<PAGE>
As filed with the Securities and Exchange Commission on September 17, 1999
Registration Statement No. 333-83501
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
Amendment No. 2
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 17, 1999
[LOGO]
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. We have applied to have the shares we are
offering 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 September , 1999.
<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>
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>
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................................................................. 33
Management............................................................... 44
Certain Transactions..................................................... 52
Ownership of Principal Stockholders and Management....................... 58
Description of Capital Stock............................................. 60
Shares Eligible For Future Sale.......................................... 64
Underwriting............................................................. 66
Legal Matters............................................................ 68
Experts.................................................................. 68
Where You Can Find Additional Information................................ 68
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:
. assumes 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."
Proposed 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 face numerous risks related to being an early stage company in a new and
rapidly evolving market
NaviSite was 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. As a result, we have a limited operating
history upon which you can evaluate our business. Moreover, as an early stage
company in the new and rapidly evolving Web site and Internet application
hosting and management service market, we face numerous risks that could impair
our ability to successfully execute our business strategy. To address these
risks, we must:
. expand our Web site and Internet application hosting and management
expertise to ensure a high level of customer service;
. differentiate our company and our service offerings from those of our
competitors, especially Internet application service providers;
. leverage and expand our infrastructure to keep pace with our
anticipated growth; and
. build a more comprehensive sales and marketing structure to support
our business and achieve broader brand recognition in the market for
Web site and Internet application hosting and management services.
If we are not successful in addressing the risks we face as an early stage
company in a new and rapidly evolving market, we may not be successful in
executing our business strategy.
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.
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.
7
<PAGE>
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 July 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
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
8
<PAGE>
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 are
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 cannot 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.
Our ability to grow 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.
9
<PAGE>
The market we serve is highly competitive, and we may lack the resources needed
to compete successfully
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. 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 our market must grow rapidly and
achieve a significant presence to compete effectively. We may lack the
financial and other resources, expertise or capability to compete
successfully. A more detailed discussion regarding the competition we face
is included in this prospectus under the heading "Business--Competition."
Our business may not be successful if we are unable to maintain numerous third-
party industry relationships
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.
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 unless we can find, license and
launch equivalent software applications.
10
<PAGE>
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 a loss of revenue due to customer
loss or claims for service credits under our service level guarantees.
We cannot assure you that one or more of our third-party agreements or
industry relationships will not be terminated in the future. In order to
provide services to our growing customer base, we also intend to seek
additional industry relationships. We can not assure you that we will be able
to enter into favorable new relationships or that we will be able to
effectively manage multiple relationships with a growing number of third
parties. If any of our strategic agreements or relationships are terminated or
not renewed or we otherwise are unable to use some or all of the software
applications or technology tools on which our business depends, we may be
unable to successfully execute our business strategy.
Our failure to 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.
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. 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 are not available or are not available on acceptable terms, our
ability to respond to
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<PAGE>
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 losses
To be successful, 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.
We may not be able to effectively protect or continue to use the proprietary
rights necessary for the conduct of our business
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 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.
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 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.
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<PAGE>
If we are unable to retain key officers and personnel and to continue to
recruit additional skilled personnel, the growth of our business could be
impaired, and, as a result, our business may not be successful
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
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.
The loss of key members of our sales and marketing teams or key technical
service personnel could jeopardize our positive relations with our
customers. In addition, 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.
Our failure to recruit additional skilled personnel could limit our growth,
and as a result, our business may not be successful
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. Our inability
to continue to attract and retain sufficient numbers of highly skilled
employees could limit our growth, and as a result, our business may not be
successful.
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.
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If our expansion into international markets is not successful we could
experience increased operating costs or lost revenue opportunities
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" may 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.
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
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<PAGE>
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, 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
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<PAGE>
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 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.
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<PAGE>
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%, %
and %, 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
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 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. In addition, the terms of our outstanding
preferred stock restrict the payment of dividends on our common stock. 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);
150,000,000 shares authorized (pro forma and
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 $2.50 per share. To the extent that any of these
options are exercised, there will be further dilution to new investors.
21
<PAGE>
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 a 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.
23
<PAGE>
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 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 increased 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 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 $252,000 of interest on
intercompany debt at a rate of 7% 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 Communications, L.L.C. 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 7% 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 federal tax loss carryforwards or carrybacks as of July 31,
1999. NaviSite has net operating loss carryforwards for Massachusetts state tax
purposes of approximately $728,000 as of July 31, 1999, which will expire from
2001 through 2002. In addition, NaviSite has net operating loss carryforwards
for California state tax purposes of approximately $1,590,000 as of July 31,
1999, which will expire from 2001 through 2004.
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..... 0 (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 Coporation 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 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.
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 $3,951,000, 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 Series B convertible preferred shares will convert into 5,418,590
shares of common stock.
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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:
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;
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. 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.
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
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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 and materially adversely affect our financial condition and
operating results. 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.
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.
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 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. The Company 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. The Company is required to adopt this standard in the first quarter
of fiscal year 2000, and expects that the adoption of SFAS 133 will not have a
material impact on the its financial position or its results of operations. In
June 1999, SFAS No. 137 was issued, which delays the adoption of SFAS 133 until
the first quarter of fiscal year 2001.
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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 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 and
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 Computer Corporation and
Microsoft Corporation, 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 that
assist us with complex development, integration and project management, and to
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 group 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.
We may lack the financial and other resources, expertise or capabilities to
compete successfully 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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<PAGE>
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 11,000 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 the next nine to 12 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 the next 12 to 18 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 the next
four to five 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 NaviSite's Chief Executive Officer and as one
of its 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 NaviSite's President and as one of its Directors
since NaviSite was incorporated as a separate entity in February 1997, and also
served as its 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 NaviSite's Chief Financial Officer since
March 1997 and as the 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 NaviSite's 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 NaviSite's Vice President of Facilities
since June 1999 and served as NaviSite's 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 NaviSite's 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 NaviSite's 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 NaviSite's 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 NaviSite's 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 a new stock option plan for
our 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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<PAGE>
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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<PAGE>
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.
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<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 under these offer letters.
50
<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 payment
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 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, 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.
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 1998) 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.
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.
51
<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%
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 was
released from the San Jose lease guaranty upon the landlord's receipt of our
letter of credit, guaranteed by CMGI, in the amount of $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 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.
52
<PAGE>
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 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 $3,951,000, 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 Series B convertible preferred shares 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.
53
<PAGE>
Under this agreement, CMGI also will agree to make available to us at least
11,000 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
54
<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.
55
<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 12% 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 earlier 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 indemnification.
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.
57
<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 CMGI common stock
is based on 95,310,000 shares of common stock outstanding as of August 3, 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
One Dell Way
Round Rock, Texas 78682
Microsoft Corporation .................... 993,243 4.8
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.
58
<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 11.3%
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 11.4%
</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.
59
<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 be in effect 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. The revised certificate of
incorporation and the revised by-laws will become effective upon completion of
this offering.
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.
60
<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 and 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--
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
61
<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. We intend to comply with these procedures in connection with this
offering.
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
62
<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 are in the process of obtaining our own
liability insurance for our officers and directors.
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.
63
<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, 69,338 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.
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).
64
<PAGE>
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory stock plan or other written agreement is
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 2,626,411 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 and the 1998 Director Stock Option 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--Registration
Rights Agreement" and "Description of Capital Stock--Registration Rights."
65
<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 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
66
<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,
and 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. 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. NaviSite has agreed to use all commercially
reasonable efforts to require that the underwriters offer Dell and Microsoft up
to % of the shares of the common stock to be sold in this offering, assuming
the conversion of our preferred stock held by them into common stock in
connection with this offering.
67
<PAGE>
Listing. Application has been made to have the shares of common stock
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.
68
<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.
69
<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 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 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 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 it's 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 on-
going 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 2000, and expects that
the adoption of SFAS 133 will not have a material impact on the its financial
position or its results of operations. In June 1999, SFAS No. 137 was issued,
delaying adoption of SFAS 133 until the first quarter of fiscal year 2001.
(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
In May 1999, the Company formalized its borrowing arrangement with CMGI and
executed a secured convertible demand note with CMGI dated May 1, 1999.
Commencing in February 1998, advances accrue interest at the annual rate of 7%,
and 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.
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.
F-13
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
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 was released from the San Jose guaranty upon execution of the
$2.4 million letter of credit, guaranteed by CMGI.
(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
State net operating loss..................................... 111 209
Depreciation and amortization ............................... 37 182
----- ----
Total deferred tax assets...................................... 395 691
Less: Valuation allowance...................................... (395) (691)
----- ----
Net deferred taxes............................................. $ -- $ --
===== ====
</TABLE>
The Company has net operating loss carryforwards for Massachusetts State
tax purposes of approximately $728,000 as of July 31, 1999. The net operating
loss carryforwards will expire from 2001 through 2002. In addition, the Company
has net operating loss carryforwards for California tax purposes of
approximately $1,590,000 as of July 31, 1999, which will expire from 2001
through 2004.
(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.
F-15
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
(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 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 a
fully participating, 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 B Preferred Stock ranks pari passu to 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 is 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 to 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. Such shares are subject to certain demand
registration rights. On or after the fifth anniversary of the purchase date,
and upon a written majority of the holders of Series C Preferred Stock, the
Company must redeem all of the outstanding shares of Series C Preferred Stock
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 is 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 to the
Series A, B and C Preferred Stock, and has a liquidation preference equal to
its purchase price plus dividends computed at 7% per
F-16
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
annum. The Series D Preferred Stock automatically converts into common stock
upon the completion of a qualifying initial public offering. Such shares are
subject to certain demand registration rights. On or after the fifth
anniversary of the purchase date, and upon a written majority of the holders of
Series D Preferred Stock, the Company must redeem all of the outstanding shares
of Series D Preferred Stock 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 the 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 5,612,212. 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, up to a maximum number of shares of common stock not to
exceed 125,000 shares. 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 $ 2.27
Granted................. 8,000 1.95 80,000 2.32 331,600 44.19
Exercised............... (23,200) 0.19 (12,040) 1.11 (33,671) 2.23
------- ------- -------
Options outstanding, end
of year............... 20,880 $1.41 88,840 $2.27 386,769 $38.21
======= ===== ======= ===== ======= ======
Options exercisable, end
of year............... 6,426 $0.97 1,670 $1.78 7,000 $ 2.29
======= ===== ======= ===== ======= ======
</TABLE>
The following table summarizes information about stock options 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 0.05 $ 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 Statement of Financial Accounting Standard ("SFAS")
No. 130, "Reporting Comprehensive Income." 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 No. 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 through an
allocation based upon the company's headcount 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 $251
Rent and Facilities.......................................... -- $ 15 $240
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
12% 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
incorporated 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, which 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 during 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 during 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 CONDENSED CONSOLIDATED 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 $ $ 524
Revenue, related parties....... 3,871 -- -- 3,866
-------- ------ ------ --------
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 PRO FORMA CONDENSED CONSOLIDATED STATEMENTS 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 are in the process of obtaining our own liability
insurance for our officers and directors. 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 restructuring 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
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
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
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
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
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.
II-4
<PAGE>
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. 2 to the registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Andover, Massachusetts, on September
17, 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. 2 to the registration statement has been signed by the following persons in
the capacities indicated on September 17, 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
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 1.1
UNDERWRITING AGREEMENT
October __, 1999
BancBoston Robertson Stephens Inc.
ING Baring Furman Selz LLC
FAC/Equities
As Representatives of the several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, CA 94104
Ladies and Gentlemen:
NaviSite, Inc., a Delaware corporation (the "Company), proposes to issue
and sell to the several underwriters named in Schedule A (the "Underwriters") an
aggregate of _____ shares (the "Firm Shares") of its Common Stock, par value
$0.01 per share (the "Common Shares"). In addition, the Company has granted to
the Underwriters an option to purchase up to an additional _____ Common Shares
(the "Option Shares") as provided in Section 2. The Firm Shares and, if and to
the extent such option is exercised, the Option Shares are collectively called
the "Shares". BancBoston Robertson Stephens Inc., ING Baring Furman Selz LLC
and FAC/Equities have agreed to act as representatives of the several
Underwriters (in such capacity, the "Representatives") in connection with the
offering and sale of the Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-83501), which contains a form of prospectus to be used in connection with
the public offering and sale of the Shares. Such registration statement, as
amended, including the financial statements, exhibits and schedules thereto, in
the form in which it was declared effective by the Commission under the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder (collectively, the "Securities Act"), including any information
deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A
or Rule 434 under the Securities Act, is called the "Registration Statement".
Any registration statement filed by the Company pursuant to Rule 462(b) under
the Securities Act is called the "Rule 462(b) Registration Statement", and from
and after the date and time of filing of the Rule 462(b) Registration Statement
the term "Registration Statement" shall include the Rule 462(b) Registration
Statement. Such prospectus, in the form first used by the Underwriters to
confirm sales of the Shares, is called the "Prospectus"; provided, however, if
the Company has, with the consent of BancBoston Robertson Stephens Inc., elected
to rely upon Rule 434 under the Securities Act, the term "Prospectus" shall mean
the Company's prospectus subject to completion (each, a "preliminary
<PAGE>
prospectus") dated October __, 1999 (such preliminary prospectus is called the
"Rule 434 preliminary prospectus"), together with the applicable term sheet (the
"Term Sheet") prepared and filed by the Company with the Commission under Rules
434 and 424(b) under the Securities Act and all references in this Agreement to
the date of the Prospectus shall mean the date of the Term Sheet. All
references in this Agreement to the Registration Statement, the Rule 462(b)
Registration Statement, a preliminary prospectus, the Prospectus or the Term
Sheet, or any amendments or supplements to any of the foregoing, shall include
any copy thereof filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval System ("EDGAR").
The Company hereby confirms its agreements with the Underwriters as
follows:
Section 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents, warrants and covenants to each Underwriter
as follows:
(a) Compliance with Registration Requirements. The Registration Statement and
any Rule 462(b) Registration Statement have been declared effective by the
Commission under the Securities Act. The Company has complied to the
Commission's satisfaction with all requests of the Commission for
additional or supplemental information. No stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement is in effect and no proceedings for such purpose have been
instituted or are pending or, to the best knowledge of the Company, are
contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed with the
Commission complied in all material respects with the Securities Act. Each of
the Registration Statement, any Rule 462(b) Registration Statement and any post-
effective amendment thereto, at the time it became effective and up to and on
the Closing Date and on any later date on which Option Shares are to be
purchased, complied and will comply in all material respects with the Securities
Act and did not and will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading. The Prospectus, as amended or
supplemented, as of its date and up to and on the Closing Date and on any later
date on which Option Shares are to be purchased, did not and will not contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The representations
and warranties set forth in the two immediately preceding sentences do not apply
to statements in or omissions from the Registration Statement, any Rule 462(b)
Registration Statement, or any post-effective amendment thereto, or the
Prospectus, or any amendments or supplements thereto, made in reliance upon and
in conformity with information furnished to the Company in writing by the
Representatives expressly for use therein. There are no contracts or other
documents required to be described in the Prospectus or to be filed as exhibits
to the Registration Statement which have not been described or filed as
required.
(b) Offering Materials Furnished to Underwriters.. The Company has delivered
to each Representative one complete conformed copy of the Registration
Statement and of each consent
2
<PAGE>
and certificate of experts filed as a part thereof, and conformed copies of
the Registration Statement (without exhibits) and preliminary prospectuses
and the Prospectus, as amended or supplemented, in such quantities and at
such places as the Representatives have reasonably requested for each of
the Underwriters.
(c) Distribution of Offering Material By the Company. The Company has not
distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than a preliminary prospectus, the
Prospectus or the Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the
Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as
the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
the rights and remedies of creditors or by general equitable principles.
(e) Authorization of the Shares. The Shares to be purchased by the
Underwriters from the Company have been duly authorized for issuance and
sale pursuant to this Agreement and, when issued and delivered by the
Company pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are no persons
with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included
in the offering contemplated by this Agreement, except for such rights as
have been duly waived.
(g) No Material Adverse Change. Subsequent to the respective dates as of which
information is given in the Prospectus: (i) there has been no material
adverse change, or any development that could reasonably be expected to
result in a material adverse change, in the condition, financial or
otherwise, or in the earnings, business or operations, whether or not
arising from transactions in the ordinary course of business, of the
Company and its subsidiary, considered as one entity (any such change or
effect, where the context so requires, is called a "Material Adverse
Change" or a "Material Adverse Effect"); (ii) the Company and its
subsidiary, considered as one entity, have not incurred any material
liability or obligation, indirect, direct or contingent, not in the
ordinary course of business nor entered into any material transaction or
agreement not in the ordinary course of business; and (iii) there has been
no dividend or distribution of any kind declared, paid or made by the
Company or, except for dividends paid to the Company or its subsidiary, its
subsidiary on any class of capital stock or repurchase or redemption by the
Company or its subsidiary of any class of capital stock.
(h) Preparation of the Financial Statements. The financial statements filed
with the Commission as a part of the Registration Statement and included in
the Prospectus present fairly the consolidated financial position of the
Company and its subsidiary as of and at the dates indicated and the results
of their operations and cash flows for the periods specified. The
3
<PAGE>
supporting schedules included in the Registration Statement present fairly
the information required to be stated therein. Such financial statements
and supporting schedules have been prepared in conformity with generally
accepted accounting principles as applied in the United States applied on a
consistent basis throughout the periods involved, except as may be
expressly stated in the related notes thereto. No other financial
statements or supporting schedules are required to be included in the
Registration Statement. The financial data set forth in the Prospectus
under the captions "Summary--Summary Consolidated Financial Data",
"Selected Consolidated Financial Data" and "Capitalization" fairly present
the information set forth therein on a basis consistent with that of the
audited financial statements contained in the Registration Statement.
(i) Company's Accounting System. The Company and its subsidiary maintain a
system of accounting controls sufficient to provide reasonable assurances
that (i) transactions are executed in accordance with management's general
or specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles as applied in the United States and to
maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with existing
assets at reasonable intervals and appropriate action is taken with respect
to any differences.
(j) Subsidiaries of the Company. The Company does not own or control, directly
or indirectly, any corporation, association or other entity other than
Servercast Communications, L.L.C.
(k) Incorporation and Good Standing of the Company and its Subsidiary. Each of
the Company and its subsidiary has been duly organized and is validly
existing as a corporation or limited liability company, as the case may be,
in good standing under the laws of the jurisdiction in which it is
organized, with full corporate power and authority to own its properties
and conduct its business as described in the prospectus, and is duly
qualified to do business as a foreign corporation and is in good standing
under the laws of each jurisdiction which requires such qualification,
except where the failure to be so qualified or in good standing would not
result in a Material Adverse Effect.
(l) Capitalization of the Subsidiary. All the outstanding membership interests
of the subsidiary have been duly and validly authorized and issued and are
fully paid and nonassessable, and, except as otherwise set forth in the
Prospectus, all outstanding membership interests of the subsidiary are
owned by the Company directly, free and clear of any security interests,
claims, liens or encumbrances.
(m) No Prohibition on Subsidiary from Paying Dividends or Making Other
Distributions. The subsidiary of the Company is not currently prohibited,
directly or indirectly, from paying any dividends to the Company, from
making any other distribution on the subsidiary's members' interest, from
repaying to the Company any loans or advances to the subsidiary from the
Company or from transferring any of the subsidiary's property or assets to
the Company, except as described in or contemplated by the Prospectus.
4
<PAGE>
(n) Capitalization and Other Capital Stock Matters. The authorized, issued and
outstanding capital stock of the Company is as set forth in the Prospectus
under the caption "Capitalization" (other than subsequent issuances, if
any, pursuant to employee benefit plans described in the Prospectus or upon
exercise of outstanding options described in the Prospectus). The Common
Shares (including the Shares) conform in all material respects to the
description thereof contained in the Prospectus. All of the issued and
outstanding Common Shares have been duly authorized and validly issued, are
fully paid and nonassessable and have been issued in compliance with
federal and state securities laws. None of the outstanding Common Shares
were issued in violation of any preemptive rights, rights of first refusal
or other similar rights to subscribe for or purchase securities of the
Company, except where such rights have been effectively waived. There are
no authorized or outstanding options, warrants, preemptive rights, rights
of first refusal or other rights to purchase, or equity or debt securities
convertible into or exchangeable or exercisable for, any capital stock of
the Company or any of its subsidiaries other than those described in the
Prospectus. The description of the Company's stock option, stock bonus and
other stock plans or arrangements, and the options or other rights granted
thereunder, set forth in the Prospectus accurately and fairly presents the
information required to be shown with respect to such plans, arrangements,
options and rights.
(o) Stock Exchange Listing. The Shares have been approved for inclusion on the
Nasdaq National Market, subject only to official notice of issuance.
(p) No Consents, Approvals or Authorizations Required. No consent, approval,
authorization or order of or filing with any court or governmental agency
or regulatory body is required in connection with the transactions
contemplated herein, except such as have been obtained or made under the
Securities Act and such as may be required (i) under the blue sky laws of
any jurisdiction in connection with the purchase and distribution of the
Shares by the Underwriters in the manner contemplated here and in the
Prospectus, (ii) by the National Association of Securities Dealers, Inc.
and (iii) by the federal and provincial laws of Canada.
(q) Non-Contravention of Existing Instruments and Agreements. Neither the
issuance and sale of the Shares nor the consummation of any other of the
transactions herein contemplated nor the fulfillment of the terms hereof
will conflict with or result in a breach or violation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or
its subsidiary, in each case material to the Company and its subsidiary
considered as one enterprise, pursuant to (i) the charter or by-laws of the
Company or its subsidiary, (ii) the terms of any indenture, contract,
lease, mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which the
Company or its subsidiary is a party or bound or to which its or their
property is subject or (iii) any statute, law, rule, regulation, judgment,
order or decree applicable to the Company or its subsidiary of any court,
regulatory body, administrative agency, governmental body, arbitrator or
other authority having jurisdiction over the Company or its subsidiary or
any of its or their properties.
(r) No Defaults or Violations. Neither the Company nor its subsidiary is in
violation or default of (i) any provision of its charter or by-laws, (ii)
the terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition,
covenant or instrument to which it is a party or bound or to which its
property is
5
<PAGE>
subject or (iii) any statute, law, rule, regulation, judgment, order or
decree of any court, regulatory body, administrative agency, governmental
body, arbitrator or other authority having jurisdiction over the Company or
the subsidiary or any of its properties, as applicable, except any such
violation or default which would not, singly or in the aggregate, result in
a Material Adverse Change except as otherwise disclosed in the Prospectus.
(s) No Actions, Suits or Proceedings. No action, suit or proceeding by or
before any court or governmental agency, authority or body or any
arbitrator involving the Company or its subsidiary or their respective
properties is pending or, to the best knowledge of the Company, threatened
that (i) could reasonably be expected to have a material adverse effect on
the performance of this Agreement or the consummation of any of the
transactions contemplated hereby or (ii) could reasonably be expected to
result in a Material Adverse Effect.
(t) All Necessary Permits, Etc. The Company and its subsidiary possess such
valid and current certificates, authorizations or permits issued by the
appropriate state, federal or foreign regulatory agencies or bodies
necessary to conduct their respective businesses, and neither the Company
nor its subsidiary has received any notice of proceedings relating to the
revocation or modification of, or non-compliance with, any such
certificate, authorization or permit which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, could result in
a Material Adverse Change.
(u) Title to Properties. The Company and its subsidiary have good and
marketable title to all the properties and assets reflected as owned in the
financial statements referred to in Section 1(h) above (or elsewhere in the
Prospectus), in each case free and clear of any security interests,
mortgages, liens, encumbrances, equities, claims and other defects, except
such as do not materially and adversely affect the value of such property
and do not materially interfere with the use made or proposed to be made of
such property by the Company or its subsidiary. The real property,
improvements, equipment and personal property held under lease by the
Company or its subsidiary are held under valid and enforceable leases, with
such exceptions as are not material and do not materially interfere with
the use made or proposed to be made of such real property, improvements,
equipment or personal property by the Company or its subsidiary.
(v) Intellectual Property Rights. Each of the Company and its subsidiary owns
or possesses legally enforceable rights to use all patents, patent rights
or licenses, inventions, collaborative research agreements, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which are
necessary to conduct its businesses as described in the Registration
Statement and Prospectus, except where the failure to own or possess such
rights would not reasonably be expected to result in a Material Adverse
Change; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not result in a
Material Adverse Change that is not otherwise disclosed in the Prospectus;
the Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of the Company by others
with respect to any patent, patent rights, inventions, trade secrets, know-
how, trademarks, service marks, trade names or copyrights; and the Company
has not received any notice of, and has no knowledge of, any infringement
of or conflict with asserted rights of others with respect to any patent,
patent rights, inventions, trade secrets, know-how, trademarks, service
marks, trade names or copyrights which, singly or in the
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aggregate, if the subject of an unfavorable decision, ruling or finding,
might result in a Material Adverse Change. The Company has received no
written claim being made against the Company regarding patents, patent
rights or licenses, inventions, collaborative research, trade secrets,
know-how, trademarks, service marks, trade names or copyrights, except
where the disposition of such claim would not reasonably be expected to
result in a Material Adverse Effect. The Company and its subsidiary do not
in the conduct of their business as now or proposed to be conducted as
described in the Prospectus infringe or conflict with any right or patent
of any third party, or any discovery, invention, product or process which
is the subject of a patent application filed by any third party, in each
case known to the Company or its subsidiary, which such infringement or
conflict is reasonably likely to result in a Material Adverse Change.
(w) Year 2000 Preparedness. There are no issues related to the Company's, or
its subsidiary's, preparedness for the Year 2000 that (i) are of a
character required to be described or referred to in the Registration
Statement or Prospectus by the Securities Act which have not been
accurately described in the Registration Statement or Prospectus or (ii)
might reasonably be expected to result in any Material Adverse Change. On
or before December 1, 1999, all internal computer systems and each Material
Constituent Component (as defined below) of those systems and all computer-
related products and each material Constituent Component (as defined below)
of those products of the Company and its subsidiary will fully comply with
Year 2000 Qualification Requirements. "Year 2000 Qualifications
Requirements" means that the internal computer systems and each material
Constituent Component (as defined below) of those systems and all computer-
related products and each material Constituent Component (as defined below)
of those products of the Company and its subsidiary (i) have been reviewed
to confirm that they store, process (including sorting and performing
mathematical operations, calculations and computations), input and output
data containing date and other information correctly regardless of whether
the date contains dates and times before, on or after January 1, 2000, (ii)
have been designed to ensure date and time entry recognition and
calculations, and date data interface values, that reflect the century,
(iii) accurately manage and manipulate data involving dates and times,
including single century formulas and multi-century formulas and will not
cause an abnormal ending scenario within the application or generate
incorrect values or invalid results involving such dates, (iv) accurately
process any date rollover, and (v) accept and respond to two-digit year
date input in a manner that resolves any ambiguities as to the century.
"Constituent Component" means all software (including operating systems,
programs, packages and utilities), firmware, hardware, networking
components, and peripherals provided as part of the configuration. The
Company has inquired of material vendors as to their preparedness for the
Year 2000 and has disclosed in the Registration Statement or Prospectus any
issues that might reasonably be expected to result in any Material Adverse
Change.
(x) No Transfer Taxes or Other Fees. There are no transfer taxes or other
similar fees or charges under federal law or the laws of any state, or any
political subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance and sale by the
Company of the Shares.
(y) Company Not an "Investment Company. The Company has been advised of the
rules and requirements under the Investment Company Act of 1940, as amended
(the "Investment Company Act"). The Company is not, and after receipt of
payment for the Shares will not be, an
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"investment company" or an entity "controlled" by an "investment company"
within the meaning of the Investment Company Act and will conduct its
business in a manner so that it will not become subject to the Investment
Company Act.
(z) Insurance. The Company and its subsidiary are insured with policies in
such amounts and with such deductibles and covering such risks as the
Company believes are adequate and customary for their business including,
but not limited to, policies covering real and personal property owned or
leased by the Company and its subsidiary against theft, damage,
destruction, acts of vandalism and earthquakes, general liability and
directors and officers liability. The Company has no reason to believe
that it or its subsidiary will not be able (i) to renew its existing
insurance coverage as and when such policies expire or (ii) to obtain
comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that
would not result in a Material Adverse Change. Neither the Company nor its
subsidiary has been denied any insurance coverage which it has sought or
for which it has applied.
(aa) Labor Matters. To the Company's knowledge, no labor disturbance by the
employees of the Company or its subsidiary exists or is imminent that might
be expected to result in a Material Adverse Change.
(bb) No Price Stabilization or Manipulation. The Company has not taken and will
not take, directly or indirectly, any action designed to or that might be
reasonably expected to cause or result in stabilization or manipulation of
the price of the Common Stock to facilitate the sale or resale of the
Shares.
(cc) Lock-Up Agreements. Each officer and director of the company and each
beneficial owner of one or more percent of the outstanding issued share
capital of the Company has agreed to sign an agreement substantially in the
form attached hereto as Exhibit A (the "Lock-up Agreements"). The Company
has provided to counsel for the Underwriters a complete and accurate list
of all security holders of the Company and the number and type of
securities held by each security holder. The Company has provided to
counsel for the Underwriters true, accurate and complete copies of all of
the Lock-up Agreements presently in effect or effected hereby. The Company
hereby represents and warrants that it will not release any of its
officers, directors or other stockholders from any Lock-up Agreements
currently existing or hereafter effected without the prior written consent
of BancBoston Robertson Stephens Inc.
(dd) Related Party Transactions. There are no business relationships or
related-party transactions involving the Company or its subsidiary or any
other person required to be described in the Prospectus which have not been
described as required.
(ee) No Unlawful Contributions or Other Payments. Neither the Company nor its
subsidiary nor, to the best of the Company's knowledge, any employee or
agent of the Company or its subsidiary, has made any contribution or other
payment to any official of, or candidate for, any federal, state or foreign
office in violation of any law or of the character required to be disclosed
in the Prospectus.
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(ff) Environmental Laws. Except as otherwise disclosed in the Prospectus, (i)
the Company is in compliance with all rules, laws and regulations relating
to the use, treatment, storage and disposal of toxic substances and
protection of health or the environment ("Environmental Laws") which are
applicable to its business, except where the failure to comply would not
result in a Material Adverse Change, (ii) the Company has received no
notice from any governmental authority or third party of an asserted claim
under Environmental Laws, which claim is required to be disclosed in the
Registration Statement and the Prospectus, (iii) the Company will not be
required to make future material capital expenditures to comply with
Environmental Laws and (iv) no property which is owned, leased or occupied
by the Company has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation, and Liability Act of 1980, as amended
(42 U.S.C. (S) 9601, et seq.), or otherwise designated as a contaminated
site under applicable state or local law.
(gg) ERISA Compliance. The Company and its subsidiaries and any "employee
benefit plan" (as defined under the Employee Retirement Income Security Act
of 1974, as amended, and the regulations and published interpretations
thereunder (collectively, "ERISA")) established or maintained by the
Company or its subsidiary are in compliance in all material respects with
ERISA. No "reportable event" (as defined under ERISA) has occurred or is
reasonably expected to occur with respect to any "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their
"ERISA Affiliates" (as defined below) except for any such event which would
not be reasonably likely to result in a Material Adverse Change. No
"employee benefit plan" established or maintained by the Company, its
subsidiaries or any of their ERISA Affiliates, if such "employee benefit
plan" were terminated, would have any "amount of unfunded benefit
liabilities" (as defined under ERISA). Neither the Company, its
subsidiaries nor any of their ERISA Affiliates has incurred or reasonably
expects to incur any liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "employee benefit plan" or (ii)
Sections 412, 4971, 4975 or 4980B of the Code (as defined below). Each
"employee benefit plan" established or maintained by the Company or its
subsidiary that is intended to be qualified under Section 401(a) of the
Code has received a favorable determination letter from the Internal
Revenue Service and, to the knowledge of the Company, nothing has occurred,
whether by action or failure to act, which would cause the loss of such
qualification. "ERISA Affiliate" means, with respect to the Company or its
subsidiary, any member of any group of organizations described in Sections
414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended, and
the regulations and published interpretations thereunder (the "Code") of
which the Company or its subsidiary is a member.
(hh) Any certificate signed by an officer of the Company and delivered to the
Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the
matters set forth therein.
Section 2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) The Firm Shares. The Company agrees to issue and sell to the several
Underwriters the Firm Shares upon the terms herein set forth. On the basis
of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase from the Company
the respective
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number of Firm Shares set forth opposite their names on Schedule A. The
purchase price per Firm Share to be paid by the several Underwriters to the
Company shall be $___ per share.
(b) The First Closing Date. Delivery of the Firm Shares to be purchased by the
Underwriters and payment therefor shall be made by the Company and the
Representatives at 6:00 a.m. San Francisco time, at the offices of Skadden,
Arps, Slate, Meagher & Flom LLP, Boston, Massachusetts (or at such other
place as may be agreed upon among the Representatives and the Company),
(i) on the third (3rd) full business day following the first day that
Shares are traded, (ii) if this Agreement is executed and delivered after
1:30 p.m., San Francisco time, the fourth (4th) full business day following
the day that this Agreement is executed and delivered or (iii) at such
other time and date not later that seven (7) full business days following
the first day that Shares are traded as the Representatives and the Company
may determine (or at such time and date to which payment and delivery shall
have been postponed pursuant to Section 8 hereof), such time and date of
payment and delivery being herein called the "Closing Date;" provided,
however, that if the Company has not made available to the Representatives
copies of the Prospectus within the time provided in Section 2(g) hereof,
the Representatives may, in their sole discretion, postpone the Closing
Date until no later that two (2) full business days following delivery of
copies of the Prospectus to the Representatives.
(c) The Option Shares; the Second Closing Date. In addition, on the basis of
the representations, warranties and agreements herein contained, and upon
the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally
and not jointly, up to an aggregate of _____ Option Shares from the Company
at the purchase price per share to be paid by the Underwriters for the Firm
Shares. The option granted hereunder is for use by the Underwriters solely
in covering any over-allotments in connection with the sale and
distribution of the Firm Shares. The option granted hereunder may be
exercised at any time upon notice by the Representatives to the Company,
which notice may be given at any time within 30 days from the date of this
Agreement. The time and date of delivery of the Option Shares, if
subsequent to the First Closing Date, is called the "Second Closing Date"
and shall be determined by the Representatives and shall not be earlier
than three nor later than five full business days after delivery of such
notice of exercise. If any Option Shares are to be purchased, each
Underwriter agrees, severally and not jointly, to purchase the number of
Option Shares (subject to such adjustments to eliminate fractional shares
as the Representatives may determine) that bears the same proportion to the
total number of Option Shares to be purchased as the number of Firm Shares
set forth on Schedule A opposite the name of such Underwriter bears to the
total number of Firm Shares. The Representatives may cancel the option at
any time prior to its expiration by giving written notice of such
cancellation to the Company.
(d) Public Offering of the Shares. The Representatives hereby advise the
Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Shares as
soon after this Agreement has been executed and the Registration Statement
has been declared effective as the Representatives, in their sole judgment,
have determined is advisable and practicable.
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(e) Payment for the Shares. Payment for the Shares shall be made at the First
Closing Date (and, if applicable, at the Second Closing Date) by wire
transfer in immediately available-funds to the order of the Company.
It is understood that the Representatives have been authorized, for their
respective accounts and the accounts of the several Underwriters, to accept
delivery of, and make payment of the purchase price for, the Firm Shares and any
Option Shares the Underwriters have agreed to purchase. BancBoston Robertson
Stephens Inc., ING Baring Furman Selz LLC and FAC/Equities, individually and not
as the Representatives of the Underwriters, may (but shall not be obligated to)
make payment for any Shares to be purchased by any Underwriter whose funds shall
not have been received by the Representatives by the First Closing Date or the
Second Closing Date, as the case may be, for the account of such Underwriter,
but any such payment shall not relieve such Underwriter from any of its
obligations under this Agreement.
(f) Delivery of the Shares. The Company shall deliver, or cause to be
delivered, a credit representing the Firm Shares to an account or accounts
at The Depository Trust Company, as designated by the Representatives for
the accounts of the Representatives and the several Underwriters at the
First Closing Date, against the irrevocable release of a wire transfer of
immediately available funds for the amount of the purchase price therefor.
The Company shall also deliver, or cause to be delivered a credit
representing the Option Shares the Underwriters have agreed to purchase at
the First Closing Date (or the Second Closing Date, as the case may be), to
an account or accounts at The Depository Trust Company as designated by the
Representatives for the accounts of the Representatives and the several
Underwriters, against the irrevocable release of a wire transfer of
immediately available funds for the amount of the purchase price therefor.
Time shall be of the essence, and delivery at the time and place specified
in this Agreement is a further condition to the obligations of the
Underwriters.
(g) Delivery of Prospectus to the Underwriters. Not later than 12:00 noon on
the second business day following the date the Shares are released by the
Underwriters for sale to the public, the Company shall deliver or cause to
be delivered copies of the Prospectus in such quantities and at such places
as the Representatives shall request.
Section 3. COVENANTS OF THE COMPANY.
The Company further covenants and agrees with each Underwriter as
follows:
(a) Registration Statement Matters. The Company will (i) use its best efforts
to cause a registration statement on Form 8-A (the "Form 8-A Registration
Statement") as required by the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), to become effective simultaneously with the
Registration Statement, (ii) use its best efforts to cause the Registration
Statement to become effective or, if the procedure in Rule 430A of the
Securities Act is followed, to prepare and timely file with the Commission
under Rule 424(b) under the Securities Act a Prospectus in a form approved
by the Representatives containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule
430A of the Securities Act and (iii) not file any amendment to the
Registration Statement or supplement to
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the Prospectus of which the Representatives shall not previously have been
advised and furnished with a copy or to which the Representatives shall
have reasonably objected in writing or which is not in compliance in all
material respects with the Securities Act. If the Company elects to rely on
Rule 462(b) under the Securities Act, the Company shall file a Rule 462(b)
Registration Statement with the Commission in compliance with Rule 462(b)
under the Securities Act prior to the time confirmations are sent or given,
as specified by Rule 462(b)(2) under the Securities Act, and shall pay the
applicable fees in accordance with Rule 111 under the Securities Act.
(b) Securities Act Compliance. The Company will advise the Representatives
promptly (i) when the Registration Statement or any post-effective
amendment thereto shall have become effective, (ii) of receipt of any
comments from the Commission, (iii) of any request of the Commission for
amendment of the Registration Statement or for supplement to the Prospectus
or for any additional information and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or of the institution
of any proceedings for that purpose. The Company will use its best efforts
to prevent the issuance of any such stop order preventing or suspending the
use of the Prospectus and to obtain as soon as possible the lifting
thereof, if issued.
(c) Blue Sky Compliance. The Company will cooperate with the Representatives
and counsel for the Underwriters in endeavoring to qualify the Shares for
sale under the securities laws of such jurisdictions (both national and
foreign) as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the
Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction where it
is not now so qualified or required to file such a consent. The Company
will, from time to time, prepare and file such statements, reports and
other documents, as are or may be required to continue such qualifications
in effect for so long a period as the Representatives may reasonably
request for distribution of the Shares.
(d) Amendments and Supplements to the Prospectus and Other Securities Act
Matters. The Company will comply in all material respects with the
Securities Act and the Exchange Act, and the rules and regulations of the
Commission thereunder, so as to permit the completion of the distribution
of the Shares as contemplated in this Agreement and the Prospectus. If
during the period in which a prospectus is required by law to be delivered
by an Underwriter or dealer, any event shall occur as a result of which, in
the judgment of the Company or in the reasonable opinion of the
Representatives or counsel for the Underwriters, it becomes necessary to
amend or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances existing at the time the Prospectus is
delivered to a purchaser, not misleading, or, if it is necessary at any
time to amend or supplement the Prospectus to comply with any law, the
Company promptly will prepare and file with the Commission, and furnish at
its own expense to the Underwriters and to dealers, an appropriate
amendment to the Registration Statement or supplement to the Prospectus so
that the Prospectus as so amended or supplemented will not, in the light of
the circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with the law.
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(e) Copies of any Amendments and Supplements to the Prospectus. The Company
agrees to furnish the Representatives, without charge, during the period
beginning on the date hereof and ending on the later of the First Closing
Date or such date, as in the opinion of counsel for the Underwriters, the
Prospectus is no longer required by law to be delivered in connection with
sales by an Underwriter or dealer (the "Prospectus Delivery Period"), as
many copies of the Prospectus and any amendments and supplements thereto
(including any documents incorporated or deemed incorporated by reference
therein) as the Representatives may reasonably request.
(f) Use of Proceeds. The Company shall apply the net proceeds from the sale of
the Shares sold by it in the manner described under the caption "Use of
Proceeds" in the Prospectus.
(g) Transfer Agent. The Company shall engage and maintain, at its expense, a
registrar and transfer agent for the Company Shares.
(h) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month
period ending October 31, 2000 that satisfies the provisions of Section
11(a) of the Securities Act.
(i) Periodic Reporting Obligations. During the Prospectus Delivery Period, the
Company shall file, on a timely basis, with the Commission and the National
Association of Securities Dealers, Inc. all reports and documents required
to be filed under the Exchange Act.
(j) Agreement Not to Offer or Sell Additional Securities. The Company will not,
without the prior written consent of BancBoston Robertson Stephens Inc.,
for a period of 180 days following the date of the Prospectus, offer, sell
or contract to sell, or otherwise dispose of or enter into any transaction
which is designed to, or could be expected to, result in the disposition
(whether by actual disposition or effective economic disposition due to
cash settlement or otherwise by the Company or any affiliate of the Company
or any person in privity with the Company or any affiliate of the Company)
directly or indirectly, or announce the offering of, any other Common
Shares or any securities convertible into, or exchangeable for, Common
Shares; provided, however, that the Company may (i) grant options and issue
and sell Common Shares pursuant to any director or employee stock option
plan, stock ownership plan or dividend reinvestment plan of the Company in
effect at the date of the Prospectus and described in the Prospectus so
long as none of those shares may be transferred on during the period of 180
days from the date that the Registration Statement is declared effective
(the "Lock-Up Period") and the Company shall enter stop transfer
instructions with its transfer agent and registrar against the transfer of
any such Common Shares and (ii) the Company may issue Common Shares
issuable upon the conversion of securities or the exercise of options,
warrants or rights outstanding at the date of the Prospectus and described
in the Prospectus.
(k) Future Reports to the Representatives. During the period of three years
hereafter the Company will furnish to the Representatives (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report
of the Company containing the balance sheet of the Company as of the close
of such fiscal year and statements of income, stockholders' equity and cash
flows for the year then ended and the opinion thereon of the Company's
independent public or certified
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public accountants; (ii) as soon as practicable after the filing thereof,
copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Current Report on Form 8-K or other report filed by
the Company with the Commission, the National Association of Securities
Dealers, Inc. or any securities exchange; and (iii) as soon as available,
copies of any report or communication of the Company mailed generally to
holders of its capital stock.
(l) Exchange Act Compliance. During the Prospectus Delivery Period, the Company
will file all documents required to be filed with the Commission pursuant
to Section 13, 14 or 15 of the Exchange Act, in the manner and within the
time periods required by the Exchange Act.
Section 4. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Shares
as provided herein on the First Closing Date and, with respect to the
Option Shares, the Second Closing Date, shall be subject to the accuracy of
the representations and warranties on the part of the Company set forth in
Section 1 hereof as of the date hereof and as of the First Closing Date as
though then made and, with respect to the Option Shares, as of the Second
Closing Date as though then made, to the timely performance by the Company
of its covenants and other obligations hereunder, and to each of the
following additional conditions:
(a) Compliance with Registration Requirements; No Stop Order; No Objection from
the National Association of Securities Dealers, Inc. The Registration
Statement shall have become effective prior to the execution of this
Agreement, or at such later date as shall be consented to in writing by
you; and no stop order suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have been initiated or, to
the knowledge of the Company or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information
(to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the satisfaction of
Underwriters' Counsel; and the National Association of Securities Dealers,
Inc. shall have raised no objection to the fairness and reasonableness of
the underwriting terms and arrangements.
(b) No Material Adverse Change or Ratings Agency Change. Subsequent to the
execution and delivery of this Agreement and prior to the First Closing
Date, or the Second Closing Date, as the case may be,
(i) there shall not have been any Material Adverse Change in the condition
(financial or otherwise), earnings, operations or business of the Company
and its subsidiary considered as one enterprise from that set forth in the
Registration Statement or Prospectus, which is material and adverse and
that makes it impracticable or inadvisable to proceed with the public
offering of the Shares as contemplated by the Prospectus; and
(ii) there shall not have occurred any downgrading, nor shall any notice
have been given of any intended or potential downgrading or of any review
for a possible change that does not indicate the direction of the possible
change, in the rating accorded any of the Company's securities by any
"nationally recognized statistical rating organization," as such term is
defined for purposes of Rule 436(g)(2) under the Act.
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(c) Opinion of Counsel for the Company. You shall have received on the First
Closing Date, or the Second Closing Date, as the case may be, an opinion of
Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Company,
substantially in the form of Exhibit B attached hereto, dated the First
Closing Date, or the Second Closing Date, addressed to the Underwriters and
with reproduced copies or signed counterparts thereof for each of the
Underwriters.
Counsel rendering the opinion contained in Exhibit B may rely as to
questions of law not involving the laws of the United States or the
Commonwealth of Massachusetts and the State of Delaware upon opinions of
local counsel, and as to questions of fact upon representations or
certificates of officers of the Company and of government officials, in
which case their opinion is to state that they are so relying and that they
have no knowledge of any material misstatement or inaccuracy in any such
opinion, representation or certificate. Copies of any opinion,
representation or certificate so relied upon shall be delivered to you, as
Representatives of the Underwriters, and to Underwriters' Counsel.
(d) Opinion of Counsel for the Underwriters. You shall have received on the
First Closing Date or the Second Closing Date, as the case may be, an
opinion of Hale and Dorr LLP, substantially in the form of Exhibit C
hereto. The Company shall have furnished to such counsel such documents as
they may have requested for the purpose of enabling them to pass upon such
matters.
(e) Accountants' Comfort Letter. You shall have received on the First Closing
Date and on the Second Closing Date, as the case may be, a letter from KPMG
LLP addressed to the Underwriters, dated the First Closing Date or the
Second Closing Date, as the case may be, confirming that they are
independent certified public accountants with respect to the Company within
the meaning of the Act and the applicable published Rules and Regulations
and based upon the procedures described in such letter delivered to you
concurrently with the execution of this Agreement (herein called the
"Original Letter"), but carried out to a date not more than four (4)
business days prior to the First Closing Date or the Second Closing Date,
as the case may be, (i) confirming, to the extent true, that the statements
and conclusions set forth in the Original Letter are accurate as of the
First Closing Date or the Second Closing Date, as the case may be, and (ii)
setting forth any revisions and additions to the statements and conclusions
set forth in the Original Letter which are necessary to reflect any changes
in the facts described in the Original Letter since the date of such
letter, or to reflect the availability of more recent financial statements,
data or information. The letter shall not disclose any change in the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiary considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in
your sole judgment, impracticable or inadvisable to proceed with the public
offering of the Shares as contemplated by the Prospectus. The Original
Letter from KPMG LLP shall be addressed to or for the use of the
Underwriters in form and substance satisfactory to the Underwriters and
shall (i) represent, to the extent true, that they are independent
certified public accountants with respect to the Company within the meaning
of the Act and the applicable published Rules and Regulations, (ii) set
forth their opinion with respect to their examination of the consolidated
balance sheet of the Company as of July 31, 1999 and related consolidated
statements of
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operations, shareholders' equity, and cash flows for the year ended July
31, 1999, (iii) state that KPMG LLP has performed the procedures set out in
Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim
financial information and providing the report of KPMG LLP as described in
SAS 71 on the financial statements for each of the quarters in the
seven-quarter period ended July 31, 1999 (the "Quarterly Financial
Statements"), (iv) state that in the course of such review, nothing came to
their attention that leads them to believe that any material modifications
need to be made to any of the Quarterly Financial Statements in order for
them to be in compliance with generally accepted accounting principles
consistently applied across the periods presented, and address other
matters agreed upon by KPMG LLP and you. In addition, you shall have
received from KPMG LLP a letter addressed to the Company and made available
to you for the use of the Underwriters stating that their review of the
Company's system of internal accounting controls, to the extent they deemed
necessary in establishing the scope of their examination of the Company's
consolidated financial statements as of July 31, 1999, did not disclose any
weaknesses in internal controls that they considered to be material
weaknesses.
(f) Officers' Certificate. You shall have received on the First Closing Date
and the Second Closing Date, as the case may be, a certificate of the
Company, dated the First Closing Date or the Second Closing Date, as the
case may be, signed by the Chief Executive Officer and Chief Financial
Officer of the Company, to the effect that, and you shall be satisfied
that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the First
Closing Date or the Second Closing Date, as the case may be, and
the Company has complied with all the agreements and satisfied all
the conditions on its part to be performed or satisfied at or prior
to the First Closing Date or the Second Closing Date, as the case
may be;
(ii) To the Company's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Act;
(iii) When the Registration Statement became effective and at all
times subsequent thereto up to the delivery of such certificate,
(A) the Registration Statement and the Prospectus, and any
amendments or supplements thereto, contained all material
information required to be included therein by the Securities Act
and in all material respects conformed to the requirements of the
Securities Act, and (B) the Registration Statement and the
Prospectus, and any amendments or supplements thereto, did not and
does not include any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading; and, since the
effective date of the Registration Statement, there has occurred no
event required to be set forth in an amended or supplemented
Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not
been (a) any material adverse change in the condition (financial or
otherwise), earnings, operations or business of the Company and its
subsidiary considered as one enterprise, (b) any transaction that
is
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material to the Company and its subsidiary considered as one
enterprise, except transactions entered into in the ordinary course
of business, (c) any obligation, direct or contingent, that is
material to the Company and its subsidiary considered as one
enterprise, incurred by the Company or its subsidiary, except
obligations incurred in the ordinary course of business, (d) any
change in the capital stock or outstanding indebtedness of the
Company or its subsidiary that is material to the Company and its
subsidiary considered as one enterprise, (e) any dividend or
distribution of any kind declared, paid or made on the capital
stock of the Company or its subsidiary, or (f) any loss or damage
(whether or not insured) to the property of the Company or its
subsidiary which has been sustained or will have been sustained
which has a material adverse effect on the condition (financial or
otherwise), earnings, operations or business of the Company and its
subsidiary considered as one enterprise.
(g) Lock-up Agreement from Certain Stockholders of the Company. The Company
shall have obtained and delivered to you an agreement substantially in the
form of Exhibit A attached hereto from each officer and director of the
Company and each beneficial owner of one or more percent of the outstanding
issued share capital of the Company.
(h) Stock Exchange Listing. The Shares shall have been approved for inclusion
on the Nasdaq National Market, subject only to official notice of issuance.
(i) Compliance with Prospectus Delivery Requirements. The Company shall have
complied with the provisions of Sections 2(g) and 3(e) hereof with respect
to the furnishing of Prospectuses.
(j) Additional Documents. On or before each of the First Closing Date and the
Second Closing Date, as the case may be, the Representatives and counsel
for the Underwriters shall have received such information, documents and
opinions as they may reasonably require for the purposes of enabling them
to pass upon the issuance and sale of the Shares as contemplated herein, or
in order to evidence the accuracy of any of the representations and
warranties, or the satisfaction of any of the conditions or agreements,
herein contained.
If any condition specified in this Section 4 is not satisfied when and as
required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Option Shares, at any time prior to the
Second Closing Date, which termination shall be without liability on the part of
any party to any other party, except that Section 5 (Payment of Expenses),
Section 6 (Reimbursement of Underwriters' Expenses), Section 7 (Indemnification
and Contribution) and Section 10 (Representations and Indemnities to Survive
Delivery) shall at all times be effective and shall survive such termination.
Section 5. PAYMENT OF EXPENSES. The Company agrees to pay all costs, fees
and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary
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issue, transfer and other stamp taxes in connection with the issuance and sale
of the Shares to the Underwriters, (iv) all fees and expenses of the Company's
counsel, independent public or certified public accountants and other advisors,
(v) all costs and expenses incurred in connection with the preparation,
printing, filing, shipping and distribution of the Registration Statement
(including financial statements, exhibits, schedules, consents and certificates
of experts), each preliminary prospectus and the Prospectus, and all amendments
and supplements thereto, and this Agreement, (vi) all filing fees, attorneys'
fees and expenses incurred by the Company or the Underwriters in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Shares for offer and sale under the
state securities or blue sky laws or the provincial securities laws of Canada or
any other country, and, if requested by the Representatives, preparing and
printing a "Blue Sky Survey", an "International Blue Sky Survey" or other
memorandum, and any supplements thereto, advising the Underwriters of such
qualifications, registrations and exemptions, (vii) the filing fees incident to,
and the reasonable fees and expenses of counsel for the Underwriters in
connection with, review and approval of the Underwriters' participation in the
offering and distribution of the Common Shares by the National Association of
Securities Dealers, Inc., (viii) the fees and expenses associated with including
the Common Shares on the Nasdaq National Market, (ix) all costs and expenses
incident to the preparation and undertaking of "road show" preparations to be
made to prospective investors, and (x) all other fees, costs and expenses
referred to in Item 13 of Part II of the Registration Statement. Except as
provided in this Section 5, Section 6, and Section 7 hereof, the Underwriters
shall pay their own expenses, including the fees and disbursements of their
counsel.
Section 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If the sale to the
Underwriters of the Shares on the First Closing Date is not consummated because
of any refusal, inability or failure on the part of the Company to perform any
agreement herein or to comply with any provision hereof, the Company agrees to
reimburse the Representatives and the other Underwriters (or such Underwriters
as have terminated this Agreement with respect to themselves), severally, upon
demand for all out-of-pocket expenses that shall have been reasonably incurred
by the Representatives and the Underwriters in connection with the proposed
purchase and the offering and sale of the Shares, including but not limited to
fees and disbursements of counsel, printing expenses, travel expenses, postage,
facsimile and telephone charges.
Section 7. INDEMNIFICATION AND CONTRIBUTION.
(a) Indemnification of the Underwriters.
(1) The Company agrees to indemnify and hold harmless each Underwriter, its
officers and employees, and each person, if any, who controls any Underwriter
within the meaning of the Securities Act and the Exchange Act against any loss,
claim, damage, liability or expense, as incurred, to which such Underwriter or
such controlling person may become subject, under the Securities Act, the
Exchange Act or other federal or state statutory law or regulation, or at common
law or otherwise (including in settlement of any litigation, if such settlement
is effected with the written consent of the Company, which consent shall not be
unreasonably
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withheld), insofar as such loss, claim, damage, liability or expense (or actions
in respect thereof as contemplated below) arises out of or is based (i) upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the
Securities Act, or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading; or (ii) upon any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission therefrom
of a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; [or
(iii) in whole or in part upon any inaccuracy in the representations and
warranties of the Company contained herein; or (iv) in whole or in part upon any
failure of the Company to perform its obligations hereunder or under law; or (v)
any act or failure to act or any alleged act or failure to act by any
Underwriter in connection with, or relating in any manner to, the Shares or the
offering contemplated hereby, and which is included as part of or referred to in
any loss, claim, damage, liability or action arising out of or based upon any
matter covered by clause (i), (ii), (iii) or (iv) above, provided that the
Company shall not be liable under this clause (v) to the extent that a court of
competent jurisdiction shall have determined by a final judgment that such loss,
claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter through
its bad faith or willful misconduct;] and to reimburse each Underwriter and
each such controlling person for any and all expenses (including the fees and
disbursements of counsel chosen by BancBoston Robertson Stephens Inc.) as such
expenses are reasonably incurred by such Underwriter or such controlling person
in connection with investigating, defending, settling, compromising or paying
any such loss, claim, damage, liability, expense or action; provided, however,
that the foregoing indemnity agreement shall not apply to any loss, claim,
damage, liability or expense to the extent, but only to the extent, arising out
of or based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by the Representatives expressly for use in
the Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto); and provided, further, that with respect to
any preliminary prospectus, the foregoing indemnity agreement shall not inure to
the benefit of any Underwriter from whom the person asserting any loss, claim,
damage, liability or expense purchased Shares, or any person controlling such
Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense. The indemnity agreement
set forth in this Section 7(a) shall be in addition to any liabilities that the
Company may otherwise have.
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold
harmless the Company, each of its directors, each of its officers who
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Securities Act or the Exchange Act,
against any loss,
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claim, damage, liability or expense, as incurred, to which the Company, or
any such director, officer or controlling person may become subject, under
the Securities Act, the Exchange Act, or other federal or state statutory
law or regulation, or at common law or otherwise (including in settlement
of any litigation, if such settlement is effected with the written consent
of such Underwriter), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of
or is based upon any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto), or arises out of or is
based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in
reliance upon and in conformity with written information furnished to the
Company by the Representatives expressly for use therein; and to reimburse
the Company, or any such director, officer or controlling person for any
legal and other expense reasonably incurred by the Company, or any such
director, officer or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action. The indemnity agreement set forth in this
Section 7(b) shall be in addition to any liabilities that each Underwriter
may otherwise have.
(c) Information Provided by the Underwriters. The Company hereby acknowledges
that the only information that the Underwriters have furnished to the
Company expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) are
the statements set forth under the caption "Underwriting" in the
Prospectus; and the Underwriters confirm that such statements are correct.
(d) Notifications and Other Indemnification Procedures. Promptly after receipt
by an indemnified party under this Section 7 of notice of the commencement
of any action, such indemnified party will, if a claim in respect thereof
is to be made against an indemnifying party under this Section 7, notify
the indemnifying party in writing of the commencement thereof, but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party for contribution or
otherwise than under the indemnity agreement contained in this Section 7 to
the extent it is not prejudiced as a proximate result of such failure. In
case any such action is brought against any indemnified party and such
indemnified party seeks or intends to seek indemnity from an indemnifying
party, the indemnifying party will be entitled to participate in, and, to
the extent that it shall elect, jointly with all other indemnifying parties
similarly notified, by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party,
to assume the defense thereof with counsel reasonably satisfactory to such
indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that a conflict may arise
between the positions of the indemnifying party and the indemnified party
in conducting the defense of any such action or that there may be legal
defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party,
the indemnified party or parties shall have the right to select separate
counsel to assume such legal defenses and to otherwise participate in the
defense of such action
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on behalf of such indemnified party or parties. Upon receipt of notice from
the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by
the indemnified party of counsel, the indemnifying party will not be liable
to such indemnified party under this Section 7 for any legal or other
expenses subsequently incurred by such indemnified party in connection with
the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding
sentence (it being understood, however, that the indemnifying party shall
not be liable for the expenses of more than one separate counsel (together
with local counsel), approved by the indemnifying party (BancBoston
Robertson Stephens Inc. in the case of Section 7(b) and Section 8),
representing the indemnified parties who are parties to such action), (ii)
the indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable
time after notice of commencement of the action, or (iii) the indemnifying
party has authorized the employment of counsel for the indemnified party at
the expense of the indemnifying party, in each of which cases the fees and
expenses of counsel shall be at the expense of the indemnifying party.
(e) Settlements. The indemnifying party under this Section 7 shall not be
liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld. No indemnifying
party shall, without the prior written consent of the indemnified party,
effect any settlement, compromise or consent to the entry of judgment in
any pending or threatened action, suit or proceeding in respect of which
any indemnified party is or could have been a party and indemnity was or
could have been sought hereunder by such indemnified party, unless such
settlement, compromise or consent includes (i) an unconditional release of
such indemnified party from all liability on claims that are the subject
matter of such action, suit or proceeding.
(f) Contribution. If the indemnification provided for in this Section 7 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof), then each
indemnifying party shall contribute to the aggregate amount paid or payable
by such indemnified party in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares. If, however,
the allocation provided by the immediately preceding sentence is not
permitted by applicable law, then each indemnifying party shall contribute
to such amount paid or payable by such indemnified party in such proportion
as is appropriate to reflect not only such relative benefits but also the
relative fault of the Company on the one hand and the Underwriters on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, (or actions or proceedings in
respect thereof), as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriter on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses)
received by the Company bears to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company on the one hand or the Underwriters on the other and the parties'
relative intent,
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knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and Underwriters agree that it would not be just and equitable
if contributions pursuant to this Section 7(f) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7(f). The amount paid
or payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to above in
this Section 7(f) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (f), (i) no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter and (ii) 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. The Underwriters' obligations in this Section 7(f)
to contribute are several in proportion to their respective underwriting
obligations and not joint.
(g) Timing of Any Payments of Indemnification. Any losses, claims, damages,
liabilities or expenses for which an indemnified party is entitled to
indemnification or contribution under this Section 7 shall be paid by the
indemnifying party to the indemnified party as such losses, claims,
damages, liabilities or expenses are incurred, but in all cases, no later
than thirty (30) days of invoice to the indemnifying party.
(h) Survival. The indemnity and contribution agreements contained in this
Section 7 shall remain operative and in full force and effect, regardless
of (i) any investigation made by or on behalf of any Underwriter or any
person controlling any Underwriter, the Company, its directors or officers
or any persons controlling the Company, (ii) acceptance of any Shares and
payment therefor hereunder, and (iii) any termination of this Agreement. A
successor to any Underwriter, or to the Company, its directors or officers,
or any person controlling the Company, shall be entitled to the benefits of
the indemnity, contribution and reimbursement agreements contained in this
Section 7.
(i) Acknowledgements of Parties. The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were
represented by counsel during the negotiations regarding the provisions
hereof including, without limitation, the provisions of this Section 7, and
are fully informed regarding said provisions. They further acknowledge
that the provisions of this Section 7 fairly allocate the risks in light of
the ability of the parties to investigate the Company and its business in
order to assure that adequate disclosure is made in the Registration
Statement and Prospectus as required by the Securities Act and the Exchange
Act.
Section 8. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the several Underwriters shall fail or refuse to purchase Shares that it
or they have agreed to purchase
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hereunder on such date, and the aggregate number of Common Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
does not exceed 10% of the aggregate number of the Shares to be purchased on
such date, the other Underwriters shall be obligated, severally, in the
proportions that the number of Firm Common Shares set forth opposite their
respective names on Schedule A bears to the aggregate number of Firm Shares set
forth opposite the names of all such non-defaulting Underwriters, or in such
other proportions as may be specified by the Representatives with the consent of
the non-defaulting Underwriters, to purchase the Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date. If, on the First Closing Date or the Second Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
and the aggregate number of Shares with respect to which such default occurs
exceeds 10% of the aggregate number of Shares to be purchased on such date, and
arrangements satisfactory to the Representatives and the Company for the
purchase of such Shares are not made within 48 hours after such default, this
Agreement shall terminate without liability of any party to any other party
except that the provisions of Section 4, and Section 7 shall at all times be
effective and shall survive such termination. In any such case either the
Representatives or the Company shall have the right to postpone the First
Closing Date or the Second Closing Date, as the case may be, but in no event for
longer than seven days in order that the required changes, if any, to the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
8. Any action taken under this Section 8 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
Section 9. TERMINATION OF THIS AGREEMENT. Prior to the First Closing Date,
this Agreement may be terminated by the Representatives by notice given to the
Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
Nasdaq Stock Market, or trading in securities generally on either the Nasdaq
Stock Market or the New York Stock Exchange shall have been suspended or
limited, or minimum or maximum prices shall have been generally established on
any of such stock exchanges by the Commission or the National Association of
Securities Dealers, Inc.; (ii) a general banking moratorium shall have been
declared by any of federal, New York, Delaware or California authorities; (iii)
there shall have occurred any outbreak or escalation of national or
international hostilities or any crisis or calamity, or any substantial change
in the United States or international financial markets, or any substantial
change or development involving a prospective change in United States' or
international political, financial or economic conditions, as in the judgment of
the Representatives is material and adverse and makes it impracticable or
inadvisable to market the Common Shares in the manner and on the terms described
in the Prospectus or to enforce contracts for the sale of securities; (iv) in
the judgment of the Representatives there shall have occurred any Material
Adverse Change; or (v) the Company shall have sustained a loss by strike, fire,
flood, earthquake, accident or other calamity of such character as in the
judgment of the Representatives may interfere materially with the conduct of the
business and operations of the Company regardless of whether or not such loss
shall have
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been insured. Any termination pursuant to this Section 9 shall be without
liability on the part of (a) the Company to any Underwriter, except that the
Company shall be obligated to reimburse the expenses of the Representatives and
the Underwriters pursuant to Sections 5 and 6 hereof, (b) any Underwriter to the
Company, or (c) of any party hereto to any other party except that the
provisions of Section 7 shall at all times be effective and shall survive such
termination.
Section 10. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of CMGI and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation made by or on behalf of any
Underwriter or the Company or any of its or their partners, officers or
directors or any controlling person, as the case may be, and will survive
delivery of and payment for the Shares sold hereunder and any termination of
this Agreement.
Section 11. NOTICES. All communications hereunder shall be in writing and
shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
BANCBOSTON ROBERTSON STEPHENS INC.
555 California Street
San Francisco, California 94104
Facsimile: (415) 676-2696
Attention: General Counsel
With a copy to:
HALE AND DORR LLP
60 State Street
Boston, Massachusetts 02109
Facsimile: (617) 526-5000
Attention: Peter B. Tarr, Esq.
If to the Company:
NAVISITE, INC.
100 Brickstone Square
Andover, Massachusetts 01810
Facsimile: (978) 684-3599
Attention: Chief Executive Officer
With a copy to:
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
One Beacon Street
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Boston, Massachusetts 02108
Facsimile: (617) 573-4822
Attention: David T. Brewster, Esq.
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
Section 12. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto, including any substitute Underwriters pursuant
to Section 8 hereof, and to the benefit of the employees, officers and directors
and controlling persons referred to in Section 7, and to their respective
successors, and no other person will have any right or obligation hereunder.
The term "successors" shall not include any purchaser of the Shares as such from
any of the Underwriters merely by reason of such purchase.
Section 13. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of
any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
Section 14. GOVERNING LAW PROVISIONS.
(a) Governing Law. This agreement shall be governed by and construed in
accordance with the internal laws of the state of New York applicable to
agreements made and to be performed in such state.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding arising out
of or based upon this Agreement or the transactions contemplated hereby
("Related Proceedings") may be instituted in the federal courts of the
United States of America located in the City and County of San Francisco or
the courts of the State of California in each case located in the City and
County of San Francisco (collectively, the "Specified Courts"), and each
party submits to the non-exclusive jurisdiction of such courts in any such
suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any
such court. The parties waive any objection to the laying of venue of any
suit, action or other proceeding in the Specified Courts and waive and
agree not to plead or claim in any such court that any such suit, action or
other proceeding brought in any such court has been brought in an
inconvenient forum. Each party not located in the United States appoints
CT Corporation System, which currently maintains a San Francisco office at
49 Stevenson Street, San Francisco, California 94105, United States of
America, as its agent to receive service of process or other legal summons
for purposes of any such suit, action or proceeding that may be instituted
in any state or federal court in the City and County of San Francisco.
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(c) Waiver of Immunity. With respect to any Related Proceeding, each party
waives, to the fullest extent permitted by applicable law, all immunity
(whether on the basis of sovereignty or otherwise) from jurisdiction,
service of process, attachment (both before and after judgment) and
execution to which it might otherwise be entitled in the Specified Courts,
and with respect to any Related Judgment, each party waives any such
immunity in the Specified Courts or any other court of competent
jurisdiction, and will not raise or claim or cause to be pleaded any such
immunity at or in respect of any such Related Proceeding or Related
Judgment, including, without limitation, any immunity pursuant to the
United States Foreign Sovereign Immunities Act of 1976, as amended.
Section 15. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in
two or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
[The remainder of this page has been intentionally left blank.]
26
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company the enclosed copies hereof, whereupon this
instrument, along with all counterparts hereof, shall become a binding agreement
in accordance with its terms.
Very truly yours,
NAVISITE, INC.
By:
-------------------------
[Title]
CMGI, INC.
By:
-------------------------
[Title]
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives as of the date first above written.
BANCBOSTON ROBERTSON STEPHENS INC.
ING BARING FURMAN SELZ LLC
FAC/EQUITIES
On their behalf and on behalf of each of the several underwriters named in
Schedule A hereto.
- ----------
BY: BANCBOSTON ROBERTSON STEPHENS INC.
By:
-------------------------
Authorized Signatory
27
<PAGE>
SCHEDULE A
Number of Firm
Common Shares To be
Purchased
Underwriters
BANCBOSTON ROBERTSON STEPHENS,
INC. [__________]
ING BARING FURMAN SELZ LLC [__________]
FAC/EQUITIES [__________]
[__________] [__________]
[__________] [__________]
Total [__________]
28
<PAGE>
Exhibit 4.1
COMMON STOCK
NAVI
[NAVISITE, INC. LOGO APPEARS HERE]
THIS CERTIFICATE IS TRANSFERABLE
IN BOSTON, MA OR NEW YORK, NY
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP 63935M 10 9
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE, OF
- ------------------------------- NAVISITE, INC. --------------------------------
(hereinafter called the "Corporation") transferable only on the books of the
Corporation by the holder hereof in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed. This Certificate and the shares
represented hereby are issued under and subject to the laws of the State of
Delaware and to the provisions of the Certificate of Incorporation and By-Laws
of the Corporation, all as in effect from time to time, and the holder hereof,
by acceptance of this Certificate, consents and agrees to be bound by such laws
and all of said provisions. This Certificate is not valid until countersigned
and registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated
[NAVISITE SEAL APPEARS HERE]
TREASURER CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
BANKBOSTON, N.A.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
NAVISITE, INC.
The Corporation is authorized to issue more than one class of stock. Upon
written request, made by the holder of this Certificate, the Corporation will
furnish to such holder without charge a copy of the full text of the powers,
designations, preferences and relative, participating, optional, or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT-..............Custodian......................
(Cust) (Minor)
under Uniform Gifts to Minors
Act........................
(State)
Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and
-------------------------------
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- ---------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
shares
- -------------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- -----------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
------------------------
------------------------------------------------
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
NOTICE: WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
SIGNATURE(S) GUARANTEED: ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
<PAGE>
Exhibit 5.1
[Letterhead of
Skadden, Arps, Slate, Meagher & Flom LLP
One Beacon Street
Boston, Massachusetts 02108-3194
(617) 573-4800]
September 17, 1999
NaviSite, Inc.
100 Brickstone Square
Andover, Massachusetts 01810
Re: NaviSite, Inc -- Registration Statement on Form S-1
---------------------------------------------------
Ladies and Gentlemen:
We have acted as special counsel to NaviSite, Inc., a Delaware
corporation (the "Company"), in connection with the public offering by the
Company of an aggregate of up to 6,325,000 shares (including 825,000 shares
subject to an over-allotment option) (the "Shares") of the Company's common
stock, par value $0.01 per share (the "Common Stock").
This opinion is being furnished in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended
(the "Securities Act").
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Registration
Statement on Form S-1 (File No. 333-83501), relating to the Shares, as filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act on July 22, 1999, Amendment No. 1 thereto, as filed with the
Commission under the Securities Act on September 3, 1999 and Amendment No. 2
thereto, as filed with the Commission under the Securities Act on the date
hereof (such Registration Statement, as so amended, being hereinafter referred
to as the "Registration Statement"); (ii) the form of the Underwriting Agreement
(the "Underwriting Agreement") proposed to be entered into among the Company, as
issuer, and BancBoston Robertson
<PAGE>
NaviSite, Inc.
September 17, 1999
Page 2
Stephens Inc., Hambrecht & Quist LLC and FAC/Equities, a division of First
Albany Corporation, as representatives of the several underwriters named therein
(the "Underwriters"), filed as an exhibit to the Registration Statement; (iii) a
specimen certificate representing the Common Stock (the "Specimen Certificate"),
the form of which is filed as an exhibit to the Registration Statement; (iv) a
certified copy of the Company's Certificate of Incorporation, as amended, as
currently in effect, filed as an exhibit to the Registration Statement; (v) the
Amended and Restated Certificate of Incorporation of the Company, to be
effective immediately prior to the consummation of the offering, the form of
which is filed as an exhibit to the Registration Statement; (vi) the Company's
By-Laws, as amended, as currently in effect, filed as an exhibit to the
Registration Statement; (vii) the Amended and Restated By-Laws of the Company,
to be effective immediately prior to the consummation of the offering, the form
of which is filed as an exhibit to the Registration Statement; and (viii)
certain resolutions adopted by the Board of Directors of the Company (the
"Board") dated as of June 11, 1999, certain draft resolutions (the "Draft
Resolutions") proposed to be adopted by the Board and certain draft resolutions
(the "Draft Offering Committee Resolutions") proposed to be adopted by the
Offering Committee appointed by the Board (the "Offering Committee"), in each
case relating to the issuance and sale of the Shares and certain related
matters. We have also examined originals or copies, certified or otherwise
identified to our satisfaction, of such records of the Company and such
agreements, certificates of public officials, certificates of officers or other
representatives of the Company and others, and such other documents,
certificates and records as we have deemed necessary or appropriate as a basis
for the opinions set forth herein.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies, and the
authenticity of the originals of such latter documents. In making our
examination of documents executed or to be executed by parties other than the
Company, we have assumed that such parties had or will have the power, corporate
or other, to enter into and perform all obligations thereunder and have also
assumed the due authorization by all requisite action, corporate or other, and
execution and delivery by such parties of such documents and the validity and
binding effect thereof on such parties. As to any facts material to the opinions
expressed herein which we have not independently established or verified, we
have relied upon oral or written statements and representations of officers and
other representatives of the Company and others.
<PAGE>
NaviSite, Inc.
September 17, 1999
Page 3
Members of our firm are admitted to the Bar in the State of Delaware,
and we do not express any opinion as to the laws of any jurisdiction other than
the General Corporation Law of the State of Delaware.
Based upon and subject to the foregoing, we are of the opinion that
when (i) the Draft Resolutions have been adopted by the Board; (ii) the
Registration Statement becomes effective under the Securities Act; (iii) the
price at which the Shares are to be sold to the Underwriters pursuant to the
Underwriting Agreement and other matters relating to the issuance and sale of
the Shares have been approved by the Offering Committee in accordance with the
Draft Offering Committee Resolutions and such Draft Offering Committee
Resolutions have been adopted by the Offering Committee; (iv) the Underwriting
Agreement has been duly executed and delivered; and (v) certificates
representing the Shares in the form of the Specimen Certificate examined by us
have been (A) duly executed by an authorized officer of the transfer agent and
registrar for the Common Stock, (B) registered by such transfer agent and
registrar and (C) delivered to and paid for by the Underwriters at a price per
Share not less than the per Share par value of the Shares as contemplated by the
Underwriting Agreement, the issuance and sale of the Shares will have been duly
authorized, and the Shares will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as
an exhibit to the Registration Statement. We also consent to the reference to
our firm under the caption "Legal Matters" in the Registration Statement. In
giving such consent, we do not thereby admit that we are included in the
category of persons whose consent is required under Section 7 of the Securities
Act or the rules and regulations of the Commission promulgated thereunder.
This opinion is furnished by us, as your special counsel, in
connection with the filing of the Registration Statement and, except as provided
in the immediately preceding paragraph, is not to be used, circulated, quoted or
otherwise referred to for any other purpose or relied upon by any other person
without our prior written permission.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher & Flom LLP
<PAGE>
EXHIBIT 10.1
------------
________________________________________
NAVISITE, INC.
AMENDED AND RESTATED
1998 EQUITY INCENTIVE PLAN
________________________________________
1. Purpose
The purpose of this NaviSite, Inc. Amended and Restated 1998 Equity
Incentive Plan (the "Plan") is to attract and retain key employees and
----
consultants of the Company and its Affiliates, to provide an incentive for them
to achieve long-range performance goals, and to enable them to participate in
the long-term growth of the Company by granting Awards with respect to the
Company's Common Stock. Certain capitalized terms used herein are defined in
Section 9 below.
2. Administration
The Plan shall be administered by the Committee. The Committee shall select
the Participants to receive Awards and shall determine the terms and conditions
of such Awards. The Committee shall have authority to adopt, alter and repeal
such administrative rules, guidelines and practices governing the operation of
the Plan as it shall from time to time consider advisable, and to interpret the
provisions of the Plan. The Committee's decisions shall be final and binding. To
the extent permitted by applicable law, the Committee may delegate to one or
more executive officers of the Company the power to make Awards to Participants
who are not Reporting Persons or Covered Employees and to make all
determinations under the Plan with respect thereto, provided that, subject to
Sections 4(a) and 4(c) hereof, the Committee shall fix the maximum amount of
such Awards for all such Participants and a maximum for any one Participant.
3. Eligibility
All employees and consultants of the Company or any Affiliate capable of
contributing significantly to the successful performance of the Company, other
than a person who has irrevocably elected not to be eligible, are eligible to be
Participants in the Plan. With respect to Awards issued in connection with the
reorganization of NaviSite Internet Services, Inc. into the Company and NaviNet,
Inc., a Delaware corporation ("NaviNet"), employees and consultants of NaviNet
-------
shall also be eligible to be Participants in the Plan and NaviNet shall be
deemed to be an Affiliate of the Company for purposes of interpreting the
provisions of the Plan applicable to such Awards. Incentive Stock Options (as
defined in Section 5(a) hereof) may be granted under the Plan only to persons
eligible to receive such options under the Code.
1
<PAGE>
4. Stock Available for Awards
(a) Amount. Subject to adjustment under Section 4(b) hereof, Awards may be
made under the Plan with respect to a maximum of 5,562,212 shares of Common
Stock. If any Award expires or is terminated unexercised or is forfeited or
settled without the issuance of shares of Common Stock, the shares subject to
such Award, to the extent of such expiration, termination, forfeiture or
settlement shall again be available under the Plan. Common Stock issued through
the assumption or substitution of outstanding grants from an acquired company
shall not reduce the shares available for Awards under the Plan. Shares issued
under the Plan may consist in whole or in part of authorized but unissued shares
or treasury shares.
(b) Adjustment. In the event that the Committee determines that any stock
dividend, extraordinary cash dividend, recapitalization, reorganization, merger,
consolidation, split-up, spin-off, combination, exchange of shares or other
transaction affects the Common Stock such that an adjustment is required in
order to preserve the benefits intended to be provided by the Plan, then the
Committee (subject in the case of Incentive Stock Options to any limitation
imposed by the Code) may in its sole discretion equitably adjust any or all of
(i) the number and kind of shares in respect of which Awards may be made under
the Plan, (ii) the number and kind of shares or other consideration subject to
outstanding Awards and (iii) the exercise price with respect to any of the
foregoing, provided that the number of shares or other consideration subject to
any Award shall always be a whole number, and if considered appropriate, the
Committee may make provision for a cash payment with respect to an outstanding
Award.
(c) Limit on Individual Grants. The maximum number of shares of Common
Stock subject to Options and Stock Appreciation Rights that may be granted to
any Participant in the aggregate in any calendar year shall not exceed 300,000
shares, subject to adjustment under Section 4(b) hereof.
5. Stock Options
(a) Grant of Options. Subject to the provisions of the Plan, the Committee
may grant options ("Options") to purchase shares of Common Stock (i) intended to
-------
comply with the requirements of Section 422 of the Code or any successor
provision and any regulations thereunder ("Incentive Stock Options") and (ii)
-----------------------
not intended to comply with such requirements ("Nonstatutory Stock Options").
--------------------------
The Committee shall determine the number of shares subject to each Option and
the exercise price therefor, which shall not be less than 100% of the Fair
Market Value of the Common Stock on the date of grant. No Incentive Stock Option
may be granted hereunder more than ten years after the effective date of the
Plan.
(b) Terms and Conditions. Each Option shall be exercisable at such times
and subject to such terms and conditions as the Committee may specify in the
applicable grant or thereafter. The Committee may impose such conditions with
respect to the exercise of Options, including conditions relating to applicable
federal or state securities laws, as it considers necessary or advisable.
(c) Payment. No shares shall be delivered pursuant to any exercise of an
Option until payment in full of the exercise price therefor is received by the
Company. Such payment may be
2
<PAGE>
made in whole or in part in cash or, to the extent permitted by the Committee at
or after the grant of the Option, by delivery of a note or other commitment
satisfactory to the Committee or shares of Common Stock owned by the optionee,
including Restricted Stock, or by retaining shares otherwise issuable pursuant
to the Option, in each case valued at their Fair Market Value on the date of
delivery or retention, or such other lawful consideration, including a payment
commitment of a financial or brokerage institution, as the Committee may
determine. If the exercise price of an option is paid by delivery of Restricted
Stock (as defined below) owned by the optionee, shares so acquired will be
subject to the same restrictions as were applicable to such Restricted Stock.
6. Stock Appreciation Rights
(a) Grant of SARs. Subject to the provisions of the Plan, the Committee may
grant rights to receive any excess in value of shares of Common Stock over the
exercise price ("Stock Appreciation Rights" or "SARs") in tandem with an
------------------------- ----
Option (at or after the award of the Option), or alone and unrelated to an
Option. SARs in tandem with an Option shall terminate to the extent that the
related Option is exercised, and the related Option shall terminate to the
extent that the tandem SARs are exercised. The Committee shall determine at the
time of grant or thereafter whether SARs are settled in cash, Common Stock or
other securities of the Company, Awards or other property, and may define the
manner of determining the excess in value of the shares of Common Stock.
(b) Exercise Price. The Committee shall fix the exercise price of each SAR
or specify the manner in which the price shall be determined. An SAR granted in
tandem with an Option shall have an exercise price not less than the exercise
price of the related Option. An SAR granted alone and unrelated to an Option may
not have an exercise price less than 100% of the Fair Market Value of the Common
Stock on the date of grant.
(c) Limited SAR's. An SAR related to an Option, which SAR can only be
exercised upon or during limited periods following a change in control of the
Company, may entitle the Participant to receive an amount based upon the highest
price paid or offered for Common Stock in any transaction relating to the change
in control or paid during a specified period immediately preceding the
occurrence of the change in control in any transaction reported in the stock
market in which the Common Stock is normally traded.
7. Restricted Stock
(a) Grant of Restricted Stock. Subject to the provisions of the Plan, the
Committee may grant shares of Common Stock subject to forfeiture ("Restricted
----------
Stock") and determine the duration of the period (the "Restricted Period")
- ----- -----------------
during which, and the conditions under which, the shares may be forfeited to the
Company and the other terms and conditions of such Awards. Shares of Restricted
Stock may be issued for no cash consideration, such minimum consideration as may
be required by applicable law or such other consideration as the Committee may
determine.
(b) Restrictions. Shares of Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered, except as permitted by the
Committee, during the Restricted Period. Shares of Restricted Stock shall be
evidenced in such manner as the Committee may determine. Any certificates issued
in respect of shares of Restricted Stock shall be registered in the
3
<PAGE>
name of the Participant and unless otherwise determined by the Committee,
deposited by the Participant, together with a stock power endorsed in blank,
with the Company. At the expiration of the Restricted Period, the Company shall
deliver such certificates to the Participant or if the Participant has died, to
the Participant's Designated Beneficiary.
8. General Provisions Applicable to Awards
(a) Documentation. Each Award under the Plan shall be evidenced by a
writing delivered to the Participant specifying the terms and conditions thereof
and containing such other terms and conditions not inconsistent with the
provisions of the Plan as the Committee considers necessary or advisable to
achieve the purposes of the Plan or to comply with applicable tax and regulatory
laws and accounting principles.
(b) Committee Discretion. Each type of Award may be made alone, in addition
to or in relation to any other Award. The terms of each type of Award need not
be identical, and the Committee need not treat Participants uniformly. Except as
otherwise provided by the Plan or a particular Award, any determination with
respect to an Award may be made by the Committee at the time of grant or at any
time thereafter.
(c) Dividends and Cash Awards. In the discretion of the Committee, any
Award under the Plan may provide the Participant with (i) dividends or dividend
equivalents payable (in cash or in the form of Awards under the Plan) currently
or deferred with or without interest and (ii) cash payments in lieu of or in
addition to an Award.
(d) Termination of Employment or Service on the Board. The Committee shall
determine the effect on an Award of the disability, death, retirement or other
termination of employment or service on the Board of a Participant and the
extent to which, and the period during which, the Participant's legal
representative, guardian or Designated Beneficiary may receive payment of an
Award or exercise rights thereunder.
(e) Change in Control. In order to preserve a Participant's rights under an
Award in the event of a change in control of the Company (as defined by the
Committee), the Committee in its discretion may, at the time an Award is made or
at any time thereafter, take one or more of the following actions: (i) provide
for the acceleration of any time period relating to the exercise or payment of
the Award, (ii) provide for payment to the Participant of cash or other property
with a Fair Market Value equal to the amount that would have been received upon
the exercise or payment of the Award had the Award been exercised or paid upon
the change in control, (iii) adjust the terms of the Award in a manner
determined by the Committee to reflect the change in control, (iv) cause the
Award to be assumed, or new rights substituted therefor, by another entity, or
(v) make such other provision as the Committee may consider equitable to
Participants and in the best interests of the Company.
(f) Transferability. In the discretion of the Committee, any Award may be
made transferable upon such terms and conditions and to such extent as the
Committee determines, provided that Incentive Stock Options may be transferable
only to the extent permitted by the Code. The Committee may in its discretion
waive any restriction on transferability. Any exercise by a
4
<PAGE>
transferee shall also be governed by the Plan. Under certain circumstances, the
Company may or may not permit the transfer of an Award, and such transferred
Award, or securities purchasable upon exercise of such transferred Award, may or
may not be registered under the Securities Act of 1933, as amended.
(g) Loans. The Committee may authorize the making of loans or cash payments
to Participants in connection with the grant or exercise of any Award under the
Plan, which loans may be secured by any security, including Common Stock,
underlying or related to such Award (provided that the loan shall not exceed the
Fair Market Value of the security subject to such Award at the time such loan is
made), and which may be forgiven upon such terms and conditions as the Committee
may establish at the time of such loan or at any time thereafter.
(h) Withholding Taxes. The Participant shall pay to the Company, or make
provision satisfactory to the Committee for payment of, any taxes required by
law to be withheld in respect of Awards under the Plan no later than the date of
the event creating the tax liability. The Company and its Affiliates may, to the
extent permitted by law, deduct any such tax obligations from any payment of any
kind otherwise due to the Participant. In the Committee's discretion, such tax
obligations may be paid in whole or in part in shares of Common Stock, including
shares retained from the Award creating the tax obligation, valued at their Fair
Market Value on the date of delivery.
(i) Foreign Nationals. Awards may be made to Participants who are foreign
nationals or employed outside the United States on such terms and conditions
different from those specified in the Plan as the Committee considers necessary
or advisable to achieve the purposes of the Plan or to comply with applicable
laws.
(j) Amendment of Award. The Committee may amend, modify or terminate any
outstanding Award, including substituting therefor another Award of the same or
a different type, changing the date of exercise or realization and converting an
Incentive Stock Option to a Nonstatutory Stock Option, provided that the
Participant's consent to such action shall be required unless the Committee
determines that the action, taking into account any related action, would not
materially and adversely affect the Participant.
9. Certain Definitions
"Affiliate" means any business entity in which the Company owns directly or
---------
indirectly 50% or more of the total voting power or has a significant financial
interest as determined by the Committee.
"Award" means any Option, Stock Appreciation Right or Restricted Stock
-----
granted under the Plan.
"Board" means the Board of Directors of the Company.
-----
"Code" means the Internal Revenue Code of 1986, as amended from time to
----
time, or any successor law.
5
<PAGE>
"Committee" means one or more committees each comprised of not less than
---------
two members of the Board appointed by the Board to administer the Plan or a
specified portion thereof. Unless otherwise determined by the Board, if a
Committee is authorized to grant Awards to a Reporting Person or a Covered
Employee, each member shall be a "non-employee director" within the meaning of
applicable Rule 16b-3 under the Exchange Act or an "outside director" within the
meaning of Section 162(m) of the Code, respectively. In the event that the Board
does not appoint a Committee, references in the Plan to the Committee shall mean
the Board.
"Common Stock" or "Stock" means the Common Stock, $0.01 par value, of the
------------ -----
Company.
"Company" means NaviSite, Inc., a Delaware corporation.
-------
"Covered Employee" means a "covered employee" within the meaning of Section
----------------
162(m) of the Code.
"Designated Beneficiary" means the beneficiary designated by a Participant,
----------------------
in a manner determined by the Committee, to receive amounts due or exercise
rights of the Participant in the event of the Participant's death. In the
absence of an effective designation by a Participant, "Designated Beneficiary"
means the Participant's estate.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
------------
time to time, or any successor law.
"Fair Market Value" means, (i) with respect to property other than Common
-----------------
Stock, the fair market value of such property as determined by the Committee in
good faith or in the manner established by the Committee from time to time and
(ii) with respect to Common Stock, 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 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 on which the Common Stock is then traded, on the last
preceding trading day.
"Participant" means a person selected by the Committee to receive an Award
-----------
under the Plan.
"Reporting Person" means a person subject to Section 16 of the Exchange
----------------
Act.
10. Miscellaneous
(a) No Right To Employment or Service on the Board. No person shall have
any claim or right to be granted an Award. Neither the Plan nor any Award
hereunder shall be deemed to give any employee the right to continued employment
or to limit the right of the Company to discharge any employee at any time.
(b) No Rights As Stockholder. Subject to the provisions of the applicable
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed under
the Plan until he or she becomes the holder thereof.
6
<PAGE>
A Participant to whom Common Stock is awarded shall be considered the holder of
the Stock at the time of the Award except as otherwise provided in the
applicable Award.
(c) Effective Date. Subject to the approval of the stockholders of the
Company, the Plan shall be effective on December 28, 1998.
(d) Amendment of Plan. The Board may amend, suspend or terminate the Plan
or any portion thereof at any time, subject to such stockholder approval as the
Board determines to be necessary or advisable to comply with any tax or
regulatory requirement.
(e) Governing Law. The provisions of the Plan shall be governed by and
interpreted in accordance with the laws of the State of Delaware.
_________________________________________
This Plan was originally approved by the Board on December 28, 1998.
This Plan was originally approved by the stockholders on December 28, 1998.
This Plan was amended by the Board on [ ], 1999.
7
<PAGE>
Exhibit 10.17
NAVISITE, INC.
1999 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
1. Purpose.
-------
The purpose of this 1999 Stock Option Plan for Non-Employee Directors (the
"Plan") of NaviSite, Inc. (the "Company") is to encourage ownership in the Com
pany by non-employee directors of the Company whose continued services are
considered essential to the Company's future progress and to provide them with a
further incentive to remain as directors of the Company.
2. Administration.
--------------
The Board of Directors (the "Board") shall supervise and administer the
Plan. All questions concerning interpretation of the Plan or any options granted
under it shall be resolved by the Board of Directors and such resolution shall
be final and binding upon all persons having an interest in the Plan. The Board
of Directors may, to the full extent permitted by or consistent with applicable
laws or regulations, delegate any or all of its powers under the Plan to a
committee appointed by the Board of Directors, and if a committee is so
appointed, all references to the Board of Directors in the Plan shall mean and
relate to such committee.
3. Eligibility.
-----------
There shall be eligible to receive options under the Plan each director of
the Company who: (i) is not an employee of the Company or any of its
subsidiaries or affiliates, (ii) unless otherwise determined by the Board, is
not an affiliate (as such term is defined in Rule 144(a)(1) promulgated under
the Securities Act of 1993), employee or designee of an institutional or
corporate investor that owns, at the time of his or her initial election as a
director of the Company, more than 5% of the outstanding shares of Common Stock
of the Company (an "Affiliated Director").
4. Stock Subject to the Plan.
-------------------------
(a) A total of 250,000 shares of the Company's Common Stock, par value $.01
per share ("Common Stock") may be issued under the Plan, subject to adjust ment
as provided in Section 7.
<PAGE>
(b) 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.
5. Terms, Conditions and Form of Options.
-------------------------------------
Each option granted under the Plan shall be evidenced by a written
agreement in such form as the Board of Directors shall from time to time
approve, which agreements shall comply with and be subject to the following
terms and conditions:
(a) (i) Initial Grants. Each eligible director who is elected for the
--------------
first time to the Board of Directors of the Company after this Plan is adopted
by the Board of Directors shall be granted, upon the date of such initial
election, an option to acquire 25,000 shares of Common Stock under the Plan (the
"Initial Option"), provided that if such initial election occurs prior to the
approval of the Plan by the stockholders of the Company, such option may, at the
discretion of the Board, be granted on the date of such approval. Each
Affiliated Director who ceases to be an Affiliated Director and is not otherwise
an employee of the Company or any of its subsidiaries or affiliates shall be
granted, on the date such director ceases to be an Affiliated Director but
remains as a member of the Board or Directors, an Initial Option to acquire
25,000 shares of Common Stock under the Plan.
(ii) Annual Grants. On the first anniversary of the grant of the
-------------
Initial Option to an eligible director, and on each subsequent anniversary
thereof, the Company shall grant to such eligible director an option to purchase
6,250 shares of Common Stock (an "Annual Option"), provided that such eligible
director serves as a member of the Board on the applicable anniversary date.
(iii) Additional Shares. The Board may, in its discretion,
-----------------
increase to up to 100,000 the aggregate number of shares of Common Stock that
may be subject to an Initial Option and/or Additional Options covering any
vesting period of up to 48 months that may be granted to an eligible director
after the date of such increase.
(b) Option Exercise Price. The option exercise price per share for each
---------------------
option granted under the Plan shall equal (i) the closing price of the Common
Stock on any national securities exchange on which the Common Stock is listed,
(ii) the closing price of the Common Stock on the Nasdaq National Market or
2
<PAGE>
(iii) the average of the closing bid and asked prices of the Common Stock in the
over-the-counter market, whichever is applicable, on the date of grant, or if
none of clauses (i), (ii) or (iii) applies, the fair market value of the Common
Stock, as determined by the Board, on the date of grant. In the case of clauses
(i), (ii) and (iii), if no sales of Common Stock were made on the date of grant,
the price of the Common Stock shall be the reported price for the next preceding
day on which sales were made.
(c) Transferability of Options. Except as the Board may otherwise provide
--------------------------
in an option granted under the Plan, any option granted under the Plan to an
optionee shall not be transferable by the optionee other than (i) by will or the
laws of descent and distribution, (ii) pursuant to a qualified domestic
relations order as defined by the Code or Title I of the Employee Retirement
Income Security Act, or the rules thereunder, or (iii) to any child, stepchild,
grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling,
mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law,
sister-in-law, niece, nephew or other person sharing the director's household
(other than a parent or employee) (a "Family Member"), or any trust in which
Family Members have more than 50% of the beneficial interest, any foundation in
which Family Members (or the optionee) control the management of assets, and any
other entity in which Family Members (or the optionee) have more than a 50%
aggregate voting interest. References to an optionee, to the extent relevant in
the context, shall include references to authorized transferees.
(d) Time and Manner of Exercise.
---------------------------
(i) Vesting.
-------
(a) Each Initial Option granted under the Plan shall 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, provided that the
optionee serves as a director on such monthly anniversary date.
(b) Each Additional Option shall vest and become exercis able 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, provided that the optionee serves as a director on such monthly
anniversary date.
3
<PAGE>
(ii) Termination. Except as otherwise provided in the applicable
-----------
option agreement, each option shall terminate, and may no longer be exercised,
on the earlier of (i) the date ten years after the date of grant of such option
or (ii) six months after the date on which the optionee ceases to serve as a
director of the Company (or 12 months if such cessation is due to the death of
such director). Each option may be exercised during the 6 or 12 month period
set forth in clause (ii) above only to the extent it was exercisable at the time
of the optionee's cessation of service as a director.
(iii) Change in Control. All outstanding options granted under
-----------------
the Plan shall immediately become exercisable in full upon a Change in Control
(as defined in Section 8).
(iv) Exercise Procedure. An option may be exercised in whole or in
------------------
part, to the extent it is then exercisable, only by written notice to the
Company at its principal office accompanied by (i) payment in cash or by check
of the full exercise price for the shares as to which it is exercised, (ii)
delivery of outstanding shares of Common Stock (which have been outstanding for
at least six months) having a fair market value on the last business day
preceding the date of exercise equal to the option exercise price, (iii) an
irrevocable undertaking by a creditworthy broker to deliver promptly to the
Company sufficient funds to pay the exercise price or delivery of irrevocable
instructions to a creditworthy broker to deliver promptly to the Company cash or
a check sufficient to pay the exercise price, (iv) payment by such other means
as may be approved by the Board, or (v) any combination of the foregoing.
(v) Exercise by Representative Following Death of Director. An
------------------------------------------------------
optionee, by written notice to the Company, may designate one or more persons
(and from time to time change such designation), including his or her legal
representative, who, by reason of the optionee's death, shall acquire the right
to exercise all or a portion of the option. If the person or persons so
designated wish to exercise any portion of the option, they must do so within
the term of the option as provided herein. Any exercise by a representative
shall be subject to the provisions of the Plan.
(vi) Withholding Taxes. An optionee shall pay to the Company, or make
-----------------
provisions satisfactory to the Company for payment of, any taxes required by law
to be withheld upon any exercise of an option granted under the Plan, no later
than the date of the event creating such tax liability. In the Board's
discretion, such tax obligation may be paid in whole or in part in shares of
Common Stock, including shares retained from the exercise of the option, valued
at the then fair market value.
4
<PAGE>
(e) Early Exercise Provisions. Notwithstanding anything to the contrary in
-------------------------
the Plan, an optionee may at any time exercise any Initial Option or Additional
Option in its entirety, as to both vested and unvested shares, provided that at
the time of and as a condition to such exercise, such optionee executes and
delivers to the Company a stock restriction agreement, in a form approved by the
Board, pursuant to which the Company (or its designee) shall have the right to
purchase from the optionee within 90 days of his or her termination of service
as a director for any reason (or, if later, within 90 days after his or her
exercise of the option), at the original option exercise price, all shares
acquired upon such exercise that would not, but for the provisions of this
Section 5(e), have otherwise been purchasable by the optionee under the
provisions of Section 5(d)(i) on the date of such termination of service.
6. Limitation of Rights.
--------------------
(a) No Right to Continue as a Director. Neither the Plan, nor the granting
----------------------------------
of an option nor any other action taken pursuant to the Plan, shall constitute
or be evidence of any agreement or understanding, express or implied, that the
Company will retain the optionee as a director for any period of time.
(b) No Stockholders' Rights for Options. An optionee shall have no rights
-----------------------------------
as a stockholder with respect to the shares covered by his or her option until
the date of the issuance to him or her of a stock certificate therefor, and no
adjust ment will be made for dividends or other rights (except as provided in
Section 7) for which the record date is prior to the date such certificate is
issued.
(c) Compliance with Securities Laws. Each option shall be subject to the
-------------------------------
requirement that if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the shares subject to such option
upon any securities exchange or under any state or federal law, or the consent
or approval of any governmental or regulatory body, or the disclosure of non-
public information or the satisfaction of any other condition is necessary as a
condition of, or in connection with, the issuance or purchase of shares
thereunder, such option may not be exer cised, in whole or in part, unless such
listing, registration, qualification, consent or approval, or satisfaction of
such condition shall have been effected or obtained on conditions acceptable to
the Board of Directors. Nothing herein shall be deemed to require the Company
to apply for or to obtain such listing, registration or qualifica tion, or to
satisfy such condition.
5
<PAGE>
7. Adjustment Provisions for Mergers, Recapitalizations and Related Transac
------------------------------------------------------------------------
tions.
- -----
If, through or as a result of any merger, consolidation, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split, or other similar transaction, (i) the outstanding shares of Common Stock
are exchanged for a different number or kind of securities of the Company or of
another entity, or (ii) additional shares or new or different shares or other
securities of the Company are distributed with respect to such shares of Common
Stock, the Board of Directors shall make an appropriate and proportionate
adjustment in (x) the maximum number and kind of shares reserved for issuance
under the Plan, (y) the number and kind of shares or other securities subject to
then outstanding options under the Plan, and (z) the price for each share
subject to any then outstanding options under the Plan (without changing the
aggregate purchase price for such options), to the end that each option shall be
exercisable, for the same aggregate exercise price, for such securities as such
optionholder would have held immediately following such event if he had
exercised such option immediately prior to such event. No fractional shares
will be issued under the Plan on account of any such adjustments.
8. Change in Control.
-----------------
For purposes hereof, "Change in Control" means an event or occurrence set
forth in any one or more of subsections (a) through (d) below (including an
event or occurrence that constitutes a Change in Control under one of such
subsections but is specifically exempted from another such subsection):
(a) the acquisition by an individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership of any
capital stock of the Company if, after such acquisition, such Person
beneficially owns (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) a majority or more of either (i) the then outstanding shares of
common stock of the Company (the "Out standing Company Common Stock") or (ii)
the combined voting power of the then outstanding securities of the Company
entitled to vote generally in the election of directors (the "Outstanding
Company Voting Securities"); provided, however, that for purposes of this
subsection (a), the following acquisitions shall not constitute a Change in
Control: (i) any acquisition directly from the Company (excluding an acquisition
pursuant to the exercise, conversion or exchange of any security exercisable
6
<PAGE>
for, convertible into or exchangeable for common stock or voting securities of
the Company, unless the Person exercising, converting or exchanging such
security acquired such security directly from the Company or an underwriter or
agent of the Company), (ii) any acquisition by the Company, (iii) any
acquisition by any em ployee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company, or (iv)
any Business Combination (as defined below) excepted from subsection (c) of this
Section 8 by the proviso set forth therein; or
(b) such time as the Continuing Directors (as defined below) do not
constitute a majority of the Board (or, if applicable, the Board of Directors of
a successor corporation to the Company), where the term "Continuing Director"
means at any date a member of the Board (i) who was a member of the Board on
the date of adoption of this Plan or (ii) who was nominated or elected
subsequent to such date by at least a majority of the directors who were
Continuing Directors at the time of such nomination or election or whose
election to the Board was recommended or endorsed by at least a majority of the
directors who were Continuing Directors at the time of such nomination or
election; provided, however, that there shall be excluded from this clause (ii)
any individual whose initial assumption of office occurred as a result of an
actual or threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or consents, by
or on behalf of a person other than the Board; or
(c) the consummation of a merger, consolidation, reorganization, recapi
talization or statutory share exchange involving the Company or a sale or other
disposition of all or substantially all of the assets of the Company (a
"Business Combination"), provided, that no such Business Combination shall
constitute a Change in Control if, immediately following such Business
Combination, all or substantially all of the individuals and entities who were
the beneficial owners of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, at least a majority of the then
outstanding shares of common stock and the combined voting power of the then
outstanding securities entitled to vote generally in the election of directors,
respectively, of the resulting or acquiring corporation in such Business
Combination (which shall include, without limitation, a corporation which as a
result of such transaction owns the Company or substantially all of the
Company's assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior to such
Business Combi nation, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, respectively; or
7
<PAGE>
(d) approval by the stockholders of the Company of a complete liquida tion
or dissolution of the Company.
9. Termination and Amendment of the Plan.
-------------------------------------
The Board of Directors may suspend or terminate the Plan or amend it in any
respect whatsoever. In addition, the Board may, in its discretion, accelerate
the vesting of any option or options granted under the Plan. Without limiting
the foregoing, if the Financial Accounting Standards Board implements changes to
the manner on which companies are required to account for grants of options to
directors and the Board determines that grants of fully vested options to
directors would have desirable accounting benefits to the Company, this Plan
shall be amended to provide that, from and after such amendment: (i) the Initial
Option shall cover [_______] shares, (ii) Additional Options shall cover
[_______] shares, (iii) all such options shall be fully vested upon grant and
(iv) all such options shall have a five-year term and shall remain exercisable
during the entire five-year term of the options.
Adopted by the Board of Directors on
_____________ ___, 1999
Approved by the Stockholders on
_____________ ___, 1999
8
<PAGE>
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 17, 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 17, 1999
