Software vendor payable, current portion ..... 817 708
Notes payable, current portion................ -- 1,000
-------- --------
Total current liabilities....................... 14,455 8,124
-------- --------
Capital lease obligations, less current
portion........................................ 90 178
Software vendor payable, less current portion... -- 1,757
Notes payable, less current portion............. 1,000 --
-------- --------
Total liabilities............................... 15,545 10,059
-------- --------
Series C Convertible Redeemable Preferred
Stock, $.01 par value, 1,095 and 0 shares
issued and outstanding at July 31, 1999 and
July 31, 1999 (pro forma), respectively (at
liquidation value)........................... -- 8,088 --
Series D Convertible Redeemable Preferred
Stock, $.01 par value, 993 and 0 shares
issued and outstanding at July 31, 1999 and
July 31, 1999 (pro forma), respectively (at
liquidation value)........................... -- 7,333 --
-------- -------- --------
Total redeemable preferred stock................ -- 15,421 --
-------- -------- --------
Commitments and contingencies
Stockholders' equity (deficit):
Series A Convertible Preferred Stock, $.01 par
value, 1,324 shares authorized; 1,324 and 0
shares issued and outstanding at July 31,
1999 and July 31, 1999 (pro forma),
respectively (liquidating preference of
$16,409)..................................... -- 13 --
Series B Convertible Preferred Stock, $.01 par
value, 1,000 shares authorized; 542 and 0
shares issued and outstanding at July 31,
1999 and July 31, 1999 (pro forma),
respectively (liquidating preference of
$15,039)..................................... -- 5 --
Common Stock, $.01 par value, 30,000 shares
authorized; 8,051, 69 and 20,816 shares
issued and outstanding at July 31, 1998, July
31, 1999, and July 31, 1999 (pro forma),
respectively................................. 81 1 208
Additional paid-in capital.................... -- 30,291 45,523
Accumulated deficit........................... (10,147) (34,679) (34,679)
-------- -------- --------
Total stockholders' equity (deficit)............ (10,066) (4,369) $ 11,052
-------- -------- ========
Total liabilities and stockholders' equity
(deficit)...................................... $ 5,479 $ 21,111
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NAVISITE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended July 31,
----------------------------------------
1997 1998 1999
------------ ------------ -------------
(In thousands, except per share data)
<S> <C> <C> <C>
Revenue:
Revenue........................... $ -- $ 158 $ 3,461
Revenue, related parties.......... 3,361 3,871 7,058
----------- ------------ -------------
Total revenue.................. 3,361 4,029 10,519
Cost of revenue..................... 3,494 8,876 20,338
----------- ------------ -------------
Gross profit (loss)............... (133) (4,847) (9,819)
----------- ------------ -------------
Operating expenses:
Selling and marketing............. 347 2,530 6,888
General and administrative........ 467 1,412 4,823
Product development............... -- 287 2,620
----------- ------------ -------------
Total operating expenses....... 814 4,229 14,331
----------- ------------ -------------
Loss from operations................ (947) (9,076) (24,150)
Other income (expense):
Interest expense, net............. (1) (85) (347)
Other expense, net................ -- (11) (35)
----------- ------------ -------------
Net loss............................ (948) (9,172) (24,532)
Accretion of dividends on Series C
and D Convertible Redeemable
Preferred Stock................... -- -- (172)
----------- ------------ -------------
Net loss applicable to common
stockholders...................... $ (948) $ (9,172) $ (24,704)
=========== ============ =============
Basic and diluted net loss per
common share...................... $ (0.24) $ (1.14) $ (7.41)
=========== ============ =============
Basic and diluted weighted average
number of common shares
outstanding....................... 4,000 8,017 3,332
=========== ============ =============
Unaudited pro forma basic and
diluted net loss per share........ $ (1.51)
=============
Pro forma weighted average number of
basic and diluted shares
outstanding....................... 16,407
=============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NAVISITE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Series B
Series A Convertible
Convertible Preferred
Preferred Stock Stock Common Stock Additional
---------------- ------------- --------------- Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Shares Amount Capital Deficit Equity (Deficit)
-------- ------- ------ ------ ------- ------ ---------- ----------- ----------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at August 1,
1996................... -- $ -- -- $ -- -- $ -- $ -- $ (27) $ (27)
Issuance of common
stock................ -- -- -- -- 8,000 80 -- -- 80
Net loss.............. -- -- -- -- -- -- -- (948) (948)
-------- ------- ---- ----- ------- ----- ------- -------- --------
Balance at July 31,
1997................... -- -- -- -- 8,000 80 -- (975) (895)
Exercise of stock
options.............. -- -- -- -- 51 1 -- -- 1
Net loss.............. -- -- -- -- -- -- -- (9,172) (9,172)
-------- ------- ---- ----- ------- ----- ------- -------- --------
Balance at July 31,
1998................... -- -- -- -- 8,051 81 -- (10,147) (10,066)
Reorganization........ 1,324 13 -- -- (8,000) (80) 15,755 -- 15,688
Conversion of Debt to
CMGI into Series B
Convertible Preferred
Stock................ -- -- 542 5 -- -- 14,708 -- 14,713
Exercise of stock
options.............. -- -- -- -- 18 -- -- -- --
Accretion of dividends
on Series C and D
Convertible
Redeemable Preferred
Stock................ -- -- -- -- -- -- (172) -- (172)
Net loss.............. -- -- -- -- -- -- -- (24,532) (24,532)
-------- ------- ---- ----- ------- ----- ------- -------- --------
Balance at July 31, 1999
....................... 1,324 $ 13 542 $ 5 69 $ 1 $30,291 $(34,679) $ (4,369)
======== ======= ==== ===== ======= ===== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NAVISITE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended July 31,
--------------------------
1997 1998 1999
------- ------- --------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $ (948) $(9,172) $(24,532)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization.................... 126 574 2,081
Loss on disposal of assets....................... -- 11 39
Provision for bad debts.......................... -- 8 275
Changes in operating assets and liabilities, net
of impact of acquisition in 1998:
Accounts receivable............................. (245) (155) (1,667)
Due from CMGI .................................. -- -- (77)
Prepaid expenses................................ (94) (334) 739
Deferred IPO costs.............................. -- -- (335)
Deposits........................................ (114) (43) (232)
Accounts payable................................ 544 (17) 1,000
Accrued expenses................................ 87 1,271 2,553
------- ------- --------
Net cash used for operating activities........ (644) (7,857) (20,156)
------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment............... (1,553) (1,181) (9,767)
Acquisition of business........................... -- (45) --
------- ------- --------
Net cash used for investing activities........ (1,553) (1,226) (9,767)
------- ------- --------
Cash flows from financing activities:
Proceeds from increase in debt to CMGI, net....... 2,197 9,166 18,962
Proceeds from issuance of Series C and D
Convertible Redeemable Preferred Stock, net of
financing costs of $109 and $99, respectively... -- -- 15,249
Proceeds from exercise of stock options........... -- 1 --
Payments of capital lease obligations............. -- (46) (122)
Payments of software vendor obligations........... -- (38) (814)
------- ------- --------
Net cash provided by financing activities..... 2,197 9,083 33,275
------- ------- --------
Net increase in cash............................... -- -- 3,352
Cash, beginning of period.......................... -- -- --
------- ------- --------
Cash, end of period................................ $ -- $ -- $ 3,352
======= ======= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest........................................... $ -- $ 15 $ 77
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997, 1998 and 1999
(1) Description of Business
NaviSite, Inc. (the "Company") is a leading provider of business critical
Internet outsourcing solutions, specializing in high-end Web hosting and
application services for companies conducting business on the Internet.
Substantially all revenues are generated from customers in the United States.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The Company is a majority owned subsidiary of CMGI, Inc. ("CMGI" or
"Parent"). The Company commenced operations in July 1996 and was incorporated
on February 3, 1997 as CMG Information Technology, Inc. (subsequently renamed
NaviSite Internet Services Corporation). On December 28, 1998, the assets and
liabilities of the Company were contributed to a newly-formed subsidiary,
NaviSite, Inc. The assets and liabilities were recorded at historical amounts
as the entities were under common control. The accompanying consolidated
financial statements, which have been prepared as if the Company had operated
as a separate stand-alone entity for all periods presented, include only
revenue and expenses attributable to the Company since it commenced operations
in July 1996.
The consolidated financial statements include certain allocations from CMGI
for certain general and administrative expenses such as rent, legal services,
insurance, and employee benefits. Allocations are based primarily on headcount.
Management believes that the method used to allocate the costs and expenses is
reasonable; however, such allocated amounts may or may not necessarily be
indicative of what actual expenses would have been incurred had the Company
operated independently of CMGI.
(b) Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiary, Servercast Communications, L.L.C.
("Servercast") after elimination of all significant intercompany balances and
transactions.
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
(d) Revenue Recognition
Revenue consists of monthly fees for server hosting, systems
administration, application rentals and Web site management services. Revenue
(other than installation fees) is generally billed and recognized over the term
of the contract, generally one year, based on actual usage. Installation fees
are typically recognized at the time that installation occurs. Payments
received in advance of providing services are deferred until the period such
services are provided.
F-7
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
(e) Cash
Under an arrangement with CMGI, the Company maintained a zero balance cash
account. Cash required by the Company for the funding of its operations was
provided as needed with a corresponding increase to the "Debt to CMGI" account.
Customer receipts and other cash receipts of the Company were remitted to CMGI
upon receipt by the Company and serve to reduce the "Debt to CMGI" account.
During fiscal 1998, non-cash investing activities included the acquisition
of Servercast (see note 4) in exchange for term notes totaling $1,000,000.
During fiscal 1999, non-cash financing activities included the issuance of
1,323,953 shares of the Company's Series A Convertible Preferred Stock ("Series
A Preferred Stock") in exchange for 8,000,000 shares of the Company's common
stock and $15,767,600 reduction in debt to CMGI and the issuance of 541,859
shares of the Company's Series B Convertible Preferred Stock ("Series B
Preferred Stock") in exchange for a $14,713,000 reduction in debt to CMGI (see
note 9). Non-cash financing activities also included a software licensing
arrangement, including services and maintenance of $923,000, for an aggregate
of $2.5 million, payable over a three-year period. The Company has recorded
deferred IPO costs of $496,000, which are included in accrued expenses at July
31, 1999.
The Company purchased $195,000 and $378,000 of equipment under capital
lease obligations during the fiscal years ended July 31, 1998 and 1999,
respectively.
(f) Software Development Costs
Software development costs are accounted for under Statement of Financial
Accounting Standard ("SFAS") No. 86, Accounting for Costs of Computer Software
to be Sold, Leased or Otherwise Marketed ("SFAS 86"). Capitalization of
software development costs commences upon the establishment of technological
feasibility. To date, all such amounts have been insignificant, and,
accordingly, the Company has charged all such costs to product development
expense.
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements and assets acquired under capital leases are amortized
using the straight-line method over the shorter of the lease term or estimated
useful life of the asset. Expenditures for maintenance and repairs are charged
to expense as incurred.
(h) Goodwill
Goodwill relates to the Company's purchase of its wholly owned subsidiary,
Servercast, in July 1998 (see note 4). Such costs are being amortized on a
straight-line basis over five years, the period expected to be benefited.
(i) Accounting for Impairment of Long-Lived Assets
The Company assesses the need to record impairment losses on long-lived
assets used in operations when indicators of impairment are present. On an
ongoing basis, management reviews the value and period of amortization or
depreciation of long-lived assets, including goodwill. During this review, the
significant assumptions used in determining the original cost of long-lived
assets are reevaluated. Although the
F-8
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
assumptions may vary from transaction to transaction, they generally include
revenue growth, operating results, cash flows and other indicators of value.
Management then determines whether there has been a permanent impairment of the
value of long-lived assets by comparing future undiscounted cash flows to the
asset's carrying value. If the estimated future undiscounted cash flows exceed
the carrying value of the asset, a loss is recorded as the excess of the
asset's carrying value over fair value.
(j) Income Taxes
The Company accounts for income taxes under the asset and liability 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 respective tax
bases and operating loss and tax credit carryforwards. 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 and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The Company is currently greater than 80% owned by CMGI, and as
such, CMGI realizes the full benefit of all federal and part of the state net
operating losses that have been incurred by the Company. Therefore, such net
operating losses incurred by the Company will have no future benefit to the
Company. The tax sharing agreement between the Company and CMGI requires the
Company to reimburse CMGI for the amounts it contributes to the consolidated
tax liability of the CMGI group; however, under the policy, CMGI is not
obligated to reimburse the Company for any losses utilized in the consolidated
CMGI group.
(k) Advertising Costs
The Company recognizes advertising costs as incurred. The Company did not
incur any advertising costs during fiscal 1997. Advertising expense was
approximately $266,000 and $417,000 for the fiscal years ended July 31, 1998
and 1999, respectively.
(l) Stock-Based Compensation Plans
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). As permitted by SFAS 123, the Company measures
compensation cost in accordance with Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB No. 25"), and related
interpretations. Accordingly, no accounting recognition is given to stock
options granted at fair market value until they are exercised. Upon exercise,
net proceeds, including income tax benefits realized, are credited to equity.
Therefore, the adoption of SFAS 123 was not material to the Company's financial
condition or results of operations; however, the pro forma impact on earnings
has been disclosed in the notes to the Consolidated Financial Statements as
required by SFAS 123 (see note 10).
(m) Historical and Unaudited Pro Forma Basic and Diluted Net Loss per Share
The Company has adopted SFAS No. 128, Earnings Per Share ("SFAS 128"). In
accordance with SFAS No. 128, basic earnings (loss) per share is computed using
the weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share is computed using the weighted average number
of common and dilutive common equivalent shares outstanding during the period,
using either the "as-if-converted" method for convertible preferred stock or
the treasury stock method for options, unless such amounts are anti-dilutive.
F-9
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
As described in note 9, conversion of all preferred stock and amounts due
to CMGI, if any, will occur upon the completion of a qualified public offering
of the Company's common stock. The unaudited pro forma basic and diluted net
loss per share information included in the accompanying consolidated statements
of operations for the fiscal year ended July 31, 1999 reflects the impact on
unaudited pro forma basic and diluted net loss per share of such conversion as
of the beginning of each period or date of issuance, if later, using the "as-
if-converted" method.
The reconciliation of the numerators and denominators of the unaudited pro
forma basic and diluted net loss per share computation for the Company's
reported net loss for the year ended July 31, 1999 is as follows (in thousands,
except per share data):
<TABLE>
<S> <C>
Numerator:
Net loss......................................................... $(24,704)
--------
Denominator:
Common shares outstanding...................................... 3,331
Assumed conversion of preferred stock.......................... 13,076
--------
Weighted average number of pro forma basic and diluted
shares outstanding........................................ 16,407
========
Pro forma basic and diluted net loss per share................... $ (1.50)
========
</TABLE>
(n) Segment Reporting
The Company has adopted the provisions of SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information ("SFAS 131"), effective
August 1, 1998. SFAS 131 establishes standards for the way that public business
enterprises report selected information about operating segments in annual and
interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS 131 requires the use of the "management approach" in disclosing segment
information, based largely on how senior management generally analyzes the
business operations. The Company currently operates in only one segment, and as
such, no additional disclosures are required.
(o) New Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AcSEC") issued Statement of
Position 98-1, "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires the capitalization
of certain internal costs related to the implementation of computer software
obtained for internal use. The Company is required to adopt this standard in
the first quarter of fiscal year 2000, and expects that the adoption of SOP 98-
1 will not have a material impact on its financial position or its results of
operations.
In April 1998, the AcSEC issued Statement of Position 98-5, "Reporting
Costs of Start-Up Activities" ("SOP 98-5"). Under SOP 98-5, the cost of start-
up activities should be expensed as incurred. Start-up activities are broadly
defined as those one-time activities related to opening a new facility,
introducing a new product or service, conducting business in a new territory,
conducting business with a new class of customer, commencing some new operation
or organizing a new entity. SOP 98-5 is effective for the Company's fiscal 2000
consolidated financial statements. The Company does not expect its adoption to
have a material impact on its financial position or results of operations.
F-10
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as "derivatives") and for hedging activities. SFAS
133 requires the recognition of all derivatives as either assets or liabilities
in the statement of financial position and the measurement of those instruments
at fair value. The Company is required to adopt this standard in the first
quarter of fiscal year 2001 pursuant to SFAS No. 137 (issued in June 1999),
which delays the adoption of SFAS 133 until that time. The Company expects that
the adoption of SFAS 133 will not have a material impact on the its financial
position or its results of operations.
(p) Deferred IPO Costs
The Company has deferred $831,000 of direct and incremental costs
associated with its initial public offering. Upon completion of the offering,
such amounts will be recorded as a reduction of the proceeds raised in the
offering. If the offering is unsuccessful, all deferred IPO costs will be
charged to operations.
(3) Property and Equipment
<TABLE>
<CAPTION>
July 31,
Estimated ---------------
Useful Life 1998 1999
-------------------------- ------ -------
(In thousands)
<S> <C> <C> <C>
Office furniture and equipment.... 5 years $ 232 $ 341
Computer equipment................ 3 years 1,197 2,520
Software licenses................. 3 years or life-of-license 1,390 4,213
Leasehold improvements............ 4 years or life-of-lease 1,256 2,760
Leasehold improvements in progress
................................ -- 5,838
------ -------
4,075 15,672
Less: Accumulated depreciation and
amortization.................... (683) (2,513)
------ -------
$3,392 $13,159
====== =======
</TABLE>
The cost and related accumulated amortization of property and equipment
held under capital leases is as follows:
<TABLE>
<CAPTION>
July 31,
-----------
1998 1999
----- -----
(In
thousands)
<S> <C> <C>
Cost............................................................ $ 195 $ 573
Accumulated amortization........................................ 60 186
----- -----
$ 135 $ 387
===== =====
</TABLE>
F-11
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
(4) Acquisition of Servercast Communications, L.L.C.
In July 1998, the Company acquired Servercast Communications, L.L.C.
("Servercast"), a leading provider of high-performance Internet outsourcing
solutions. The Company issued $1,000,000 in term notes with principal payable
on January 2, 2000. CMGI has guaranteed the payment of these term notes.
Interest accrues at the rate of 5.5% and is payable in three equal installments
on January 2, 1999, July 2, 1999 and January 2, 2000. The total purchase price
for Servercast was valued at $1,045,000, including acquisition costs of
$20,000, and bridge notes receivable of $25,000.
Total purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Working capital deficit ............. $ (140)
Property and equipment............... 171
Goodwill............................. 1,014
------
Purchase price....................... $1,045
======
</TABLE>
The acquisition has been accounted for using the purchase method, and,
accordingly, the purchase price has been allocated to the assets purchased and
liabilities assumed based upon their fair values at the dates of acquisition.
The results of operations of Servercast have been included in the Company's
consolidated financial statements from July 1, 1998.
The portion of the purchase price allocated to goodwill is being amortized
on a straight-line basis over five years. Amortization of goodwill resulting
from the acquisition of Servercast was approximately $17,000 for the one month
period in the fiscal year ended July 31, 1998 in which Servercast was owned by
the Company and $203,000 for the year ended July 31, 1999.
The following table represents the unaudited pro forma results of
operations of the Company for the years ended July 31, 1997 and 1998, as if the
Servercast purchase had occurred at the beginning of the respective periods.
These pro forma results include adjustments for the amortization of goodwill
and increased interest expense on debt related to the acquisition. They have
been prepared for comparative purposes only and do not purport to be indicative
of what would have occurred had the acquisition been made at the beginning of
the respective periods or of results that may occur in the future.
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 1997 July 31, 1998
------------- -------------
(unaudited)
(In thousands)
<S> <C> <C>
Revenues....................................... $ 3,640 $ 4,390
======= =======
Net loss....................................... (1,437) (9,704)
======= =======
Basic and diluted net loss per common share ... $ (0.36) $ (1.21)
======= =======
Basic and diluted weighted average number of
common shares outstanding ................... 4,000 8,017
======= =======
</TABLE>
F-12
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
(5) Debt to CMGI
Commencing in February 1998, advances made by CMGI to the Company accrued
interest at the annual rate of 7%. In December 1998, advances of $15,767,600
from CMGI, including accrued interest thereon, were converted into 1,323,953
shares of Series A Preferred Stock. These advances were made by CMGI to the
Company from February 1998 through October 1998. In May 1999, the Company
formalized its borrowing arrangement with CMGI and executed a secured
convertible demand note with CMGI dated as of May 1, 1999 (the "Secured
Convertible Demand Note"). The Secured Convertible Demand Note covers advances
made by CMGI to the Company for periods commencing in November 1998. Under the
Secured Convertible Demand Note, advances and accrued interest may be prepaid
without penalty. Advances outstanding under this note are secured by
substantially all assets and intellectual property of the Company, and
principal and accrued interest may be converted at the option of CMGI into
shares of Series B Preferred Stock. The number of Series B Preferred shares to
be issued upon conversion of each borrowing represented by the note is based on
the estimated fair value of the Company at the end of the quarter in which such
borrowing is made. (The conversion price applicable to advances made and
interest accrued during a fiscal quarter in which an offering triggering
automatic conversion into Company common stock of Series B Preferred Stock
occurs is equal to the public offering price per share, and the conversion
price applicable to advances made and interest accrued during a fiscal quarter
in which CMGI elects to connect those advances or that interest prior to the
end of that fiscal quarter is the conversion price in effect for the
immediately preceding fiscal quarter). Effective June 4, 1999, CMGI elected to
convert advances and accrued interest outstanding at May 31, 1999 in the amount
of $14,713,000 into 541,859 shares of Series B Convertible Preferred Stock.
(see note 9)
Average balances outstanding in Debt to CMGI for the years ended July 31,
1997, 1998, and 1999 amounted to $965,000, $6,113,000 and $8,107,000,
respectively.
(6) Accrued expenses
Accrued expenses and deferred revenue consist of the following:
<TABLE>
<CAPTION>
July 31,
-------------
1998 1999
------ ------
(In
thousands)
<S> <C> <C>
Accrued payroll, benefits and commissions........................ $ 355 $1,157
Deferred revenue................................................. 1 701
Accrued IPO costs ............................................... 0 496
Other ........................................................... 1,054 1,609
------ ------
$1,410 $3,963
====== ======
</TABLE>
(7) Commitments and Contingencies
(a) Leases
CMGI has entered into noncancelable operating leases on behalf of the
Company covering certain of its office facilities and equipment which expire
through 2012. In addition, the Company pays CMGI for office facilities used as
the Company's headquarters for which it is charged based upon an allocation of
the total costs for the facilities at market rates. Substantially all leases
for real property have been guaranteed by CMGI.
Total rent expense amounted to $1,722,000, $3,567,000 and $5,983,000 for
the years ended July 31, 1997, 1998 and 1999, respectively.
F-13
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
Additionally, CMGI leases certain property and equipment for the benefit of
the Company under capital lease obligations expiring through 2002. CMGI charges
the Company the actual lease fees under these arrangements.
Minimum annual rental commitments are as follows as of July 31, 1999:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
(In thousands)
<S> <C> <C>
2000....................................................... $11,155 $249
2001....................................................... 9,101 156
2002....................................................... 6,248 43
2003....................................................... 3,929 --
2004 ...................................................... 4,633 --
Thereafter ................................................ 15,245 --
------- ----
$50,311 448
=======
Less amounts representing interest......................... 41
----
Present value of future minimum lease payments............. 407
Less current portion of capital lease obligations.......... 229
----
Long-term portion of capital lease obligations............. $178
====
</TABLE>
In May 1999, the Company agreed to lease an additional 150,000 square feet
in Andover, Massachusetts over an initial lease term of 12 years. Further, the
Company made a cash payment to the developers of $5.7 million to fund
construction of leasehold improvements and provided a letter of credit for $4.0
million as a construction and lease security deposit and is committed to
provide $2.5 million as an additional security deposit. Also, in May 1999, the
Company agreed to lease a 66,000 square foot facility in San Jose, California
for a lease term of seven years. Further, the Company has made a lease deposit
of $252,000 and provided a letter of credit for $2.4 million as a lease
security deposit to be reduced annually based on the remaining term of the
lease. CMGI has guaranteed both of these leases. CMGI will be released from the
Andover guaranty upon the earlier of the completion of an initial public
offering or the date on which the Company occupies the premises and begins to
pay rent. CMGI will be released from the San Jose guaranty within 15 days of
the later of the closing of this offering and the execution by the Company of a
letter of credit in the amount of approximately $2.4 million.
(b) Litigation
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
consolidated financial position or results from operations of the Company.
(8) Income Taxes
No provision for federal or state income taxes has been recorded as the
Company incurred net operating losses for all periods presented. At July 31,
1999, the Company had no federal net operating loss carryforwards available to
offset future taxable income as the Company's parent, CMGI, has utilized
substantially all of the Company's federal net operating losses through July
31, 1999. The Company has recorded a full valuation allowance against its
deferred tax assets since management believes that, after considering all the
available objective evidence, both positive and negative, historical and
prospective, with greater weight given to historical evidence, it is more
likely than not that these assets will not be realized. No income tax benefit
has been recorded for all periods presented because of the valuation allowance.
F-14
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that give rise to significant portions of
federal deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
July 31,
-----------
1998 1999
----- ----
(In
thousands)
<S> <C> <C>
Deferred tax assets:
Accruals and reserves........................................ $ 247 $300
Depreciation and amortization ............................... 37 182
----- ----
Total deferred tax assets...................................... 284 482
Less: Valuation allowance...................................... (284) (482)
----- ----
Net deferred taxes............................................. $ -- $ --
===== ====
</TABLE>
(9) Stockholders' Equity
In October 1998, the Company's stockholders authorized 5,000,000 shares of
preferred stock of which 1,323,953 shares have been designated as Series A
Preferred Stock. In May 1999, the Company's stockholders authorized 1,000,000
shares to be designated as Series B Preferred Stock, 1,095,472 shares to be
designated as Series C Convertible Preferred Stock ("Series C Preferred Stock")
and 993,243 shares to be designated as Series D Convertible Preferred Stock
("Series D Preferred Stock"). The remaining shares have not been designated.
(a) Series A Preferred Stock
In December 1998, the Board of Directors authorized and issued 1,323,953
shares of Series A Preferred Stock in exchange for 8,000,000 shares of common
stock and $15,767,600 in principal amount of Debt to CMGI. The Series A
Preferred Stock is entitled to receive annual dividends at 7% commencing
November 1, 1998, as and if declared. No dividends have been declared or paid
by the Company. The Series A Preferred Stock is voting and is convertible into
10 shares of common stock subject to certain adjustments. In the event of any
liquidation, dissolution or winding up of the Company, the Series A Preferred
Stock has a liquidation preference of $11.91 per share plus dividends of 7%
compounded annually beginning on November 1, 1998. The Series A Preferred Stock
is convertible into common stock immediately at the option of the holder, and
automatically converts into common stock upon the completion of a qualifying
initial public offering.
At July 31, 1999, 13,239,530 shares of common stock have been reserved for
issuance upon the conversion of the Series A Preferred Stock.
(b) Series B Preferred Stock
In May 1999, the Board of Directors approved the designation of 1,000,000
shares of the Company's preferred stock as Series B Preferred Stock. Effective
June 4, 1999, CMGI elected to convert the advances and accrued interest
outstanding under the Secured Convertible Demand Note as of January 31, 1999,
April 30 and May 31, 1999, in the aggregate amount of $14,713,000 into 541,859
shares of Series B Preferred Stock. The conversion of advances and accrued
interest into Series B Preferred Stock was based on the estimated fair value of
the Company as of the end of each of the fiscal quarters in which such advances
were made, except with respect to the advances converted as of June 4, 1999,
prior to the end of the fiscal quarter. Under the terms of the Secured
Convertible Demand Note, advances converted prior to the end of the fiscal
quarter in which they
F-15
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
were made are converted based upon the conversion price in effect for the
immediately preceding fiscal quarter. Based on an enterprise valuation
determined through a discounted cash flow analysis for the fiscal quarter ended
January 31, 1999, $5,347,705 of advances and accrued interest were converted at
a per share price of $12.74 into 419,738 shares of Series B Preferred Stock.
Based on an enterprise valuation determined through arms' length negotiations
with, and subsequent sales of Series C Preferred Stock and Series D Preferred
Stock to, two unaffiliated third parties on June 4, 1999, a per share valuation
of $76.68 was utilized to convert $5,413,117 and $3,952,110 of advances and
accrued interest into 70,594 and 51,547 shares of Series B Preferred Stock,
respectively.
The Series B Preferred Stock is entitled to received noncumulative annual
dividends at 7%, as and if declared. No dividends have been declared or paid by
the Company. The Series B Preferred Stock is fully participating, voting and
convertible into 10 shares of common stock, subject to certain adjustments. In
the event of any liquidation, dissolution or winding up of the Company, the
Series B Preferred Stock ranks pari passu with the Series A Preferred Stock,
and has a liquidation preference equal to its purchase price plus dividends
computed at 7% per annum. The Series B Preferred Stock is convertible into
common stock immediately at the option of the holder and automatically converts
into common stock upon the completion of a qualifying initial public offering.
At July 31, 1999, 5,418,590 shares of common stock have been reserved for
issuance upon the conversion of the Series B Preferred Stock.
(c) Series C Preferred Stock
In May 1999, the Board of Directors approved the designation of 1,095,472
shares of the Company's preferred stock as Series C Preferred Stock. The Series
C Preferred Stock is entitled to receive noncumulative annual dividends at 7%,
as and if declared. No dividends have been declared or paid by the Company. The
Series C Preferred Stock is fully participating, voting and convertible at the
option of the holder into shares of common stock at $7.40 per share, subject to
certain adjustments. In the event of any liquidation, dissolution or winding up
of the Company, the Series C Preferred Stock ranks pari passu with the Series A
and B Preferred Stock and has a liquidation preference equal to its purchase
price plus dividends computed at 7% per annum. The Series C Preferred Stock
automatically converts into common stock upon the completion of a qualifying
initial public offering. On or after the fifth anniversary of the purchase
date, the Series C Preferred Stock is redeemable, either at the written
election of a majority of the holders of Series C Preferred Stock or at the
option of the Company, at a price equal to its purchase price plus dividends
computed at 7% per annum. Holders of Series C Preferred Stock may participate
in future issuances of equity instruments, as defined. In June 1999, the
Company sold 1,095,472 Series C preferred shares for $7,997,493, net of
issuance costs of $109,000.
At July 31, 1999, 1,095,472 shares of common stock have been reserved for
issuance upon the conversion of the Series C Preferred Stock.
(d) Series D Preferred Stock
In May 1999, the Board of Directors approved the designation of 993,243
shares of the Company's preferred stock as Series D Preferred Stock. The Series
D Preferred Stock is entitled to receive noncumulative annual dividends at 7%,
as and if declared. No dividends have been declared or paid by the Company. The
Series D Preferred Stock is fully participating, voting and convertible at the
option of the holder into shares of common stock at $7.40 per share, subject to
certain adjustments. In the event of any liquidation, dissolution or winding up
of the Company the Series D Preferred Stock ranks pari passu with the Series A,
B and C
F-16
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
Preferred Stock and has a liquidation preference equal to its purchase price
plus dividends computed at 7% per annum. The Series D Preferred Stock
automatically converts into common stock upon the completion of a qualifying
initial public offering. On or after the fifth anniversary of the purchase
date, the Series D Preferred Stock is redeemable, either at the written
election of a majority of the holders of Series D Preferred Stock or at the
option of the Company, at a price equal to its purchase price plus dividends
computed at 7% per annum. Holders of Series D Preferred Stock may participate
in future issuances of equity instruments, as defined. In June 1999, the
Company sold 993,243 Series D preferred shares for $7,252,000, net of issuance
costs of $99,000.
At July 31, 1999, 993,243 shares of common stock have been reserved for
issuance upon the conversion of the Series D Preferred Stock.
(e) Unaudited Pro Forma Balance Sheet
Concurrent with the closing of a qualifying initial public offering,
amounts due to CMGI, if any, will convert into Series B Preferred Stock, and
all the outstanding shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock will convert into
shares of the Company's common stock. The assumed conversion of convertible
preferred stock into an aggregate of 20,746,835 shares of Common Stock has been
reflected in the unaudited pro forma balance sheet as of July 31, 1999. See
also note 12.
(10) Stock Option Plans
(a) NaviSite 1998 Equity Incentive Plan
In December 1998, the Company's Board of Directors and Stockholders
approved the 1998 Equity Incentive Plan, as amended as of April 20, 1999 (the
"1998 Plan"). The 1998 plan replaced NaviSite Internet Services Corporation's
1997 Equity Incentive Plan (the "1997 Plan"). All options outstanding under the
1997 Plan were cancelled and replaced with an equivalent amount of options
issued in accordance with the 1998 Plan. Under the 1998 Plan, non-qualified
stock options or incentive stock options may be granted to the Company's or its
affiliates' employees, directors and consultants, as defined, up to a maximum
number of shares of common stock not to exceed 2,500,000 shares. In August
1999, the Board of Directors approved an increase in the number of shares
authorized under the 1998 Plan to 5,562,212. The Board of Directors administers
this plan, selects the individuals to whom options will be granted and
determines the number of shares and exercise price of each option. Options are
granted at estimated fair market value based on third-party valuations or cash
equity transactions with unrelated parties (when available). Options granted
under the 1998 Plan have a five-year maximum term and typically vest over a
four year period, with 25% of options granted becoming exercisable one year
from the date of grant and the remaining 75% vesting monthly for the next
thirty-six (36) months. The following table reflects activity and historical
exercise prices of stock options under the Company's 1998 Plan for the three
years ended July 31, 1999.
F-17
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------------ ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year..... -- $ -- 1,073,000 $0.01 1,545,750 $0.16
Granted................. 1,073,000 0.01 842,500 0.31 1,434,229 4.30
Exercised............... -- -- (51,019) 0.01 (18,319) 0.01
Cancelled............... -- -- (318,731) 0.05 (530,998) 0.45
--------- ----- --------- ----- --------- -----
Options outstanding, end
of year............... 1,073,000 $0.01 1,545,750 $0.16 2,430,662 $2.54
========= ===== ========= ===== ========= =====
Options exercisable, end
of year............... 96,250 $0.01 296,552 $0.01 640,663 $0.09
========= ===== ========= ===== ========= =====
Options available for
grant, end of year.... 927,000 403,231 --
========= ========= =========
</TABLE>
The following table summarizes information about the Company's stock
options outstanding at July 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (years) Price Outstanding Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01--$0.17 961,392 2.9 $0.06 584,543 $0.04
$0.18--$1.00 362,791 4.0 $0.77 56,120 $0.57
$1.01--$1.28 380,750 4.5 $1.21 -- --
$1.29--$7.40 725,729 4.7 $7.40 -- --
--------- ------- -----
2,430,662 3.9 $2.54 640,663 $0.09
========= ======= =====
</TABLE>
(b) Director Stock Option Plan
In December 1998, the Company's Board of Directors and Stockholders
approved the 1998 Director Stock Option Plan (the "1998 Director Plan"). Under
the 1998 Director Plan, each NaviSite director (who is not also an employee of
NaviSite, any subsidiary of NaviSite or of CMGI) is entitled to receive, upon
the date of his or her election, a non-statutory option to purchase common
stock as defined. A maximum number of 125,000 shares of common stock are
authorized for issuance under the 1998 Director Plan. Each automatic grant will
have an exercise price equal to the current fair market value of the common
stock at the time of grant and will have a maximum term of ten years, subject
to earlier termination following the optionee's cessation of service on the
board of directors. Each automatic option grant shall vest and become
exercisable with respect to 20% of the options granted on the first anniversary
of the date of the grant, and shall become exercisable with respect to an
additional 20% on the date of each annual stockholders' meeting at which the
option-holder is re-elected as director.
As of July 31, 1999, 50,000 options were granted and outstanding under the
1998 Director Plan with a weighted average exercise price of $0.34.
F-18
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
(c) CMGI 1986 Stock Option Plan
Certain NaviSite employees have been granted options for the purchase of
CMGI common stock under the CMGI 1986 Stock Option Plan (the "1986 Plan").
Options under the 1986 Plan are granted at fair market value on the date of the
grant and are generally exercisable in equal cumulative installments over a
four-to-ten year period beginning one year after the date of grant. Outstanding
options under the 1986 Plan expire through 2007. Under the 1986 Plan, non-
qualified stock options or incentive stock options may be granted to CMGI's or
its subsidiaries' employees, as defined. The Board of Directors of CMGI
administers this plan, selects the individuals to whom options will be granted
and determines the number of shares and exercise price of each option. The
following table reflects activity and historical exercise prices of stock
options granted to Company employees under the 1986 Plan for the three years
ended July 31, 1999:
<TABLE>
<CAPTION>
1997 1998 1999
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year..... 36,080 $0.51 20,880 $1.41 88,840 $ 2.26
Granted................. 8,000 1.95 80,000 2.31 331,600 44.19
Exercised............... (23,200) 0.19 (12,040) 1.10 (33,671) 2.23
------- ------- -------
Options outstanding, end
of year............... 20,880 $1.41 88,840 $2.26 386,769 $38.21
======= ===== ======= ===== ======= ======
Options exercisable, end
of year............... 6,426 $0.96 1,670 $1.78 7,000 $ 2.29
======= ===== ======= ===== ======= ======
</TABLE>
The following table summarizes information about stock options granted to
Company employees under the 1986 Plan outstanding at July 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Prices Outstanding (years) Price Outstanding Price
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.61--$1.95 3,501 2.1 $ 1.88 333 $1.78
$1.96--$2.50 51,668 3.2 $ 2.31 6,667 2.31
$2.51--$10.00 231,600 4.1 $ 10.00 -- --
$10.01--$125.00 100,000 4.7 $123.38 -- --
------- -----
386,769 4.1 $ 38.21 7,000 $2.29
======= =====
</TABLE>
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), sets
forth a fair-value based method of recognizing stock-based compensation
expense. As permitted by SFAS No. 123, the Company has elected to continue to
apply APB No. 25 to account for the stock-based compensation plans in which the
Company's employees participate. Had compensation cost for awards in fiscal
1997, 1998 and 1999 under the three stock-based compensation plans in which the
Company's employees participate been determined based on the fair value method
set forth under SFAS 123, the pro forma effect on the Company's net loss would
have been as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
July 31, 1997 July 31, 1998 July 31, 1999
-------------- ----------------- ------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ----- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net loss applicable to
common stockholders
(in thousands)........ $(948) $(955) $(9,172) $(9,273) $(24,704) $(26,161)
===== ===== ======= ======= ======== ========
Net loss per share...... $(.24) $(.24) $(1.14) $(1.16) $(7.41) $(7.85)
===== ===== ======= ======= ======== ========
</TABLE>
F-19
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
The pro forma per share net loss reflects the fair-value compensation cost
associated with option grants to the Company's employees under the 1986 Plan.
The fair value of each stock option grant has been estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions for fiscal 1997, 1998 and 1999, respectively: volatility of
59.00%, 75.50% and 100%; risk-free interest rate of 6.19%, 5.48% and 5.16%;
4-year expected life of options for all years; and 0% dividend yield for all
years. The weighted average fair value per share of options granted during
fiscal 1997, 1998 and 1999 was $0.01, $0.21 and $3.08, respectively.
The fair value of each stock option granted under the 1986 Plan has been
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions for fiscal 1997, 1998 and 1999,
respectively: volatility of 66.69%, 90.07% and 100%; risk-free interest rate of
6.19%, 5.50% and 5.16%; expected life of options of 6.2, 4.2 years and 4.3
years; and 0% dividend yield for all years. The weighted average fair value per
share of options granted during fiscal 1997, 1998 and 1999 was $1.30, $1.58 and
$31.58, respectively.
(11) Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income (SFAS
130). This statement requires that all components of comprehensive income be
reported in the financial statements in the period in which they are
recognized. For each year reported, comprehensive loss under SFAS 130 was
equivalent to the Company's net loss reported in the accompanying consolidated
statements of operations.
(12) Related Party Transactions
CMGI has provided the Company with accounting, systems and related services
("enterprise services") at amounts that approximated the fair value of services
received in each of the periods presented in these financial statements. The
Company also occupies facilities that are leased by CMGI, whereby CMGI charges
the Company for its share of rent and related facility costs for CMGI's
corporate headquarters through an allocation based upon the company's headcount
located on the premises in relation to total headcount for all CMGI companies
located in the premises. The Company has also purchased certain employee
benefits (including 401(k) plan participation by employees of the Company) and
insurance (including property and casualty insurance) through CMGI. CMGI also
has provided the Company with Internet marketing and business development
services. Amounts due CMGI are included in "Debt to CMGI" on the consolidated
balance sheets. The following table summarizes the expenses allocated to the
Company by CMGI for enterprise services, rent and facilities, human resources
and benefits and Internet marketing and business development:
<TABLE>
<CAPTION>
Year Ended
July 31,
--------------
1997 1998 1999
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Enterprise Services.......................................... $48 $157 $240
Rent and Facilities.......................................... -- $ 15 $251
Human Resources and Benefits................................. -- $ 46 $530
Internet Marketing and Business Development. ................ -- $ 71 $325
</TABLE>
F-20
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
The Company sells its products and services to companies in which CMGI has
an investment interest or a significant ownership interest. Total revenue
realized from services to related parties was $3,361,000, $3,871,000 and
$7,058,000 for the fiscal years ended July 31, 1997, 1998 and 1999,
respectively. These related parties typically receive a 10% discount for
services provided by the Company. The related cost of revenue is consistent
with the costs incurred on similar transactions with unrelated parties.
The Company provides administrative services related to the leasing of
equipment on behalf of CMGI and related entities. These services include the
negotiation of lease terms and conditions and payment of lessors' monthly lease
charges. CMGI or the related entity is then charged the actual lease fees.
Under this arrangement, CMGI bears all liability for payment, and NaviSite is
not financially obligated under the leases.
(13) Concentration of Credit Risk
Amounts included in the consolidated balance sheets for accounts
receivable, debt to CMGI, accounts payable, accrued expenses and notes payable
approximate their fair value due to their short maturities. Financial
instruments that potentially subject the Company to concentration of credit
risk consist primarily of trade receivables. The Company performs periodic
credit evaluations of its customers' financial condition and generally does not
require collateral or other security against trade receivable balances;
however, it does maintain an allowance for potential credit losses and such
losses have been within management's expectations.
For the year ended July 31, 1997, all of the Company's revenue was earned
from related parties. Three of these related parties accounted for 46%, 28% and
14% of revenue earned during the year ended July 31, 1997. For the fiscal year
ended July 31, 1998, 96% ($3,871,000) of the Company's revenue was earned from
related parties. Three of these related parties accounted for 40%, 19% and 11%
of revenue earned for the fiscal year ended July 31, 1998. For the fiscal year
ended July 31, 1999, 67% ($7,058,000) of the Company's revenue was earned from
related parties. Two of these related parties accounted for 22% and 16% of
revenue earned during the fiscal year ended July 31, 1999.
Accounts receivable at July 31, 1998 included 63% due from related parties,
with two related entities comprising 37% and 15%. Accounts receivable at July
31, 1999 included 30% due from related parties, with one related entity
comprising 13%.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members
Servercast Communications, L.L.C.:
We have audited the accompanying balance sheets of Servercast
Communications, L.L.C. as of December 31, 1997 and June 30, 1998, and the
related statements of operations, members' equity (deficit), and cash flows for
the period from inception (February 6, 1997) through December 31, 1997 and for
the six months ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Servercast Communications,
L.L.C. as of December 31, 1997 and June 30, 1998, and the results of its
operations and its cash flows for the period from inception (February 6, 1997)
through December 31, 1997 and for the six months ended June 30, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
/s/ KPMG LLP
May 28, 1999
Boston, Massachusetts
F-22
<PAGE>
SERVERCAST COMMUNICATIONS, L.L.C.
BALANCE SHEETS
December 31, 1997 and June 30, 1998
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ --------
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................. $ 13,354 $ --
Accounts receivable, net of allowance for doubtful
accounts of $0 and $1,650, respectively............. 28,432 82,777
Prepaid expenses and other current assets............... 2,598 1,299
Members contributions receivable........................ 3,500 3,500
-------- --------
Total current assets............................... 47,884 87,576
-------- --------
Property and equipment:
Servers and related equipment......................... 135,559 152,864
Software licenses..................................... 6,387 12,308
Office computer equipment............................. 2,667 3,437
Furniture............................................. 1,581 1,581
-------- --------
146,194 170,190
Less accumulated depreciation and amortization.......... 12,762 35,300
-------- --------
133,432 134,890
-------- --------
Other assets............................................ 1,079 1,004
-------- --------
Total assets............................................ $182,395 $223,470
======== ========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current liabilities:
Cash overdraft........................................ $ -- $ 7,621
Note payable to NaviSite.............................. -- 25,000
Accounts payable...................................... 87,334 188,162
Accrued expenses...................................... 50,700 42,360
-------- --------
Total current liabilities............................... 138,034 263,143
Commitments and contingencies
Members' equity (deficit)............................... 44,361 (39,673)
-------- --------
Total liabilities and members' equity (deficit)......... $182,395 $223,470
======== ========
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
SERVERCAST COMMUNICATIONS, L.L.C.
STATEMENTS OF OPERATIONS
For the period from inception (February 6, 1997) through December 31, 1997
and for the six months ended June 30, 1998
<TABLE>
<CAPTION>
Period from
inception
(February 6,
1997) through Six months
December 31, ended June 30,
1997 1998
------------- --------------
<S> <C> <C>
Net revenue....................................... $ 255,622 $ 224,674
Cost of revenue................................... 171,923 154,773
--------- ---------
Gross profit.................................... 83,699 69,901
--------- ---------
Selling, general and administrative expenses...... 295,794 203,852
--------- ---------
Loss from operations............................ (212,095) (133,951)
Interest expense.................................. -- 83
--------- ---------
Net loss........................................ $(212,095) $(134,034)
========= =========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
SERVERCAST COMMUNICATIONS, L.L.C.
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
For the period from inception (February 6, 1997) through December 31, 1997
and for the six months ended June 30, 1998
<TABLE>
<CAPTION>
Members'
Equity (Deficit)
----------------
<S> <C>
Members' contributions..................................... $ 256,456
Net loss for the period from inception (February 6, 1997)
through December 31, 1997................................ (212,095)
---------
Balance at December 31, 1997................................. 44,361
Members' contributions..................................... 50,000
Net loss for the six months ended June 30, 1998............ (134,034)
---------
Balance at June 30, 1998..................................... $ (39,673)
=========
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
SERVERCAST COMMUNICATIONS, L.L.C.
STATEMENTS OF CASH FLOWS
For the period from inception (February 6, 1997) through December 31, 1997
and for the six months ended June 30, 1998
<TABLE>
<CAPTION>
Period from
inception
(February 6,
1997) through Six months
December 31, ended June 30,
1997 1998
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(212,095) $(134,034)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization................... 13,512 22,613
Provision for doubtful accounts................. -- 1,650
Changes in operating assets and liabilities:
Accounts receivable............................ (28,432) (55,995)
Prepaid expenses and other current assets...... (2,598) 1,299
Deposits....................................... (1,079) --
Accounts payable............................... 87,334 100,828
Accrued expenses............................... 50,700 (8,340)
--------- ---------
Net cash used by operating activities........ (92,658) (71,979)
--------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment........... (146,194) (23,996)
Other assets..................................... (750) --
--------- ---------
Net cash used by investing activities........ (146,944) (23,996)
--------- ---------
Cash flows from financing activities:
Cash overdraft................................... -- 7,621
Proceeds from note payable to NaviSite........... -- 25,000
Members' contributions........................... 252,956 50,000
--------- ---------
Net cash provided by financing activities.... 252,956 82,621
--------- ---------
Change in cash.................................... 13,354 (13,354)
Cash at beginning of period....................... -- 13,354
--------- ---------
Cash at end of period............................. $ 13,354 $ --
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest........................... $ -- $ 83
========= =========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
During the period from inception (February 6, 1997) through December 31,
1997, the Company issued $3,500 in membership interests to an individual,
in exchange for a subscription to contribute the same amount. Such amount
was received in cash subsequent to June 30, 1998.
See accompanying notes to financial statements.
F-26
<PAGE>
SERVERCAST COMMUNICATIONS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and June 30, 1998
(1) Organization
Servercast Communications, L.L.C., ("Servercast" or the "Company") was
organized on February 6, 1997 as a Delaware limited liability company. The
Company's operating agreement indicates that Servercast will cease to operate
no later than December 1, 2050. Profits and losses are allocated to members in
accordance with the proportionate percentage interest as determined by the fair
market value of their original capital contribution. As a limited liability
company, the members' liability is limited to the amounts of their investment
in the Company.
The Company provides Web site hosting and maintenance for a variety of
companies engaging in electronic commerce. Servercast also develops Web sites.
Servercast's customers are located throughout the United States.
(2) Summary of Significant Accounting Policies
(a) Revenue Recognition
Revenue for hosting and maintaining Web sites is recognized ratably over
the life of the contract, typically one year. Revenue from the development of
Web sites is recognized as the services are performed.
(b) Cash Equivalents
For purposes of the statement of cash flows, Servercast considers all
highly liquid debt instruments with an original maturity of three months or
less to be cash equivalents.
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are provided for on the straight-line basis over the estimated useful lives of
the related assets. The depreciation period is generally three to seven years.
(d) Income Taxes
The Company is treated as a partnership for federal and state tax purposes
and thus is not subject to income taxes. The members of the Company must
include their proportionate share of the Company's profits and losses in their
respective personal tax returns. Accordingly, no provision has been made for
income taxes.
For income tax purposes, the Company has elected to report under the
accrual basis of accounting. At December 31, 1997 and June 30, 1998, the tax
bases of the Company's assets and liabilities are $8,167 and $9,092 less,
respectively, than the financial reporting bases of these assets and
liabilities. The difference results from the use of different methods related
to reporting depreciation, and the Company's allowance for doubtful accounts
which is not deductible until the accounts are written-off.
(e) Long-Lived Asset Impairment
The Company adopted Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets to be Disposed Of ("SFAS No.
121"). SFAS No. 121 addresses the accounting for the impairment of long-lived
assets, certain identifiable intangible assets and goodwill when events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company adoption of SFAS No. 121 had no material impact on
its results of operations or financial condition.
F-27
<PAGE>
SERVERCAST COMMUNICATIONS, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and June 30, 1998
(f) Fair Value of Financial Instruments
The Company adopted Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Statements" ("SFAS No. 107"), which
requires that the Company estimate and disclose the fair value of each material
class of financial instrument for which it is practicable to estimate that
value. In accordance with SFAS No. 107, the Company has identified its material
financial instruments as cash, trade receivables and payables and notes
payable. The carrying amount of cash, trade receivables, trade payables and
notes payable approximate fair value because of the short-term nature of these
financial instruments.
(g) Concentration of Credit Risk
Financial instruments which subject the Company to credit risk consist
principally of trade receivables. The Company's policy with respect to the
credit risk of trade receivables is to evaluate, prior to the extension of
credit, each customer's financial condition and to determine the amount of open
credit to be extended.
(h) Management's Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(i) Comprehensive Income
On January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 131, "Reporting Comprehensive Income" ("SFAS
No. 131"). SFAS No. 131 requires that the components of comprehensive income be
reported in the financial statements. For the period from inception (February
6, 1997) through December 31, 1997 and for the six months ended June 30, 1998,
the Company's net loss was equal to its total comprehensive loss.
(3) Commitments
The Company leases certain office facilities under operating leases with an
initial term of less than one year. Additionally, the Company leases certain
floor space at facilities that house its equipment used for Web site hosting.
The lessors of these locations provide the Company with Web hosting and
maintenance services for the benefit of the Company's customers. These
agreements also have initial terms of one year or less.
For the period from inception (February 6, 1997) through December 31, 1997
and for the six months ended June 30, 1998, rent and Web hosting expenses under
these agreements amounted to $102,117 and $68,901, respectively. Of these
amounts, $64,352 and $47,769 were included in cost of revenues in the
accompanying statements of operations, respectively. For the period from
inception (February 6, 1997) through December 31, 1997 and for the six months
ended June 30, 1998, $33,305 and $12,175 of the rents included in selling,
general and administrative expenses were paid to a related party who is a
member of the Company. Subsequent to the sale of the Company on July 1, 1998
(see note 6), the Company relocated its Web hosting equipment to sites
maintained by the purchaser, and, accordingly, the Company no longer leases
these Web hosting sites from unrelated third parties.
F-28
<PAGE>
SERVERCAST COMMUNICATIONS, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and June 30, 1998
(4) Note Payable
At June 30, 1998, note payable represented a $25,000 note payable, due upon
demand, to NaviSite Internet Services, Inc. ("NaviSite") (see note 6). The note
is secured by substantially all assets of the Company and bears interest at a
rate of 5.50% per annum.
(5) Major Customers
At December 31, 1997, three customers accounted for 31%, 34% and 26% of
accounts receivable, respectively. Revenue earned from these customers for the
period from inception (February 6, 1997) through December 31, 1997 amounted to
36%, 22% and 12%, respectively, of total revenue during the period.
At June 30, 1998, three customers accounted for 30%, 20% and 18% of
accounts receivable, respectively. Revenue earned from these customers for the
six months ended June 30, 1998 amounted to 28%, 5% and 6% of total revenue
during the period.
(6) Subsequent Event
Effective July 1, 1998, NaviSite purchased the outstanding membership
interests of all members in exchange for a $1,000,000 note payable. The
acquisition will be recorded using the purchase method of accounting.
F-29
<PAGE>
SERVERCAST COMMUNICATIONS, L.L.C.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The unaudited pro forma combined condensed statement of operations of the
Company for the year ended July 31, 1998 gives pro forma effect to the July 1,
1998 acquisition of Servercast Communications, L.L.C. ("Servercast") as if it
had occurred on August 1, 1997. The results of operations of the Company for
the fiscal year ended July 31, 1998 have been combined with the results of
operations of Servercast for the period from August 1, 1997 through June 30,
1998 (the results of operations of Servercast for the period July 1, 1998
through July 31, 1998 are included in the consolidated statement of operations
of the Company).
The Company has accounted for the acquisition under the purchase method of
accounting. The total cost of the acquired business of $1,045,000, including
direct acquisition costs, has been allocated to the underlying tangible and
intangible assets acquired and liabilities assumed based on their respective
fair values, resulting in goodwill of $1,014,000.
The unaudited pro forma financial data are not necessarily indicative of
the results of operations of the Company had the transaction occurred on August
1, 1997, nor are they necessarily indicative of the results of operations which
may be expected to occur in the future. Furthermore, the unaudited pro forma
financial data should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this prospectus.
F-30
<PAGE>
NAVISITE, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the year ended July 31, 1998
<TABLE>
<CAPTION>
Year ended July 31, 1998
--------------------------------
Pro Forma
NaviSite Servercast Adjustments Total
-------- ---------- ----------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Revenue........................ $ 158 $ 361 $ -- $ 519
Revenue, related parties....... 3,871 -- -- 3,871
-------- ------ ------ --------
Total revenue............... 4,029 361 -- 4,390
Cost of revenue.................. 8,876 310 -- 9,186
-------- ------ ------ --------
Gross loss..................... (4,847) 51 -- (4,796)
-------- ------ ------ --------
Operating expenses:
Selling and marketing.......... 2,530 93 -- 2,623
General and Administrative..... 1,412 254 186 (a) 1,852
Product development............ 287 -- -- 287
-------- ------ ------ --------
Total operating expenses.... 4,229 347 186 4,762
-------- ------ ------ --------
Loss from operations............. (9,076) (296) (186) (9,558)
Other income (expense):
Interest expense, net.......... (85) -- (50)(b) (135)
Other expense, net............. (11) -- -- (11)
-------- ------ ------ --------
Net loss......................... $ (9,172) $ (296) $ (236) $ (9,704)
======== ====== ====== ========
Pro forma basic and diluted net
loss per share................. $ (1.14) $ (1.21)
======== ========
Pro forma weighted average number
of basic and diluted shares
outstanding.................... 8,017 8,017
======== ========
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Year ended July 31, 1998
(a) Reflects goodwill amortization recorded by NaviSite for the eleven-month
period ending June 30, 1998 prior to the acquisition of Servercast.
Goodwill is being amortized over five years, using the straight-line
method.
(b) Reflects interest expense related to 5.5% notes payable in the amount of
one million dollars for the eleven-month period ending June 30, 1998 prior
to the acquisition of Servercast.
F-31
<PAGE>
The inside back cover page contains the following:
[In the top fourth of the page, flush left, is the following text:]
NaviSite's State-of-the-Art Data Center Infrastructure
NaviSite has invested in world-class infrastructure that combines state-of-
the-art facilities and the latest Internet and network technologies, creating a
solid foundation for all our customer's Internet outsourcing needs.
[In the middle of the page, flush left, one on top of the other, two
pictures of NaviSite data center hardware. To the right of the pictures,
centered vertically, is the following text:]
The Data Center
NaviSite's data centers are built to carrier-class standards and include
fully redundant network, fiber and facility components in an effort to ensure
no single points of failure and to help keep our customers' Web sites and key
applications up and running.
[In the lower fourth of the page, flush left, is a picture of the control
room in a NaviSite data center. To the right of it is the following text:]
The Network Operations Center
Each NaviSite data center has a Network Operations Center with expert staff
on hand to monitor customers' Web, database and application servers, as well as
network connectivity, 24-hours-a-day, seven-days-a-week.
<PAGE>
[The outside back cover page contains the
following:]
[LOGO]
NaviSite Corporate
Headquarters:
300 Federal Street
Andover, MA 01810
888.298.8222 p
978.552.3500 f
[email protected]
www.navisite.com
West Coast Location:
1700 Green Hills Road
Scotts Valley, CA 95066
888.755.5525 p
831.439.6789 f
A CMGi company
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The expenses, other than underwriting discounts and commissions, expected
to be incurred by us in connection with the issuance and distribution of the
securities being registered under this registration statement are estimated to
be as follows:
<TABLE>
<S> <C>
SEC registration fee......................................... $ 19,460
NASD filing fees............................................. 7,500
Nasdaq National Market listing fee........................... 95,000
Printing and engraving expenses.............................. 185,000
Legal fees and expenses...................................... 750,000
Accounting fees and expenses................................. 450,000
Blue Sky fees and expenses (including legal fees)............ 12,500
Transfer agent fees.......................................... 5,000
Miscellaneous................................................ 75,540
-----------
Total...................................................... $ 1,600,000
===========
</TABLE>
Item 14. Indemnification of Directors and Officers.
The Delaware General Corporation Law and our revised certificate of
incorporation provide for indemnification of our officers and directors for
liabilities and expenses that they may incur in such capacities.
Our revised certificate of incorporation generally provides that we shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit, investigation,
administrative hearing or any other proceeding by reason of the fact that he or
she is or was a director or officer of ours, or is or was serving at our
request as a director, officer, employee or agent of another entity, against
expenses incurred by him or her in connection with such proceeding. An officer
or director shall not be entitled to indemnification by us if:
. the officer or director did not act in good faith and in a manner
reasonably believed to be in, or not opposed to, our best interests;
or
. with respect to any criminal action or proceeding, the officer or
director had reasonable cause to believe his conduct was unlawful.
Our revised certificate of incorporation limits the liability of our
directors to the maximum extent permitted by Delaware law. Section 145 of the
Delaware General Corporation Law provides that directors will not be personally
liable for monetary damages for breach of their fiduciary duties as directors,
except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This provision has no effect on any non-monetary remedies that may be
available to us or our stockholders, nor does it relieve us or our officers or
directors from compliance with federal or state securities laws.
II-1
<PAGE>
The underwriting agreement provides that the underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of NaviSite against some liabilities, including liabilities under the
Securities Act. Reference is made to the form of underwriting agreement filed
as Exhibit 1.1 hereto.
Our officers and directors are currently insured under a policy procured by
CMGI that provides coverage against losses arising from claims against them for
any actual or alleged act, omission, misstatement, misleading statement,
neglect, error or breach of duty by them in their capacity as officers or
directors of NaviSite. We also have obtained our own liability insurance for
our officers and directors effective as of September 20, 1999. At the present
time, there is no pending litigation or proceeding involving any director,
officer, employee or agent of NaviSite in which indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification.
Item 15. Recent Sales of Unregistered Securities.
In the three fiscal years preceding the filing of this registration
statement, NaviSite has issued the following securities that were not
registered under the Securities Act:
(a) Issuance of Capital Stock.
In December 1998, NaviSite issued 60,589 shares of common stock and
1,323,953 shares of Series A convertible preferred stock to NaviSite Internet
Services Corporation, our predecessor and a wholly owned subsidiary of CMGI,
Inc., in exchange for a contribution of assets from NaviSite Internet Services
Corporation. In April 1999, NaviSite issued an additional 8,749 shares of
common stock to NaviSite Internet Services Corporation. Upon the merger of
NaviSite Internet Services Corporation with and into CMGI, which is expected to
occur prior to the completion of this offering, the 69,338 shares of common
stock held of record by NaviSite Internet Services Corporation will be
exchanged for outstanding shares of NaviSite Internet Services Corporation
which were issued to NaviSite employees pursuant to option exercises under the
1997 NaviSite Internet Services Corporation Equity Incentive Plan. The 1998
NaviSite, Inc. Equity Incentive Plan replaces the 1997 NaviSite Internet
Services Corporation Equity Incentive Plan. Upon the merger of NaviSite
Internet Services Corporation with and into CMGI, all of the outstanding
options granted under the 1997 Equity Incentive Plan are being cancelled and
replaced with an equivalent amount of options issued in accordance with our
1998 Equity Incentive Plan.
The shares of Series A convertible preferred stock will be distributed to
CMGI upon the consummation of the merger. Every one share of Series A
convertible preferred stock will convert into 10 shares of common stock upon
completion of this offering.
In June 1999, NaviSite issued 541,859 shares of its Series B convertible
preferred stock to CMGI in exchange for cancellation of an aggregate of
$14,712,932 of intercompany debt pursuant to a secured convertible demand note
to CMGI dated May 1, 1999. It is expected that every one share of Series B
convertible preferred stock will convert into 10 shares of common stock upon
completion of this offering.
In June 1999, pursuant to the Series C Preferred Stock Purchase Agreement
between NaviSite and Dell USA L.P., NaviSite issued 1,095,472 shares of Series
C convertible preferred stock to Dell at a purchase price of $7.40 per share or
$8,106,493, in the aggregate. It is expected that upon completion of this
offering, the 1,095,472 shares of Series C convertible preferred stock will
convert into 1,095,472 shares of common stock.
In June 1999, pursuant to the Series D Convertible Preferred Stock Purchase
Agreement between NaviSite and Microsoft Corporation, NaviSite issued 993,243
shares of its Series D convertible preferred stock to Microsoft, at a purchase
price of $7.40 per share or $7,350,000, in the aggregate. It is expected that
upon completion of this offering, the 993,243 shares of Series D convertible
preferred stock will convert into 993,243 shares of common stock.
II-2
<PAGE>
(b) Grants of Stock Options.
In December 1998, the NaviSite, Inc. 1998 Equity Incentive Plan replaced
the 1997 NaviSite Internet Services Corporation Equity Incentive Plan. As noted
in Item 15(a) above, as part of the corporate reorganization of NaviSite
Internet Services Corporation, all options outstanding under the 1997 NaviSite
Internet Services Corporation Equity Incentive Plan are being cancelled and
replaced with an equivalent amount of options issued in accordance with our
1998 Equity Incentive Plan upon the merger of NaviSite Internet Services
Corporation with and into CMGI, which is expected to occur prior to completion
of this offering. As of August 31, 1999, we had granted options to purchase an
aggregate of 2,564,161 shares of common stock under the 1998 Equity Incentive
Plan (which number includes options granted in replacement of options granted
by NaviSite Internet Services Corporation under the 1997 NaviSite Internet
Services Corporation Equity Incentive Plan), exercisable at a weighted average
exercise price of $3.03 per share.
On December 28, 1998, we granted options to purchase 50,000 shares of
common stock under our 1998 Director Stock Option Plan exercisable at $0.34 per
share.
On August 18, 1999, we granted options to purchase 25,000 shares of common
stock under our 1998 Director Stock Option Plan at an exercise price per share
equal to the per share public offering price set forth on the cover page of
this prospectus.
No underwriters were involved in the foregoing sales of securities. These
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder or, in the case of options to purchase common stock, Rule 701 under
the Securities Act. All of the foregoing securities are deemed restricted
securities for purposes of the Securities Act.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
1.1** Form of Underwriting Agreement
2.1** Asset Assignment Agreement dated December 28, 1998 among NaviSite
Internet Services Corporation and NaviSite, Inc.
2.2** Purchase Agreement dated as of July 1, 1998 among NaviSite Internet
Services Corporation, Neil Black, in his capacity as Managing Member
of Servercast Communications, L.L.C. and all of the other members of
Servercast Communications, L.L.C. individually, as named therein
(Exhibits and schedules have been omitted. The Registrant hereby
undertakes to furnish supplementally copies of the exhibits and
schedules to the Commission upon request.)
3.1** Certificate of Incorporation, as amended
3.2 Form of Amended and Restated Certificate of Incorporation (to become
effective upon the closing of this offering)
3.3** By-Laws, as amended
3.4** Form of Amended and Restated By-Laws (to become effective upon the
closing of this offering)
4.1** Specimen certificate representing shares of common stock
4.2** Series C Convertible Preferred Stock Purchase Agreement dated as of
June 3, 1999 by and between NaviSite, Inc. and Dell USA L.P.
4.3** Series D Convertible Preferred Stock Purchase Agreement dated as of
June 3, 1999 by and between NaviSite, Inc. and Microsoft Corporation
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
5.1** Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
10.1** Form of Amended and Restated 1998 Equity Incentive Plan
10.2 Form of Amended and Restated 1998 Director Stock Option Plan
10.3 Form of 1999 Employee Stock Purchase Plan
10.4** Net Lease Agreement dated as of March 20, 1997 by and between CMG
Information Technologies, Inc. and Borland International, Inc., as
amended by First Amendment dated June 1, 1998
10.5** Lease dated as of March, 1997 by and between William J. Callahan and
William J. Callahan, Jr., as trustees of Andover Park Realty Trust,
and CMG Information Services, Inc.
10.6** Lease dated as of May 14, 1999 by and between 400 River Limited
Partnership and NaviSite, Inc.
10.7** Lease made as of April 30, 1999 by and between CarrAmerica Realty
Corporation and NaviSite, Inc.
10.8** Term Note in favor of Peter C. Kirwan, Jr. dated July 1, 1998,
executed by NaviSite Internet Services Corporation
10.9** Bonus Agreement dated as of July 1, 1998 by and between NaviSite
Internet Services Corporation and Peter C. Kirwan, Jr.
10.10** Form of Director Indemnification Agreement
10.11 Form of Facilities and Administrative Support Agreement between
NaviSite, Inc. and CMGI, Inc.
10.12 Form of Investor Rights Agreement by and among NaviSite, Inc. and
CMGI, Inc.
10.13 Form of Tax Allocation Agreement between NaviSite, Inc. and CMGI,
Inc.
10.14** Secured Convertible Demand Note issued by NaviSite, Inc. to CMGI,
Inc. dated as of May 1, 1999
10.15** Intellectual Property Security Agreement between NaviSite, Inc. and
CMGI, Inc. dated as of May 1, 1999
10.16** Security Agreement between NaviSite, Inc. and CMGI, Inc. dated as of
May 1, 1999
10.17** Form of 1999 Stock Option Plan for Non-Employee Directors
10.18 Form of Deferred Compensation Plan
21.1** Subsidiaries
23.1** Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in
Exhibit 5.1)
23.2 KPMG LLP Consent and Report on Schedule
23.3 Consent of KPMG LLP (Servercast Communications, L.L.C.)
24.1** Power of Attorney (included on the signature page of this
registration statement)
24.2** Power of Attorney for Stephen D.R. Moore
27** Financial Data Schedule
</TABLE>
- --------
* To be filed by Amendment.
** Previously filed.
(b) Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts
II-4
<PAGE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) that for the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) that for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-1 and has duly caused this
Amendment No. 3 to the registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Andover, Massachusetts, on September
29, 1999.
NaviSite, Inc.
/s/ Kenneth W. Hale
By
-----------------------------------
Kenneth W. Hale
Chief Financial Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the registration statement has been signed by the following persons in
the capacities indicated on September 29, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* Chief Executive Officer and Director
___________________________________________ (Principal Executive Officer)
Joel B. Rosen
/s/ Kenneth W. Hale Chief Financial Officer, Treasurer and
___________________________________________ Secretary (Principal Financial and
Kenneth W. Hale Accounting Officer)
* President and Director
___________________________________________
Robert B. Eisenberg
* Chairman of the Board of Directors
___________________________________________
David S. Wetherell
* Director
___________________________________________
Craig D. Goldman
* Director
___________________________________________
Andrew J. Hajducky III
* Director
___________________________________________
</TABLE> Stephen D.R. Moore
* By /s/ Kenneth W. Hale
-----------------------------------
Kenneth W. Hale
Chief Financial Officer
<PAGE>
Schedule II
NAVISITE, INC.
VALUATION AND QUALIFYING ACCOUNTS
for the years ended July 31, 1997, 1998 and 1999
(in thousands)
<TABLE>
<CAPTION>
Balance at Additions Deductions Balance
Beginning Charged to from at End
of Year Expense Reserves of Year
---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Description
Year ended July 31, 1997:
Allowance for doubtful accounts..... $ -- $-- $ -- $ --
Year ended July 31, 1998:
Allowance for doubtful accounts..... $ -- $ 8 $ (1) $ 7
Year ended July 31, 1999:
Allowance for doubtful accounts..... $ 7 $275 $(20) $ 262
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
1.1** Form of Underwriting Agreement
2.1** Asset Assignment Agreement dated December 28, 1998 among NaviSite
Internet Services Corporation and NaviSite, Inc.
2.2** Purchase Agreement dated as of July 1, 1998 among NaviSite Internet
Services Corporation, Neil Black, in his capacity as Managing Member
of Servercast Communications, L.L.C. and all of the other members of
Servercast Communications, L.L.C. individually, as named therein
(Exhibits and schedules have been omitted. The registrant hereby
undertakes to furnish supplementally copies of the exhibits and
schedules to the Commission upon request.)
3.1** Certificate of Incorporation, as amended
3.2 Form of Amended and Restated Certificate of Incorporation (to become
effective upon the closing of this offering)
3.3** By-Laws, as amended
3.4** Form of Amended and Restated By-Laws (to become effective upon the
closing of this offering)
4.1** Specimen certificate representing shares of common stock
4.2** Series C Convertible Preferred Stock Purchase Agreement dated as of
June 3, 1999 by and between NaviSite, Inc. and Dell USA L.P.
4.3** Series D Convertible Preferred Stock Purchase Agreement dated as of
June 3, 1999 by and between NaviSite, Inc. and Microsoft Corporation
5.1** Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
10.1** Form of Amended and Restated 1998 Equity Incentive Plan
10.2 Form of Amended and Restated 1998 Director Stock Option Plan
10.3 Form of 1999 Employee Stock Purchase Plan
10.4** Net Lease Agreement dated as of March 20, 1997 by and between CMG
Information Technologies, Inc. and Borland International, Inc., as
amended by First Amendment dated June 1, 1998
10.5** Lease dated as of March, 1997 by and between William J. Callahan and
William J. Callahan, Jr., as trustees of Andover Park Realty Trust,
and CMG Information Services, Inc.
10.6** Lease dated as of May 14, 1999 by and between 400 River Limited
Partnership and NaviSite, Inc.
10.7** Lease made as of April 30, 1999 by and between CarrAmerica Realty
Corporation and NaviSite, Inc.
10.8** Term Note in favor of Peter C. Kirwan, Jr. dated July 1, 1998,
executed by NaviSite Internet Services Corporation
10.9** Bonus Agreement dated as of July 1, 1998 by and between NaviSite
Internet Services Corporation and Peter C. Kirwan, Jr.
10.10** Form of Director Indemnification Agreement
10.11 Form of Facilities and Administrative Support Agreement between
NaviSite, Inc. and CMGI, Inc.
10.12 Form of Investor Rights Agreement by and among NaviSite, Inc. and
CMGI, Inc.
10.13 Form of Tax Allocation Agreement between NaviSite, Inc. and CMGI,
Inc.
10.14** Secured Convertible Demand Note issued by NaviSite, Inc. to CMGI,
Inc. dated as of May 1, 1999
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
10.15** Intellectual Property Security Agreement between NaviSite, Inc. and
CMGI, Inc. dated as of May 1, 1999
10.16** Security Agreement between NaviSite, Inc. and CMGI, Inc. dated as of
May 1, 1999
10.17** Form of 1999 Stock Option Plan for Non-Employee Directors
10.18 Form of Deferred Compensation Plan
21.1** Subsidiaries
23.1** Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in
Exhibit 5.1)
23.2 KPMG LLP Consent and Report on Schedule
23.3 Consent of KPMG LLP (Servercast Communications, L.L.C.)
24.1** Power of Attorney (included on the signature page of this
Registration Statement)
24.2** Power of Attorney for Stephen D.R. Moore
27** Financial Data Schedule
</TABLE>
- --------
* To be filed by Amendment.
** Previously filed.
<PAGE>
EXHIBIT 3.2
-----------
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
NAVISITE, INC.
NaviSite, Inc. (the "Corporation"), a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware (the
"DGCL"), does hereby certify as follows:
1. The Corporation filed its original Certificate of Incorporation with
the Secretary of the State of Delaware on December 28, 1998.
2. At a duly called meeting of the Board of Directors of the Corporation
at which a quorum was present at all times, a resolution was duly adopted,
pursuant to Sections 242 and 245 of the DGCL, setting forth an Amended and
Restated Certificate of Incorporation of the Corporation and declaring said
Amended and Restated Certificate of Incorporation advisable. The stockholders
of the Corporation duly approved said proposed Amended and Restated Certificate
of Incorporation by written consent in accordance with Sections 228, 242 and 245
of the DGCL. The resolution setting forth the Amended and Restated Certificate
of Incorporation is as follows:
RESOLVED: That the Certificate of Incorporation of the Corporation, be and
--------
hereby is amended and restated in its entirety so that the same shall read as
follows:
FIRST. The name of the Corporation is:
NaviSite, Inc.
SECOND. The address of the Corporation's registered office in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
<PAGE>
THIRD. The nature of the business or purposes to be conducted or
promoted by the Corporation is as follows:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 155,000,000 shares, consisting of
(i) 150,000,000 shares of Common Stock, par value $.01 per share ("Common
Stock"), and (ii) 5,000,000 shares of Preferred Stock, par value $.01 per share
("Preferred Stock").
The following is a statement of the designations and the powers, privileges
and rights, and the qualifications, limitations or restrictions thereof, in
respect of each class of capital stock of the Corporation.
A. COMMON STOCK.
------------
1. General. The voting, dividend and liquidation rights of the holders
-------
of the Common Stock are subject to and qualified by the rights of the holders of
the Preferred Stock of any series as may be designated by the Board of Directors
upon any issuance of the Preferred Stock of any series.
2. Voting. The holders of the Common Stock shall have voting rights at
------
all meetings of stockholders, each such holder being entitled to one vote for
each share thereof held by such holder. There shall be no cumulative voting.
The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote, irrespective of the provisions of Section 242(b)(2) of the
DGCL.
3. Dividends. Dividends may be declared and paid on the Common Stock
---------
from funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
4. Liquidation. Upon the dissolution or liquidation of the Corporation,
-----------
whether voluntary or involuntary, holders of Common Stock will be entitled to
2
<PAGE>
receive all assets of the Corporation available for distribution to its
stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
B. PREFERRED STOCK.
---------------
Preferred Stock may be issued from time to time in one or more series, each
of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock which may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law. Different series of
Preferred Stock shall not be construed to constitute different classes of
shares for the purposes of voting by classes unless expressly provided.
Authority is hereby expressly granted to the Board of Directors from time
to time to issue the Preferred Stock in one or more series, and in connection
with the creation of any such series, by resolution or resolutions providing for
the issuance of the shares thereof, to determine and fix such voting powers,
full or limited, or no voting powers, and such designations, preferences and
relative participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, including without limitation thereof,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as shall be stated and expressed in such resolutions, all to the
full extent now or hereafter permitted by the DGCL. Without limiting the
generality of the foregoing, the resolutions providing for issuance of any
series of Preferred Stock may provide that such series shall be superior or rank
equally or be junior to the Preferred Stock of any other series to the extent
permitted by law. Except as otherwise provided in this Certificate of
Incorporation, no vote of the holders of the Preferred Stock or Common Stock
shall be a prerequisite to the designation or issuance of any shares of any
series of the Preferred Stock authorized by and complying with the conditions of
this Amended and Restated Certificate of Incorporation, the right to have such
vote being expressly waived by all present and future holders of the capital
stock of the Corporation.
FIFTH. The Corporation shall have a perpetual existence.
SIXTH. Election of directors need not be by written ballot, except as and
to the extent provided in the By-Laws of the Corporation.
3
<PAGE>
SEVENTH. Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of the DGCL or on the application of trustees in
dissolution or of any receiver or receivers appointed for the Corporation under
the provisions of Section 279 of the DGCL order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of the
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of the Corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of the Corporation, as the case
may be, and also on the Corporation.
EIGHTH. Except to the extent that the DGCL prohibits the elimination or
limitation of liability of directors for breaches of fiduciary duty, no director
of the Corporation shall be personally liable to the Corporation or its
stockholders for monetary damages for any breach of fiduciary duty as a
director, notwithstanding any provision of law imposing such liability. No
amendment to or repeal of this provision shall apply to or have any effect on
the liability or alleged liability of any director of the Corporation for or
with respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
NINTH. a. Actions, Suits and Proceedings Other than by or in the Right of
---------------------------------------------------------------
the Corporation. The Corporation shall indemnify each person who was or is a
- ---------------
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that such person is or was, or has agreed to become, a
director or officer of the Corporation, or is or was serving, or has agreed to
serve, at the request of the Corporation, as a director, officer, partner,
employee or trustee of, or in a similar capacity with, another corporation,
partnership, joint venture, trust or other enterprise (including any employee
benefit plan), or by reason of any action alleged to have been taken or omitted
in
4
<PAGE>
such capacity against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person or on such person's behalf in connection with such action, suit or
proceeding and any appeal therefrom, if such person acted in good faith and in a
manner such person reasonably believed to be in, or not opposed to, the best
interests of the Corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent,
---------------
shall not, of itself, create a presumption that such person did not act in good
faith and in a manner which such person reasonably believed to be in, or not
opposed to, the best interests of the Corporation and, with respect to any
criminal action or proceeding, had reasonable cause to believe that such
person's conduct was unlawful.
b. Actions or Suits by or in the Right of the Corporation. The
------------------------------------------------------
Corporation shall indemnify each person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or suit by or
in the right of the Corporation to procure a judgment in its favor by reason of
the fact that such person is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer, partner, employee or trustee
of, or in a similar capacity with, another corporation, partnership, joint
venture, trust or other enterprise (including any employee benefit plan), or by
reason of any action alleged to have been taken or omitted in such capacity,
against all expenses (including attorneys' fees) and, to the extent permitted by
law, amounts paid in settlement actually and reasonably incurred by such person
or on the such person's behalf in connection with such action, suit or
proceeding and any appeal therefrom, if such person acted in good faith and in a
manner such person reasonably believed to be in, or not opposed to, the best
interests of the Corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
Court of Chancery of Delaware shall determine upon application that, despite the
adjudication of such liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
(including attorneys' fees) which the Court of Chancery of Delaware shall deem
proper. Each person seeking indemnification pursuant to Paragraphs a. and b. of
this Article Ninth shall hereafter be referred to as an "Indemnitee."
5
<PAGE>
c. Indemnification for Expenses of Successful Party. Notwithstanding the
------------------------------------------------
other provisions of this Article Ninth, to the extent that an Indemnitee has
been successful, on the merits or otherwise, in defense of any action, suit or
proceeding referred to in Paragraphs a. and b. of this Article Ninth, or in
defense of any claim, issue or matter therein, or on appeal from any such
action, suit or proceeding, the Indemnitee shall be indemnified against all
expenses (including attorneys' fees) actually and reasonably incurred by the
Indemnitee or on the Indemnitee's behalf in connection therewith. Without
limiting the foregoing, if any action, suit or proceeding is disposed of, on the
merits or otherwise (including a disposition without prejudice), without (i) the
disposition being adverse to the Indemnitee, (ii) an adjudication that the
Indemnitee was liable to the Corporation, (iii) a plea of guilty or nolo
----
contendere by the Indemnitee, (iv) an adjudication that the Indemnitee did not
- ----------
act in good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the Corporation and (v) with respect to any criminal
proceeding, an adjudication that the Indemnitee had reasonable cause to believe
his conduct was unlawful, the Indemnitee shall be considered for the purposes
hereof to have been wholly successful with respect thereto.
d. Notification and Defense of Claim. As a condition precedent to an
---------------------------------
Indemnitee's right to be indemnified, the Indemnitee must notify the Corporation
in writing as soon as practicable of any action, suit, proceeding or
investigation involving the Indemnitee for which indemnity will or could be
sought. With respect to any action, suit, proceeding or investigation of which
the Corporation is so notified, the Corporation will be entitled to participate
therein at its own expense and/or to assume the defense thereof at its own
expense, with legal counsel reasonably acceptable to the Indemnitee. After
notice from the Corporation to the Indemnitee of its election so to assume such
defense, the Corporation shall not be liable to the Indemnitee for any legal or
other expenses subsequently incurred by the Indemnitee in connection with such
action, suit, proceeding or investigation, other than as provided below in this
Paragraph d. The Indemnitee shall have the right to employ the Indemnitee's own
counsel in connection with such action, suit, proceeding or investigation, but
the fees and expenses of such counsel incurred after notice from the Corporation
of its assumption of the defense thereof shall be at the expense of the
Indemnitee unless (i) the employment of counsel by the Indemnitee has been
authorized by the Corporation, (ii) counsel to the Indemnitee shall have
reasonably concluded that there may be a conflict of interest or position on any
significant issue between the Corporation and the Indemnitee in the conduct of
the defense of such action, suit, proceeding or investigation or (iii) the
Corporation shall not in fact have employed counsel to assume the defense of
such action, suit, proceeding or investigation, in each of which cases the fees
and expenses of counsel for the Indemnitee shall be at the expense of the
Corporation, except as otherwise expressly provided by this Article Ninth. The
Corporation shall not be entitled, without the consent of the Indemnitee, to
assume the defense of any claim brought by or in the right of the Corporation or
as to which counsel for the Indemnitee shall have reasonably made the conclusion
provided for in clause (ii) above. The Corporation shall not be required to
indemnify the Indemnitee under this Article Ninth for any amounts paid in
settlement of any action, suit, proceeding or investigation effected without its
written consent. The Corporation shall not settle any action, suit, proceeding
or
6
<PAGE>
investigation in any manner which would impose any penalty or limitation on
the Indemnitee without the Indemnitee's written consent. Neither the Corporation
nor the Indemnitee will unreasonably withhold its consent to any proposed
settlement.
e. Advance of Expenses. Subject to the provisions of Paragraph f. below,
-------------------
in the event that the Corporation does not assume the defense pursuant to
Paragraph d. of this Article Ninth of any action, suit, proceeding or
investigation of which the Corporation receives notice under this Article Ninth,
any expenses (including attorneys' fees) incurred by an Indemnitee in defending
a civil or criminal action, suit, proceeding or investigation or any appeal
therefrom shall be paid by the Corporation in advance of the final disposition
of such matter; provided, however, that the payment of such expenses incurred by
-------- -------
the Indemnitee in advance of the final disposition of such matter shall be made
only upon receipt of an undertaking by or on behalf of the Indemnitee to repay
all amounts so advanced in the event that it shall ultimately be determined that
the Indemnitee is not entitled to be indemnified by the Corporation as
authorized in this Article Ninth; and further provided that no such advancement
------- --------
of expenses shall be made if it is determined that (i) the Indemnitee did not
act in good faith and in a manner the Indemnitee reasonably believed to be in,
or not opposed to, the best interests of the Corporation or (ii) with respect to
any criminal action or proceeding, the Indemnitee had reasonable cause to
believe the Indemnitee's conduct was unlawful. Such undertaking shall be
accepted without reference to the financial ability of the Indemnitee to make
such repayment.
f. Procedure for Indemnification. In order to obtain indemnification or
-----------------------------
advancement of expenses pursuant to Paragraph a., b., c. or e. of this Article
Ninth, the Indemnitee shall submit to the Corporation a written request,
including in such request such documentation and information as is reasonably
available to the Indemnitee and is reasonably necessary to determine whether and
to what extent the Indemnitee is entitled to indemnification or advancement of
expenses. Any such indemnification or advancement of expenses, unless ordered
by a court, shall be made, with respect to requests under Paragraph a., b. or
e., only as authorized in the specific case upon a determination by the
Corporation that the indemnification of the Indemnitee is proper because the
Indemnitee has met the applicable standard of conduct set forth in Paragraph a.,
b. or e., as the case may be. Such determination shall be made in each instance
(i) by a majority vote of the directors of the Corporation consisting of persons
who are not at that time parties to the action, suit or proceeding in question
("Disinterested Directors"), whether or not a quorum, (ii) by a majority vote of
a committee of Disinterested Directors designated by majority vote of
Disinterested Directors, whether or not a quorum, (iii) if there are no
Disinterested
7
<PAGE>
Directors, or if Disinterested Directors so direct, by independent legal counsel
(who may, to the extent permitted by law, be regular legal counsel to the
Corporation) in a written opinion or (iv) by the stockholders of the
Corporation.
g. Remedies. The right to indemnification or advances as granted by this
--------
Article Ninth shall be enforceable by the Indemnitee in any court of competent
jurisdiction. Neither the failure of the Corporation to have made a
determination prior to the commencement of such action that indemnification is
proper in the circumstances because the Indemnitee has met the applicable
standard of conduct, nor an actual determination by the Corporation pursuant to
Paragraph f. above that the Indemnitee has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that the
Indemnitee has not met the applicable standard of conduct. The Indemnitee's
expenses (including attorneys' fees) incurred in connection with successfully
establishing the Indemnitee's right to indemnification, in whole or in part, in
any such proceeding also shall be indemnified by the Corporation.
h. Limitations. Notwithstanding anything to the contrary in this
-----------
Article Ninth, except as set forth in Paragraph g. above, the Corporation shall
not indemnify an Indemnitee in connection with a proceeding (or part thereof)
initiated by the Indemnitee unless the initiation thereof was approved by the
Board of Directors of the Corporation. Notwithstanding anything to the contrary
in this Article Ninth, the Corporation shall not indemnify an Indemnitee to the
extent the Indemnitee is reimbursed from the proceeds of insurance, and in the
event the Corporation makes any indemnification payments to an Indemnitee and
the Indemnitee is subsequently reimbursed from the proceeds of insurance, the
Indemnitee shall promptly refund such indemnification payments to the
Corporation to the extent of such insurance reimbursement.
i. Subsequent Amendment. No amendment, termination or repeal of this
--------------------
Article Ninth or of the relevant provisions of the DGCL or any other applicable
laws shall affect or diminish in any way the rights of any Indemnitee to
indemnification under the provisions hereof with respect to any action, suit,
proceeding or investigation arising out of or relating to any actions,
transactions or facts occurring prior to the final adoption of such amendment,
termination or repeal.
j. Other Rights. The indemnification and advancement of expenses
------------
provided by this Article Ninth shall not be deemed exclusive of any other rights
to which an Indemnitee seeking indemnification or advancement of expenses may be
8
<PAGE>
entitled under any law (common or statutory), agreement or vote of stockholders
or Disinterested Directors or otherwise, both as to action in the Indemnitee's
official capacity and as to action in any other capacity while holding office
for the Corporation, and shall continue as to an Indemnitee who has ceased to
be a director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of the Indemnitee. Nothing contained in this
Article Ninth shall be deemed to prohibit, and the Corporation is specifically
authorized to enter into, agreements with officers and directors providing
indemnification rights and procedures different from those set forth in this
Article Ninth. In addition, the Corporation may, to the extent authorized from
time to time by the Board of Directors, grant indemnification rights to other
employees or agents of the Corporation or other persons serving the Corporation
and such rights may be equivalent to, or greater or less than, those set forth
in this Article Ninth.
k. Partial Indemnification. If an Indemnitee is entitled under any
-----------------------
provision of this Article Ninth to indemnification by the Corporation for some
or a portion of the expenses (including attorneys' fees), judgments, fines or
amounts paid in settlement actually and reasonably incurred by the Indemnitee or
on the Indemnitee's behalf in connection with any action, suit, proceeding or
investigation and any appeal therefrom but not, however, for the total amount
thereof, the Corporation shall nevertheless indemnify the Indemnitee for the
portion of such expenses (including attorneys' fees), judgments, fines or
amounts paid in settlement to which the Indemnitee is entitled.
l. Insurance. The Corporation may purchase and maintain insurance, at
---------
its expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) against any expense,
liability or loss incurred by such person in any such capacity, or arising out
of his or her status as such, whether or not the Corporation would have the
power to indemnify such person against such expense, liability or loss under the
DGCL.
m. Savings Clause. If this Article Ninth or any portion hereof shall be
--------------
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest extent
9
<PAGE>
permitted by any applicable portion of this Article Ninth that shall not have
been invalidated and to the fullest extent permitted by applicable law.
n. Definitions. Terms used herein and defined in Section 145(h) and
-----------
Section 145(i) of the DGCL shall have the respective meanings assigned to such
terms in such Section 145(h) and Section 145(i).
TENTH. Except as otherwise provided herein, the Corporation reserves the
right to amend, alter, change or repeal any provision contained in this Amended
and Restated Certificate of Incorporation, in the manner now or hereafter
prescribed by statute and this Amended and Restated Certificate of
Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation.
ELEVENTH: Special meetings of stockholders may be called at any time by
only the Chairman of the Board of Directors, the Chief Executive Officer, the
President, the Board of Directors or the holders of at least 40% of the votes
which all stockholders would be entitled to cast in any annual election of
directors. Business transacted at any special meeting of stockholders shall be
limited to matters relating to the purpose or purposes stated in the notice of
meeting.
TWELFTH: In furtherance and not in limitation of the powers conferred upon
it by the laws of the State of Delaware, the Board of Directors shall have the
power to adopt, amend, alter or repeal the Corporation's By-Laws. The
affirmative vote of a majority of the directors present at any regular or
special meeting of the Board of Directors at which a quorum is present shall be
required to adopt, amend, alter or repeal the Corporation's By-Laws. The
Corporation's By-Laws also may be adopted, amended, altered or repealed by the
affirmative vote of the holders of at least a majority of the votes which all of
the stockholders would be entitled to cast in any annual election of directors.
THIRTEENTH: The Corporation hereby elects not to be governed by Section
203 of the DGCL.
10
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Amended and Restated Certificate of Incorporation to be
signed by its President this _____ day of ______________, 1999.
NAVISITE, INC.
By:_________________________________________
Robert B. Eisenberg, President
11
<PAGE>
EXHIBIT 10.2
------------
NAVISITE, INC.
Amended and Restated
1998 Director Stock Option Plan
-------------------------------
1. Purpose.
-------
This Amended and Restated 1998 Director Stock Option Plan (the "Plan")
governs options to purchase Common Stock, $.01 par value per share (the "Common
Stock"), of NaviSite, Inc. (the "Company") granted by the Company to members of
the Board of Directors of the Company (the "Board") who are not also officers or
employees of the Company or any affiliate of the Company. The purpose of the
Plan is to attract and retain qualified persons to serve as Directors of the
Company and to encourage ownership of the Common Stock of the Company by such
Directors.
2. Administration.
--------------
Grants of stock options under the Plan shall be automatic as provided in
Section 8. All questions of interpretation of the Plan or of any options
granted hereunder shall be determined by the Board. Any and all powers of the
Board under the Plan may be exercised by a committee consisting of one or more
Directors appointed by the Board who are not participants in the Plan.
3. Eligibility.
-----------
Members of the Board who are not also officers or employees of the Company
or any affiliate of the Company shall be eligible to participate in the Plan.
4. Shares Subject to the Plan.
--------------------------
Options may be granted under the Plan in respect of a maximum of 125,000
shares of Common Stock, subject to adjustment as provided in Section 5 below.
Shares to be issued upon the exercise of options granted under the Plan may be
either authorized but unissued shares or shares held by the Company in its
treasury. Whenever options under the Plan lapse, terminate or otherwise become
unexercisable, the shares of Common Stock which were available for such options
shall again be available for the grant of options under the Plan. The Company
shall at all times during the term of the Plan and while options remain
outstanding hereunder reserve such number of shares of Common Stock as will be
sufficient to satisfy the requirements of the Plan.
5. Adjustment of Number of Option Shares.
-------------------------------------
In the event of a stock dividend, split-up, combination or reclassification
of shares, recapitalization or other similar capital change relating to the
Company's Common Stock, the maximum aggregate number and kind of shares or
securities of the Company as to which options may be granted under this Plan and
as to which options then outstanding shall be exercisable, the
1
<PAGE>
option price of such options and the consideration with respect to which the
options are exercisable may be appropriately adjusted (as determined by the
Board in its sole discretion) to reflect such change or distribution.
Except as otherwise provided in the Option Agreement (as defined below) in
the event of any reorganization, consolidation or merger to which the Company is
a party and in which the Company does not survive, or upon the dissolution or
liquidation of the Company, all outstanding options shall terminate; provided,
--------
however, that (i) in the event of the liquidation or dissolution of the Company,
- -------
or in the event of any such reorganization, consolidation or merger in which the
Company does not survive and with respect to which the resulting or surviving
corporation does not assume such outstanding option or issue a substitute option
therefor, such option shall be exercisable in full, without regard to any
installment restrictions on exercise imposed pursuant to this Plan or any Option
Agreement, during such period preceding the effective date of such liquidation,
dissolution, reorganization, consolidation or merger (unless such option is
terminated earlier by its terms) as may be specified by the Board; and (ii) in
the event of any such reorganization, consolidation or merger, the Board may, in
its good faith discretion, arrange to have the resulting or surviving
corporation assume such outstanding option or issue a substitute option
therefor.
No fraction of a share shall be purchasable or deliverable upon exercise of
an option, but, in the event any adjustment hereunder of the number of shares
covered by the option shall cause such number to include a fraction of a share,
such fraction shall be adjusted to the nearest smaller whole number of shares.
6. Non-Statutory Stock Options.
---------------------------
All options granted under the Plan shall be non-statutory options not
entitled to special tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code").
7. Form of Option Agreements.
-------------------------
Options shall be granted hereunder pursuant to the terms of written
agreements ("Option Agreements") which shall be substantially in the form of the
attached Exhibit A or in such other form as the Board may from time to time
---------
determine.
8. Grant of Options and Option Terms.
---------------------------------
a. Automatic Grant of Options. Commencing on the date of the adoption of
this Plan by the stockholders, each non-employee director of the Company shall,
upon the date of his or her election (the "Date of Grant"), automatically be
granted an option to purchase 25,000 shares of Common Stock, with the exception
of Craig Goldman, who shall be granted an option to purchase 50,000 shares of
Common Stock on the date this Plan is adopted by the Board of Directors (the
"Craig Goldman option"). No options shall be granted hereunder (i) if, upon the
election of such a non-employee director, there are not sufficient shares
reserved for issuance under the Plan to make such an automatic grant and (ii)
after ten years from the date on which this Plan was initially approved and
adopted by the Board.
2
<PAGE>
b. Exercisability of Options. The options granted under this Plan shall
become exercisable with respect to 5,000 shares on the first anniversary of the
Date of Grant (except in the case of the Craig Goldman option, which option
shall be exercisable as to 10,000 shares on the Date of Grant), and shall become
exercisable as to an additional 5,000 shares (except in the case of the Craig
Goldman option, which option shall be exercisable as to an additional 10,000
shares) on the date of each annual meeting of the stockholders of the Company (a
"Stockholder Meeting") thereafter but in all cases if and only if the option
holder is a member of the Board at the opening of business on the next business
day following the date of such annual meeting. Directors holding exercisable
options under this Plan who cease to serve as members of the Board of the
Company for any reason other than death may, for a period of seven months
following the date of cessation of service, exercise the rights they had under
such options at the time they ceased being a Director. Any options and rights
that have not yet become exercisable shall terminate upon cessation of such
Director's membership on the Board. Upon the death of a Director, those
entitled to do so under the Director's will or the laws of descent and
distribution shall have the right, at any time within twelve months after the
date of death, to exercise in whole or in part any options which were
exercisable at the time of such Director's death. The rights of the option
holder may be exercised by the holder's guardian or legal representative in the
case of disability and by the beneficiary designated by the holder in writing
delivered to the Company or, if none has been designated, by the holder's estate
or his or her transferee on death in accordance with this Plan, in the case of
death. Options granted under the Plan shall terminate, and no rights thereunder
may be exercised, after the expiration of the applicable exercise period.
Notwithstanding the foregoing provisions, no rights under any options may be
exercised after the expiration of ten years from their Date of Grant.
c. Option Price; Fair Market Value. With the exception of the Craig
Goldman option, the per share option price for each option granted under this
Plan shall be the Fair Market Value per share of the Common Stock (as
hereinafter defined) on the Date of Grant. The "Fair Market Value" per share of
the Common Stock shall be the value determined by the Board in good faith,
provided that if the Common Stock is then quoted on the Nasdaq National Market
("Nasdaq") or traded on any other national securities exchange or other
interdealer quotation system, then the Fair Market Value of a share of Common
Stock shall be the closing price for the Common Stock as reported by Nasdaq, or
the principal exchange or quotation system on which the Common Stock is then
traded or quoted, on the last preceding trading day. The Craig Goldman option
shall be exercisable at $0.34 per share.
d. Term of Option. The term of each option granted under the Plan shall
be ten years from the Date of Grant, subject to earlier termination as provided
in Section 5 hereof or in this Section 8 or in the Option Agreement.
e. Method of Exercise and Payment. Each exercise of an option hereunder
may be effected only by giving written notice, in the manner provided in Section
12 hereof, of intent to exercise the option, specifying the number of shares as
to which the option is being exercised, and accompanied by full payment of the
option price for the number of shares then being acquired. Such payment shall
be made (i) in cash, (ii) by certified or bank check payable to the order of the
Company, (iii) credit to the Company's account at a financial or brokerage
institution on the date of exercise or a payment commitment of such an
institution acceptable to
3
<PAGE>
the Company, (iv) in shares of Common Stock having an aggregate Fair Market
Value, at the time of such payment, equal to the total option price for the
number of shares of Common Stock for which payment is then being made, or (v)
partly in cash or by certified or bank check payable to the order of the Company
and the balance in shares of Common Stock having an aggregate Fair Market Value,
at the time of such payment, equal to the difference between the total option
price for the number of shares of Common Stock for which payment is then being
made and the amount of the payment in cash or by certified or bank check. Shares
of Common Stock surrendered in payment of all or part of the option price must
have been held by the person exercising the option free of restrictions imposed
by the Company for at least six months unless otherwise permitted by the Board.
Receipt by the Company of such notice and payment shall, for purposes of
this Plan, constitute exercise of the option or a part thereof. Within twenty
(20) days thereafter, the Company shall deliver or cause to be delivered to the
optionee a certificate or certificates for the number of shares of Common Stock
then being purchased by the optionee. Such shares shall be fully paid and non-
assessable. Notwithstanding the foregoing, if any law or applicable regulation
of the Securities and Exchange Commission or other public regulatory authority
(including, but not limited to, a stock exchange) shall require the Company or
the optionee (i) to register or qualify, under the Securities Act of 1933, as
amended (the "Securities Act"), any similar federal statute then in force or any
state law regulating the sale of securities, any shares of Common Stock covered
by an option with respect to which notice of intent to exercise shall have been
delivered to the Company or (ii) to take any other action in connection with
such shares before issuance thereof may be effected, then the delivery of the
certificate or certificates for such shares shall be postponed until completion
of the necessary action. Nothing herein shall be deemed to require the Company
to take such action. Any such action shall be taken by the Company at its own
expense.
To the extent determined necessary by counsel to the Company to comply with
any applicable law, the Company may require an individual exercising an option
to represent that his purchase of shares of Common Stock pursuant to such
exercise is for his own account, for investment and without a view to resale or
distribution and that he will not sell or otherwise dispose of any such shares
except pursuant to (i) an effective registration statement covering such
transaction filed with the Securities and Exchange Commission and in compliance
with all of the applicable provisions of the Securities Act, and the rules and
regulations thereunder, or (ii) an opinion of Company counsel that such
registration is not required.
f. Non-transferability. Options granted under the Plan shall not be
transferable by the holder thereof otherwise than by will or the laws of descent
and distribution.
9. Limitation of Rights.
--------------------
No Right to Continue as a Director. Neither the Plan, nor the granting of
an option or any other action taken pursuant to the Plan, shall constitute an
agreement or understanding, express or implied, that the Company will retain an
optionee as a Director for any period of time or at any particular rate of
compensation.
4
<PAGE>
No Stockholders' Rights for Options. Directors shall have no rights as
stockholders with respect to the shares covered by their options until the date
they are issued such shares, and no adjustment will be made for dividends or
other rights for which the record date is prior to the date such option shares
are so issued.
10. Stockholder Approval.
--------------------
The Plan is subject to approval by the stockholders of the Company by the
affirmative vote of the holders of shares of voting capital stock present or
representing a majority of votes entitled to be cast at a meeting of the
Company's stockholders. In the event such approval is not obtained, all options
granted under this Plan shall be void and without effect.
11. Amendment or Termination.
------------------------
The Board may amend or terminate this Plan at any time subject to any
stockholder approval that the Board deems necessary. No such termination or
amendment shall adversely affect the rights of any option holder with respect to
outstanding options under the Plan without the prior written consent of such
option holder.
12. Notices.
-------
Any communication or notice required or permitted to be given under this
Plan shall be in writing and mailed by registered or certified mail or delivered
in hand, if to the Company, to its Chief Financial Officer at NaviSite, Inc.,
100 Brickstone Square, Andover, MA 01810 (or such other address as the Company
may from time to time prescribe) and, if to an optionee, to such address as the
optionee shall last have furnished to the Company.
13. Governing Law.
-------------
The Plan shall be governed by and construed in accordance with the laws of
the State of Delaware.
As adopted by the Board on
December 28, 1998
As approved by the Stockholders on
December 28, 1998
As amended and restated by the Board on [_________], 1999
5
<PAGE>
EXHIBIT A
---------
1998 DSO - _______ 25,000 Shares
NAVISITE, INC.
1998 Director Stock Option Plan
Non-statutory Stock Option Agreement
__________ __, 199_
NaviSite, Inc. (the "Company"), a Delaware corporation, hereby grants to
the person named below (the "Optionee") an option to purchase shares of Common
Stock, $.01 par value per share, of the Company (the "Option") under and subject
to the Company's 1998 Director Stock Option Plan (the "Plan"), subject to the
following terms and conditions and those set forth in the Plan:
Name of Optionee:
Address:
Social Security No.
Option Price:
Date of Grant:
Exercisability Schedule:
This option shall become exercisable as provided in Section 8 of the Plan.
By signing this Stock Option Agreement and returning on signed copy of to
the Company, the Optionee accepts the Option described herein on the terms and
conditions set forth herein or in the Plan.
NAVISITE, INC. Accepted and agreed to:
By: ____________________ _______________________
Title: Optionee
6
<PAGE>
EXHIBIT 10.3
------------
NAVISITE, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
The purpose of this 1999 Employee Stock Purchase Plan (the "Plan") is to
provide eligible employees of NaviSite, Inc. (the "Company") with opportunities
to purchase shares of the Company's common stock, $.01 par value (the "Common
Stock"). Fifty thousand (50,000) shares of Common Stock in the aggregate have
been approved for this purpose. This Plan is intended to qualify as an "employee
stock purchase plan" as defined in Section 423 of the Internal Revenue Code of
1986, as amended (the "Code"), and the regulations promulgated thereunder and
shall be interpreted consistent therewith.
1. Administration. The Plan will be administered by the Board of
--------------
Directors of the Company (the "Board) or by a Committee appointed by the Board
(the "Committee"). The Board or the Committee has authority to make rules and
regulations for the administration of the Plan and its interpretation and
decisions with regard thereto shall be final and conclusive.
2. Eligibility. All employees of the Company, including Directors who
-----------
are employees, and all employees of any subsidiary of the Company (as defined in
Section 424(f) of the Code) designated by the Board or the Committee from time
to time (a "Designated Subsidiary"), are eligible to participate in any one or
more of the offerings of Options (as defined in Section 9) to purchase Common
Stock under the Plan provided that:
(a) they are customarily employed by the Company or a Designated
Subsidiary for more than 20 hours a week and for more than five months in a
calendar year; and
(b) they have been employed by the Company or a Designated Subsidiary for
at least six months prior to enrolling in the Plan; and
(c) they are employees of the Company or a Designated Subsidiary on the
first day of the applicable Plan Period (as defined below).
<PAGE>
No employee may be granted an option hereunder if such employee,
immediately after the option is granted, owns, directly or indirectly, 5% or
more of the total combined voting power or value of the stock of the Company or
any subsidiary. For purposes of the preceding sentence, the attribution rules
of Section 424(d) of the Code shall apply in determining the stock ownership of
an employee, and all stock which the employee has a contractual right to
purchase shall be treated as stock owned by the employee.
3. Offerings. The Company will make one or more offerings ("Offerings")
---------
to employees to purchase stock under this Plan. Unless otherwise determined by
the Board or Committee, the first Offering will commence on the effective date
(the "Effective Date") of the Company's initial public offering of Common Stock
(or, if shares of Common Stock are not traded on a national securities exchange
or the Nasdaq National Market on the Effective Date, then on the next date on
which the Common Stock is so traded) and end on February 29, 2000. Unless
otherwise determined by the Board or the Committee, subsequent Offerings will
commence on the date after the end of the preceding Offering and will end on the
last day of the third full month thereafter. Each such period is referred to as
a Plan Period (a "Plan Period"). The Board or the Committee may, at its
discretion, choose a different Plan Period for any Offerings.
4. Participation. An employee eligible on the first day of any Offering
-------------
(an "Offering Commencement Date") may participate in such Offering by completing
and forwarding a payroll deduction authorization form to the employee's
appropriate payroll office prior to the enrollment deadline established by the
Board or Committee. The form will authorize a regular payroll deduction
from the Compensation received by the employee during the Plan Period. Unless an
employee files a new form or withdraws from the Plan, his or her deductions and
purchases will continue at the same rate for future Offerings under the Plan as
long as the Plan remains in effect. The term "Compensation" means the amount of
money reportable on the employee's Federal Income Tax Withholding Statement,
excluding overtime, shift premium, incentive or bonus awards, allowances and
reimbursements for expenses such as relocation allowances for travel expenses,
income or gains on the exercise of Company stock options or stock appreciation
rights, and similar items, whether or not shown on the employee's Federal Income
Tax Withholding Statement, but including, in the case of salespersons, sales
commissions to the extent determined by the Board or the Committee.
2
<PAGE>
5. Deductions. The Company will maintain payroll deduction accounts for
----------
all participating employees. With respect to any Offering made under this Plan,
an employee may authorize a payroll deduction in any whole percentage (not less
than 1% or more than 10%) or dollar amount not less than $10, or such lesser
amount as the Board or Committee shall determine before the start of each Plan
Period, of the Compensation he or she receives during the Plan Period or such
shorter period during which deductions from payroll are made, provided that such
percentage or amount may not result in total deductions of less than $100 for
any Plan Period for any employee.
No employee may be granted an Option which permits his rights to purchase
Common Stock under this Plan and any other employee stock purchase plan (as
defined in Section 423(b) of the Code) of the Company and any subsidiaries, to
accrue at a rate which exceeds $25,000 of fair market value of such Common Stock
(determined at the Offering Commencement Date of the Plan Period) for each
calendar year in which the Option is outstanding at any time.
6. Deduction Changes. An employee may decrease, increase or discontinue
-----------------
his payroll deduction once during any Plan Period, by filing a new payroll
deduction authorization form. If an employee elects to discontinue his payroll
deductions during a Plan Period, but does not elect to withdraw his funds
pursuant to Section 8 hereof, funds deducted prior to his or her election to
discontinue will be applied to the purchase of Common Stock on the Exercise Date
(as defined below).
7. Interest. Interest will not be paid on any employee accounts, except
--------
to the extent that the Board or the Committee, in its sole discretion, elects to
credit employee accounts with interest at such per annum rate as it may from
time to time determine.
8. Withdrawal of Funds. An employee may at any time prior to the close
-------------------
of business on the last business day in a Plan Period and for any reason
permanently draw out the balance accumulated in the employee's account and
thereby withdraw from participation in an Offering. Partial withdrawals are not
permitted. The employee may not begin participation again during the remainder
of the Plan Period. The employee may participate in any subsequent Offering in
accordance with terms and conditions established by the Board or the Committee.
9. Purchase of Shares. On the Offering Commencement Date of each Plan
------------------
Period, the Company will grant to each eligible employee who is then a
3
<PAGE>
participant in the Plan an option ("Option") to purchase on the last business
day of such Plan Period (the "Exercise Date"), at the Option Price hereinafter
provided for, the largest number of whole shares of Common Stock of the Company
as does not exceed the number of shares determined by multiplying $[1,667] by
the number of full months in the Offering Period and dividing the result by the
closing price (as defined below) on the Offering Commencement Date of such Plan
Period.
Except as otherwise provided herein, the purchase price for each share
purchased will be 85% of the closing price of the Common Stock on (i) the first
business day of such Plan Period or (ii) the Exercise Date, whichever closing
price shall be less. Such closing price shall be (a) the closing price on any
national securities exchange on which the Common Stock is listed, (b) the
closing price on the Nasdaq National Market or (c) the average of the closing
bid and asked prices in the over-the-counter-market, whichever is applicable, as
published in The Wall Street Journal. If no sales of Common Stock were made on
-----------------------
such a day, the price of the Common Stock for purposes of clauses (a) and (b)
above shall be the reported price for the next preceding day on which sales were
made. Notwithstanding the foregoing, for purposes of the initial Plan Period,
the purchase price for each share will be (i) 85% of the price at which the
Common Stock is initially offered to the public or (ii) 85% of the closing price
of the Common Stock on the Exercise Date, whichever price shall be less.
Each employee who continues to be a participant in the Plan on the Exercise
Date shall be deemed to have exercised his or her Option at the Option Price on
such date and shall be deemed to have purchased from the Company the number of
full shares of Common Stock reserved for the purpose of the Plan that his
accumulated payroll deductions on such date will pay for, but not in excess of
the maximum number determined in the manner set forth above.
Any balance remaining in an employee's payroll deduction account at the end
of a Plan Period, other than amounts that would have otherwise been applied for
the payment of fractional shares, will be automatically refunded to the
employee.
10. Issuance of Certificates. Certificates representing shares of Common
------------------------
Stock purchased under the Plan may be issued only in the name of the employee,
in the name of the employee and another person of legal age as joint tenants
with rights of survivorship or (in the Company's sole discretion) in the name of
a brokerage firm, bank or other nominee holder designated by the employee. The
Company may, in its sole discretion and in compliance with applicable laws,
authorize the use of book entry registration of shares in lieu of issuing stock
certificates.
11. Rights on Retirement, Death or Termination of Employment. In the
--------------------------------------------------------
event of a participating employee's termination of employment prior to the last
business day of a Plan Period, no payroll deduction shall be taken from any pay
4
<PAGE>
due and owing to an employee and the balance in the employee's account shall be
paid to the employee or, in the event of the employee's death, (a) to a
beneficiary previously designated in a revocable notice signed by the employee
(with any spousal consent required under state law) or (b) in the absence of
such a designated beneficiary, to the executor or administrator of the
employee's estate or (c) if no such executor or administrator has been appointed
to the knowledge of the Company, to such other person(s) as the Company may, in
its discretion, designate. If, prior to the last business day of the Plan
Period, the Designated Subsidiary by which an employee is employed shall cease
to be a subsidiary of the Company, or if the employee is transferred to a
subsidiary of the Company that is not a Designated Subsidiary, the employee
shall be deemed to have terminated employment for the purposes of this Plan.
12. Optionees Not Stockholders. Neither the granting of an Option to an
--------------------------
employee nor the deductions from his pay shall constitute such employee a
stockholder of the shares of Common Stock covered by an Option under this Plan
until such shares have been purchased by and issued to him or her.
13. Rights Not Transferable. Rights under this Plan are not transferable
-----------------------
by a participating employee other than by will or the laws of descent and
distribution and are exercisable during the employee's lifetime only by the
employee.
14. Application of Funds. All funds received or held by the Company under
--------------------
this Plan may be combined with other corporate funds and may be used for any
corporate purpose.
15. Adjustment in Case of Changes Affecting Common Stock. In the event of
----------------------------------------------------
a subdivision of outstanding shares of Common Stock, or the payment of a
dividend in Common Stock, the number of shares approved for this Plan, and the
share limitation set forth in Section 9, shall be increased proportionately, and
such other adjustment shall be made as may be deemed equitable by the Board or
the Committee. In the event of any other change affecting the Common Stock, such
adjustment shall be made as may be deemed equitable by the Board or the
Committee to give proper effect to such event.
16. Merger. In the event of a merger or consolidation of the Company with
------
or into another corporation, or of a sale of all or substantially all of the
assets of the Company, while unexercised Options remain outstanding under the
Plan, (a) subject to the provisions of clauses (b) and (c), after the effective
date of such
5
<PAGE>
transaction, each holder of an outstanding Option shall be entitled, upon
exercise of such Option, to receive in lieu of shares of Common Stock, shares of
such stock or other securities as the holders of shares of Common Stock received
pursuant to the terms of such transaction; or (b) all outstanding Options may be
cancelled by the Board or the Committee as of a date prior to the effective date
of any such transaction and all payroll deductions shall be paid out to the
participating employees; or (c) all outstanding Options may be cancelled by the
Board or the Committee as of the effective date of any such transaction,
provided that notice of such cancellation shall be given to each holder of an
Option, and each holder of an Option shall have the right to exercise such
Option in full based on payroll deductions then credited to his account as of a
date determined by the Board or the Committee, which date shall not be less than
ten (10) days preceding the effective date of such transaction.
17. Amendment of the Plan. The Board may at any time, and from time to
---------------------
time, amend this Plan in any respect, except that (a) if the approval of any
such amendment by the stockholders of the Company is required by Section 423 of
the Code, such amendment shall not be effected without such approval, and (b) in
no event may any amendment be made which would cause the Plan to fail to comply
with Section 423 of the Code.
18. Insufficient Shares. In the event that the total number of shares of
-------------------
Common Stock specified in elections to be purchased under any Offering plus the
number of shares purchased under previous Offerings under this Plan exceeds the
maximum number of shares issuable under this Plan, the Board or the Committee
will allot the shares then available on a pro rata basis.
19. Termination of the Plan. This Plan may be terminated at any time by
-----------------------
the Board. Upon termination of this Plan all amounts in the accounts of
participating employees shall be promptly refunded.
20. Governmental Regulations. The Company's obligation to sell and
------------------------
deliver Common Stock under this Plan is subject to listing on a national stock
exchange or quotation on the Nasdaq National Market (to the extent the Common
Stock is then so listed or quoted) and the approval of all governmental
authorities required in connection with the authorization, issuance or sale of
such stock.
21. Governing Law. The Plan shall be governed by Delaware law except to
-------------
the extent that such law is preempted by federal law.
6
<PAGE>
22. Issuance of Shares. Shares may be issued upon exercise of an Option
------------------
from authorized but unissued Common Stock, from shares held in the treasury of
the Company or from any other proper source.
23. Notification upon Sale of Shares. Each employee agrees, by entering
--------------------------------
the Plan, to promptly give the Company notice of any disposition of shares
purchased under the Plan where such disposition occurs within two years after
the date of grant of the Option pursuant to which such shares were purchased.
24. Effective Date and Approval of Stockholders. The Plan shall take
-------------------------------------------
effect on _____, 1999 subject to approval by the stockholders of the Company as
required by Section 423 of the Code, which approval must occur within twelve
months of the adoption of the Plan by the Board.
Adopted by the Board of Directors on _______________, 1999
Approved by the Stockholders on _______________, 1999
7
<PAGE>
EXHIBIT 10.11
-------------
FACILITIES AND ADMINISTRATIVE SUPPORT AGREEMENT
-----------------------------------------------
THIS FACILITIES AND ADMINISTRATIVE SUPPORT AGREEMENT dated as of
____________, 1999 is made between CMGI, Inc. ("CMGI"), a Delaware corporation,
and NaviSite, Inc. ("NaviSite"), a Delaware corporation.
Preliminary Statement
---------------------
NaviSite desires to obtain administrative and other services from CMGI, and
CMGI is willing to furnish or make such services available to NaviSite.
By this Agreement, CMGI and NaviSite desire to set forth the basis for
CMGI's provision of services of the types referred to herein.
Agreements
----------
IT IS MUTUALLY agreed by CMGI and NaviSite (collectively, the "Parties")
as follows:
1. Provision of Services. Beginning on the date of this Agreement, CMGI will
---------------------
provide or otherwise make available to NaviSite those CMGI-supplied
services and third-party-supplied services paid for by CMGI on the bases
set forth on Schedule A and Schedule B attached hereto and consistent with
---------- ----------
the parties' practices as of the date hereof (collectively, the
"Services").
2. Billing and Payment. CMGI shall submit monthly invoices to NaviSite for
-------------------
the Services, and NaviSite shall make payment within 30 days after its
receipt of such invoices. Each invoice shall be itemized by the Service
provided.
3. Term and Termination. The initial term of this Agreement shall begin on the
--------------------
date of this Agreement and continue for a period of one year. This
Agreement shall automatically renew at the end of the initial term for
successive one-year periods unless terminated or modified in accordance
with the following provisions:
(a) Entire Agreement. Either party may elect not to renew this Agreement,
----------------
except for the Services set forth on Schedule A, upon 180 days'
----------
<PAGE>
written notice the other party prior to the expiration of the initial term
or any renewal period.
(b) Individual Services. Either party may terminate an individual Service
-------------------
or Services, except for the services set forth on Schedule A, upon 90
----------
days' written notice to the other party.
(c) Rent and Related Services. Either party may terminate those Services
-------------------------
set forth on Schedule A upon 30 days' written notice to the other
----------
party prior to the expiration of the end of the initial term or any
renewal period. In addition, those services set forth on Schedule A
----------
shall terminate effective upon the last day of the month in which
NaviSite notifies CMGI that either (i) NaviSite's new facility at 400
Minuteman Road, Andover, Massachusetts is ready to be occupied by
NaviSite or (ii) NaviSite has vacated completely CMGI's facility at
100 Brickstone Square, Andover, Massachusetts, whichever is later.
(d) Material Breach. Either party may terminate this Agreement in the
---------------
event of a material breach of this Agreement by the other party that
is not cured within 30 days of written notice thereof from the other
party.
(e) Automatic Termination. This Agreement, other than the services set
---------------------
forth on Schedule A, shall automatically terminate upon the date on
-----------
which the ownership by CMGI of the outstanding voting capital stock of
NaviSite shall first be less than 50% of the then outstanding voting
capital stock of NaviSite.
4. Limitation on Liability. Neither party shall be liable to the other for
-----------------------
any amount in excess of the amount invoiced to NaviSite for the 12-month
period preceding any event giving rise to liability. Neither party shall be
liable to the other for consequential damages except for those arising out
of intentional misconduct or gross negligence.
5. Force Majeure. CMGI shall be excused for failure to provide the Services
-------------
hereunder to the extent that such failure is directly or indirectly caused
by an occurrence commonly known as force majeure, including, without
-------------
limitation, delays arising out of acts of God, acts or orders of a
government, agency or instrumentality thereof (whether of fact or law),
acts of public enemy, riots,
2
<PAGE>
embargoes, strikes or other concerted acts of workers (whether of CMGI or
other persons), casualties or accidents, delivery of materials,
transportation or shortage of cars, trucks, fuel, power, labor or materials
or any other causes, circumstances or contingencies within or without the
United States of America that are beyond the control of CMGI; provided,
--------
however, that CMGI shall use its best efforts to resume provision of the
-------
Services as soon as possible. Notwithstanding any events operating to
excuse performance by CMGI, this Agreement shall continue in full force for
the remainder of its term and any renewals thereof.
6. Notices. All notices, billings, requests, demands, approvals, consents and
-------
other communications which are required or may be given under this
Agreement shall be in writing and will be deemed to have been duly given if
delivered person ally or sent by registered or certified mail, return
receipt requested, postage prepaid to the parties at their respective
addresses set forth below:
If to NaviSite: If to CMGI:
NaviSite, Inc. CMGI, Inc.
100 Brickstone Square 100 Brickstone Square
Andover, MA 01810 Andover, MA 01810
Attn: Chief Financial Officer Attn: Chief Financial Officer
7. No Assignment. This Agreement shall not be assignable except with the prior
-------------
written consent of the other party to this Agreement.
8. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the Commonwealth of Massachusetts applicable to
contracts made and to be performed therein.
9. Amendments. This Agreement and all attachments hereto constitute the entire
-----------
agreement between the parties as to the subject matter hereof and supercede
all prior negotiations, undertakings, representations and agreements, if
any, of the parties hereto as to the subject matter hereof. This Agreement
may not be amended orally but may be amended only by a written instrument
signed by all of the parties hereto.
3
<PAGE>
10. Waivers. The failure of either party to require strict performance by the
-------
other party of any provision in this Agreement will not waive or diminish
that party's right to demand strict performance thereafter of that or any
other provision hereof.
11. Paragraph Titles. The paragraph titles used in this Agreement are for
----------------
convenience of reference only and will not be considered in the
interpretation or construction of any of the provisions thereof.
12. Counterparts; Facsimile Signatures. This Agreement may be executed in two
----------------------------------
counterparts, each of which shall be deemed to be an original and both of
which together shall constitute one and the same document. This Agreement
may be executed by facsimile signatures.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
CMGI, INC. NAVISITE, INC.
By:__________________________ By:___________________________
Name:________________________ Name:_________________________
Title:_______________________ Title:________________________
4
<PAGE>
Schedule A
----------
Rent and Related Services
-------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Services Provided by CMGI to NaviSite Allocation of Cost to NaviSite
- ---------------------------------------- --------------------------------------
- --------------------------------------------------------------------------------
<S> <C>
1. Brickstone Square Rent. Provision Allocated based on headcount for
of space located at the Andover NaviSite located at the Andover
Premises (approximately 17,800 Premises divided by headcount for
square feet). the CMGI Companies located at the
Andover Premises.
- --------------------------------------------------------------------------------
2. Facilities. Salary, fringe Allocated based on both: (a)
benefits, payroll taxes for the percentage of time that the
entire facility department. facilities department devotes to
the Federal Street Premises and
(b) headcount for NaviSite located
at the Andover Premises divided by
headcount for the CMGI Companies
located at the Andover Premises.
- --------------------------------------------------------------------------------
3. Mass Electric. Utilities provided Allocated based on headcount for
by Massachusetts Electric. NaviSite located at the Andover
Premises divided by headcount for
the CMGI Companies located at the
Andover Premises.
- --------------------------------------------------------------------------------
4. Office Cleaning/Plant Maintenance. Allocated based on headcount for
NaviSite located at the Andover
Premises divided by headcount for
the CMGI Companies located at the
Andover Premises.
- --------------------------------------------------------------------------------
</TABLE>
Defined Terms:
- ---------------
Andover Premises -- those premises located at 100 Brickstone Square,
Andover, MA 01810 leased by CMGI.
CMGI Companies -- the companies which are controlled by CMGI or in which
CMGI holds an equity interest.
Federal Street
Premises -- those premises located at 300 Federal Street, Andover,
MA 01810 occupied by NaviSite.
headcount -- the number of employees employed by a particular CMGI
Company on the last day of a given month.
<PAGE>
Schedule B
----------
Provision of Other Services
---------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Services Provided by CMGI to NaviSite Allocation of Cost to NaviSite
- ----------------------------------------- -------------------------------------
- --------------------------------------------------------------------------------
<S> <C>
1. CMG Europe. All overhead costs for NaviSite is charged 5% of all costs
CMGI's European office of Marcus associated with the European office.
Bicknell, his assistant and accountant.
- --------------------------------------------------------------------------------
2. Internet Marketing. Salary, fringe NaviSite is one of six CMGI
benefits and taxes for Bill White and Companies that benefits from these
his assistant (both at CMGI). services and absorbs 16% of total
costs.
- --------------------------------------------------------------------------------
3. Internet Development. Salary, NaviSite is one of six CMGI
fringe benefits and taxes for Dave Companies that benefits from
Andonian and his staff (all at these services and absorbs
CMGI). 16% of total costs.
- --------------------------------------------------------------------------------
4. Marketing Research. Access to NaviSite is charged $2,000 per
research agencies such as Forrester month for access to marketing
Research, Inc. and Jupiter. research information.
- --------------------------------------------------------------------------------
5. Enterprise Services. Desktop and Allocated based on headcount for
network services support. NaviSite located at the Andover
Premises and the Federal Street
Premises divided by the
headcount for the CMGI Companies
using desktop and network services
support located at the Andover
Premises and the Federal Street
Premises.
- --------------------------------------------------------------------------------
6. Trade show Booth Rental. NaviSite is charged $1,239.55 per
month for the amortization of the
trade show booth. The amortization
charge back started in October 1998
and will continue for 36 months
from that date. NaviSite may
continue to use the booth as long
as CMGI continues to own more than
50% of the outstanding voting
capital stock of NaviSite.
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Services Provided by CMGI to NaviSite Allocation of Cost to NaviSite
- ----------------------------------------- -------------------------------------
- --------------------------------------------------------------------------------
<S> <C>
7. Medical/Dental Life and Long-term CMGI will provide Medical, Dental
Disability and Life and Long-term disability
coverage to NaviSite employees
under CMGI's group plans. NaviSite
will be billed directly by the
insurance provider for all costs
associated with coverage for
NaviSite employees enrolled in the
medical or dental insurance plan or
covered by the life and long-term
disability policy.
- --------------------------------------------------------------------------------
8. Federal Express/United Parcel CMGI's Accounts Payable department
Service. codes each individual charge based
on the identity of the sender.
- --------------------------------------------------------------------------------
9. Postage Machine. Mailings from the NaviSite is charged actual postage
Andover Premises. costs for mail stamped by the CMGI
postage machine.
- --------------------------------------------------------------------------------
10. Pepsi/Poland Springs. Allocated based on headcount for
NaviSite located at the Andover
Premises divided by headcount for
the CMGI Companies located at the
Andover Premises.
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Services Provided by CMGI to NaviSite Allocation of Cost to NaviSite
- ----------------------------------------- -------------------------------------
- --------------------------------------------------------------------------------
<S> <C>
11. Telephone. Provision of common, Modem, fax and 800 lines are
modem, fax and 800 lines. charged to NaviSite or the
individual employee who is
designated to that particular line.
Common inbound and outbound lines
are allocated based on headcount
for NaviSite located at the Andover
Premises divided by headcount for
the CMGI Companies located at the
Andover Premises.
- --------------------------------------------------------------------------------
12. MobilComm/Pagenet/Skytel/ Cellular Charged back to the person or
One. department which is assigned that
particular pager or cell phone.
- --------------------------------------------------------------------------------
13. Maxout Fitness. Fitness club Allocated based on the number of
membership. employees at NaviSite who belong to
the fitness club. The cost is
offset by the fitness club dues
that are withheld from the paycheck
of each employee who is a member of
the fitness club.
- --------------------------------------------------------------------------------
14. Legal Services. To the extent that legal fees and
expenses of NaviSite are paid for
by CMGI, such fees and expenses
will be allocated based upon the
actual use of the legal services.
- --------------------------------------------------------------------------------
15. KPMG. Preparation of yearly income To the extent that legal fees and
tax returns. expenses of NaviSite are paid for
by CMGI, such fees and expenses
will be allocated based upon the
actual use of KPMG services.
- --------------------------------------------------------------------------------
16. Funding Flex Spending. Charged for amounts reimbursed to
an employee through the flexible
spending account on a person by
person basis.
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Services Provided by CMGI to NaviSite Allocation of Cost to NaviSite
- ----------------------------------------- -------------------------------------
- --------------------------------------------------------------------------------
<S> <C>
19. The TPA Fees. Administration of Allocated based on number of
the flexible spending program. employees at NaviSite enrolled in
the program divided by the number
of employees at the CMGI Companies
enrolled in the program.
- --------------------------------------------------------------------------------
20. 401(k) and 401(k) Match Funding. NaviSite credits the 401(k)
contribution and 401(k) matching
contribution each month from its
payroll entry to a 401(k)
withholding account. Upon funding
the 401(k), CMGI charges back the
funds to NaviSite. NaviSite then
charges those funds to the 401(k)
withholdings account. There is
usually a lag time of 15 days to 30
days for funding the 401(k).
- --------------------------------------------------------------------------------
</TABLE>
Defined Terms
-------------
Andover Premises -- those premises located at 100 Brickstone Square,
Andover, MA 01810 leased by CMGI.
CMGI Companies -- those companies that are controlled by CMGI or in which
CMGI holds an equity interest.
Federal Street -- those premises located at 300 Federal Street, Andover,
Premises MA 01810 occupied by NaviSite.
headcount -- the number of employees employed by a particular CMGI
Company on the last day of a given month.
<PAGE>
EXHIBIT 10.12
-------------
NAVISITE, INC.
INVESTOR RIGHTS AGREEMENT
This Agreement dated as of __________, 1999 is entered into by and among
NaviSite, Inc., a Delaware corporation (the "Company"), and CMGI, Inc., a
Delaware corporation (the "Investor").
Recitals
--------
WHEREAS, the Company desires to undertake an initial public offering of its
Common Stock; and
WHEREAS, in order to induce the Investor to approve such offering, the
Company has agreed to provide for certain arrangements with respect to (i) the
registration of shares of capital stock of the Company under the Securities Act
of 1933, as amended, and (ii) the Investor's right of first refusal with respect
to certain issuances of securities of the Company;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement, the parties hereto agree as follows:
I. - Certain Definitions.
-------------------
As used in this Agreement, the following terms shall have the following
respective meanings:
"Commission" means the Securities and Exchange Commission, or any other
----------
federal agency at the time administering the Securities Act.
"Common Stock" means the common stock, $.01 par value per share, of the
------------
Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
------------
any successor federal statute, and the rules and regulations of the Commission
issued under such Act, as they each may, from time to time, be in effect.
<PAGE>
"Initiating Holders" means the Stockholders initiating a request for
------------------
registration pursuant to Section 2.1(a) or 2.1(b), as the case may be.
"Initial Public Offering" means the initial underwritten public offering of
-----------------------
shares of Common Stock pursuant to an effective Registration Statement.
"Permitted Transferee" shall have the meaning set forth in Section 3.3.
--------------------
"Prospectus" means the prospectus included in any Registration Statement,
----------
as amended or supplemented by an amendment or prospectus supplement, including
post-effective amendments, and all material incorporated by reference or deemed
to be incorporated by reference in such Prospectus.
"Registration Statement" means a registration statement filed by the
----------------------
Company with the Commission for a public offering and sale of securities of the
Company (other than a registration statement on Form S-8 or Form S-4, or their
successors, or any other form for a similar limited purpose, or any registration
statement covering only securities proposed to be issued in exchange for
securities or assets of another corporation).
"Registration Expenses" means the expenses described in Section 2.4.
---------------------
"Registrable Shares" means (a) the shares of Common Stock held by the
------------------
Investor upon the closing of the Initial Public Offering and (b) any other
shares of Common Stock issued in respect of such shares (because of stock
splits, stock dividends, reclassifications, recapitalizations or similar
events); provided, however, that shares of Common Stock which are Registrable
-------- -------
Shares shall cease to be Registrable Shares upon (i) any sale pursuant to a
Registration Statement or Rule 144 under the Securities Act or (ii) any sale in
any manner to a person or entity which, by virtue of Section 3.4 of this
Agreement, is not entitled to the rights provided by this Agreement.
"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
successor federal statute, and the rules and regulations of the Commission
issued under such Act, as they each may, from time to time, be in effect.
2
<PAGE>
"Selling Stockholder" means any Stockholder owning Registrable Shares
-------------------
included in a Registration Statement.
"Stockholders" means the Investor and any persons or entities to whom the
------------
rights granted under this Agreement are transferred by the Investor, its
successors or assigns, pursuant to Section 3.4 hereof.
II. - Registration Rights.
-------------------
2.1 Required Registrations.
----------------------
(a) At any time following 180 days after the closing of the
Initial Public Offering, a Stockholder or Stockholders may request, in writing,
that the Company effect the registration on Form S-1 or Form S-2 (or any
successor form) of Registrable Shares owned by such Stockholder or Stockholders
having an aggregate value of at least $10,000,000 (based on the then current
public market price).
(b) At any time after the Company becomes eligible to file
a Registration Statement on Form S-3 (or any successor form relating to
secondary offerings), a Stockholder or Stockholders may request, in writing,
that the Company effect the registration on Form S-3 (or such successor form),
of Registrable Shares having an aggregate value of at least $2,500,000 (based on
the then current public market price).
(c) Upon receipt of any request for registration pursuant
to this Section 2.1, the Company shall promptly give written notice of such
proposed registration to all other Stockholders. Such Stockholders shall have
the right, by giving written notice to the Company within 15 days after the
Company provides its notice, to elect to have included in such registration such
of their Registrable Shares as such Stockholders may request in such notice of
election, subject in the case of an underwritten offering to the approval of the
managing underwriter as provided in Section 2.1(d) below. Thereupon, the Company
shall, as expeditiously as possible, use its best efforts to effect the
registration on an appropriate registration form of all Registrable Shares which
the Company has been requested to so register (provided, however, that in the
-------- -------
case of a registration requested under Section 2.1(b), the Company will only be
obligated to effect such registration on Form S-3 (or any successor form)).
3
<PAGE>
(d) If the Initiating Holders intend to distribute the
Registrable Shares covered by their request by means of an underwriting, they
shall so advise the Company as a part of their request made pursuant to Section
2.1(a) or (b), as the case may be, and the Company shall include such
information in its written notice referred to in Section 2.1(c). The right of
any other Stockholder to include its Registrable Shares in such registration
pursuant to Section 2.1(a) or (b), as the case may be, shall be conditioned upon
such other Stockholder's participation in such underwriting on the terms set
forth herein. If the managing underwriter determines that the marketing factors
require a limitation of the number of shares to be underwritten, the number of
Registrable Shares to be included in a Registration Statement filed pursuant to
this Section 2.1 shall be reduced pro rata among the requesting Stockholders
based on the quotient of (i) the total Registrable Shares to be included in the
Registration Statement, divided by (ii) the total number of Registrable Shares
that requested registration.
(e) The Initiating Holders shall have the right to select
the managing underwriter(s) for any underwritten offering requested pursuant to
Section 2.1(a) or (b), subject to the approval of the Company, which approval
will not be unreasonably withheld.
(f) The Company shall not be required to effect more than
two registrations pursuant to Section 2.1(a) or more than five registrations
pursuant to Section 2.1(b). In addition, the Company shall not be required to
effect any registration within 90 days after the effective date of any other
Registration Statement of the Company relating to an underwritten offering. For
purposes of this Section 2.1(f), a Registration Statement shall not be counted
until such time as such Registration Statement has been declared effective by
the Commission, unless the Initiating Holders withdraw their request for such
registration (other than as a result of information concerning the business or
if financial condition of the Company which is made known to the Stockholders
after the date on which such registration was requested) and elect not to pay
the Registration Expenses therefor pursuant to Section 2.4.
(g) If at the time of any request to register Registrable
Shares by Initiating Holders pursuant to this Section 2.1, the Company is
engaged or has plans to engage in a registered public offering or is engaged in
any other activity which, in the good faith determination of the Company's Board
of Directors, would be adversely affected by the requested registration or if
financial statements required for the requested registration are not then
available, then the Company may at its option direct that such request be
delayed for a period not in excess of 90 days from the date
4
<PAGE>
of such request, such right to delay a request to be exercised by the Company
not more than once in any 12-month period.
2.2 Incidental Registration.
-----------------------
(a) Whenever the Company proposes to file a Registration
Statement (other than a Registration Statement filed pursuant to Section 2.1) at
any time and from time to time, it will, prior to such filing, give written
notice to all Stockholders of its intention to do so; provided, that no such
--------
notice need be given if no Registrable Shares are to be included therein as a
result of a determination of the managing underwriter pursuant to Section
2.2(b). Upon the written request of a Stockholder or Stockholders given within
20 days after the Company provides such notice (which request shall state the
intended method of disposition of such Registrable Shares), the Company shall
use its best efforts to cause all Registrable Shares which the Company has been
requested by such Stockholder or Stockholders to register to be registered under
the Securities Act to the extent necessary to permit their sale or other
disposition in accordance with the intended methods of distribution specified in
the request of such Stockholder or Stockholders; provided, that the Company
--------
shall have the right to postpone or withdraw any registration effected pursuant
to this Section 2.2 without obligation to any Stockholder.
(b) If the registration for which the Company gives notice
pursuant to Section 2.2(a) involves an underwriting, the Company shall so advise
the Stockholders as a part of the written notice given pursuant to Section
2.2(a). In such event, the right of any Stockholder to include its Registrable
Shares in such registration pursuant to Section 2.2 shall be conditioned upon
such Stockholder's participation in such underwriting on the terms set forth
herein. All Stockholders proposing to distribute their securities through such
underwriting shall enter into an underwriting agreement in customary form with
the underwriter or underwriters selected for the underwriting by the Company.
Notwithstanding any other provision of this Agreement, if the Company and the
managing underwriter(s) determine in good faith that marketing factors require a
limitation of the number of shares to be underwritten, then the Company and the
managing underwriter(s) may exclude shares from the registration and the
underwriting, and the number of shares that may be included in the registration
and the underwriting shall be allocated, first to the Company or the Company
-----
stockholder(s) for which the registration was initiated, and second to each of
------
the Stockholders requesting inclusion of their Registrable Shares in such
registration and each of the other holders of piggyback registration rights on a
parity with those Stockholders on a pro rata basis based on the total number of
Registrable Shares and other securities requested for inclusion in such
registration by each such Stockholder or other holder. If any holder of
Registrable Shares or any other Company stockholder requesting inclusions of
securities in the registration disapproves of the terms of any such
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, and any Registrable Shares or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration.
5
<PAGE>
(c) Notwithstanding the foregoing, the Company shall not be
required, pursuant to this Section 2.2, to include any Registrable Shares in a
Registration Statement if such Registrable Shares can then be sold pursuant to
Rule 144(k) under the Securities Act and represent less than 1% of the then
outstanding shares of Common Stock.
2.3 Registration Procedures.
-----------------------
(a) If and whenever the Company is required by the
provisions of this Agreement to use its best efforts to effect the registration
of any Registrable Shares under the Securities Act, the Company shall:
(i) file with the Commission a Registration
Statement with respect to such Registrable Shares and use its best efforts
to cause that Registration Statement to become effective as soon as
possible;
(ii) as expeditiously as possible, prepare and
file with the Commission any amendments and supplements to the
Registration Statement and the prospectus included in the Registration
Statement as may be necessary to comply with the provisions of the
Securities Act (including the anti-fraud provisions thereof) and to keep
the Registration Statement effective for 12 months from the effective date
or such lesser period until all such Registrable Shares are sold;
6
<PAGE>
(iii) as expeditiously as possible, furnish to
each Selling Stockholder such reasonable numbers of copies of the
Prospectus, including any preliminary Prospectus, in conformity with the
requirements of the Securities Act, and such other documents as such
Selling Stockholder may reasonably request in order to facilitate the
public sale or other disposition of the Registrable Shares owned by such
Selling Stockholder;
(iv) as expeditiously as possible, use its best
efforts to register or qualify the Registrable Shares covered by the
Registration Statement under the securities or Blue Sky laws of such states
as the Selling Stockholders shall reasonably request and do any and all
other acts and things that may be necessary or desirable to enable the
Selling Stockholders to consummate the public sale or other disposition in
such states of the Registrable Shares owned by the Selling Stockholder;
provided, however, that the Company shall not be required in connection
-------- -------
with this paragraph (iv) to qualify as a foreign corporation or execute a
general consent to service of process in any jurisdiction;
(v) as expeditiously as possible, cause all such
Registrable Shares to be listed on each securities ex change or automated
quotation system on which similar securities issued by the Company are then
listed; and
(vi) promptly make available for inspection by
the Selling Stockholders, any managing underwriter participating in any
disposition pursuant to such Registration Statement and any attorney or
accountant or other agent retained by any such underwriter or selected by
the Selling Stockholders, all financial and other records, pertinent
corporate documents and properties of the Company and cause the Company's
officers, directors, employees and independent accountants to supply all
information reasonably requested by any such Selling Stockholder,
underwriter, attorney, accountant or agent in connection with such
Registration Statement.
(b) If the Company has delivered a Prospectus to the
Selling Stockholders, and after having done so, the Prospectus is amended to
comply with the requirements of the Securities Act, the Company shall promptly
notify the
7
<PAGE>
Selling Stockholders and, if requested, the Selling Stockholders shall
immediately cease making offers of Registrable Shares and return all
Prospectuses to the Company. The Company shall promptly provide the Selling
Stockholders with revised Prospectuses, and following receipt of the revised
Prospectuses, the Selling Stock holders shall be free to resume making offers of
the Registrable Shares.
(c) In the event that, in the judgment of the Company, it is
advisable to suspend use of a Prospectus included in a Registration Statement
due to pending material developments or other events that have not yet been
publicly disclosed and as to which the Company believes public disclosure would
be detrimental to the Company, the Company shall notify all Selling
Stockholders to such effect, and upon receipt of such notice, each such Selling
Stockholder shall immediately discontinue any sales of Registrable Shares
pursuant to such Registration Statement until such Selling Stockholder has
received copies of a supplemented or amended Prospectus or until such Selling
Stockholder is advised in writing by the Company that the then current
Prospectus may be used and has received copies of any additional or
supplemental filings that are incorporated or deemed incorporated by reference
in such Prospectus. Notwithstanding anything to the contrary herein, the Company
shall not exercise its rights under this Section 2.3(c) to suspend sales of
Registrable Shares for a period in excess of 90 days in any 365-day period.
2.4 Allocation of Expenses. The Company will pay all Registration
----------------------
Expenses for all registrations under this Agreement; provided, however, that if
-------- -------
a registration under Section 2.1 is withdrawn at the request of the Initiating
Holders (other than as a result of information concerning the business or
financial condition of the Company which is made known to the Stockholders after
the date on which such registration was requested) and if the Initiating Holders
elect not to have such registration counted as a registration requested under
Section 2.1, the requesting Stockholders shall pay the Registration Expenses of
such registration pro rata in accordance with the number of their Registrable
Shares included in such registration. For purposes of this Section, the term
"Registration Expenses" shall mean all expenses incurred by the Company in
complying with this Agreement, including, without limitation, all registration
and filing fees, exchange listing fees, printing expenses, fees and expenses of
counsel for the Company and the fees and expenses of one counsel selected by the
Selling Stockholders to represent the Selling Stockhold ers, state Blue Sky
fees and expenses and the expense of any special audits incident to or required
by any such registration, but excluding underwriting discounts, selling
commissions and the fees and expenses of Selling Stockholders' own counsel
(other than the counsel selected to represent all Selling Stockholders).
8
<PAGE>
2.5 Indemnification and Contribution.
--------------------------------
(a) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Agreement, the Company will
indemnify and hold harmless the Selling Stockholder, each underwriter of such
Registrable Shares and each other person, if any, who controls such Selling
Stockholder or underwriter within the meaning of the Securities Act or the
Exchange Act against any losses, claims, damages or liabilities, joint or
several, to which such Selling Stockholder, under writer or controlling person
may become subject under the Securities Act, the Exchange Act, state securities
or Blue Sky laws or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) (i) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in any Registration Statement under which such Registrable Shares were
registered under the Securities Act, any preliminary prospectus or final
prospectus contained in the Registration Statement or any amendment or
supplement to such Registration Statement or (ii) arise out of or are based upon
the omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; and the
Company will reimburse such Selling Stockholder, underwriter and controlling
person for any legal or any other expenses reasonably incurred by such Selling
Stockholder, underwriter or controlling person in connection with investigating
or defending any such loss, claim, damage, liability or action; provided,
--------
however, that the Company will not be liable in any such case to the extent that
- -------
any such loss, claim, damage or liability arises out of or is based upon any
untrue statement or omission made in such Registration Statement, preliminary
prospectus or prospectus, or any such amendment or supplement, in reliance upon
and in conformity with information furnished to the Company, in writing, by or
on behalf of such Selling Stockholder, underwriter or controlling person
specifically for use in the preparation thereof.
(b) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Agreement, each Selling
Stockholder, severally and not jointly, will indemnify and hold harmless the
Company, each of its directors and officers and each underwriter (if any) and
each person, if any, who controls the Company or any such underwriter within the
meaning of the Securities Act or the Exchange Act, against any losses, claims,
damages or liabilities, joint or several, to which the Company, such directors
and officers, underwriter or controlling person may become subject under the
Securities Act, Exchange Act, state securities or Blue Sky laws or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) (i) arise out of or are based upon any untrue
9
<PAGE>
statement or alleged untrue statement of a material fact contained in any
Registration Statement under which such Registrable Shares were registered under
the Securities Act, any preliminary prospectus or final prospectus contained in
the Registration Statement or any amendment or supplement to the Registration
Statement or (ii) arise out of or are based upon any omission or alleged
omission to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, if the statement or omission was
made in reliance upon and in conformity with information relating to such
Selling Stockholder furnished in writing to the Company by or on behalf of such
Selling Stockholder specifically for use in connection with the preparation of
such Registration Statement, prospectus, amendment or supplement; provided,
--------
however, that the obligations of a Selling Stockholder hereunder shall be
- -------
limited to an amount equal to the net proceeds to such Selling Stockholder of
Registrable Shares sold in connection with such registration.
(c) Each party entitled to indemnification under this Section
2.5 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided, that counsel for the Indemnifying
--------
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld); and, provided, further, that the failure of any Indemnified Party to
-------- -------
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 2.5 except to the extent that the Indemnifying
Party is adversely affected by such failure. The Indemnified Party may
participate in such defense at such Indemnified Party's expense; provided,
--------
however, that the Indemnifying Party shall pay such expense if representation
- -------
of such Indemnified Party by the counsel retained by the Indemnifying Party
would be inappropriate due to actual or potential differing interests between
the Indemnified Party and any other party represented by such counsel in such
proceeding; provided further that in no event shall the Indemnifying Party be
-------- -------
required to pay the expenses of more than one law firm per jurisdiction as
counsel for the Indemnified Party. The Indemnifying Party also shall be
responsible for the expenses of such defense if the Indemnifying Party does not
elect to assume such defense. No Indemnifying Party, in the defense of any
such claim or litigation shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
of such claim or litigation, and no Indemnified Party shall consent to entry of
any
10
<PAGE>
judgment or settle such claim or litigation without the prior written consent of
the Indemnifying Party, which consent shall not be unreasonably withheld.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 2.5 is
due in accordance with its terms but for any reason is held to be unavailable to
an Indemnified Party in respect to any losses, claims, damages and liabilities
referred to herein, then the Indemnifying Party shall, in lieu of indemnifying
such Indemnified Party, contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages or liabilities to
which such party may be subject in such proportion as is appropriate to reflect
the relative fault of the Company on the one hand and the Selling Stockholders
on the other in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative fault of the Company and the Selling
Stockholders shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of material fact related to information
supplied by the Company or the Selling Stockholders and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and the Stockholders agree that it would
not be just and equitable if contribution pursuant to this Section 2.5 were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this Section 2.5(d), (a) in no case shall any
one Selling Stockholder be liable or responsible for any amount in excess of the
net proceeds received by such Selling Stockholder from the offering of
Registrable Shares and (b) the Company shall be liable and responsible for any
amount in excess of such proceeds; provided, however, that no person guilty of
-------- -------
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties under this Section 2.5(d), notify such
party or parties from whom contribution may be sought, but the omission so to
notify such party or parties from whom contribution may be sought shall not
relieve such party from any other obligation it may have thereunder or otherwise
under this Section 2.5(d). No party shall be liable for contribution with
respect to any action, suit, proceeding or claim settled without its prior
written consent, which consent shall not be unreasonably withheld.
11
<PAGE>
2.6 Other Matters with Respect to Underwritten Offerings. In the
----------------------------------------------------
event that Registrable Shares are sold pursuant to a Registration Statement in
an underwritten offering pursuant to Section 2.1, the Company agrees to enter
into an underwriting agreement containing customary representations and
warranties with respect to the business and operations of the Company and
customary covenants and agreements to be performed by the Company, including
without limitation customary provisions with respect to indemnification by the
Company of the underwriters of such offering.
2.7 Information by Holder. Each Selling Stockholder shall furnish
---------------------
to the Company such information regarding such Selling Stockholder and the
distribution proposed by such Selling Stockholder as the Company may reasonably
request in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Agreement.
III. - Right Of First Refusal.
----------------------
3.1 Rights of Investor.
------------------
(a) Until the first date on which the Investor or any
Permitted Transferee (as defined below) owns less than a majority, by voting
power, of the outstanding shares of capital stock of the Company (assuming the
exercise and conversion of all outstanding options, warrants and convertible
securities), the Company shall not issue or sell (i) any shares of its Common
Stock, (ii) any other voting equity securities of the Company, including,
without limitation, shares of preferred stock, (iii) any option, warrant or
other right to subscribe for, purchase or otherwise acquire any voting equity
securities of the Company or (iv) any debt securities convertible into voting
capital stock of the Company (collectively, the "Offered Securities"), unless in
each such case the Company shall have first complied with this Section 3.1. The
Company shall deliver to the Investor a written notice of any proposed or
intended issuance or sale of Offered Securities (the "Offer"), which Offer shall
(A) identify and describe the Offered Securities, (B) describe the price and
other terms upon which they are to be issued or sold, and the number or amount
of the Offered Securities to be issued or sold, (C) identify the persons or
entities (if known) to which or with which the Offered Securities are to be
offered, issued or sold and (D) offer to issue and sell to the Investor a number
of the Offered Securities (the "Available Amount") such that, after the issuance
and sale of all of the Offered Securities, including the purchase of the
Available Amount by the Investor, the
12
<PAGE>
Investor would own at least a majority, by voting power, of the outstanding
capital stock of the Company (assuming the exercise and conversion of all
outstanding options, warrants and convertible securities). The Company shall not
be required to offer any Offered Securities to the Investor hereunder if, after
the issuance and sale thereof, the Investor (or the Permitted Transferee) would
continue to own at least a majority, by voting power, of the outstanding capital
stock of the Company (assuming the exercise and conversion of all outstanding
options, warrants and convertible securities).
(b) To accept an Offer, in whole or in part, the Investor must
deliver a written notice to the Company within 20 days after its receipt of the
Offer, setting forth the portion of the Available Amount that the Investor
elects to purchase (the "Notice of Acceptance").
(c) The Company shall have 180 days from the expiration of the
period set forth in Section 3.1(b) above to issue or sell all or any part of
such Offered Securities as to which a Notice of Acceptance has not been given by
the Investor, upon terms and conditions which are not more favorable, in the
aggregate, to the acquiring person or persons or less favorable to the Company
than those set forth in the Offer. If the consideration to be received by the
Company from the sale of Offered Securities consists of anything other than
cash, the Board of Directors of the Company shall in good faith determine the
cash equivalent of such non-cash consideration and the Investor may pay an
equivalent portion of its purchase price for the elected portion of the
Available Amount in cash.
(d) The purchase by the Investor of any Offered Securities is
subject in all cases to the preparation, execution and delivery by the Company
and the Investor of a purchase agreement relating to such Offered Securities
reasonably satisfactory in form and substance to the Investor.
(e) The rights of the Investor under this Section 3.1 shall not
apply to the grant of options to officers, directors, consultants and employees
of the Company or any subsidiary pursuant to any plan, agreement or arrangement
approved by a vote of not less than a majority of the members of the Board of
Directors of the Company, provided, however, that if the exercise of any such
-------- -------
options results in the reduction of the Investor's, or Permitted Transferee's,
ownership to less than a majority, by voting power, of the outstanding capital
stock of the Company, the Company shall so notify the Investor (or Permitted
Transferee), and the Investor or Permitted Transferee shall have the right,
within 30 days after such notice, to pur-
13
<PAGE>
chase from the Company, at a price equal to the then Fair Market Value (as
defined below) thereof, such number of shares of Common Stock as would increase
its ownership to a majority, by voting power, of the outstanding capital stock
of the Company. "Fair Market Value" shall mean the average closing price of the
Common Stock on the Nasdaq National Market (or other principal securities
exchange or other interdealer quotation system on which the Common Stock is
traded or quoted), during the 10-day period ending on the day prior to the date
of purchase.
3.2 Termination. This Article III shall terminate upon the earlier
-----------
of (i) the sale of all or substantially all of the assets or business of the
Company, by merger, sale of assets or otherwise, and (ii) the first date on
which the Investor (or Permitted Transferee) owns less than a majority, by
voting power, of the outstanding capital stock of the Company for 30 consecutive
days.
3.3 Permitted Transferee. For purposes hereof, a "Permitted
--------------------
Transferee" shall mean any person or entity that acquires directly from the
Investor shares of Common Stock representing at least a majority of the
outstanding shares of Common Stock of the Company and to which the Investor
assigns, in writing, its rights under Section 3.1. Upon such assignment, the
Permitted Transferee shall be considered the "Investor" for purposes of Section
3.1.
3.4 Transfers of Rights. The rights and obligations of the Investor
-------------------
under Section 2 may be assigned by Investor to any person or entity that
acquires shares of Common Stock having an aggregate value of at least $2,500,000
(as adjusted in stock splits and similar events) from the Investor. The rights
and obligations of the Investor under Section 3.1 may be assigned only to a
Permitted Transferee, and upon such assignment, the rights and obligations of
the Investor under Section 3.1 shall terminate. In the event of any such
assignment, the assignee must provide written notice of such assignment to the
Company and agree in writing to be bound by the applicable provisions of this
Agreement.
IV. - General.
-------
4.1 Severability. The invalidity or unenforceability of any
------------
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
4.2 Specific Performance. In addition to any and all other remedies
--------------------
that may be available at law in the event of any breach of this Agreement, each
14
<PAGE>
Investor shall be entitled to specific performance of the agreements and
obligations of the Company hereunder and to such other injunctive or other
equitable relief as may be granted by a court of competent jurisdiction.
4.3 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the internal laws of the Commonwealth of Massachusetts
(without reference to the conflicts of law provisions thereof).
4.4 Notices. All notices, requests, consents and other
-------
communications under this Agreement shall be in writing and shall be deemed
delivered (i) two business days after being sent by registered or certified
mail, return receipt requested, postage prepaid, or (ii) one business day after
being sent via a reputable nationwide overnight courier service guaranteeing
next business day delivery, in each case to the intended recipient as set forth
below:
If to the Company, at NaviSite, Inc., 100 Brickstone Square, Andover,
Massachusetts 01810, Attention: President, or at such other address or
addresses as may have been furnished in writing by the Company to the Investor;
or
If to the Investor, at CMGI, Inc., 100 Brickstone Square, Andover,
Massachusetts 01810, or at such other address or addresses as may have been
furnished to the Company in writing by such Investor.
Any party may give any notice, request, consent or other communication
under this Agreement using any other means (including, without limitation,
personal delivery, messenger service, telecopy, first class mail or electronic
mail), but no such notice, request, consent or other communication shall be
deemed to have been duly given unless and until it is actually received by the
party for whom it is intended. Any party may change the address to which
notices, requests, consents or other communications hereunder are to be
delivered by giving the other parties notice in the manner set forth in this
Section.
4.5 Complete Agreement. This Agreement constitutes the entire
------------------
agreement and understanding of the parties hereto with respect to the subject
matter hereof and supersedes all prior agreements and understandings relating to
such subject matter.
4.6 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended or terminated and the observance of any term of this Agreement may be
15
<PAGE>
waived (either generally or in a particular instance and either retroactively or
prospectively) with the written consent of the Company and the Investor.
4.7 Pronouns. Whenever the context may require, any pronouns used in
--------
this Agreement shall include the corresponding masculine, feminine or neuter
forms, and the singular form of nouns and pronouns shall include the plural, and
vice versa.
4.8 Counterparts; Facsimile Signatures. This Agreement may be
----------------------------------
executed in two counterparts, each of which shall be deemed to be an original,
and both of which together shall constitute one and the same document. This
Agreement may be executed by facsimile signatures.
4.9 Section Headings. The section headings are for the convenience
----------------
of the parties and in no way alter, modify, amend, limit or restrict the
contractual obligations of the parties.
4.1 Effective Date. This Agreement shall become effective upon the
--------------
closing of the Company's initial public offering of Common Stock pursuant to an
effective registration statement and shall terminate if such offering does not
close prior to March 31, 2000.
Executed as of the date first written above.
NAVISITE, INC.
By:__________________________
Name:
Title:
CMGI, INC.
By:__________________________
Name:
Title:
16
<PAGE>
EXHIBIT 10.13
TAX ALLOCATION AGREEMENT
TAX ALLOCATION AGREEMENT (the "Agreement") is made as of _________, 1999 by
and among CMGI, Inc., a Delaware corporation ("Parent"), and NaviSite, Inc., a
Delaware corporation ("Sub").
WHEREAS, prior to the Closing Date (as defined below), Sub was a member of
the Parent Group (as defined below);
WHEREAS, Parent will cause to be sold to the public a portion of the common
stock of Sub in a Public Offering (as defined below);
WHEREAS, the parties desire to provide for the allocation of
responsibilities, liabilities and benefits in respect of Taxes (as defined
below).
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
DEFINITIONS
"Closing Date" means the close of business on the date on which Sub ceases
to be a member of the Parent Group.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Returns" means any consolidated, combined or unitary Tax
Returns required to be filed by Parent with respect to United States federal,
state or local Taxes imposed or based on net income, net worth or gross
receipts.
"Parent Group" means an affiliated group (within the meaning of Section
1504(a) of the Code and any corresponding provisions of state, local or foreign
tax law) having Parent as its common parent.
"Parent Subsidiary" or "Parent Subsidiaries" mean each corporation of which
Parent owns, directly or indirectly, capital stock representing more than 50% of
the outstanding voting stock. Parent Subsidiary or Parent Subsidiaries shall not
include Sub or any Sub Subsidiary.
"Public Offering" means either the sale to the public by Parent or the
issuance to the public by Sub of common stock of Sub.
"Returns" means all returns, reports and information statements (including
all exhibits and schedules thereto) required to be filed with a taxing authority
with respect to any Taxes.
<PAGE>
"Sub Subsidiary" or "Sub Subsidiaries" means each corporation of which Sub
owns on the Closing Date or thereafter, directly or indirectly, capital stock
representing more than 50% of the outstanding voting stock.
"Sub Taxes" means United States federal, state and local Taxes imposed or
based on net income, net worth or gross receipts (including interest and
penalties relating thereto) attributable to the operations of Sub and Sub
Subsidiaries.
"Taxes" means all federal, state, local and foreign income, profits,
franchise, sales, use, occupation, property, severance, excise, payroll,
withholding and any other taxes (including interest and penalties thereon).
ARTICLE II
REPRESENTATIONS
Section 2.1 Parent represents and warrants to the Sub that all
Consolidated Returns for any taxable year or Tax period ending on or before the
Closing Date have been or shall be timely filed in accordance with all
applicable laws, and all Taxes shown as due on such Consolidated Returns have
been or shall be paid, and any proposed deficiency asserted by any taxing
authority with respect thereto has been paid or properly protested.
Section 2.2 Sub represents and warrants to Parent that all Tax Returns for
any taxable year or Tax period ending on or before the Closing Date with respect
to Sub and Sub Subsidiaries, excluding any Consolidated Returns, have been or
shall be timely filed in accordance with all applicable laws, and all Taxes
shown as due on such Returns have been or shall be paid, and any proposed
deficiency asserted by any taxing authority with respect thereto has been paid
or properly protested.
ARTICLE III
TAX MATTERS
Section 3.1 Parent shall include (to the extent required by law) in
Consolidated Returns the taxable income or loss and all other Tax items of Sub
for the taxable years or Tax periods ending on or before the Closing Date. For
the period commencing on August 1 immediately preceding the Closing Date and
ending on the Closing Date, the following arrangement shall apply to ensure that
the correct amount of Sub Taxes due in respect of the Consolidated Returns is
billed to and paid by Sub:
(a) An estimate of the amount of such Sub Taxes due, which estimate shall
be determined in good faith and shall reflect amounts, if any, previously paid
by Sub with respect to Sub Taxes through the Closing Date, shall be billed to
Sub and paid to Parent prior to the Closing Date.
(b) Upon filing of the Consolidated Returns for the taxable year which
shall include the period commencing on August 1 and ending on the Closing Date,
either
(i) the unpaid amount, if any, of Sub Taxes due in respect of such
Consolidated Returns shall be billed to Sub, and Sub or its designee shall pay
such amount to Parent within 30 days after receiving written notice from Parent
of such amount, or
2
<PAGE>
(ii) if the amount of such Sub Taxes paid to Parent, if any, exceeds
the amount of the Sub Taxes due in respect of such Consolidated Returns, Parent
or its designee shall pay such excess to Sub or its designee within 30 days
after filing the Consolidated Returns for the taxable year which includes the
Closing Date.
(c) Sub Taxes due in respect of Consolidated Returns shall be determined in
accordance with (i) the method set forth in Section 1552(a)(1) of the Code and
U.S. Federal Income Tax Regulation Sections 1.1552-1(a)(1) and 1.1552-1(b), (ii)
one of the three methods of allocation under Section 1.1502-33(d) (sometimes
referred to as the three "Complementary Methods") and (iii) the practices of the
parties for Tax periods ended prior to the Closing Date.
(d) Except as provided in Section 3.7 and the last sentence of this
subsection (d), no party shall have any obligation to make any payments to
another party for the use of such other party's Tax attributes pursuant to U.S.
Federal Income Tax Regulation Section 1.1502-33(d) or otherwise.
Section 3.2 Subject to the provisions of Section 3.1, Parent shall be
liable for any and all Sub Taxes in respect of all Consolidated Returns due or
payable by Parent for any taxable year or Tax period ending on or before the
Closing Date.
Section 3.3 Subject to the provisions of Section 3.1, Sub and Sub
Subsidiaries shall be liable for (i) any and all Sub Taxes in respect of
Consolidated Returns due or payable to Parent by Sub under Section 3.1 and (ii)
any and all Taxes (other than Sub Taxes in respect of Consolidated Returns) due
or payable by Sub or Sub Subsidiaries for any taxable year or Tax period
(whether ending before, on or after the Closing Date).
Section 3.4 Any Taxes (other than ad valorem, personal property and real
property Taxes) for any Tax period beginning before the Closing Date and ending
after the Closing Date shall be apportioned between Sub as a member of the
Parent Group and Sub as a separate company which is not a member of the Parent
Group, respectively, based on the actual operations of Sub and/or Sub
Subsidiaries, as the case may be, during the portion of such period ending on
the Closing Date, and the portion of such period beginning on the day following
the Closing Date, and each portion of such period shall be deemed to be a Tax
period subject to the provisions of Sections 3.2 and 3.3. In the case of ad
valorem, personal property and real property Taxes, such apportionment shall be
on a per diem basis.
Section 3.5 Sub shall file or cause to be filed all required state, local
and foreign non-Consolidated Returns with respect to Sub and Sub Subsidiaries
for the Tax period beginning before the Closing Date and ending after the
Closing Date, and any such unfiled Tax Returns for periods ending on or before
the Closing Date, and Sub shall pay or cause its Subsidiaries to pay all Taxes
shown as due on any such Tax Returns.
Section 3.6 Any refunds or credits of Sub Taxes in respect of Consolidated
Returns for any taxable year or Tax period ending on or before the Closing Date
shall be for the account of Parent and Parent Subsidiaries. Any refunds or
credits of Taxes (other than Sub Taxes in respect of Consolidated Returns) paid
by Sub or Sub Subsidiaries for any taxable year or Tax period (whether ending
before, on or after the Closing Date) shall be for the account of Sub and its
Subsidiaries.
3
<PAGE>
Section 3.7
(a) Parent shall promptly pay to Sub the amount of any incremental Tax
savings generated by (i) a deduction, credit or exclusion that (A) is actually
realized by the Parent Group with respect to Taxes for a taxable period ending
on or before the Closing Date and (B) relates to or is based on an item that is
the basis for a similar deduction, credit or exclusion taken on a Return with
respect to Taxes of Sub or Sub Subsidiaries for a taxable period ending after
the Closing Date that is denied, disallowed, forfeited or accelerated prior to
the Closing Date or (ii) a reduction in the amount of any gross income or
revenue that (A) is actually realized by the Parent Group with respect to Taxes
for a taxable period ending on or before the Closing Date and (B) relates to, or
is based on, a similar item of gross income or revenue that Sub or Sub
Subsidiaries are required to include on a Return or otherwise required to
include in its computation of taxable income as a result of an audit, other
administrative proceeding or otherwise with respect to Taxes for a taxable
period ending after the Closing Date.
(b) Sub shall promptly pay to Parent the amount of any incremental Tax
savings generated by (i) a deduction, credit or exclusion that (A) is actually
realized by the Sub or Sub Subsidiaries with respect to Taxes for a taxable
period ending after the Closing Date and (B) relates to or is based on an item
that is the basis for a similar deduction, credit or exclusion taken on a
Consolidated Return with respect to Taxes for a taxable period ending on or
before the Closing Date that is denied, disallowed, forfeited or deferred until
after the Closing Date or (ii) a reduction in the amount of any gross income or
revenue that (A) is actually realized by Sub or Sub Subsidiaries with respect to
Taxes for a taxable period ending after the Closing Date and (B) relates to, or
is based on, a similar item of gross income or revenue that the Parent Group is
required to include on a Consolidated Return or otherwise required to include
in its computation of taxable income as a result of an audit, other
administrative proceeding or otherwise with respect to Taxes for a taxable
period ending after the Closing Date.
Section 3.8 Parent or Parent designee shall exercise, at Parent's expense,
complete control of the audit, appeal, litigation and/or settlement of any
issues raised in any official inquiry, examination or proceeding that could
result in an official determination with respect to Taxes due or payable by the
Parent Group, Parent Subsidiaries, Sub or Sub Subsidiaries for any taxable year
or Tax period (including a period deemed to be a Tax period under Section 3.4)
ending on or before the Closing Date, except in respect of Taxes for which Sub
or Sub Subsidiaries are responsible in connection with non-Consolidated Returns
required to be filed by Sub or Sub Subsidiaries, in which case Sub shall
exercise, at Sub's expense, complete control of the audit, appeal, litigation
and/or settlement. The parties shall cooperate in any such inquiry, examination
or proceeding.
Section 3.9 Sub irrevocably designates Parent (and shall cause each Sub
Subsidiary to irrevocably designate Parent) as its agent and attorney-in-fact
(and shall execute any necessary powers of attorney) for the purpose of taking
any and all actions necessary or incidental to the filing of Consolidated Tax
Returns. Parent and Sub will each furnish to the other any and all information
which the other may reasonably request in order to carry out the provisions of
this Agreement to determine the amount of any Tax liability.
4
<PAGE>
ARTICLE IV
INDEMNIFICATION
Section 4.1
(a) Except to the extent of any due and unpaid obligations of Sub with
respect to its payment obligations under Article III, Parent (i) shall indemnify
and hold harmless Sub and each Sub Subsidiary against the amount of any and
all liability, loss, expense or damage Sub or such Sub Subsidiary may suffer or
incur as a result of any or all claims, demands, costs or expenses (including,
without limitation, attorneys' and accountants' fees), interest, penalties or
judgments made against it arising from or incurred in relation to all Taxes in
respect of all Consolidated Returns and (ii) shall make any payment, remove any
lien and take any action reasonably necessary to prevent Sub or such Sub
Subsidiary from incurring such liabilities, losses, expenses or damages.
(b) Except to the extent of any due and unpaid obligations of Parent with
respect to its payment obligations under Article III, Sub shall indemnify and
hold harmless Parent and each Parent Subsidiary against the amount of any and
all liability, loss, expense or damage any such company may suffer or incur as a
result of any or all claims, demands, costs or expenses (including, without
limitation, attorneys' and accountants' fees), interest, penalties or judgments
made against it arising from or incurred in relation to (i) any failure of Sub
to pay any amount to Parent with respect to Sub's obligations under Article III
and (ii) any and all Taxes (other than Taxes in respect of Consolidated Returns)
due or payable by Sub or Sub Subsidiaries for any taxable year or Tax period
beginning before, on or after the Closing Date.
Section 4.2 Payments under this Agreement shall be due no later than 30
days after the date written demand therefor, with a reasonably detailed
explanation for the basis of the claim, is actually received by Parent or Sub.
Section 4.3 In the event that any party fails to pay any amount owed
pursuant to this Agreement within 10 days after the date when such amount is
due, interest shall accrue on the unpaid amount at the rate applicable to
underpayments of the Tax with respect to which such amount relates from the due
date until such amounts are fully paid.
ARTICLE V
MISCELLANEOUS
Section 5.1 For all purposes of this Agreement, Sub shall be the agent for
each Sub Subsidiary, with full power to give any consent and/or exercise any
right provided for herein on behalf of such Sub Subsidiary.
Section 5.2 Any dispute concerning the calculation or basis of
determination of any payment provided for hereunder shall be resolved by a law
firm or "big five" accounting firm, selected jointly by Parent and Sub, whose
judgment shall be conclusive and binding upon the parties in the absence of
manifest error. The fees and other expenses of such law or accounting firm
shall be paid 50% by Parent and 50% by Sub.
5
<PAGE>
Section 5.3 This Agreement shall be binding upon the parties hereto and
shall inure to the benefit of and be binding upon any of their successors or
assigns; provided, however, that none of Parent, Sub or any of the Sub
Subsidiaries may assign or delegate any of its obligations hereunder without the
consent of Sub (in the case of a proposed assignment or delegation by Parent) or
Parent (in the case of a proposed assignment or delegation by Sub or any of the
Sub Subsidiaries).
Section 5.4 This Agreement embodies the entire understanding between the
parties relating to its subject matter and supersedes and terminates all prior
agreements and understandings among the parties with respect to such subject
matter. Any and all prior correspondence, conversations and memoranda with
respect to such subject matter are merged herein and shall be without effect
hereon. No promises, covenants or representations of any kind, other than those
expressly stated herein, have been made to induce any party to enter into this
Agreement. This Agreement shall not be modified or terminated except by a
writing duly signed by each of the parties (or, in the case of a Sub Subsidiary,
by Sub acting as its agent on its behalf), and no waiver of any provisions of
this Agreement shall be effective unless in a writing duly signed by the party
sought to be bound (or, in the case of a Sub Subsidiary, by Sub acting as its
agent on its behalf).
Section 5.5 Any payment, notice or communication required or permitted to
be given under this Agreement shall be in writing and may be delivered by hand,
first-class mail, facsimile (if confirmed) or overnight courier:
If to Parent, to:
100 Brickstone Square
Andover, Massachusetts 01810
Attention: Mr. Don Combs, Vice President for Finance
If to Sub on its own behalf, or as agent for the Sub Subsidiaries, to:
100 Brickstone Square
Andover, Massachusetts 01810
Attention: Mr. Kenneth W. Hale, Chief Financial Officer
or to such other person or address as a party shall furnish in writing to all
the other parties. All such notices and communications shall be effective (i)
when received, if delivered by hand, first-class mail or overnight courier, or
(ii) when transmission is confirmed, if delivered by facsimile.
Section 5.6 This Agreement may be executed in two or more counterparts,
each of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument. This Agreement may be executed by
facsimile signatures.
Section 5.7 This Agreement shall be governed by the laws applicable to
contracts entered into and to be fully performed within the State of Delaware by
residents thereof.
Section 5.8 Each of Parent, Sub and any of the Sub Subsidiaries agree
that, in the event of any legal suit or proceeding arising in connection with
this Agreement and the obligations of the parties hereunder, it shall submit to
the jurisdiction of the United States District Court of Delaware and further
agrees to venue in such court.
6
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by its respective duly authorized officer as of the date first set
forth above.
CMGI, INC.
By:__________________________________
Title:_______________________________
NAVISITE, INC.
By:__________________________________
Title:_______________________________
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<PAGE>
EXHIBIT 10.18
NAVISITE, INC.
DEFERRED COMPENSATION PLAN
ARTICLE I
ESTABLISHMENT OF PLAN
1.1 Purpose. The NaviSite, Inc. Deferred Compensation Plan is hereby
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established by the Board of Directors of NaviSite, Inc. ("NaviSite"), a
Delaware corporation, to provide deferred compensation benefits to selected
executives of NaviSite and certain related subsidiaries as more fully provided
herein. The benefits provided under the Plan are intended to be in addition to
other employee benefits programs offered by the Participating Employers (as
defined in Section 2.18), including but not limited to tax-qualified employee
benefit plans.
1.2 Prior Plan. NaviSite has been a Participating Employer in the CMGI
----------
and Participating Subsidiaries Deferred Compensation Plan (the "Prior Plan").
In connection with the initial public offering of its common stock, NaviSite has
decided to continue providing such benefits to its employees under a separate
plan. Therefore, NaviSite hereby adopts this unfunded deferred compensation
plan, to be known as the NaviSite, Inc. Deferred Compensation Plan, hereinafter
referred to as the "Plan" as a continuation of the Prior Plan. All of
NaviSite's liabilities under the terms of the Prior Plan, with respect to
benefits accrued by its employees as well as new benefits for employees, will
henceforth be provided under the terms of this Plan.
1.3 Applicability of ERISA. This Plan is intended to be a "top-hat" plan.
----------------------
This is an unfunded plan maintained primarily for the purpose of providing
deferred compensation to a select group of management or highly compensated
employees within the meaning of ERISA.
ARTICLE II
DEFINITIONS
As used within this document, the following words and phrases have the
meanings described in this Article II unless a different meaning is required by
the context. Some of the words and phrases used in the Plan are not defined in
this Article II, but for convenience, are defined as they are introduced into
the text. Words in the masculine gender shall be deemed to include the feminine
gender. Any headings used are included for ease of reference only, and are not
to be construed so as to alter any of the terms of the Plan.
<PAGE>
2.1 Annual Deferral. The amount of Base Salary and/or Bonuses which the
---------------
Participant elects to defer in each Deferral Period pursuant to Article 4.1 of
the Plan document.
2.2 Basic Salary. A Participant's base annual salary for the applicable
------------
Plan Year.
2.3 Beneficiary. An individual or entity designated by a Participant in
-----------
accordance with Section 14.6.
2.4 Board or Board of Directors. The Board of Directors of NaviSite.
----- ------------------
2.5 Bonus. Earnings awarded to a Participant at the option of the
-----
Participating Employer which may or may not occur during each Plan Year.
2.6 Code. The Internal Revenue Code of 1986. Reference to a section of
----
the Code shall include that section and any comparable section or sections of
any future legislation that amends, supplements or supersedes such section.
2.7 Committee. A committee of one or more individuals appointed by the
---------
Board of Directors to administer the Plan, or, in the absence of such
appointment, the Board of Directors.
2.8 Deferral Account. The account established for a Participant pursuant
----------------
to Section 5.1 of the Plan document.
2.9 Deferral Election. The election made by the Participant pursuant to
-----------------
Section 4.1 of the Plan document.
2.10 Deferral Period. The Plan Year, or in the case of a newly hired or
---------------
promoted employee who becomes an Eligible Employee during a Plan Year, the
remaining portion of the Plan Year. In the case of the first Plan Year under
the Prior Plan, the Deferral Period commenced December 1, 1998 and ended
December 31, 1998.
2.11 Disability. A total and permanent disability, which qualifies the
----------
Participant for early payout of benefits, as described in Section 7.2. The
existence of a Disability shall be determined by the Committee on the advice
of a physician chosen by the Committee.
2
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2.12 Effective Date. The Prior Plan was effective December 1, 1998. The terms
--------------
of this Plan will be effective on the closing of the initial public offering of
NaviSite's common stock.
2.13 Eligible Employee. Any person who is employed by NaviSite on the
-----------------
Effective Date of the Plan and who was an Eligible Employee under the Prior
Plan, and any employee of the Participating Employer who is designated by the
Board of Directors.
2.14 ERISA. The Employee Retirement Income Security Act of 1974, as amended.
-----
2.15 IRS. The Internal Revenue Service.
---
2.16 Participant. Any individual who becomes eligible to participate in the
-----------
Plan pursuant to Article III of the Plan document.
2.17 Participant Agreement and Deferral Election Form. The written agreement
------------------------------------------------
made by Participant to defer his Basic Salary and/or Bonus. Such written
agreement shall be in a format designated by NaviSite.
2.18 Participating Employer. NaviSite and each related subsidiary of NaviSite
----------------------
which has adopted this Plan with the consent of NaviSite. For purposes of this
Plan, a "related subsidiary" is a subsidiary that together with NaviSite would
be treated as a single employer within the meaning of Code Section 414(b), (c),
(m) or (o) of the Code.
2.19 Plan. The NaviSite, Inc. Deferred Compensation Plan.
----
2.20 Plan Administrator. NaviSite, unless NaviSite designates another
------------------
individual or entity to hold the position of the Plan Administrator.
2.21 Plan Year. For the initial Plan Year under the Prior Plan, the period
---------
beginning December 1, 1998 and ending on December 31, 1998. Thereafter, "Plan
Year" means the 12-month period beginning each January 1 and ending on the
following December 31.
2.22 Rabbi Trust. The Rabbi Trust, which NaviSite may, in its discretion,
-----------
establish for the Plan, as amended from time to time.
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2.23 Specified Age. Age 65 or later age chosen by the Participant on his
-------------
Participation Agreement and Deferral Election Form.
2.24 Valuation Date. Each business day of the Plan Year.
--------------
2.25 Years of Service. Each consecutive twelve (12) month period during
----------------
which a Participant is continuously employed by the Participating Employer.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.1 Participation Eligibility. Participation in the Plan is open only to
-------------------------
Eligible Employees of a Participating Employer. Any Participant in the Prior
Plan who is an employee or former employee of NaviSite on the Effective Date of
the Plan will automatically cease to be a Participant under the Prior Plan and
immediately become a Participant under the Plan. An Eligible Employee may
become a Participant by submitting a properly executed Participation Agreement
and Deferral Election form prior to January 1 of the Plan Year for which it is
effective. Any employee becoming an Eligible Employee after January 1 of any
Plan Year (e.g., new hires or promoted employees or newly designated
participating subsidiaries), may become a Participant for the Deferral Period
commencing on or after he becomes an Eligible Employee if he submits a properly
completed Participation Agreement and Deferral Election Form within thirty (30)
days after becoming eligible for participation.
3.2 Participation C Subsequent Entry into Plan. An Eligible Employee who
------------------------------------------
does not elect to participate at the time of initial eligibility as set forth in
Section 3.1 shall remain eligible to become a Participant in subsequent Plan
Years as long as he continues his status as an Eligible Employee. In such
event, the Eligible Employee may become a Participant by submitting a properly
executed Participation Agreement and Deferral Election Form prior to January 1
of the Plan Year for which it is effective.
ARTICLE IV
CONTRIBUTIONS
4.1 Deferral Election. Before the first day of each Plan Year, a
-----------------
Participant may file with the Committee a Participation Agreement and Deferral
Election Form indicating the amount of Basic Salary and/or Bonus deferrals that
Plan Year. A Participant shall not be obligated to make a Deferral Election in
each Plan Year. After a Plan Year commences, such Deferral Election shall
continue for the entire Plan Year except that it shall terminate upon
termination of employment. On the Effective Date of the Plan, any Participation
Agreement and Deferral Election Form filed under the Prior Plan for 1999 by an
Eligible Employee of NaviSite shall continue in full force and effect under the
terms of this Plan.
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4.2 Maximum Deferral Election. A Participant may elect to defer up to 25%
-------------------------
of Basic Salary and/or up to 100% of Bonus earned during the corresponding
Deferral Period. The amount of deferral must be stated as a percentage. A
Deferral Election may be automatically reduced if the Committee determines that
such action is necessary to meet Federal or state tax withholding obligations.
4.3 Minimum Deferral Election. A Participant must either (i) elect to
-------------------------
defer at least $2,000 during the Deferral Period from Basic Salary, Bonus, or a
combination of Basic Salary and Bonus or (ii) make no deferral during such
Deferral Period.
4.4 Employer Contributions. Participating Employer may, in its sole
----------------------
discretion, make a contribution to the Participants' Deferral Accounts.
ARTICLE V
ACCOUNTS
5.1 Deferral Accounts. Solely for recordkeeping purposes, the Plan
-----------------
Administrator shall establish a Deferral Account for each Participant. A
Participant's Deferral Account shall be credited with the contributions made by
him or on his behalf by the Participating Employer under Section 4.4 and shall
be credited (or charged, as the case may be) with the hypothetical or deemed
investment earnings and losses determined pursuant to Section 5.3, and charged
with distributions made to or with respect to him. Any deferral account under
the Prior Plan maintained for an employee or former employee of NaviSite shall
be governed solely by the terms of this Plan after its Effective Date.
5.2 Crediting of Deferral Accounts. Salary contributions under Section
------------------------------
4.1 shall be credited to a Participant's Deferral Account as of the date on
which such contributions were withheld from his Basic Salary. Bonus
contributions under Section 4.1 shall be credited to a Participant's Deferral
Account as of the date on which the contribution would have otherwise been paid
in cash. Contributions under Section 4.4 shall be credited to the Participant's
Deferral Account as of the date declared by the Participating Employer. Any
distribution with respect to a Deferral Account shall be charged to such
Deferral Account as of the date the distribution is made by the Participating
Employer or the trustee of any Rabbi Trust established for the Plan.
5
<PAGE>
5.3 Earning Credits or Losses. Amounts credited to a Deferral Account
-------------------------
shall be credited with deemed net income gain and loss, including the deemed net
unrealized gain and loss based on hypothetical investment directions made by the
Participant with respect to such Deferral Account on a form designated by
NaviSite, in accordance with investment options and procedures adopted by
NaviSite in its sole discretion, from time to time. Such earnings will continue
to accrue during any period in which installments are paid pursuant to Article
VII. Any such form executed with respect to the Prior Plan by an individual who
is an employee or former employee of NaviSite shall continue in effect until
modified in accordance with the terms of this Plan.
5.4 Hypothetical Nature of Accounts. The Plan constitutes a mere promise
-------------------------------
by the Participating Employer to make the benefit payments in the future. Any
Deferral Account established for a Participant under this Article V shall be
hypothetical in nature and shall be maintained for the Participating Employer's
recordkeeping purposes only, so that any contributions can be credited and so
that deemed investment earnings and losses on such amounts can be credited (or
charged, as the case may be). Neither the Plan nor any of the Deferral Accounts
(or subaccounts) shall hold any actual funds or assets. The right of any
individual or entity to receive one or more payments under the Plan shall be an
unsecured claim against the general assets of the Participating Employer. Any
liability of the Participating Employer to any Participant, former Participant
or Beneficiary with respect to a right to payment shall be based solely upon
contractual obligations created by the Plan. The Participating Employer, the
board of directors of any Participating Employer, the Committee and any
individual or entity shall not be deemed to be a trustee of any amounts to be
paid under the Plan. Nothing contained in the Plan, and no action taken
pursuant to its provisions, shall create or be construed to create a trust of
any kind, or a fiduciary relationship, between the Participating Employer and a
Participant, former Participant, Beneficiary or any other individual or entity.
NaviSite may, in its sole discretion, establish a Rabbi Trust as a vehicle in
which to place funds with respect to this Plan.
The Participating Employer does not in any way guarantee any Participant's
Deferral Account against loss or depreciation, whether caused by poor investment
performance, insolvency of a deemed investment or by any other event or
occurrence. In no event shall the employees, officers, directors or stockholders
of the Participating Employer be liable to any individual or entity on account
of any claim arising by reason of the Plan provisions or any instrument or
instruments implementing its provisions, or for the failure of any Participant,
Beneficiary or other individual or entity to be entitled to any particular tax
consequences with respect to the Plan or any credit or payment thereunder.
6
<PAGE>
5.5 Statement of Deferral Accounts. The Plan Administrator shall provide
------------------------------
to each Participant quarterly statements setting forth the value of the Deferral
Account maintained for such Participant.
ARTICLE VI
VESTING
6.1 Vesting. The Participating Employer's contributions credited to a
-------
Participant's Deferral Account under Section 4.4 and any deemed investment
earnings attributable to these contributions shall be one hundred percent (100%)
vested or nonforfeitable when the Participant has five Years of Service with the
Participating Employer. Prior to the time a Participant has five Years of
Service with the Participating Employer, the Participating Employer's
contributions to his account shall be zero percent (0%) vested. In addition, a
Participant shall be one hundred percent (100%) vested in the Participating
Employer's contributions, including any deemed investment earnings attributable
to these contributions, upon his death or Disability while he is actively
employed by the Participating Employer. All other amounts credited to a
Participant's Deferral Account shall be one hundred percent (100%) vested at all
times.
ARTICLE VII
BENEFITS
7.1 Attainment of Specified Age. Unless benefits have already commenced
---------------------------
pursuant to another section in this Article VII, a Participant shall be entitled
to begin receipt of the vested amount credited to his Deferral Account as of the
Valuation Date coinciding with his Specified Age chosen according to his
Participation Agreement and Deferral Election Form. Payment of any amount under
this Section shall commence within thirty (30) days of the Participant's
Specified Age and in accordance with the payment method elected by the
Participant on his Participation Agreement and Deferral Election Form. Payments
shall commence on or after that age even if the Participant is still then
employed.
7.2 Disability. If a Participant suffers a Disability while employed with
----------
the Participating Employer and before he is entitled to benefits under this
Article, he shall receive the amount credited to his Deferral Account as of the
Valuation Date coinciding with the Date on which the Participant is determined
to have suffered a
7
<PAGE>
Disability. Payment of any amount under this section shall commence within
thirty (30) days of when the Committee determines the existence of the
Participant's Disability and in accordance with the payment method elected by
the Participant on his Participation Agreement and Deferral Election Form.
7.3 Pre-Retirement Survivor Benefit. If a Participant dies before
-------------------------------
becoming entitled to benefits under this Article, the Beneficiary or
Beneficiaries designated under Section 14.6 shall receive in a single lump sum a
Pre-Retirement Survivor Benefit equal to two (2) times the Participant's Basic
Salary for the Plan Year in which he dies (such Pre-Retirement Survivor Benefit
not to exceed $500,000) in addition to the vested amount credited to the
Participant's Deferral Account as of the Valuation Date coinciding with the date
of the Participant's death. Payment of any amount under this section shall be
made within thirty (30) days of the Participant's death, or if later, within
thirty (30) days of when the Committee received notification of or otherwise
confirms the Participant's death.
7.4 Post-Retirement Survivor Benefit. If a Participant dies after
--------------------------------
benefits have commenced, but prior to receiving complete payment of benefits
under this Article, the Beneficiary or Beneficiaries designated under Section
14.6, shall receive in a single lump sum the vested amount credited to the
Participant's Deferral Account as of the Valuation Date coinciding with the date
of the Participant's death. Payment of any amount under this section shall be
made within thirty (30) days of the Participant's death, or if later, within
thirty (30) days of when the Committee received notification of or otherwise
confirms the Participant's death.
7.5 Termination. If a Participant's employment terminates with the
-----------
Participating Employer before he becomes entitled to receive benefits by reason
of any of the above Sections, he shall receive in a single lump sum the vested
amount credited to his Deferral Account as of the Valuation Date coinciding with
the date on which the Participant's employment terminates. Payment of any
amount under this Section shall be made within thirty (30) days of when the
Participant terminates his employment with the Participating Employer.
7.6 Change in Control. If a Change in Control occurs before a Participant
-----------------
becomes entitled to receive benefits by reason of any of the above sections or
before the Participant has received complete payment of his benefits under this
Article, he shall receive a lump sum payment of the amount credited to his
Deferral Account as of the Valuation Date immediately preceding the date on
which the Change in Control occurs. Payment of any amount under this section
shall be made within thirty (30) days of when the Change in Control occurs.
8
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For purposes of this Plan, a Change in Control shall mean a change in control of
the Participating Employer of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not
the Participating Employer is in fact required to comply therewith; provided
that, without limitation, a Change in Control for purposes of this Plan shall be
deemed to have occurred if on any future date:
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than the Participating Employer, any trustee or other
fiduciary holding securities under an employee benefit plan of the Participating
Employer or a corporation owned, directly or indirectly, by the stockholders of
the Participating Employer in substantially the same proportions as their
ownership of stock of the Participating Employer for the first time becomes the
"beneficial owner" (as defined in the Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Participating Employer representing
thirty percent (30%) or more of the combined voting power of the Participating
Employer's then outstanding securities; or
(ii) during any period of twenty-four (24) consecutive months (not
including any period prior to the Effective Date of this Plan), individuals who
at the beginning of such period constitute the Participating Employer's board of
directors and any new director (other than a director designated by a person who
has entered into an agreement with the Participating Employer to effect a
transaction described in paragraphs (i), (ii) or (iii) of this Section) whose
election by the board of directors of the Participating Employer or nomination
for election by the stockholders of the Participating Employer was approved by a
vote of at least two-thirds (2/3) of the directors then still in office who
either were directors at the beginning of such period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof; or
(iii) the stockholders of the Participating Employer approve a merger
or consolidation of the Participating Employer with any other corporation, other
than (A) a merger or consolidation which would result in the voting securities
of the Participating Employer outstanding immediately prior thereto continuing
to represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least fifty percent (50%) of the combined
voting securities of the Participating Employer or such surviving entity
outstanding immediately after such merger or consolidation or (B) a merger or
consolidation effected to implement a recapitalization of the Participating
Employer (or similar transaction) in which no "person" (as hereinabove defined)
acquires thirty percent (30%) or more of the combined voting power of the
Participating Employer's then outstanding securities; or
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(iv) the stockholders of the Participating Employer approve a plan of
complete liquidation of the Participating Employer or an agreement for the sale
or disposition by the Participating Employer of all or substantially all of the
Participat ing Employer's assets.
7.7 Payment Methods. Unless otherwise provided in this Article VII, a
---------------
Participant may elect to receive payment of the vested amount credited to his
Deferral Account in a single lump sum or in five (5) or (10) annual
installments. This election must be made on the Participation Agreement and
Deferral Election Form for the corresponding Plan Year. Any installment
payments shall be paid annually on the first practicable day after the
distributions are scheduled to commence. Each installment payment shall be
determined by multiplying the Deferral Account balance by a fraction, the
numerator of which is one and the denominator of which is the number of
remaining installment payments.
ARTICLE VIII
IN-SERVICE DISTRIBUTIONS
8.1 Election of In-Service Distributions. A Participant may elect in each
------------------------------------
Deferral Period, for that particular Deferral Election, to receive in the future
an In-Service Distribution from his Deferral Account. Such Deferral Election
shall state the percentage or flat dollar amount and date on which such In-
Service Distribution is to be paid, provided that such date is not earlier than
five (5) years from January 1st of the Plan Year following the year of said
election. For example: The earliest distribution date for the initial Plan
Year ending December 31, 1999 would be January 1, 2005. This is calculated
using January 1, 2000 as the "January 1/st/ of the Plan Year following" plus
five (5).
8.2 Payment of In-Service Distributions. All In-Service Distributions
-----------------------------------
shall be made within thirty (30) days of the date stated on the Election Form.
Distributions shall be in the form of a single lump sum payment.
8.3 Termination Prior to In-Service Distribution Date. Notwithstanding a
-------------------------------------------------
Participant's election of an In-Service Distribution, in the event a
Participant's employment terminates for any reason pursuant to Section 7.5 of
the Plan document and prior to such Participant receiving any In-Service
Distribution, the Participant shall receive his Deferral Account according to
the payment method designated in Article VII or as elected on his Participation
Agreement and Deferral Election Form.
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ARTICLE IX
HARDSHIP WITHDRAWALS
9.1 Hardship Withdrawals. If a Participant incurs an unforeseeable
--------------------
emergency, the Participant may make a written request to the Committee for a
hardship withdrawal ("Hardship Withdrawal") from his account. An
unforeseeable emergency is a severe financial hardship to the Participant
resulting from a sudden and unexpected illness or accident of the Participant or
the Participant's dependent (as defined in Section 152(e) of the Code), loss of
the Participant's property due to casualty or other similar extraordinary and
unforeseen circumstances beyond the control of the Participant. Withdrawals of
amounts because of unforeseeable emergencies are only permitted to the extent
reasonably necessary to satisfy the emergency needed. This section shall be
interpreted in a manner consistent with Sections 1.457-2(h)(4) and 1.457-2(h)(5)
of the Treasury Regulations. In the event of a Hardship Withdrawal, the
Participant's deferrals for the remainder of the Plan Year shall be suspended.
Deferrals may commence with the next following Plan Year provided the
Participant completes the appropriate Participation Agreement and Deferral
Election form prior to January 1 of the corresponding Plan Year.
ARTICLE X
ESTABLISHMENT OF TRUST
10.1 Establishment of Trust. NaviSite may establish a Rabbi Trust for the
----------------------
Plan. If established, all benefits payable under this Plan to a Participant
shall be paid directly by the Participating Employer from the Rabbi Trust. To
the extent that such benefits are not paid from the Rabbi Trust, the benefits
shall be paid from the general assets of the Participating Employer. The assets
of the Rabbi Trust are subject to the claims of the Participating Employer's
creditors in the event of its insolvency. Except as to any amounts paid or
payable to a Rabbi Trust, the Participating Employer shall not be obligated to
set aside, earmark or escrow any funds or other assets to satisfy its
obligations under this Plan, and the Participant and/or his designated
Beneficiaries shall not have any property interest in any specific assets of the
Participating Employer other than the unsecured right to receive payments from
the Participating Employer, as provided in this Plan.
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ARTICLE XI
PLAN ADMINISTRATION
11.1 Plan Administration. The Plan shall be administered by the Committee and
-------------------
such Committee may designate an agent to perform the recordkeeping duties. The
Committee shall construe and interpret the Plan, including disputed and doubtful
terms and provisions and, in its sole discretion, decide all questions of
eligibility and determine the amount, manner and time of payment of benefits
under the Plan. The determinations and interpretations of the Committee shall
be consistently and uniformly applied to all Participants and Beneficiaries,
including but not limited to interpretations and determinations of amounts due
under this Plan, and shall be final and binding on all parties. The Plan at all
times shall be interpreted and administered as an unfunded deferred compensation
plan, and no provision of the Plan shall be interpreted so as to give any
Participant or Beneficiary any right in any asset of the Participating Employer
which is a right greater than the right of a general unsecured creditor of the
Participating Employer.
ARTICLE XII
NON-ALIENATION OF BENEFITS
12.1 Non-alienation of Benefits. The interests of Participants and their
--------------------------
Beneficiaries under this Plan are not subject to the claims of their creditors
and may not be voluntarily or involuntarily sold, transferred, alienated,
assigned, pledged, anticipated, or encumbered, attached or garnished. Any
attempt by a Participant, his Beneficiary, or any other individual or entity to
sell, transfer, alienate, assign, pledge, anticipate, encumber, attach, garnish,
charge or otherwise dispose of any right to benefits payable shall be void. The
Participating Employer may cancel and refuse to pay any portion of a benefit
which is sold, transferred, alienated, assigned, pledged, anticipated,
encumbered, attached or garnished. The benefits which a Participant may accrue
under this Plan are not subject to the terms of any Qualified Domestic Relations
Order (as that term is defined in Section 414(p) of the Code) with respect to
any Participant, and the Plan Administrator, board of directors of any
Participating Employer, Committee and Participating Employer shall not be
required to comply with the terms of such order in connection with this Plan.
The withholding of taxes from Plan payments, the recovery of Plan overpayments
of benefits made to a Participant or Beneficiary, the transfer of Plan benefit
rights from the Plan to another plan, or the direct deposit of Plan Payments to
an account in a financial institution (if no actually a part of an arrangement
constituting an assignment or alienation) shall not be construed as assignment
or alienation under this Article XII.
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ARTICLE XIII
AMENDMENT AND TERMINATION
13.1 Amendment and Termination. NaviSite reserves the right to amend, alter or
-------------------------
discontinue this Plan at any time. Such action may be taken in writing by any
officer of NaviSite who has been duly authorized by NaviSite to perform acts of
such kind. However, no such amendment shall deprive any Participant or
Beneficiary of any portion of any benefit which would have been payable had the
Participant's employment with NaviSite terminated on the effective date of
such amendment or termination. Notwithstanding the provisions of this Article
XIII to the contrary, NaviSite may amend the Plan at any time, in any manner, if
NaviSite determines any such amendment is required to ensure that the Plan is
characterized as providing deferred compensation for a select group of
management or highly compensated employees and as described in ERISA Sections
201(2), 301(a)(3) and 401(a)(1) or to otherwise conform the Plan to the
provisions of any applicable law including, but not limited to, ERISA and the
Code.
ARTICLE XIV
GENERAL PROVISIONS
14.1 Good Faith Payment. Any payment made in good faith in accordance with
------------------
provisions of the Plan shall be a complete discharge of any liability for the
making of such payment under the provisions of this Plan.
14.2 No Right to Employment. This Plan does not constitute a contract of
----------------------
employment, and participation in the Plan shall not give any Participant the
right to be retained in the employment of the Participating Employer.
14.3 Binding Effect. The provisions of this Plan shall be binding upon the
--------------
Participating Employer and its successors and assigns and upon every Participant
and his heirs, Beneficiaries, estates and legal representatives.
14.4 Participant Change of Address. Each Participant entitled to benefits
-----------------------------
shall file with the Plan Administrator, in writing, any change of post office
address. Any check representing payment and any communication addressed to a
Participant or a former Participant at this last address filed with the Plan
Administrator, or if no such address has been filed, then at his last address as
indicated on the Participating Employer's records, shall be binding on such
Participant for all purposes of the Plan, and neither the Plan Administrator,
the Participating Employer nor any other payor shall be obligated to search for
or ascertain the location of any such Participant. If
13
<PAGE>
the Plan Administrator is in doubt as to the address of any Participant entitled
to benefits or as to whether benefit payments are being received by a
Participant, it shall, by registered mail addressed to such Participant at his
last known address, notify such Participant that:
(i) All unmailed and future Plan payments shall be withheld until
Participant provides the Plan Administrator with evidence of such Participant's
continued life and proper mailing address; and
(ii) Participant's right to any Plan payment shall, at the option of the
Committee, be canceled forever, if, at the expiration of five (5) years from the
date of such mailing, such Participant or his Beneficiary shall not have
provided the Committee with evidence of his continued life and proper mailing
address.
14.5 Notices. Each Participant shall furnish to the Plan Administrator any
-------
information the Plan Administrator deems necessary for purposes of administering
the Plan, and the payment provisions of the Plan are conditional upon the
Participant furnishing promptly such true and complete information as the Plan
Administrator may request. Each Participant shall submit proof of his age when
required by the Plan Administrator. The Plan Administrator shall, if such proof
of age is not submitted as required, use such information as is deemed by it to
be reliable, regard less of the lack of proof, or the misstatement of the age
of individuals entitled to benefits. Any notice or information which, according
to the terms of the Plan or requirements of the Plan Administrator, must be
filed with the Plan Administrator, shall be deemed so filed if addressed and
either delivered in person or mailed to and received by the Plan Administrator,
in care of NaviSite at:
NaviSite, Inc.
100 Brickstone Square
Andover, MA 01810
14.6 Designation of Beneficiary. Each Participant shall designate, by name, on
--------------------------
Beneficiary designation forms provided by the Plan Administrator, the
Beneficiary(ies) who shall receive any benefits which might be payable after
such Participant's death. A Beneficiary designation may be changed or revoked
without such Beneficiary's consent at any time or from time to time in the
manner as provided by the Plan Administrator, and the Plan Administrator shall
have no duty to notify any individual or entity designated as a Beneficiary of
any change in such designation which might affect such individual or entity's
present or future rights. If the designated Beneficiary does not survive the
Participant, all amounts which would have
14
<PAGE>
been paid to such deceased Beneficiary shall be paid to any remaining
Beneficiary in that class of beneficiaries, unless the Participant has
designated that such amounts go to the lineal descendants of the deceased
Beneficiary. If none of the designated primary Beneficiaries survive the
Participant, and the Participant did not designate that payments would be
payable to such Beneficiary's lineal descendants, amounts otherwise payable to
such Beneficiaries shall be paid to any successor Beneficiaries designated by
the Participant, or if none, to the Participant's spouse, or, if the Participant
was not married at the time of death, the Participant's estate.
No Participant shall designate more than five (5) simultaneous Beneficiaries,
and if more than one (1) Beneficiary is named, Participant shall designate the
share to be received by each Beneficiary. Despite the limitation on five (5)
Beneficiaries, a Participant may designate more than five (5) Beneficiaries
provided such beneficiaries are the surviving spouse and children of the
Participant. If a Participant designates alternative, successor, or
contingent Beneficiaries, such Participant shall specify the shares, terms and
conditions upon which amount shall be paid to such multiple, alternative,
successor or contingent beneficiaries. Any payment made under this Plan after
the death of a Participant shall be made only to the Beneficiary or
Beneficiaries designated pursuant to this Section. Any beneficiary designation
made in accordance with the Prior Plan shall be treated as if made under this
Plan.
14.7 Claims. Any claim for benefits must initially be submitted in writing to
------
the Plan Administrator. If such claim is denied (in whole or in part), the
claimant shall receive notice from the Plan Administrator, in writing, setting
forth the specific reasons for denial, with specific reference to applicable
provisions of this Plan. Such notice shall be provided within ninety (90) days
of the date the claim for benefits is received by the Plan Administrator, unless
special circumstances require an extension of time for processing the claim,
in which event notification of the extension shall be provided to the claimant
prior to the expiration of the initial 90 day period. The extension notification
shall indicate the special circumstances requiring the extension of time and the
date by which the Plan Administrator expects to render its decision. Any such
extension shall not exceed 90 days. Any disagreements about such
interpretations and construction may be appealed in writing by the claimant
within sixty (60) days to the Plan Administrator. The Plan Administrator shall
respond to such appeal within sixty (60) days, with a notice in writing fully
disclosing its decision and its reasons, unless special circumstances require
an extension of time for reviewing the claim, in which event notification of the
extension shall be provided to the claimant prior to the expiration of the
initial sixty (60) day period. Any such extension shall be provided to the
claimant prior to the commencement of the extension. Any such extension shall
not exceed 60 days. No employee of NaviSite or member of the Board of
Directors, or any committee thereof, shall be liable to any individual or entity
for any action taken hereunder, except those actions which are unreasonable and
undertaken with lack of good faith.
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14.8 Action by Board of Directors. Any action required to be taken by the
----------------------------
board of directors of the Participating Employer pursuant to the Plan provisions
may be performed by a committee of the board, to which the board of directors of
the Participating Employer delegates the authority to take actions of that kind.
14.9 Governing Law. To the extent not superseded by the laws of the United
-------------
States, the laws of the Commonwealth of Massachusetts shall be controlling in
all matters relating to this Plan.
14.10 Severability. In the event any provision of this Plan shall be held
------------
illegal or invalid for any reason, such illegality or invalidity shall not
affect the remaining provisions of the Plan, and the Plan shall be interpreted
and enforced as if such illegal and invalid provisions had never been set forth.
IT WITNESS WHEREOF, NaviSite, Inc. has adopted the foregoing instrument.
NAVISITE, INC.
By
----------------------------
Title:
ATTEST
-----------------------
16
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Exhibit 23.2
ACCOUNTANTS' CONSENT AND REPORT ON SCHEDULE
The Board of Directors
NaviSite, Inc.:
The audits referred to in our report dated August 27, 1999 included the
related financial statement schedule as of July 31, 1997, 1998 and 1999, and
for each of the years in the three year period ended July 31, 1999, included
in the Registration Statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
We consent to the inclusion of our report dated August 27, 1999, with respect
to the consolidated balance sheets of NaviSite, Inc., as of July 31, 1998 and
1999, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for each of the years in the three year
period ended July 31, 1999, which report appears in this Registration
Statement, and to the references to our firm under the headings "Selected
Consolidated Financial Data," and "Experts" in this Registration Statement.
KPMG LLP
/s/ KPMG LLP
Boston, Massachusetts
September 29, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
The Members
Servercast Communications, L.L.C.:
We consent to the inclusion of our report on Servercast Communications,
L.L.C. dated May 28, 1999 in the prospectus constituting part of this
Registration Statement on Form S-1 of NaviSite, Inc. and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG LLP
/s/ KPMG LLP
Boston, Massachusetts
September 29, 1999
