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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number: 0-27597
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NAVISITE, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-2137343
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
400 Minuteman Road 01810
Andover, Massachusetts (Zip Code)
(Address of principal executive
offices)
(978) 682-8300
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of March 15, 2000, there were 56,186,204 shares of the registrant's
Common Stock, par value $.01 per share, outstanding.
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NAVISITE, INC
Form 10-Q for the Quarter ended January 31, 2000
INDEX
<TABLE>
<CAPTION>
Page
Number
------
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of January 31, 2000 (unaudited) and
July 31, 1999........................................................ 3
Consolidated Statements of Operations for the three and six months
ended January 31, 2000 and 1999 (unaudited).......................... 4
Consolidated Statements of Cash Flows for the six months ended January
31, 2000 and 1999 (unaudited)........................................ 5
Notes to Interim Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 22
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........................ 23
Item 6. Exhibits and Reports on Form 8-K................................. 24
SIGNATURE................................................................ 25
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
NAVISITE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
January 31, July 31,
2000 1999
----------- --------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 37,754 $ 3,352
Accounts receivable, less allowance for doubtful
accounts of $545 and $262, at January 31, 2000 and
July 31, 1999, respectively........................... 5,828 1,881
Accounts receivable from related parties............... 3,028 77
Prepaid expenses and other current assets.............. 1,862 628
Deferred IPO costs..................................... -- 831
-------- --------
Total current assets................................. 48,472 6,769
-------- --------
Property and equipment, net.............................. 45,898 13,159
Deposits................................................. 3,009 389
Goodwill, net of accumulated amortization of $321 and
$220 at January 31, 2000 and July 31, 1999,
respectively............................................ 693 794
-------- --------
Total assets............................................. $ 98,072 $ 21,111
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable, current portion......................... $ -- $ 1,000
Capital lease obligations, current portion............. 169 229
Software vendor payable, current portion............... 733 708
Accounts payable....................................... 5,671 2,224
Accrued expenses and deferred revenue.................. 8,267 3,963
-------- --------
Total current liabilities................................ 14,840 8,124
-------- --------
Capital lease obligations, less current portion.......... 107 178
Software vendor payable, less current portion............ 1,415 1,757
-------- --------
Total liabilities........................................ 16,362 10,059
-------- --------
Series C Convertible Redeemable Preferred Stock, $.01
par value, 1,095 shares authorized: 0 and 1,095 shares
issued and outstanding at January 31, 2000 and July
31, 1999, respectively (at liquidation value)......... -- 8,088
Series D Convertible Redeemable Preferred Stock, $.01
par value, 993 shares authorized: 0 and 993 shares
issued and outstanding at January 31, 2000 and July
31, 1999, 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: 0 and 1,324 shares issued and
outstanding at January 31, 2000 and July 31, 1999,
respectively.......................................... -- 13
Series B Convertible Preferred Stock, $.01 par value,
1,000 shares authorized: 0 and 542 shares issued and
outstanding at January 31, 2000 and July 31, 1999,
respectively.......................................... -- 5
Preferred Stock, $.01 par value, 5,000 shares
authorized: 0 and 0 shares issued and outstanding at
January 31, 2000 and July 31, 1999, respectively...... -- --
Common Stock, $.01 par value, 300,000 shares
authorized: 56,186 and 138 shares issued and
outstanding at January 31, 2000 and July 31, 1999,
respectively.......................................... 562 1
Additional paid in capital............................. 137,820 30,291
Accumulated deficit.................................... (56,672) (34,679)
-------- --------
Total stockholders' equity (deficit)..................... 81,710 (4,369)
-------- --------
Total liabilities & stockholders' equity (deficit)....... $ 98,072 $ 21,111
======== ========
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
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NAVISITE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
-------------------- -----------------
2000 1999 2000 1999
--------- --------- -------- -------
<S> <C> <C> <C> <C>
Revenue............................. $ 3,997 $ 604 $ 6,467 $ 1,094
Revenue, related parties............ 5,173 1,562 8,569 2,740
--------- -------- -------- -------
Total revenue..................... 9,170 2,166 15,036 3,834
Cost of revenue....................... 12,322 3,935 21,391 7,721
--------- -------- -------- -------
Gross profit (loss)................. (3,152) (1,769) (6,355) (3,887)
--------- -------- -------- -------
Operating Expenses:
Selling and marketing............... 5,264 1,112 9,070 2,541
General and administrative.......... 2,663 804 5,264 1,347
Product development................. 1,056 439 1,947 706
--------- -------- -------- -------
Total operating expenses.......... 8,983 2,355 16,281 4,594
--------- -------- -------- -------
Loss from operations.................. (12,135) (4,124) (22,636) (8,481)
Other income (expense):
Interest income..................... 756 -- 839 4
Interest expense.................... (63) (39) (196) (194)
--------- -------- -------- -------
Total other income (expense)...... 693 (39) 643 (191)
Net loss.............................. $ (11,442) $ (4,163) $(21,993) $(8,672)
========= ======== ======== =======
Basic and diluted net loss per common
share................................ $ (.21) $ (.41) $ (.71) $ (.66)
========= ======== ======== =======
Basic and diluted weighted average
number of common shares outstanding.. 55,741 10,051 30,891 13,081
========= ======== ======== =======
Pro forma basic and diluted net loss
per common share..................... $ (.14) $ (.44) $ (.30)
======== ======== =======
Pro forma basic and diluted weighted
average number of shares
outstanding.......................... 30,814 50,164 28,551
======== ======== =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
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NAVISITE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
January 31,
-----------------
2000 1999
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................... $(21,993) $(8,672)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization............................. 2,814 733
Provision for bad debts................................... 283 28
Changes in operating assets and liabilities, net of impact
of acquisition in 1998:
Accounts receivable...................................... (4,230) (615)
Accounts receivable from related parties................. (3,063) --
Prepaid expenses......................................... (403) (103)
Deposits................................................. (2,620) (88)
Accounts payable......................................... 3,447 476
Accrued expenses and deferred revenue.................... 4,304 71
-------- -------
Net cash used for operating activities.................. (21,461) (8,170)
Cash flows from investing activities:
Purchases of property and equipment........................ (35,453) (1,268)
-------- -------
Net cash used for investing activities.................. (35,453) (1,268)
Cash flows from financing activities:
Proceeds from increase in debt to CMGI, net................ 12,369 9,882
Proceeds from issuance of common stock, net of issuance
costs..................................................... 80,382 --
Proceeds from exercise of stock options.................... 14 --
Repayment of note payable.................................. (1,000) --
Repayment of software vendor obligations................... (317) (397)
Repayment of capital lease obligations..................... (131) (47)
-------- -------
Net cash provided by financing activities............... 91,316 9,438
Net increase in cash........................................ 34,402 --
Cash and cash equivalents, beginning of period.............. 3,352 --
-------- -------
Cash and cash equivalents, end of period.................... $ 37,754 $ --
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 211 $ 152
======== =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
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NAVISITE, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
January 31, 2000
1. Basis of Presentation
The accompanying consolidated financial statements have been prepared by
NaviSite, Inc. ("NaviSite" or the "Company") in accordance with generally
accepted accounting principles and pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. It is suggested that the financial
statements be read in conjunction with the audited financial statements and the
accompanying notes included in the Company's Registration Statement on Form S-1
(File No. 333-83501), which was declared effective by the Securities and
Exchange Commission on October 21, 1999.
The information furnished reflects all adjustments which, in the opinion of
management, are of a normal reoccurring nature and are considered necessary for
a fair presentation of results for the interim periods. Such adjustments
consist only of normal reoccurring items. It should also be noted that results
for the interim periods are not necessarily indicative of the results expected
for the full year or any future period.
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures 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.
2. Two-For-One Stock Split
The consolidated financial statements have been retroactively adjusted to
reflect the announced two-for-one stock split payable in the form of a stock
dividend on April 5, 2000 to holders of record at the close of business on
March 22, 2000.
3. Initial Public Offering
On October 21, 1999, the Company's Registration Statement on Form S-1 (File
No. 333-83501) was declared effective by the Securities and Exchange
Commission. Pursuant to the Registration Statement, the Company sold 11,000,000
shares of its common stock, par value $.01 per share (the "Common Stock") at
$7 per share. On November 18, 1999, the underwriters of the Company's initial
public offering exercised their over-allotment option in full to purchase an
additional 1,650,000 shares of Common Stock at $7 per share. The closing in
connection with the exercise of the over-allotment option was held on November
23, 1999. The Company received proceeds of approximately $80,382,000, net of
offering costs of approximately $8,169,000, from its initial public offering
and the subsequent exercise by the underwriters of the over-allotment option.
In connection with the closing of the Company's initial public offering on
October 27, 1999, all of the outstanding shares of Series A, Series B, Series C
and Series D convertible preferred stock, par value $.01 per share, of the
Company automatically converted into 43,244,630 shares of Common Stock.
Immediately following the automatic conversion of all of the Company's
outstanding shares of convertible preferred stock, the Company filed an amended
and restated certificate of incorporation. Under the amended and restated
certificate of incorporation, the Company is authorized to issue 300,000,000
shares of Common Stock and 5,000,000 shares of preferred stock, par value $.01
per share. There currently are no shares of preferred stock issued and
outstanding.
6
<PAGE>
NAVISITE INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiary, Servercast Communications, L.L.C., after
elimination of all significant intercompany balances and transactions.
5. Cash and Cash Equivalents
Cash equivalents consist of a money market fund with a unit value of $1.00,
investing in high quality short-term debt obligations, including commercial
paper, asset-backed commercial paper, corporate bonds, U.S. government agency
obligations, taxable municipal securities and repurchase agreements.
Under the letter of credit arrangement, discussed in Note 6, the Company was
required to maintain on deposit a compensating balance, restricted as to use,
of 110% of the outstanding liability under the letter of credit. At January 31,
2000, $6.1 million of the cash balance shown in the balance sheet represented a
compensating balance. The letter of credit expired March 1, 2000, at which
time, the Company was released from the compensating balance requirement.
6. Letter of Credit
On December 3, 1999, the Company executed a $10.3 million letter of credit
(the "Letter of Credit") in connection with the construction of a new 153,000
square foot facility in Andover, Massachusetts, which includes a new data
center. The Letter of Credit required a restricted compensating balance equal
to 110% of the amount of the outstanding liability covered by the Letter of
Credit. At January 31, 2000, the liability outstanding under the Letter of
Credit was $6.1 million. The Letter of Credit expired March 1, 2000.
7. Lease Line
During the quarter ended January 31, 2000, the Company secured $42.0 million
in lease lines from various lessors for the purpose of financing computer-
related equipment. These lines, which are typically renewed on a quarterly
basis by the lessors, are used to secure equipment under two or three year
operating leases. As of January 31, 2000, $13.8 million of equipment had been
leased under the lease lines.
8. Net Loss Per Common Share
The Company calculates earnings (loss) per share in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share ("SFAS 128"). In accordance with SFAS 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 "if-converted" method
for convertible preferred stock or the treasury stock method for options,
unless such amounts are anti-dilutive.
7
<PAGE>
NAVISITE INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the six months ended January 31, 2000 and the three and six months ended
January 31, 1999, net loss per basic and diluted share is based on weighted
average common shares and excludes any common stock equivalents, as they would
be anti-dilutive due to the reported loss. For the six months ended January 31,
2000 and the three and six months ended January 31, 1999, a pro forma basic and
diluted loss per share calculation, assuming the conversion of all amounts due
to CMGI and all outstanding shares of preferred stock into common stock using
the "if-converted" method from the later of the date of issuance or beginning
of the period, is presented. The following table provides a reconciliation of
the denominators used in calculating the pro forma basic and diluted earnings
(loss) per share for the six months ended January 31, 2000 and the three and
six months ended January 31, 1999:
<TABLE>
<CAPTION>
Three Months
Ended Six Months Ended
January 31, January 31,
----------------- -----------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Numerator:
Net loss.............................. $(11,442) $(4,163) $(21,993) (8,672)
Denominator:
Basic weighted average number of
common shares outstanding............ 55,741 10,051 30,891 13,081
Assumed conversion of amounts due to
CMGI and preferred stock............. -- 20,763 19,273 15,470
-------- ------- -------- -------
Weighted average number of pro forma
basic and diluted shares outstanding... 55,741 30,814 50,164 28,551
======== ======= ======== =======
Pro forma basic and diluted net loss per
share.................................. n/a $ (0.14) $ (0.44) $ (0.30)
======== ======= ======== =======
</TABLE>
9. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS 133
requires the recognition of all derivatives as either assets or liabilities in
the statement of financial position and the measurement of those instruments at
fair value. The Company is required to adopt this standard in the first quarter
of fiscal year 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 its consolidated
financial statements.
In November 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 100, Restructuring and Impairment Charges
("SAB 100"). In December 1999, the SEC issued SAB No. 101, Revenue Recognition
in Financial Statements ("SAB 101"). SAB No. 100 expresses the views of the SEC
staff regarding the accounting for and disclosure of certain expenses not
commonly reported in connection with exit activities and business combinations.
This includes the accrual of exit and employee termination costs and the
recognition of impairment charges. The Company does not expect the provisions
of SAB No. 100 to have a material impact on its consolidated financial
statements. SAB No. 101 expresses the views of the SEC staff in applying
generally accepted accounting principles to certain revenue recognition issues.
The Company does not expect the provisions of SAB No. 101 to have a material
impact on its consolidated financial statements.
8
<PAGE>
NAVISITE INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Subsequent Event
On February 22, 2000, the Company acquired ClickHear, Inc. ("ClickHear"), a
provider of comprehensive streaming services. The addition of a full range of
streaming services will enhance NaviSite's ability to provide end-to-end
solutions to its customers, and will enable NaviSite to continue to offer
significant new application services. Under the terms of the merger, CMGI
initially acquired control of ClickHear through the issuance of approximately
$5.0 million of CMGI common stock ("CMGI Common Stock") for all outstanding
shares of ClickHear. The number of shares of CMGI Common Stock delivered was
based on $119.14, the average of the last reported sales prices of the CMGI
Common Stock over the 45 consecutive trading days ending two trading days prior
to the effective date of this merger. On February 22, CMGI contributed all of
the ClickHear shares held to the Company in exchange for approximately $5.0
million of the Company's common stock, $0.01 par value per share (the "Common
Stock"). The number of shares of the Company's Common Stock delivered was based
on $73.63 the average of the last reported sales prices of the Common Stock
over the 45 consecutive trading days ending two trading days prior to the
effective date of this merger. Of the shares of CMGI Common Stock exchanged for
ClickHear shares, 20% are held in escrow for the purpose of securing the
indemnification obligations of those ClickHear shareholders who received merger
shares and certain performance and employee retention milestones.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, that involve
risks and uncertainties. All statements other than statements of historical
information provided herein are forward-looking statements and may contain
information about financial results, economic conditions, trends and known
uncertainties. Our actual results could differ materially from those discussed
in the forward-looking statements as a result of a number of factors, which
include those discussed in this section and elsewhere in this report and the
risks discussed in the Company's other filings with the Securities and Exchange
Commission. Readers are cautioned not to place undue reliance on these forward-
looking statements, which reflect management's analysis, judgment, belief or
expectation only as of the date hereof. The Company undertakes no obligation to
publicly reissue these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
In March 2000, the Company's Board of Directors approved a two-for-one
common stock split, effected in the form of a stock dividend of one share of
common stock for each share of common stock outstanding. The stock dividend is
payable on April 5, 2000 to stockholders of record at the close of business on
March 22, 2000. Accordingly, the consolidated financial statements have been
retroactively adjusted for all periods presented to reflect this event. Unless
otherwise indicated, all share information in this Management's Discussion and
Analysis of Financial Condition and Results of Operations reflect the two-for-
one stock split.
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 professional 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 intend to expand both domestically and internationally. As part of this
expansion, we recently completed construction on a new 153,000 square foot
facility in Andover, Massachusetts, which includes a new data center. In May
1999, we executed a 12-year lease for this new facility. On December 3, 1999,
we executed a $10.3 million letter of credit in connection with the
construction of the Massachusetts facility. The new Massachusetts facility
opened on schedule on January 7, 2000. In addition, during the six month period
ended January 31, 2000, construction was completed on a new 66,000 square foot
facility located in San Jose, California, which also includes a new data
center. In May 1999, we executed a seven-year lease for this facility. The new
San Jose data center opened on schedule on November 18, 1999.
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, basic and advanced back-up, storage and monitoring
services; enhanced server management, which includes custom reporting, hardware
options, load balancing and mirroring, system security, remote management and
the services of our technical account 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; 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 typically
range from one to three year commitments.
10
<PAGE>
Our revenue from sales to related parties consists principally of sales of
services to CMGI, Inc. and other entities in which CMGI holds an equity
interest. In general, in pricing the services provided to CMGI and these CMGI
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%.
Three-month period ended January 31, 2000 compared to the three-month period
ended January 31, 1999
Revenue
Total revenue increased 323% to approximately $9.2 million for the three-
month period ended January 31, 2000, from approximately $2.2 million for the
same period in 1999. The increase in revenue is due to both additional business
with CMGI subsidiaries and affiliates and the increase in the number of
unaffiliated customers.
Cost of Revenue
Cost of revenue principally includes labor and headcount expenses,
additional equipment, maintenance and facilities costs, and bandwidth and
connectivity charges. Cost of revenue increased 213% to approximately $12.3
million for the three-month period ended January 31, 2000, from approximately
$3.9 million for the same period in 1999. As a percentage of revenue, cost of
revenue decreased to 134% for the three-month period ended January 31, 2000,
from 182% for the same period in 1999. The cost of revenue increase in the
period is due primarily to the increased depreciation resulting from the
investments in our new data centers in San Jose, California and Andover,
Massachusetts as well as continuing investments in our existing data centers.
The San Jose facility became operational on November 18, 1999 and the Andover
facility on January 7, 2000; both facilities commenced operations on time.
Operating Expenses
Selling and Marketing. Selling and marketing expenses primarily include
salaries and commissions and expenses for marketing programs, including
advertising, events, sponsorship, direct marketing, product literature, and
agency fees. Selling and marketing expenses increased 373% to approximately
$5.3 million for the three-month period ended January 31, 2000, from
approximately $1.1 million for the same period in 1999. This increase is due
primarily to the development of NaviSite's sales and marketing capability in
connection with our effort to increase sales to unaffiliated customers.
General and Administrative. General and administrative expenses primarily
include the costs of financial, leasing, human resource, information
technology, business development and administrative personnel, professional
services and corporate overhead. General and administrative expenses increased
231% to approximately $2.7 million for the three-month period ended January 31,
2000, from approximately $804,000 for the same period 1999. The increase is due
to hiring of additional personnel to support our growing operations and also
reflects the higher cost associated with Year 2000 projects and becoming a
publicly traded company.
Product Development. Product development expenses consist primarily of
salaries and related costs. Product development expenses increased 141% to
approximately $1.1 million for the three-month period ended January 31, 2000,
from approximately $439,000 for the same period in 1999. This increase is due
primarily to the costs associated with an increase in product development
personnel to 26 as of January 31, 2000, from 12 employees at January 31, 1999.
This growth in product development personnel reflects our increased service
offerings and emphasis on application services.
Interest Income
Interest income increased to approximately $756,000 for the three-month
period ended January 31, 2000, from $0 interest income for the same period in
1999. This increase is due primarily to the funds available for investment
resulting from the proceeds from the initial public offering in October 1999
and the exercise of an over allotment option granted to the underwriters in
November 1999.
11
<PAGE>
Interest Expense
Interest expense increased to approximately $63,000 for the three-month
period ended January 31, 2000 from $39,000 for the same period in 1999 due to
increased interest expense on long-term capital lease obligations and the
intercompany interest expense to CMGI. Other interest expense is due to the
term notes issued in connection with our acquisition, in July 1998, of
Servercast Communications, L.L.C. and imputed interest on a software license
purchase.
Six-month period ended January 31, 2000 compared to the six-month period ended
January 31, 1999
Revenue
Total revenue increased 292% to approximately $15.0 million for the six-
month period ended January 31, 2000, from approximately $3.8 million for the
same period in 1999. The increase in revenue is due to both additional business
with CMGI subsidiaries and affiliates and the increase in the number of
unaffiliated customers. The related party revenue increased 213% while the
unaffiliated revenue increased 491% over the same six-month period ended
January 31, 1999.
Cost of Revenue
Cost of revenue principally includes labor and headcount expenses,
additional equipment, maintenance and facilities costs and increased bandwidth
and connectivity charges. Cost of revenue increased 177% to approximately $21.4
million for the six-month period ended January 31, 2000, from approximately
$7.7 million for the same period in 1999. As a percentage of revenue, cost of
revenue decreased to 142% for the six-month period ended January 31, 2000, from
201% for the same period in 1999. The dollar-value increase in each period is
due primarily to the costs associated with increased investment in our existing
and our new data centers--in San Jose, California and Andover, Massachusetts.
Operating Expenses
Selling and Marketing. Selling and marketing expenses primarily include
salaries and commissions and expenses for marketing programs, including
advertising, events, sponsorships, direct marketing, product literature and
agency fees. Selling and marketing expenses increased 257% to approximately
$9.1 million for the six-month period ended January 31, 2000, from
approximately $2.5 million for the same period in 1999. This increase is due
primarily to the expansion of our direct sales force with the intention of
increasing sales to unaffiliated customers and the development of NaviSite's
marketing capability.
General and Administrative. General and administrative expenses primarily
include the costs of financial, leasing, human resource, information
technology, business development and administrative personnel, professional
services, and corporate overhead. General and administration expenses increased
291% to approximately $5.3 million for the six-month period ended January 31,
2000, from approximately $1.3 million for the same period 1999. The increase is
due to hiring of additional personnel in all areas of administration to support
our growing operations and also reflects the higher cost associated with Year
2000 projects and becoming a publicly traded company.
Product Development. Product development expenses consist primarily of
salaries and related costs. Product development expenses increased 176% to
approximately $1.9 million for the six-month period ended January 31, 2000,
from approximately $706,000 for the same period in 1999. This increase is due
primarily to the costs associated with an increase in product development
personnel as of January 31, 2000 to 26, from 12 employees at January 31, 1999.
This growth in product development personnel reflects our increased service
offerings and emphasis on application services.
Interest Income
Interest income increased to approximately $839,000 in the six-month period
ended January 31, 2000, from $4,000 interest income for the same period in
1999. This increase is due primarily to the funds available for investment
resulting from the proceeds from the IPO in October 1999 and the over allotment
exercise in November 1999.
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Interest Expense
Interest expense, net was virtually unchanged for the six-month period ended
January 31, 2000 from $196,000 compared to $194,000 expense for the same period
in 1999. This interest expense is due primarily to intercompany interest
expense to CMGI and other interest expense due to the term notes issued in
connection with our acquisition, in July 1998, of Servercast Communications,
L.L.C., interest expense on long-term capital lease obligations and imputed
interest on a software license purchase.
Liquidity and Capital Resources
Since our inception, our operations have been funded primarily by CMGI
through the issuance of preferred stock and convertible debt, the issuance of
preferred stock and our initial public offering and related underwriters' over-
allotment in October 1999 and November 1999, respectively.
Net cash used for operating activities for the six-month period ended
January 31, 2000 amounted to $21.5 million, resulting primarily from net
operating losses and increases in accounts receivable and deposits, partially
offset by non-cash depreciation and amortization charges and increases in
accounts payable and accrued expenses. The net increase in accounts receivable
is a result of the revenue growth for the period.
Net cash used for investing activities for the six-month period ended
January 31, 2000 amounted to $35.5 million. The net cash used for investing
activities was utilized primarily to build and equip two new datacenters and
acquire property and equipment required to support the growth of the business.
Net cash provided by financing activities for the six-month period ended
January 31, 2000 amounted to $91.3 million. Cash provided by financing
activities included $80.4 million of combined net proceeds from our initial
public offering and exercise of the underwriters' over-allotment option, as
well as funds advanced from CMGI, totaling $12.4 million, to fund our
operations for the period August 1, 1999 through the closing of the initial
public offering on October 27, 1999. The cash provided by financing activities
was partially offset by the repayment of a $1.0 million note payable related to
the Servercast acquisition.
Until the completion of our initial public offering on October 27, 1999,
CMGI funded our operations as needed, increasing our obligations to CMGI and
allowing us to maintain a zero-balance cash account. Customer and other
receipts were remitted to CMGI and applied to reduce our obligations to CMGI.
We 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. Prior to the completion of our initial public
offering, the amount of each borrowing represented by the note was 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 during
the fiscal quarter in which our initial public offering occurred was determined
by the offering price of the initial public offering. Any future advances from
CMGI under this note will be convertible from time to time into the number of
shares of common stock equal to the quotient of the aggregate amount of
principal and interest to be so converted, divided by the applicable conversion
price for that fiscal quarter.
Under this note, CMGI converted intercompany debt in the aggregate amount of
approximately $12.3 million, representing funds advanced during the period
subsequent to the quarter ended July 31, 1999 through October 21, 1999 (the
effective date of the registration statement relating to our initial public
offering), into 87,548 shares of Series B convertible preferred stock (based
upon a conversion price of $140.00, ten times the initial public offering price
of $14.00 per share). Upon the closing of our initial public offering, each
issued and outstanding share of Series B convertible preferred stock converted
into twenty shares of common stock, or 12,588,140 shares of common stock in the
aggregate. We have not borrowed funds from CMGI since the completion of our
initial public offering on October 27, 1999, and we do not expect to borrow
funds from CMGI in the future.
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On December 3, 1999, in connection with the construction contract for our
new Andover, Massachusetts facility, we obtained a letter of credit in the
amount of $10.3 million, representing the remaining balance due under the
construction contract. Under the letter of credit arrangement (see Note 5 for
description) the Company was required to maintain on deposit a compensating
balance, restricted as to use, of 110% of the outstanding liability under the
letter of credit. The obligation under the letter of credit was paid in full on
March 1, 2000, and the corresponding compensating balance requirement was
ended.
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 will be sufficient
to meet our anticipated needs for working capital and capital expenditures over
the next nine months, assuming we obtain additional lease financing credit
lines. 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, we 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.
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 needed to accept four-digit entries to distinguish
21st century dates from 20th century dates. As a result, many companies'
software and computer systems needed to be upgraded or replaced in order to
continue to function properly into the Year 2000 and beyond. NaviSite
confronted the Year 2000 problem in several contexts:
As of January 31, 2000, we have spent nearly $2.7 million (approximately
$388,000 for the three months ended January 31, 2000) on our Year 2000
compliance effort.
Our Year 2000 project plan has consisted 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 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; 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.
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NaviSite successfully completed all phases of our Year 2000 project plan.
We 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.
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 have taken the necessary
steps to achieve Year 2000 compliance. We did not experience any significant
problems with customer equipment due to the Year 2000 issue.
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 require that all new software
application providers certify that they are Year 2000 compliant before we
enter into agreements with them. We did not experience any significant
problems with our supplier provided equipment and software.
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.
Additional Risk Factors that May Affect Future Results
The risks and uncertainties described below are not the only ones NaviSite
faces. Additional risks and uncertainties not presently known to NaviSite or
that are currently deemed immaterial may also impair its business operations.
If any of the following risks actually occur, NaviSite's financial condition
and operating results could be materially adversely affected.
NaviSite has a history of operating losses and expects 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. 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 January 31, 2000, we had an accumulated
deficit of $56.7 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 two years.
Fluctuations in NaviSite's quarterly operating results may negatively
impact its 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
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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.
NaviSite is controlled by CMGI, and CMGI may have interests that conflict
with the interests of NaviSite's other stockholders. As of January 31, 2000,
CMGI beneficially owned approximately 69.5% of NaviSite's outstanding common
stock. Accordingly, CMGI has the power, acting alone, to elect a majority of
NaviSite's board of directors and has the ability to determine the outcome of
any corporate actions requiring stockholder approval, regardless of how
NaviSite's other stockholders may vote. Under Delaware law, CMGI may exercise
its voting power by written consent, without convening a meeting of the
stockholders, meaning that CMGI could effect a sale or merger of NaviSite
without prior notice to, or the consent of, NaviSite's other stockholders.
CMGI's interests could conflict with the interests of NaviSite's 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 sufficient to maintain its majority
ownership position. CMGI's ownership may have the effect of delaying, deferring
or preventing a change in control of NaviSite or discouraging a potential
acquiror from attempting to obtain control of NaviSite, which in turn could
adversely affect the market price of NaviSite's common stock.
A significant portion of NaviSite's revenue currently is generated by
services provided to CMGI and companies affiliated with CMGI, and the loss of
this revenue would substantially impair the growth of NaviSite's business.
NaviSite anticipates that it will continue to receive a significant portion of
its revenue in the future from CMGI and CMGI affiliates. CMGI and CMGI
affiliates accounted for approximately 57% of NaviSite's revenue in the six-
month period ended January 31, 2000 and approximately 72% of NaviSite's revenue
in the six-month period ended January 31, 1999. NaviSite cannot assure you that
revenues generated by CMGI and CMGI affiliates will continue or that it will be
able to secure business from unaffiliated customers to replace this revenue in
the future. The loss of revenue from CMGI and CMGI affiliates, or NaviSite's
inability to replace this operating revenue, would substantially impair the
growth of its business.
NaviSite's ability to grow its business would be substantially impaired if
it 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 NaviSite uses or provides to its customers for their use
in connection with its services is provided under leases executed or guaranteed
by CMGI. We do not expect CMGI to continue this practice, and accordingly,
NaviSite or its customers will have to obtain this equipment directly, on an
unguaranteed basis. NaviSite cannot assure you that it or its customers can do
so on similar financial terms.
If the growth of the market for Internet commerce and communication does not
continue, there may be insufficient demand for NaviSite's services, and as a
result, NaviSite's 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, NaviSite's business strategy may not be
successful because there may not be a continuing market demand for its Web site
and Internet application hosting and management services. In
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addition, in order for the market for NaviSite's 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 NaviSite's Web
site and Internet application hosting and management services.
NaviSite's growth could be substantially limited if the market for Internet
application services fails to continue to develop or if NaviSite cannot
continue to 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 continue
to develop, or develops more slowly than we expect, or if our Web site and
Internet application hosting and management services do not continue to achieve
broad market acceptance, our growth could be substantially limited.
NaviSite's ability to successfully market its services could be
substantially impaired if it is unable to deploy new Internet applications or
if new Internet applications deployed by it 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 NaviSite's services could be
greatly hindered and NaviSite's 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 NaviSite serves is highly competitive, and as an early stage
company, NaviSite may lack the financial and other resources, expertise or
capability needed to capture increased market share. NaviSite competes 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. NaviSite believes that participants in
this market must grow rapidly and achieve a significant presence to compete
effectively. As an early stage company, NaviSite's business is not as developed
as that of many of our competitors. For example, 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.
Any interruptions in, or degradation of, NaviSite's private transit Internet
connections could result in the loss of customers or hinder NaviSite's 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.
Increased costs associated with NaviSite's private transit Internet
connections could result in the loss of customers or significant increases in
operating costs. NaviSite's private transit Internet connections are already
more costly than alternative arrangements commonly utilized to move Internet
traffic. If providers increase the
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pricing associated with utilizing their bandwidth, NaviSite may be required to
identify alternative methods to distribute its 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 NaviSite is unable to access
alternative networks to distribute its customers' digital content on a cost-
effective basis or to pass any additional costs on to its customers, NaviSite's
operating costs would increase significantly.
If NaviSite is unable to maintain existing and develop additional
relationships with Internet application software vendors, the sale, marketing
and provision of NaviSite's 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.
NaviSite purchases from a limited number of suppliers key components of its
infrastructure, including networking equipment, that are available only from
limited sources in the quantities and with the quality that it demands. For
example, NaviSite purchases most of the routers and switches used in its
infrastructure from Cisco Systems Inc. and most of the intelligent Web
switching technology from ArrowPoint Communications Inc. NaviSite cannot assure
you that it will have the necessary hardware or parts on hand or that its
suppliers will be able to provide them in a timely manner in the event of
equipment failure. NaviSite's 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
NaviSite's service level guarantees.
NaviSite's inability to scale its infrastructure or otherwise manage its
anticipated growth and the related expansion of its operations could result in
decreased revenue and continued operating losses. NaviSite has experienced
rapid growth in its service offerings and its customer base. As of January 31,
1999, NaviSite was a Web site hosting provider with approximately 76 customers.
As of January 31, 2000, NaviSite was providing Web site and Internet
application hosting and management services to approximately 196 customers. In
order to service its growing customer base, NaviSite will need to continue to
improve and expand its network infrastructure, in particular through the
construction of new data centers. The ability of NaviSite's network to connect
and manage a substantial number of customers at high transmission speeds while
maintaining superior performance is largely unproven. If its network
infrastructure is not scalable, NaviSite may not be able to provide our
services to additional customers, which would result in decreased revenue.
In addition, between January 31, 1999 and January 31, 2000, NaviSite
increased the number of its employees from 118 to 297. This growth has placed,
and likely will continue to place, a significant strain on NaviSite's
financial, management, operational and other resources. To effectively manage
its anticipated growth, NaviSite will be required to continue to enhance its
operating and financial procedures and controls, to upgrade or replace its
operational, financial and management information systems and to attract,
train, motivate, manage and retain key employees. If NaviSite is unable to
effectively manage its rapid growth, it could experience continued operating
losses.
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You may experience additional dilution because NaviSite's historical source
of funding is expected to change, and other funding may not be available to
NaviSite on favorable terms, if at all. Until the completion of our initial
public offering, CMGI funded our operations as needed, increasing our
obligations to CMGI and allowing us to maintain a zero-balance cash account. As
a result of the completion of our initial public offering, our net obligations
to CMGI, together with all convertible preferred stock held by CMGI, was
converted into common stock. We do not expect to borrow additional funds from
CMGI in the future. After the application of the net proceeds from its initial
public 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.
NaviSite's network infrastructure could fail, which would impair its ability
to provide guaranteed levels of service and could result in significant
operating losses. To provide its customers with guaranteed levels of service,
NaviSite must operate its network infrastructure on a 24-hour-a- day, seven-
day-a-week basis without interruption. In order to operate in this manner,
NaviSite must protect its 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 NaviSite
provides to its 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 NaviSite's proprietary rights could result in the
loss of its competitive advantage in the market. NaviSite relies on a
combination of trademark, service mark, copyright and trade secret laws and
contractual restrictions to establish and protect its proprietary rights.
NaviSite does not own any patents that would prevent or inhibit competitors
from using its technology or entering its market. We cannot assure you that the
contractual arrangements or other steps taken by us to protect our proprietary
rights will prove sufficient to prevent misappropriation of our proprietary
rights or to deter independent, third-party development of similar proprietary
assets. In addition, NaviSite provides its services in other countries where
the laws may not afford adequate protection for its proprietary rights.
Third-party infringement claims against NaviSite's technology suppliers,
customers or NaviSite could result in disruptions in service, the loss of
customers or costly and time consuming litigation. NaviSite licenses or leases
most technologies used in the Internet application services that it offers.
NaviSite's 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. NaviSite expects 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, NaviSite has 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.
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The loss of key officers and personnel could impair NaviSite's ability to
successfully execute its business strategy, because NaviSite substantially
relies on their experience and management skills, or could jeopardize
NaviSite's ability to continue to provide service to our customers. NaviSite
believes that the continued service of key personnel, including Joel B. Rosen,
our 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. In addition, the loss of key members of NaviSite's 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 NaviSite fails to attract and retain additional skilled personnel, its
ability to provide Web site and Internet application management and technical
support may be limited, and as a result, NaviSite may be unable to attract
customers and grow its business. NaviSite's 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. NaviSite may
not be able to hire the necessary personnel to implement its business strategy,
or may need to provide higher compensation to such personnel than it currently
anticipates.
Any future acquisitions NaviSite makes of companies or technologies may
result in disruptions to NaviSite's business or distractions of its management
due to difficulties in assimilating acquired personnel and operations.
NaviSite's 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, NaviSite's acquisitions must
be accounted for using the purchase method of accounting, which could result in
unfavorable accounting for 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 NaviSite's 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 NaviSite's long-term strategy is to expand into
international markets. 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.
NaviSite faces risks inherent in doing business in international markets
which could adversely affect the success of its international operations. There
are risks inherent in doing business in international markets, including
different regulatory requirements, trade barriers, challenges in staffing and
managing foreign
20
<PAGE>
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
NaviSite's international operations.
Although NaviSite has to-date successfully addressed issues relating to
"Year 2000" future problems could disrupt NaviSite's operations, resulting in
lost revenue and increased operating costs. Because NaviSite offers computer-
related services and because of the business-critical nature of many of its
customers' applications, NaviSite's risk of lawsuits related to Year 2000
issues is likely to be greater than that of companies in some other industries.
NaviSite's 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 its services. A failure of this kind could
cause service interruptions or disruptions for one or more of NaviSite's
customers. This scenario could arise as a result of a failure by NaviSite or
its 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.
The emergence and growth of a market for NaviSite's 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. NaviSite's 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 NaviSite's Internet application
services will be impaired if improvements are not made to the entire Internet
infrastructure to alleviate overloading and congestion.
NaviSite 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 NaviSite's
Internet application services utilize encryption and authentication technology
licensed from third parties to provide the protections necessary to ensure
secure transmission of confidential information. NaviSite also relies on
security systems designed by third parties and the personnel in its network
operations centers to secure those data centers. Any unauthorized access,
computer viruses, accidental or intentional actions and other disruptions could
result in increased operating costs. For example, we may incur significant
costs to protect against these interruptions and the threat of security
breaches or to alleviate problems caused by such interruptions or breaches, and
we expect to expend significant financial resources in the future to equip our
new and existing data centers with state-of-the-art security measures. If a
third party were able to misappropriate a consumer's personal or proprietary
information, including credit card information, during the use of an
application solution provided by us, we could be subject to claims, litigation
or other potential liability.
NaviSite may become subject to burdensome government regulation and legal
uncertainties that could substantially impair the growth of its business or
expose it 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 NaviSite's
business or expose NaviSite to unanticipated liabilities. Moreover, the
applicability of existing laws to the Internet and Internet application service
providers is uncertain. These existing laws could expose NaviSite to
substantial liability if they are found to be applicable
21
<PAGE>
to its business. For example, NaviSite provides services over the Internet in
many states in the United States and in the United Kingdom and facilitates the
activities of its customers in these jurisdictions. As a result, NaviSite 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 it do not have a
physical presence, employees or property there.
NaviSite may be subject to legal claims in connection with the information
disseminated through its network which could have the effect of diverting
management's attention and require NaviSite to expend significant financial
resources. NaviSite 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 its network. For example, lawsuits may be
brought against NaviSite claiming that content distributed by some of its
current or future customers may be regulated or banned. In these and other
instances, NaviSite 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. NaviSite's 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 NaviSite's 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.
NaviSite has in the past received, and may in the future receive, letters from
recipients of information transmitted by its 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.
The market price of NaviSite's common stock may experience extreme price and
volume fluctuations. The market price of NaviSite's common stock may fluctuate
substantially due to a variety of factors, including: any actual or anticipated
fluctuations in NaviSite's financial condition and operating results; public
announcements concerning NaviSite or its competitors, or the Internet industry;
the introduction or market acceptance of new service offerings by NaviSite or
its competitors; changes in industry research analysts' earnings estimates;
changes in accounting principles; sales of NaviSite's common stock by existing
stockholders; and the loss of any of NaviSite's 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 often has been
unrelated to the operating performance of particular companies. In the past,
securities class action litigation often has been brought against companies
that experience volatility in the market price of their securities. Whether or
not meritorious, litigation brought against NaviSite could result in
substantial costs and a diversion of management's attention and resources.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
We are exposed to market risk related to changes in interest rates. We
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.
22
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(c) Since October 31, 1999, the Registrant has issued the following
securities that were not registered under the Securities Act of 1933, as
amended (the "Securities Act"):
(i) Issuance of Capital Stock
From October 31, 1999 through the end of the fiscal 2000 second quarter
(January 31, 2000), the Registrant issued a total of 43,894 shares of
common stock upon the exercise of employee stock options. The aggregate
consideration received for such shares was $745.
(ii) Grants of Stock Options
From October 31, 1999 through the end of the fiscal 2000 second quarter
(January 31, 2000), the Registrant granted options to purchase an aggregate
of 364,000 shares of common stock under its Amended and Restated 1998
Equity Incentive Plan, exercisable at a weighted average exercise price of
$73.31 per share.
No underwriters were involved in the foregoing sales of securities. These
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of options to purchase common stock granted prior
to October 21, 1999 and in the case of common stock purchased pursuant to the
Amended and Restated 1998 Equity Incentive Plan, Rule 701 of the Securities
Act. All of the foregoing securities are deemed restricted securities for
purposes of the Securities Act.
(d) Use of Proceeds of the Initial Public Offering
On July 22, 1999, the Registrant filed a Registration Statement on Form S-1
(File No. 333-83501) to register under the Securities Act 5,500,000 shares of
its common stock, par value $.01 per share (plus an additional 825,000 shares
subject to an over-allotment option granted to the underwriters). The
Registration Statement was declared effective by the Securities and Exchange
Commission on October 21, 1999.
The managing underwriters for the offering were BancBoston Robertson
Stephens Inc., Hambrecht & Quist LLC and FAC/Equities, a division of First
Albany Corporation.
The initial public offering commenced on October 22, 1999 and closed on
October 27, 1999, on which date the Registrant sold 5,500,000 shares of common
stock to the underwriters at an initial public offering price of $14.00 per
share. On November 18, 1999, the underwriters exercised in full their over-
allotment option to purchase an additional 825,000 shares of common stock at
$14.00 per share. The over-allotment closing was held on November 23, 1999. The
aggregate proceeds of the initial public offering (including the over-allotment
option) were $88,550,000. The Registrant's aggregate proceeds from the initial
public offering (including the proceeds received in connection with the
exercise of the over-allotment option), net of underwriting discounts and
commissions, were $82,351,500.
From the effective date of the Registration Statement through the end of the
fiscal 2000 second quarter (January 31, 2000), NaviSite incurred the following
expenses in connection with the initial public offering:
<TABLE>
<S> <C>
Underwriting discounts and Commissions....................... $ 6,199,000
Other expenses (estimated)................................... $ 1,970,000
-----------
Total expenses............................................. $ 8,169,000
===========
Net offering proceeds to NaviSite ........................... $80,381,000
===========
</TABLE>
23
<PAGE>
None of the expenses incurred by the Registrant in connection with the
initial public offering were paid, directly or indirectly, to directors,
officers, persons owning ten percent or more of the Registrant's equity
securities or affiliates of the Registrant.
From the effective date of the Registration Statement through the end of the
fiscal 2000 second quarter (January 31, 2000), the Registrant has utilized the
proceeds from the initial public offering and underwriters' over-allotment as
follows:
<TABLE>
<S> <C>
Construction of new datacenters.............................. $25,900,000
Working capital requirements................................. 14,700,000
Repayment of notes payable................................... 1,000,000
Fixed asset acquisitions..................................... 1,000,000
-----------
Total...................................................... $42,600,000
===========
</TABLE>
In July 1998, in connection with the Registrant's acquisition of Servercast
Communications, L.L.C., the Registrant issued $1,000,000 in term notes with
principal payable on January 2, 2000. In January 2000, the Registrant paid the
principal and remaining interest due on these term notes to certain
individuals, including Mr. Peter C. Kirwan, Jr., the Chief Technology Officer
of the Registrant. Apart from this payment, none of the net proceeds of the
initial public offering were paid, directly or indirectly, to directors,
officers, persons owning ten percent or more of the Registrant's equity
securities or affiliates of the Registrant.
Unused proceeds of the initial public offering are currently invested in a
U.S. Treasury Money Market Fund.
All of the foregoing share information in Item 2 does not reflect the
Registrant's recently announced two-for-one stock split, to be effected as a
100% stock dividend. Such stock dividend is payable on April 5, 2000 to all
stockholders of record at the close of business on March 22, 2000.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------- -------
<C> <S>
2.1 Stock Purchase Agreement dated as of February 16, 2000 between CMGI,
Inc., the Registrant, ClickHear, Inc. and the Stockholders of
ClickHear, Inc. (incorporated by reference to Exhibit 99.1 in the
Registrant's Current Report on Form 8-K dated February 22, 2000).
2.2 Inter-Company Agreement dated February 22, 2000, between CMGI, Inc and
the Registrant (incorporated by reference to Exhibit 99.2 in the
Registrant's Current Report on Form 8-K dated February 22, 2000).
10.1 Irrevocable Standby Letter of Credit, dated as of December 3, 1999,
between BankBoston, N.A. and the Registrant.
10.2 Security Agreement and Assignment of Account, dated December 3, 1999,
between BankBoston, N.A. and the Registrant.
10.3 Severance Agreement and General Release, dated November 8, 1999, and
as amended on December 2, 1999, between Barbara Fortier and the
Registrant.
27 Financial Data Schedule
</TABLE>
(b) Reports Submitted on Form 8-K
On March 8, 2000, the Registrant filed a Current Report on Form 8-K, dated
February 22, 2000, relating to the acquisition of ClickHear, Inc. by the
Registrant.
24
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
NAVISITE, INC.
/s/ Kenneth W. Hale
By __________________________________
Kenneth W. Hale
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: March 16, 2000
25
<PAGE>
EXHIBIT 10.1
IRREVOCABLE STANDBY LETTER OF CREDIT DATE: DECEMBER 3, 1999
BENEFICIARY DELIVERY BY COURIER SERVICE
GILBANE BUILDING COMPANY
7 JACKSON WALKWAY CREDIT NUMBER: S-023-STBY-50103433
PROVIDENCE, RI 02940
Dear Sir or Madam:
BY ORDER OF:
NAVISITE, INC.
100 BRICKSTONE SQUARE
ANDOVER, MA 01810
We hereby open in your favor our Irrevocable Standby Letter Of Credit for the
account of Navisite, Inc. for a sum or sums not exceeding a total of US Dollars
10,325,238.52 (Ten Million Three Hundred Twenty Five Thousand Two Hundred Thirty
Eight And 52/100 US Dollars) available by your draft(s) at sight on ourselves
effective immediately and expiring at our counters on February 29, 2000.
Draft(s) must be accompanied by:
1) Beneficiary's signed statement certifying: "The amount of our draft drawn
under BankBoston, N.A. Letter of Credit No. 50103433 represents the amount due
on invoice(s) presented to Navisite, Inc. which was (were) not paid in
accordance with the terms of payment or contract. Demand for payment has been
made and payment has not been received by us from Navisite, Inc. or any other
source."
2) Copy of unpaid invoice(s).
Each draft must bear upon its face the clause "Drawn under Letter of Credit No.
50103433 dated December 3, 1999 of BankBoston, N.A., Boston, MA".
The amount available for drawing under this Letter of Credit will be
automatically reduced by any payments made outside this credit to Gilbane
Building Company if such payments are effected by BankBoston, N.A., make
reference to this credit and copy of payment is sent to Global Trade Services by
fax to (617) 434-5909.
We hereby agree that drafts drawn under and in compliance with the terms of this
Letter of Credit will be duly honored if presented to the above-mentioned drawee
bank on or before February 29, 2000.
<PAGE>
PAGE 2 - CREDIT NO. S-023-STBY-50103433
Documents for negotiation/payment under this Letter of Credit are to be sent via
courier services in one lot to BankBoston, N.A., attn: Global Trade Services
Dept., 150 Federal Street, Boston, MA 02110, Mail Stop 50-04-01.
This Standby Letter of Credit is subject to the "International Standby Practices
(ISP98), International Chamber of Commerce Publication No. 590."
Kindly note that the prefix S-023-STBY is included in our letter of credit
number for internal identification purposes only and is subject to change. The
remainder of our reference number is the actual letter of credit number which is
not subject to change.
Kindly address all correspondence regarding this letter of credit to the
attention of our Letter of Credit Operations, P.O. Box 1763, Boston, MA 02105,
attention Nathalie Alves, mentioning our reference number as it appears above.
Telephone inquiries can be made to Nathalie Alves at (617) 434-5493.
Very truly yours,
/s/ Milan Kucha
-------------------------------
Milan Kucha
Trade Services Representative
<PAGE>
EXHIBIT 10.2
SECURITY AGREEMENT AND ASSIGNMENT OF ACCOUNT
--------------------------------------------
Date: December 3, 1999
TO: BANKBOSTON, N.A. (the "Bank"), a national banking association having its
----
Head Office at 100 Federal Street, Boston, Massachusetts 02110:
1. ASSIGNMENT OF ACCOUNT. FOR VALUE RECEIVED, and in consideration of
---------------------
the Bank giving, in its discretion, time, credit or banking facilities or
accommodations to NaviSite Inc. (the "Company") and certain of the Company's
-------
subsidiaries (collectively, the "Borrowers" and each individually, a
---------
"Borrower"), the undersigned (jointly and severally if more than one) hereby
--------
pledges, assigns and transfers all of its right, title and interest in and to,
and grants to the Bank a security interest in all mutual funds, cash,
instruments, securities and other investment property now or hereafter as
maintained or held in that certain Loan Collateral Account #OFFK 522 137343-CL
(collectively, "Collateral") in an aggregate amount of not less than
----------
$10,325,238.52 or such greater amount which constitutes all Obligations to the
Bank, together with all interest, dividends and income thereon and all sums now
or at any time hereafter on deposit therein or due thereon and any instruments,
investments, securities or other investment property purchased with the proceeds
thereof, and any and all proceeds and products of any of the foregoing
(collectively, the "Account"), as collateral security for the payment and
-------
performance of the following (collectively, the "Obligations"): any and all
-----------
obligations of the Borrowers and the undersigned to the Bank or any of its
branches and affiliates of every kind and description, whether direct or
indirect, absolute or contingent, primary or secondary, joint or several, due or
to become due, now existing or hereafter arising or acquired including, without
limitation, all obligations of the Company to the Bank arising from a standby
letter of credit number 501 03433 in an aggregate amount of not less than
$10,325,238.52 or such greater amount which represents the actual obligation
(together with all agreements and instruments executed in connection with any of
the foregoing, and as the same may from time to time be modified, amended,
extended or replaced, the "Loan Documents"). The Bank hereby agrees that if at
--------------
any time, any of the Obligations have matured and are indefeasibly repaid in
full, the Bank shall immediately reduce the amount required to be held in the
Account by the amount of such repayment. In addition, the Bank hereby agrees
that if at any time, any of the obligations are permanently reduced (but not
reduced to zero), the Bank shall reduce the amount required to be held by the
Bank in the Account by the amount of such permanent reduction.
2. REPRESENTATIONS, WARRANTIES AND COVENANTS.
-----------------------------------------
2.1 The undersigned represents and warrants that (a) the undersigned has
the right and legal authority to execute and deliver this Assignment; (b) except
for any financing statement which may have been filed by the Bank, no financing
statement covering the Account has been filed with any filing office; (c) no
other assignment or security agreement has been executed with respect to the
Account; (d) the Account is not subject to any liens, offsets or rights of any
person or entity other than the Bank; (e) if the undersigned is a corporation,
the opening of the Account, the deposit of funds therein and the assignment and
pledge thereof pursuant to the terms of this Assignment have been authorized by
all necessary corporate action and do not contravene any provision of its
constituent documents or any law, regulation, decree, order or agreement binding
on the undersigned; and (f) this Assignment represents the legal, valid and
binding obligation of the undersigned, enforceable in accordance with its terms.
2.2 So long as any of the Obligations remain outstanding, the
undersigned: (a) will execute and deliver to the Bank all such other documents,
and take such other actions, as and when the Bank may from time to time request
in order to more fully evidence and perfect the Bank's interest in the Account;
(b) will not take or permit to be taken any action of any kind with respect to
the Account, including any attempt to transfer, assign or create in favor of any
party other than the Bank a security interest in, the Account; (c) will not
make, or allow to be made, any withdrawals from the Account and will not close
the Account; and (d) will immediately segregate from all other funds of the
undersigned and hold in trust for the Bank any funds received from the Account
in violation of this Assignment, and will not exercise dominion or control over
such funds except to pay them immediately into the Account.
3. DEFAULT; REMEDIES. Upon the occurrence of any default in the payment
-----------------
or performance of any obligation under this Assignment or any other Obligation
(after giving effect to any grace periods
<PAGE>
-2-
applicable thereto) and so long as such default shall be continuing, the Bank
may declare the Obligations immediately due and payable and may (i) withdraw
immediately all or any portion of the funds on deposit in or payable on the
Account, and apply such funds to the payment of the Obligations in such order
and manner as the Bank, in its sole discretion, may elect; (ii) on behalf of the
undersigned endorse the name of the undersigned upon any checks, drafts, or
other instruments payable to the undesigned evidencing payment on the Account;
(iii) surrender or present for withdrawal the passbook, certificate or other
documents issued to the undersigned in connection with the Account; (iv)
liquidate any Collateral on such terms as the Bank may determine whether by
private or public sale and notify any third party, including the Securities
Intermediary, to liquidate the Collateral on behalf of the Bank and direct the
proceeds thereof to the Bank for application to payment of the Obligations in
such order as the Bank may determine. All transaction costs relating to exercise
of any of the Bank's rights or remedies hereunder shall be borne by the
undersigned and the Bank may deduct any such costs from proceeds of the
Collateral before application of such proceeds to the Obligations. Any such
third party may rely on this Assignment as conclusive evidence that the Bank has
the power and authority to provide any notice or direction relating to the
Collateral as the Bank deems necessary in order to exercise any rights and
remedies available to the Bank relating to the Collateral.
4. BANK AS ATTORNEY-IN-FACT. The undersigned appoints the Bank as its
------------------------
attorney-in-fact for the purposes of carrying out the provisions of this
Assignment and taking any action and executing any instrument that the Bank may
deem necessary or advisable to accomplish the purposes hereof. This power of
attorney shall be irrevocable and shall not terminate upon the death or any
disability of the undersigned.
5. RIGHTS OF BANK; INDEMNIFICATION.
-------------------------------
5.1 The Bank shall not be liable for its failure to use due diligence in
the collection of the Obligations, or for any action or omission in connection
therewith, or for any loss of interest on, or penalty assessed against, funds in
or payable on the Account as a result of the Bank's exercising any of its rights
or remedies under this Assignment. The Bank may exercise its rights with respect
to the Account and the Collateral without resorting, or regard, to other
collateral or sources of reimbursement for the Obligations. No delay or omission
on the part of the Bank in exercising any right shall operate as a waiver of
such right or any other right. A waiver on any one occasion shall not bar or
waive the exercise of any right on any future occasion. All rights and remedies
of the Bank, whether evidenced hereby or by any other agreement, are cumulative
and not exclusive of any remedies provided by law or any other agreement, and
may be exercised separately or concurrently.
5.2 The undersigned shall indemnify and hold harmless the Bank from and
against any liability or damage which the Bank may incur in the exercise and
performance, in good faith, of any of the Bank's powers and duties set forth
herein.
6. WAIVERS BY THE UNDERSIGNED. The undersigned waives presentment,
--------------------------
demand, notice, protest, notice of acceptance of this Assignment, notice of any
loans made, credit or other extensions granted, collateral received or delivered
or any other action taken in reliance hereon and all other demands and notices
of any description, except for such demands and notices as are expressly
required to be provided to the undersigned under this Assignment or any other
document evidencing the Obligations. With respect to both the Obligations and
the Account, the undersigned assents to any extension or postponement of the
time of payment or any other forgiveness or indulgence, to any substitution,
exchange or release of any collateral securing the Obligations, to the addition
or release of any party or person primarily or secondarily liable, to the
acceptance of partial payment thereon and the settlement, compromise or
adjustment of any thereof, all in such manner and at such time or times as the
Bank may deem advisable. The undersigned waives all rights against the Borrower
arising hereunder by way of subrogation, reimbursement, indemnification,
contribution or otherwise; the undersigned will not prove any claim in
competition with the Bank in respect of any payment hereunder in bankruptcy or
insolvency proceedings of any nature; and the undersigned will not claim any
set-off or counterclaim against the Borrower in respect of any liability of the
undersigned to the Borrower.
7. NOTICES. Any demand upon or notice to the undersigned that the Bank
-------
may give shall be effective when delivered by hand, properly deposited in the
mails postage prepaid, or sent by telex, answerback received, or electronic
facsimile transmission, receipt acknowledged, or delivered to a telegraph
<PAGE>
-3-
company or overnight courier, in each case addressed to the undersigned at the
address shown next to its signature at the end of this Assignment or as it
appears on the books and records of the Bank. Demands or notices addressed to
any other address at which the Bank customarily communicates with the
undersigned also shall be effective. Any notice of the undersigned to the Bank
shall be given as aforesaid, addressed to the Bank at the address shown at the
beginning of this Assignment or such other address as the Bank may advise the
undersigned in writing.
8. TERMINATION; REINSTATEMENT. This Assignment shall remain in full
--------------------------
force and effect until the Obligations have been repaid in full and the Bank
shall have no further obligation to extend credit to the Borrower or the
undersigned.
9. SUCCESSORS AND ASSIGNS. This Assignment shall be binding upon the
-----------------------
undersigned, its successors and assigns, and shall inure to the benefit of and
be enforceable by the Bank and its successors and assigns. Without limiting the
generality of the foregoing sentence, the Bank may transfer any agreement or any
note held by it evidencing, securing or otherwise executed in connection with
the Obligations, or sell participations in any interest therein, to any other
person or entity, and such other person or entity shall thereupon become vested,
to the extent set forth in the agreement evidencing such assignment, transfer or
participation, with all the rights in respect thereof granted to the Bank
herein.
10. GENERAL. The provisions of this Assignment may not be amended,
-------
modified or waived except by a writing signed by the undersigned and the Bank,
nor may the undersigned assign any of its rights hereunder. This Assignment and
the terms, covenants and conditions hereof shall be construed in accordance
with, and governed by, the laws of The Commonwealth of Massachusetts (without
giving effect to any conflicts of law provisions contained therein). In the
event that the Account is held or stands in the name of the undersigned and
another or others jointly, the Bank may deal with the same for all purposes as
if it belonged to or stood in the name of the undersigned alone. Section
headings are for convenience of reference only and are not a part of this
Assignment.
11. JURY WAIVER. THE BANK (BY ITS ACCEPTANCE OF THIS ASSIGNMENT) AND THE
-----------
UNDERSIGNED AGREE THAT NEITHER OF THEM NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A)
SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM, OR ANY OTHER ACTION
BASED UPON, OR ARISING OUT OF, THIS ASSIGNMENT, ANY RELATED INSTRUMENTS, ANY
COLLATERAL OR THE DEALINGS OR THE RELATIONSHIP BETWEEN OR AMONG ANY OF THEM, OR
(B) SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY
TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS PARAGRAPH SHALL
BE SUBJECT TO NO EXCEPTIONS. NEITHER THE BANK NOR THE UNDERSIGNED HAS AGREED
WITH OR REPRESENTED TO THE OTHER THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT
BE FULLY ENFORCED IN ALL INSTANCES.
IN WITNESS WHEREOF, the undersigned has caused this Assignment to be
duly executed as an instrument under seal as of the date first written above.
NaviSite Inc.
/s/ Kenneth W. Hale
----------------------------------
By:
Title:
<PAGE>
EXHIBIT 10.3
SEVERANCE AGREEMENT AND GENERAL RELEASE
NaviSite, Inc. ("NaviSite" or the "Company") and Barbara Fortier, (the
"Employee") agree as of November 8, 1999 that the following sets out their
understanding regarding the Employee's separation from the Company.
RECITALS
Whereas the parties to this Agreement wish to set out the terms and
conditions under which the Employee will sever her employment relationship with
NaviSite;
For purposes of this Agreement, whenever the name Company is used, it
includes all parent, subsidiary, and affiliated entities, including but not
limited to NaviNet, Engage Technologies and CMG Information Services, Inc.
("CMGI"), as well as all current and former agents, employees, attorneys,
insurers, shareholders, officers and directors, all successors and assigns and
all other persons and entities for whose acts and omissions the Company may be
held liable.
In consideration of the promises and conditions set forth below, the
sufficiency of which is hereby acknowledged, the Company and the Employee agree
as follows:
1. TERMINATION DATE - The Employee's effective date of termination from
----------------
the Company shall be November 30, 1999 (the "Termination Date").
2. SEVERANCE PAY - To receive the stated severance benefits you must sign
-------------
this Agreement and return it to NaviSite no sooner than your Termination Date
and no later than 21 calendar days after your termination date. Within 15 days
after the receipt by NaviSite of the executed Agreement, the Company will pay
the Employee A LUMP SUM PAYMENT equivalent to sixteen (16) weeks of her current
base salary less applicable state and federal taxes.
3. BENEFITS - Effective as of the Termination Date, you shall be
--------
considered to have elected to continue receiving group medical insurance
pursuant to the federal "COBRA" law, 29 U.S.C. (S)1161 et seq. For the first
------
two months after the termination date, the Company shall pay the full premium
for such coverage. All premium costs after the two month period shall be paid by
you on a monthly basis for as long as, and to the extent that, you remain
eligible for COBRA continuation. All other benefits, including life insurance
and longterm disability, will cease upon the termination date.
4. STOCK OPTIONS - The Company will request on Employee's behalf that
-------------
BancBoston Robertson Stephens Inc., on behalf of itself and as the
representatives for the underwriters, releases Employee from the Lock-Up
Agreement she executed on August 13, 1999. Employee will then have the right to
exercise all vested options that she has in CMGI, NaviSite, and NaviNet in
accordance with the applicable plans and agreements.
5. OUTPLACEMENT - NaviSite agrees to provide you executive outplacement
------------
services with a provider to be identified. The value of these services shall not
exceed a cost of $10,000.
<PAGE>
6. VACATION PAY - The Employee will receive payment on the Termination
------------
Date for any unused vacation time accrued through the Termination Date.
7. RELEASE - For the purpose of implementing a full and complete
-------
settlement and release and in consideration of the above payments and benefits,
to which the Employee acknowledges that she would not otherwise be entitled, the
Employee hereby fully, forever, irrevocably and unconditionally releases,
remises and discharges the Company, its officers, directors, stockholders,
agents, employees, corporate affiliates and attorneys, from any and all claims,
charges, complaints, demands, actions, causes of action, suits, rights, debts,
sums of money, costs, accounts, reckonings, covenants, contracts, agreements,
promises, doings, omissions, damages, executions, obligations, liabilities, and
expenses (including attorneys' fees and costs), of every kind and nature which
she ever had or now has against the Company, its officers, directors,
stockholders, corporate affiliates, agents, employees and attorneys, including,
but not limited to, all claims arising out of her employment, all employment
discrimination claims under any state, federal, or local law, including but not
limited to, Title VII of the Civil Rights Act of 1964, 42 U.S.C. (S)2000 et
--
seq.; the Age Discrimination in Employment Act, 29 U.S.C. (S)621 et seq.; the
- --- ------
Americans With Disabilities Act, 42 U.S.C., (S)12101 et seq.; the
Massachusetts Fair Employment Practices Act, M.G.L. c. 151B (S)1 et seq.; the
------
Massachusetts Civil Rights Act, M.G.L. c. 12 (S)(S)11H and 11I, the
Massachusetts Equal Rights Act, c. 93 (S)102 and M.G.L. c. 214, (S)1C, as well
as any common law tort claims, wrongful discharge claims, and all other claims
brought under any other federal, state or local statutes or ordinances not
expressly referenced above.
8. NON-DISCLOSURE AND NON-COMPETITION - The Employee acknowledges her
----------------------------------
obligation to keep confidential all non-public information concerning the
Company which Employee has acquired during the course of employment with the
Company. As stated more fully in the CMG Information Services, Inc.,
Nondisclosure and Developments Agreement, including all attachments thereto,
signed by Employee on July 3, 1997 (which remain in full force and effect), the
Employee will not disclose any such information to, or use such information for
the benefit of, any third party, including competitors of the Company. The
Employee further acknowledges and reaffirms her obligations under the non-
competition agreement previously signed by Employee. The Employee further
acknowledges that the obligations pursuant to the non-competition agreement will
remain in full force and effect.
9. COMPANY EQUIPMENT - The Employee confirms that she has returned to the
-----------------
Company all files, records, equipment and any other Company-owned property in
her possession, including, without limitation, all equipment, tangible
proprietary information, documents, books, records, reports, contracts, lists,
computer disks (or other computer-generated files or data), or copies thereof,
created on any medium, prepared or obtained by the Employee in the course of or
incident to her employment with the Company.
10. AMENDMENTS; WAIVERS - This Agreement may not be amended except by an
-------------------
instrument in writing, signed by each of the parties. No failure to exercise and
no delay in exercising any right, remedy, or power under this Agreement shall
operate as a waiver thereof, nor shall any single or partial exercise thereof,
or the exercise of any other right, remedy, or power provided herein or by law
or in equity.
2
<PAGE>
11. SEVERABILITY - Should any provision of this Agreement be declared or
------------
be determined by any court of competent jurisdiction to be illegal or invalid,
the validity of the remaining parts, terms or provisions shall not be affected
thereby and said illegal and invalid part, term or provision shall be deemed not
to be a part of this Agreement.
12. CONFIDENTIALITY - The Employee understands and agrees that the
---------------
existence and terms of this Agreement and release are confidential and shall not
be disclosed to any third party without the written consent of the Company,
except as required by federal or state law.
13. NATURE OF AGREEMENT - The parties understand and agree that this
-------------------
Agreement is a severance agreement and does not constitute an admission of
liability or wrong doing on the part of the Company.
14. AGE DISCRIMINATION CLAIMS - The Employee understands and agrees that,
-------------------------
by entering this Agreement, (a) she is waiving any rights or claims she might
have under the Age Discrimination in Employment Act, as amended by the Older
Workers Benefit Protection Act; (b) she has received consideration beyond that
to which she was previously entitled; (c) she is advised to consult with an
attorney before signing this Agreement; and (d) she has been offered the
opportunity to evaluate the terms of this Agreement for not less than twenty-one
(21) days prior to her execution of the Agreement. The Employee understands that
she may revoke this Agreement (by written notice to the Company) for a period of
seven (7) days after the execution of this Agreement, and the Agreement shall
not be effective or enforceable until the expiration of this seven (7) day
revocation period.
15. VOLUNTARY ASSENT - The Employee affirms that no other promises or
----------------
agreements of any kind have been made to or with her by any person or entity
whatsoever to cause the Employee to sign this Agreement, and that she fully
understands the meaning and intent of this Agreement. The Employee further
states and represents that she has carefully read this Agreement, understands
the contents herein, freely and voluntarily assents to all of the terms and
conditions hereof, and signs her name of her own free act.
16. NON-DISPARAGEMENT - The Employee understands and agrees that she shall
-----------------
not make any false, disparaging or derogatory statements in public or private
regarding the Company or any of its directors, officers, employees, agents or
representatives or the Company's business affairs and financial condition.
17. APPLICABLE LAW - This Agreement shall be interpreted and construed by
--------------
the laws of the Commonwealth of Massachusetts, without regard to conflicts of
laws provisions. The Employee hereby irrevocably submits to, and acknowledges
and recognizes the jurisdiction of the courts of the Commonwealth of
Massachusetts (which courts, together with all applicable appellate courts, for
purposes of this Agreement, are the only courts of competent jurisdiction) over
any suit, action or other proceeding arising out of, under or in connection with
this Agreement or the subject matter hereof.
18. ENTIRE AGREEMENT - The parties understand and agree that the preceding
----------------
paragraphs recite the sole consideration for this Agreement, and that all
agreements and understandings between the Employee and the Company on any
subject are embodied and expressed in this Agreement. This Agreement shall
supersede all prior or contemporaneous agreements and
3
<PAGE>
understandings between the Employee and the Company, whether written or oral,
express or implied, with respect to any subject whatsoever, except to the extent
that the provisions of any such agreement have been expressly referred to in
this Agreement as having continued effect.
IN WITNESS WHEREOF, all parties have set their hand and seal to this
Agreement as of the date written above.
NaviSite, Inc.
By its authorized representative,
Name: /s/ Jeanne Knight
-------------------------------
Title: Director, Human Resources
-------------------------------
Date: 11/9/99
-------------------------------
BARBARA FORTIER
/s/ Barbara Fortier
-------------------------------
Date: 12/2/99
-------------------------------
4
<PAGE>
[NaviSite LOGO APPEARS HERE]
AMENDMENT TO SEVERANCE AGREEMENT AND GENERAL RELEASE
In accordance with the Company's letter to the Employee dated November
19, 1999, and pursuant to paragraph 17 of the Severance Agreement and General
Release (the "Agreement") between the parties dated November 8, 1999, paragraph
1 of the Agreement is hereby amended to read:
"TERMINATION DATE - The Employee's effective date of termination from
----------------
the Company shall be December 10, 1999."
NaviSite, Inc.
By its authorized representative,
Name: /s/ Jeanne Knight
---------------------------
Title: Director, Human Resources
---------------------------
Date: 12/2/99
---------------------------
BARBARA FORTIER
/s/ Barbara Fortier
---------------------------
Date: 12/2/99
---------------------------
100 Brickstone Square
5th Floor
Anodover, MA 01810
p 888.298.8222
f 978.684.3599
www.navisite.com
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