<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-83501
[NAVISITE LOGO APPEARS HERE]
5,500,000 Shares
Common Stock
NaviSite, Inc. is offering 5,500,000 shares of its common stock. This is
NaviSite's initial public offering. The common stock has been approved for
quotation on the Nasdaq National Market under the symbol "NAVI."
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.
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Investing in our common stock involves risks.
See "Risk Factors" beginning on page 7.
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<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public Offering Price.................................... $14.00 $77,000,000
Underwriting Discounts and Commissions................... $ 0.98 $ 5,390,000
Proceeds to NaviSite..................................... $13.02 $71,610,000
</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. Robertson
Stephens expects to deliver the shares of common stock to purchasers on October
27, 1999.
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Robertson Stephens
Hambrecht & Quist
FAC/Equities
The date of this prospectus is October 22, 1999.
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The inside front cover page also contains the following:
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We help companies cost- . . . and less worry.
effectively run their Internet [Customer logos
applications with greater superimposed over
speed, reliability and NaviSite logo]
efficiency. . .
Integrated application services
to match customers' process life cycle.
[The following words appear inside an arrow pointing downwards and
arcing towards the left:]
</TABLE>
Rent
Deploy
Advise
Host
Manage
Support
<PAGE>
The inside front cover page contains the following:
[Centered on the lower third of the page, a picture of the control room in
a NaviSite data center. Directly above it, covering the top two-thirds of the
page, is the NaviSite logo with the following text super-imposed on top of it:]
NaviSite, Inc., an Internet application service provider, offers Web site
and Internet application hosting and management services. Our offerings, high
level of customer service and state-of-the-art infrastructure allow us to offer
service levels that we believe are among the most comprehensive in the
industry. With our services, customers can focus on their core competencies,
assured that their Web sites and Internet applications are being managed 24-
hours-a-day, seven-days-a-week.
<PAGE>
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus.
Until November 16, 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
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Page
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<S> <C>
Summary.................................................................. 4
Risk Factors............................................................. 7
Forward Looking Statements............................................... 17
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Consolidated Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 22
Business................................................................. 33
Management............................................................... 44
Certain Transactions..................................................... 53
Ownership of Principal Stockholders and Management....................... 59
Description of Capital Stock............................................. 61
Shares Eligible For Future Sale.......................................... 65
Underwriting............................................................. 67
Legal Matters............................................................ 69
Experts.................................................................. 69
Where You Can Find Additional Information................................ 70
Index to Financial Statements............................................ F-1
</TABLE>
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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
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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
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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 71.8% 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, the number of shares outstanding upon completion
of this offering:
. gives effect to the conversion of approximately $12,257,000 of
indebtedness to CMGI into 87,548 shares of Series B convertible
preferred stock prior to the completion of this offering;
. gives effect to the conversion of all outstanding shares of convertible
preferred stock into an aggregate of 21,622,315 shares of common stock
upon completion of this offering;
. does not reflect the exercise, in October 1999, of options for the
purchase of 20,371 shares of common stock; and
. assumes no exercise of the underwriters' over-allotment option.
5
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THE OFFERING
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Common stock offered by NaviSite..... 5,500,000 shares
Common stock to be outstanding after
this offering...................... 27,191,653 shares
Use of proceeds...................... For enhancement and expansion of our
network infrastructure, expansion of
sales and marketing efforts, enhancement
of application management and technical
expertise, possible acquisitions of
complimentary businesses and
technologies and working capital and
general corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol........ NAVI
</TABLE>
Summary Consolidated Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended July 31,
-----------------------
1997 1998 1999
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<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 shares of convertible preferred stock outstanding as of July
31, 1999 into shares of common stock and (iii) on a pro forma as adjusted basis
to give effect to the issuance to CMGI upon completion of this offering of an
aggregate of 875,480 additional shares of common stock upon the conversion of
outstanding Series B convertible preferred stock issued to CMGI subsequent to
July 31, 1999 and to reflect the sale of 5,500,000 shares of common stock at an
initial public offering price of $14.00 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>
Balance Sheet Data:
Cash and equivalents............................ $ 3,352 $ 3,352 $73,362
Working capital (deficit)....................... (1,355) (1,355) 68,655
Total assets.................................... 21,111 21,111 91,121
Total stockholders' equity (deficit)............ (4,369) 11,052 93,319
</TABLE>
6
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RISK FACTORS
You should carefully consider the following risks before making an
investment decision. Our financial condition and operating results could be
materially adversely affected by any of the risks set forth below. The market
price of our common stock could decline due to any of these risks, and you
could lose all or part of your investment. You also should refer to the other
information set forth in this prospectus, including our consolidated financial
statements and the accompanying notes appearing elsewhere in this prospectus.
Risks Related to Our Company and Our Operations
We have a history of operating losses and expect future losses
We cannot assure you that we will ever achieve profitability on a quarterly
or annual basis or, if we achieve profitability, that it will be sustainable.
We were organized in 1996 by CMGI, Inc., formerly known as CMG Information
Services, Inc., to support the networks and host the Web sites of CMGI and a
number of CMGI affiliates. It was not until the Fall of 1997 that we began
providing Web site hosting and Internet application management services to
companies unaffiliated with CMGI. Since our inception in 1996, we have
experienced operating losses and negative cash flows for each quarterly and
annual period. As of July 31, 1999, we had an accumulated deficit of $34.7
million. The income potential of our business is unproven, and our limited
operating history makes it difficult to evaluate our prospects. We anticipate
increased expenses as we continue to expand and improve our infrastructure,
invest in additional applications, enhance our application management
expertise, expand our sales and marketing efforts and pursue additional
industry relationships. As a result, we expect to incur operating losses for at
least the next three years.
Fluctuations in our quarterly operating results may negatively impact our stock
price
Our quarterly operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are outside our control.
These factors include:
. the demand for and market acceptance of our Web site and Internet
application hosting and management services;
. our ability to develop, market and introduce new services on a timely
basis;
. downward price adjustments by our competitors;
. changes in the mix of services provided by our competitors;
. technical difficulties or system downtime affecting the Internet
generally or our hosting operations specifically;
. our ability to meet any increased technological demands of our
customers;
. the amount and timing of costs related to our marketing efforts and
service introductions; and
. economic conditions specific to the Internet application service
provider industry.
Our operating results for any particular quarter may fall short of our
expectations or those of investors or securities analysts. In this event, the
market price of our common stock would be likely to fall.
Our principal stockholder will continue to control us and may have interests
that conflict with those of our other stockholders
As of August 31, 1999, CMGI, through its ownership of NaviSite Internet
Services Corporation, beneficially owned approximately 89.6% of our outstanding
common stock and, upon completion of this offering, will beneficially own
approximately 71.8% of our outstanding common stock. Accordingly, CMGI will
continue to have the power, acting alone, to elect a majority of our board of
directors and will have the ability to determine the outcome of any corporate
actions requiring stockholder approval, regardless of how our other
7
<PAGE>
stockholders may vote. Under Delaware law, CMGI may exercise its voting power
by written consent, without convening a meeting of the stockholders, meaning
that CMGI will be able to effect a sale or merger of NaviSite without prior
notice to, or the consent of, our other stockholders. CMGI's interests could
conflict with the interests of our other stockholders. The possible need of
CMGI to maintain control of NaviSite in order to avoid becoming a registered
investment company could influence future decisions by CMGI as to the
disposition of any or all of its ownership position in NaviSite. CMGI would be
subject to numerous regulatory requirements with which it would have difficulty
complying if it were required to register as an investment company. As a
result, CMGI may be motivated to maintain at least a majority ownership
position in NaviSite, even if other stockholders of NaviSite might consider a
sale of control of NaviSite to be in their best interests. As long as it is a
majority stockholder, CMGI has contractual rights to purchase shares in any
future financing of NaviSite, other than this offering, sufficient to maintain
its majority ownership position. CMGI's ownership may have the effect of
delaying, deferring or preventing a change in control of our company or
discouraging a potential acquiror from attempting to obtain control of us,
which in turn could adversely affect the market price of our common stock.
A significant portion of our revenue is generated by CMGI and companies
affiliated with CMGI, and the loss of this revenue would substantially impair
the growth of our business
A significant portion of our revenue currently is generated by services
provided to CMGI and CMGI affiliates, and we anticipate that we will continue
to receive a significant portion of our revenue in the future from CMGI and
CMGI affiliates. CMGI and CMGI affiliates accounted for 96% of our revenue in
fiscal 1998 and 67% of our revenue in fiscal 1999. We cannot assure you that
revenues generated by CMGI and CMGI affiliates will continue or that we will be
able to secure business from unaffiliated customers to replace these revenues
in the future. The loss of revenue from CMGI and CMGI affiliates, or our
inability to replace this operating revenue, would substantially impair the
growth of our business. A more detailed discussion of our customer
relationships with CMGI and its affiliates is included in this prospectus under
the headings "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview" and "Certain Transactions--Relationship and
Transactions between NaviSite and CMGI, Inc."
Our ability to grow our business would be substantially impaired if we were
unable to obtain, on commercially reasonable terms, certain equipment that is
currently provided under leases executed or guaranteed by CMGI
Certain of the equipment that we use or provide to our customers for their
use in connection with our services is provided under leases executed or
guaranteed by CMGI. If CMGI discontinues this practice, which it could do at
any time, we or our customers would have to obtain this equipment directly, and
we cannot assure you that we or our customers could do so on similar financial
terms. Our ability to grow our business would be substantially impaired if we
or our customers were unable to obtain this equipment on commercially
reasonable terms. A more detailed discussion of our other arrangements with
CMGI and its affiliates is included in this prospectus under the heading
"Certain Transactions--Relationship and Transactions between NaviSite and CMGI,
Inc."
If the growth of the market for Internet commerce and communication does not
continue, there may be insufficient demand for our services, and as a result,
our business strategy may not be successful
The increased use of the Internet for retrieving, sharing and transferring
information among businesses and consumers has developed only recently, and the
market for the purchase of products and services over the Internet is new and
emerging. If acceptance and growth of the Internet as a medium for commerce and
communication does not continue, our business strategy may not be successful
because there may not be a continuing market demand for our Web site and
Internet application hosting and management services. In addition, in order for
the market for our services to grow, consumers who have historically purchased
and communicated through traditional means must elect to purchase products and
services and conduct their communication online. These transitions must
continue to ensure a growing market for our Web site and Internet application
hosting and management services.
8
<PAGE>
Our growth could be substantially limited if the market for Internet
application services fails to develop or if we cannot achieve broad market
acceptance
The market for Internet application services has only developed recently
and is evolving rapidly. There is significant uncertainty as to whether the
Internet application service market will ultimately prove to be viable or, if
it becomes viable, that it will continue to grow. Historically, businesses have
been reluctant to outsource the hosting and management of sophisticated
applications and have considered third-party service vendors to be unequipped
to manage Internet applications critical to their businesses. If the market for
outsourced system and network management of Web sites and Internet applications
fails to develop, or develops more slowly than we expect, or if our Web site
and Internet application hosting and management services do not achieve broad
market acceptance, our growth could be substantially limited.
Our ability to successfully market our services could be substantially impaired
if we are unable to deploy new Internet applications or if new Internet
applications deployed by us prove to be unreliable, defective or incompatible
We cannot assure you that we will not experience difficulties that could
delay or prevent the successful development, introduction or marketing of
Internet application services in the future. If any newly introduced Internet
applications suffer from reliability, quality or compatibility problems, market
acceptance of our services could be greatly hindered and our ability to attract
new customers could be adversely affected. We cannot assure you that new
applications deployed by us will be free from any reliability, quality or
compatibility problems. If we incur increased costs or are unable, for
technical or other reasons, to host and manage new Internet applications or
enhancements of existing applications, our ability to successfully market our
services could be substantially impaired.
The market we serve is highly competitive, and as an early stage company, we
may lack the financial and other resources, expertise or capability needed to
capture increased market share
We compete in the Internet application service market. This market is
rapidly evolving, highly competitive and likely to be characterized by an
increasing number of market entrants and by industry consolidation. We believe
that participants in our market must grow rapidly and achieve a significant
presence to compete effectively. As an early stage company, our business is not
as developed as that of many of our competitors. For example, our facilities
currently have limited growth capacity and we have a significantly smaller
number of customers than many of the companies that compete in our market. We
estimate that the growth capacity of our facilities may be sufficient only for
the next two years. Insufficient growth capacity in our facilities could impair
our ability to achieve rapid growth through an increase in our customer base.
Moreover, many of our competitors have substantially greater financial,
technical and marketing resources, greater name recognition and more
established relationships in the industry than we have. We may lack the
financial and other resources, expertise or capability needed to capture
increased market share in this environment in the future. A more detailed
discussion regarding the competition we face is included in this prospectus
under the heading "Business--Competition."
Any interruptions in, or degradation of, our private transit Internet
connections could result in the loss of customers or hinder our ability to
attract new customers
Our customers rely on our ability to move their digital content as
efficiently as possible to the people accessing their Web sites and Internet
applications. We utilize our direct private transit Internet connections to
major backbone providers as a means of avoiding congestion and resulting
performance degradation at public Internet exchange points. We rely on these
telecommunications network suppliers to maintain the operational integrity of
their backbones so that our private transit Internet connections operate
effectively. Any interruptions in, or degradation of, our private transit
Internet connections could result in the loss of customers or hinder our
ability to attract new customers.
9
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Increased costs associated with our private transit Internet connections could
result in the loss of customers or significant increases in our operating costs
Our private transit Internet connections are already more costly than
alternative arrangements commonly utilized to move Internet traffic. If our
providers increase the pricing associated with utilizing their bandwidth, we
may be required to identify alternative methods to distribute our customers'
digital content. We cannot assure you that our customers will continue to be
willing to pay the higher costs associated with direct private transit or that
we could effectively move to another network approach. If we are unable to
access alternative networks to distribute our customers' digital content on a
cost-effective basis or to pass any additional costs on to our customers, our
operating costs would increase significantly.
If we are unable to maintain existing and develop additional relationships with
Internet application software vendors, the sale, marketing and provision of our
Internet application services may be unsuccessful
We believe that to penetrate the market for our Web site and Internet
application hosting and management services we must maintain existing and
develop additional relationships with industry-leading Internet application
software vendors and other third parties. We license or lease our software
applications from Internet application software vendors. The loss of any of
these applications could materially impair our ability to provide services to
our customers or require us to obtain substitute software applications of lower
quality or performance standards or at greater cost. In addition, because we
generally license applications on a non-exclusive basis, our competitors may
license and utilize the same software applications. In fact, many of the
companies with which we have strategic relationships currently have, or could
enter into, similar license agreements with our competitors or prospective
competitors. We cannot assure you that software applications will continue to
be available to us from Internet application software vendors on commercially
reasonable terms. If we are unable to identify and license software
applications which meet our targeted criteria for new application
introductions, we may have to discontinue or delay introduction of services
relating to these applications.
We purchase key components of our infrastructure from a limited number of
suppliers, and our inability or failure to obtain these components in a timely
manner could result in sustained equipment failure and a loss of revenue
We purchase from a limited number of suppliers key components of our
infrastructure, including networking equipment, that are available only from
limited sources in the quantities and with the quality that we demand. For
example, we purchase most of the routers and switches used in our
infrastructure from Cisco Systems Inc. and most of the intelligent Web
switching technology from ArrowPoint Communications Inc. We cannot assure you
that we will have the necessary hardware or parts on hand or that our suppliers
will be able to provide them in a timely manner in the event of equipment
failure. Our inability or failure to obtain the necessary hardware or parts on
a timely basis could result in sustained equipment failure and a loss of
revenue due to customer loss or claims for service credits under our service
level guarantees.
Our inability to scale our infrastructure or otherwise manage our anticipated
growth and the related expansion of our operations could result in decreased
revenue and continued operating losses
We have experienced rapid growth in our service offerings and our customer
base. As of July 31, 1998, we were a Web site hosting provider with
approximately 51 customers. As of July 31, 1999, we were providing Web site and
Internet application hosting and management services to approximately 126
customers. In order to service our growing customer base, we will need to
continue to improve and expand our network infrastructure, in particular
through the expansion of one of our existing data centers and the construction
of new data centers. The ability of our network to connect and manage a
substantial number of customers at high transmission speeds while maintaining
superior performance is largely unproven. If our network infrastructure is not
scalable, we may not be able to provide our services to additional customers,
which would result in decreased revenue.
10
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In addition, between July 31, 1998 and July 31, 1999, we increased the
number of our employees from 86 to 201. This growth has placed, and likely will
continue to place, a significant strain on our financial, management,
operational and other resources. To effectively manage our anticipated growth,
we will be required to continue to enhance our operating and financial
procedures and controls, to upgrade or replace our operational, financial and
management information systems and to attract, train, motivate, manage and
retain key employees. If we are unable to effectively manage our rapid growth,
we could experience continued operating losses.
You may experience additional dilution because our historical source of funding
is expected to change, and other funding may not be available to us on
favorable terms, if at all
CMGI has historically funded our operations as needed, increasing our
obligations to CMGI and allowing us to maintain a zero-balance cash account. We
expect this source and manner of funding to continue until completion of this
offering. At that time, we expect that our net obligations to CMGI, together
with all convertible preferred stock held by CMGI, will be converted into
common stock at a ratio of ten shares of common stock for each outstanding
share of preferred stock. We do not expect to borrow funds from CMGI after
completion of this offering.
After completion of, and the application of the net proceeds from, this
offering, we may need to raise additional funds. We cannot assure you that
additional financing will be available on terms favorable to us, if at all. If
adequate funds were not available or were not available on acceptable terms,
our ability to respond to competitive pressures would be significantly limited.
Moreover, if additional funds are raised through the issuance of equity or
convertible debt securities, your percentage ownership in us will be reduced,
and you may experience additional dilution.
Our network infrastructure could fail, which would damage our ability to
provide guaranteed levels of service and could result in significant operating
losses
To provide our customers with guaranteed levels of service, we must operate
our network infrastructure on a 24-hour-a-day, seven-day-a-week basis without
interruption. In order to operate in this manner, we must protect our network
infrastructure, equipment and customer files against damage from human error,
natural disasters, unexpected equipment failure, power loss or
telecommunications failures, sabotage or other intentional acts of vandalism.
Even if we take precautions, the occurrence of a natural disaster, equipment
failure or other unanticipated problem at one or more of our data centers could
result in interruptions in the services we provide to our customers. We cannot
assure you that our disaster recovery plan will address all, or even most, of
the problems we may encounter in the event of such a disaster.
We have experienced service interruptions in the past, and any future
service interruptions could:
. require us to spend substantial amounts of money to replace equipment
or facilities;
. entitle customers to claim service credits under our service level
guarantees;
. cause customers to seek damages for losses incurred; or
. make it more difficult for us to attract new customers or enter into
additional strategic relationships.
Any of these occurrences could result in significant operating losses.
The misappropriation of our proprietary rights could result in the loss of our
competitive advantage in the market
We rely on a combination of trademark, service mark, copyright and trade
secret laws and contractual restrictions to establish and protect our
proprietary rights. We do not own any patents that would prevent or inhibit
competitors from using our technology or entering our market. We cannot assure
you that the contractual arrangements or other steps taken by us to protect our
proprietary rights will prove sufficient to
11
<PAGE>
prevent misappropriation of our proprietary rights or to deter independent,
third-party development of similar proprietary assets. In addition, we provide
our services in other countries where the laws may not afford adequate
protection for our proprietary rights. If our proprietary rights are
misappropriated, we may lose our competitive advantage in the market.
Third-party infringement claims against our technology suppliers, our customers
or us could result in disruptions in service, the loss of customers or costly
and time consuming litigation
We license or lease most technologies used in the Internet application
services that we offer. Our technology suppliers may become subject to third-
party infringement claims which could result in their inability or
unwillingness to continue to license their technology to us. We expect that we
and our customers increasingly will be subject to third-party infringement
claims as the number of Web sites and third-party service providers for Web-
based businesses grows. In addition, we have received notices alleging that our
service marks infringe the trademark rights of third parties. We cannot assure
you that third parties will not assert claims against us in the future or that
these claims will not be successful. Any infringement claim as to our
technologies or services, regardless of its merit, could result in delays in
service, installation or upgrades, the loss of customers or costly and time-
consuming litigation, or require us to enter into royalty or licensing
agreements.
The loss of key officers and personnel could impair our ability to successfully
execute our business strategy, because we substantially rely on their
experience and management skills, or could jeopardize our ability to continue
to provide service to our customers
We believe that the continued service of key personnel, including Joel B.
Rosen, our recently elected Chief Executive Officer, and Robert B. Eisenberg,
our founder and President, is a key component of the future success of our
business. None of our key officers or personnel is currently a party to an
employment agreement with us. This means that any officer or employee can
terminate his or her relationship with us at any time. In addition, we do not
carry life insurance for any of our key personnel to insure our business in the
event of their death. The loss of any of our key officers or personnel could
impair our ability to successfully execute our business strategy, because we
substantially rely on their experience and management skills.
In addition, the loss of key members of our sales and marketing teams or
key technical service personnel could jeopardize our positive relations with
our customers. Any loss of key technical personnel would jeopardize the
stability of our infrastructure and our ability to provide the guaranteed
service levels our customers expect.
If we fail to attract and retain additional skilled personnel, our ability to
provide Web site and Internet application management and technical support may
be limited, and as a result, we may be unable to attract customers and grow our
business
We believe that our ability to attract, train, motivate and retain highly
skilled technical, managerial and sales personnel, particularly in the areas of
Web site and Internet application management and technical support, is
essential to our future success. Our business requires individuals with
significant levels of Internet application expertise, in particular to win
consumer confidence in outsourcing the hosting and management of mission-
critical applications. Competition for such personnel is intense, and qualified
technical personnel are likely to remain a limited resource for the foreseeable
future. Locating candidates with the appropriate qualifications, particularly
in the desired geographic location, can be costly and difficult. We may not be
able to hire the necessary personnel to implement our business strategy, or we
may need to provide higher compensation to such personnel than we currently
anticipate. If we fail to attract and retain sufficient numbers of highly
skilled employees, our ability to provide Web site and Internet application
management and technical support may be limited, and as a result, we may be
unable to attract customers and grow our business.
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<PAGE>
Any future acquisitions we make of companies or technologies may result in
disruptions to our business or distractions of our management due to
difficulties in assimilating acquired personnel and operations
Our business strategy contemplates future acquisitions of complementary
businesses or technologies. If we do pursue additional acquisitions, our risks
may increase because our ongoing business may be disrupted and management's
attention and resources may be diverted from other business concerns. In
addition, through acquisitions, we may enter into markets or market segments in
which we have limited prior experience.
Once we complete an acquisition, we will face additional risks. These risks
include:
. difficulty assimilating acquired operations, technologies and
personnel;
. inability to retain management and other key personnel of the acquired
business; and
. changes in management or other key personnel that may harm
relationships with the acquired business's customers and employees.
In addition, for at least the next two years, our acquisitions must be
accounted for using the purchase method of accounting, which could result in
unfavorable accounting for our acquisitions. We cannot assure you that any
acquisitions will be successfully identified and completed or that, if one or
more acquisitions are completed, the acquired business, assets or technologies
will generate sufficient revenue to offset the associated costs or other
adverse effects.
The international market for our services is unproven, and as a result, the
revenue generated by any current or future international operations may not be
adequate to offset the expense of establishing and maintaining those operations
One component of our long-term strategy is to expand into international
markets. The international market for Web site and Internet application hosting
and management services is unproven, and we cannot assure you that we will be
able to market, sell and provide our services successfully outside the United
States. We could suffer significant operating losses if the revenue generated
by any current or future international data center or other operations is not
adequate to offset the expense of establishing and maintaining those
international operations.
We face risks inherent in doing business in international markets which could
adversely affect the success of our international operations
There are risks inherent in doing business in international markets,
including different regulatory requirements, trade barriers, challenges in
staffing and managing foreign operations, currency risk, different technology
standards, different tax structures which may adversely impact earnings,
different privacy, censorship and service provider liability standards and
regulations and foreign political and economic instability, any of which could
adversely affect the success of our international operations.
Problems relating to the "Year 2000 issue" could disrupt our operations,
resulting in lost revenue and increased operating costs
Because we offer computer-related services and because of the business-
critical nature of many of our customers' applications, our risk of lawsuits
related to Year 2000 issues is likely to be greater than that of companies in
some other industries. Our worst case scenario regarding the Year 2000 issue
involves the complete or partial failure of one or more computer systems or
software products that underlie or comprise our services. A failure of this
kind could cause service interruptions or disruptions for one or more of our
customers. This scenario could arise as a result of a failure by us or our
product or service vendors to identify or effectively address Year 2000
problems in these systems or products. For example, Year 2000 patches provided
to us by key software or hardware vendors for customer servers or network
devices could fail, causing customer outages or degraded network performance.
Alternatively, patches provided by third parties for our desktop computers
could fail, impeding network access or compromising network performance.
13
<PAGE>
We confront the Year 2000 problem in several contexts:
Our Facilities and Services. Because our network infrastructure
incorporates components from multiple hardware and software providers, we may
be unable to determine whether any of these components will cause unexpected
Year 2000 problems or whether different components will interact in a way that
causes malfunctions. In most cases, we do not independently verify through
testing the Year 2000 compliance of vendors' products, and we cannot offer any
assurance that vendors' guarantees, if and when provided, are true or
sufficient or that we will not encounter Year 2000 compliance problems
associated with those products. While we expect that our network infrastructure
and all other material components of our facilities will be Year 2000 compliant
on or before December 1, 1999, we cannot assure you that we will meet this goal
or that we will not discover any compliance problems in the future. Our failure
to adequately address Year 2000 compliance issues in our network infrastructure
could result in claims of mismanagement, misrepresentation or breach of
contract and related litigation, which could be costly and time-consuming for
us to defend.
Our Customers. We also face risks from customer-provided hardware or
software that we host in our data centers. The failure of our customers and
third-party providers to ensure that this hardware and software is Year 2000
compliant could result in unforeseen problems within our network
infrastructure, which could result in lost revenue and increased operating
costs. In addition, we cannot give any assurances that our customers will
upgrade their internal networks which interface with our network infrastructure
or will otherwise provide appropriate remediation for Year 2000 compliance.
Our Suppliers. We cannot assure you that we will be able to provide our
services and maintain our operations if we are unable to obtain products,
services or systems that are Year 2000 compliant when we need them. In
addition, if vendors and service providers cannot deliver their products
because of their own Year 2000 compliance problems, we could experience
increased operating costs and lost revenue.
Information on our state of readiness, costs and contingency plans
regarding the Year 2000 issue is included in this prospectus under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Considerations."
Risks Related to the Internet Industry
The emergence and growth of a market for our Internet application services will
be impaired if third parties do not continue to develop and improve the
Internet infrastructure
The recent growth in the use of the Internet has caused frequent periods of
performance degradation, requiring the upgrade of routers and switches,
telecommunications links and other components forming the infrastructure of the
Internet by Internet service providers and other organizations with links to
the Internet. Any perceived degradation in the performance of the Internet as a
means to transact business and communicate could undermine the benefits and
market acceptance of our Web site and Internet application hosting and
management services. Our services are ultimately limited by, and dependent
upon, the speed and reliability of hardware, communications services and
networks operated by third parties. Consequently, the emergence and growth of
the market for our Internet application services will be impaired if
improvements are not made to the entire Internet infrastructure to alleviate
overloading and congestion.
We could be subject to increased operating costs, as well as claims, litigation
or other potential liability, in connection with risks associated with Internet
security and the security of our systems
A significant barrier to the growth of e-commerce and communications over
the Internet has been the need for secure transmission of confidential
information. Several of our Internet application services utilize encryption
and authentication technology licensed from third parties to provide the
protections necessary to effect secure transmission of confidential
information. We also rely on security systems designed by third parties and the
personnel in our network operations centers to secure our data centers. Any
unauthorized access,
14
<PAGE>
computer viruses, accidental or intentional actions and other disruptions could
result in increased operating costs. For example, we may incur significant
costs to protect against these interruptions and the threat of security
breaches or to alleviate problems caused by such interruptions or breaches, and
we expect to expend significant financial resources in the future to equip our
new and existing data centers with state-of-the-art security measures. If a
third party were able to misappropriate a consumer's personal or proprietary
information, including credit card information, during the use of an
application solution provided by us, we could be subject to claims, litigation
or other potential liability.
We may become subject to burdensome government regulation and legal
uncertainties that could substantially impair the growth of our business or
expose us to unanticipated liabilities
It is likely that laws and regulations directly applicable to the Internet
or to Internet application service providers may be adopted. These laws may
cover a variety of issues, including user privacy and the pricing,
characteristics and quality of products and services. The adoption or
modification of laws or regulations relating to commerce over the Internet
could substantially impair the growth of our business or expose us to
unanticipated liabilities. Moreover, the applicability of existing laws to the
Internet and Internet application service providers is uncertain. These
existing laws could expose us to substantial liability if they are found to be
applicable to our business. For example, we provide services over the Internet
in many states in the United States and in the United Kingdom, and we
facilitate the activities of our customers in these jurisdictions. As a result,
we may be required to qualify to do business, be subject to taxation or be
subject to other laws and regulations in these jurisdictions, even if we do not
have a physical presence, employees or property there.
We may be subject to legal claims in connection with the information
disseminated through our network which could have the effect of diverting
management's attention and require us to expend significant financial resources
As an Internet application service provider, we may face potential direct
and indirect liability for claims of defamation, negligence, copyright, patent
or trademark infringement, violation of securities laws and other claims based
on the nature and content of the materials disseminated through our network.
For example, lawsuits may be brought against us claiming that content
distributed by some of our current or future customers may be regulated or
banned. In these and other instances, we may be required to engage in
protracted and expensive litigation which could have the effect of diverting
management's attention and require us to expend significant financial
resources. Our general liability insurance may not necessarily cover any of
these claims or may not be adequate to protect us against all liability that
may be imposed.
In addition, on a limited number of occasions in the past, businesses,
organizations and individuals have sent unsolicited commercial e-mails from
servers hosted at our facilities to massive numbers of people, typically to
advertise products or services. This practice, known as "spamming," can lead to
complaints against service providers that enable such activities, particularly
where recipients view the materials received as offensive. We have in the past
received, and may in the future receive, letters from recipients of information
transmitted by our customers objecting to such transmission. Although we
prohibit our customers by contract from spamming, we cannot assure you that our
customers will not engage in this practice, which could subject us to claims
for damages.
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<PAGE>
Risks Related to this Offering
There has been 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, determined 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 the factors considered in determining the initial public
offering price is included in this prospectus under the heading
"Underwriting."
The market price of our common stock may experience extreme price and volume
fluctuations
The market price of the common stock may fluctuate substantially due to a
variety of factors, including:
. any actual or anticipated fluctuations in our financial condition and
operating results;
. public announcements concerning us or our competitors, or the Internet
industry;
. the introduction or market acceptance of new service offerings by us
or our competitors;
. changes in industry research analysts' earnings estimates;
. changes in accounting principles;
. sales of our common stock by existing stockholders; and
. the loss of any of our key personnel.
In addition, the stock market has experienced extreme price and volume
fluctuations. The market prices of the securities of technology and Internet-
related companies have been especially volatile. This volatility has often
been unrelated to the operating performance of particular companies. In the
past, securities class action litigation has often been brought against
companies that experience volatility in the market price of their securities.
Whether or not meritorious, litigation brought against us could result in
substantial costs and a diversion of management's attention and resources.
If our existing stockholders sell a substantial number of shares of our common
stock in the public market, the market price of our common stock will likely
fall
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, including shares issuable upon the
exercise of outstanding options, the market price of our common stock will
likely fall. CMGI, Dell and Microsoft will directly own approximately 71.8%,
4.0% and 3.7%, 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
27,191,653 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."
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<PAGE>
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 substantially higher than the book
value per share of the outstanding common stock. You will incur immediate and
substantial dilution in the amount of $10.60 per share based upon an initial
public offering price of $14.00 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.
17
<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 $70.0 million, or $80.8 million if
the over-allotment option granted to the underwriters is exercised in full,
based on an initial public offering price of $14.00 per share, and after
deducting underwriting discounts and commissions and estimated offering
expenses payable by us.
The principal purposes of this offering are:
. to increase our equity capital;
. to facilitate future access by us to public equity markets;
. to provide increased visibility and credibility in the marketplace;
and
. to enhance our ability to use common stock as consideration for
acquisitions and as a means of attracting and retaining key employees.
We currently intend to use the net proceeds of this offering for the
following:
. enhancement and expansion of our network infrastructure;
. expansion of our sales and marketing efforts, including the hiring of
additional personnel;
. enhancement of our application management and technical expertise; and
. working capital and general corporate purposes.
In addition, we may also use a portion of the net proceeds of this offering
for the acquisition of businesses or technologies that are complementary to
those we currently possess. While we evaluate these types of opportunities from
time to time, there are currently no agreements with respect to any specific
acquisitions.
We have not yet determined the actual expected expenditures and therefore
cannot estimate the amounts to be used for each purpose set forth above. The
amounts and timing of these expenditures will vary significantly depending upon
a number of factors, including, but not limited to, the availability of
construction financing, the success and timing of our hiring efforts, the
amount of cash generated by our operations and the market response to our Web
site and Internet application hosting and management services. Accordingly, our
management will retain broad discretion as to the allocation of the proceeds of
this offering.
Pending use of the net proceeds as described above, we intend to invest the
net proceeds of this offering in short-term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock, and
we do not currently intend to pay any cash dividends on the common stock in the
foreseeable future. We expect to retain future earnings, if any, to fund the
development and growth of our business. Future dividends, if any, will be
determined by our board of directors. As a result of not collecting a dividend,
there is a risk that stockholders will not experience a positive return on
their investment unless they sell their shares of common stock at a profit.
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<PAGE>
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
shares of convertible preferred stock outstanding as of July 31, 1999
into shares of common stock; and
. on a pro forma as adjusted basis to give effect to the issuance to CMGI
upon completion of this offering of an aggregate of 875,480 additional
shares of common stock upon the conversion of outstanding Series B
convertible preferred stock issued to CMGI subsequent to July 31, 1999
and to reflect the sale of 5,500,000 shares of common stock at an
initial public offering price of $14.00 per share, after deducting
underwriting discounts and commissions and estimated offering expenses
payable by us.
This information should be read in conjunction with the section of this
prospectus with the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the accompanying notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
July 31, 1999
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Series C Convertible Redeemable Preferred Stock,
par value $0.01 per share: 1,095,472 shares
authorized, issued and outstanding (actual);
no shares authorized, issued or outstanding
(pro forma and pro forma as adjusted).......... $ 8,088 $ -- $ --
Series D Convertible Redeemable Preferred Stock,
par value $0.01 per share: 993,243 shares
authorized, issued and outstanding (actual);
no shares authorized, issued or outstanding
(pro forma and pro forma as adjusted).......... 7,333 -- --
------- ------- -------
Total redeemable preferred stock............... 15,421 -- --
------- ------- -------
Stockholders' equity (deficit):
Series A Convertible Preferred Stock, par value
$0.01 per share: 1,323,953 shares authorized,
issued and outstanding (actual); no shares
authorized, issued or outstanding (pro forma
and pro forma as adjusted)................... 13 -- --
Series B Convertible Preferred Stock, par value
$0.01 per share: 1,000,000 shares authorized;
541,859 issued and outstanding (actual); no
shares authorized, issued or outstanding
(pro forma and pro forma as adjusted)........ 5 -- --
Common stock, par value $0.01 per share:
30,000,000 shares authorized (actual and pro
forma); 150,000,000 shares authorized (pro
forma as adjusted); 69,338 shares issued and
outstanding (actual); 20,816,173 and
27,191,653 shares issued and outstanding (pro
forma and pro forma as
adjusted, respectively)...................... 1 208 272
Additional paid-in capital....................... 30,291 45,523 127,726
Accumulated deficit.............................. (34,679) (34,679) (34,679)
------- ------- -------
Total stockholders' equity (deficit)........... (4,369) 11,052 93,319
------- ------- -------
Total capitalization........................ $11,052 $11,052 $93,319
======= ======= =======
</TABLE>
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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<PAGE>
DILUTION
Our pro forma net tangible book value as of July 31, 1999 was $22,514,874,
or $1.04 per share of common stock, as adjusted to reflect the issuance to CMGI
of an aggregate of 875,480 additional shares of common stock upon the
conversion of outstanding Series B convertible preferred stock issued to CMGI
subsequent to July 31, 1999. Pro forma net tangible book value per share, as
adjusted to reflect the issuance of the additional shares to CMGI, represents
the amount of our total tangible assets less total liabilities, divided by
21,691,653, the pro forma number of shares of common stock outstanding as of
July 31, 1999, as adjusted to reflect the issuance of the additional shares to
CMGI. 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 basis, as adjusted to reflect the issuance of the additional shares to
CMGI and the shares issued to new investors. After giving effect to the
conversion of all outstanding shares of convertible preferred stock into an
aggregate of 21,622,315 shares of common stock upon completion of this offering
and the sale of the 5,500,000 shares of common stock offered by us at an
initial public offering price of $14.00 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 $92,524,874, or $3.40 per share of common stock. This
represents an immediate increase in net tangible book value of $2.36 per share
of common stock to existing stockholders and an immediate dilution in pro forma
net tangible book value of $10.60 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>
Initial public offering price per share............................. $14.00
Pro forma net tangible book value per share as of July 31, 1999... $1.04
Increase per share attributable to new investors.................. 2.36
-----
Pro forma net tangible book value per share after this offering..... 3.40
------
Dilution per share to new investors................................. $10.60
======
</TABLE>
The following table summarizes, on a pro forma basis as of July 31, 1999,
as adjusted to reflect the issuance to CMGI of an aggregate of 875,480
additional shares of common stock upon the conversion of outstanding Series B
convertible preferred stock issued to CMGI subsequent to 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.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 21,691,653 79.8% $ 57,988,000 43.0% $ 2.67
New investors............ 5,500,000 20.2 77,000,000 57.0 14.00
---------- ----- ------------ -----
Total.................. 27,191,653 100.0% $134,988,000 100.0%
========== ===== ============ =====
</TABLE>
The foregoing tables and calculations assume no exercise of options
outstanding under our 1998 Equity Incentive Plan or our 1998 Director Stock
Option Plan. As of July 31, 1999, there were 2,480,662 shares of common stock
reserved for issuance upon exercise of outstanding options with a weighted
average exercise price of $2.49 per share. To the extent that any of these
options are exercised, there will be further dilution to new investors.
20
<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>
21
<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.
Effective as of October 1, 1999, NaviSite Internet Services Corporation was
merged with and into CMGI, leaving NaviSite and NaviNet, Inc. as direct
subsidiaries of CMGI.
Our predecessor, NaviSite Internet Services Corporation, was incorporated
in Delaware in February 1997 under the name CMG Information Technology, Inc.
and changed its name to NaviSite Internet Services Corporation in May 1997. We
commenced operations in July 1996, funded by CMGI, to support the networks and
host the Web sites of CMGI and a number of CMGI affiliates. CMGI affiliates
include all entities in which CMGI holds an equity interest. We began providing
Web site hosting and Internet application management services to companies
unaffiliated with CMGI in the Fall of 1997.
All financial information presented here refers only to NaviSite, including
the hosting and Internet application management segments of NaviSite Internet
Services Corporation, and does not include the financial condition or results
of operations of NaviNet, Inc., including the dial-up operations of NaviSite
Internet Services Corporation.
In July 1998, we acquired Servercast Communications, L.L.C., a Delaware
limited liability company and developer and integrator of Internet
applications, for $1.0 million in notes, plus bridge notes receivable of
$25,000 and $20,000 in acquisition costs. We acquired Servercast principally
for its expertise in online advertising, e-commerce, content management and
streaming media. The purchase price plus associated costs of the acquisition
were recorded as goodwill and are being amortized on a straight-line basis over
five years.
We intend to expand domestically and internationally and currently have two
new data centers under construction. In addition, we recently converted 3,200
square feet of office space at our current data center location in Andover,
Massachusetts into data center space. In May 1999, we executed a 12-year lease
for a new 150,000 square foot facility located in Andover, Massachusetts,
currently being constructed to our
22
<PAGE>
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. We currently are finalizing the terms of
construction contracts for the new Massachusetts facility and the new
California facility. Additional information on these construction contracts is
included in this prospectus under the heading "Certain Transactions--
Relationship and Transactions Between NaviSite and CMGI, Inc.--Leases,
Construction Contracts and CMGI Guarantees." 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
23
<PAGE>
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.
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>
24
<PAGE>
Comparison of Fiscal Years Ended July 31, 1999 and 1998
Revenue
Total revenue increased 161% to approximately $10.5 million in fiscal 1999,
from approximately $4.0 million in fiscal 1998. The increase in revenue is due
to additional business with CMGI and CMGI affiliates and the increase in the
number of non-affiliated customers to 106 as of July 31, 1999 from 37 as of
July 31, 1998 (including customers of Servercast, acquired by us on July 1,
1998). Customers of Servercast accounted for $1,143,000, or 11%, of total
revenue in fiscal 1999.
Cost of Revenue
Cost of revenue increased 129% to approximately $20.3 million in fiscal
1999, from approximately $8.9 million in fiscal 1998. As a percentage of
revenue, cost of revenue decreased to 193% in fiscal 1999, from 220% in fiscal
1998. The dollar-value increase in each period is due primarily to the costs
associated with increased investment in our existing data centers. These costs
principally include labor and headcount expenses, additional equipment and
maintenance costs and increased bandwidth and connectivity charges.
Operating Expenses
Selling and Marketing. Selling and marketing expenses increased 172% to
approximately $6.9 million in fiscal 1999, from approximately $2.5 million in
fiscal 1998. This increase is due primarily to the development of NaviSite's
sales and marketing capability in connection with the commencement of sales to
unaffiliated customers. These costs primarily include salaries and commissions
and expenses for marketing programs, advertising and product literature.
General and Administrative. General and administrative expenses increased
242% to approximately $4.8 million in fiscal 1999, from approximately $1.4
million in fiscal 1998. The dollar-value increase in general and administrative
expenses is due to both an increase in salaries and related costs, to
approximately $1.7 million in fiscal 1999, from approximately $752,000 in
fiscal 1998, resulting from the hiring of additional administrative and finance
personnel to support our growing operations and an increase in intercompany
charges from CMGI to approximately $494,000 in fiscal 1999, from approximately
$161,000 in fiscal 1998, for human resource support, business development and
corporate overhead. Other expenses contributing to the dollar-value increase
include moving and rental costs associated with the occupation of our current
corporate headquarters and legal and professional fees, which increased to
approximately $1.1 million in fiscal 1999, from approximately $221,000 in
fiscal 1998, associated with: Year 2000 consultants and contract labor; legal
review of operating contracts, leases, option plans and the Navisite Internet
Services Corporation corporate reorganization; and accounting and finance
contract labor. General and administrative expenses associated with Servercast
(acquired by us on July 1, 1998) increased to approximately $517,000 in fiscal
1999, from approximately $19,000 in fiscal 1998.
Product Development. Product development expenses increased to $2.6 million
in fiscal 1999, from approximately $287,000 in fiscal 1998. This increase is
due primarily to the costs associated with an increase in product development
personnel by July 31, 1999 to 20, from one person at the inception of our
product development operations in 1998. This growth in product development
personnel reflects our increased service offerings and emphasis on application
services.
Interest Expense, net
Interest expense, net increased to approximately $347,000 in fiscal 1999,
from $85,000 in fiscal 1998. This increase is due primarily to the inclusion in
interest expense, net in fiscal 1999 of approximately $303,000 of interest on
intercompany debt at a rate of seven percent per annum pursuant to an
arrangement entered into between NaviSite and CMGI in the second half of fiscal
1998. Interest expense associated with the issuance of term notes in connection
with our acquisition, in July 1998, of Servercast totaled approximately $55,000
during fiscal 1999. Interest expense on long-term capital lease obligations is
also included in interest expense, net.
25
<PAGE>
Comparison of Fiscal Years Ended July 31, 1998 and 1997
Revenue
Total revenue increased 20% to approximately $4.0 million in fiscal 1998,
from approximately $3.4 million in fiscal 1997. Because NaviSite first sold its
services to unaffiliated customers in the Fall of 1997, almost all of
NaviSite's revenue in fiscal 1998 and fiscal 1997 came from CMGI and CMGI
affiliates. The dollar-value increase in revenue in fiscal 1998 from fiscal
1997 is due to a growth in revenue of approximately $510,000 from services
provided to affiliated customers and the addition of commercial customers with
revenue totaling $158,000. In fiscal 1998, three customers, all affiliates of
CMGI, accounted for 40%, 19% and 11% of revenue, respectively. In fiscal 1997,
these same three customers accounted for 46%, 28% and 14% of revenue,
respectively.
Cost of Revenue
Cost of revenue increased 154% to approximately $8.9 million in fiscal
1998, from approximately $3.5 million in fiscal 1997. As a percentage of
revenue, cost of revenue increased to 220%, from 104%, reflecting costs
associated with the build-out of the Andover data center and the opening of the
Scotts Valley data center in anticipation of future growth.
Operating Expenses
Selling and Marketing. Selling and marketing expenses increased to $2.5
million in fiscal 1998, from $347,000 in fiscal 1997. The increases are the
result of significant growth in our sales force and marketing group during this
period as we commenced sales to unaffiliated customers. Advertising costs and
significant initial costs for product literature also are components of the
increase in fiscal 1998 over fiscal 1997.
General and Administrative. General and administrative expenses increased
202% to approximately $1.4 million in fiscal 1998, from approximately $467,000
in fiscal 1997. These increases are the result of increased payroll and related
costs and professional fees required to support our growing operations.
Product Development. Product development expenses increased to $287,000 in
fiscal 1998 due to initial hiring in our product development group at its
inception in fiscal 1998. Product development expenses were zero in fiscal
1997. The introduction of product development personnel reflects our increased
service offerings and emphasis on application services.
Interest Expense, net
Interest expense, net increased to $85,000 in fiscal 1998, from $1,000 in
fiscal 1997. The increase in fiscal 1998 from fiscal 1997 is due primarily to
the inclusion in interest expense, net in fiscal 1998 of approximately $65,000
of interest on intercompany debt at a rate of seven percent per annum pursuant
to an arrangement entered into between NaviSite and CMGI in the second half of
fiscal 1998. Interest expense on long-term capital lease obligations is also
included in interest expense, net in fiscal 1998 and is the sole component of
interest expense, net in fiscal 1997.
Income Taxes
NaviSite is part of the CMGI consolidated group for tax purposes, and as
such, all benefits of federal tax losses from inception through July 31, 1999
have been used to the benefit of CMGI in its consolidated return. As a result,
NaviSite has no tax loss carryforwards or carrybacks as of July 31, 1999.
26
<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 our audited consolidated financial
statements and the accompanying notes appearing elsewhere in this prospectus.
The results of operations for any quarter are not necessarily indicative of the
results of operations for any future period.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------
April 30, July 31, Oct. 31, Jan. 31, April 30, July 31,
1998 1998 1998 1999 1999 1999
--------- -------- -------- -------- --------- --------
Statement of Operations
Data: (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Revenue................ $ 28 $ 119 $ 490 $ 604 $ 958 $ 1,409
Revenue, related
parties.............. 1,024 1,074 1,178 1,562 2,025 2,293
------- ------- ------- ------- ------- -------
Total revenue......... 1,052 1,193 1,668 2,166 2,983 3,702
Cost of revenue......... 2,584 2,453 3,786 3,935 5,836 6,781
------- ------- ------- ------- ------- -------
Gross profit (loss).... (1,532) (1,260) (2,118) (1,769) (2,853) (3,079)
------- ------- ------- ------- ------- -------
Operating expenses:
Selling and marketing.. 762 1,106 1,429 1,112 1,856 2,491
General and
administrative....... 378 485 543 804 1,208 2,268
Product development.... 104 173 267 439 672 1,242
------- ------- ------- ------- ------- -------
Total operating
expenses............ 1,244 1,764 2,239 2,355 3,736 6,001
------- ------- ------- ------- ------- -------
Loss from operations.... (2,776) (3,024) (4,357) (4,124) (6,589) (9,080)
Other income (expense):
Interest expense, net
..................... (24) (57) (156) (39) (135) (17)
Other expense, net..... -- (11) 4 -- (40) 1
------- ------- ------- ------- ------- -------
Total other income
(expense)........... (24) (68) (152) (39) (175) (16)
------- ------- ------- ------- ------- -------
Net loss................ $(2,800) $(3,092) $(4,509) $(4,163) $(6,764) $(9,096)
======= ======= ======= ======= ======= =======
<CAPTION>
Percentage of Total Revenues
Three Months Ended
---------------------------------------------------------------
April 30, July 31, Oct. 31, Jan. 31, April 30, July 31,
1998 1998 1998 1999 1998 1999
--------- -------- -------- -------- --------- --------
Statement of Operations
Data:
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Revenue................ 2.7 % 10.0 % 29.4 % 27.9 % 32.1 % 38.1 %
Revenue, related
parties.............. 97.3 90.0 70.6 72.1 67.9 61.9
------- ------- ------- ------- ------- -------
Total revenue......... 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue......... 245.6 205.6 227.0 181.7 195.6 183.2
------- ------- ------- ------- ------- -------
Gross profit (loss).... (145.6) (105.6) (127.0) (81.7) (95.6) (83.2)
------- ------- ------- ------- ------- -------
Operating expenses:
Selling and marketing.. 72.4 92.7 85.7 51.3 62.2 67.3
General and
administrative....... 35.9 40.7 32.6 37.1 40.5 61.3
Product development.... 9.9 14.5 16.0 20.3 22.5 33.5
------- ------- ------- ------- ------- -------
Total operating
expenses............ 118.2 147.9 134.3 108.7 125.2 162.1
------- ------- ------- ------- ------- -------
Loss from operations ... (263.8) (253.5) (261.3) (190.4) (220.8) (245.3)
Other income (expense):
Interest expense, net
..................... (2.3) (4.8) (9.2) (1.8) (4.5) (0.4)
Other expense, net..... 0.0 (0.9) 0.2 0.0 (1.3) 0.0
------- ------- ------- ------- ------- -------
Total other income
(expense)........... (2.3) (5.7) (9.1) (1.8) (5.8) (0.4)
------- ------- ------- ------- ------- -------
Net loss................ (266.2)% (259.2)% (270.4)% (192.2)% (226.7)% (245.7)%
======= ======= ======= ======= ======= =======
</TABLE>
27
<PAGE>
Liquidity and Capital Resources
Since our inception, our operations have been funded primarily by CMGI
through the issuance of preferred stock and convertible debt.
Net cash used in operating activities amounted to $20.2 million, $7.9
million and $644,000 for fiscal 1999, fiscal 1998 and fiscal 1997,
respectively. The increase in cash used in operations has primarily been caused
by increasing net operating losses, which are partially offset by non-cash
depreciation and amortization charges included in the applicable net loss and
increases in accounts payable and accrued expenses.
Net cash used in investing activities amounted to $9.8 million, $1.2
million and $1.6 million during fiscal 1999, fiscal 1998 and fiscal 1997,
respectively. The net cash used for investing activities was utilized to
acquire property and equipment required to support the growth of the business
and to expand data center infrastructure.
Net cash provided by financing activities amounted to $33.3 million, $9.1
million and $2.2 million for fiscal 1999, fiscal 1998 and fiscal 1997,
respectively. Cash provided for financing activities included funds advanced
from CMGI, totaling $19.0 million, to fund our operations in 1999. In addition,
cash provided by financing activities in fiscal 1999 included $8.0 million in
net proceeds from the issuance of Series C convertible preferred stock to Dell
Computer Corporation and $7.2 million in net proceeds from the issuance of
Series D convertible preferred stock to Microsoft Corporation. Cash provided by
financing activities in fiscal 1998 and fiscal 1997 primarily was related to
funds advanced from CMGI to fund our operations. Our current interest rate for
our financing activities through CMGI is seven percent. Non-cash financing
transactions included capital lease financing for equipment and a software
vendor payable in fiscal 1999 and fiscal 1998.
CMGI has historically funded our operations as needed, increasing our
obligations to CMGI and allowing us to maintain a zero-balance cash account.
Customer and other receipts have been remitted to CMGI and have been applied to
reduce our obligations to CMGI. We have issued a secured convertible demand
note to CMGI in exchange for the cancellation of all outstanding intercompany
debt incurred by us to CMGI prior to April 30, 1999. This note also provides
for additional advances by CMGI to us after April 30, 1999. CMGI may elect to
convert amounts payable under the note into Series B convertible preferred
stock at any time. Additional intercompany debt accrues at a rate of seven
percent per year, compounded monthly until the day CMGI elects to convert the
debt into shares of Series B convertible preferred stock. The amount of each
borrowing represented by the note is convertible from time to time into the
number of shares of Series B convertible preferred stock equal to one-tenth of
the quotient of the aggregate amount of principal and interest to be so
converted, divided by the applicable conversion price for that fiscal quarter.
The conversion price applicable to advances made in any fiscal quarter,
except advances made in the fiscal quarter during which a qualified initial
public offering occurs and advances converted into Series B convertible
preferred stock in the same fiscal quarter in which they were made, is
determined by dividing our total enterprise value as of the fiscal quarter end
(as determined in good faith by our board of directors) by the number of shares
of common stock outstanding on a fully diluted, as-if-converted basis. Our
total enterprise value, and the conversion price applicable to advances made
under the note, has increased significantly since the fiscal quarter ended
January 31, 1999. For the fiscal quarter ended January 31, 1999, our enterprise
value was based on a discounted cash flow analysis. Our enterprise value for
the fiscal quarter ended April 30, 1999, however, was determined through arms'
length negotiations with, and subsequent sales of our Series C convertible
preferred stock and Series D convertible preferred stock to, two unaffiliated
third parties-Dell and Microsoft. While our business experienced certain
positive operating results during our fiscal quarter ended April 30, 1999,
including principally growth in our revenue from customers unaffiliated with
CMGI and growth in the total number of our customers and in our customers
unaffiliated with CMGI, we believe that the significant increase in our total
enterprise value for our fiscal quarter ended April 30, 1999 from that for our
fiscal quarter ended January 31, 1999 results primarily from the fact that our
total enterprise value for our fiscal quarter ended April 30, 1999 was
determined through arms' length negotiations with our two third-party
investors. The conversion prices for the Series B convertible preferred stock
issued upon conversion of advances made under the note in the fiscal quarter
ended April 30, 1999, the Series C convertible preferred stock and the Series D
preferred stock all are based on our enterprise value for the fiscal quarter
ended April 30, 1999.
28
<PAGE>
Under this note, intercompany debt in the aggregate amount of approximately
$10,761,000, representing $5,348,000 advanced during the quarter ended January
31, 1999 and an additional $5,413,000 advanced during the quarter ended April
30, 1999, in each case including interest accrued during the applicable fiscal
quarter, was converted into 490,332 shares of Series B convertible preferred
stock (based upon applicable conversion prices of $12.74 and $76.68,
respectively). Effective June 4, 1999, CMGI elected to convert intercompany
debt in the aggregate amount of approximately $3,952,000, representing funds
advanced subsequent to the quarter ended April 30, 1999, into 51,527 shares of
Series B convertible preferred stock (based upon a conversion price of $76.68).
Under the terms of the note, because CMGI elected to convert these advances
prior to the end of the fiscal quarter in which the advances were made, the
applicable conversion price was the conversion price in effect for the
immediately preceding fiscal quarter. Immediately prior to the completion of
this offering, CMGI will convert intercompany debt in the aggregate amount of
approximately $12,257,000, representing funds advanced subsequent to the
quarter ended July 31, 1999, into 87,548 shares of Series B convertible
preferred stock (based upon a conversion price of $140, ten times the initial
public offering price of $14.00 per share). Upon completion of this offering,
each issued and outstanding share of Series B convertible preferred stock will
convert into ten shares of common stock, or 6,294,070 shares of common stock in
the aggregate. We do not expect to borrow funds from CMGI after completion of
this offering.
In connection with the construction contract for our new Andover,
Massachusetts facility, we will be required to obtain a letter of credit in the
amount of the remaining balance due under the contract, which is currently
estimated to be less than $15.0 million. See "Certain Transactions--
Relationship and Transactions between NaviSite and CMGI, Inc.--Leases,
Construction Contracts and CMGI Guarantees." We expect to commence negotiations
on the terms of the letter of credit prior to the 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
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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;
. assessment, which is the process of isolating Year 2000 issues with the
systems and products identified in the inventory phase of our Year 2000
project plan and identifying necessary upgrades and replacements to
address these Year 2000 issues;
. remediation, which consists of implementing the necessary upgrades and
replacements identified in the assessment phase of our Year 2000
project plan; and
. contingency planning, which involves both the proactive visioning of
failures of computer systems and software products and of other adverse
impacts on our operations caused by the failure or inadequate
completion of one or more of the first four phases of our Year 2000
project plan and the suggestion and documentation of reasonable
solutions to resolve these potential failures.
We have substantially completed the awareness, inventory and assessment phases
of our Year 2000 project plan. We also continue to conduct awareness campaigns
as needed, update our inventory and conduct Year 2000 assessment on an ongoing
basis as new computer systems and software products are introduced to our data
centers or integrated into our operations. We intend to continue this ongoing
inventory and assessment process through at least December 31, 2000. The
awareness, inventory and assessment phases of our Year 2000 project plan
revealed to us a number of potential problems at the operating system and BIOS
levels with: hosted servers owned by both us and our customers; networked and
standalone desktop computers; and our network operations centers. In addition,
these phases of our plan revealed potential problems with hardware devices
utilized as part of our network infrastructure, including, for example,
routers. All of the revealed problems are ordinary and routine in nature, and
all are able to be remedied with standard software or hardware patches. In most
cases, if time permits, we test vendor software patches for Year 2000
compliance.
We anticipate completing the remediation and contingency planning phases by
December 1, 1999. The remediation phase of our Year 2000 project plan is
designed to remediate Year 2000 problems at the operating system and BIOS
levels as to computer systems used by customers for whom we provide management
services. A number of managed servers remain on our inventory for remediation.
The remediation of certain of these servers has been delayed as a result of
customer requests to postpone scheduled remediation based on the internal
business needs of those customers. We believe that remediation will continue
through December 1, 1999 because of these delays with customer server
remediation and the potential release by suppliers of new patches. As new
managed servers are brought on line through at least December 31, 1999, we will
certify Year 2000 compliance before these servers are installed. As described
in further detail below, our co-location customers have full responsibility for
remediating their own servers and applications, and all of our customers are
responsible for remediating their own application software and any desktop
computers used by them in connection with the services we provide. Year 2000
problems isolated to date with respect to our desktop computers, network
operations centers and network infrastructure have been substantially
remediated.
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The formal contingency planning phase of our Year 2000 project plan is
complete. We anticipate continuing to update our contingency plans as required,
at least through the end of the remediation phase of our Year 2000 project
plan.
Because our infrastructure incorporates components from different
providers, we may be unable to determine whether any of these components will
cause unexpected Year 2000 problems or whether different components will
interact in a way that causes malfunctions. While we expect that our network
infrastructure and all other material components of our facilities will not
experience any Year 2000-related failures, we cannot assure you that we will
not experience these failures or that we will not discover any compliance
problems in the future. Our failure timely and adequately to address Year 2000
compliance issues in our business could result in lost revenues and claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming for us to defend.
Our Customers. We also face risks from customer-provided computer systems
and application software that we host in our data centers that in many cases
has been customized by outside service providers or customer personnel. While
we inform our co-location customers that they are responsible for the Year 2000
compliance of their hosted computer systems and all customers that they are
responsible for the Year 2000 compliance of their own application software, we
cannot assure you that our customers will take the steps necessary to achieve
Year 2000 compliance. The failure of customers and third-party providers to
ensure that their hosted computer systems and application software is Year 2000
compliant could disrupt our operations, resulting in lost revenue and increased
operating costs. In addition, our customers maintain their internal operations
on networks which may be impacted by Year 2000 complications, which could in
turn affect our internal structure or our ability to provide services to them.
We cannot assure you that our customers will upgrade their internal networks or
otherwise provide appropriate remediation for Year 2000 compliance. In
addition, in the event that a significant number of our customers experience
Year 2000-related problems, whether due to our products or not, demand for
technical support and assistance may increase dramatically. In this case, our
costs for providing technical support may rise and the quality of our service
or our ability to manage incoming requests may be impaired.
Our Suppliers. In addition, we depend on software and hardware supplied by
numerous vendors to provide our application hosting and management services,
rental services and consulting services. We are currently seeking assurances
from our existing vendors that their products are Year 2000 compliant, and we
require that all new software application providers certify that they are Year
2000 compliant before we enter into agreements with them. However, because in
most cases we do not independently verify the Year 2000 compliance of vendors'
products, we cannot assure you that these vendors' guarantees are true or
sufficient or that we will not encounter Year 2000 compliance problems
involving their products.
We cannot assure you that we will be able to provide our services and
maintain our operations if we are unable to obtain products, services or
systems that are Year 2000 compliant when we need them. In addition, if vendors
and service providers cannot deliver their products because of their own Year
2000 compliance problems or as a result of systemic failures such as power
outages relating to the Year 2000, we could experience increased operating
costs and lost revenue.
Inflation
We believe that our revenues and results of operations have not been
significantly impacted by inflation during the past three fiscal years.
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Recent Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-1,
"Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires the capitalization of certain internal costs
related to the implementation of computer software obtained for internal use.
NaviSite is required to adopt this standard in the first quarter of fiscal year
2000, and expects that the adoption of SOP 98-1 will not have a material impact
on its financial position or its results of operations.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting Costs of Start-Up Activities." Under SOP
98-5, the cost of start-up activities should be expensed as incurred. Start-up
activities are broadly defined as those one-time activities related to opening
a new facility, introducing a new product or service, conducting business in a
new territory, conducting business with a new class of customer, commencing
some new operation or organizing a new entity. SOP 98-5 is effective for the
Company's fiscal 2000 consolidated financial statements. NaviSite does not
expect its adoption to have a material impact on its financial position or
results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS 133
requires the recognition of all derivatives as either assets or liabilities in
the statement of financial position and the measurement of those instruments at
fair value. NaviSite is required to adopt this standard in the first quarter of
fiscal year 2001 pursuant to SFAS No. 137 (issued in June 1999), which delays
the adoption of SFAS 133 until that time. NaviSite expects that the adoption of
SFAS 133 will not have a material impact on the its financial position or its
results of operations.
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BUSINESS
Company Overview
NaviSite is an Internet application service provider offering Web site and
application hosting and management services. Our Internet application service
offerings allow businesses to outsource the deployment, configuration, hosting,
management and support of their Web sites and Internet applications in a cost-
effective and rapid manner. Our focus on enhanced management services, beyond
basic co-location services, allows us to meet the expanding needs of businesses
as their Web sites and Internet applications become more complex. We also
provide our customers with access to our state-of-the-art data centers and the
benefit of our direct private transit Internet connections to major Internet
backbone providers. We only use direct private transit Internet connections,
which differentiates our network infrastructure from that of most of our
competitors. These connections increase reliability and download speeds.
The scalability of our infrastructure and cost-effectiveness of our
solutions allow us to offer a comprehensive suite of services to meet the
current and future hosting and management needs of our customers. Our suite of
service offerings includes:
. Web site and Internet application hosting, which includes access to
our state-of-the-art data centers, bandwidth and basic back-up,
storage and monitoring services;
. Enhanced server management, which includes custom reporting, hardware
options, load balancing and mirroring, system security, advanced back-
up options, remote management and the services of our business
solution managers;
. Specialized application management, which includes management of e-
commerce and other sophisticated applications and their underlying
services, including ad-serving, streaming, databases and transaction
processing; and
. Application rentals and related consulting and other professional
services.
Industry Background
Growth of Business Use of the Internet. The dramatic growth in Internet
usage in recent years, combined with enhanced functionality, accessibility and
security, has made the Internet increasingly attractive to businesses as a
medium for communication and commerce. Forrester Research, Inc. has estimated
that the number of U.S. enterprise businesses online will increase from
approximately 1.8 million in 1998 to approximately 4.3 million in 2003.
As business use of the Internet grows, we believe those businesses which
are utilizing the Internet are seeking to identify and implement increasingly
sophisticated Internet applications. These new applications permit businesses
to:
. engage in business-to-business and business-to-consumer e-commerce;
. enhance business sales efforts through Web-based technologies such as
ad-serving and streaming;
. build and enhance customer relationships by providing Internet-based
customer service and technical support; and
. communicate and conduct business more rapidly and cost-effectively
with customers, suppliers and employees worldwide.
As a result, the proliferation of business Web sites and Internet
applications has created a strong demand for specialized information technology
support and application expertise.
Movement Toward Outsourcing. A growing number of businesses using the
Internet as part of their business strategy have chosen to outsource Internet
application development, implementation and support, particularly the hosting
and management of their Web sites and Internet applications. This follows an
overall movement toward outsourcing of information technology services.
According to Forrester Research, businesses
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in the United States are now spending approximately 25% of their overall
information technology budgets on outsourced services. The growth in outsourced
hosting and management of Web sites and Internet applications is driven by a
number of factors, including:
. the desire of businesses to improve the reliability, availability and
overall performance of their Web sites and Internet applications as
those applications increase in complexity and importance;
. the desire of businesses to reduce time to market;
. the challenges faced by businesses in hiring, training and retaining
application engineers and information technology employees with
Internet expertise;
. the increased costs associated with developing and maintaining
business networks and software applications; and
. deployment risk and the risk of technological obsolescence as they
attempt to capitalize on leading-edge technologies.
Forrester Research has estimated that the market for managed Web site
hosting in the United States will grow from less than $1.0 billion in 1998 to
over $14.0 billion in 2003. In January 1998, Forrester Research estimated that
the market for branded application outsourcing services in the United States
will grow to $21.1 billion by 2001.
Need for Providers of Enhanced, Integrated Hosting and Application
Management Services. Many businesses have outsourced hosting and management of
their Web sites and Internet applications. However, many Web site hosting
providers lack the requisite expertise to implement and manage increasingly
sophisticated Internet applications. Moreover, many of these providers lack the
scalable capacity, high-speed connectivity, monitoring capabilities and level
of reliability and availability which businesses demand. System integrators and
turnkey application developers often have the requisite expertise and resources
to supply businesses with highly customized application solutions, but these
solutions are expensive and time consuming to implement. Some businesses
attempt to reduce cost and shorten time to deployment by utilizing multiple
vendors, each of which provides only a partial solution. This has created
significant opportunity for an application service provider which can offer Web
site and Internet application deployment, configuration, hosting, management
and support.
The NaviSite Solution
We provide a range of integrated, scalable Web site and Internet
application hosting and management services that can be deployed in a cost-
effective and rapid manner. Our Internet application service offerings allow
customers to outsource the deployment, configuration, hosting, management and
support of Web sites and Internet applications. Our focus on enhanced
management services, beyond basic co-location services, allows us to meet the
expanding needs of businesses as their Web sites and Internet applications
become more complex. Key components of our services include:
Cost-Effective Application Services. The scalable nature of our
infrastructure, the repeatability of our Internet application services and our
hosting and management expertise allow us to provide our customers with Web
site and Internet application hosting and management services on a cost-
effective basis. We believe that our customers would otherwise be required to
make significant expenditures to replicate our performance, reliability and
expertise either internally or by using outside vendors.
Rapid Deployment. We offer our customers the ability to rapidly deploy
Internet applications, often in a matter of weeks, instead of months. We
believe that we can deploy sophisticated Internet applications much more
rapidly than businesses can deploy the same applications in-house. Moreover,
our Internet application solutions can be deployed more rapidly than highly
customized applications. This is crucial as our customers develop a Web
presence and need to have their Web sites and Internet applications online as
quickly as possible.
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High-Performance, World-Class Infrastructure. Our infrastructure has been
designed expressly to meet the more demanding technical requirements of
sophisticated Web sites and Internet applications and to provide capacity ahead
of customer demand. We believe that this approach to capacity facilitates the
high-speed data transmission, reliability and availability which our customers'
Web sites and Internet applications demand. In addition, our direct private
transit Internet connections to major Internet backbone providers increase
reliability and download speeds and differentiate our network infrastructure
from that of most of our competitors. Our high-performance infrastructure
together with our trained and experienced staff enable us to offer levels of
service which are backed by guarantees which we believe are among the highest
and most comprehensive in the industry.
Strategy
NaviSite's objective is to be the leading Internet application service
provider. We plan to achieve this goal by continuing to enhance and leverage
our expertise, service offerings and infrastructure to provide customers with
integrated, reliable and secure Internet-based business solutions. Key
components of our strategy include:
Expand Our Suite of Internet Applications. We intend to both increase the
number and vary the kind of applications and application management services we
offer and increase revenue from application rentals. We continue to introduce
Internet business applications which enable customers to develop a Web-based
business presence. Currently, we offer our customers e-commerce and other
sophisticated applications and their underlying services, including ad-serving,
streaming, databases and transaction processing. We focus on application
services which are repeatable, meaning services that we can provide to
customers with minimal additional customization and integration. We believe
that this repeatability decreases our time to market, reduces our operating
risks and produces a higher return on our investment.
Offer Multiple Service Levels to Meet the Evolving Needs of Customers. We
offer multiple service levels to customers so that we can meet their needs for
Internet application services at each stage in the development of their Web-
based operations. For example, a customer initially may use our Web site or
Internet application hosting services or enhanced server management. Later, as
its operations grow and the Internet becomes more of an integral part of its
business strategy, the customer may use our specialized application management
services or application rentals. We believe we have created a competitive
advantage by offering multiple service levels to meet the evolving needs of
customers.
Increase Brand Awareness. We intend to increase awareness of the NaviSite
brand in key business markets and associate the NaviSite brand with the highest
quality Web site and Internet application hosting and management services, high
performance, world-class infrastructure and superior customer service. We
believe that this awareness and association is essential to the continued
expansion of our customer base. We plan to aggressively build the NaviSite
brand through our industry relationships and the use of marketing and co-
marketing programs.
Enhance Our Expertise and Technological Capabilities. We have acquired, and
intend to continue to enhance, the expertise and technological capabilities
required to conduct and grow our business ahead of customer demand. This means
hiring and training application experts before introducing a new application to
customers. This also means expanding existing data centers, adding data
centers, keeping current with key technological trends and increasing
bandwidth. We intend to enhance our expertise by training existing personnel
and by hiring and retaining new application service professionals. We believe
the combination of our Web site and Internet application hosting and management
expertise and our scalable infrastructure provide us with a competitive
advantage.
Continue to Develop and Leverage Industry Relationships. We believe our
industry relationships with Internet application software vendors and
developers, application and system integrators, hardware suppliers and others
provide us with enhanced market opportunities. Through these relationships, we
purchase, license or
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lease services or products to expand our application service offerings or
infrastructure. We also intend to expand our channel sales capability by
working with an increasing number of system integrators and Internet
application software developers and providers. By leveraging our current and
future industry relationships, we intend to not only increase our market
visibility and credibility but also offer our clients more fully integrated
Web site and Internet application hosting and management services.
Access Foreign Markets. We continually assess the need for foreign
operations based on opportunities in specific geographic locations. We
currently have data center capacity in Europe through a bilateral agreement
for Internet hosting services with Planet Online. This arrangement was
established to meet the overseas demands of existing domestic customers. As
the needs of our existing and prospective customers evolve, we intend to take
advantage of foreign market opportunities as they arise.
Pursue Strategic Acquisitions. As opportunities arise, we intend to
continue to pursue strategic acquisitions that can provide complementary
capabilities, technical personnel, established customer relationships and
geographic presence in domestic and international markets.
Services
We offer a comprehensive suite of services to meet the current and future
hosting and management needs of our customers.
Web Site and Internet Application Hosting. Our Web site and Internet
application hosting services provide customers with access to our state-of-
the-art data centers, bandwidth and basic back-up, storage and monitoring
services. Customers are able to access their servers 24-hours-a-day, seven-
days-a-week. These co-located servers are securely housed in separate,
limited-access rooms in our data centers. In fiscal 1999, approximately 17% of
our revenue was derived from basic co-location customers to which we provide
no enhanced or specialized management services.
Web Site and Application Management. We provide both enhanced server
management and specialized application management. Both types of management
services permit us to provide customers with comprehensive problem-solving
solutions, from identification to resolution to post-resolution analysis. To
provide these services, our trained technical personnel utilize advanced
network monitoring and management tools for Web site and application
troubleshooting, together with internal policies and procedures designed to
ensure rapid, effective solutions to technical problems.
Our enhanced server management services include custom reporting, hardware
options, load balancing and mirroring, system security, advanced back-up
options, remote management and the services of our business solution managers.
We also provide specialized application management services for select
software applications, such as:
. ad-serving, which allows customers to conduct advertising and
profiling over the Internet; and
. e-commerce, which enables customers to implement online stores,
customer ordering, payment and fulfillment.
Application Rentals. We offer Internet application rentals to customers
and application developers who need to access sophisticated Internet
applications or application components which can be customized by developers
as part of a complete software solution. Often, obtaining a full license for
these applications is too expensive for customers or application developers,
especially for short-term or single-project use. In addition, these
applications may require experienced personnel to deploy and configure them.
Applications which we currently offer to customers on a rental basis include
Engage Technologies, Inc.'s ad-serving application and a number of Oracle
Corporation's database applications. Internet application components that we
offer to application developers include streaming, personalization,
statistical reporting and imaging services.
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Professional Services. We supply consulting and other professional services
to our customers. These services include network and system configuration and
architecture, project implementation, bandwidth planning and, in limited cases,
basic software development and system integration.
Sales and Marketing
Our sales and marketing objective is to leverage our Web site and Internet
application hosting and management expertise to become the leading provider of
Internet application services. We have developed a sales and marketing strategy
that initially has targeted businesses that have adopted the Internet as an
integral part of their business strategy. We intend to increasingly target more
traditional enterprises as they incorporate the Internet into their business
models.
Our sales efforts focus on direct sales, as well as channel sales through
various industry relationships. We plan to establish a leading position in our
target markets by aggressively expanding our sales force, continuing to
establish and leverage industry relationships to increase channel sales and
expanding our marketing staff.
Direct Sales. Our direct sales professionals include:
. sales representatives, who conduct sales campaigns, identify targeted
prospects, oversee sales territories and manage customer
relationships;
. sales engineers, who discuss with prospective customers their Web site
and Internet application hosting and management needs and technical
requirements; and
. telesales representatives, who qualify customer leads.
Our direct sales teams currently are located in: Andover, Massachusetts;
New York, New York; and San Jose and Los Angeles, California. We plan to expand
our sales force to provide geographic presence in other key markets.
Channel Sales. We have developed important industry relationships to
enhance our channel sales and marketing capabilities. In 1998, we began
pursuing channel sales relationships through our Alliance Partner Program. We
also have generated leads or referrals on an informal basis from application
and system integrators and Internet application software vendors. We intend to
continue to leverage our industry relationships to develop customer referrals,
mutual referral relationships, enhanced service offerings, and in some cases,
co-selling and cross-selling opportunities. Although our industry relationships
have not yet matured into significant sources of new customers, we expect these
relationships to generate more referrals and leads in the future.
Marketing. Our marketing group is responsible for corporate and product
marketing, product management, corporate communications, public relations, lead
generation and marketing communications. As with our sales approach, our
overall marketing strategy focuses on supporting both direct sales and channel
sales. The key goals for our current marketing efforts are to establish a
national and local awareness of the NaviSite brand and our services, position
ourselves as a leading Web site and Internet application hosting and management
partner, develop and enhance channel sales relationships and demonstrate to
potential customers how our services differentiate us from our competition. Our
marketing efforts include:
. comprehensive lead generation through telemarketing, direct marketing,
direct mail programs, electronic and print advertising, seminars and
targeted shows and events;
. interactive, online marketing programs;
. marketing communications and public relations materials to sustain
press coverage in both trade and business publications;
. market development activities targeted to Web site design firms,
Internet application developers and consultants;
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. lead generation, referrals, mutual Web site links or co-marketing
through industry relationships with technology vendors such as Cisco
Systems Inc., Oracle Corporation, BMC Software Distribution, Inc., EMC
Corporation and ArrowPoint Communications, Inc.; and
. strategic marketing relationships with Dell and Microsoft, which are
principal stockholders of NaviSite.
We expect to make significant investments in these and other marketing
programs to increase awareness of the NaviSite brand. We also intend to
continue to leverage our advantageous relationship with CMGI as a source of
lead generation and referrals for our services.
Industry Relationships
In our sales and marketing efforts, we are pursuing industry relationships
targeted by our Alliance Partner Program.
Web and Application Developers. We have developed relationships with
multiple small- to medium-sized Web site design firms, Internet application
developers, consultants and other similar companies that have established
relationships with our target customers. These companies generally lack the
infrastructure and expertise needed to offer their customers a complete, cost-
effective solution and, as a result, turn to us to provide hosting and
management services and expertise to enhance their own product and service
offerings. These relationships provide us with greater market reach through
referrals, without the related overhead costs. In return, we offer these
companies discounts on our services, participation in networking events and
trade shows, joint marketing and promotional campaigns and Web site linkage.
Application and System Integrators. We have developed relationships with
several high-end network integration companies and system integrators from whom
we receive assistance with complex development, integration and project
management and for whom we provide application hosting and management
solutions. These relationships enable us to deliver more comprehensive Internet
application solutions to meet the needs of our customers.
Internet Application Software Vendors. We have developed relationships with
some of the leading Internet application software vendors. We target Internet
application software vendors with brand name recognition and established sales
and support channels. These relationships are mutually beneficial, providing us
with additional applications to sell or rent to our customers and the software
vendors with a distribution channel for their applications. We also benefit
from cross-selling and co-marketing opportunities and specialized product
training to enhance our application management expertise.
Customers
We were organized in 1996 by CMGI to support the networks and host the Web
sites of CMGI and a number of CMGI affiliates. In the Fall of 1997, we began
supplying Web site hosting and management services to companies unaffiliated
with CMGI. As of July 31, 1999, we had approximately 126 customers, up from 51
as of July 31, 1998. CMGI and CMGI affiliates accounted for 62% of our revenue
for the quarter ended July 31, 1999 as compared to 90% of our revenue for the
quarter ended July 31, 1998. CMGI and CMGI affiliates accounted for 15% of our
customer base as of July 31, 1999 as compared to 27% of our customer base as of
July 31, 1998.
A representative list of our customers as of July 31, 1999 includes:
AltaVista Company; Ancestry.com, Inc.; Catalog City, Inc.; Engage Technologies,
Inc.; FairMarket, Inc.; Furniture.com, Inc.; Planet Direct Corporation; Raging
Bull, Inc.; Send.com; ThingWorld.com; and TribalVoice.
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Product Development
Our product development staff focuses on Internet applications and network
architecture. This group identifies new Internet applications, incorporates
these applications into our suite of service offerings and positions them for
marketing, sale and rapid deployment. We focus on Internet applications that
permit us to offer our customers repeatable, scalable services. Our goal is to
introduce services capable of utilization by a large number of customers,
maximizing revenue production and minimizing the incremental operating cost for
each additional customer utilizing that service. As new applications are
introduced, our personnel integrate the application into our management and
billing systems, provide technical documentation and training and ensure the
security of the offering. This process is critical to our ability to provide
integrated, scalable applications to our customers and is designed to result in
increased operating margins, faster product delivery and improved customer
service.
Our product development group also identifies, selects and implements the
various technologies, including network storage and back-up, that provide the
basic infrastructure for both our internal network and the solutions we offer
our customers.
Customer Service and Support
We believe customer service and support is critical to our future success
and growth. Our customer care staff is focused on direct and indirect customer
service and support. We have developed a customized, life-cycle project
management approach to our operations. For some of our customers, we assign a
single business solutions manager who services the customer from deployment
through the entire customer relationship. This approach is designed to enhance
our responsiveness to customer requests, problem troubleshooting and technology
upgrades. In servicing and supporting our customers, we utilize a number of
state-of-the-art automated systems, including a knowledge-based problem-
resolution and trouble-ticketing system, an enterprise system monitoring
platform, sophisticated data storage, an enterprise tape backup system and a
corporate intranet with a built-in document management and source control
system. We believe that our approach to customer service and support and our
ability to rapidly respond to customer needs provides us with a significant
competitive advantage.
Network Infrastructure, Technology and Operations
NaviSite entered the Internet application service market with the advantage
of a well developed infrastructure established by CMGI to support CMGI and a
number of its affiliates. We have differentiated our infrastructure from
competing application service providers through our direct private transit
Internet connections to five major Internet backbone providers. We designed our
infrastructure specifically to provide superior performance for our Web site
and Internet application hosting and management services, including multi-level
network redundancy to provide the highest levels of network uptime, reliable
and customized network security and fast, guaranteed response time and
availability of customers' content, which we deliver through our private
transit Internet connections. Our infrastructure is also designed to scale to
support continued growth. We believe that our sophisticated and highly
redundant infrastructure provides us with a competitive advantage over other
hosting vendors and most Internet service providers. Key elements of our
infrastructure include:
Data Centers. Our strategy is to build a select number of high performance
data centers in order to provide our customers with a critical mass of
expertise in Internet applications and management services from each data
center, while capturing the benefits of centralized infrastructure and
staffing. We currently have data centers located in Andover, Massachusetts and
Scotts Valley, California. These state-of-the-art data centers incorporate
technically sophisticated components and are designed to be completely fault-
tolerant. The components used in our data centers include Cisco redundant core
routers, Cisco redundant core switching hubs and secure, virtual local area
networks. We obtain the equipment and tools necessary for our data center
operations, including our infrastructure hardware, networking and software
products from industry leaders such as ArrowPoint Communications, Cisco
Systems, Compaq Computer Corporation, Dell, EMC and Oracle.
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<PAGE>
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
40
<PAGE>
. adequate capital to permit continued investment in infrastructure,
customer service and support and sales and marketing.
As an early stage company, we may lack the financial and other resources,
expertise or capabilities to capture increased market share in this environment
in the future.
Our current and prospective competitors include:
. other providers of co-location or high-end Web site hosting and
related services, including AboveNet Communications, Inc., Digex
Corporation, Exodus Communications, Inc., Frontier GlobalCenter Inc.,
Globix Corporation, Interliant, Inc. and a large number of local and
regional hosting providers;
. national and regional Internet service providers, including Concentric
Network Corporation, MindSpring Enterprises, Inc., PSINet Inc., UUNet,
WorldCom and Verio Inc.;
. companies that focus on customized Internet application services,
including AppNet Systems, Inc., CORIO, Inc., IBM Global Services,
USinternetworking, Inc. and USWeb/CKS;
. application developers and Internet application software vendors,
including Open Market, Inc., DoubleClick Inc. and broadcast.com inc.;
. large system integrators and information technology outsourcing firms,
including Electronic Data Systems Corporation and International
Business Machines Corporation; and
. global telecommunications companies, including AT&T Corp., MCI
WorldCom, Inc. and Sprint Corporation, and regional and local
telecommunications companies, including MediaOne Group, Inc. and
regional Bell operating companies, such as Bell Atlantic Corporation.
Many of these competitors have substantially greater financial, technical
and marketing resources, larger customer bases, longer operating histories,
greater name recognition and more established relationships in the industry
than we have. As a result, many of these competitors may be able to develop and
expand their network infrastructures and service offerings more rapidly, adapt
to new or emerging technologies and changes in customer requirements more
quickly, take advantage of acquisitions and other opportunities more readily,
devote greater resources to the marketing and sale of their services and adopt
more aggressive pricing policies than we can. Because of these competitive
factors and due to our comparatively small size and our lack of financial
resources, we may be unable to successfully compete in the Internet application
service market.
In addition, we believe that there will be continued consolidation within
the Internet application service market in which we compete. Our competitors
may consolidate with one another, or acquire software application vendors or
technology providers, enabling them to more effectively compete with us. This
consolidation could affect prices and other competitive factors in ways which
would impede our ability to compete successfully in the Internet application
service market.
Proprietary Rights
We rely on a combination of trademark, service mark, copyright and trade
secret laws and contractual restrictions to establish and protect our
proprietary rights and promote our reputation and the growth of our business.
We do not own any patents that would prevent or inhibit competitors from using
our technology or entering our market. While it is our practice to require all
of our employees, consultants and independent contractors to enter into
agreements containing non-disclosure, non-competition and non-solicitation
restrictions and covenants, and while our agreements with some of our customers
and suppliers include provisions prohibiting or restricting the disclosure of
proprietary information, we can not assure you that these contractual
arrangements or the other steps taken by us to protect our proprietary rights
will prove sufficient to prevent misappropriation of our proprietary rights or
to deter independent, third-party development of similar proprietary assets. In
addition, we provide our services in other countries where the laws may not
afford adequate protection for our proprietary rights.
41
<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 17,800 square feet of
the space leased by CMGI at that location. We also occupy approximately 22,000
square feet at 300 Federal Street, Andover, Massachusetts, pursuant to an
agreement that expires in 2007. Part of this facility is utilized for our East
Coast data center, which we recently expanded. We believe that this facility
has sufficient growth capacity for approximately the next 10 months.
We also occupy approximately 14,100 square feet at 1700 Greens Hill Road,
Scotts Valley, California, part of which is utilized for our West Coast data
center, pursuant to an agreement that expires in 2002. We believe that this
facility has sufficient growth capacity for approximately the next six months.
We do not have any current intention to expand the Scotts Valley facility.
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In addition, we occupy four offices at 304 Park Avenue South, 11th Floor,
New York, New York, pursuant to an agreement that expires in March 2001. This
office space is utilized by sales and marketing personnel.
New Facilities. In May 1999, we executed a 12-year lease for a new 150,000
square foot facility located at 400 Minuteman Road, Andover, Massachusetts,
which is currently being constructed to our specifications. Part of this
facility will be utilized for a new data center. We currently are finalizing
the terms of the construction contract for the new Massachusetts facility and
we anticipate that work will be completed on this facility in the Spring of
2000. We believe that the new Massachusetts facility will have sufficient
growth capacity for at least the next two years. Construction also has started
on a new 66,000 square foot facility located in the Valley Technology Centre,
2720 Zanker Road, San Jose, California, part of which will be utilized for a
new data center. We also currently are finalizing the terms of the construction
contract for the new California facility. 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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<PAGE>
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of NaviSite, and their ages and
positions with NaviSite as of August 31, 1999, are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
- ---- --- -----------
<S> <C> <C>
Joel B. Rosen............. 41 Chief Executive Officer and Director
Robert B. Eisenberg....... 48 President and Director
Kenneth W. Hale........... 46 Chief Financial Officer, Treasurer and Secretary
Thomas W. Culver.......... 52 Vice President, Operations
Barbara H. Fortier........ 44 Vice President, Facilities
Peter C. Kirwan, Jr....... 35 Chief Technology Officer
Jonathan Rodin............ 41 Vice President, Product Development
Jay S. Seaton............. 45 Vice President, Marketing
J. Andrew Sherman......... 44 Vice President, Sales
David S. Wetherell........ 45 Chairman of the Board of Directors
Craig D. Goldman.......... 55 Director
Andrew J. Hajducky III.... 45 Director
Stephen D.R. Moore........ 48 Director
</TABLE>
Joel B. Rosen has served as our Chief Executive Officer and as one of our
Directors since April 1999. From January 1996 to August 1998, Mr. Rosen served
as Executive Vice President of Aspen Technology, Inc., a publicly traded
enterprise software and services provider, where he was responsible for
managing two of Aspen Technology's three business units. From August 1988 to
January 1996, Mr. Rosen held several management positions within Aspen
Technology, including Director of Marketing, Vice President of Marketing and
Senior Vice President of Marketing and New Businesses. From 1984 to 1988, Mr.
Rosen was a Consultant and Manager at Bain & Company.
Robert B. Eisenberg founded NaviSite in July 1996 while an employee of
CMGI, Inc. He has served as our President and as one of our Directors since our
predecessor was incorporated as a separate entity in February 1997, and also
served as our Chief Executive Officer from February 1997 to April 1999. From
March 1995 to July 1996, Mr. Eisenberg served as Vice President of Information
Technology at MediaOne Group, Inc. (formerly Continental Cablevision), a cable
television provider. From September 1991 to March 1995, Mr. Eisenberg served as
the Director of Information Technology at New England Business Services, Inc.,
a provider of business forms and software for small businesses.
Kenneth W. Hale has served as our Chief Financial Officer since March 1997
and as our Treasurer and Secretary since March 1998. From May 1989 to September
1996, Mr. Hale served as Chief Financial Officer and Treasurer of
Media/Communications Partners, a telecommunications and media venture capital
firm, where he was responsible for overseeing the financial management of
multiple venture capital funds and related entities. From June 1980 to April
1989, Mr. Hale was a Senior Manager, Audit and Tax, at Ernst & Whinney, which
merged with Arthur Young & Co. to form Ernst & Young LLP. Mr. Hale is a
Certified Public Accountant.
Thomas W. Culver has served as our Vice President of Operations since June
1999. From June 1997 to May 1999, Mr. Culver worked as an independent
consultant. From September 1995 to June 1997, Mr. Culver served as Group
Manager of Information Technology at Paymentech, Inc., formerly known as First
USA Paymentech, a national credit card payment processor, where he was
responsible for systems development, database and systems administration and
operations. From October 1986 to September 1995, Mr. Culver was Chief
Information Officer of DMGT Corp., a credit card payment processor, where he
managed the information technology department.
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Barbara H. Fortier has served as our Vice President of Facilities since
June 1999 and served as our Vice President of Operations from July 1997 to June
1999. From November 1995 to June 1997, Ms. Fortier served as Senior Manager of
Communications at Staples, Inc., a national retailer of office supplies, where
she was responsible for all telecommunications services, local area networking
and wide area networking services. From January 1993 to November 1995, Ms.
Fortier served as Communications Manager at New England Business Services,
Inc., a provider of business forms and software for small businesses.
Peter C. Kirwan, Jr. has served as our Chief Technology Officer since July
1998. In the five years prior to joining NaviSite, Mr. Kirwan was an
entrepreneur in the commercial Internet field, founding two Internet service
providers. The first, Media Access Systems, Inc., was a New York based Internet
service provider focusing on high-speed business Internet connections and one
of the first companies to provide Web server hosting in the United States. The
second, Servercast Communications, L.L.C., focused exclusively on application
management and hosting and was acquired by NaviSite in July 1998.
Jonathan Rodin has served as our Vice President of Product Development
since February 1999. From October 1997 to July 1998, Mr. Rodin served as Vice
President of Engineering at ADSmart Corporation, a developer and marketer of
online ad sales and ad-serving solutions and a subsidiary of CMGI. From July
1991 to September 1997, Mr. Rodin served as the Vice President of Engineering
at FTP Software, Inc., an independent vendor of software and related
applications for the personal computer market.
Jay S. Seaton has served as our Vice President of Marketing since December
1997. From November 1996 to December 1997, Mr. Seaton served as Vice President
of Sales and Marketing at Radnet, Inc., a provider of application tools. From
June 1991 to November 1996, Mr. Seaton served as Director of Marketing and
Product Management at Banyan Systems Incorporated, a provider of distributed
networking software.
J. Andrew Sherman has served as our Vice President of Sales since August
1997. From March 1996 to August 1997, Mr. Sherman served as Vice President of
U.S. Sales for Fulcrum Technologies Inc., a software firm focused on providing
knowledge management capabilities to large enterprises on intranet platforms.
From September 1994 to March 1996, Mr. Sherman served as Regional Manager at
Sybase, Inc., a database and application development tools company. Prior to
1994, Mr. Sherman also held senior positions at Apple Computer, Inc. and MCI
WorldCom, Inc.
David S. Wetherell has served as a Director and Chairman of the Board of
Directors of NaviSite since February 1997. Mr. Wetherell has served as Chairman
of the Board, President, Chief Executive Officer and Secretary of CMGI, Inc.
since 1986 and as a member of CMG@Ventures I, LLC, a venture capital firm
subsidiary of CMGI, and President of CMG@Ventures, Inc., the managing partner
of CMG@Ventures I, LLC, since January 1995. He is also a managing member of
CMG@Ventures II, LLC, CMG@Ventures III, LLC and @Ventures Management, LLC,
which also are strategic investment and development venture capital
subsidiaries or CMGI affiliates. From 1982 until joining CMGI in 1986, Mr.
Wetherell was a co-founder and President of Softrend, Inc., a microcomputer
software publisher. Mr. Wetherell is also the founder of BookLink Technologies,
Inc., a CMGI subsidiary that was sold to America Online, Inc. in 1994. Mr.
Wetherell also serves as the Chairman of the Board of Directors of Engage
Technologies, Inc., a subsidiary of CMGI.
Craig D. Goldman has served as a Director of NaviSite since March 1998. Mr.
Goldman has served as President and Chief Executive Officer for Cyber
Consulting Services Corp., a technology consulting firm, since March 1996. From
October 1991 to March 1996, Mr. Goldman served with Chase Manhattan Bank as
Senior Vice President and Chief Information Officer. Mr. Goldman served with
Chase Manhattan Bank as Senior Vice President, Technology and Operations from
March 1988 to October 1991, after having started with Chase Manhattan in June
1985. Mr. Goldman also serves as a director of CMGI, Inc., Engage Technologies,
Inc. and PRT Group Inc.
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Andrew J. Hajducky III has served as a Director of NaviSite since February
1997. Mr. Hajducky has served as the Chief Financial Officer and Treasurer of
CMGI, Inc. since October 1995 and as a member of CMG@Ventures I, LLC, a venture
capital firm subsidiary of CMGI, since January 1995. He is also a managing
member of CMG@Ventures II, LLC, CMG@Ventures III, LLC and @Ventures Management,
LLC, which are strategic investment and development venture capital
subsidiaries or CMGI affiliates. From 1990 to October 1995, Mr. Hajducky was
the Entrepreneurial Services Partner of the Merger and Acquisition division of
the public accounting firm of Ernst & Young LLP. From 1983 through 1990, he
held various positions with Arthur Young & Co., which merged with Ernst &
Whinney to form Ernst & Young LLP. Previously, Mr. Hajducky was the Chief
Financial Officer of Mountain International Company/AccuTel, Inc., a
telecommunications and software company. Mr. Hajducky is a Certified Public
Accountant. Mr. Hajducky also serves as a director of Engage Technologies, Inc.
Stephen D.R. Moore has served as a Director of NaviSite since August 1999.
Mr. Moore has served as Chairman and Chief Executive Officer of Stream
International Inc., a provider of outsourced technical support services, since
January 1997. From April 1995 to September 1996, Mr. Moore served as President,
and from September 1996 to January 1997, he served as Chief Operating Officer
of Stream Holdings Inc., a software services firm. Prior to that time, Mr.
Moore served as President of Corporate Software, Inc., an outsource technical
support provider, from May 1992 to April 1995, after having served as its Vice
President, European Operations.
Each executive officer of NaviSite is elected by, and serves at the
discretion of, the board of directors. Each executive officer serves for a term
of one year. There are no family relationships among any of the directors or
executive officers of NaviSite.
Board Committees
NaviSite's board of directors has an audit committee and a compensation
committee. The audit committee determines our accounting policies and practices
and financial reporting and internal control structures, recommends to the
board of directors the appointment of independent auditors to audit our
financial statements each year and confers with the auditors and oversees our
officers for purposes of reviewing our system of internal accounting and
financial controls. The audit committee consists of Messrs. Goldman, Moore and
Hajducky.
The compensation committee of the board of directors is responsible for
determining salaries, incentives and other forms of compensation for officers
and other key employees of NaviSite and administers our incentive compensation
and benefit plans. The compensation committee consists of Messrs. Goldman,
Moore and Wetherell.
Director Compensation
We do not currently pay any cash compensation to members of our board for
attending meetings of the board of directors or committee meetings, but we do
reimburse directors for their reasonable travel expenses incurred in connection
with attending these meetings. Any board member who is not also an officer or
employee of NaviSite, any subsidiary of NaviSite or CMGI is entitled to non-
statutory stock options under our 1998 Director Stock Option Plan.
NaviSite has reserved for issuance 125,000 shares of common stock under the
1998 Director Stock Option Plan. 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. Effective as of October 8, 1999, no
further options will be granted under this plan. Commencing on December 28,
1998, the date that the Director Stock Option Plan was adopted, each non-
employee director of NaviSite was 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
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<PAGE>
Goldman, who was granted an option to purchase 50,000 shares of common stock
pursuant to the terms of the Director Stock Option Plan. The exercise price for
each automatic grant is equal to the fair market value of the common stock at
the time of grant, and each option has 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 vests and becomes 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.
Effective as of October 8, 1999, we terminated the 1998 Director Stock
Option Plan and replaced it with the 1999 Stock Option Plan for Non-Employee
Directors, which was approved and adopted by our board of directors and our
stockholders in October 1999. A total of 250,000 shares of our common stock are
reserved for issuance 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
are 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.
49
<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 $ -- $3,525,497
CMGI 0 100,000 -- --
Robert B. Eisenberg..... NaviSite 224,999 75,001 3,147,736 1,049,264
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 37,500 524,625 524,625
CMGI 0 16,000 -- 1,315,000
NaviNet 23,437 0 38,437 --
Jay S. Seaton........... NaviSite 39,582 60,418 547,419 835,581
CMGI 0 8,000 -- 657,500
J. Andrew Sherman....... NaviSite 49,999 50,001 699,486 699,514
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
initial public offering price of $14.00 per share, minus the applicable
option exercise price, multiplied by the number of shares of common stock
underlying the option. With respect to the CMGI options, the value of
unexercised in-the-money options is based on the difference between
$92.19, which was the closing price of CMGI common stock on July 31, 1999,
and the applicable option exercise price. With respect to the NaviNet
options, the value of unexercised in-the-money options is based on the
difference between $1.65, which was the fair market value per share of the
NaviNet common stock on July 31, 1999, as determined by an independent
third-party valuation consultant, and the applicable option exercise
price.
Employment and Non-Competition Agreements
None of our executive officers has an employment agreement, although all of
our executive officers have entered into agreements that contain non-
disclosure, non-competition and non-solicitation restrictions and covenants,
including a provision prohibiting these officers from competing with NaviSite
during their employment with us and for a period of 12 months after termination
of their employment with us.
In addition, each executive officer is party to an offer letter with CMGI
which sets forth his or her annual salary, annual bonus eligibility, option
grants and other benefits. Joel Rosen's offer letter, dated April 14, 1999,
provides that if he is terminated without cause or there is a substantive
change in his job title, responsibilities or location of employment, or a
reduction in his compensation, following a change of control of either NaviSite
or CMGI, then his options to purchase 534,166 shares of NaviSite common stock
and 100,000 shares of CMGI common stock will immediately become fully vested
and exercisable. Upon completion of this offering, NaviSite is assuming the
obligations applicable to NaviSite under these offer letters.
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 and restated as of October
8, 1999. Under the Equity Incentive Plan, NaviSite is authorized to grant
incentive stock options, non-statutory stock options, stock appreciation rights
and restricted stock awards to employees, directors and consultants of
NaviSite, or any affiliate, who is capable of contributing significantly to our
successful performance. In general, options granted pursuant to the 1998 Equity
Incentive Plan are exercisable within four years of the original grant date.
The board of directors or an appropriate committee of the board has the right,
at its discretion, to accelerate the vesting of any award or provide for cash
payments to the participants in exchange for their awards upon a change of
control of NaviSite. Options are not assignable or transferable except by will
or the laws of descent or distribution. Our board of directors may amend,
suspend or terminate the Equity Incentive Plan at any time, subject to any
required stockholder approval.
As of August 31, 1999, options to purchase an aggregate of 2,564,161 shares
of common stock at a weighted average exercise price of $3.20 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 was approved and adopted by our board
of directors and our stockholders in October 1999, to be effective upon
completion of this offering. The 1999 Employee Stock Purchase Plan provides for
the issuance of a maximum of 50,000 shares of our common stock.
The 1999 Employee Stock Purchase Plan will be administered by the
compensation committee. All employees of NaviSite who have been employed by us
for at least six months and whose customary employment is for more than 20
hours per week and for more than five months in any calendar year are eligible
to participate in the 1999 Employee Stock Purchase Plan. Employees who would
own five percent or more of the total combined voting power or value of
NaviSite's stock immediately after having subscribed for shares under the 1999
Employee Stock Purchase Plan may not participate in the 1999 Employee Stock
Purchase Plan. To participate in the 1999 Employee Stock Purchase Plan, an
employee must authorize us to deduct an amount (not less than one percent nor
more than 10% of a participant's total cash compensation) from his or her pay
during each three-month payment period, with the exception of the first payment
period, which will commence upon the closing of this offering and end on
February 29, 2000. At the end of each payment period, except for the first
payment period following this offering, the participant's funds are used to
purchase shares of our common stock at a price equal to 85% of the lesser of
the last reported sale price of the common stock on the first or last business
day of the payment period. With respect to the first payment period following
this offering, the price will be equal to 85% of the lesser of the per share
public offering price set forth on the cover page of this prospectus or the
last reported sale price of the common stock on the last business day of the
payment period.
401(k) Plan
NaviSite is a participating employer in the 401(k) defined contribution
profit sharing savings and retirement plan sponsored by CMGI. All NaviSite
employees who are at least 21 years of age and have satisfied the necessary
service eligibility requirements, except for nonresident aliens with no United
States source of income, are eligible to participate in the plan. Under our
401(k) plan, a participant employee may elect to reduce his or her current
compensation by up to the lower of 15% or the statutorily prescribed limit
($10,000 in 1999) and have the amount of the reduction contributed to the plan
on the employee's behalf as salary deferral contributions. The 401(k) plan
permits additional discretionary matching contributions by us with respect to
our employees' pre-tax contributions up to the first six percent of each
employee's salary contributed to the plan. The 401(k) plan also permits us to
make discretionary profit sharing contributions to the plan on behalf of our
employees. All contributions to the 401(k) plan by or on behalf of employees
are subject to aggregate annual limits prescribed by the Internal Revenue
Service.
51
<PAGE>
Deferred Compensation Plan
A Deferred Compensation Plan was approved and adopted by our board of
directors in October 1999, to be effective upon completion of this offering.
Under the terms of the deferred compensation plan, NaviSite employees who are
selected by our board of directors (as well as certain of our employees who
previously participated in a deferred compensation plan sponsored by CMGI) will
be able to elect to defer a portion of their compensation for the following
calendar year. Participants in the plan will be able to defer up to 25% of
their salary and 100% of their bonus compensation, which amounts will be paid
out at a later date at the participant's election. NaviSite also may make
discretionary contributions to a participant's account, to which the
participant generally will become entitled after five years of service with us.
NaviSite will maintain a bookkeeping account to track deferred amounts, which
amounts will be credited with gains or losses based on the performance of
deemed investment alternatives made available to participants under the plan.
Compensation Committee Interlocks and Insider Participation
Prior to this offering, we had no separate compensation committee or other
board committee performing equivalent functions. These functions were performed
by our board of directors, which consisted of Joel B. Rosen and Robert B.
Eisenberg, our Chief Executive Officer and President, respectively, David S.
Wetherell, Chairman of the Board, President, Chief Executive Officer and
Secretary of CMGI, Craig D. Goldman, a director of CMGI, and Andrew J. Hajducky
III, Chief Financial Officer and Treasurer of CMGI.
52
<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, which merged with and into CMGI effective
as of October 1, 1999. CMGI will directly own approximately 71.8% of our common
stock upon completion of this offering.
CMGI has the power to elect our entire board of directors and to approve or
disapprove any corporate transactions or other matters submitted to our
stockholders for approval, including the approval of mergers or other
significant corporate transactions. CMGI may exercise its voting power by
written consent, without convening a meeting of the stockholders, meaning that
CMGI will be able to effect a sale or merger of NaviSite without prior notice
to, or the consent of, our other stockholders. CMGI also holds a majority
equity ownership position in many of our customers.
NaviSite and CMGI have entered into or, upon or prior to completion of this
offering, will enter into the present and prospective arrangements and
transactions described below. These agreements were or will be negotiated
between CMGI, as a corporate parent, and NaviSite, its subsidiary, and
therefore are not the result of negotiations between independent parties.
NaviSite and CMGI intend that these agreements and the transactions provided
for in these agreements, taken as a whole, accommodate their respective
interests in a manner that is fair to both NaviSite and CMGI. However, because
of the complex nature of the various relationships among NaviSite, CMGI and
various CMGI affiliates, we cannot assure you that each of the agreements
described below, or the transactions provided for in these agreements, were or
will be effected on terms at least as favorable to NaviSite as NaviSite could
have obtained from unaffiliated third parties.
NaviSite and CMGI or its affiliates may enter into additional or modified
arrangements and transactions in the future. NaviSite, CMGI or its affiliates,
as the case may be, will negotiate the terms of such arrangements and
transactions. Upon or prior to completion of this offering, NaviSite expects to
adopt a policy that all future arrangements between NaviSite and CMGI or its
affiliates, other than routine commercial transactions entered into in the
ordinary course of business, will be on terms that NaviSite believes are no
less favorable to it than the terms NaviSite believes would be available from
unaffiliated parties and must be approved by a majority of NaviSite's directors
who are not employees of CMGI (even though such directors may be less than a
quorum).
The following is a summary of the material arrangements and transactions
between NaviSite and CMGI or its affiliates.
Leases, Construction Contracts and CMGI Guarantees
In connection with our execution of three of our real property leases, CMGI
has provided our landlords with guarantees of all of our obligations under the
leases. In connection with the execution of the lease for our Scotts Valley,
California facility, CMGI guaranteed the full performance of all of our
obligations through the expiration of the lease term. In connection with the
execution of the lease for our new Andover, Massachusetts facility, CMGI
executed an unconditional guaranty of the lease and an accompanying letter of
credit to ensure the full and punctual payment, as well as performance of all
of our obligations, under the lease. CMGI will be released from the Andover
guaranty upon the occurrence of the earlier of the closing of this offering or
the date on which we occupy the premises and begin to pay rent. CMGI also
executed an unconditional and irrevocable guaranty in connection with the
execution of the lease for our new facility in San Jose, California. CMGI will
be released from the San Jose lease guaranty within 15 days of the later of the
closing of this offering and the landlord's receipt of a letter of credit, in
the form specified in the guaranty, in the amount of approximately $2.4
million.
53
<PAGE>
We also currently are finalizing construction contracts in connection with
our new facilities in Andover, Massachusetts and San Jose, California. If we
execute either or both of these contracts prior to the completion of this
offering, CMGI will be required to execute a guarantee on our behalf with
respect to each executed contract. Each contract provides that CMGI will be
released from any related guarantee upon the completion of this offering. In
connection with the construction contract for the new Andover, Massachusetts
facility, we will be required, upon CMGI's release from its guarantee or, if
the contract is executed after the completion of this offering, upon execution
of the contract, to obtain a letter of credit in the amount of the remaining
balance due under the contract, which is currently estimated to be less than
$15.0 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.
Debt Conversion
We have issued a secured convertible demand note to CMGI in exchange for
the cancellation of all intercompany debt incurred by us to CMGI subsequent to
the conversion of CMGI debt into Series A convertible preferred stock and prior
to April 30, 1999. This note also provides for additional advances by CMGI to
us after April 30, 1999. CMGI may elect to convert amounts payable under the
note into Series B convertible preferred stock at any time. Additional
intercompany debt incurred after April 30, 1999 accrues interest at a rate of
seven percent per year, compounded monthly until the day CMGI elects to convert
the debt into shares of Series B convertible preferred stock. The amount of
each borrowing represented by the note is convertible from time to time into
the number of shares of Series B convertible preferred stock equal to one-tenth
of the quotient of:
. the aggregate amount of principal and interest to be so converted,
divided by
. the applicable conversion price for that fiscal quarter.
The conversion price applicable to advances made in any fiscal quarter,
except advances made in the fiscal quarter during which a qualified initial
public offering occurs and advances converted into Series B convertible
preferred stock in the same fiscal quarter in which they were made, is
determined by dividing our total enterprise value as of the fiscal quarter end,
as determined in good faith by our board of directors, by the number of shares
of common stock outstanding on a fully diluted, as-if-converted basis. Each
share of Series B convertible preferred stock issued and outstanding will
convert into ten shares of common stock upon the completion of this offering.
Under this note, intercompany debt in the aggregate amount of approximately
$10,761,000, representing $5,348,000 advanced during the quarter ended January
31, 1999 and an additional $5,413,000 advanced during the quarter ended April
30, 1999, in each case including interest accrued during the applicable fiscal
quarter, was converted into 490,332 shares of Series B convertible preferred
stock (based upon applicable conversion prices of $12.74 and $76.68,
respectively). Effective June 4, 1999, CMGI elected to convert intercompany
debt in the aggregate amount of approximately $3,952,000, representing funds
advanced subsequent to the quarter ended April 30, 1999, into 51,527 shares of
Series B convertible preferred stock (based upon a conversion price of $76.68).
Under the terms of the note, because CMGI elected to convert these advances
prior to the end of the fiscal quarter in which the advances were made, the
applicable conversion price was the conversion price in effect for the
immediately preceding fiscal quarter. Immediately prior to the completion of
this offering, CMGI will convert intercompany debt in the aggregate amount of
approximately $12,257,000, representing funds advanced subsequent to the
quarter ended July 31, 1999, into 87,548 shares of Series B convertible
preferred stock (based upon a conversion price of $140, ten times the initial
public offering price of $14.00 per share). Upon completion of this offering,
the 629,407 shares of Series B convertible preferred stock issued and
outstanding will convert into 6,294,070 shares of common stock. We do not
expect to borrow funds from CMGI after completion of this offering.
54
<PAGE>
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 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.
Under this agreement, CMGI also will agree to make available to us at least
17,800 square feet of space at its headquarters until completion of our new
Andover, Massachusetts facility. We intend to relocate our executive offices to
our new facility upon completion of that facility.
The initial term of this agreement will be one year from the date of the
agreement, with automatic renewals at the end of the initial term and each
renewal term for successive one-year periods. Either party will be permitted to
terminate the facilities and administrative support agreement upon prior
written notice. The facilities and administrative support agreement will
automatically terminate upon the date CMGI owns less than 50% of our
outstanding common stock.
The fees payable by us for the availability of space and other services are
typically determined through an allocation of CMGI's costs based upon the
proportion of our employee headcount to the total headcount of CMGI and other
CMGI affiliates located in the same facility or using the same services. Under
the facilities and administrative support agreement, we will pay CMGI a monthly
fee reflecting the cost of the services provided by CMGI based on the total
number of our employees and consultants on the last day of that month.
In fiscal 1997, fiscal 1998 and fiscal 1999, we paid CMGI $48,000, $289,000
and $1,346,000, respectively, for services similar to those to be provided
under the facilities and administrative support agreement.
Tax Allocation Agreement
Upon 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.
55
<PAGE>
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 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 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.
56
<PAGE>
The chart set forth below lists the CMGI affiliates from which we derived
revenue in excess of $60,000 in each of the last three fiscal years and the
revenue derived from these CMGI affiliates for the fiscal years ended July 31,
1997, 1998 and 1999, as applicable. Our total revenue was $3,361,000,
$4,029,000 and $10,519,000, for the fiscal years ended July 31, 1997, 1998 and
1999, respectively.
<TABLE>
<CAPTION>
Name of affiliate Fiscal 1997(1) Fiscal 1998(1) Fiscal 1999(1)
----------------- -------------- -------------- --------------
<S> <C> <C> <C>
Planet Direct Corporation......... $1,545,948 $1,593,618 $2,307,534
Engage Technologies, Inc.......... 949,046 751,714 1,721,736
ADSmart Corporation............... 456,673 430,248 476,787
InfoMation........................ 158,059 350,312 397,658
Ancestry.com, Inc................. -- -- 535,940
ZineZone Corp.(2)................. -- 117,946 231,218
Vicinity Corporation.............. 236,004 137,226 204,535
Raging Bull, Inc.................. -- -- 288,711
ThingWorld.com.................... -- 66,080 178,190
CMG Direct Corporation(3)......... -- 191,300 115,280
Furniture.com, Inc................ -- -- 213,684
Universal Learning Technology..... -- -- 104,316
MotherNature.com, Inc............. -- -- 88,985
PlanetAll.com, Inc.(4)............ -- 182,495 --
NextMonet.com, Inc. .............. -- -- 63,435
</TABLE>
- --------
(1) Dashes indicate periods in which the listed customers were not CMGI
affiliates, but do not indicate that no revenues were derived in those
periods.
(2) Known as Password Internet Publishing Corp. until February 1999.
(3) All of the issued and outstanding capital stock of CMG Direct Corporation
was sold by CMGI to Marketing Services Group, Inc. in May 1999. CMGI holds
approximately 18% of the outstanding common stock of Marketing Services
Group.
(4) Effective as of August 1998, PlanetAll is no longer a CMGI affiliate.
We also have provided services to CMGI and other CMGI affiliates, including
Lycos, Inc., Nascent Technologies, Inc., NaviNet, Inc., On-Demand Solutions,
Inc., SalesLink Corporation and TicketsLive Corporation. Aggregate sales to
CMGI and these affiliates totaled $15,750, $50,560 and $130,218 for fiscal
1997, fiscal 1998 and fiscal 1999, respectively.
In addition, subsequent to the end of fiscal 1999, CMGI acquired a
controlling interest in AltaVista Company, one of our customers. Our aggregate
sales to AltaVista in fiscal 1999 were $336,625.
Servercast Communications, L.L.C. Acquisition
Term Notes
In connection with our acquisition in July 1998 of Servercast, we issued
four term notes to the members of Servercast in the aggregate principal amount
of $1.0 million, payable on or before January 2, 2000, in exchange for all of
the membership interests in Servercast. CMGI has guaranteed the payment of each
of these term notes. CMGI's guarantee will terminate upon the earliest to occur
of (i) the closing of this offering, (ii) the sale of NaviSite to an acquiror
with a net worth of at least $15 million and (iii) the payment by us of all
amounts owed under the term notes.
One of these term notes, in the principal amount of $279,100, was issued to
Peter C. Kirwan, Jr., our Chief Technology Officer, in exchange for his 27.91%
membership interest in Servercast. The note bears interest at the rate of 5.5%
per year (calculated on the basis of a 365-day year and the actual number of
days elapsed). The note provides that accrued interest will be paid in three
equal installments of $7,675.25 each, to be paid on January 2, 1999, July 2,
1999 and January 2, 2000. The first and second scheduled payments of
57
<PAGE>
$7,675.25 each were made in full on January 2, 1999 and July 2, 1999,
respectively. Mr. Kirwan has agreed that payment of accrued interest or
principal may be offset by claims for indemnification that we may have pursuant
to the terms of the related purchase agreement and that 20% of any principal
amount paid prior to July 1, 2000 shall be delivered into an escrow fund for
the purpose of funding Mr. Kirwan's indemnification obligations to us.
Bonus Agreement
In connection with our acquisition of Servercast, we also entered into a
bonus agreement dated as of July 1, 1998 with Mr. Kirwan. The bonus agreement
provides that Mr. Kirwan will receive an incentive bonus payment if established
targets are met relating to the revenues and operating losses of Servercast for
the one-year period ended July 1, 1999. The maximum amount which Mr. Kirwan
could receive pursuant to the bonus agreement is $231,187. Pursuant to the
terms of the bonus agreement and the related purchase agreement, 20% of any
bonus amount due to Mr. Kirwan as of July 1, 1999 shall be delivered into the
escrow fund described above. In order to be eligible for the incentive bonus
and the return of any escrowed amount, Mr. Kirwan must remain an employee of
NaviSite through July 1, 1999 and July 1, 2000, respectively, unless he either
terminates his employment with just cause or is terminated by us without cause,
in which case he remains entitled to any bonus payments or escrowed amounts
due. Mr. Kirwan remains an employee of NaviSite, and we are currently in the
process of comparing actual revenues and operating losses against the targets
established in the bonus agreement to determine any bonus payment due to Mr.
Kirwan as of July 1, 1999.
Pursuant to the bonus agreement, we also granted Mr. Kirwan non-statutory
stock options to purchase 50,000 shares of our common stock, at an exercise
price of $0.93 per share. Options for one fourth, or 12,500, of these shares
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. Mr. Kirwan has exercised options for the
purchase of 15,624 of these shares.
58
<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 27,191,653 shares of common stock
outstanding upon completion of this offering. Percentage of outstanding shares
of CMGI common stock is based on 114,582,987 shares of common stock outstanding
as of August 26, 1999. In computing the number of shares of common stock
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of August 31, 1999 are
deemed outstanding. These shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of any other person.
Principal Stockholders
The following table sets forth information with respect to the beneficial
ownership of our common stock by our principal stockholders as of August 31,
1999 and as adjusted to reflect the sale of the shares of common stock offered
in this offering. The outstanding shares of common stock shown as held by CMGI
as of August 31, 1999 include shares issued upon completion of the corporate
reorganization of NaviSite Internet Services Corporation, effective as of
October 1, 1999, and conversion of convertible preferred stock held by CMGI as
of August 31, 1999. The percentage ownership of CMGI after this offering
reflects the issuance to CMGI of an aggregate of 875,480 additional shares of
common stock upon the conversion of outstanding Series B convertible preferred
stock.
<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% 71.8%
100 Brickstone Square
Andover, Massachusetts 01810
Dell Computer Corporation ................ 1,095,472(1) 5.3% 4.0%
One Dell Way
Round Rock, Texas 78682
Microsoft Corporation .................... 993,243 4.8% 3.7%
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.
59
<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. Percentage of
outstanding shares after offering for NaviSite reflects the issuance to CMGI of
an aggregate of 875,480 additional shares of common stock upon the conversion
of outstanding Series B convertible preferred 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% 71.8%
Craig D. Goldman......... 0 10,000 * *
Andrew J. Hajducky III... 18,658,120 (1) 0 89.6% 71.8%
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% 72.3%
</TABLE>
<TABLE>
<CAPTION>
CMGI Common Stock
-------------------------------------
Number of
Shares
Subject Percentage of
Number of to Common
Name Shares Options Stock
---- --------- --------- -------------
<S> <C> <C> <C>
Joel B. Rosen........................... 0 0 *
Robert B. Eisenberg..................... 1,142 20,335 *
Barbara H. Fortier...................... 548 4,333 *
Jay S. Seaton........................... 0 2,167 *
J. Andrew Sherman....................... 484 4,333 *
David S. Wetherell...................... 8,466,336 (2) 2,305,888 9.2%
Craig D. Goldman........................ 120,000 75,200 *
Andrew J. Hajducky III.................. 20,752 106,997 *
Stephen D.R. Moore...................... 0 0 *
All current directors and executive
officers as a group (13 persons)...... 8,610,144 (2) 2,526,836 9.5%
</TABLE>
- --------
(1) Consists of shares owned by CMGI on an as-converted basis. Messrs.
Wetherell and Hajducky disclaim beneficial ownership of all 18,658,120
shares owned by CMGI.
(2) Includes 1,701,732 shares held in trust for the benefit of Mr. Wetherell's
minor children and 23,372 shares held by Mr. Wetherell and his wife as
trustees for the David S. Wetherell Charitable Trusts. Mr. Wetherell
disclaims beneficial ownership of the 1,725,104 shares held in trust for
his children and as trustee for the charitable trust.
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and various provisions of
our revised certificate of incorporation and our revised by-laws is a summary.
Statements contained in this prospectus relating to such provisions are not
necessarily complete, and reference is made to the revised certificate of
incorporation and the revised by-laws that will become effective upon the
completion of this offering, copies of which have been filed with the
Securities and Exchange Commission as exhibits to our registration statement of
which this prospectus constitutes a part.
Upon completion of this offering, our authorized capital stock will consist
of 150,000,000 shares of common stock, par value $0.01 per share, and 5,000,000
shares of preferred stock, par value $0.01 per share.
Common Stock
As of August 31, 1999, there were 20,816,173 shares of common stock
outstanding, held of record by four stockholders. Upon completion of this
offering, there will be 27,191,653 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.
61
<PAGE>
We have no current plans to issue any preferred stock. However, the
issuance of preferred stock or of rights to purchase preferred stock could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, a majority of our
outstanding common stock.
Registration Rights
Under the terms of the Series C and the Series D convertible preferred
stock purchase agreements entered into between us and each of the Series C
stockholder and the Series D stockholder, respectively, effective upon
completion of this offering, assuming the conversion of the preferred stock
held by the Series C stockholder and the Series D stockholder into common
stock, these stockholders, together with their permitted assignees,
collectively the holders of an aggregate of 2,088,715 shares of our common
stock, will have the right to register some or all of their shares under the
Securities Act under specified conditions. At any time after the six-month
anniversary of the closing of this offering, the holders of at least 50% of the
Series C shares or at least 50% of the Series D shares, as applicable, are
entitled to demand that we file a registration statement under the Securities
Act covering the registration of some or all of their shares, subject to
specified limitations. Under these demand registration rights, we are only
obligated to effect two registrations for each of the Series C stockholder,
together with its permitted assignees, and the Series D stockholder, together
with its permitted assignees. In addition, pursuant to the terms of the Series
C convertible preferred stock purchase agreement and the Series D convertible
preferred stock purchase agreement, after the completion of this offering, the
Series C and Series D stockholders will have unlimited incidental registration
rights in the event that we propose to register any shares of common stock
under the Securities Act, either for our own account or for the account of
other security holders. The Series C and Series D stockholders having
incidental registration rights are entitled to receive notice of any such
registration and are entitled to include their shares in the registration,
subject to specified limitations.
In addition, at any time after the earlier of the one-year anniversary of
the closing of this offering or such time as we become eligible to file a
registration statement on Form S-3, the holders of at least 50% of the Series C
shares or at least 50% of the Series D shares, as applicable, are entitled to
require us to file a registration statement on Form S-3 covering their shares
of common stock. We will not be obligated to effect more than two Form S-3
registrations on behalf of either the Series C stockholder or the Series D
stockholder. These registration rights are subject to customary conditions and
limitations, including the right of the underwriters of an offering to limit
the number of shares of common stock held by security holders with registration
rights to be included in that registration. We also may defer a request for
registration for a period of not more than 90 days, subject to specified
conditions, if our board of directors determines that the requested
registration would be materially detrimental to us and our stockholders. We
generally are required to bear all of the expenses of all of the registrations
effected under the convertible preferred stock purchase agreements, excluding
underwriting discounts and commissions.
The registration of any of the shares of common stock held by stockholders
with registration rights would result in these shares becoming freely tradeable
without restriction under the Securities Act immediately upon effectiveness of
that registration statement. Information regarding the registration rights of
CMGI is included in this prospectus under the heading "Certain Transactions--
Relationship and Transactions Between NaviSite and CMGI, Inc.--Investor Rights
Agreement."
Participation Rights
Under the terms of the Series C convertible preferred stock purchase
agreement and the Series D convertible preferred stock purchase agreement
entered into between us and each of the Series C stockholder and the Series D
stockholder, respectively, we agreed that, in connection with certain
underwritten public offerings of our common stock, which would include this
offering assuming the conversion of the preferred stock held by the Series C
and the Series D stockholders into common stock, we would use all commercially
reasonable efforts to require that the underwriters offer to each of the Series
C stockholder and the Series D stockholder shares of the common stock to be
sold in the offering. Under these agreements, each of the Series C stockholder
and the Series D stockholder would be permitted to purchase, at the gross price
per share
62
<PAGE>
negotiated by us with the underwriters of the offering as reflected in the
final prospectus, up to an aggregate of 0.5% of the outstanding shares of our
common stock on a fully diluted basis, after giving effect to the sale of
shares of common stock in the offering. In connection with an offering to which
these participation rights are applicable, we agreed to deliver or cause to be
delivered a copy of the preliminary prospectus for the offering to both the
Series C stockholder and the Series D stockholder simultaneously with the
distribution of same to the public at large by the underwriters. The Series C
stockholder and the Series D stockholder each then are entitled to exercise its
respective right of participation by delivering written notice to us not later
than five business days prior to the pricing of the offering. The underwriters
of the offering then are entitled to reduce the number of shares of common
stock to be offered to the Series C stockholder and the Series D stockholder to
the extent deemed necessary in the underwriters' reasonable judgment to ensure
the success of such offering or to comply with applicable rules and
regulations. Because, notwithstanding our commercially reasonable efforts, it
is not possible under applicable law to sell shares to the Series C stockholder
and Series D stockholders in this offering, the Series C stockholder and the
Series D stockholder have waived their respective rights to participate.
Delaware Anti-Takeover Statute
Our revised certificate of incorporation contains a provision expressly
electing not to be governed by Section 203 of the Delaware General Corporation
Law. In general, Section 203 restricts some business combinations involving
interested stockholders or their affiliates. An interested stockholder is
defined as any person or entity that is the beneficial owner of at least 15% of
a corporation's voting stock or is an affiliate or associate of the corporation
or the owner of 15% or more of the outstanding voting stock of the corporation
at any time in the past three years. Because of this election, Section 203 will
not apply to us.
Limitation of Liability and Indemnification
Our revised certificate of incorporation limits the liability of our
directors to the maximum extent permitted by Delaware law. Delaware law
provides that directors will not be personally liable for monetary damages for
breach of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This provision has no effect on any non-monetary remedies that may be available
to us or our stockholders, nor does it relieve us or our officers or directors
from compliance with federal or state securities laws.
Our revised certificate of incorporation also generally provides that we
will indemnify, to the fullest extent permitted by Section 145 of the Delaware
General Corporation Law, any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit,
investigation, administrative hearing or any other proceeding by reason of the
fact that he or she is or was a director or officer of ours, or is or was
serving at our request as a director, officer, employee or agent of another
entity, against expenses incurred by him or her in connection with that
proceeding. An officer or director will not be entitled to indemnification by
us if:
. the officer or director did not act in good faith and in a manner
reasonably believed to be in, or not opposed to, our best interests;
or
. with respect to any criminal action or proceeding, the officer or
director had reasonable cause to believe his or her conduct was
unlawful.
In addition, we plan to enter into indemnification agreements with our
directors containing provisions which may require us, among other things, to
indemnify our directors against various liabilities that may arise by virtue of
their status or service as directors and to advance their expenses incurred as
a result of any
63
<PAGE>
proceeding against them as to which they could be indemnified. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling NaviSite pursuant to
the foregoing provisions or otherwise, NaviSite has been informed that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
NaviSite's revised certificate of incorporation also permits NaviSite to
secure insurance on behalf of any officer or director for any liability arising
out of his or her actions in such capacity, regardless of whether our revised
certificate of incorporation would otherwise permit indemnification for that
liability. Our officers and directors are currently insured under a policy
procured by CMGI that provides coverage against losses arising from claims
against them for any actual or alleged act, omission, misstatement, misleading
statement, neglect, error or breach of duty by them in their capacity as
officers or directors of NaviSite. We also have obtained our own liability
insurance for our officers and directors effective as of September 20, 1999.
At the present time, there is no pending litigation or proceeding involving
any director, officer, employee or agent of NaviSite in which indemnification
will be required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is BankBoston, N.A.
64
<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, we will have an aggregate of 27,212,024
shares of common stock outstanding (including 20,371 shares issued in October
1999 upon the 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 21,712,024 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 21,662,024 shares in the aggregate upon completion of
this offering (including 20,371 shares issued in October 1999 upon the exercise
of outstanding options), 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, 39,709 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 272,120 shares upon completion of this
offering (including 20,371 shares issued in October 1999 upon the
exercise of outstanding options); or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of
a notice on Form 144 with respect to such sale, subject to the
restrictions specified in Rule 144.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about us.
Commencing 90 days after the date of this prospectus, 50,000 shares not subject
to a lock-up agreement will be available for resale to the public in accordance
with Rule 144.
Rule 144(k)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years is entitled to sell such
shares under Rule 144(k) without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, Rule 144(k) shares may be sold immediately upon
completion of this offering. Immediately upon completion of this offering, no
outstanding shares may be sold under Rule 144(k).
65
<PAGE>
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchase shares from us in
connection with a compensatory stock plan or other written agreement are
eligible to resell such shares 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance with various
restrictions, including the holding period, contained in Rule 144.
Stock Options
As of August 31, 1999, options to purchase a total of 2,639,161 shares of
common stock were outstanding, of which 690,426 were then exercisable. Upon
completion of this offering, we intend to file a registration statement to
register for resale an aggregate of 5,916,841 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. All holders of outstanding options have entered into
lock-up agreements.
We have agreed not to sell or otherwise dispose of any shares of common
stock during the 180-day period following the date of the prospectus, except we
may issue and grant options to purchase shares of common stock under the 1998
Equity Incentive Plan, the 1998 Director Stock Option Plan, the 1999 Stock
Option Plan for Non-Employee Directors and the 1999 Employee Stock Purchase
Plan. In addition, we may issue shares of common stock in connection with an
acquisition of another company if the terms of such issuance provide that the
common stock so issued shall not be resold prior to the expiration of the 180-
day lock-up period.
Registration Rights
Upon completion of this offering, under specified circumstances and subject
to customary conditions, the holders of an aggregate of 21,622,315 shares of
our common stock, including CMGI, which will directly own approximately
19,533,600 shares upon completion of this offering, or their permitted
assignees, will be entitled to rights with respect to the registration under
the Securities Act of some or all of their shares, subject to the 180-day lock-
up period described above. Under the agreements providing for these
registration rights, these stockholders are subject to lock-up periods of not
more than 180 days following the date of this prospectus or any subsequent
prospectus. A more detailed discussion of these registration rights is included
in this prospectus under the headings "Certain Transactions--Relationship and
Transactions Between NaviSite and CMGI, Inc.--Investor Rights Agreement" and
"Description of Capital Stock--Registration Rights."
66
<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.................................. 2,295,000
Hambrecht & Quist LLC.............................................. 1,530,000
FAC/Equities, a division of First Albany Corporation .............. 1,275,000
Prudential Securities Incorporated................................. 100,000
E*trade Securities, Inc............................................ 75,000
Raymond James & Associates, Inc.................................... 75,000
C.E. Unterberg, Towbin............................................. 75,000
Wit Capital Corporation............................................ 75,000
---------
Total........................................................... 5,550,000
=========
</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 $0.60 per share, of which $0.10 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 $88,550,000, $6,198,500
and $82,351,500, respectively. The underwriting discount and commission per
share is equal to the public offering price per share of common stock less the
amount paid by the underwriters to us per share of common stock.
NaviSite estimates total expenses payable by us in connection with this
offering, other than the underwriting discounts and commissions referred to
above, will be approximately $1.6 million.
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and us against various civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements. Each executive officer and director and substantially
all of our stockholders have agreed, during the period of 180 days after the
date of this prospectus, subject to various exceptions, not to offer to sell,
contract to sell, or otherwise sell, dispose of, loan, pledge or grant any
rights with respect to any
67
<PAGE>
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
portion of securities subject to the lock-up agreements. There are no existing
agreements between the representatives and any of our stockholders who have
executed a lock-up agreement providing consent to the sale of shares prior to
the expiration of the lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of BancBoston Robertson Stephens Inc.,
subject to various exceptions:
. consent to the disposition of any shares held by stockholders subject
to lock-up agreements prior to the expiration of the lock-up period; or
. issue, sell, contract to sell, or otherwise dispose of, any shares of
common stock, any options to purchase any shares of common stock or any
securities convertible into, exercisable for or exchangeable for shares
of common stock other than our sale of shares in this offering, the
issuance of our common stock upon the exercise of outstanding options,
the issuance of options under existing stock option and incentive plans
provided the options do not vest prior to the expiration of the lock-up
period and the issuance of our common stock in connection with an
acquisition of another company if the terms of such issuance provide
that the common stock so issued shall be subject to the terms of the
lock-up agreement. Please refer to the information in this prospectus
under the heading "Shares Eligible for Future Sale."
The underwriters have advised us that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority.
Public Offering Price. Prior to this offering, there has been no public
market for the common stock. Consequently, the public offering price for the
common stock offered by this prospectus has been determined through
negotiations among the representatives and us. Among the factors considered in
such negotiations, the primary factors were 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
68
<PAGE>
provided on any other Web site maintained by Wit Capital is not part of this
prospectus and has not been approved or endorsed by NaviSite or any underwriter
and should not be relied upon by prospective investors.
Participation Rights. Assuming the conversion into common stock of our
preferred stock held by Dell and Microsoft, we have agreed to use all
commercially reasonable efforts to require that the underwriters offer to Dell
and Microsoft in this offering up to an aggregate of 0.5% of the outstanding
shares of our common stock, calculated on a fully diluted basis, after giving
effect to the sale of shares of common stock in this offering. Because,
notwithstanding our commercially reasonable efforts, it is not possible under
applicable law to sell shares to Dell and Microsoft in this offering, Dell and
Microsoft have waived their respective rights to participate.
Listing. The common stock has been approved for quotation on the Nasdaq
National Market under the symbol "NAVI."
Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Act, some persons participating in this
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, that may have the
effect of stabilizing or maintaining the market price of the common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of shares of common stock on
behalf of the underwriters for the purpose of fixing or maintaining the price
of the common stock. A "syndicate covering transaction" is the bid for or the
purchase of common stock on behalf of the underwriters to reduce a short
position incurred by the underwriters in connection with this offering. A
"penalty bid" is an arrangement permitting the representatives to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with this offering if the common stock originally sold by such
underwriter or syndicate member is purchased by the representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such underwriter or syndicate member. The representatives have advised us that
these transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, Boston, Massachusetts.
Various legal matters in connection with this offering will be passed upon for
the underwriters by Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of the Company as of July 31, 1998
and 1999, and for each of the years in the three-year period ended July 31,
1999, have been included in this prospectus and in the registration statement,
of which this prospectus is a part, in reliance on the reports of KPMG LLP,
independent auditors, appearing elsewhere herein, and upon the authority of
said firm as experts in auditing and accounting.
The financial statements of Servercast Communications, L.L.C., as of
December 31, 1997 and June 30, 1998, and for the period from inception
(February 6, 1997) through December 31, 1997 and for the six months ended June
30, 1998, have been included in this prospectus and in the registration
statement, of which this prospectus is a part, in reliance on the report of
KPMG LLP, independent auditors, appearing elsewhere herein, and upon the
authority of said firm as experts in auditing and accounting.
69
<PAGE>
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.
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.
70
<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-23
Balance Sheets as of December 31, 1997 and June 30, 1998.................. F-24
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-25
Statements of Members' Equity (Deficit) for the period from inception
(February 6, 1997) through December 31, 1997 and for the six months
ended June 30, 1998..................................................... F-26
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-27
Notes to Financial Statements............................................. F-28
Unaudited Pro Forma Combined Condensed Financial Data for NaviSite, Inc.
and Servercast Communications, L.L.C.
Unaudited Pro Forma Combined Condensed Statement of Operations for the
year ended July 31, 1998................................................ F-32
Notes To Unaudited Pro Forma Combined Condensed Statement of Operations... F-32
</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.
/s/ KPMG LLP
KPMG LLP
August 27, 1999, except
as to Note 14, which is
as of October 8, 1999
Boston, Massachusetts
F-2
<PAGE>
NAVISITE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, Pro Forma
------------------ July 31,
1998 1999 1999
-------- -------- ---------
(In thousands, except
par value)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ -- $ 3,352
Accounts receivable, less allowance for
doubtful accounts of $7 and $262 at July 31,
1998 and 1999, respectively.................. 489 1,881
Due from CMGI................................. -- 77
Prepaid expenses.............................. 444 628
Deferred IPO costs............................ -- 831
-------- --------
Total current assets............................ 933 6,769
-------- --------
Property and equipment, net..................... 3,392 13,159
Deposits........................................ 157 389
Goodwill, net of accumulated amortization of $17
and $220 at July 31, 1998 and 1999,
respectively................................... 997 794
-------- --------
Total assets.................................... $ 5,479 $ 21,111
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Debt to CMGI.................................. $ 11,439 $ --
Accounts payable.............................. 728 2,224
Accrued expenses and deferred revenue......... 1,410 3,963
Capital lease obligations, current portion.... 61 229
Software vendor payable, current portion ..... 817 708
Notes payable, current portion................ -- 1,000
-------- --------
Total current liabilities....................... 14,455 8,124
-------- --------
Capital lease obligations, less current
portion........................................ 90 178
Software vendor payable, less current portion... -- 1,757
Notes payable, less current portion............. 1,000 --
-------- --------
Total liabilities............................... 15,545 10,059
-------- --------
Series C Convertible Redeemable Preferred
Stock, $.01 par value, 1,095 and 0 shares
issued and outstanding at July 31, 1999 and
July 31, 1999 (pro forma), respectively (at
liquidation value)........................... -- 8,088 --
Series D Convertible Redeemable Preferred
Stock, $.01 par value, 993 and 0 shares
issued and outstanding at July 31, 1999 and
July 31, 1999 (pro forma), respectively (at
liquidation value)........................... -- 7,333 --
-------- -------- --------
Total redeemable preferred stock................ -- 15,421 --
-------- -------- --------
Commitments and contingencies
Stockholders' equity (deficit):
Series A Convertible Preferred Stock, $.01 par
value, 1,324 shares authorized; 1,324 and 0
shares issued and outstanding at July 31,
1999 and July 31, 1999 (pro forma),
respectively (liquidating preference of
$16,409)..................................... -- 13 --
Series B Convertible Preferred Stock, $.01 par
value, 1,000 shares authorized; 542 and 0
shares issued and outstanding at July 31,
1999 and July 31, 1999 (pro forma),
respectively (liquidating preference of
$15,039)..................................... -- 5 --
Common Stock, $.01 par value, 30,000 shares
authorized; 8,051, 69 and 20,816 shares
issued and outstanding at July 31, 1998, July
31, 1999, and July 31, 1999 (pro forma),
respectively................................. 81 1 208
Additional paid-in capital.................... -- 30,291 45,523
Accumulated deficit........................... (10,147) (34,679) (34,679)
-------- -------- --------
Total stockholders' equity (deficit)............ (10,066) (4,369) $ 11,052
-------- -------- ========
Total liabilities and stockholders' equity
(deficit)...................................... $ 5,479 $ 21,111
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NAVISITE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended July 31,
----------------------------------------
1997 1998 1999
------------ ------------ -------------
(In thousands, except per share data)
<S> <C> <C> <C>
Revenue:
Revenue........................... $ -- $ 158 $ 3,461
Revenue, related parties.......... 3,361 3,871 7,058
----------- ------------ -------------
Total revenue.................. 3,361 4,029 10,519
Cost of revenue..................... 3,494 8,876 20,338
----------- ------------ -------------
Gross profit (loss)............... (133) (4,847) (9,819)
----------- ------------ -------------
Operating expenses:
Selling and marketing............. 347 2,530 6,888
General and administrative........ 467 1,412 4,823
Product development............... -- 287 2,620
----------- ------------ -------------
Total operating expenses....... 814 4,229 14,331
----------- ------------ -------------
Loss from operations................ (947) (9,076) (24,150)
Other income (expense):
Interest expense, net............. (1) (85) (347)
Other expense, net................ -- (11) (35)
----------- ------------ -------------
Net loss............................ (948) (9,172) (24,532)
Accretion of dividends on Series C
and D Convertible Redeemable
Preferred Stock................... -- -- (172)
----------- ------------ -------------
Net loss applicable to common
stockholders...................... $ (948) $ (9,172) $ (24,704)
=========== ============ =============
Basic and diluted net loss per
common share...................... $ (0.24) $ (1.14) $ (7.41)
=========== ============ =============
Basic and diluted weighted average
number of common shares
outstanding....................... 4,000 8,017 3,332
=========== ============ =============
Unaudited pro forma basic and
diluted net loss per share........ $ (1.51)
=============
Pro forma weighted average number of
basic and diluted shares
outstanding....................... 16,407
=============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NAVISITE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Series B
Series A Convertible
Convertible Preferred
Preferred Stock Stock Common Stock Additional
---------------- ------------- --------------- Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Shares Amount Capital Deficit Equity (Deficit)
-------- ------- ------ ------ ------- ------ ---------- ----------- ----------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at August 1,
1996................... -- $ -- -- $ -- -- $ -- $ -- $ (27) $ (27)
Issuance of common
stock................ -- -- -- -- 8,000 80 -- -- 80
Net loss.............. -- -- -- -- -- -- -- (948) (948)
-------- ------- ---- ----- ------- ----- ------- -------- --------
Balance at July 31,
1997................... -- -- -- -- 8,000 80 -- (975) (895)
Exercise of stock
options.............. -- -- -- -- 51 1 -- -- 1
Net loss.............. -- -- -- -- -- -- -- (9,172) (9,172)
-------- ------- ---- ----- ------- ----- ------- -------- --------
Balance at July 31,
1998................... -- -- -- -- 8,051 81 -- (10,147) (10,066)
Reorganization........ 1,324 13 -- -- (8,000) (80) 15,755 -- 15,688
Conversion of Debt to
CMGI into Series B
Convertible Preferred
Stock................ -- -- 542 5 -- -- 14,708 -- 14,713
Exercise of stock
options.............. -- -- -- -- 18 -- -- -- --
Accretion of dividends
on Series C and D
Convertible
Redeemable Preferred
Stock................ -- -- -- -- -- -- (172) -- (172)
Net loss.............. -- -- -- -- -- -- -- (24,532) (24,532)
-------- ------- ---- ----- ------- ----- ------- -------- --------
Balance at July 31, 1999
....................... 1,324 $ 13 542 $ 5 69 $ 1 $30,291 $(34,679) $ (4,369)
======== ======= ==== ===== ======= ===== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NAVISITE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended July 31,
--------------------------
1997 1998 1999
------- ------- --------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $ (948) $(9,172) $(24,532)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization.................... 126 574 2,081
Loss on disposal of assets....................... -- 11 39
Provision for bad debts.......................... -- 8 275
Changes in operating assets and liabilities, net
of impact of acquisition in 1998:
Accounts receivable............................. (245) (155) (1,667)
Due from CMGI .................................. -- -- (77)
Prepaid expenses................................ (94) (334) 739
Deferred IPO costs.............................. -- -- (335)
Deposits........................................ (114) (43) (232)
Accounts payable................................ 544 (17) 1,000
Accrued expenses................................ 87 1,271 2,553
------- ------- --------
Net cash used for operating activities........ (644) (7,857) (20,156)
------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment............... (1,553) (1,181) (9,767)
Acquisition of business........................... -- (45) --
------- ------- --------
Net cash used for investing activities........ (1,553) (1,226) (9,767)
------- ------- --------
Cash flows from financing activities:
Proceeds from increase in debt to CMGI, net....... 2,197 9,166 18,962
Proceeds from issuance of Series C and D
Convertible Redeemable Preferred Stock, net of
financing costs of $109 and $99, respectively... -- -- 15,249
Proceeds from exercise of stock options........... -- 1 --
Payments of capital lease obligations............. -- (46) (122)
Payments of software vendor obligations........... -- (38) (814)
------- ------- --------
Net cash provided by financing activities..... 2,197 9,083 33,275
------- ------- --------
Net increase in cash............................... -- -- 3,352
Cash, beginning of period.......................... -- -- --
------- ------- --------
Cash, end of period................................ $ -- $ -- $ 3,352
======= ======= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest........................................... $ -- $ 15 $ 77
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997, 1998 and 1999
(1) Description of Business
NaviSite, Inc. (the "Company") is a leading provider of business critical
Internet outsourcing solutions, specializing in high-end Web hosting and
application services for companies conducting business on the Internet.
Substantially all revenues are generated from customers in the United States.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The Company is a majority owned subsidiary of CMGI, Inc. ("CMGI" or
"Parent"). The Company commenced operations in July 1996 and was incorporated
on February 3, 1997 as CMG Information Technology, Inc. (subsequently renamed
NaviSite Internet Services Corporation). On December 28, 1998, the assets and
liabilities of the Company were contributed to a newly-formed subsidiary,
NaviSite, Inc. The assets and liabilities were recorded at historical amounts
as the entities were under common control. The accompanying consolidated
financial statements, which have been prepared as if the Company had operated
as a separate stand-alone entity for all periods presented, include only
revenue and expenses attributable to the Company since it commenced operations
in July 1996.
The consolidated financial statements include certain allocations from CMGI
for certain general and administrative expenses such as rent, legal services,
insurance, and employee benefits. Allocations are based primarily on headcount.
Management believes that the method used to allocate the costs and expenses is
reasonable; however, such allocated amounts may or may not necessarily be
indicative of what actual expenses would have been incurred had the Company
operated independently of CMGI.
(b) Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiary, Servercast Communications, L.L.C.
("Servercast") after elimination of all significant intercompany balances and
transactions.
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
(d) Revenue Recognition
Revenue consists of monthly fees for server hosting, systems
administration, application rentals and Web site management services. Revenue
(other than installation fees) is generally billed and recognized over the term
of the contract, generally one year, based on actual usage. Installation fees
are typically recognized at the time that installation occurs. Payments
received in advance of providing services are deferred until the period such
services are provided.
F-7
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
(e) Cash
Under an arrangement with CMGI, the Company maintained a zero balance cash
account. Cash required by the Company for the funding of its operations was
provided as needed with a corresponding increase to the "Debt to CMGI" account.
Customer receipts and other cash receipts of the Company were remitted to CMGI
upon receipt by the Company and serve to reduce the "Debt to CMGI" account.
During fiscal 1998, non-cash investing activities included the acquisition
of Servercast (see note 4) in exchange for term notes totaling $1,000,000.
During fiscal 1999, non-cash financing activities included the issuance of
1,323,953 shares of the Company's Series A Convertible Preferred Stock ("Series
A Preferred Stock") in exchange for 8,000,000 shares of the Company's common
stock and $15,767,600 reduction in debt to CMGI and the issuance of 541,859
shares of the Company's Series B Convertible Preferred Stock ("Series B
Preferred Stock") in exchange for a $14,713,000 reduction in debt to CMGI (see
note 9). Non-cash financing activities also included a software licensing
arrangement, including services and maintenance of $923,000, for an aggregate
of $2.5 million, payable over a three-year period. The Company has recorded
deferred IPO costs of $496,000, which are included in accrued expenses at July
31, 1999.
The Company purchased $195,000 and $378,000 of equipment under capital
lease obligations during the fiscal years ended July 31, 1998 and 1999,
respectively.
(f) Software Development Costs
Software development costs are accounted for under Statement of Financial
Accounting Standard ("SFAS") No. 86, Accounting for Costs of Computer Software
to be Sold, Leased or Otherwise Marketed ("SFAS 86"). Capitalization of
software development costs commences upon the establishment of technological
feasibility. To date, all such amounts have been insignificant, and,
accordingly, the Company has charged all such costs to product development
expense.
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements and assets acquired under capital leases are amortized
using the straight-line method over the shorter of the lease term or estimated
useful life of the asset. Expenditures for maintenance and repairs are charged
to expense as incurred.
(h) Goodwill
Goodwill relates to the Company's purchase of its wholly owned subsidiary,
Servercast, in July 1998 (see note 4). Such costs are being amortized on a
straight-line basis over five years, the period expected to be benefited.
(i) Accounting for Impairment of Long-Lived Assets
The Company assesses the need to record impairment losses on long-lived
assets used in operations when indicators of impairment are present. On an
ongoing basis, management reviews the value and period of amortization or
depreciation of long-lived assets, including goodwill. During this review, the
significant assumptions used in determining the original cost of long-lived
assets are reevaluated. Although the
F-8
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
assumptions may vary from transaction to transaction, they generally include
revenue growth, operating results, cash flows and other indicators of value.
Management then determines whether there has been a permanent impairment of the
value of long-lived assets by comparing future undiscounted cash flows to the
asset's carrying value. If the estimated future undiscounted cash flows exceed
the carrying value of the asset, a loss is recorded as the excess of the
asset's carrying value over fair value.
(j) Income Taxes
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The Company is currently greater than 80% owned by CMGI, and as
such, CMGI realizes the full benefit of all federal and part of the state net
operating losses that have been incurred by the Company. Therefore, such net
operating losses incurred by the Company will have no future benefit to the
Company. The tax sharing agreement between the Company and CMGI requires the
Company to reimburse CMGI for the amounts it contributes to the consolidated
tax liability of the CMGI group; however, under the policy, CMGI is not
obligated to reimburse the Company for any losses utilized in the consolidated
CMGI group.
(k) Advertising Costs
The Company recognizes advertising costs as incurred. The Company did not
incur any advertising costs during fiscal 1997. Advertising expense was
approximately $266,000 and $417,000 for the fiscal years ended July 31, 1998
and 1999, respectively.
(l) Stock-Based Compensation Plans
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). As permitted by SFAS 123, the Company measures
compensation cost in accordance with Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB No. 25"), and related
interpretations. Accordingly, no accounting recognition is given to stock
options granted at fair market value until they are exercised. Upon exercise,
net proceeds, including income tax benefits realized, are credited to equity.
Therefore, the adoption of SFAS 123 was not material to the Company's financial
condition or results of operations; however, the pro forma impact on earnings
has been disclosed in the notes to the Consolidated Financial Statements as
required by SFAS 123 (see note 10).
(m) Historical and Unaudited Pro Forma Basic and Diluted Net Loss per Share
The Company has adopted SFAS No. 128, Earnings Per Share ("SFAS 128"). In
accordance with SFAS No. 128, basic earnings (loss) per share is computed using
the weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share is computed using the weighted average number
of common and dilutive common equivalent shares outstanding during the period,
using either the "as-if-converted" method for convertible preferred stock or
the treasury stock method for options, unless such amounts are anti-dilutive.
F-9
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
As described in note 9, conversion of all preferred stock and amounts due
to CMGI, if any, outstanding at July 1, 1999, 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>
See also Note 14.
(n) Segment Reporting
The Company has adopted the provisions of SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information ("SFAS 131"), effective
August 1, 1998. SFAS 131 establishes standards for the way that public business
enterprises report selected information about operating segments in annual and
interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS 131 requires the use of the "management approach" in disclosing segment
information, based largely on how senior management generally analyzes the
business operations. The Company currently operates in only one segment, and as
such, no additional disclosures are required.
(o) New Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AcSEC") issued Statement of
Position 98-1, "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires the capitalization
of certain internal costs related to the implementation of computer software
obtained for internal use. The Company is required to adopt this standard in
the first quarter of fiscal year 2000, and expects that the adoption of SOP 98-
1 will not have a material impact on its financial position or its results of
operations.
In April 1998, the AcSEC issued Statement of Position 98-5, "Reporting
Costs of Start-Up Activities" ("SOP 98-5"). Under SOP 98-5, the cost of start-
up activities should be expensed as incurred. Start-up activities are broadly
defined as those one-time activities related to opening a new facility,
introducing a new product or service, conducting business in a new territory,
conducting business with a new class of customer, commencing some new operation
or organizing a new entity. SOP 98-5 is effective for the Company's fiscal 2000
consolidated financial statements. The Company does not expect its adoption to
have a material impact on its financial position or results of operations.
F-10
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as "derivatives") and for hedging activities. SFAS
133 requires the recognition of all derivatives as either assets or liabilities
in the statement of financial position and the measurement of those instruments
at fair value. The Company is required to adopt this standard in the first
quarter of fiscal year 2001 pursuant to SFAS No. 137 (issued in June 1999),
which delays the adoption of SFAS 133 until that time. The Company expects that
the adoption of SFAS 133 will not have a material impact on the its financial
position or its results of operations.
(p) Deferred IPO Costs
The Company has deferred $831,000 of direct and incremental costs
associated with its initial public offering. Upon completion of the offering,
such amounts will be recorded as a reduction of the proceeds raised in the
offering. If the offering is unsuccessful, all deferred IPO costs will be
charged to operations.
(3) Property and Equipment
<TABLE>
<CAPTION>
July 31,
Estimated ---------------
Useful Life 1998 1999
-------------------------- ------ -------
(In thousands)
<S> <C> <C> <C>
Office furniture and equipment.... 5 years $ 232 $ 341
Computer equipment................ 3 years 1,197 2,520
Software licenses................. 3 years or life-of-license 1,390 4,213
Leasehold improvements............ 4 years or life-of-lease 1,256 2,760
Leasehold improvements in progress
................................ -- 5,838
------ -------
4,075 15,672
Less: Accumulated depreciation and
amortization.................... (683) (2,513)
------ -------
$3,392 $13,159
====== =======
</TABLE>
The cost and related accumulated amortization of property and equipment
held under capital leases is as follows:
<TABLE>
<CAPTION>
July 31,
-----------
1998 1999
----- -----
(In
thousands)
<S> <C> <C>
Cost............................................................ $ 195 $ 573
Accumulated amortization........................................ 60 186
----- -----
$ 135 $ 387
===== =====
</TABLE>
F-11
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
(4) Acquisition of Servercast Communications, L.L.C.
In July 1998, the Company acquired Servercast Communications, L.L.C.
("Servercast"), a leading provider of high-performance Internet outsourcing
solutions. The Company issued $1,000,000 in term notes with principal payable
on January 2, 2000. CMGI has guaranteed the payment of these term notes.
Interest accrues at the rate of 5.5% and is payable in three equal installments
on January 2, 1999, July 2, 1999 and January 2, 2000. The total purchase price
for Servercast was valued at $1,045,000, including acquisition costs of
$20,000, and bridge notes receivable of $25,000.
Total purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Working capital deficit ............. $ (140)
Property and equipment............... 171
Goodwill............................. 1,014
------
Purchase price....................... $1,045
======
</TABLE>
The acquisition has been accounted for using the purchase method, and,
accordingly, the purchase price has been allocated to the assets purchased and
liabilities assumed based upon their fair values at the dates of acquisition.
The results of operations of Servercast have been included in the Company's
consolidated financial statements from July 1, 1998.
The portion of the purchase price allocated to goodwill is being amortized
on a straight-line basis over five years. Amortization of goodwill resulting
from the acquisition of Servercast was approximately $17,000 for the one month
period in the fiscal year ended July 31, 1998 in which Servercast was owned by
the Company and $203,000 for the year ended July 31, 1999.
The following table represents the unaudited pro forma results of
operations of the Company for the years ended July 31, 1997 and 1998, as if the
Servercast purchase had occurred at the beginning of the respective periods.
These pro forma results include adjustments for the amortization of goodwill
and increased interest expense on debt related to the acquisition. They have
been prepared for comparative purposes only and do not purport to be indicative
of what would have occurred had the acquisition been made at the beginning of
the respective periods or of results that may occur in the future.
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 1997 July 31, 1998
------------- -------------
(unaudited)
(In thousands)
<S> <C> <C>
Revenues....................................... $ 3,640 $ 4,390
======= =======
Net loss....................................... (1,437) (9,704)
======= =======
Basic and diluted net loss per common share ... $ (0.36) $ (1.21)
======= =======
Basic and diluted weighted average number of
common shares outstanding ................... 4,000 8,017
======= =======
</TABLE>
F-12
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
(5) Debt to CMGI
Commencing in February 1998, advances made by CMGI to the Company accrued
interest at the annual rate of 7%. In December 1998, advances of $15,767,600
from CMGI, including accrued interest thereon, were converted into 1,323,953
shares of Series A Preferred Stock. These advances were made by CMGI to the
Company from inception through October 1998. In May 1999, the Company
formalized its borrowing arrangement with CMGI and executed a secured
convertible demand note with CMGI dated as of May 1, 1999 (the "Secured
Convertible Demand Note"). The Secured Convertible Demand Note covers advances
made by CMGI to the Company for periods commencing in November 1998. Under the
Secured Convertible Demand Note, advances and accrued interest may be prepaid
without penalty. Advances outstanding under this note are secured by
substantially all assets and intellectual property of the Company, and
principal and accrued interest may be converted at the option of CMGI into
shares of Series B Preferred Stock. The number of Series B Preferred shares to
be issued upon conversion of each borrowing represented by the note is based on
the estimated fair value of the Company at the end of the quarter in which such
borrowing is made. (The conversion price applicable to advances made and
interest accrued during a fiscal quarter in which an offering triggering
automatic conversion into Company common stock of Series B Preferred Stock
occurs is equal to the public offering price per share, and the conversion
price applicable to advances made and interest accrued during a fiscal quarter
in which CMGI elects to connect those advances or that interest prior to the
end of that fiscal quarter is the conversion price in effect for the
immediately preceding fiscal quarter). Effective June 4, 1999, CMGI elected to
convert advances and accrued interest outstanding at May 31, 1999 in the amount
of $14,713,000 into 541,859 shares of Series B Convertible Preferred Stock. See
also Notes 9 and 14.
Average balances outstanding in Debt to CMGI for the years ended July 31,
1997, 1998 and 1999 amounted to $965,000, $6,113,000 and $8,107,000,
respectively.
(6) Accrued Expenses
Accrued expenses and deferred revenue consist of the following:
<TABLE>
<CAPTION>
July 31,
-------------
1998 1999
------ ------
(In
thousands)
<S> <C> <C>
Accrued payroll, benefits and commissions........................ $ 355 $1,157
Deferred revenue................................................. 1 701
Accrued IPO costs ............................................... 0 496
Other ........................................................... 1,054 1,609
------ ------
$1,410 $3,963
====== ======
</TABLE>
(7) Commitments and Contingencies
(a) Leases
CMGI has entered into noncancelable operating leases on behalf of the
Company covering certain of its office facilities and equipment which expire
through 2012. In addition, the Company pays CMGI for office facilities used as
the Company's headquarters for which it is charged based upon an allocation of
the total costs for the facilities at market rates. Substantially all leases
for real property have been guaranteed by CMGI.
Total rent expense amounted to $1,722,000, $3,567,000 and $5,983,000 for
the years ended July 31, 1997, 1998 and 1999, respectively.
F-13
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
Additionally, CMGI leases certain property and equipment for the benefit of
the Company under capital lease obligations expiring through 2002. CMGI charges
the Company the actual lease fees under these arrangements.
Minimum annual rental commitments are as follows as of July 31, 1999:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
(In thousands)
<S> <C> <C>
2000....................................................... $11,155 $249
2001....................................................... 9,101 156
2002....................................................... 6,248 43
2003....................................................... 3,929 --
2004 ...................................................... 4,633 --
Thereafter ................................................ 15,245 --
------- ----
$50,311 448
=======
Less amounts representing interest......................... 41
----
Present value of future minimum lease payments............. 407
Less current portion of capital lease obligations.......... 229
----
Long-term portion of capital lease obligations............. $178
====
</TABLE>
In May 1999, the Company agreed to lease an additional 150,000 square feet
in Andover, Massachusetts over an initial lease term of 12 years. Further, the
Company made a cash payment to the developers of $5.7 million to fund
construction of leasehold improvements and provided a letter of credit for $4.0
million as a construction and lease security deposit and is committed to
provide $2.5 million as an additional security deposit. Also, in May 1999, the
Company agreed to lease a 66,000 square foot facility in San Jose, California
for a lease term of seven years. Further, the Company has made a lease deposit
of $252,000 and provided a letter of credit for $2.4 million as a lease
security deposit to be reduced annually based on the remaining term of the
lease. CMGI has guaranteed both of these leases. CMGI will be released from the
Andover guaranty upon the earlier of the completion of an initial public
offering or the date on which the Company occupies the premises and begins to
pay rent. CMGI will be released from the San Jose guaranty within 15 days of
the later of the closing of this offering and the execution by the Company of a
letter of credit in the amount of approximately $2.4 million.
The Company is currently finalizing construction contracts in connection
with its new facilities in San Jose, California and Andover, Massachusetts. If
the Company executes either or both of these contracts prior to the completion
of the initial public offering, CMGI will be required to execute a guarantee on
the Company's behalf with respect to each executed contract. Each contract
provides that CMGI will be released from any related guarantee upon completion
of the initial public offering. In connection with the construction contract
for the new Andover, Massachusetts facility, the Company will be required, upon
CMGI's release from its guarantee or, if the contract is executed after the
completion of the initial public offering, upon execution of the contract, to
obtain a letter of credit in the amount of the remaining balance due under the
contract, which is currently estimated to be less than $15.0 million.
(b) Litigation
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
consolidated financial position or results from operations of the Company.
F-14
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
(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.
Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that give rise to significant portions of
federal deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
July 31,
-----------
1998 1999
----- ----
(In
thousands)
<S> <C> <C>
Deferred tax assets:
Accruals and reserves........................................ $ 247 $300
Depreciation and amortization ............................... 37 182
----- ----
Total deferred tax assets...................................... 284 482
Less: Valuation allowance...................................... (284) (482)
----- ----
Net deferred taxes............................................. $ -- $ --
===== ====
</TABLE>
(9) Stockholders' Equity
In October 1998, the Company's stockholders authorized 5,000,000 shares of
preferred stock of which 1,323,953 shares have been designated as Series A
Preferred Stock. In May 1999, the Company's stockholders authorized 1,000,000
shares to be designated as Series B Preferred Stock, 1,095,472 shares to be
designated as Series C Convertible Preferred Stock ("Series C Preferred Stock")
and 993,243 shares to be designated as Series D Convertible Preferred Stock
("Series D Preferred Stock"). The remaining shares have not been designated.
(a) Series A Preferred Stock
In December 1998, the Board of Directors authorized and issued 1,323,953
shares of Series A Preferred Stock in exchange for 8,000,000 shares of common
stock and $15,767,600 in principal amount of Debt to CMGI. The Series A
Preferred Stock is entitled to receive annual dividends at 7% commencing
November 1, 1998, as and if declared. No dividends have been declared or paid
by the Company. The Series A Preferred Stock is voting and is convertible into
10 shares of common stock subject to certain adjustments. In the event of any
liquidation, dissolution or winding up of the Company, the Series A Preferred
Stock has a liquidation preference of $11.91 per share plus dividends of 7%
compounded annually beginning on November 1, 1998. The Series A Preferred Stock
is convertible into common stock immediately at the option of the holder, and
automatically converts into common stock upon the completion of a qualifying
initial public offering.
At July 31, 1999, 13,239,530 shares of common stock have been reserved for
issuance upon the conversion of the Series A Preferred Stock.
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 conversion of advances and accrued
interest into Series B Preferred Stock was based on the estimated fair value of
the Company as of the end of each of the fiscal quarters in which such advances
were made, except with respect to the advances converted as of June 4, 1999,
prior to the end of the fiscal quarter. Under the terms of the Secured
Convertible Demand Note, advances converted prior to the end of the fiscal
quarter in which they were made are converted based upon the conversion price
in effect for the immediately preceding fiscal quarter. Based on an enterprise
valuation determined through a discounted cash flow analysis for the fiscal
quarter ended January 31, 1999, $5,347,705 of advances and accrued interest
were converted at a per share price of $12.74 into 419,738 shares of Series B
Preferred Stock. Based on an enterprise valuation determined through arms'
length negotiations with, and subsequent sales of Series C Preferred Stock and
Series D Preferred Stock to, two unaffiliated third parties on June 4, 1999, a
per share valuation of $76.68 was utilized to convert $5,413,117 and $3,952,110
of advances and accrued interest into 70,594 and 51,527 shares of Series B
Preferred Stock, respectively.
The Series B Preferred Stock is entitled to received noncumulative annual
dividends at 7%, as and if declared. No dividends have been declared or paid by
the Company. The Series B Preferred Stock is fully participating, voting and
convertible into 10 shares of common stock, subject to certain adjustments. In
the event of any liquidation, dissolution or winding up of the Company, the
Series B Preferred Stock ranks pari passu with the Series A Preferred Stock,
and has a liquidation preference equal to its purchase price plus dividends
computed at 7% per annum. The Series B Preferred Stock is convertible into
common stock immediately at the option of the holder and automatically converts
into common stock upon the completion of a qualifying initial public offering.
At July 31, 1999, 5,418,590 shares of common stock have been reserved for
issuance upon the conversion of the Series B Preferred Stock. See also Note 14.
(c) Series C Preferred Stock
In May 1999, the Board of Directors approved the designation of 1,095,472
shares of the Company's preferred stock as Series C Preferred Stock. The Series
C Preferred Stock is entitled to receive noncumulative annual dividends at 7%,
as and if declared. No dividends have been declared or paid by the Company. The
Series C Preferred Stock is fully participating, voting and convertible at the
option of the holder into shares of common stock at $7.40 per share, subject to
certain adjustments. In the event of any liquidation, dissolution or winding up
of the Company, the Series C Preferred Stock ranks pari passu with the Series A
and B Preferred Stock and has a liquidation preference equal to its purchase
price plus dividends computed at 7% per annum. The Series C Preferred Stock
automatically converts into common stock upon the completion of a qualifying
initial public offering. On or after the fifth anniversary of the purchase
date, the Series C Preferred Stock is redeemable, either at the written
election of a majority of the holders of Series C Preferred Stock or at the
option of the Company, at a price equal to its purchase price plus dividends
computed at 7% per annum. Holders of Series C Preferred Stock may participate
in future issuances of equity instruments, as defined. In June 1999, the
Company sold 1,095,472 Series C preferred shares for $7,997,493, net of
issuance costs of $109,000.
At July 31, 1999, 1,095,472 shares of common stock have been reserved for
issuance upon the conversion of the Series C Preferred Stock.
F-16
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
(d) Series D Preferred Stock
In May 1999, the Board of Directors approved the designation of 993,243
shares of the Company's preferred stock as Series D Preferred Stock. The Series
D Preferred Stock is entitled to receive noncumulative annual dividends at 7%,
as and if declared. No dividends have been declared or paid by the Company. The
Series D Preferred Stock is fully participating, voting and convertible at the
option of the holder into shares of common stock at $7.40 per share, subject to
certain adjustments. In the event of any liquidation, dissolution or winding up
of the Company the Series D Preferred Stock ranks pari passu with the Series A,
B and C Preferred Stock and has a liquidation preference equal to its purchase
price plus dividends computed at 7% per annum. The Series D Preferred Stock
automatically converts into common stock upon the completion of a qualifying
initial public offering. On or after the fifth anniversary of the purchase
date, the Series D Preferred Stock is redeemable, either at the written
election of a majority of the holders of Series D Preferred Stock or at the
option of the Company, at a price equal to its purchase price plus dividends
computed at 7% per annum. Holders of Series D Preferred Stock may participate
in future issuances of equity instruments, as defined. In June 1999, the
Company sold 993,243 Series D preferred shares for $7,252,000, net of issuance
costs of $99,000.
At July 31, 1999, 993,243 shares of common stock have been reserved for
issuance upon the conversion of the Series D Preferred Stock.
(e) Unaudited Pro Forma Balance Sheet
Concurrent with the closing of a qualifying initial public offering,
amounts due to CMGI, if any, will convert into Series B Preferred Stock, and
all the outstanding shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock will convert into
shares of the Company's common stock. The assumed conversion of convertible
preferred stock into an aggregate of 20,746,835 shares of Common Stock has been
reflected in the unaudited pro forma balance sheet as of July 31, 1999. See
also note 12.
(10) Stock Option Plans
(a) NaviSite 1998 Equity Incentive Plan
In December 1998, the Company's Board of Directors and Stockholders
approved the 1998 Equity Incentive Plan, as amended (the "1998 Plan"). The 1998
plan replaced NaviSite Internet Services Corporation's 1997 Equity Incentive
Plan (the "1997 Plan"). All options outstanding under the 1997 Plan were
cancelled and replaced with an equivalent amount of options issued in
accordance with the 1998 Plan. Under the 1998 Plan, non-qualified stock options
or incentive stock options may be granted to the Company's or its affiliates'
employees, directors and consultants, as defined, up to a maximum number of
shares of common stock not to exceed 2,500,000 shares. In August 1999, the
Board of Directors approved an increase in the number of shares authorized
under the 1998 Plan to 5,562,212. The Board of Directors administers this plan,
selects the individuals to whom options will be granted and determines the
number of shares and exercise price of each option. Options are granted at
estimated fair market value based on third-party valuations or cash equity
transactions with unrelated parties (when available). Options granted under the
1998 Plan have a five-year maximum term and typically vest over a four year
period, with 25% of options granted becoming exercisable one year from the date
of grant and the remaining 75% vesting monthly for the next thirty-six (36)
months. The following table reflects activity and historical exercise prices of
stock options under the Company's 1998 Plan for the three years ended July 31,
1999.
F-17
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------------ ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year..... -- $ -- 1,073,000 $0.01 1,545,750 $0.16
Granted................. 1,073,000 0.01 842,500 0.31 1,434,229 4.30
Exercised............... -- -- (51,019) 0.01 (18,319) 0.01
Cancelled............... -- -- (318,731) 0.05 (530,998) 0.45
--------- ----- --------- ----- --------- -----
Options outstanding, end
of year............... 1,073,000 $0.01 1,545,750 $0.16 2,430,662 $2.54
========= ===== ========= ===== ========= =====
Options exercisable, end
of year............... 96,250 $0.01 296,552 $0.01 640,663 $0.09
========= ===== ========= ===== ========= =====
Options available for
grant, end of year.... 927,000 403,231 --
========= ========= =========
</TABLE>
The following table summarizes information about the Company's stock
options outstanding at July 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (years) Price Outstanding Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01--$0.17 961,392 2.9 $0.06 584,543 $0.04
$0.18--$1.00 362,791 4.0 $0.77 56,120 $0.57
$1.01--$1.28 380,750 4.5 $1.21 -- --
$1.29--$7.40 725,729 4.7 $7.40 -- --
--------- ------- -----
2,430,662 3.9 $2.54 640,663 $0.09
========= ======= =====
</TABLE>
(b) Director Stock Option Plan
In December 1998, the Company's Board of Directors and Stockholders
approved the 1998 Director Stock Option Plan (the "1998 Director Plan"). Under
the 1998 Director Plan, each NaviSite director (who is not also an employee of
NaviSite, any subsidiary of NaviSite or of CMGI) is entitled to receive, upon
the date of his or her election, a non-statutory option to purchase common
stock as defined. A maximum number of 125,000 shares of common stock are
authorized for issuance under the 1998 Director Plan. Each automatic grant will
have an exercise price equal to the current fair market value of the common
stock at the time of grant and will have a maximum term of ten years, subject
to earlier termination following the optionee's cessation of service on the
board of directors. Each automatic option grant shall vest and become
exercisable with respect to 20% of the options granted on the first anniversary
of the date of the grant, and shall become exercisable with respect to an
additional 20% on the date of each annual stockholders' meeting at which the
option-holder is re-elected as director.
As of July 31, 1999, 50,000 options were granted and outstanding under the
1998 Director Plan with a weighted average exercise price of $0.34. See also
Note 14.
F-18
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
(c) CMGI 1986 Stock Option Plan
Certain NaviSite employees have been granted options for the purchase of
CMGI common stock under the CMGI 1986 Stock Option Plan (the "1986 Plan").
Options under the 1986 Plan are granted at fair market value on the date of the
grant and are generally exercisable in equal cumulative installments over a
four-to-ten year period beginning one year after the date of grant. Outstanding
options under the 1986 Plan expire through 2007. Under the 1986 Plan, non-
qualified stock options or incentive stock options may be granted to CMGI's or
its subsidiaries' employees, as defined. The Board of Directors of CMGI
administers this plan, selects the individuals to whom options will be granted
and determines the number of shares and exercise price of each option. The
following table reflects activity and historical exercise prices of stock
options granted to Company employees under the 1986 Plan for the three years
ended July 31, 1999:
<TABLE>
<CAPTION>
1997 1998 1999
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year..... 36,080 $0.51 20,880 $1.41 88,840 $ 2.26
Granted................. 8,000 1.95 80,000 2.31 331,600 44.19
Exercised............... (23,200) 0.19 (12,040) 1.10 (33,671) 2.23
------- ------- -------
Options outstanding, end
of year............... 20,880 $1.41 88,840 $2.26 386,769 $38.21
======= ===== ======= ===== ======= ======
Options exercisable, end
of year............... 6,426 $0.96 1,670 $1.78 7,000 $ 2.29
======= ===== ======= ===== ======= ======
</TABLE>
The following table summarizes information about stock options granted to
Company employees under the 1986 Plan outstanding at July 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Prices Outstanding (years) Price Outstanding Price
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.61--$1.95 3,501 2.1 $ 1.88 333 $1.78
$1.96--$2.50 51,668 3.2 $ 2.31 6,667 2.31
$2.51--$10.00 231,600 4.1 $ 10.00 -- --
$10.01--$125.00 100,000 4.7 $123.38 -- --
------- -----
386,769 4.1 $ 38.21 7,000 $2.29
======= =====
</TABLE>
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), sets
forth a fair-value based method of recognizing stock-based compensation
expense. As permitted by SFAS No. 123, the Company has elected to continue to
apply APB No. 25 to account for the stock-based compensation plans in which the
Company's employees participate. Had compensation cost for awards in fiscal
1997, 1998 and 1999 under the three stock-based compensation plans in which the
Company's employees participate been determined based on the fair value method
set forth under SFAS 123, the pro forma effect on the Company's net loss would
have been as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
July 31, 1997 July 31, 1998 July 31, 1999
-------------- ----------------- ------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ----- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net loss applicable to
common stockholders
(in thousands)........ $(948) $(955) $(9,172) $(9,273) $(24,704) $(26,161)
===== ===== ======= ======= ======== ========
Net loss per share...... $(.24) $(.24) $(1.14) $(1.16) $(7.41) $(7.85)
===== ===== ======= ======= ======== ========
</TABLE>
F-19
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
The pro forma per share net loss reflects the fair-value compensation cost
associated with option grants to the Company's employees under the 1986 Plan.
The fair value of each stock option grant has been estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions for fiscal 1997, 1998 and 1999, respectively: volatility of
59.00%, 75.50% and 100%; risk-free interest rate of 6.19%, 5.48% and 5.16%;
4-year expected life of options for all years; and 0% dividend yield for all
years. The weighted average fair value per share of options granted during
fiscal 1997, 1998 and 1999 was $0.01, $0.21 and $3.08, respectively.
The fair value of each stock option granted under the 1986 Plan has been
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions for fiscal 1997, 1998 and 1999,
respectively: volatility of 66.69%, 90.07% and 100%; risk-free interest rate of
6.19%, 5.50% and 5.16%; expected life of options of 6.2, 4.2 years and 4.3
years; and 0% dividend yield for all years. The weighted average fair value per
share of options granted during fiscal 1997, 1998 and 1999 was $1.30, $1.58 and
$31.58, respectively.
(11) Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income (SFAS
130). This statement requires that all components of comprehensive income be
reported in the financial statements in the period in which they are
recognized. For each year reported, comprehensive loss under SFAS 130 was
equivalent to the Company's net loss reported in the accompanying consolidated
statements of operations.
(12) Related Party Transactions
CMGI has provided the Company with accounting, systems and related services
("enterprise services") at amounts that approximated the fair value of services
received in each of the periods presented in these financial statements. The
Company also occupies facilities that are leased by CMGI, whereby CMGI charges
the Company for its share of rent and related facility costs for CMGI's
corporate headquarters through an allocation based upon the company's headcount
located on the premises in relation to total headcount for all CMGI companies
located in the premises. The Company has also purchased certain employee
benefits (including 401(k) plan participation by employees of the Company) and
insurance (including property and casualty insurance) through CMGI. CMGI also
has provided the Company with Internet marketing and business development
services. Amounts due CMGI are included in "Debt to CMGI" on the consolidated
balance sheets. The following table summarizes the expenses allocated to the
Company by CMGI for enterprise services, rent and facilities, human resources
and benefits and Internet marketing and business development:
<TABLE>
<CAPTION>
Year Ended
July 31,
--------------
1997 1998 1999
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Enterprise Services.......................................... $48 $157 $240
Rent and Facilities.......................................... -- $ 15 $251
Human Resources and Benefits................................. -- $ 46 $530
Internet Marketing and Business Development. ................ -- $ 71 $325
</TABLE>
F-20
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
The Company sells its products and services to companies in which CMGI has
an investment interest or a significant ownership interest. Total revenue
realized from services to related parties was $3,361,000, $3,871,000 and
$7,058,000 for the fiscal years ended July 31, 1997, 1998 and 1999,
respectively. These related parties typically receive a 10% discount for
services provided by the Company. The related cost of revenue is consistent
with the costs incurred on similar transactions with unrelated parties.
The Company provides administrative services related to the leasing of
equipment on behalf of CMGI and related entities. These services include the
negotiation of lease terms and conditions and payment of lessors' monthly lease
charges. CMGI or the related entity is then charged the actual lease fees.
Under this arrangement, CMGI bears all liability for payment, and NaviSite is
not financially obligated under the leases.
(13) Concentration of Credit Risk
Amounts included in the consolidated balance sheets for accounts
receivable, debt to CMGI, accounts payable, accrued expenses and notes payable
approximate their fair value due to their short maturities. Financial
instruments that potentially subject the Company to concentration of credit
risk consist primarily of trade receivables. The Company performs periodic
credit evaluations of its customers' financial condition and generally does not
require collateral or other security against trade receivable balances;
however, it does maintain an allowance for potential credit losses and such
losses have been within management's expectations.
For the year ended July 31, 1997, all of the Company's revenue was earned
from related parties. Three of these related parties accounted for 46%, 28% and
14% of revenue earned during the year ended July 31, 1997. For the fiscal year
ended July 31, 1998, 96% ($3,871,000) of the Company's revenue was earned from
related parties. Three of these related parties accounted for 40%, 19% and 11%
of revenue earned for the fiscal year ended July 31, 1998. For the fiscal year
ended July 31, 1999, 67% ($7,058,000) of the Company's revenue was earned from
related parties. Two of these related parties accounted for 22% and 16% of
revenue earned during the fiscal year ended July 31, 1999.
Accounts receivable at July 31, 1998 included 63% due from related parties,
with two related entities comprising 37% and 15%. Accounts receivable at July
31, 1999 included 30% due from related parties, with one related entity
comprising 13%.
(14) Subsequent Events
(a) 1999 Employee Stock Purchase Plan
The 1999 Employee Stock Purchase Plan (the "Stock Purchase Plan") was
adopted by the Company's Board of Directors and Stockholders in October 1999.
The Stock Purchase Plan provides for the issuance of a maximum of 50,000 shares
of the Company's common stock.
(b) Deferred Compensation Plan
A Deferred Compensation Plan (the "Deferred Compensation Plan") was adopted
by the Company's Board of Directors in October 1999. Under the terms of the
Deferred Compensation Plan, the Company's employees who are selected by the
Board of Directors (as well as certain of the Company's employees who
previously participated in a deferred compensation plan sponsored by CMGI) will
be able to elect to defer a portion of their compensation for the following
calendar year. The Company also may make discretionary contributions to a
participant's account, to which the participant generally will become entitled
after five years of service with the Company.
F-21
<PAGE>
NAVISITE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 31, 1997, 1998 and 1999
(c) 1999 Director Stock Option Plan
In October 1999, the Company terminated the 1998 Director Plan and the
Board of Directors and the Stockholders approved and adopted the 1999 Stock
Option Plan for Non-Employee Directors (the "1999 Director Plan"). A total of
250,000 shares of common stock are reserved for issuance under the 1999
Director Plan. Directors who are not NaviSite employees or otherwise
affiliates, employees or designees of an institutional or corporate investor
that owns more than 5% of outstanding common stock will be eligible to receive
non-statutory stock options under the 1999 Director Plan. Under the 1999
Director Plan, the Company will grant an initial option to acquire 25,000
shares of common stock to each eligible director who is elected a director for
the first time.
The Company also will grant to eligible directors an additional option for
the purchase of 6,250 shares of 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 the Company's directors on that anniversary date. The
Board of Directors 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.
(d) Series B Preferred Stock
Immediately prior to the completion of the initial public offering, CMGI
will convert intercompany debt in the aggregate amount of approximately
$12,257,000, representing funds advanced subsequent to the quarter ended July
31, 1999, into 87,548 shares of Series B Preferred Stock (based upon a
conversion price of $140, ten times the initial public offering price of $14.00
per share). The Company does not expect to borrow funds from CMGI after the
completion of the initial public offering.
F-22
<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.
/s/ KPMG LLP
KPMG LLP
May 28, 1999
Boston, Massachusetts
F-23
<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-24
<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-25
<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-26
<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-27
<PAGE>
SERVERCAST COMMUNICATIONS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and June 30, 1998
(1) Organization
Servercast Communications, L.L.C., ("Servercast" or the "Company") was
organized on February 6, 1997 as a Delaware limited liability company. The
Company's operating agreement indicates that Servercast will cease to operate
no later than December 1, 2050. Profits and losses are allocated to members in
accordance with the proportionate percentage interest as determined by the fair
market value of their original capital contribution. As a limited liability
company, the members' liability is limited to the amounts of their investment
in the Company.
The Company provides Web site hosting and maintenance for a variety of
companies engaging in electronic commerce. Servercast also develops Web sites.
Servercast's customers are located throughout the United States.
(2) Summary of Significant Accounting Policies
(a) Revenue Recognition
Revenue for hosting and maintaining Web sites is recognized ratably over
the life of the contract, typically one year. Revenue from the development of
Web sites is recognized as the services are performed.
(b) Cash Equivalents
For purposes of the statement of cash flows, Servercast considers all
highly liquid debt instruments with an original maturity of three months or
less to be cash equivalents.
(c) Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are provided for on the straight-line basis over the estimated useful lives of
the related assets. The depreciation period is generally three to seven years.
(d) Income Taxes
The Company is treated as a partnership for federal and state tax purposes
and thus is not subject to income taxes. The members of the Company must
include their proportionate share of the Company's profits and losses in their
respective personal tax returns. Accordingly, no provision has been made for
income taxes.
For income tax purposes, the Company has elected to report under the
accrual basis of accounting. At December 31, 1997 and June 30, 1998, the tax
bases of the Company's assets and liabilities are $8,167 and $9,092 less,
respectively, than the financial reporting bases of these assets and
liabilities. The difference results from the use of different methods related
to reporting depreciation, and the Company's allowance for doubtful accounts
which is not deductible until the accounts are written-off.
(e) Long-Lived Asset Impairment
The Company adopted Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets to be Disposed Of ("SFAS No.
121"). SFAS No. 121 addresses the accounting for the impairment of long-lived
assets, certain identifiable intangible assets and goodwill when events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company adoption of SFAS No. 121 had no material impact on
its results of operations or financial condition.
F-28
<PAGE>
SERVERCAST COMMUNICATIONS, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and June 30, 1998
(f) Fair Value of Financial Instruments
The Company adopted Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Statements" ("SFAS No. 107"), which
requires that the Company estimate and disclose the fair value of each material
class of financial instrument for which it is practicable to estimate that
value. In accordance with SFAS No. 107, the Company has identified its material
financial instruments as cash, trade receivables and payables and notes
payable. The carrying amount of cash, trade receivables, trade payables and
notes payable approximate fair value because of the short-term nature of these
financial instruments.
(g) Concentration of Credit Risk
Financial instruments which subject the Company to credit risk consist
principally of trade receivables. The Company's policy with respect to the
credit risk of trade receivables is to evaluate, prior to the extension of
credit, each customer's financial condition and to determine the amount of open
credit to be extended.
(h) Management's Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(i) Comprehensive Income
On January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 131, "Reporting Comprehensive Income" ("SFAS
No. 131"). SFAS No. 131 requires that the components of comprehensive income be
reported in the financial statements. For the period from inception (February
6, 1997) through December 31, 1997 and for the six months ended June 30, 1998,
the Company's net loss was equal to its total comprehensive loss.
(3) Commitments
The Company leases certain office facilities under operating leases with an
initial term of less than one year. Additionally, the Company leases certain
floor space at facilities that house its equipment used for Web site hosting.
The lessors of these locations provide the Company with Web hosting and
maintenance services for the benefit of the Company's customers. These
agreements also have initial terms of one year or less.
For the period from inception (February 6, 1997) through December 31, 1997
and for the six months ended June 30, 1998, rent and Web hosting expenses under
these agreements amounted to $102,117 and $68,901, respectively. Of these
amounts, $64,352 and $47,769 were included in cost of revenues in the
accompanying statements of operations, respectively. For the period from
inception (February 6, 1997) through December 31, 1997 and for the six months
ended June 30, 1998, $33,305 and $12,175 of the rents included in selling,
general and administrative expenses were paid to a related party who is a
member of the Company. Subsequent to the sale of the Company on July 1, 1998
(see note 6), the Company relocated its Web hosting equipment to sites
maintained by the purchaser, and, accordingly, the Company no longer leases
these Web hosting sites from unrelated third parties.
F-29
<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-30
<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-31
<PAGE>
NAVISITE, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the year ended July 31, 1998
<TABLE>
<CAPTION>
Year ended July 31, 1998
--------------------------------
Pro Forma
NaviSite Servercast Adjustments Total
-------- ---------- ----------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Revenue........................ $ 158 $ 361 $ -- $ 519
Revenue, related parties....... 3,871 -- -- 3,871
-------- ------ ------ --------
Total revenue............... 4,029 361 -- 4,390
Cost of revenue.................. 8,876 310 -- 9,186
-------- ------ ------ --------
Gross loss..................... (4,847) 51 -- (4,796)
-------- ------ ------ --------
Operating expenses:
Selling and marketing.......... 2,530 93 -- 2,623
General and Administrative..... 1,412 254 186 (a) 1,852
Product development............ 287 -- -- 287
-------- ------ ------ --------
Total operating expenses.... 4,229 347 186 4,762
-------- ------ ------ --------
Loss from operations............. (9,076) (296) (186) (9,558)
Other income (expense):
Interest expense, net.......... (85) -- (50)(b) (135)
Other expense, net............. (11) -- -- (11)
-------- ------ ------ --------
Net loss......................... $ (9,172) $ (296) $ (236) $ (9,704)
======== ====== ====== ========
Pro forma basic and diluted net
loss per share................. $ (1.14) $ (1.21)
======== ========
Pro forma weighted average number
of basic and diluted shares
outstanding.................... 8,017 8,017
======== ========
</TABLE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
Year ended July 31, 1998
(a) Reflects goodwill amortization recorded by NaviSite for the eleven-month
period ending June 30, 1998 prior to the acquisition of Servercast.
Goodwill is being amortized over five years, using the straight-line
method.
(b) Reflects interest expense related to 5.5% notes payable in the amount of
one million dollars for the eleven-month period ending June 30, 1998 prior
to the acquisition of Servercast.
F-32
<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.
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[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
