e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For Fiscal Year
Ended July 31,
2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period
From to
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Commission File 000-27597
NaviSite, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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52-2137343
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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400 Minuteman Road
Andover, Massachusetts
(Address of principal
executive offices)
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01810
(zip
code)
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Registrants telephone number, including area code
(978) 682-8300
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.01 par value
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
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 that the registrant
was required to file such reports) and (2) has been subject
to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The approximate aggregate market value of registrants
common stock held by non-affiliates of the Registrant on
January 31, 2009, based upon the closing price of a share
of the Registrants common stock on such date as reported
by the NASDAQ Capital Market: $7,018,538
On October 19, 2009, the Registrant had outstanding
37,276,771 shares of common stock, $0.01 par value.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement for
its annual meeting of stockholders for the fiscal year ended
July 31, 2009, which statement will be filed with the
Securities and Exchange Commission within 120 days after
the end of the registrants fiscal year, are incorporated
by reference into Part III hereof.
NAVISITE,
INC.
2009 ANNUAL REPORT
ON
FORM 10-K
TABLE OF CONTENTS
2
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on
Form 10-K
of NaviSite, Inc. (NaviSite, the
Company, we,
us and our) contains
forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act), and
Section 27A of the Securities Act of 1933, as amended (the
Securities Act), 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 our other filings with
the Securities and Exchange Commission (the
SEC). Readers are cautioned not to
place undue reliance on these forward-looking statements, which
reflect our managements analysis, judgment, belief or
expectation only as of the date hereof. Investors are warned
that actual results may differ materially from our expectations.
We undertake no obligation to publicly reissue or update these
forward-looking statements to reflect events or circumstances
that arise after the date hereof. All logos and company and
product names may be trademarks or registered trademarks of
their respective owners.
Our
Business
NaviSite is a global information-technology
(IT) provider of enterprise-hosting and
application services. We help more than 1,400 customers reduce
the cost and complexity of IT, increase their service levels,
free IT resources and focus on their core businesses by offering
a comprehensive suite of customized IT-as-a-service solutions.
Our goal is to be the leading provider for cloud-enabled
enterprise-hosting and managed-application services by
leveraging our deep knowledge, experience, technology platform,
commitment to flexibility and responsiveness to our customers.
Our core competencies are to provide complex enterprise-hosting
solutions, customized
managed-application
services and remote operations services. Our suite of managed
applications includes Oracle
e-Business
Suite, PeopleSoft Enterprise, Siebel, JD Edwards, Hyperion,
Lawson, Kronos, Lotus Domino and Microsoft Dynamics, including
Exchange email services. By managing application and
infrastructure and providing comprehensive services, we are able
to address the key challenges faced by IT organizations
today: increasing complexity, pressures on capital
and operating expenses and declining or limited resources.
We provide our services from a global platform of 13 data
centers in the United States and two in the United Kingdom,
totaling approximately 200,000 square feet of usable space,
and a primary network operations center, or NOC, in India and
secondary NOC support based out of Andover, Massachusetts. Using
this platform, we leverage innovative and scalable uses of
technology, including shared components and virtualization,
along with the subject-matter expertise of our professional
staff to deliver what we believe are cost-effective, flexible
solutions that provide responsive and predictable levels of
service to meet our customers business needs. Combining
our technology, domain expertise and competitive fixed-cost
infrastructure, we can offer our customers the cost and
functional advantages of outsourcing with a proven partner like
NaviSite. We are dedicated to delivering quality services and
meeting rigorous standards, including maintaining our SAS 70
Type II compliance and Microsoft Gold and Oracle Certified
Partner certifications.
In addition to delivering enterprise hosting and application
services, we are able to leverage our infrastructure and
application-management platform,
NaviViewtm,
to deliver our partners software on demand and thereby
provide an alternative to the traditional licensing of software.
As the platform provider for an increasing number of independent
software vendors (ISVs) and providers of
software-as-a-service (SaaS), we enable
solutions and services to a diverse, growing customer base. We
have adapted our infrastructure and platform by incorporating
virtualization technologies to provide services specific to the
needs of our customers in order to increase our market share.
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We believe that our data centers and infrastructure have the
capacity necessary to expand our business for the foreseeable
future. Further, trends in hardware virtualization and the
density of computing resources, which reduce the required square
footage, or footprint, in the data center, are favorable to
NaviSites services-oriented offerings, as compared with
traditional co-location or managed-hosting providers. Our
services, as described below, combine our developed
infrastructure with established processes and procedures for
delivering hosting- and application-management services. Our
high-availability infrastructure, high-performance monitoring
systems and proactive and collaborative problem-resolution and
change-management processes are designed to identify and address
potentially crippling problems before they disrupt our
customers operations.
We currently serve over 1,400 customers. Our hosted customers
typically enter into service agreements for a term of one to
five years, with monthly payments, that provide us with a
recurring revenue base. Our revenue growth comes from adding new
customers and delivering additional services to existing
customers. Our recurring revenue base is affected by new
customers and renewals and terminations with existing customers.
Our
Services
We offer our customers a broad range of enterprise-hosting and
managed-application services that can be deployed quickly and
cost effectively. Our expertise allows us to meet an expanding
set of increasingly complex customer requirements. Our
experience and capabilities save our customers the time and cost
of developing expertise in house, and we increasingly serve as
the sole manager of our customers outsourced applications.
We provide these services to a range of industries
including financial services, healthcare and pharmaceuticals,
manufacturing and distribution, publishing, media and
communications, business services, public sector and
software through our own sales force and
sales-channel relationships.
Our managed-hosting, -application and -remote-operations
services are facilitated by our proprietary
NaviViewtm
collaborative infrastructure- and application-management
platform. As described further below, our
NaviViewtm
platform enables us to provide highly efficient, effective and
customized management of enterprise applications and hosted
infrastructure. Comprised of a suite of third-party and
proprietary products,
NaviViewtm
provides tools designed specifically to meet the needs of
customers who outsource IT functions.
Supporting our managed-hosting and applications services
requires a range of hardware and software designed for the
specific needs of our customers. NaviSite is a leader in using
virtual computing and memory, shared and dedicated storage and
networking as ways to optimize services for performance, cost
and operational efficiency. We strive to continually innovate as
technology develops. An example of this continued innovation is
the deployment of our utility- or cloud-based infrastructure to
maximize infrastructure leverage.
Our services are grouped and described further as follows:
Enterprise-Hosting
Services
NaviSites hosting services provide highly dependable and
secure technology solutions for our customers critical IT
needs.
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Infrastructure as a Service
(IaaS) Support
provided for hardware and software located in one of our 15 data
centers. We also provide bundled offerings packaged as
content-delivery services. Specific services include:
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dedicated and virtual servers;
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business continuity and disaster recovery;
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connectivity;
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content distribution;
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database administration and performance tuning;
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desktop support;
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hardware management;
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monitoring;
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network management;
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security;
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server and operating management; and
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storage management.
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Software as a Service Enablement of SaaS to
the ISV community. Services include SaaS starter kits and
services specific to the needs of ISVs that want to offer their
software in an on-demand or subscription mode.
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Co-location Physical space offered in a data
center. In addition to providing the physical space, NaviSite
offers environmental support, specified power with backup power
generation and network-connectivity options.
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Application
Management
We provide implementation and operational services for the
packaged applications listed below. We offer in
addition to packaged enterprise-resource-planning, or ERP,
applications outsourced messaging, including the
monitoring and management of Microsoft Exchange and Lotus
Domino.
Application-management
services are available either in a NaviSite data center or,
through remote management, on customers premises.
Moreover, our customers can choose to use dedicated or shared
servers. We also provide specific services to help customers
migrate from legacy or proprietary messaging systems to
Microsoft Exchange or Lotus Domino, and our experts can
customize messaging and collaborative applications. We offer
user provisioning, spam filtering, virus protection and enhanced
monitoring and reporting.
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ERP Application-Management Services Defined
services provided for specific packaged applications. Services
include implementation, upgrade assistance, monitoring,
diagnostics, problem resolution and functional end-user support.
Applications include:
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Oracle
e-Business
Suite;
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PeopleSoft Enterprise;
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Siebel;
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JD Edwards;
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Hyperion;
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Lawson;
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Kronos;
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Microsoft Dynamics;
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Microsoft Exchange; and
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Lotus Domino.
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ERP Professional Services Planning,
implementation, optimization, enhancement and upgrades for
supported third-party ERP applications.
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Custom-Development Professional Services
Planning, implementation, optimization and
enhancement for custom applications developed by us or our
customers.
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NaviViewtm
Platform
Our proprietary
NaviViewtm
platform is a critical element of our service offerings, each of
which can be customized to meet our customers particular
needs. Using this platform, we offer valuable flexibility
without the significant costs associated with traditional
customization.
NaviViewtm
allows us to work with our customers IT teams, systems
integrators and other third parties to deliver services to
customers. Our
NaviViewtm
platform and its user interface help ensure full transparency to
the customer and seamless operation of outsourced applications
and infrastructure, including (i) hardware,
operating-system, database and application monitoring,
(ii) event management, (iii) problem-resolution
management and (iv) integrated change- and
configuration-management tools. Our
NaviViewtm
platform includes the following elements.
Event-Detection System Our proprietary
technology allows our operations personnel to efficiently
process alerts across heterogeneous computing environments. This
system collects and aggregates data from all of the relevant
systems-management software packages utilized by an IT
organization.
Synthetic-Transaction Monitoring Our
proprietary synthetic-transaction methods emulate the end-user
experience and monitor for application latency or malfunctions
that affect user productivity.
Automated Remediation Our
NaviViewtm
platform also allows us to proactively monitor, identify and
correct common problems associated with the applications we
manage on behalf of our customers. These automated corrections
help ensure availability and reliability by remediating known
issues in real time and keeping applications up and running
while underlying problems or potential problems are diagnosed.
Component-Information Manager This central
repository provides a unified view of disparate network,
database, application and hardware information.
Escalation Manager This workflow-automation
technology allows us to streamline routine tasks and escalate
critical issues in a fraction of the time that manual procedures
require. Our escalation manager initiates specific orders and
tasks based on pre-defined conditions, ensuring clear and
consistent communication with our customers.
We believe that the combination of
NaviViewtm,
our dedicated and virtual utility platform, with our physical
infrastructure and technical staff gives us a unique ability to
provide complex enterprise hosting and application services.
NaviViewtm
is hardware-, application- and operating-system-neutral.
Designed to enable enterprise-hosting and software applications
to be monitored and managed, our
NaviViewtm
technology allows us to offer new solutions to our software
vendors and new products to our current customers.
Our
History
We were formed in 1996 within CMGI, Inc. (currently known as
ModusLink Global Solutions, Inc.
(ModusLink)), our former majority
stockholder, to support the networks and host websites of
ModusLink, its subsidiaries and several of its affiliated
companies. In 1997 we began offering and supplying
website-hosting and -management services to companies not
affiliated with ModusLink. We were incorporated in Delaware in
December 1998.
Acquisitions
in Fiscal Year 2008
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In August 2007 we acquired the assets of Alabanza LLC and
Hosting Ventures LLC (together, Alabanza) and
all of the issued and outstanding stock of Jupiter Hosting, Inc.
(Jupiter). These acquisitions provided
additional managed-hosting customers, proprietary software for
provisioning and additional data-center space in the Bay Area
market.
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In September 2007 we acquired netASPx, Inc.
(netASPx), based in Minneapolis, Minnesota.
The acquisition of netASPx added functional expertise in the
Lawson and Kronos ERP applications and approximately
18,000 square feet of data-center capacity.
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In October 2007 we acquired the assets of iCommerce, Inc.
(iCommerce).
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Our
Industry
The dramatic and continued growth in Internet use and the
enhanced functionality, accessibility and security of
Internet-based applications and software as a service (or
subscription-based software) have made conducting business on
the Internet a necessity for todays enterprises. In
addition, the costs, complexity and technological challenges
faced by todays businesses have them increasingly looking
to outsourcing IT services. We believe that a fast-growing trend
is the increased use of managed IT infrastructure and
applications by companies to allow them to focus and enhance
their core business operations, increase efficiencies and remain
competitive. Enterprise hosting and related applications extend
beyond traditional websites to business-process software
applications in such areas as finance,
e-mail,
enterprise-resource planning, supply-chain management and
customer-relationship management. Organizations have become
increasingly dependent on these applications, which have evolved
into important business components. In addition, we believe that
the pervasiveness of the Internet and quality of network
infrastructure, along with the dramatic decline in the pricing
of computing technology and the emergence of blade-based
virtualization and cloud computing, have made the
outsourced-delivery model an attractive choice for enterprise
customers. We believe that the accelerated acceptance of
alternative software-licensing models by software-industry
market leaders and the growing number of software-as-a-service
offerings are driving other software vendors in this direction
and, consequently, generating strong industry growth.
As enterprises seek to remain competitive and improve
profitability, we believe that they will continue to implement
increasingly sophisticated applications and delivery models.
Some of the potential benefits of these applications and
delivery models include the ability to:
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increase business-operating efficiencies and reduce costs by
using
best-of-breed
applications;
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build and enhance customer relationships by providing
Internet-enabled customer service and technical support;
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manage vendor and supplier relationships through
Internet-enabled technologies, such as online training and
online sales and marketing;
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communicate and conduct business more rapidly and
cost-effectively with customers, suppliers and employees
worldwide; and
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improve service and lower the cost of software ownership by the
adoption of new Internet-enabled software-delivery models.
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These benefits have driven increased use of IT infrastructure
and applications, and this trend in turn has created a strong
demand for specialized IT support and applications expertise. An
increasing number of businesses are choosing to outsource the
hosting and management of these applications.
The trend towards outsourced hosting and management of IT
infrastructure and applications by todays business
organizations is driven by a number of factors, including:
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developments by major hardware and software vendors that
facilitate outsourcing, such as the production of rack-based
blade servers designed to be shared by a number of customers;
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advances in virtualization and high-density computing that are
beyond the skill and cost ability of the typical IT department;
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the need to improve the reliability, availability and overall
performance of applications as they increase in importance and
complexity;
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the need to focus on core business operations;
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challenges and costs of hiring, training and retaining
application engineers and IT employees with the requisite range
of IT expertise;
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the increasing complexity of managing the operations of
applications that need to function in house, with business
partners and on the public Internet; and
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Utility-like cloud service offerings that enable
companies to scale their services based on fluctuating
requirements.
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Notwithstanding increasing demand for these services, the number
of suppliers of these services has decreased over the past five
years, primarily as a result of industry consolidation. We
believe that this consolidation trend will continue and will
benefit the relatively few service providers with sufficient
resources and infrastructure to provide the cost-effective
scalability, performance, reliability and business continuity
that customers expect.
Our
Strategy
Our goal is to become the leading provider of cloud-enabled
enterprise-hosting and managed-application services. Further,
our financial objective is to market and deliver high-value
services to generate the highest revenue per square foot of
available capacity in our data centers. Key elements of our
strategy are as follows:
Provide Excellent Customer Service. We are
committed to providing all of our customers with a high level of
customer support. We believe that, through the acquisition of
several businesses, we have had the benefit of consolidating
best-of-breed
account-management and customer-support practices that ensure
that we are achieving this goal.
Innovate and Leverage Our Technology
Platform. We will continue to expand our platform
leverage by continued use of virtualization and utility-type
services, including the development of a virtual enterprise
cloud platform. We believe that the typical middle-market
organization is not able to take advantage of these technology
developments because of their complexity and cost. By
continually updating our platform, we will continue to drive our
competitiveness with higher-value services at competitive prices.
Expand Our Global-Delivery Capabilities. We
believe that global delivery is an integral piece of our
long-term strategy to the extent that it directly leads to our
overall goal of service and operational excellence for our
customers. By leveraging a global-delivery solution, we believe
that we will be able to continue to deliver superior services
and technical expertise at a competitive cost and enhance the
value proposition for our customers.
Improve Operating Margins Through
Efficiencies. We have made significant
improvements to our overall cost structure. We intend to
continue to improve operating margins as we grow revenue and
improve the efficiency of our operations. As we grow, we will
take advantage of our infrastructure capacity, our
NaviViewtm
platform and our automated processes. We believe that, due to
the relatively fixed-cost nature of our infrastructure,
increasing our customer revenue would incrementally improve our
operating margins.
Focus Our Service Offerings. We continue to
focus our service offerings to compete more effectively by being
the best at what we do for the packaged solutions we support.
With our professional services and deep operational expertise,
we effectively deliver to our customers a full range of services
for Oracle, PeopleSoft, J. D. Edwards, Siebel, Lawson, Kronos,
Microsoft Dynamics, Microsoft Exchange and Lotus Domino
solutions. We believe that these services will help our
customers achieve peak effectiveness with their systems. As a
full-service provider for a broad range of applications, we are
able to create leverage and cross- and up-sell opportunities in
a manner that is unparalleled in the marketplace.
Our
Infrastructure
Our infrastructure has been designed specifically to meet the
demanding technical requirements of delivering our services to
our customers. We securely deliver our services across Windows
and Unix platforms. We believe that our infrastructure, together
with our trained and experienced staff, enable us to offer
market-leading levels of service backed by high-service-level
guarantees.
Network-Operations Centers We monitor the
operations of our infrastructure and customer applications from
our own
state-of-the-art
network-operations centers. Network and system management and
monitoring tools continuously monitor our network server and
application performance. Our network operations centers perform
first-level problem identification, validation and resolution.
We have redundant network operations centers in New Delhi,
India, and Andover, Massachusetts, that are staffed
24 hours a day, seven days a week,
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with network, security, Windows and Unix database and
application personnel. We have technical and functional
application-support personnel located in our facilities in
San Jose, California; Syracuse, New York; Houston, Texas;
Minneapolis, Minnesota; Atlanta, Georgia; Andover,
Massachusetts; and New Delhi, India. These employees provide
initial and escalated support 24 hours a day, seven days a
week, for our customers. Our engineers and support personnel are
promptly alerted to problems, and we have established procedures
for rapidly resolving technical issues that may arise.
Data Centers We currently operate in 13 data
centers in the United States and two data centers in the United
Kingdom. Our data centers incorporate technically sophisticated
components that are designed to be fault-tolerant. The
components used in our data centers include redundant core
routers, redundant core-switching hubs and secure virtual
local-area networks. We utilize the equipment and tools
necessary for our data-center operations, including our
infrastructure hardware, networking and software products, from
industry leaders such as BMC, Cisco, Dell, IBM, EMC,
Hewlett-Packard, Microsoft, Oracle and Sun Microsystems.
Virtualization We employ virtualization
technologies (also known as Cloud Computing), for
processing, storage and networking. By using this approach, we
are able to maximize the benefit of our capital expenditures,
minimize the amount of valuable data center space used and
create additional operating efficiencies that lower our cost.
Virtualization decreases our time to provision and thereby
accelerates our ability to recognize revenue. With its inherent
redundancy and scalability, virtualization adds business
continuity and, for Internet-based applications and hosting,
reliability. Virtualization also brings otherwise unaffordable
IT progress within the reach of the typical middle-market
customer.
Internet Connectivity We have redundant
high-capacity Internet connections with providers such as Global
Crossing, Level 3, Cogent, AT&T and XO Communications
and others. We have deployed direct private-transit and peering
Internet connections to utilize the providers peering
capabilities and to enhance routes via their networks that
improve global performance. Our private-transit system enables
us to provide fast, reliable access for our customers IT
infrastructure and applications.
Sales and
Marketing
Sales Our sales teams are located in the
United States, the United Kingdom and India and focus on the
identification, quoting and sale of solutions to new customers.
Our sales professionals meet with these prospective customers to
understand and identify their individual business requirements
and to offer tailor-made solutions. The sales teams are focused
on enterprise hosting, application management and professional
services, with respect to which domain knowledge and expertise
are a significant differentiator. Our sales teams are supported
by solution architects who assess the infrastructure and
application requirements to develop an optimal design and cost
analysis. The quoting for prospective opportunities with less
complex requirements is automated and is provided online
directly to our sales professionals.
The sales teams are augmented by account managers assigned to
specific accounts to identify and manage cross-selling
opportunities of additional services and the renewal of
contracts approaching term. To date, most of our sales have been
realized through our direct-sales-force teams. Our sales
representatives call potential customers from our offices in the
United States and India to develop new opportunities and consult
with smaller mid-market companies. We also leverage business
development resources to create market demand for our products
and services.
Automation and Platform-Based Sales We
launched in 2008 an automated platform to allow new customers to
purchase and provision hosted Microsoft Exchange. This automated
system allows customers to buy services immediately without
interaction with NaviSite staff.
Marketing Our marketing organization is
responsible for defining our overall market strategy, generating
qualified leads for our field and inside sales forces and
increasing the overall awareness of our brand. Our
lead-generation programs include comprehensive online and
offline marketing programs and emphasize online search, e-mail,
banner advertising, outbound telemarketing efforts, trade
conferences and webinars. We maintain a data-driven, rigorous
measurement and monitoring approach to maximize the efficacy of
our marketing investments and deliver the highest possible
return on investment.
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Customers
Our customers include mid-sized companies, divisions of large
multinational companies and government agencies. Our customers
operate in a wide variety of industries, such as technology,
manufacturing and distribution, healthcare and pharmaceuticals,
publishing, media and communications, financial services,
retail, business services and government agencies.
As of July 31, 2009, NaviSite serviced over 1,400 hosted
customers.
No customer represented 10% or more of our revenue for the
fiscal years ended July 31, 2009, 2008 and 2007.
Substantially all of our revenues are derived from
and over 85% of our plant, property and equipment is located
in the United States.
Competition
We compete in the outsourced IT and professional-services
markets. These markets are fragmented, highly competitive and
likely to be characterized by industry consolidation.
We believe that participants in these markets must grow rapidly
and achieve a significant presence to compete effectively. We
believe that the primary competitive factors determining success
in our markets include:
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the quality of services delivered;
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the ability to consistently measure, track and report
operational metrics;
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application-hosting, infrastructure and messaging-management
expertise;
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fast, redundant and reliable Internet connectivity;
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a robust infrastructure providing availability, speed,
scalability and security;
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comprehensive and diverse service offerings and the timely
addition of value-add services;
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brand recognition;
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strategic relationships;
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competitive pricing; and
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adequate capital to permit continued investment in
infrastructure, customer service and support and sales and
marketing.
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Based on the breadth of our service offerings, the strength of
our
NaviViewtm
platform, our existing infrastructure capacity and our pricing,
we believe that we compete effectively.
Our current and prospective competitors include:
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hosting and related services providers, including Terremark,
Inc.; Rackspace Hosting, Inc.; Savvis; IBM; AT&T; and other
local and regional hosting providers;
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application-services providers, such as IBM, AT&T,
Electronic Data Systems Corp., Cedar Crestone, Oracle On Demand
and Computer Sciences Corporation;
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co-location providers, including Savvis, Equinix and
Switch & Data Facilities Company, Inc.; and
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messaging providers, including Apptix Intermedia.
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Intellectual
Property
We rely on a combination of trademark, service mark, copyright,
patent and trade-secret laws and contractual restrictions to
establish and protect our proprietary rights and promote our
reputation and the growth of our business. Our business is not
substantially dependent on any single or group of related
patents, trademarks, copyrights or licenses.
Employees
As of July 31, 2009, we had 650 employees. Of these
employees, 462 were principally engaged in operations, 98 were
principally engaged in sales and marketing and 90 were
principally engaged in general and administrative functions.
None of our employees is party to a collective-bargaining
agreement, and we believe that our relationship with our
employees is good. We also retain consultants and independent
contractors on a regular basis to assist in the completion of
projects.
Available
Information
We make our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports available through our website
under Investors, free of charge, as soon as
reasonably practicable after we file such material with, or
furnish it to, the SEC. Our Internet address is
http://www.navisite.com.
The contents of our website are not incorporated by reference in
this annual report on
Form 10-K
or any other report filed with, or furnished to, the SEC.
We operate in a rapidly changing environment that involves a
number of risks, some of which are beyond our control.
Forward-looking statements in this report and those made from
time to time by us through our senior management are made
pursuant to the safe-harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements
concerning our expected future revenues, earnings or financial
results; project plans; performance; or development of products
and services, as well as other estimates related to future
operations, are necessarily only estimates of future results. We
cannot assure you that actual results will not materially differ
from expectations. Forward-looking statements represent our
managements current expectations and are inherently
uncertain. We do not undertake any obligation to update
forward-looking statements. If any of the following risks
actually occurs, our business, financial condition and operating
results could be materially adversely affected.
We have a history of losses and may never achieve or
sustain profitability. We have never been
profitable and may never become profitable. As of July 31,
2009, we had incurred losses since our incorporation resulting
in an accumulated deficit of approximately $519.6 million.
During the fiscal year ended July 31, 2009, we had a net
loss attributable to common shareholders of approximately
$18.5 million. We may continue to incur losses in the
future. As a result, we can give no assurance that we will
achieve profitability or be capable of sustaining profitable
operations.
Our financing agreement with a syndicated group of lenders
includes various covenants and restrictions that may negatively
affect our liquidity and our ability to operate and manage our
business. As of September 30, 2009, we
owed approximately $117.3 million under a credit agreement
with a syndicated group of lenders. The credit agreement:
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restricts our ability to create, incur, assume or permit to
exist any additional indebtedness, excluding limited exemptions;
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restricts our ability to create, incur, assume or permit to
exist any lien on any of our assets, excluding limited
exemptions;
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restricts our ability to make investments, with limited
exemptions;
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requires that we meet financial covenants for leverage, fixed
charges and capital expenditures;
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restricts our ability to enter into any transaction of merger or
consolidation, excluding limited exemptions;
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restricts our ability to sell assets or purchase or otherwise
acquire the property of any person, excluding limited exemptions;
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restricts our ability to authorize, declare or pay dividends,
excluding limited exemptions;
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restricts our ability to enter into any transaction with any
affiliate except on terms and conditions that are at least as
favorable to us as those that could reasonably be obtained in a
comparable arms-length transaction with a person who is
not an affiliate; and
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restricts our ability to amend our organizational documents.
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If we breach the credit agreement, a default could result. A
default, if not waived, could result in, among other things, our
not being able to borrow additional amounts under the credit
agreement. In addition, all or a portion of our outstanding
amounts may become immediately due and payable on an accelerated
basis, which would adversely affect our liquidity and our
ability to manage our business. The maturity date of the term
loan is June 8, 2013, and our revolving-credit facility
terminates on June 8, 2012. Interest on the term loan is
payable in arrears on the first business day of August,
November, February and May, for alternative-base-rate
(ABR) loans, and the last day of the chosen
interest period (which can be one, two, three, six, nine or
twelve months), or every three months, if the chosen interest
period is greater than three months, for
London-interbank-offered-rate
(LIBOR) loans.
The term loan amortizes on the first day of each fiscal quarter
(commencing on August 1, 2007) in equal quarterly
installments during the periods set forth below in the aggregate
amounts set forth opposite such periods:
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Year
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Percentage of Term Loan
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1
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1.0
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%
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2
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1.0
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%
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1.0
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%
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4
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1.0
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%
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5
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1.0
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%
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6
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95.0
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%
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In addition, the credit agreement exposes us to interest-rate
fluctuations that could significantly increase the interest we
pay. We are required, under the credit agreement, to maintain
interest-rate protection that results in at least 50% of the
aggregate principal amount of our consolidated indebtedness,
other than the revolving loans under the credit agreement, being
subject to a fixed or maximum interest rate.
We may be unable to borrow the full amount of the
revolving-credit facility, up to $10.0 million, if any of
the lenders are unable to make a loan in an amount equal to
their applicable commitments under the revolving-credit facility.
Continued debt-covenant compliance under our credit
agreement may not be possible if certain future actions are not
taken. In order for us to comply with our
credit agreements senior-leverage ratio and fixed-charges
covenants for quarterly periods in 2010 and beyond, we will need
to achieve some of the following
measures: (i) increase our EBITDA,
(ii) successfully complete the sale of certain non-core
assets (e.g., certain co-location data centers or other
non-strategic assets), a portion of the proceeds from which
would be used to repay debt, (iii) execute a debt-reduction
plan, (iv) refinance our existing debt arrangement and
(v) modify one of our significant data-center lease
agreements. If the aforementioned measures are not sufficient to
maintain compliance with our financial covenants, we would need
to seek a waiver or amendment from the syndicated lending group.
However, there can be no assurance that we could obtain such a
waiver or amendment, in which case our debt would immediately
become due and payable in full, an event that would adversely
affect our liquidity and our ability to manage our business. We
believe that our execution of some combination of the above
measures will be sufficient for us to maintain compliance with
our financial covenants throughout 2010.
12
We may need to obtain additional debt or equity financing
in order to satisfy any mandatory redemption of our preferred
stock. Our Series A Convertible
Preferred Stock (Preferred Stock) has rights
that could require us to redeem any or all of the issued and
outstanding Preferred Stock on or after August 2013. We may need
to obtain additional debt or equity financing in order to
satisfy any mandatory redemption, but that financing may not be
available on favorable terms or at all. In addition, our credit
agreement restricts our ability to incur additional
indebtedness, which could negatively affect our ability to
fulfill our obligations to the holders of the Preferred Stock.
Disruption in financial and currency markets could have a
negative effect on our business. As has been
widely reported, financial markets in the United States, Europe
and Asia have in recent years experienced disruption, including
unusual volatility in security prices, diminished liquidity and
credit availability, rating downgrades of certain investments
and declining valuations of others. Governments took
unprecedented actions intended to address these market
conditions which, include restricted credit and declines in real
estate values. While currently these conditions have not
impaired our ability to operate our business, there can be no
assurance that there will not be a further deterioration in
financial markets and confidence in major economies, a
circumstance that could lead to challenges in the operation of
our business. These economic developments affect businesses such
as ours in a number of ways. The current tightening of credit in
financial markets adversely affects the ability of customers and
suppliers to obtain financing for significant purchases and
operations and could result in a decrease in orders and spending
for our products and services. We are unable to predict future
disruptions in financial markets and adverse economic conditions
and the effects that they would have on our business and
financial condition.
Atlantic Investors, LLC, Unicorn Worldwide Holdings
Limited and Madison Technology LLC may have interests that
conflict with the interests of our other stockholders and have
significant influence over corporate
decisions. Atlantic Investors, LLC
(Atlantic) together with its two
managing members, Unicorn Worldwide Holdings Limited and Madison
Technology LLC owned approximately 36% of our
outstanding capital stock as of July 31, 2009, based on
available voting shares. As of July 31, 2009,
Atlantics ownership alone was approximately 35% based on
available voting shares. Atlantic, Unicorn Worldwide Holdings
Limited and Madison Technology LLC together have significant
power in the election of our board of directors. Regardless of
how our other stockholders may vote, Atlantic, Unicorn Worldwide
Holdings and Madison Technology LLC, acting together, may have
the ability to determine whether to engage in a merger,
consolidation or sale of our assets and any other significant
corporate transaction.
Members of our management group also have significant
interests in Atlantic Investors, LLC, that may create conflicts
of interest. Some of the members of our
management group also serve as members of the management group
of Atlantic and its affiliates. Specifically, Andrew Ruhan, the
chairman of our board of directors, holds an equity interest in
Unicorn Worldwide Holdings Limited, a managing member of
Atlantic. Arthur P. Becker, our president and chief executive
officer and a member of our board of directors, is the managing
member of Madison Technology LLC, a managing member of Atlantic.
As a result, these NaviSite officers and directors may face
potential conflicts of interest with each other and our
stockholders. In their capacity as our officers or directors,
they may face situations that conflict with their fiduciary
obligations to Atlantic, which in turn may have interests that
conflict with the interests of our other stockholders.
Our common stockholders may suffer dilution in the future
upon exercise of outstanding convertible securities or the
issuance of additional securities in potential future
acquisitions or financings. In connection
with a financing agreement with Silver Point Finance, LLC, we
issued warrants to SPCP Group, LLC, and SPCP Group III LLC,
two affiliates of Silver Point Finance, to purchase an aggregate
of 3,930,136 shares of our common stock. If the warrants
are exercised, Silver Point Finance may obtain a significant
equity interest in NaviSite and other stockholders may
experience significant and immediate dilution. As of
September 30, 2009, SPCP Group, LLC, and SPCP
Group III LLC have partially exercised the warrants to
acquire 2,730,005 shares of our common stock, and warrants
for the purchase of 1,200,131 shares of our common stock
remain outstanding.
In connection with our acquisition of netASPx, we issued to its
stockholders 3,125,000 shares of our Preferred Stock.
Additional shares of the Preferred Stock have been and will be
issued each fiscal quarter to
13
the former shareholders of netASPx, as in-kind dividends that
accrue on the outstanding Preferred Stock. The Preferred Stock
may be converted into shares of common stock at a price of $8.00
per share subject to adjustment. If converted, the shares of
Preferred Stock convert into the number of shares of common
stock determined by dividing the redemption price per share of
the Preferred Stock by the conversion price applicable to such
shares. As of September 30, 2009, such a conversion would
result in one share of common stock being issued upon the
conversion of one share of Preferred Stock. The conversion and
redemption prices are subject to adjustment in certain
circumstances or upon default of our agreement. However, in no
event are the number of shares of common stock to be issued upon
the conversion of the Preferred Stock to equal or exceed
6,692,856 (which represents 19.9% of the outstanding shares of
our common stock on September 10, 2007) without the
approval of our stockholders in accordance with the applicable
rules and regulations of the Nasdaq Stock Market. As of
September 30, 2009, no shares of Preferred Stock have been
converted into shares of our common stock.
Our stockholders will also experience dilution to the extent
that additional shares of our common stock are issued in
potential future acquisitions or financings.
A failure to meet customer specifications or expectations
could result in lost revenues, increased expenses, negative
publicity, claims for damages and harm to our reputation and
cause demand for our services to decline. Our
agreements with customers require us to meet specified service
levels for the services we provide, and our customers may have
additional expectations about our services. Any failure to meet
customers specifications or expectations could result in:
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delayed or lost revenue;
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requirements to provide additional services to a customer at
reduced charges or no charge;
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negative publicity about us, which could adversely affect our
ability to attract or retain customers; and
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claims by customers for substantial damages against us,
regardless of our responsibility for the failure, which claims
may neither be covered by insurance policies nor limited by the
contractual terms of our engagement.
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Our ability to successfully market our services could be
substantially impaired if we are unable to deploy new
infrastructure systems and applications or if we do deploy them
but they prove unreliable, defective or
incompatible. We may experience difficulties
that could delay or prevent the successful development,
introduction or marketing of hosting- and application-management
services in the future. If any newly introduced infrastructure
systems and applications suffer from reliability, quality or
compatibility problems, market acceptance of our services could
be greatly hindered and our ability to attract new customers
significantly reduced. 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 infrastructure systems and applications or
enhancements of existing applications, our ability to
successfully market our services could be substantially limited.
Any interruption in, or degradation of, our
private-transit Internet connections could result in the loss of
customers or hinder our ability to attract new
customers. Our customers rely on our ability
to move their digital content as efficiently as possible to the
people accessing their websites and infrastructure systems and
applications. We utilize our direct private-transit Internet
connections to major network providers, such as Level 3
Communications Inc. and Global Crossing, 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
networks so that our private-transit Internet connections
operate effectively. If our private-transit Internet connections
are interrupted or degraded, we may face claims by, or loss of,
customers and harm to our reputation in the industry, either of
which result would likely cause demand for our services to
decline.
If we are unable to maintain existing, and develop
additional, relationships with software vendors, the sales and
marketing of our service offerings may be
unsuccessful. We believe that, to penetrate
the market for managed IT services, we must maintain existing,
and develop additional, relationships with industry-
14
leading software vendors. We license or lease select software
applications from software vendors, including IBM, Microsoft
Corp. and Oracle Corp. Our relationships with Microsoft and
Oracle are critical to the operations and success of our
business. The loss of our ability to continue to obtain, utilize
or depend on any of these applications or relationships could
substantially weaken our ability to provide services to our
customers. It may also require us to obtain substitute software
applications that may be 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 software vendors on commercially reasonable
terms. If we are unable to identify and license software
applications that meet our targeted criteria for new application
introductions, we may have to discontinue or delay introduction
of services relating to these applications.
Our network infrastructure could fail, which failure would
impair our ability to provide guaranteed levels of service and
could result in significant operating
losses. To provide our customers with
guaranteed levels of service, we must operate our network
infrastructure 24 hours a day, seven days a week, without
interruption. We must, therefore, protect our network
infrastructure, equipment and customer files against damage from
human error, natural disasters, unexpected equipment failure,
power loss or telecommunications failures, terrorism, sabotage
or other intentional acts of vandalism. Even if we take
precautions, the occurrence of a natural disaster, equipment
failure or other unanticipated problem at one or more of our
data centers could result in interruptions in the services we
provide to our customers. We cannot assure you that our
disaster-recovery plan will address all, or even most, of the
problems we may encounter in the event of a disaster or other
unanticipated problem. We have experienced service interruptions
in the past, and any future service interruptions could:
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require us to spend substantial amounts of money to replace
equipment or facilities;
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entitle customers to claim service credits or seek damages for
losses under our service-level guarantees;
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cause customers to seek alternate providers; or
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impede our ability to attract new customers, retain current
customers or enter into additional strategic relationships.
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Our dependence on third parties increases the risk that we
will not be able to meet our customers needs for software,
systems and services on a timely or cost-effective basis, which
inability could result in the loss of
customers. Our services and infrastructure
rely on products and services of third-party providers. We
purchase key components of our infrastructure, including
networking equipment, from a limited number of suppliers, such
as HP, Sun Microsystems, IBM, Cisco Systems, Inc., Microsoft and
Oracle. We cannot assure you that we will not experience
operational problems attributable to the installation,
implementation, integration, performance, features or
functionality of third-party software, systems and services. We
cannot assure you that we will have the necessary hardware or
parts on hand or that our suppliers will be able to provide them
in a timely manner in the event of equipment failure. Our
inability to timely obtain and continue to maintain the
necessary hardware or parts could result in sustained equipment
failure and a loss of revenue due to customer loss or claims for
service credits under our service-level guarantees.
We could be subject to increased operating costs, as well
as claims, litigation or other potential liability, in
connection with risks associated with Internet security and the
security of our systems. A significant
barrier to the growth of
e-commerce
and communications over the Internet has been the need for
secure transmission of confidential information. Several of our
infrastructure systems and application services use encryption
and authentication technology licensed from third parties to
provide the protections necessary to ensure secure transmission
of confidential information. We also rely on security systems
designed by third parties and the personnel in our
network-operations centers to secure those data centers. Any
unauthorized access, computer viruses, accidental or intentional
actions or other disruptions could result in increased operating
costs. For example, we may incur additional significant costs to
protect against these interruptions and the threat of security
breaches or to alleviate problems caused by these interruptions
or breaches. If a third
15
party were able to misappropriate a consumers 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.
Third-party infringement claims against our technology
suppliers, customers or us could result in disruptions in
service, the loss of customers or costly and time-consuming
litigation. We license or lease most
technologies used in the infrastructure systems and application
services that we offer. If our technology suppliers become
subject to third-party infringement or other claims and
assertions, they may become unable or unwilling to continue to
license their technologies to us. We cannot assure you that
third parties will not assert claims against us in the future or
that these claims will not succeed. Any infringement claim
arising out of 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.
We may be subject to legal claims in connection with the
information disseminated through our network, and these claims
could divert managements attention and require us to
expend significant financial resources. We
may face liability for claims of defamation, negligence,
copyright, patent or trademark infringement and other claims
based on the nature of the materials disseminated through our
network. For example, lawsuits may be brought against us
claiming that content distributed by some of our customers may
be regulated or banned. In these and other instances, we may be
required to engage in protracted and expensive litigation that
could have the effect of diverting managements attention
from our business and require us to expend significant financial
resources. Our general-liability insurance may not cover any of
these claims or may not be adequate to protect us against all
liability that may be imposed. In addition, on a limited number
of occasions in the past, businesses, organizations and
individuals have sent unsolicited commercial
e-mails from
servers hosted at our facilities to a number of people,
typically to advertise products or services. This practice,
known as spamming, can lead to statutory liability
as well as complaints against any service providers that enable
these activities, particularly where recipients view the
materials received as offensive. We have received, and may
receive, letters from recipients of information transmitted by
our customers objecting to the transmission. Although we
contractually prohibit our customers from spamming, we cannot
assure you that none of them will engage in this practice, which
could subject us to claims for damages.
Concerns relating to privacy and protection of customer
and job-seeker data on our Americas Job Exchange website
could damage our reputation and deter current and potential
customers and job seekers from using our products and
services. In fiscal year 2008 we launched
Americas Job Exchange, a successor to Americas Job
Bank. Concerns about our practices for Americas Job
Exchange with regard to the collection, use, disclosure or
security of personal information or other privacy-related
matters, even if unfounded, could damage our reputation, which
damage in turn could significantly harm our business, financial
condition and operating results. While we strive to comply with
all applicable data-protection laws and regulations and our own
posted privacy policies, any actual or perceived failure to
comply may result in proceedings or actions against us by
government entities or others, which proceedings or actions
could adversely affect our business. Moreover, the actual or
perceived failure to comply with our policies or applicable
requirements related to the collection, use, sharing or security
of personal information or other privacy-related matters could
result in a loss of customer and job-seeker confidence in us,
which loss could adversely affect our business. Laws related to
data protection continue to evolve. Certain jurisdictions may
enact laws or regulations that impact our ability to offer our
products and services and result in reduced traffic or contract
terminations in those jurisdictions, any of which effects could
harm our business.
Unauthorized access, phishing schemes and other disruptions
could jeopardize the security of customer and job-seeker
information stored in our systems, result in significant
liability to us and cause existing customers and job seekers to
refrain from doing business with us.
If we fail to attract or retain key officers, management
and technical personnel, our ability to successfully execute our
business strategy, to continue to provide services and technical
support to our customers or to attract new ones could be
adversely affected. We believe that
attracting, training, retaining and motivating technical and
managerial personnel, including individuals with significant
levels of infrastructure systems and application expertise, is a
critical component of the future success of our business.
Qualified technical personnel are likely to remain a limited
resource for the foreseeable future, and competition for these
16
personnel is intense. The departure of any of our executive
officers, particularly Arthur P. Becker, our chief executive
officer and president, or core members of our sales and
marketing teams or technical service personnel, would have
negative ramifications on our customer relations and operations.
The departure of our executive officers could adversely affect
the stability of our infrastructure and our ability to provide
the guaranteed service levels our customers expect. Any officer
or employee can terminate his or her relationship with us at any
time. In addition, we do not carry life insurance on any of our
personnel. Over the past three years, we have had
reductions-in-force
and departures of several members of senior management due to
redundancies and restructurings after consolidating our acquired
companies. In the event of future reductions or departures of
employees, our ability to successfully execute our business
strategy, or to continue to provide services to our customers or
attract new customers, could be adversely affected.
The unpredictability of our quarterly results may cause
the trading price of our common stock to fluctuate or
decline. Our quarterly operating results have
previously varied, and may continue to vary, significantly as a
result of a number of factors, many of which are beyond our
control and any one of which may cause our stock price to
fluctuate. The primary factors that may affect our operating
results include the following:
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a reduction of market demand or acceptance of our services;
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our ability to develop, market and introduce new services on a
timely basis;
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the length of the sales cycle for our services;
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the timing and level of sales of our services, both of which
depend on the budgets of our customers;
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downward price adjustments by our competitors;
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changes in the mix of services provided by our competitors;
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technical difficulties or system downtime affecting the Internet
or our hosting operations;
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our ability to meet any increased technological demands of our
customers; and
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the amount and timing of costs related to our marketing efforts
and service introductions.
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Due to the above factors, we believe that
quarter-to-quarter
or
period-to-period
comparisons of our operating results may not be a good indicator
of our future performance. Our operating results for any
particular quarter may fall short of our expectations or those
of stockholders or securities analysts. In this event, the
trading price of our common stock would likely fall.
If we are unsuccessful in pending and potential litigation
matters, our financial condition may be adversely
affected. We are currently involved in
various pending and potential legal proceedings, including a
class-action
lawsuit related to our initial public offering. If we are
ultimately unsuccessful in any litigation matter, we could be
required to pay substantial amounts of cash to the other
parties. The amount and timing of any of these payments could
adversely affect our financial condition.
If the markets for outsourced IT infrastructure and
applications, Internet commerce and communication decline, there
may be insufficient demand for our services and, as a result,
our business strategy and objectives may
fail. The increased use of the Internet for
retrieving, sharing and transferring information among
businesses and consumers continues to develop, and the market
for the purchase of products and services over the Internet is
still relatively new and emerging. Our industry has experienced
periods of rapid growth followed by sharp declines in demand for
products and services, which downturns have sometimes led to the
failure of many companies focused on developing Internet-related
businesses. If acceptance and growth of the Internet as a medium
for commerce and communication declines, our business strategy
and objectives may fail because there may not be sufficient
market demand for our managed IT services.
If we do not respond to rapid changes in the technology
sector, we will lose customers. The markets
for the technology-related services we offer are characterized
by rapidly changing technology, evolving industry standards,
frequent new service introductions, shifting distribution
channels and changing customer demands. We may not be able to
adequately adapt our services or to acquire new services that
can compete successfully. In addition, we may not be able to
establish or maintain effective distribution channels. We risk
losing customers to our competitors if we are unable to adapt to
this rapidly evolving marketplace.
17
The market in which we operate is highly competitive and
is likely to consolidate, and we may lack the financial and
other resources, expertise or capability necessary to capture
increased market share or maintain our market
share. We compete in the managed-IT-services
market. This market is rapidly evolving, highly competitive and
likely to be characterized by overcapacity and industry
consolidation. Our competitors may consolidate with one another
or acquire software-application vendors or technology providers,
enabling them to more effectively compete with us. We believe
that participants in this market must grow rapidly and achieve a
significant presence to compete effectively. This consolidation
could affect prices and other competitive factors in ways that
would impede our ability to compete successfully in the
managed-IT-services market.
Further, our business is not as developed as that of many of our
competitors. Many of our competitors have substantially greater
financial, technical and market resources, greater name
recognition and more established relationships in the industry.
Many of our competitors may be able to:
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develop and expand their network infrastructure and service
offerings more rapidly;
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|
adapt to new or emerging technologies and changes in customer
requirements more quickly;
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|
take advantage of acquisitions and other opportunities more
readily; or
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|
devote greater resources to the marketing and sale of their
services and adopt more aggressive pricing policies than we can.
|
We may lack the financial and other resources, expertise or
capability necessary to maintain or capture increased market
share in this environment in the future. Because of these
competitive factors and due to our comparatively small size and
our lack of financial resources, we may be unable to
successfully compete in the managed-IT-services market.
Difficulties presented by international economic,
political, legal, accounting and business factors could harm our
business in international markets. We
currently operate two data centers in the United Kingdom.
Revenue from our foreign operations accounted for approximately
9.1% of our total revenue during the fiscal year ended
July 31, 2009. By expanding our operations into India in
fiscal year 2006, we broadened our customer-service support.
Although we expect to focus most of our growth efforts in the
United States, we may enter into joint ventures or outsourcing
agreements with third parties, acquire complementary businesses
or operations or establish and maintain new operations outside
of the United States. Some risks inherent in conducting business
internationally include:
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unexpected changes in regulatory, tax and political environments;
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longer payment cycles and problems collecting accounts
receivable;
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|
geopolitical risks, such as political and economic instability,
hostilities among countries or terrorism;
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reduced protection of intellectual-property rights;
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fluctuations in currency-exchange rates or impositions of
restrictive currency controls;
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our ability to secure and maintain the necessary physical and
telecommunications infrastructure;
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challenges in staffing and managing foreign operations;
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employment laws and practices in foreign countries;
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laws and regulations on content distributed over the Internet
that are more restrictive than those currently in place in the
United States; and
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significant changes in immigration policies or difficulties in
obtaining required immigration approvals.
|
Any one or more of these factors could adversely affect our
international operations and, consequently, our business.
18
We may become subject to burdensome government regulation
and legal uncertainties that could substantially harm our
business or expose us to unanticipated
liabilities. It is likely that laws and
regulations directly applicable to the Internet or to hosting
and managed-application service providers may be adopted. These
laws may cover a variety of issues, including user privacy and
the pricing, characteristics and quality of products and
services. The adoption or modification of laws or regulations
relating to commerce over the Internet could substantially
impair the growth of our business or expose us to unanticipated
liabilities. Moreover, the applicability of existing laws to the
Internet and hosting and managed-application service providers
is uncertain. These existing laws could expose us to substantial
liability if they are found to apply to our business. Because we
offer services over the Internet in many states in the United
States and internationally and facilitate the activities of our
customers in those jurisdictions, we may become required to
qualify to do business or subject to taxation or other laws and
regulations there even without any physical presence, employees
or property there.
The price of our common stock has been volatile and may
continue to experience wide
fluctuations. Since January 2008 our common
stock has closed as low as $0.22 per share and as high as $4.89
per share. The trading price of our common stock has been, and
may continue to be, subject to wide fluctuations due to the risk
factors discussed in this section and elsewhere in this report.
Fluctuations in the market price of our common stock may cause
investors in our common stock to lose some or all of their
investments.
Anti-takeover provisions in our corporate documents may
discourage or prevent a takeover. Provisions
in our certificate of incorporation and bylaws may have the
effect of delaying or preventing an acquisition or merger in
which we are acquired or a transaction that changes our board of
directors. These provisions:
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authorize the board to issue preferred stock without stockholder
approval;
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prohibit cumulative voting in the election of directors;
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limit the persons who may call special meetings of
stockholders; and
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|
establish advance-notice requirements for nominations for the
election of directors or for proposing matters that can be acted
on by stockholders at stockholder meetings.
|
Our ability to use U.S. net-operating-loss
carryforwards might be limited. As of
July 31, 2009, we had net-operating-loss carryforwards of
$187.3 million for U.S. federal and state tax
purposes. These loss carryforwards expire between fiscal years
2012 and 2029. To the extent that these net-operating-loss
carryforwards are available, we intend to use them to reduce the
corporate-income-tax liability associated with our operations.
Section 382 of the U.S. Internal Revenue Code
generally imposes an annual limitation on the amount of
net-operating-loss carryforwards that can be used to offset
taxable income when a corporation has undergone significant
changes in stock ownership. We have experienced ownership
changes, most recently in 2002, that have reduced our
net-operating-loss carryforwards. An analysis is currently
ongoing to determine if our ownership changed. To the extent
that our use of net-operating-loss carryforwards is
significantly limited, our income could be subject to corporate
income tax earlier than it would if we were able to use
net-operating-loss carryforwards, which taxation could result in
lower profits.
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Item 1B.
|
Unresolved
Staff Comments
|
None.
19
Facilities
Our executive offices are located at 400 Minuteman Road,
Andover, Massachusetts. We lease offices and data centers in
various cities across the United States and have an office and
data centers in the United Kingdom and an office in India. The
table below sets forth a list of our leased offices and data
centers:
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Square Footage
|
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Leased
|
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Location
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Type
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|
(Approximate)
|
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Lease Expiration
|
|
San Jose, CA(1)
|
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Data center and office
|
|
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66,350
|
|
|
November 2016
|
San Francisco, CA
|
|
Data center
|
|
|
21,805
|
|
|
January 2020
|
Santa Clara, CA
|
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Data center
|
|
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3,655
|
|
|
August 2009
|
Atlanta, GA
|
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Office
|
|
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4,598
|
|
|
September 2012
|
Chicago, IL
|
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Data center
|
|
|
6,800
|
|
|
November 2012
|
Chicago, IL
|
|
Office
|
|
|
2,212
|
|
|
April 2012
|
Oak Brook, IL
|
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Data center
|
|
|
16,780
|
|
|
September 2019
|
Andover, MA
|
|
Office
|
|
|
25,896
|
|
|
January 2018
|
Andover, MA
|
|
Data center and office
|
|
|
86,931
|
|
|
January 2018
|
Minneapolis, MN(1)
|
|
Data center and office
|
|
|
54,474
|
|
|
June 2010
|
Syracuse, NY
|
|
Data center
|
|
|
21,374
|
|
|
November 2015
|
Syracuse, NY
|
|
Office
|
|
|
1,933
|
|
|
May 2010
|
New York, NY
|
|
Office
|
|
|
1,500
|
|
|
August 2013
|
New York, NY
|
|
Data center
|
|
|
33,286
|
|
|
May 2018
|
Las Vegas, NV(2)
|
|
Data center
|
|
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28,560
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February 2010
|
Dallas, TX
|
|
Data center
|
|
|
27,370
|
|
|
January 2020
|
Houston, TX
|
|
Data center and office
|
|
|
12,956
|
|
|
January 2019
|
Herndon, VA(1)(3)
|
|
Office
|
|
|
5,515
|
|
|
June 2011
|
Vienna, VA(3)
|
|
Data center and office
|
|
|
23,715
|
|
|
December 2019
|
Gurgaon, Haryana, India
|
|
Office
|
|
|
12,706
|
|
|
August 2011
|
Watford, England
|
|
Data center
|
|
|
11,160
|
|
|
January 2018
|
London, England
|
|
Data center
|
|
|
4,017
|
|
|
March 2010
|
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(1) |
|
We have idle office space at this facility from which we derive
no economic benefit. |
|
(2) |
|
We have entered into an assignment and assumption agreement with
a third party for this facility; however, we retain the use as
licensee of approximately 2,000 square feet. |
|
(3) |
|
We have a subtenant for a portion of this space. |
We believe that these offices and data centers are adequate to
meet our foreseeable requirements and that suitable additional
or substitute space will be available on commercially reasonable
terms, if needed.
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Item 3.
|
Legal
Proceedings
|
IPO
Securities Litigation
In 2001, lawsuits naming more than 300 issuers and over 50
investment banks were filed in the United States District
Court for the Southern District of New York and assigned to the
Honorable Shira A. Scheindlin (the Court) for
all pretrial purposes (the IPO Securities
Litigation). Between June 13 and July 10, 2001,
five purported
class-action
lawsuits seeking monetary damages were filed against us; Joel B.
Rosen, our then chief executive officer; Kenneth W. Hale, our
then chief financial officer; Robert E. Eisenberg, our then
president; and the underwriters of our initial public offering
of October 22, 1999. On September 6, 2001, the Court
consolidated the five similar cases and a consolidated, amended
complaint was filed on
20
April 19, 2002 (the
Class-Action
Litigation) against us and Messrs. Rosen, Hale
and Eisenberg (collectively, the NaviSite
Defendants) and against underwriter defendants
Robertson Stephens (as
successor-in-interest
to BancBoston), BancBoston, J.P. Morgan (as
successor-in-interest
to Hambrecht & Quist), Hambrecht & Quist and
First Albany. The plaintiffs uniformly alleged that all
defendants, including the NaviSite Defendants, violated
Sections 11 and 15 of the Securities Act,
Sections 10(b) and 20(a) of the Exchange Act and
Rule 10b-5
by issuing and selling our common stock in the offering, without
disclosing to investors that some of the underwriters, including
the lead underwriters, allegedly had solicited and received
undisclosed agreements from certain investors to purchase
aftermarket shares at pre-arranged, escalating prices and also
to receive additional commissions or other compensation from
those investors. The
Class-Action
Litigation seeks certification of a plaintiff class consisting
of all persons who acquired shares of our common stock between
October 22, 1999 and December 6, 2000. The claims
against Messrs. Rosen, Hale and Eisenberg were dismissed
without prejudice on November 18, 2002, in return for their
agreement to toll any statute of limitations applicable to those
claims. Plaintiffs did not specify the amount of damages they
sought in the
Class-Action
Litigation. On October 13, 2004, the Court certified a
class in a subgroup of cases (the Focus
Cases) in the IPO Securities Litigation. The Focus
Cases were vacated on December 5, 2006, by the United
States Court of Appeals for the Second Circuit (the
Second Circuit). The
Class-Action
Litigation is not one of the Focus Cases.
Plaintiffs-appellees January 5, 2007, petition with
the Second Circuit for rehearing and rehearing en banc was
denied by the Second Circuit on April 6, 2007. Plaintiffs
renewed their certification motion in the Focus Cases on
September 27, 2007, as to redefined classes pursuant to
Fed. R. Civ. P. 23(b)(3) and 23(c)(4). On October 3, 2008,
after briefing in connection with the renewed class
certification proceedings was completed, plaintiffs withdrew
without prejudice the renewed certification motion in the Focus
Cases. On October 10, 2008, the Court confirmed
plaintiffs request and directed the clerk to close the
renewed certification motion. On April 2, 2009, a
stipulation and agreement of settlement among the plaintiffs,
issuer defendants and underwriters was submitted to the Court
for preliminary approval (the Proposed Global
Settlement). Pursuant to the Proposed Global
Settlement, all claims against the NaviSite Defendants would be
dismissed with prejudice and our pro rata share of the
settlement consideration would be fully funded by insurance. On
June 10, 2009, the Court issued an opinion and order
granting preliminary approval of the Proposed Global Settlement;
preliminarily certifying, for settlement purposes only, the
proposed classes; and directing issuance of notice to putative
settlement class members. On September 10, 2009, the Court
held a settlement fairness hearing. On October 5, 2009, the
Court entered an opinion and order granting final approval to
the Proposed Global Settlement and directing the clerk to close
each of the more than 300 actions comprising the IPO Securities
Litigation, including the Class-Action Litigation. Any appeal of
the Courts final approval of the Proposed Global
Settlement must be filed within 30 days of the date
judgment is entered.
The settlement remains subject to numerous conditions, including
potential appeals, and there can be no assurance that the
Courts approval of the Proposed Global Settlement will be
upheld in all respects if it is appealed. We believe that the
allegations against us are without merit, and, if the litigation
continues, we intend to vigorously defend against the
plaintiffs claims. Because of the inherent uncertainty of
litigation, and because the settlement remains subject to
numerous conditions and potential appeals, we are not able to
predict the possible outcome of the suits and their ultimate
effect, if any, on our business, financial condition, results of
operations or cash flows.
On October 12, 2007, a purported shareholder of the Company
filed a complaint for violation of Section 16(b) of the
Exchange Act, which prohibits short-swing trading, against two
of the underwriters of the public offering at issue in the
Class-Action
Litigation. The complaint is pending in the United States
District Court for the Western District of Washington and is
captioned Vanessa Simmonds v. Bank of America Corp., et al.
An amended complaint was filed on February 28, 2008.
Plaintiff seeks the recovery of short-swing profits from the
underwriters on behalf of the Company, which is named only as a
nominal defendant and from whom no recovery is sought. Similar
complaints have been filed against the underwriters of the
public offerings of approximately 55 other issuers also involved
in the IPO Securities Litigation. A joint status conference was
held on April 28, 2008, at which the Court stayed discovery
and ordered the parties to file motions to dismiss by
July 25, 2008. On July 25, 2008, the Company joined 29
other nominal defendant issuers and filed a joint motion to
dismiss the amended complaint. On the same date, the underwriter
21
defendants also filed a joint motion to dismiss. On
September 8, 2008, plaintiff filed her oppositions to the
motions. The replies in support of the motions to dismiss were
filed on October 23, 2008. Oral arguments on all motions to
dismiss were held on January 16, 2009, at which time the
Judge took the pending motions to dismiss under advisement. On
March 12, 2009, the Court entered an order granting the
motions to dismiss filed by the issuer defendants and the
underwriter defendants. Specifically, the Court granted the
issuer defendants joint motion to dismiss, dismissing the
complaint without prejudice on the grounds that the plaintiff
had failed to make an adequate demand on the Company prior to
filing her complaint. In its order the Court stated that it
would not permit the plaintiff to amend her demand letters while
pursuing her claims in the litigation. Because the Court
dismissed the case on the grounds that it lacked subject-matter
jurisdiction, it did not specifically reach the issue of whether
the plaintiffs claims were barred by the applicable
statute of limitations. However, the Court also granted the
underwriter defendants joint motion to dismiss with
respect to cases involving non-moving issuers, holding that the
cases were barred by the applicable statute of limitations
because the issuers shareholders had notice of the
potential claims more than five years prior to filing suit.
The plaintiff filed a notice of appeal with the Ninth Circuit
Court of Appeals on April 10, 2009. The underwriter
defendants filed a cross-appeal in each of the cases wherein the
issuers had moved for dismissal (including the appeal relating
to our IPO), and the claims against them were dismissed without
prejudice. The parties moved to consolidate the 54 cases for
purposes of appeal, which motion the Ninth Circuit granted. The
plaintiffs opening brief on appeal was filed on
August 26, 2009. The issuers (including the Company) and
the underwriters responses were filed on October 2,
2009. The plaintiff may file a reply brief by November 2,
2009, and underwriters may file a reply brief on their
cross-appeal by November 17, 2009. We do not expect that
this claim will have a material impact on our financial position
or results of operations.
Other
Litigation
Alabanza
Class Actions
In October 2007 we, pursuant to our integration plans, closed
the former Alabanza data center in Baltimore, Maryland, and
moved all equipment to our data center in Andover, Massachusetts
(the Data Migration). In connection with the
Data Migration, we encountered unforeseen circumstances that led
to extended down-time for certain of our customers.
On November 14, 2007, Pam Kagan Marketing, Inc., d/b/a
Earthplaza, filed a complaint in the United States District
Court for the District of Maryland (the
Court) against us and Alabanza seeking a
class status for the customers who experienced web-hosting
service interruptions as a result of the Data Migration (the
November
Class-Action
Litigation). The total damages claimed approximate
$5.0 million. On January 4, 2008, Palmatec, LLC; NYC
Merchandise; and Taglogic RFID, Ltd., filed a complaint in the
Maryland State Court, Circuit Court for Baltimore, against us
seeking a class status for the direct customers (the
Direct Subclass) and the entities that
purchased hosting services from those direct customers (the
Non-Privity Subclass) (the January
Class-Action
Litigation). The total damages claimed approximate
$10.0 million. The January
Class-Action
Litigation was removed to the Court by us. On May 11, 2008,
the Court issued an order consolidating the two cases. On
August 5, 2008, the plaintiffs in the January
Class-Action
Litigation voluntarily withdrew their case, without prejudice,
because of the inadequacy of their class representative. On
January 7, 2009, the District Court issued a Preliminary
Approval Order in Connection with Settlement Proceedings,
providing initial approval to a proposed class settlement. The
settlement provides for a payment to each Alabanza customer of
four times their respective minimum monthly recurring fee, with
a total maximum liability of $1.7 million, plus attorneys
fees and incentive fees. After a May 8, 2009, hearing, the
District Court issued an order granting final approval of the
settlement. The insurance company has funded the escrow account
out of which payments will be made under this settlement. As of
July 31, 2009, less than $0.3 million of the escrow
had yet to be disbursed.
22
La Touraine,
Inc.
On November 26, 2007, La Touraine, Inc.
(LTI), commenced an arbitration against us
with the American Arbitration Association, File No. 74 494
Y 01377 07 LUCM (the Demand). The Demand
alleged that Jupiter, an entity that we acquired in 2007,
breached two agreements with LTI and fraudulently induced both
of those agreements. LTI contended that we were liable for
Jupiters alleged misconduct and sought rescission of those
contracts and damages. LTI also claimed that we intentionally
interfered with the operations of certain of its websites and
caused damage. LTIs Demand followed our demand on LTI for
payment of money due under the agreements that LTI subsequently
alleged that Jupiter induced by fraud. We then counterclaimed in
the arbitration. On June 26, 2009, we entered into a
settlement agreement with LTI and certain of its affiliates
under which we and certain of our affiliates and LTI settled all
pending litigation, resolved all claims and signed a full waiver
and release of all claims, in each case, by and between the
parties. Pursuant to the settlement agreement, we paid
$5.0 million to LTI and agreed to pay up to approximately
$730,000, minus certain fees, that may be recovered from the
existing escrow account between the former stockholders of
Jupiter and us.
|
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Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Price
Range of Common Stock
Our common stock is currently traded on the NASDAQ Capital
Market under the symbol NAVI. As of October 1,
2009, there were approximately 234 holders of record of our
common stock. The following table sets forth the high and low
sales prices for our common stock as reported on the NASDAQ
Capital Market for the periods indicated.
|
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|
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|
|
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|
|
High
|
|
|
Low
|
|
|
Fiscal Year Ended July 31, 2009
|
|
|
|
|
|
|
|
|
May 1, 2009, through July 31, 2009
|
|
$
|
1.96
|
|
|
$
|
0.37
|
|
February 1, 2009, through April 30, 2009
|
|
$
|
0.52
|
|
|
$
|
0.01
|
|
November 1, 2008, through January 31, 2009
|
|
$
|
0.88
|
|
|
$
|
0.15
|
|
August 1, 2008, through October 31, 2008
|
|
$
|
3.92
|
|
|
$
|
0.50
|
|
Fiscal Year Ended July 31, 2008
|
|
|
|
|
|
|
|
|
May 1, 2008, through July 31, 2008
|
|
$
|
4.95
|
|
|
$
|
3.08
|
|
February 1, 2008, through April 30, 2008
|
|
$
|
4.75
|
|
|
$
|
2.05
|
|
November 1, 2007, through January 31, 2008
|
|
$
|
11.29
|
|
|
$
|
3.53
|
|
August 1, 2007, through October 31, 2007
|
|
$
|
11.24
|
|
|
$
|
6.18
|
|
We believe that a number of factors may cause the market price
of our common stock to fluctuate significantly. See Item 1A
(Risk Factors).
We have never paid cash dividends on our common stock. We
currently anticipate retaining all available earnings, if any,
to finance internal growth and product and service development.
Payment of dividends in the future will depend upon our
earnings, financial condition, anticipated cash needs and such
other factors as the directors may consider or deem appropriate
at the time. In addition, the terms of our credit agreement with
a syndicated group of lenders restrict the payment of cash
dividends on our common stock. Further, on September 12,
2007, we issued 3,125,000 shares of Preferred Stock, and
additional shares of the Preferred Stock have been and will be
issued as in-kind dividends that accrue on the outstanding
Preferred Stock. The
23
holders of the Preferred Stock are entitled to receive dividends
prior and in preference to any declaration or payment of any
dividend to a common stockholder.
We did not repurchase any shares of common stock during fiscal
year 2009.
Information regarding our equity-compensation plans and the
securities authorized for issuance thereunder is set forth in
Item 12 below.
Recent
Issuances of Unregistered Securities
On September 12, 2007, we acquired the outstanding capital
stock of netASPx, an application-management service provider,
for a total consideration of $40.8 million. The
consideration consisted of $15.5 million in cash, subject
to adjustment based on netASPxs cash at the closing date,
and the issuance of 3,125,000 shares of the Preferred Stock
with a fair value of $24.9 million at the time of issuance.
The Preferred Stock accrues
payment-in-kind
(PIK) dividends at 8% per annum, payable
quarterly, increasing to 10% per annum in September 2008 and 12%
per annum in March 2009.
Pursuant to the obligation described above, on June 15 and
September 15, 2009, we issued a PIK dividend of 106,731.47
and 109,933.40 shares, respectively, in aggregate, of the
Preferred Stock to their holders.
The shares issued as described in this Item 5 were not
registered under the Securities Act. We relied on the exemption
from registration provided by Section 4(2) of the
Securities Act as an issuance by us not involving a public
offering. No underwriters were involved with the issuance of the
Preferred Stock.
24
|
|
Item 6.
|
Selected
Financial Data
|
The following selected consolidated financial data should be
read in conjunction with our consolidated financial statements
and related notes and Managements Discussion and
Analysis of Financial Condition and Results of
Operations included elsewhere in this annual report on
Form 10-K.
Historical results are not necessarily indicative of results of
any future period.
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|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue, net
|
|
$
|
152,326
|
|
|
$
|
154,507
|
|
|
$
|
125,860
|
|
|
$
|
108,844
|
|
|
$
|
109,731
|
|
Revenue, related parties
|
|
|
346
|
|
|
|
372
|
|
|
|
322
|
|
|
|
243
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
152,672
|
|
|
|
154,879
|
|
|
|
126,182
|
|
|
|
109,087
|
|
|
|
109,863
|
|
Cost of revenue
|
|
|
102,288
|
|
|
|
107,715
|
|
|
|
85,196
|
|
|
|
75,064
|
|
|
|
80,227
|
|
Impairment, restructuring and other
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
102,497
|
|
|
|
107,715
|
|
|
|
85,196
|
|
|
|
75,064
|
|
|
|
80,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
50,175
|
|
|
|
47,164
|
|
|
|
40,986
|
|
|
|
34,023
|
|
|
|
29,253
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
20,279
|
|
|
|
20,116
|
|
|
|
16,924
|
|
|
|
14,756
|
|
|
|
12,993
|
|
General and administrative
|
|
|
23,781
|
|
|
|
22,773
|
|
|
|
22,043
|
|
|
|
21,787
|
|
|
|
23,600
|
|
Loss on settlement
|
|
|
5,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment, restructuring and other
|
|
|
180
|
|
|
|
|
|
|
|
(231
|
)
|
|
|
1,373
|
|
|
|
2,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
49,976
|
|
|
|
42,889
|
|
|
|
38,736
|
|
|
|
37,916
|
|
|
|
39,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
199
|
|
|
|
4,275
|
|
|
|
2,250
|
|
|
|
(3,893
|
)
|
|
|
(10,002
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
43
|
|
|
|
264
|
|
|
|
337
|
|
|
|
283
|
|
|
|
61
|
|
Interest expense
|
|
|
(14,164
|
)
|
|
|
(12,033
|
)
|
|
|
(12,476
|
)
|
|
|
(9,585
|
)
|
|
|
(7,590
|
)
|
Loss on debt extinguishment
|
|
|
|
|
|
|
(1,651
|
)
|
|
|
(15,712
|
)
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
705
|
|
|
|
2,295
|
|
|
|
864
|
|
|
|
437
|
|
|
|
2,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense
|
|
|
(13,217
|
)
|
|
|
(6,850
|
)
|
|
|
(24,737
|
)
|
|
|
(12,758
|
)
|
|
|
(14,746
|
)
|
Income tax expense
|
|
|
(1,894
|
)
|
|
|
(1,834
|
)
|
|
|
(1,173
|
)
|
|
|
(1,173
|
)
|
|
|
(1,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(15,111
|
)
|
|
|
(8,684
|
)
|
|
|
(25,910
|
)
|
|
|
(13,931
|
)
|
|
|
(16,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred-stock dividends
|
|
|
(3,350
|
)
|
|
|
(2,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(18,461
|
)
|
|
$
|
(11,340
|
)
|
|
$
|
(25,910
|
)
|
|
$
|
(13,931
|
)
|
|
$
|
(16,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(0.52
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.85
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average number of common shares
outstanding
|
|
|
35,528
|
|
|
|
34,731
|
|
|
|
30,512
|
|
|
|
28,601
|
|
|
|
28,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance-Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (deficit)
|
|
$
|
(976
|
)
|
|
$
|
2,048
|
|
|
$
|
10,611
|
|
|
$
|
(9,072
|
)
|
|
$
|
(77,560
|
)
|
Total assets
|
|
$
|
163,680
|
|
|
$
|
175,713
|
|
|
$
|
116,244
|
|
|
$
|
102,409
|
|
|
$
|
101,177
|
|
Long-term obligations
|
|
$
|
132,280
|
|
|
$
|
133,736
|
|
|
$
|
97,072
|
|
|
$
|
70,817
|
|
|
$
|
5,515
|
|
Stockholders deficit
|
|
$
|
(35,103
|
)
|
|
$
|
(18,772
|
)
|
|
$
|
(13,864
|
)
|
|
$
|
(1,976
|
)
|
|
$
|
(2,672
|
)
|
25
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This Annual Report on
Form 10-K
contains forward-looking statements, within the meaning of
Section 21E of the Exchange Act and Section 27A of the
Securities Act, 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
under Item 1A (Risk Factors) and the
risks discussed in our other filings with the SEC. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which reflect managements analysis, judgment,
belief or expectation only as of the date hereof. We undertake
no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after
the date hereof.
Overview
We provide our services to customers typically pursuant to
agreements with a term of one to five years and monthly payment
installments. As a result, these agreements provide us with a
base of recurring revenue. Our revenue increases by adding new
customers or selling additional services to existing customers.
Our overall base of recurring revenue is affected by new
customers, renewals or terminations of agreements with existing
customers.
A large portion of the costs to operate our data
centers such as rent, product development and
general and administrative expenses does not depend
strictly on the number of customers or the amount of services we
provide. As we add new customers or new services to existing
customers, we generally incur limited incremental costs relating
to telecommunications, utilities, hardware and software costs
and payroll expenses. We have substantial capacity to add
customers to our data centers. Our relatively fixed cost base,
sufficient capacity for expansion and limited incremental
variable costs provide us with the opportunity to grow
profitably. However, these same fixed costs present us with the
risk that we may incur losses if we are unable to generate
sufficient revenue.
Our fiscal year ends on July 31 of each year. During fiscal
year 2008, we completed four acquisitions. In August 2007 we
acquired the outstanding capital stock of Jupiter a
privately held company based in Santa Clara, California,
that provides managed-hosting services and acquired
the assets and assumed certain liabilities of Alabanza. Alabanza
was a provider of dedicated and shared managed-hosting services.
In September 2007 we acquired the outstanding capital stock of
netASPx, an application-management service provider, and in
October 2007 we acquired the assets of iCommerce, a reseller of
dedicated hosting services. All of the acquisitions during
fiscal year 2008 were accounted for using the purchase method of
accounting, and, as such, the results of operations and cash
flow related to these acquisitions were included in our
consolidated statement of operations and consolidated statement
of cash flows from their respective dates of acquisition.
26
Results
of Operations for the Three Years Ended July 31, 2009, 2008
and 2007
The following table sets forth the percentage relationships of
certain items from our consolidated statements of operations as
a percentage of total revenue for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenue, net
|
|
|
99.8
|
%
|
|
|
99.8
|
%
|
|
|
99.7
|
%
|
Revenue, related parties
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of Revenue
|
|
|
52.0
|
%
|
|
|
56.4
|
%
|
|
|
57.6
|
%
|
Depreciation and amortization
|
|
|
15.0
|
%
|
|
|
13.1
|
%
|
|
|
9.9
|
%
|
Restructuring charge
|
|
|
0.1
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
67.1
|
%
|
|
|
69.5
|
%
|
|
|
67.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
32.9
|
%
|
|
|
30.5
|
%
|
|
|
32.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
13.3
|
%
|
|
|
13.0
|
%
|
|
|
13.4
|
%
|
General and administrative
|
|
|
15.6
|
%
|
|
|
14.7
|
%
|
|
|
17.5
|
%
|
Loss on settlement
|
|
|
3.7
|
%
|
|
|
|
%
|
|
|
|
%
|
Impairment, restructuring and other
|
|
|
0.1
|
%
|
|
|
|
%
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
32.7
|
%
|
|
|
27.7
|
%
|
|
|
30.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
0.1
|
%
|
|
|
2.8
|
%
|
|
|
1.8
|
%
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
0.0
|
%
|
|
|
0.2
|
%
|
|
|
0.3
|
%
|
Interest expense
|
|
|
(9.3
|
)%
|
|
|
(7.8
|
)%
|
|
|
(9.9
|
)%
|
Loss on debt extinguishment
|
|
|
|
%
|
|
|
(1.1
|
)%
|
|
|
(12.5
|
)%
|
Other income (expense), net
|
|
|
0.5
|
%
|
|
|
1.5
|
%
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(8.7
|
)%
|
|
|
(4.4
|
)%
|
|
|
(19.6
|
)%
|
Income taxes
|
|
|
(1.2
|
)%
|
|
|
(1.2
|
)%
|
|
|
(0.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(9.9
|
)%
|
|
|
(5.6
|
)%
|
|
|
(20.5
|
)%
|
Accretion of preferred stock dividends
|
|
|
(2.2
|
)%
|
|
|
(1.7
|
)%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
|
(12.1
|
)%
|
|
|
(7.3
|
)%
|
|
|
(20.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of the Years 2009, 2008 and 2007
Revenue
We derive our revenue from managed-IT services
including hosting, co-location and application services
comprised of a variety of service offerings and professional
services to both enterprise and mid-market companies
and organizations. These entities include mid-sized companies,
divisions of large multinational companies and government
agencies.
Total revenue for the fiscal year ended July 31, 2009,
decreased 1.4% to approximately $152.7 million from
approximately $154.9 million for the fiscal year ended
July 31, 2008. The overall decline of approximately
$2.2 million in revenue was mainly due to a
$13.7 million reduction in professional-services revenues
offset by an increase of $10.3 million in revenue from our
enterprise-hosting and -application services. This increase was
due to increased sales to new and existing customers, offset by
a reduction of approximately $3.6 million due to changes in
foreign-currency exchange rates. In addition, fiscal-year-2009
revenues increased $1.2 million, as compared to fiscal year
2008, due to increased sales from Americas Job
27
Exchange, our employment-services website
(AJE). Revenue from related parties decreased
7% during the year ended July 31, 2009, to approximately
$346,000 from approximately $372,000 during the year ended
July 31, 2008.
Total revenue for the fiscal year ended July 31, 2008,
increased 22.7% to approximately $154.9 million from
approximately $126.2 million for the fiscal year ended
July 31, 2007. The overall growth of approximately
$28.7 million in revenue was mainly due to the addition of
revenue from the companies acquired in August, September and
October of 2007. Revenue from related parties increased 16%
during the year ended July 31, 2008, to approximately
$372,000, from approximately $322,000 during the year ended
July 31, 2007.
No customer accounted for more than 5% of total revenues in
fiscal year 2009 or 2008. One unrelated customer accounted for
8% of our total revenue in fiscal year 2007.
Cost of
Revenue and Gross Profit
Cost of revenue consists primarily of salaries and benefits for
operations personnel, bandwidth fees and related
Internet-connectivity charges, equipment costs and related
depreciation and costs to run our data centers, such as rent and
utilities.
Total cost of revenue of $102.5 million for the fiscal year
ended July 31, 2009, decreased approximately
$5.2 million, or 4.8%, from the cost of revenue of
approximately $107.7 million for the fiscal year ended
July 31, 2008. As a percentage of revenue, total cost of
revenue for the fiscal year ended July 31, 2009, decreased
to 67.1% from 69.5% for the fiscal year ended July 31,
2008. The overall decrease of approximately $5.2 million
was primarily due to a decrease of $7.4 million in
employee-related expenses, inclusive of a $0.2 million
restructuring charge for severance and related costs for our
professional-services organization. In addition, external
consulting expenses, related primarily to lower
professional-services revenue, were lower by approximately
$1.4 million, telecommunication and bandwidth cost were
lower by $1.3 million, amortization expense decreased by
approximately $0.7 million, non-billable travel expense
decreased by approximately $0.5 million and the
data-center-migration charge of $0.4 million in fiscal year
2008 did not reoccur in fiscal year 2009. These decreases of
$11.7 million were partially offset by increased
depreciation expense of approximately $3.3 million;
increased facility-related expenses, including rent and
utilities, of approximately $2.6 million; and increased
third-party pass-through charges and hardware- and
software-maintenance and -licensing costs of approximately
$0.6 million.
Total cost of revenue of $107.7 million for the fiscal year
ended July 31, 2008, increased approximately
$22.5 million, or 26.4%, from the cost of revenue of
approximately $85.2 million for the fiscal year ended
July 31, 2007. As a percentage of revenue, total cost of
revenue for the fiscal year ended July 31, 2008, increased
to 69.5% from 67.5% for the fiscal year ended July 31,
2007. The overall increase of approximately $22.5 million
was primarily due to higher costs necessary to support the
increase in revenues of $28.7 million. Incremental costs of
revenue consisted of higher salaries and related costs
(including stock-based compensation and travel expenses) of
approximately $8.5 million; increased
intangible-asset-amortization expense of approximately
$3.8 million resulting from the acquisitions of Alabanza,
Jupiter, netASPx and iCommerce during fiscal year 2008;
increased depreciation expense of approximately
$4.0 million; increased facility-related expenses,
including rent and utilities, of approximately
$4.1 million; increased telecommunication-related expenses
of approximately $2.1 million; increased third-party
hardware and software pass-through charges and hardware- and
software-maintenance and -licensing costs of approximately
$1.3 million; and a one-time data-center-migration charge
of $0.4 million. These incremental expenses were partially
offset by lower costs of outside consultants and billable
expenses related to the delivery of professional-services
revenue of approximately $1.7 million during the period.
Gross profit of $50.2 million for the fiscal year ended
July 31, 2009, increased approximately $3.0 million,
or 6.4%, from a gross profit of approximately $47.2 million
for the fiscal year ended July 31, 2008. Gross profit for
the fiscal year ended July 31, 2009, represented 32.9% of
total revenue, as compared to 30.5% of total revenue for the
fiscal year ended July 31, 2008. Gross-profit percentage
was positively impacted during
28
fiscal year 2009, as compared to fiscal 2008, primarily due to
our continued focus on cost containments and the cost reductions
in response to the lower professional-services revenue noted
above.
Gross profit of $47.2 million for the fiscal year ended
July 31, 2008, increased approximately $6.2 million,
or 15.1%, from a gross profit of approximately
$41.0 million for the fiscal year ended July 31, 2007.
Gross profit for the fiscal year ended July 31, 2008,
represented 30.5% of total revenue, as compared to 32.5% of
total revenue for the fiscal year ended July 31, 2007.
Gross-profit percentage was negatively impacted during fiscal
year 2008, as compared to fiscal year 2007, mainly due to higher
intangible-amortization
costs and higher levels of professional-services business, which
carries overall lower gross profit.
Operating
Expenses
Selling and Marketing Selling and marketing
expense consists primarily of salaries and related benefits,
commissions and marketing expenses such as advertising, product
literature, trade-show costs and marketing and direct-mail
programs.
Selling and marketing expense increased 0.8% to approximately
$20.3 million, or 13.3% of total revenue for the fiscal
year ended July 31, 2009, from approximately
$20.1 million, or 13.0% of total revenue for the fiscal
year ended July 31, 2008. The increase of approximately
$0.2 million resulted primarily from increased commission
and referral-partner expenses of $1.1 million and an
increase of $0.1 million related to advertising expense.
This increase of $1.2 million was offset by a decrease of
approximately $0.6 million in salary and related headcount
expenses and decreased travel-related expenses of
$0.4 million.
Selling and marketing expense increased 18.9% to approximately
$20.1 million, or 13.0% of total revenue for the fiscal
year ended July 31, 2008, from approximately
$16.9 million, or 13.4% of total revenue for the fiscal
year ended July 31, 2007. The increase of approximately
$3.2 million resulted primarily from increased salary and
headcount-related costs of $3.7 million (including
stock-based compensation) supporting the growth in total revenue
during the fiscal year ended July 31, 2008, and increased
lead-referral fees of $0.3 million. These cost increases
were partially offset by decreased commission-related expenses
of $0.5 million and decreased sales-related marketing
expenses of $0.3 million.
General and Administrative General and
administrative expense includes the costs of financial,
human-resources, IT and administrative personnel, professional
services, bad debt and corporate overhead.
General and administrative expense increased 4.4% to
approximately $23.8 million for the fiscal year ended
July 31, 2009, from approximately $22.8 million for
the fiscal year ended July 31, 2008. General and
administrative expense increased to 15.6% of total revenue for
the fiscal year ended July 31, 2009, from 14.7% of total
revenue for the fiscal year ended July 31, 2008. The
increased expense of $1.0 million was attributable to an
increase of approximately $1.4 million in legal fees
resulting from an increase in litigation matters during the
year; an increase in bad-debt expense of $0.6 million,
excluding $0.7 million related to the receivables that were
written off in connection with the Loss on
settlement noted below; an increase of $0.5 million
in facilities-related costs, including rent and utilities; an
increase in bank-related fees of $0.5 million; and an
increase in recruiting expense of $0.2 million. The
increased expenses of $3.2 million were offset by lower
employee-related costs, including stock-based compensation and
travel, of $1.5 million; lower professional-services fees
of $0.4 million; and a net decrease in depreciation and
amortization of $0.3 million.
General and administrative expense increased 3.3% to
approximately $22.8 million for the fiscal year ended
July 31, 2008, from approximately $22.0 million for
the fiscal year ended July 31, 2007. General and
administrative expense decreased to 14.7% of total revenue for
the fiscal year ended July 31, 2008, from 17.5% of total
revenue for the fiscal year ended July 31, 2007. The total
increased expenses of $0.8 million were attributable to an
increase of $1.1 million in facilities-related costs,
including rent and utilities; increased consulting and
professional services of $1.0 million; increased bad-debt
expense of $0.5 million; and increased miscellaneous fees,
including non-income tax expenses and administrative-service
charges of $0.7 million. The increased expenses were offset
by lower transaction-related costs of $1.8 million, lower
salary costs (including stock-based compensation) of
$0.4 million and a net decrease in depreciation and
amortization of $0.3 million.
29
Loss on settlement. During fiscal year 2009 we
entered into a settlement agreement with a former Jupiter
customer to settle all pending litigation matters between us. We
recorded a loss on settlement of $5.7 million, comprised of
a $5.0 million cash settlement payment to this former
customer and the write-off of $0.7 million of outstanding
accounts receivable from this former customer, which accounts
receivable were written off as part of this settlement.
Impairment, restructuring and other. During
fiscal year 2009 we initiated the restructuring of our
professional-services organization in an effort to realign
resources. As a result of this initiative, we terminated several
employees, resulting in a restructuring charge for severance and
related costs of $0.4 million, of which approximately
$0.2 million was included in operating expenses. No
impairment, restructuring or other charges were recorded in
fiscal year 2008.
We recorded a net impairment recovery of $0.2 million in
fiscal 2007 primarily due to an impairment recovery of
approximately $0.3 million related to revised assumptions
due to securing a sublease of an impaired facility during the
fiscal year ended July 31, 2007, offset by an approximate
$0.1 million impairment charge related to the abandonment
of additional space in our Syracuse, New York, facility.
Interest
Income
Interest income decreased $221,000 to approximately $43,000 for
the fiscal year ended July 31, 2009. The decrease is mainly
due to lower levels of average cash balances during the year
ended July 31, 2009, as compared to the fiscal year ended
July 31, 2008.
Interest income decreased 21.7% to approximately $264,000, or
0.2% of total revenue, for the fiscal year ended July 31,
2008, from approximately $337,000, or 0.3% of total revenue, for
the fiscal year ended July 31, 2007. The decrease of
$73,000 is mainly due to lower levels of average cash balances
during the year ended July 31, 2008, as compared to the
fiscal year ended July 31, 2007, as a result of our use of
cash for acquisitions during fiscal year 2008.
Interest
Expense
Interest expense increased 17.7% to approximately
$14.2 million, or 9.3% of total revenue, for the fiscal
year ended July 31, 2009, from approximately
$12.0 million, or 7.8% of total revenue, for the fiscal
year ended July 31, 2008. The increase of $2.2 million
is primarily related to an increased rate of interest and higher
average outstanding debt balances during the fiscal year ended
July 31, 2009.
Interest expense decreased 4.0% to approximately
$12.0 million, or 7.8% of total revenue, for the fiscal
year ended July 31, 2008, from approximately
$12.5 million, or 9.9% of total revenue, for the fiscal
year ended July 31, 2007. The decrease of $0.5 million
is primarily related to a lower rate of interest on our
outstanding long-term debt during the fiscal year ended
July 31, 2008. The average long-term debt balance during
the fiscal year ended July 31, 2008, compared to the fiscal
year ended July 31, 2007, was higher due to an increase in
the term-loan balance as a result of the debt refinancing in
June 2007 and the acquisitions completed in the first quarter of
fiscal year 2008.
Loss on
Debt Extinguishment
No loss on debt extinguishment was recorded during the fiscal
year ended July 31, 2009.
During the fiscal year ended July 31, 2008, we recorded a
loss on debt extinguishment of $1.7 million in connection
with the September 2007 refinancing of our credit agreement. The
total amount of the loss on debt extinguishment consisted of the
write-off of unamortized transaction fees and expenses related
to the prior refinancing of our long-term debt in June 2007.
30
Other
Income (Expense), Net
Other income was approximately $0.7 million for the fiscal
year ended July 31, 2009, as compared to other income of
approximately $2.3 million for the fiscal year ended
July 31, 2008. Other income consists of sublease rental
income and other miscellaneous income.
Other income was approximately $2.3 million for the fiscal
year ended July 31, 2008, as compared to other income of
approximately $0.9 million for the fiscal year ended
July 31, 2007. Other income consists of a $1.6 million
gain attributed to the settlement of the AppliedTheory
litigation coupled with $0.7 million for sublease rental
income and other miscellaneous income.
Income-Tax
Expense
We recorded $1.9 million of deferred income-tax expense for
the fiscal year ended July 31, 2009. Deferred income-tax
expense of $1.9 million for the fiscal year ended
July 31, 2009, was consistent with that recorded in the
fiscal year ended July 31, 2008, and $0.7 million more
than the amounts recorded for the fiscal year ended
July 31, 2007. No income-tax benefit was recorded for the
losses incurred due to a valuation allowance recognized against
deferred tax assets. The deferred tax expense resulted from
tax-goodwill amortization related to the Surebridge asset
acquisition in June 2004, the acquisition of certain
AppliedTheory Corporation assets by CBTM prior to the pooling of
interests in December 2002, the asset acquisition of Alabanza in
September 2007 and the asset acquisition of iCommerce in October
2007. Accordingly, the acquired goodwill and intangible assets
for these acquisitions are amortizable for tax purposes over
15 years. For financial-statement purposes goodwill is not
amortized for any of these acquisitions but is tested for
impairment annually. Tax amortization of goodwill results in a
taxable temporary difference, which will not reverse until the
goodwill is impaired or written off. The resulting taxable
temporary difference may not be offset by deductible temporary
differences currently available, such as net-operating-loss
carryforwards, which expire within a definite period.
Liquidity
and Capital Resources
As of July 31, 2009, our principal sources of liquidity
included cash and cash equivalents of $10.5 million and a
revolving-credit facility of $10.0 million provided under
our credit agreement with a lending syndicate. At July 31,
2009, we had borrowed $10.0 million under the
revolving-credit facility. Our current assets, including cash
and cash equivalents of $10.5 million, were approximately
$1.0 million less than our current liabilities at
July 31, 2009, as compared to a positive working capital of
$2.0 million, including cash and cash equivalents of
$3.3 million, at July 31, 2008.
Cash and cash equivalents increased approximately
$7.3 million for the fiscal year ended July 31, 2009.
Our primary sources of cash included approximately
$21.6 million in cash provided by operations and
$10.4 million in proceeds from borrowings on notes payable.
Net cash provided by operating activities of approximately
$21.6 million for the fiscal year ended July 31, 2009,
resulted from the funding of our net loss of $15.1 million,
non-cash charges of $30.6 million and $6.1 million in
net changes in operating assets and liabilities. The primary
uses of cash for the fiscal year ended July 31, 2009,
included $10.6 million to purchase property, plant and
equipment; $13.1 million paid in respect of notes payable
and capital-lease obligations; and $1.2 million of payments
for debt-issuance costs. At July 31, 2009, we had an
accumulated deficit of $519.6 million.
Our revolving-credit facility allows for maximum borrowing of
$10.0 million and expires in June 2012. Outstanding amounts
bear interest at either LIBOR plus 6% or, at our option, the
Base Rate, as defined in our credit agreement, plus 5%. There is
an additional 2% accruing as PIK interest until the leverage
ratio has been lowered to 3:1. Interest becomes due, and is
payable, quarterly in arrears.
We believe that our existing cash and cash equivalents, cash
flow from operations and existing amounts available under our
credit facility will be sufficient to meet our anticipated cash
needs for at least the next 12 months.
31
Contractual
Obligations and Commercial Commitments
We are obligated under various capital and operating leases for
facilities and equipment. Future minimum annual rental
commitments under capital and operating leases and other
commitments, as of July 31, 2009, are as follows:
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Less than
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More than
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Description
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Total
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1 Year
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1-3 Years
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3-5 Years
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5 Years
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(In thousands)
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Short/long-term debt
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$
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116,757
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$
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10,603
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$
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2,184
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$
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103,970
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$
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Interest on debt(a)
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39,936
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11,456
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19,792
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8,688
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Capital leases(b)
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22,447
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4,796
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5,119
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4,580
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7,952
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Bandwidth commitments
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1,592
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1,535
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57
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Property leases(b)(c)(d)
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84,945
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10,162
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18,177
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18,055
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38,551
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Total
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$
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265,677
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$
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38,552
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|
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$
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45,329
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$
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135,293
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$
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46,503
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(a) |
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Interest on debt assumes that LIBOR is fixed at 3.15% and that
our leverage ratio drops below 3:1 as of January 31, 2010,
resulting in a 2% interest-rate decrease. The 2% accruing PIK
interest will be paid in full at the end of the loan term. |
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(b) |
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Future commitments denominated in foreign currency are fixed at
the exchange rates as of July 31, 2009. |
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(c) |
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Amounts exclude certain common area maintenance and other
property charges that are not included within the lease payment. |
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(d) |
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On February 9, 2005, we entered into an assignment and
assumption agreement with a Las Vegas-based company, whereby
this company purchased from us the right to use
29,000 square feet in our Las Vegas data center and the
infrastructure and equipment associated with this space. In
exchange, we received an initial payment of $600,000 and were to
receive $55,682 per month over two years. On May 31, 2006,
we received full payment of the remaining unpaid balance. This
agreement shifts the responsibility for management of the data
center and its employees, along with the maintenance of the
facilitys infrastructure, to this Las Vegas-based company.
Pursuant to this agreement, we have subleased back
2,000 square feet of space, allowing us to continue
servicing our existing customer base in this market. Commitments
related to property leases include an amount related to the
2,000-square-foot sublease. |
Off-Balance-Sheet
Financing Arrangements
We do not have any off-balance-sheet financing arrangements
other than operating leases, which are recorded in accordance
with generally accepted accounting principles.
Critical
Accounting Policies
We prepare our consolidated financial statements in accordance
with accounting principles generally accepted in the United
States. In accordance therewith, we must make certain estimates,
judgments and assumptions that we believe are reasonable based
on the information available. These estimates and assumptions
affect the reported amounts of assets and liabilities at the
date of the consolidated financial statements and the reported
amounts of revenues and expenses for the periods presented. The
significant accounting policies that we believe are the most
critical to aid in fully understanding and evaluating our
reported financial results are revenue recognition; allowance
for doubtful accounts; impairment of long-lived assets, goodwill
and other intangible assets; stock-based compensation;
impairment costs; and income taxes. We review our estimates on a
regular basis and make adjustments based on historical
experiences, current conditions and future expectations. We
perform these reviews regularly and make adjustments in light of
currently available information. We believe that these estimates
are reasonable, but actual results could differ from these
estimates.
Revenue Recognition. We derive our revenue
from monthly fees for website and Internet-application
management and hosting, co-location services and professional
services. Reimbursable expenses charged to
32
customers are included in revenue and cost of revenue. Revenue
is recognized as services are performed in accordance with all
applicable revenue-recognition criteria.
Application-management, hosting and co-location services are
billed and recognized as revenue over the term of the applicable
contract based on actual customer usage. These terms generally
are one to five years. Installation fees associated with
application-management, hosting and co-location services are
billed when the installation service is provided and recognized
as revenue over the term of the related contract. Installation
fees generally consist of fees charged to set up a specific
technological environment for a customer within a NaviSite data
center. In instances where payment for a service is received in
advance of performing those services, the related revenue is
deferred until the period in which such services are performed.
The direct and incremental costs associated with installation
and setup activities are capitalized and expensed over the term
of the related contract.
Professional-services revenue is recognized on a time and
materials basis as the services are performed for time- and
materials-type contracts or on a
percentage-of-completion
method for fixed-price contracts. We estimate the percentage of
completion using the ratio of hours incurred on a contract to
the projected hours expected to be incurred to complete the
contract. Estimates to complete contracts are prepared by
project managers and reviewed by management each month. When
current contract estimates indicate that a loss is probable, a
provision is made for the total anticipated loss in the current
period. Contract losses are determined as the amount by which
the estimated service costs of the contract exceed the estimated
revenue that will be generated by the contract. Historically,
our estimates have been consistent with actual results. Unbilled
accounts receivable represent revenue for services performed
that have not been billed. Billings in excess of revenue
recognized are recorded as deferred revenue until the applicable
revenue-recognition criteria are met.
In accordance with Emerging Issues Task Force
(EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple
Deliverables, when more than one element
such as professional services, installation and hosting
services are contained in a single arrangement, we
allocate revenue between the elements based on acceptable
fair-value-allocation methodologies, so long as each element
meets the criteria for treatment as a separate unit of
accounting. An item is considered a separate unit of accounting
if it has value to the customer on a stand-alone basis and there
is objective and reliable evidence of the fair value of the
undelivered items. The fair value of each undelivered element is
determined, if sold separately, by the price charged or, if not
sold separately, by other acceptable objective evidence. We
apply judgment to ensure the appropriate application of
EITF 00-21,
including with respect to the determination of fair value for
multiple deliverables, the determination of whether undelivered
elements are essential to the functionality of delivered
elements and the timing of revenue recognition, among others.
For those arrangements with respect to which the deliverables do
not qualify as a separate unit of accounting, revenue from all
deliverables is treated as one accounting unit and generally
recognized ratably over the term of the arrangement.
Existing customers are subject to initial and ongoing credit
evaluations based on credit reviews that we perform and,
subsequent to beginning as a customer, payment history and other
factors, including the customers financial condition and
general economic trends. If it is determined, subsequent to our
initial evaluation at any time during the arrangement, that
collectability is not reasonably assured, revenue is recognized
as cash is received, as collectability is not considered
probable at the time the services are performed.
Allowance for Doubtful Accounts. We perform
initial and periodic credit evaluations of our customers
financial conditions. We make estimates of the collectability of
our accounts receivable and maintain an allowance for doubtful
accounts for potential credit losses. We specifically analyze
accounts receivable and consider historical bad debts, customer
and industry concentrations, customer creditworthiness
(including the customers financial performance and its
business history), current economic trends and changes in our
customers payment patterns when evaluating the adequacy of
the allowance for doubtful accounts. We specifically reserve for
100% of the balance of customer accounts deemed uncollectible.
For all other customer accounts, we reserve as needed based upon
managements estimates of uncollectible amounts based on
historical bad debt. Changes in economic conditions or the
financial viability of our customers may result in additional
provisions for doubtful accounts in excess of our current
estimate. Historically, our estimates have
33
been consistent with actual results. A 5% to 10% unfavorable
change in our provision requirements would result in an
approximate $0.09 million to $0.2 million decrease to
income from operations for the fiscal year ended July 31,
2009.
Impairment of Long-Lived Assets and Goodwill and Other
Intangible Assets. We review our long-lived
assets, subject to amortization and depreciation, for impairment
whenever events or changes in circumstances indicate that the
carrying amount of these assets may not be recoverable.
Long-lived and other intangible assets include customer lists,
customer-contract backlog, developed technology, vendor
contracts, trademarks, non-compete agreements and property and
equipment. Factors we consider important that could trigger an
impairment review include:
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significant underperformance relative to expected historical or
projected future operating results;
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significant changes in the manner of our use of the acquired
assets or the strategy of our overall business;
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significant negative industry or economic trends;
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significant declines in our stock price for a sustained
period; and
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our market capitalization relative to net book value.
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Recoverability is measured by a comparison of the carrying
amount of an asset to the future undiscounted cash flows
expected to be generated by the asset. If the undiscounted cash
flows expected to be generated by the use and disposal of the
asset are less than its carrying value and therefore impaired,
we recognize the impairment loss as measured by the amount by
which the carrying value of the assets exceeds its fair value.
Fair value is determined based on discounted cash flows or
values determined by reference to third-party valuation reports,
depending on the nature of the asset. Assets to be disposed of
are valued at the lower of the carrying amount or their fair
value, less disposal costs. Property and equipment is primarily
comprised of leasehold improvements, computer and office
equipment and software licenses.
We review the valuation of our goodwill in the fourth quarter of
each fiscal year, or on an interim basis, if it is considered
more likely than not that an impairment loss has been incurred.
Our valuation methodology for assessing impairment requires us
to make judgments and assumptions based on historical experience
and to rely heavily on projections of future operating
performance. We operate in highly competitive environments, and
our projections of future operating results and cash flows may
vary significantly from actual results. If the assumption that
we use in preparing our estimates of our reporting units
projected performance for purposes of impairment testing differs
materially from actual future results, we may record impairment
changes in the future and our operating results may be adversely
affected. We completed our annual impairment review of goodwill
as of July 31, 2008, and concluded that goodwill was not
impaired. No impairment indicators have arisen since that date
to cause us to perform an impairment assessment since that date.
At July 31, 2009 and 2008, the carrying value of goodwill
and other intangible assets totaled $88.7 million and
$96.0 million, respectively. Historically, our estimates
have been consistent with actual results.
Impairment costs. We generally record
impairments related to underutilized real estate leases.
Generally, whenever we determine that a facility will no longer
be utilized or generate any future economic benefit, we record
an impairment loss in the period such determination is made. As
of July 31, 2009, our accrued lease-impairment balance
totaled approximately $0.4 million, all of which represents
amounts that are committed under remaining contractual
obligations. These contractual obligations principally represent
future obligations under non-cancelable real estate leases.
Impairment estimates relating to real estate leases involve the
consideration of a number of factors, including potential
sublet-rental rates, the estimated vacancy period for the
property, brokerage commissions and certain other costs.
Estimates relating to potential sublet rates and expected
vacancy periods are most likely to have a material impact on our
results of operations if actual amounts differ significantly
from estimates. These estimates involve judgment and
uncertainties, and the settlement of these liabilities could
differ materially from recorded amounts. As such, in the course
of making such estimates, we often use third-party real estate
professionals to assist us in our assessment of the marketplace
for purposes of estimating sublet rates and vacancy periods.
Historically, our estimates have been
34
consistent with actual results. A 10% to 20% unfavorable
settlement of our remaining liabilities for impaired facilities,
as compared to our current estimates, would decrease our income
from operations for the fiscal year ended July 31, 2009, by
approximately $0.04 million to $0.09 million.
Stock-Based Compensation. Statement of
Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment,
requires companies to estimate the fair value of stock-based
payment awards on the date of grant using an option-pricing
model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite
service periods in our consolidated statement of operations.
SFAS No. 123(R) supersedes our previous accounting
under the provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. As
permitted by SFAS No. 123, we had measured options
granted prior to August 1, 2005, as compensation cost in
accordance with Accounting Principles Board Opinion
(APB) No. 25, Accounting for
Stock Issued to Employees, and related
interpretations. Accordingly, no accounting recognition is given
to stock options granted at fair market value until they are
exercised. Upon exercise of the options, net proceeds, including
tax benefits realized, are credited to equity.
Stock-based compensation expense recognized during the period is
based on the value of the portion of stock-based payment awards
that is ultimately expected to vest during the period, reduced
for estimated forfeitures. SFAS No. 123(R) requires
forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates. In our pro forma information required
under SFAS No. 123 for the periods prior to
August 1, 2005, we established estimates for forfeitures.
Stock-based compensation expense recognized in our consolidated
statements of operations for the fiscal years ended
July 31, 2008 and 2007, included compensation expense for
stock-based payment awards granted before, but unvested as of,
July 31, 2005, based on the grant-date fair value estimated
in accordance with the pro forma provisions of
SFAS No. 123, and compensation expense for the
stock-based payment awards granted after July 31, 2005,
based on the grant-date fair value estimated in accordance with
the provisions of SFAS No. 123(R).
In accordance with SFAS No. 123(R), we use the
Black-Scholes option-pricing model (the Black-Scholes
Model). In utilizing the Black-Scholes Model, we are
required to make certain estimates in order to determine the
grant-date fair value of equity awards. These estimates can be
complex and subjective and include the expected volatility of
our common stock, our divided rate, a risk-free interest rate,
the expected term of the equity award and the expected
forfeiture rate of the equity award. Any changes in these
assumptions may materially affect the estimated fair value of
our recorded stock-based compensation.
Income Taxes. Income taxes are accounted for
under the provisions of SFAS No. 109,
Accounting for Income Taxes, using the
asset-and-liability
method, whereby deferred tax assets and liabilities are
recognized for the estimated future tax consequences
attributable to differences between the financial-statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date. SFAS No. 109 also
requires that the deferred tax assets be reduced by a valuation
allowance if, based on the weight of available evidence, it is
more likely than not that some or all of the recorded deferred
tax assets will not be realized in future periods. This
methodology is subjective and requires significant estimates and
judgments in the determination of the recoverability of deferred
tax assets and in the calculation of certain tax liabilities. At
July 31, 2009 and 2008, respectively, a valuation allowance
has been recorded against the gross deferred tax asset since we
believe that, after considering all the available objective
evidence positive and negative, historical and
prospective, with greater weight given to historical
evidence it is more likely than not that these
assets will not be realized. In each reporting period, we
evaluate the adequacy of our valuation allowance on our deferred
tax assets. In the future, if we can demonstrate a consistent
trend of pre-tax income, then, at that time, we may reduce our
valuation allowance accordingly. Our federal and state
net-operating-loss carryforwards at July 31, 2009, totaled
$187.3 million. A 5% reduction in our current valuation
allowance on these federal and state net-
35
operating-loss carryforwards would result in an income-tax
benefit of approximately $3.8 million for the reporting
period.
In addition, the calculation of our tax liabilities involves
dealing with uncertainties in the application of complex tax
regulations in several tax jurisdictions. We are periodically
reviewed by domestic and foreign tax authorities regarding the
amount of taxes due. These reviews include questions regarding
the timing and amount of deductions and the allocation of income
among various tax jurisdictions. In evaluating the exposure
associated with various filing positions, we record estimated
reserves for exposures. Based on our evaluation of current tax
positions, we believe that we have appropriately accrued for
exposures.
Recent
Accounting Pronouncements
In September 2009 the FASBs Emerging Issues Task Force
issued
EITF 08-1,
Revenue Arrangements with Multiple
Deliverables.
EITF 08-1
addresses how to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting
as well as how the arrangement consideration should be allocated
among the separate units of accounting. The new guidance also
requires enhanced financial-statement disclosures. We are
currently assessing the impact that EITF 08-1 will have on
our consolidated financial statements.
In November 2008 the SEC issued for comment a proposed roadmap
regarding the potential use by U.S. issuers of financial
statements prepared in accordance with International Financial
Reporting Standards (IFRS). IFRS is a
comprehensive series of accounting standards published by the
International Accounting Standards Board
(IASB). Under the proposed roadmap, we could
be required in fiscal 2015 to prepare financial statements in
accordance with IFRS, and the SEC will make a determination in
2011 regarding the mandatory adoption of IFRS. We are currently
assessing the impact that this change would have on our
consolidated financial statements, and we will continue to
monitor the development of the potential implementation of IFRS.
In June 2009 the FASB issued SFAS No. 168,
The FASB Accounting Standards
Codificationtm
and the Hierarchy of Generally Accepted Accounting
Principles A Replacement of FASB Statement
No. 162. SFAS 168 established the FASB Accounting
Standards Codification (the Codification) as
the single source of authoritative nongovernmental
U.S. GAAP and was launched on July 1, 2009. The
Codification does not change current U.S. GAAP but is
intended to simplify user access to all authoritative
U.S. GAAP by providing all the authoritative literature
related to a particular topic in one place. All existing
accounting-standard documents are to be superseded, and all
other accounting literature not included in the Codification are
to be considered nonauthoritative. The Codification is effective
for us for the interim period ending October 31, 2009, and
it will not have an impact on our financial position or results
of operations. We are currently evaluating the impact to our
financial-reporting process of providing Codification references
in our public filings.
In April 2008 the FASB issued FSP
FAS 142-3,
Determination of the Useful Life of Intangible
Assets. FSP
FAS 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible
Assets. FSP
FAS 142-3
is effective for us beginning in fiscal 2010. We have evaluated
the impact that the adoption of FSP
FAS 142-3
will have on our financial position and results of operations
and do not believe that it will have a material impact.
In March 2008 the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133. SFAS 161 requires enhanced
disclosures about an entitys derivative and hedging
activities and thereby improves the transparency of financial
reporting. SFAS 161 is effective for fiscal years beginning
on or after November 15, 2008. We have evaluated the impact
that the adoption of SFAS 161 will have on our financial
position or results of operations and do not believe it will
have a material impact.
In December 2007 the FASB issued SFAS No. 160,
Non-Controlling Interests in Consolidated Financial
Statements, an amendment of ARB No. 151, which
requires non-controlling interests (previously referred to as
36
minority interests) to be treated as a separate component of
equity rather than a liability, as is current practice.
SFAS 160 applies to non-controlling interests and
transactions with non-controlling-interest holders in
consolidated financial statements. We adopted SFAS 160
beginning February 1, 2009. The adoption of SFAS 160
did not have a material impact on our consolidated financial
position or results of operations.
In December 2007 the FASB issued SFAS No. 141(R),
Business Combinations, which requires most
identifiable assets, liabilities, non-controlling interests and
goodwill acquired in a business combination to be recorded at
full fair value. Under SFAS 141(R) all business
combinations will be accounted for under the acquisition method.
Significant changes from current guidance resulting from
SFAS 141(R) include, among others, the requirement that
contingent assets, liabilities and consideration be recorded at
estimated fair value as of the acquisition date, with any
subsequent changes in fair value charged or credited to
earnings. Further, acquisition-related costs are to be expensed
rather than treated as part of the acquisition. SFAS 141(R)
is effective prospectively to business combinations for which
the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15,
2008. We will apply the provisions of SFAS 141(R) to any
acquisitions after July 31, 2009. The impact of this
standard, if any, will not be known until consummation of a
business combination under the new standard.
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|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We do not enter into financial instruments for trading purposes.
We have not used derivative financial instruments or derivative
commodity instruments in our investment portfolio, nor have we
entered into hedging transactions. However, under our senior
secured credit facility, we are required to maintain
interest-rate protection to effectively limit the unadjusted
variable component of the interest costs of our facility with
respect to not less than 50% of the principal amount of all
Indebtedness, as defined, at a rate that is acceptable to the
lending groups agent. Our exposure to market risk
associated with risk-sensitive instruments entered into for
purposes other than trading purposes is not material. We
currently have limited foreign operations and therefore face no
material foreign-currency-exchange-rate risk. Our interest-rate
risk at July 31, 2009, was limited mainly to LIBOR on our
outstanding loan under our senior secured credit facility. At
July 31, 2009, we had no open derivative positions with
respect to our borrowing arrangements. Because our loans
LIBOR-related rate is fixed above LIBOR a hypothetical
100-basis-point increase in LIBOR would have resulted in no
increase in our interest expense under our senior secured credit
facility for the fiscal year ended July 31, 2009.
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|
Item 8.
|
Financial
Statements and Supplementary Data
|
Our consolidated financial statements and schedules and the
reports of our independent registered public accounting firm
appear beginning on
page F-2
of this report and are incorporated herein by reference.
|
|
Item 9.
|
Changes
in, and Disagreements with, Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation of Disclosure Controls and
Procedures. Based on our evaluation (with the
participation of our principal executive and financial
officers), as of the end of the period covered by this report,
our principal executive and financial officers have concluded
that our disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e) of
the Exchange Act) are effective to ensure that information that
we are required to disclose in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms and that the information is accumulated and
communicated to our management, including our principal
executive and financial officers, as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal Control. There was no
change in our internal control over financial reporting (as
defined in
Rule 13a-15(f)
of the Exchange Act) during the fourth fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
37
Managements
Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in
Rules 13a-15(f)
and
15d-15(f) of
the Exchange Act. Our internal-control system was designed to
provide reasonable assurance to our management and board of
directors regarding the preparation and fair presentation of
published financial statements. Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risks that
controls may become inadequate because of changes in conditions
and that the degree of compliance with the policies or
procedures may deteriorate.
Our management assessed the effectiveness of our internal
control over financial reporting as of July 31, 2009. In
making this assessment, we used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
in Internal Control Integrated
Framework. Having assessed such controls accordingly,
we believe that, as of July 31, 2009, our internal control
over financial reporting is effective based on those criteria.
This Annual Report on
Form 10-K
does not include an attestation report of our independent
registered public accounting firm regarding internal control
over financial reporting. Managements report was not
subject to attestation by our independent registered public
accounting firm pursuant to temporary rules of the SEC that
permit us to provide only a managements report in this
Annual Report.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
Certain information required by Part III of this
Form 10-K
is omitted because we will file a definitive proxy statement
pursuant to Regulation 14A (the Proxy
Statement) not later than 120 days after the end
of the fiscal year covered by this
Form 10-K,
and certain information to be included therein is incorporated
herein by reference.
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Incorporated by reference to the portions of the Proxy Statement
entitled Proposal No. 1 Election of
Directors, Corporate Governance and Board
Matters, Management, Additional
Information Section 16(a) Beneficial Ownership
Reporting Compliance and Additional Information
Audit Committee Financial Expert.
During the fourth quarter of fiscal year 2009, we made no
material changes to the procedures by which our stockholders may
recommend nominees to our board of directors, as described in
our most recent proxy statement.
Code of Ethics. We have adopted a code of
business conduct and ethics that applies to all of our
directors, officers and employees, including our chief executive
officer, chief financial officer, controller and other senior
financial officers. Our code of business conduct and ethics is
posted under the Corporate Governance section of our
website, www.navisite.com. We intend to satisfy the disclosure
requirement regarding any amendment to, or waiver of, a
provision of the code of business conduct and ethics applicable
to our chief executive officer, chief financial officer,
controller or other senior financial officers by posting such
information on our website.
|
|
Item 11.
|
Executive
Compensation
|
Incorporated by reference to the portions of the Proxy Statement
entitled Executive Compensation and Additional
Information Compensation Committee Interlocks and
Insider Participation.
38
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Incorporated by reference to the portion of the Proxy Statement
entitled Security Ownership of Certain Beneficial Owners
and Management.
Equity
Compensation Plan Information as of July 31, 2009
The following table sets forth certain information regarding our
equity-compensation plans as of July 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
(a)
|
|
|
(b)
|
|
|
Available for Future
|
|
|
|
Number of Securities to
|
|
|
Weighted-Average
|
|
|
Issuance
|
|
|
|
be Issued Upon Exercise
|
|
|
Exercise Price of
|
|
|
Under Equity Compensation
|
|
|
|
of Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Plans (Excluding Securities
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column(a))
|
|
|
Equity-compensation plans approved by security holders
|
|
|
6,371,203
|
|
|
$
|
3.58
|
|
|
|
1,450,862
|
|
Equity-compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,371,203
|
|
|
|
|
|
|
|
1,450,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
Incorporated by reference to the portions of the Proxy Statement
entitled Additional Information Certain
Relationships and Related Transactions, and
Corporate Governance and Board Matters.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
Incorporated by reference to the portion of the Proxy Statement
entitled Additional Information Independent
Registered Public Accounting Firm Fees and
Additional Information Policy on Audit
Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Registered Public Accounting Firm.
PART IV
|
|
Item 15.
|
Exhibits,
Financial-Statement Schedules
|
1. Financial Statements.
The financial statements listed in the Index to Consolidated
Financial Statements are filed as part of this report.
2. Financial-Statement Schedule.
Financial-Statement Schedule II of NaviSite and the
corresponding Report of Independent Registered Public Accounting
Firm on Financial-Statement Schedule are filed as part of this
report. All other financial-statement schedules have been
omitted because they are not required or not applicable or the
information is otherwise included.
3. Exhibits.
The exhibits listed in the Exhibit Index immediately
preceding such exhibits are filed with, or incorporated by
reference in, this report.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NaviSite, Inc.
Arthur P. Becker
Chief Executive Officer
October 27, 2009
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been duly signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
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|
|
|
|
|
|
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Andrew
Ruhan
Andrew
Ruhan
|
|
Chairman of the Board
|
|
October 27, 2009
|
|
|
|
|
|
/s/ Arthur
P. Becker
Arthur
P. Becker
|
|
President, Chief Executive
Officer and Director
(Principal Executive Officer)
|
|
October 27, 2009
|
|
|
|
|
|
/s/ James
W. Pluntze
James
W. Pluntze
|
|
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
|
|
October 27, 2009
|
|
|
|
|
|
/s/ James
H. Dennedy
James
H. Dennedy
|
|
Director
|
|
October 27, 2009
|
|
|
|
|
|
/s/ Larry
W. Schwartz
Larry
W. Schwartz
|
|
Director
|
|
October 27, 2009
|
|
|
|
|
|
/s/ Thomas
R. Evans
Thomas
R. Evans
|
|
Director
|
|
October 27, 2009
|
40
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit No.
|
|
Description of Exhibit
|
|
|
2
|
.1
|
|
Asset Purchase Agreement, dated as of August 10, 2007, by and
among NaviSite, Inc.; Navi Acquisition Corp.; Alabanza,
LLC; and Hosting Ventures, LLC, is incorporated herein by
reference to Exhibit 10.1 to the Registrants Current
Report on Form 8-K filed on August 16, 2007 (File No. 000-27597).
|
|
2
|
.2
|
|
Stock Purchase Agreement, dated August 10, 2007, by and among
NaviSite, Inc.; Jupiter Hosting, Inc.; and the stockholders of
Jupiter Hosting, Inc., is incorporated herein by reference to
Exhibit 10.2 to the Registrants Current Report on Form 8-K
filed on August 16, 2007 (File No. 000-27597).
|
|
2
|
.3
|
|
Agreement and Plan of Merger, dated as of September 12, 2007, by
and among NaviSite, Inc.; NSite Acquisition Corp.; netASPx,
Inc.; and GTCR Fund VI, L.P., is incorporated herein by
reference to Exhibit 10.3 to the Registrants Current
Report on Form 8-K filed on September 18, 2007 (File No.
000-27597).
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation is
incorporated herein by reference to Exhibits to the
Registrants Quarterly Report on Form 10-Q for the fiscal
quarter ended October 31, 1999 (File No. 000-27597).
|
|
3
|
.2
|
|
Certificate of Amendment of Amended and Restated Certificate of
Incorporation, dated as of January 4, 2003, is incorporated
herein by reference to Exhibits to the Registrants
Quarterly Report on Form 10-Q for the fiscal quarter ended
January 31, 2003 (File No. 000-27597).
|
|
3
|
.3
|
|
Certificate of Amendment of Amended and Restated Certificate of
Incorporation, dated as of January 7, 2003, is incorporated
herein by reference to Exhibits to the Registrants
Quarterly Report on Form 10-Q for the fiscal quarter ended
January 31, 2003 (File No. 000-27597).
|
|
3
|
.4
|
|
Certificate of Designation of Rights, Preferences, Privileges
and Restrictions of Series A Convertible Preferred Stock, dated
as of September 12, 2007, is incorporated herein by reference to
Exhibit 3.1 to the Registrants Current Report on Form 8-K
filed on September 18, 2007 (File No. 000-27597).
|
|
3
|
.5
|
|
Waiver of Certificate of Designation of Rights, Preferences,
Privileges and Restrictions of Series A Convertible Preferred
Stock by netASPx Holdings, Inc., dated September 25, 2007, is
incorporated herein by reference to Exhibit 3.1 to the
Registrants Quarterly Report on Form 10-Q for the fiscal
quarter ended January 31, 2008 (File No. 000-27597).
|
|
3
|
.6
|
|
Amended and Restated By-Laws is incorporated herein by reference
to Exhibits to the Registrants Quarterly Report on Form
10-Q for the fiscal quarter ended October 31, 1999 (File No.
000-27597).
|
|
4
|
.1
|
|
Specimen certificate representing shares of common stock is
incorporated herein by reference to Exhibits to the
Registrants Registration Statement on Form S-1/A (File No.
333-83501).
|
|
4
|
.2
|
|
Specimen Certificate of Series A Convertible Preferred Stock of
NaviSite, Inc., is incorporated herein by reference to Exhibit
4.1 to the Registrants Current Report on Form 8-K filed on
September 18, 2007 (File No. 000-27597).
|
|
10
|
.1
|
|
Lease, dated as of May 14, 1999, by and between 400 River
Limited Partnership and the Registrant, is incorporated herein
by reference to Exhibits to the Registrants Registration
Statement on Form S-1 (File No. 333-83501).
|
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10
|
.2
|
|
Amendment No. 1 to Lease, by and between 400 River Limited
Partnership and the Registrant, is incorporated by reference to
Exhibits to the Registrants Quarterly Report on Form 10-Q
for the fiscal quarter ended October 31, 2003 (File No.
000-27597).
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10
|
.3
|
|
Amendment No. 2 to Lease, dated December 1, 2003, by and between
400 River Limited Partnership and the Registrant, is
incorporated herein by reference to Exhibits to the
Registrants Registration Statement on Form S-2 filed
January 22, 2004 (File No. 333-112087).
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|
10
|
.4
|
|
Amendment No. 3 to Lease, by and between 400 River Limited
Partnership and the Registrant, is incorporated herein by
reference to Exhibit 99.1 to the Registrants Current
Report on Form 8-K dated September 21, 2004 (File No. 000-27597).
|
|
10
|
.5
|
|
Amendment No. 5 to Lease, dated as of August 15, 2008, by and
between 400 Minuteman LLC and the Registrant, is incorporated
herein by reference to Exhibit 10.1 to the Registrants
Quarterly Report on Form 10-Q for the fiscal quarter ended
October 31, 2008 (File No. 000-27597).
|
|
|
|
|
|
Exhibit No.
|
|
Description of Exhibit
|
|
|
10
|
.6
|
|
Lease, made as of April 30, 1999, by and between CarrAmerica
Realty Corporation and the Registrant, is incorporated herein by
reference to Exhibits to the Registrants Registration
Statement on Form S-1 (File No. 333-83501).
|
|
10
|
.7
|
|
First Amendment to Lease, dated as of August 9, 2006, by and
between the Registrant and Carr NP Properties L.L.C., is
incorporated herein by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K dated September 11,
2006 (File No. 000-27597).
|
|
10
|
.8*
|
|
Amended and Restated 1998 Equity Incentive Plan is incorporated
herein by reference to Exhibits to the Registrants
Quarterly Report on Form 10-Q for the fiscal quarter ended
October 31, 1999 (File No. 000-27597).
|
|
10
|
.9*
|
|
NaviSite, Inc., Amended and Restated 1999 Employee Stock
Purchase Plan is incorporated herein by reference to Appendix I
to the Registrants Definitive Proxy Statement filed
November 13, 2007 (File No. 000-27597).
|
|
10
|
.10*
|
|
2000 Stock Option Plan is incorporated herein by reference to
Exhibits to the Registrants Annual Report on Form 10-K/A
for the fiscal year ended July 31, 2002 (File No. 000-27597).
|
|
10
|
.11*
|
|
Employment Agreement, dated as of February 21, 2003, by and
between Arthur Becker and the Registrant, is incorporated herein
by reference to Exhibits to the Registrants Quarterly
Report on Form 10-Q for the fiscal quarter ended January 31,
2003 (File No. 000-27597).
|
|
10
|
.12*
|
|
Separation Agreement dated as of April 3, 2006, by and between
the Registrant and Arthur P. Becker, is incorporated herein by
reference to Exhibit 99.1 to the Registrants Current
Report on Form 8-K dated April 6, 2006 (File No. 000-27597).
|
|
10
|
.13*
|
|
Amendment No. 1 to Separation Agreement, dated as of December 4,
2008, by and between the Registrant and Arthur P. Becker, is
incorporated herein by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K filed on December
9, 2008 (File No. 000-27597).
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|
10
|
.14
|
|
Warrant Purchase Agreement, dated as of February 13, 2007, by
and among the Registrant, SPCP Group, LLC, and SPCP Group
III, LLC, is incorporated herein by reference to Exhibit 10.1 of
the Registrants Current Report on Form 8-K filed on
February 20, 2007 (File No. 000-27597).
|
|
10
|
.15
|
|
Warrant to Purchase Common Stock, dated February 13, 2007,
issued by the Registrant to SPCP Group, LLC, is
incorporated herein by reference to Exhibit 10.2 of the
Registrants Current Report on Form 8-K filed on February
20, 2007 (File No. 000-27597).
|
|
10
|
.16
|
|
Warrant to Purchase Common Stock, dated February 13, 2007,
issued by the Registrant to SPCP Group III, LLC, is
incorporated herein by reference to Exhibit 10.3 of the
Registrants Current Report on Form 8-K filed on February
20, 2007 (File No. 000-27597).
|
|
10
|
.17
|
|
Amendment No. 1 to Warrant, dated as of February 13, 2007, by
and between the Registrant and SPCP Group, LLC, is incorporated
herein by reference to Exhibit 10.8 to the Registrants
Quarterly Report on Form 10-Q for the fiscal quarter ended
January 31, 2007 (File No. 000-27597).
|
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10
|
.18
|
|
Credit Agreement, dated as of June 8, 2007, by and among
NaviSite, Inc.; certain of its subsidiaries; Canadian Imperial
Bank of Commerce, through its New York agency, as issuing bank,
administrative agent for the Lenders and as collateral agent for
the Secured Parties and the issuing bank; CIBC World Markets
Corp., as sole lead arranger, documentation agent and
bookrunner; CIT Lending Services Corporation, as syndication
agent; and certain affiliated entities, is incorporated herein
by reference to Exhibit 10.1 to the Registrants Current
Report on Form 8-K dated as of June 13, 2007 (File No.
000-27597).
|
|
10
|
.19
|
|
Security Agreement, dated as of June 8, 2007, by and among
NaviSite, Inc.; certain of its subsidiaries; and Canadian
Imperial Bank of Commerce, acting through its New York agency,
as collateral agent, is incorporated herein by reference to
Exhibit 10.2 to the Registrants Current Report on Form 8-K
dated as of June 13, 2007 (File No. 000-27597).
|
|
10
|
.20
|
|
Form of Term Note, to be made by NaviSite, Inc., is incorporated
herein by reference to Exhibit 10.3 to the Registrants
Current Report on Form 8-K dated as of June 13, 2007 (File No.
000-27597).
|
|
10
|
.21
|
|
Form of Revolving Note to be made by NaviSite, Inc., is
incorporated herein by reference to Exhibit 10.4 to the
Registrants Current Report on Form 8-K dated as of June
13, 2007
(File No. 000-27597).
|
|
|
|
|
|
Exhibit No.
|
|
Description of Exhibit
|
|
|
10
|
.22
|
|
Amendment, Waiver and Consent Agreement No. 1, dated as of
August 10, 2007, by and among NaviSite, Inc.; certain of its
subsidiaries; Canadian Imperial Bank of Commerce, through its
New York agency, as issuing bank, administrative agent for
the Lenders and as collateral agent for the Secured Parties and
the issuing bank; CIBC World Markets Corp., as sole lead
arranger, documentation agent and bookrunner; CIT Lending
Services Corporation, as syndication agent; and certain
affiliated entities, is incorporated herein by reference to
Exhibit 10.3 to the Registrants Current Report on Form 8K
dated as of August 16, 2007 (File No. 000-27597).
|
|
10
|
.23
|
|
Amended and Restated Credit Agreement, dated as of September 12,
2007, by and among NaviSite, Inc.; certain of its subsidiaries;
Canadian Imperial Bank of Commerce, through its New York
agency, as issuing bank, administrative agent for the Lenders
and as collateral agent for the Secured Parties and the issuing
bank; CIBC World Markets Corp., as sole lead arranger,
documentation agent and bookrunner; CIT Lending Services
Corporation, as syndication agent; and certain affiliated
entities, is incorporated herein by reference to Exhibit 10.1 to
the Registrants Current Report on Form 8-K dated as of
September 18, 2007 (File No. 000-27597).
|
|
10
|
.24
|
|
Term Note, dated as of September 12, 2007, issued by NaviSite,
Inc., to CIBC, Inc., is incorporated herein by reference to
Exhibit 10.2 to the Registrants Current Report on Form 8-K
dated as of September 18, 2007 (File No. 000-27597).
|
|
10
|
.25
|
|
Waiver No. 2, dated as of November 2, 2007, by and among
NaviSite, Inc.; certain of its subsidiaries; Canadian Imperial
Bank of Commerce, through its New York agency, as issuing bank,
administrative agent for the Lenders and as collateral agent for
the Secured Parties and the issuing bank; CIBC World Markets
Corp., as sole lead arranger, documentation agent and
bookrunner; CIT Lending Services Corporation, as syndication
agent; and certain affiliated entities, is incorporated herein
by reference to Exhibit 10.2 to the Registrants Quarterly
Report on Form 10-Q for the fiscal quarter ended October 31,
2007 (File No. 000-27597).
|
|
10
|
.26
|
|
Amendment, Waiver and Consent Agreement No. 3, dated as of
January 31, 2008, by and among NaviSite, Inc.; certain of its
subsidiaries; Canadian Imperial Bank of Commerce, through its
New York agency, as issuing bank, administrative agent for
the Lenders and as collateral agent for the Secured Parties and
the issuing bank; CIBC World Markets Corp., as sole lead
arranger, documentation agent and bookrunner; CIT Lending
Services Corporation, as syndication agent; and certain
affiliated entities, is incorporated herein by reference to
Exhibit 10.3 to the Registrants Quarterly Report on Form
10-Q for the fiscal quarter ended October 31, 2007
(File No. 000-27597).
|
|
10
|
.27
|
|
Amendment and Consent Agreement No. 4, dated as of June 20,
2008, by and among NaviSite, Inc.; certain of its subsidiaries;
Canadian Imperial Bank of Commerce, through its New York agency,
as issuing bank, administrative agent for the Lenders and as
collateral agent for the Secured Parties and the issuing bank;
CIBC World Markets Corp., as sole lead arranger, documentation
agent and bookrunner; CIT Lending Services Corporation, as
syndication agent; and certain affiliated entities, is
incorporated herein by reference to Exhibit 10.5 to the
Registrants Quarterly Report on Form 10-Q for the fiscal
quarter ended April 30, 2008 (File No. 000-27597).
|
|
10
|
.28
|
|
Amendment, Waiver and Consent Agreement No. 5, dated as of
October 30, 2008, by and among NaviSite, Inc.; certain of its
subsidiaries; Canadian Imperial Bank of Commerce, through its
New York agency, as issuing bank, administrative agent for
the Lenders and as collateral agent for the Secured Parties and
the issuing bank; CIBC World Markets Corp., as sole lead
arranger, documentation agent and bookrunner; CIT Lending
Services Corporation, as syndication agent; and certain
affiliated entities, is incorporated herein by reference to
Exhibit 10.1 to the Registrants Current Report on Form 8-K
dated as of October 29, 2008 (File No. 000-27597).
|
|
10
|
.29
|
|
Registration Rights Agreement, dated as of September 12, 2007,
by and between NaviSite, Inc., and GTCR Fund VI, L.P., is
incorporated herein by reference to Exhibit 10.4 to the
Registrants Current Report on Form 8-K dated September 18,
2007 (File No. 000-27597).
|
|
10
|
.30
|
|
Warrant to Purchase Stock, dated January 30, 2004, issued by the
Registrant to Silicon Valley Bank, is incorporated herein by
reference to Exhibit 10.3 to the Registrants Current
Report on Form 8-K dated January 30, 2004 (File No. 000-27597).
|
|
|
|
|
|
Exhibit No.
|
|
Description of Exhibit
|
|
|
10
|
.31
|
|
Form of Indemnification Agreement, as executed by Messrs. Andrew
Ruhan, Arthur P. Becker, James H. Dennedy, Larry W.
Schwartz, Thomas R. Evans, James W. Pluntze, R. Brooks
Borcherding, Mark Clayman, Nasir Cochinwala, Monique Cormier,
Denis Martin, Sumeet Sabharwal, Rathin Sinha and Mark Zingale,
is incorporated by reference to Exhibits to the
Registrants Annual Report on
Form 10-K
for the fiscal year ended July 31, 2003 (File No. 000-27597).
|
|
10
|
.32
|
|
Lease and Services Agreement, by and between NaviSite Europe
Limited and Global Switch (London) Limited, is incorporated by
reference to Exhibits to the Registrants Registration
Statement on Form S-2/A filed on March 8, 2004 (File No.
333-12087).
|
|
10
|
.33*
|
|
NaviSite, Inc., Amended and Restated 2003 Stock Incentive Plan
is incorporated herein by reference to Appendix II to the
Registrants Definitive Schedule 14C filed January 5, 2005
(File No. 000-27597).
|
|
10
|
.34*
|
|
Amendment No. 1 to the NaviSite, Inc., Amended and Restated 2003
Stock Incentive Plan is incorporated herein by reference to
Appendix II to the Registrants Definitive Schedule
14C filed January 5, 2005 (File No. 000-27597).
|
|
10
|
.35*
|
|
Amendment No. 2 to the Amended and Restated 2003 Stock Incentive
Plan is incorporated herein by reference to Appendix II to
the Registrants Definitive Schedule 14C filed March 14,
2006 (File No. 000-27597).
|
|
10
|
.36*
|
|
Form of Amendment No. 1 to Restricted Stock Agreement Granted
Under Amended and Restated 2003 Stock Incentive Plan is
incorporated herein by reference to Exhibit 10.1 to the
Registrants Quarterly Report on Form 10Q for the fiscal
quarter ended January 31, 2009 (File No. 000-27597).
|
|
10
|
.37*
|
|
Form of Director Restricted Stock Agreement Granted Under
Amended and Restated 2003 Stock Incentive Plan is incorporated
herein by reference to Exhibit 10.2 to the Registrants
Quarterly Report on Form 10-Q for the fiscal quarter ended
January 31, 2009 (File No. 000-27597).
|
|
10
|
.38*
|
|
Form of Employee Restricted Stock Agreement Granted Under
Amended and Restated 2003 Stock Incentive Plan is incorporated
herein by reference to Exhibit 10.3 to the Registrants
Quarterly Report on Form 10-Q for the fiscal quarter ended
January 31, 2009 (File No. 000-27597).
|
|
10
|
.39*
|
|
Employment Offer Letter, dated August 12, 2005, between the
Registrant and Monique Cormier, is incorporated herein by
reference to Exhibit 10.64 to the Registrants Annual
Report on
Form 10-K
for the fiscal year ended July 31, 2005 (File No. 000-27597).
|
|
10
|
.40*
|
|
Separation Agreement, dated as of April 3, 2006, by and between
the Registrant and Monique Cormier, is incorporated herein by
reference to Exhibit 99.3 to the Registrants Current
Report on Form 8-K dated April 6, 2006 (File No. 000-27597).
|
|
10
|
.41*
|
|
Separation Agreement, dated as of July 31, 2007, by and between
the Registrant and James W. Pluntze, is incorporated herein by
reference to Exhibit 99.1 to the Registrants Current
Report on Form 8-K dated August 2, 2007 (File No. 000-27597).
|
|
10
|
.42*
|
|
Amendment No. 1 to Separation Agreement, dated as of December 4,
2008, by and between the Registrant and James W. Pluntze, is
incorporated herein by reference to Exhibit 10.2 to the
Registrants Current Report on Form 8-K filed on December
9, 2008 (File No. 000-27597).
|
|
10
|
.43*
|
|
NaviSite, Inc., Amended and Restated Director Compensation Plan
is incorporated herein by reference to Exhibit 99.1 to the
Registrants Current Report on Form 8-K dated August 16,
2007 (File No. 000-27597).
|
|
10
|
.44*
|
|
2007 Bonus Letter, dated October 24, 2006, by and between the
Registrant and Arthur Becker, is incorporated herein by
reference to Exhibit 10.71 to the Registrants Annual
Report on Form 10K for the fiscal year ended July 31, 2006 (File
No. 000-27597).
|
|
10
|
.45*
|
|
2007 Bonus Letter, dated October 24, 2006, by and between the
Registrant and Monique Cormier, is incorporated herein by
reference to Exhibit 10.73 to the Registrants Annual
Report on
Form 10-K
for the fiscal year ended July 31, 2006 (File No. 000-27597).
|
|
10
|
.46*
|
|
Offer of Employment, dated as of May 19, 2004, by and between
the Registrant and Mark Clayman, is incorporated herein by
reference to Exhibit 10.1 to the Registrants Quarterly
Report on Form 10-Q for the fiscal quarter ended April 30, 2008
(File No. 000-27597).
|
|
10
|
.47*
|
|
Separation Agreement, dated as of April 3, 2006, by and between
the Registrant and Mark Clayman, is incorporated herein by
reference to Exhibit 10.2 to the Registrants Quarterly
Report on Form 10-Q for the fiscal quarter ended April 30, 2008
(File No. 000-27597).
|
|
|
|
|
|
Exhibit No.
|
|
Description of Exhibit
|
|
|
10
|
.48*
|
|
Amendment No. 1 to Separation Agreement, dated as of December 7,
2008, by and between the Registrant and Mark Clayman, is
incorporated herein by reference to Exhibit 10.3 to the
Registrants Current Report on Form 8K filed on December 9,
2008 (File No. 000-27597).
|
|
10
|
.49*
|
|
Offer of Employment, dated as of June 17, 2005, by and between
the Registrant and Nasir Cochinwala, is incorporated herein by
reference to Exhibit 10.3 to the Registrants Quarterly
Report on Form 10-Q for the fiscal quarter ended April 30, 2008
(File No. 000-27597).
|
|
10
|
.50*
|
|
Separation Agreement, dated as of April 3, 2006, by and between
the Registrant and Nasir Cochinwala, is incorporated herein by
reference to Exhibit 10.4 to the Registrants Quarterly
Report on Form 10-Q for the fiscal quarter ended April 30, 2008
(File No. 000-27597).
|
|
10
|
.51*
|
|
Offer Letter, dated as of March 27, 2009, effective as of April
3, 2009, by and between the Registrant and R. Brooks
Borcherding, is incorporated herein by reference to Exhibit 10.1
to the Registrants Current Report on Form 8-K filed on
April 13, 2009 (File No. 000-27597).
|
|
10
|
.52*
|
|
Separation Agreement, dated as of April 13, 2009, by and between
the Registrant and R. Brooks Borcherding.
|
|
10
|
.53*
|
|
Offer Letter, dated as of August 28, 2009, by and between the
Registrant and Mark Zingale.
|
|
10
|
.54*
|
|
Separation Agreement, dated as of August 31, 2009, by and
between the Registrant and Mark Zingale.
|
|
10
|
.55*
|
|
Summary of the Registrants FY 2010 Executive Management
Bonus Program is incorporated herein by reference to Exhibit
10.1 to the Registrants Current Report on Form 8-K filed
on September 23, 2009 (File No. 000-27597).
|
|
10
|
.56*
|
|
Offer Letter, dated as of June 22, 2003, by and between the
Registrant and Denis Martin.
|
|
10
|
.57*
|
|
Separation Agreement, dated as of April 6, 2006, by and
between the Registrant and Denis Martin.
|
|
10
|
.58*
|
|
Amendment No. 1 to Separation Agreement, dated as of
December 8, 2008, by and between the Registrant and Denis
Martin.
|
|
10
|
.59*
|
|
Offer Letter, dated as of September 17, 2004, by and
between the Registrant and Sumeet Sabharwal.
|
|
10
|
.60*
|
|
Separation Agreement, dated as of April 3, 2006, by and
between the Registrant and Sumeet Sabharwal.
|
|
10
|
.61*
|
|
Offer Letter, dated as of May 8, 2007, by and between the
Registrant and Rathin Sinha.
|
|
10
|
.62*
|
|
Amended and Restated Separation Agreement, dated as of
September 3, 2009, by and between the Registrant and Rathin
Sinha.
|
|
21
|
|
|
Subsidiaries of the Registrant.
|
|
23
|
|
|
Consent of KPMG LLP, Independent Registered Public Accounting
Firm.
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of the Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
|
|
|
|
(*) |
|
Management contract or compensatory plan or arrangement. |
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
NaviSite, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
NaviSite, Inc. and subsidiaries (the Company) as of
July 31, 2009 and 2008, and the related consolidated
statements of operations, changes in convertible preferred stock
and stockholders deficit and comprehensive loss, and cash
flows for each of the years in the three-year period ended
July 31, 2009. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of NaviSite, Inc. and subsidiaries as of July 31,
2009 and 2008, and the results of their operations and their
cash flows for each of the years in the three-year period ended
July 31, 2009, in conformity with U.S. generally
accepted accounting principles.
Boston, Massachusetts
October 27, 2009
F-2
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except par value)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,534
|
|
|
$
|
3,261
|
|
Accounts receivable, less allowance for doubtful accounts of
$1,820 and $897 at July 31, 2009 and 2008, respectively
|
|
|
16,417
|
|
|
|
18,927
|
|
Unbilled accounts receivable
|
|
|
1,361
|
|
|
|
1,711
|
|
Prepaid expenses and other current assets
|
|
|
6,336
|
|
|
|
11,369
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
34,648
|
|
|
|
35,268
|
|
Property and equipment, net
|
|
|
32,048
|
|
|
|
38,141
|
|
Intangible assets, net of accumulated amortization
|
|
|
22,093
|
|
|
|
29,290
|
|
Goodwill
|
|
|
66,566
|
|
|
|
66,683
|
|
Other assets
|
|
|
6,769
|
|
|
|
4,446
|
|
Restricted cash
|
|
|
1,556
|
|
|
|
1,885
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
163,680
|
|
|
$
|
175,713
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Notes payable, current portion
|
|
$
|
10,603
|
|
|
$
|
6,100
|
|
Capital lease obligations, current portion
|
|
|
3,040
|
|
|
|
3,166
|
|
Accounts payable
|
|
|
5,375
|
|
|
|
7,033
|
|
Accrued expenses
|
|
|
9,490
|
|
|
|
11,070
|
|
Accrued interest
|
|
|
1,837
|
|
|
|
1,367
|
|
Accrued lease abandonment costs, current portion
|
|
|
332
|
|
|
|
857
|
|
Deferred revenue
|
|
|
4,285
|
|
|
|
2,741
|
|
Deferred other income and customer deposits
|
|
|
662
|
|
|
|
886
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
35,624
|
|
|
|
33,220
|
|
Capital lease obligations, less current portion
|
|
|
10,973
|
|
|
|
14,922
|
|
Accrued lease abandonment costs, less current portion
|
|
|
96
|
|
|
|
428
|
|
Deferred tax liabilities
|
|
|
7,492
|
|
|
|
5,597
|
|
Other long-term liabilities
|
|
|
7,565
|
|
|
|
4,939
|
|
Notes payable, less current portion
|
|
|
106,154
|
|
|
|
107,850
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
167,904
|
|
|
|
166,956
|
|
|
|
|
|
|
|
|
|
|
Series A Convertible Preferred stock, $0.01 par value;
designated 5,000 shares; issued and
outstanding: 3,664 at July 31, 2009;
3,320 shares at July 31, 2008
|
|
|
30,879
|
|
|
|
27,529
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
Stockholders deficit:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; Authorized
395,000 shares; issued and outstanding: 35,911
and 35,232 at July 31, 2009 and 2008, respectively
|
|
|
359
|
|
|
|
352
|
|
Accumulated other comprehensive (loss) income
|
|
|
(1,024
|
)
|
|
|
253
|
|
Additional paid-in capital
|
|
|
485,136
|
|
|
|
485,086
|
|
Accumulated deficit
|
|
|
(519,574
|
)
|
|
|
(504,463
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(35,103
|
)
|
|
|
(18,772
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
163,680
|
|
|
$
|
175,713
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue, net
|
|
$
|
152,326
|
|
|
$
|
154,507
|
|
|
$
|
125,860
|
|
Revenue, related parties
|
|
|
346
|
|
|
|
372
|
|
|
|
322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
152,672
|
|
|
|
154,879
|
|
|
|
126,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
79,340
|
|
|
|
87,355
|
|
|
|
72,634
|
|
Depreciation and amortization
|
|
|
22,948
|
|
|
|
20,360
|
|
|
|
12,562
|
|
Restructuring charge
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
102,497
|
|
|
|
107,715
|
|
|
|
85,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
50,175
|
|
|
|
47,164
|
|
|
|
40,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
20,279
|
|
|
|
20,116
|
|
|
|
16,924
|
|
General and administrative
|
|
|
23,781
|
|
|
|
22,773
|
|
|
|
22,043
|
|
Loss on settlement
|
|
|
5,736
|
|
|
|
|
|
|
|
|
|
Impairment, restructuring and other, net
|
|
|
180
|
|
|
|
|
|
|
|
(231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
49,976
|
|
|
|
42,889
|
|
|
|
38,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
199
|
|
|
|
4,275
|
|
|
|
2,250
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
43
|
|
|
|
264
|
|
|
|
337
|
|
Interest expense
|
|
|
(14,164
|
)
|
|
|
(12,033
|
)
|
|
|
(12,476
|
)
|
Loss on debt extinguishment
|
|
|
|
|
|
|
(1,651
|
)
|
|
|
(15,712
|
)
|
Other income, net
|
|
|
705
|
|
|
|
2,295
|
|
|
|
864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations before income taxes
|
|
|
(13,217
|
)
|
|
|
(6,850
|
)
|
|
|
(24,737
|
)
|
Income taxes
|
|
|
(1,894
|
)
|
|
|
(1,834
|
)
|
|
|
(1,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(15,111
|
)
|
|
|
(8,684
|
)
|
|
$
|
(25,910
|
)
|
Accretion of preferred stock dividends
|
|
|
(3,350
|
)
|
|
|
(2,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(18,461
|
)
|
|
$
|
(11,340
|
)
|
|
$
|
(25,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share attributable to common stockholders
|
|
$
|
(0.52
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average number of common shares
outstanding
|
|
|
35,528
|
|
|
|
34,731
|
|
|
|
30,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
1,268
|
|
|
$
|
1,794
|
|
|
$
|
1,342
|
|
Selling and marketing
|
|
|
557
|
|
|
|
746
|
|
|
|
570
|
|
General and administrative
|
|
|
1,298
|
|
|
|
1,830
|
|
|
|
1,784
|
|
Restructuring charge
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
3,142
|
|
|
$
|
4,370
|
|
|
$
|
3,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Additional
|
|
|
|
|
|
Stockholders
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
Common Stock
|
|
|
Comprehensive
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Equity
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Income (Loss)
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
Loss
|
|
Balance at July 31, 2006
|
|
|
|
|
|
$
|
|
|
|
|
|
28,959
|
|
|
$
|
290
|
|
|
$
|
203
|
|
|
$
|
467,400
|
|
|
$
|
(469,869
|
)
|
|
$
|
(1,976
|
)
|
|
|
|
|
Exercise of common stock options
|
|
|
|
|
|
|
|
|
|
|
|
1,442
|
|
|
|
14
|
|
|
|
|
|
|
|
4,034
|
|
|
|
|
|
|
|
4,048
|
|
|
|
|
|
Exercise of common stock purchase warrants
|
|
|
|
|
|
|
|
|
|
|
|
1,730
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
Conversion of note payable
|
|
|
|
|
|
|
|
|
|
|
|
1,375
|
|
|
|
14
|
|
|
|
|
|
|
|
3,850
|
|
|
|
|
|
|
|
3,864
|
|
|
|
|
|
Issuance of common stock purchase warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,219
|
|
|
|
|
|
|
|
2,219
|
|
|
|
|
|
Stock compensation and amortization of deferred stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,696
|
|
|
|
|
|
|
|
3,696
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,910
|
)
|
|
|
(25,910
|
)
|
|
|
(25,910
|
)
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
178
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
33,506
|
|
|
|
335
|
|
|
|
381
|
|
|
|
481,199
|
|
|
|
(495,779
|
)
|
|
|
(13,864
|
)
|
|
|
|
|
Exercise of common stock options and shares issued under
employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
|
664
|
|
|
|
7
|
|
|
|
|
|
|
|
1,947
|
|
|
|
|
|
|
|
1,954
|
|
|
|
|
|
Issuance of preferred stock
|
|
|
3,125
|
|
|
|
24,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend
|
|
|
195
|
|
|
|
2,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,656
|
)
|
|
|
|
|
|
|
(2,656
|
)
|
|
|
|
|
Issuance of common stock related to acquisition
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
226
|
|
|
|
|
|
|
|
226
|
|
|
|
|
|
Exercise of common stock purchase warrants
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
Vesting of restricted stock and stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
4,370
|
|
|
|
|
|
|
|
4,370
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,684
|
)
|
|
|
(8,684
|
)
|
|
|
(8,684
|
)
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
|
(128
|
)
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2008
|
|
|
3,320
|
|
|
$
|
27,529
|
|
|
|
|
35,232
|
|
|
$
|
352
|
|
|
$
|
253
|
|
|
$
|
485,086
|
|
|
$
|
(504,463
|
)
|
|
$
|
(18,772
|
)
|
|
|
|
|
Exercise of common stock options and shares issued under
employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
|
519
|
|
|
|
5
|
|
|
|
|
|
|
|
259
|
|
|
|
|
|
|
|
264
|
|
|
|
|
|
Preferred stock dividend
|
|
|
344
|
|
|
|
3,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,350
|
)
|
|
|
|
|
|
|
(3,350
|
)
|
|
|
|
|
Vesting of restricted stock and stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
160
|
|
|
|
2
|
|
|
|
|
|
|
|
3,141
|
|
|
|
|
|
|
|
3,143
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,111
|
)
|
|
|
(15,111
|
)
|
|
|
(15,111
|
)
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,277
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,277
|
)
|
|
|
(1,277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2009
|
|
|
3,664
|
|
|
$
|
30,879
|
|
|
|
|
35,911
|
|
|
$
|
359
|
|
|
$
|
(1,024
|
)
|
|
$
|
485,136
|
|
|
$
|
(519,574
|
)
|
|
$
|
(35,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(15,111
|
)
|
|
$
|
(8,684
|
)
|
|
$
|
(25,910
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
23,638
|
|
|
|
21,223
|
|
|
|
13,684
|
|
Mark to market for interest rate cap
|
|
|
73
|
|
|
|
91
|
|
|
|
106
|
|
Deferred income tax expense
|
|
|
1,894
|
|
|
|
1,834
|
|
|
|
1,173
|
|
(Gain) loss on disposal of assets
|
|
|
(14
|
)
|
|
|
17
|
|
|
|
(11
|
)
|
Gain on settlements
|
|
|
|
|
|
|
(1,607
|
)
|
|
|
|
|
Impairment costs (recoveries) associated with abandoned leases
|
|
|
|
|
|
|
|
|
|
|
(231
|
)
|
Amortization of warrants
|
|
|
|
|
|
|
|
|
|
|
1,907
|
|
Non-cash stock compensation
|
|
|
3,142
|
|
|
|
4,370
|
|
|
|
3,696
|
|
Provision for bad debts
|
|
|
1,908
|
|
|
|
581
|
|
|
|
36
|
|
Loss on debt extinguishment
|
|
|
|
|
|
|
1,651
|
|
|
|
15,712
|
|
Changes in operating assets and liabilities, net of impact of
acquisitions Accounts receivable
|
|
|
278
|
|
|
|
(500
|
)
|
|
|
(3,215
|
)
|
Due from related parties
|
|
|
|
|
|
|
|
|
|
|
30
|
|
Unbilled accounts receivable
|
|
|
299
|
|
|
|
(765
|
)
|
|
|
(490
|
)
|
Prepaid expenses and other current assets, net
|
|
|
5,474
|
|
|
|
(7,222
|
)
|
|
|
(608
|
)
|
Other assets
|
|
|
(1,874
|
)
|
|
|
(87
|
)
|
|
|
1,365
|
|
Accounts payable
|
|
|
(1,553
|
)
|
|
|
2,241
|
|
|
|
(1,710
|
)
|
Deferred other income and customer deposits
|
|
|
(464
|
)
|
|
|
(132
|
)
|
|
|
(653
|
)
|
Other long-term liabilities
|
|
|
3,204
|
|
|
|
936
|
|
|
|
(165
|
)
|
Accrued expenses and deferred revenue
|
|
|
680
|
|
|
|
(7,970
|
)
|
|
|
2,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
21,574
|
|
|
|
5,977
|
|
|
|
6,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(10,648
|
)
|
|
|
(11,975
|
)
|
|
|
(7,934
|
)
|
Cash used for acquisitions, net of cash acquired
|
|
|
|
|
|
|
(31,373
|
)
|
|
|
|
|
Proceeds from the sale of equipment
|
|
|
32
|
|
|
|
1
|
|
|
|
11
|
|
Changes in restricted cash position
|
|
|
45
|
|
|
|
13,535
|
|
|
|
(7,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(10,571
|
)
|
|
|
(29,812
|
)
|
|
|
(15,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options & employee
stock purchase plan
|
|
|
264
|
|
|
|
1,954
|
|
|
|
4,048
|
|
Proceeds from exercise of warrants
|
|
|
|
|
|
|
10
|
|
|
|
17
|
|
Proceeds from notes payable, net
|
|
|
10,436
|
|
|
|
28,881
|
|
|
|
95,517
|
|
Repayment of notes payable
|
|
|
(8,997
|
)
|
|
|
(10,114
|
)
|
|
|
(78,074
|
)
|
Debt issuance costs
|
|
|
(1,184
|
)
|
|
|
(1,509
|
)
|
|
|
(1,541
|
)
|
Payments on capital lease obligations
|
|
|
(4,091
|
)
|
|
|
(3,827
|
)
|
|
|
(2,631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used)provided by financing activities
|
|
|
(3,572
|
)
|
|
|
15,395
|
|
|
|
17,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate change on cash and cash equivalents
|
|
|
(158
|
)
|
|
|
|
|
|
|
|
|
Net increase(decrease) in cash and cash equivalents
|
|
|
7,273
|
|
|
|
(8,440
|
)
|
|
|
8,341
|
|
Cash and cash equivalents, beginning of year
|
|
|
3,261
|
|
|
|
11,701
|
|
|
|
3,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
10,534
|
|
|
$
|
3,261
|
|
|
$
|
11,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
11,950
|
|
|
$
|
11,397
|
|
|
$
|
7,709
|
|
Supplemental disclosure of non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment purchased under capital leases
|
|
$
|
2,514
|
|
|
$
|
17,652
|
|
|
$
|
2,668
|
|
Conversion of long term debt to common stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,864
|
|
Issuance of Series A Convertible Preferred Stock in
connection with netASPx acquisition
|
|
$
|
|
|
|
$
|
24,873
|
|
|
$
|
|
|
Accretion of Preferred Stock
|
|
$
|
3,350
|
|
|
$
|
2,656
|
|
|
$
|
|
|
See accompanying notes to consolidated financial statements.
F-6
NAVISITE,
INC.
|
|
(1)
|
Description
of Business
|
NaviSite, Inc. (NaviSite, the
Company, we,
us or our), provides IT
hosting, outsourcing and professional services. Leveraging our
set of technologies and subject matter expertise, we deliver
cost-effective, flexible solutions that provide responsive and
predictable levels of service for our customers
businesses. Over 1,400 companies across a variety of
industries rely on NaviSite to build, implement and manage their
mission-critical systems and applications. NaviSite is a trusted
advisor committed to ensuring the long-term success of our
customers business applications and technology strategies.
At July 31, 2009, NaviSite had
15 state-of-the-art
data centers in the United States and United Kingdom and a
network operations center in India. Substantially all revenue is
generated from customers in the United States.
|
|
(2)
|
Summary
of Significant Accounting Policies
|
(a) Basis
of Presentation and Background
NaviSite was formed in 1996 within CMGI, Inc. (currently known
as ModusLink Global Solutions, Inc.
((ModusLink)), our former majority
stockholder, to support the networks and host websites of
ModusLink, its subsidiaries and several of its affiliated
companies. In 1997 we began offering and supplying
website-hosting and -management services to companies not
affiliated with ModusLink. We were incorporated in Delaware in
December 1998. In October 1999 we completed our initial public
offering of common stock and remained a majority-owned
subsidiary of ModusLink until September 2002, at which time CBT
became our majority stockholder.
In August 2007 we acquired the outstanding capital stock of
Jupiter Hosting, Inc., a privately held company based in
Santa Clara, California, that provides managed-hosting
services. We also acquired the assets and assumed certain
liabilities of Alabanza, LLC, and Hosting Ventures, LLC
(together, Alabanza). Alabanza was a provider
of dedicated and shared managed hosting services.
In September 2007 we acquired the outstanding capital stock of
netASPx, Inc., an application-management service provider. In
October 2007 we acquired the assets of iCommerce, Inc., a
reseller of dedicated hosting services.
(b) Principles
of Consolidation
The accompanying consolidated financial statements include the
accounts of NaviSite, Inc., and our wholly owned subsidiaries.
All intercompany accounts and transactions have been eliminated.
(c) Use
of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reported
period. Actual results could differ from those estimates.
Significant estimates that we made include the useful lives of
fixed assets and intangible assets, the recoverability of
long-lived assets, the collectability of receivables, the
determination and valuation of goodwill and acquired intangible
assets, the fair value of preferred stock, the determination of
revenue and related revenue reserves, the determination of
stock-based compensation and the determination of the
deferred-tax-valuation allowance.
(d) Cash
and Cash Equivalents and Restricted Cash
We consider all highly liquid securities with original
maturities of three months or less to be cash equivalents. We
had restricted cash of $1.8 million and $1.9 million
as of July 31, 2009, and July 31, 2008,
F-7
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
including $0.3 million that is classified as short-term in
our consolidated balance sheet as of July 31, 2009, and
included in Prepaid expenses and other current
assets.
At July 31, 2009 and 2008, restricted cash consists of
cash-collateral requirements for standby letters of credit
associated with several of our facility leases.
(e) Revenue
Recognition
Revenue, net, consists of monthly fees for
application-management services, managed-hosting solutions,
co-location and professional services. Reimbursable expenses
charged to clients are included in revenue, net and cost of
revenue. Application management, managed-hosting solutions and
co-location services are billed and recognized as revenue over
the term of the contract, generally one to five years.
Installation and up-front fees associated with application
management, managed-hosting solutions and co-location services
are billed at the time that the installation service is provided
and recognized as revenue over the term of the related contract.
The direct and incremental costs associated with installation
and setup activities are capitalized and expensed over the term
of the related contract. Payments received in advance of
providing services are deferred until the period such services
are delivered.
Revenue from professional services is recognized as services are
delivered, for time- and materials-type contracts, and using the
percentage-of-completion
method, for fixed-price contracts. For fixed-price contracts,
progress towards completion is measured by a comparison of the
total hours incurred on the project to date to the total
estimated hours required upon completion of the project. When
current contract estimates indicate that a loss is probable, a
provision is made for the total anticipated loss in the current
period. Contract losses are determined to be the amount by which
the estimated service-delivery costs of the contract exceed the
estimated revenue that will be generated by the contract.
Unbilled accounts receivable represent revenue for services
performed that have not yet been billed as of the balance-sheet
date. Billings in excess of revenue recognized are recorded as
deferred revenue until the applicable revenue-recognition
criteria are met.
In accordance with Emerging Issues Task Force
(EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple
Deliverables, when more than one element
such as professional services, installation and hosting
services are contained in a single arrangement, we
allocate revenue between the elements based on
acceptable-fair-value-allocation methodologies, so long as each
element meets the criteria for treatment as a separate unit of
accounting. An item is considered a separate unit of accounting
if it has value to the customer on a stand-alone basis and there
is objective and reliable evidence of the fair value of the
undelivered items. The fair value of each undelivered element is
determined, if sold separately, by the price charged or, if not
sold separately, by other acceptable objective evidence. We
apply judgment to ensure the appropriate application of
EITF 00-21,
including with respect to the determination of fair value for
multiple deliverables, the determination of whether undelivered
elements are essential to the functionality of delivered
elements and the timing of revenue recognition, among others.
For those arrangements with respect to which the deliverables do
not qualify as a separate unit of accounting, revenue from all
deliverables is treated as one accounting unit and generally
recognized ratably over the term of the arrangement.
(f) Allowance
for Doubtful Accounts
We perform initial and periodic credit evaluations of our
customers financial conditions. We make estimates of the
collectability of our accounts receivable and maintain an
allowance for doubtful accounts for potential credit losses. We
specifically analyze accounts receivable and consider historical
bad debts, customer and industry concentrations, customer
creditworthiness (including the customers financial
performance and its business history), current economic trends
and changes in our customers payment patterns when
evaluating the adequacy of the allowance for doubtful accounts.
We specifically reserve for 100% of the balance of customer
accounts deemed uncollectible. For all other customer accounts,
we reserve as needed based upon managements estimates of
uncollectible amounts based on historical bad debt.
F-8
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(g) Concentration
of Credit Risk
Our financial instruments include cash, accounts receivable,
obligations under capital leases, debt agreements, derivative
instruments, preferred stock, accounts payable and accrued
expenses. As of July 31, 2009 and 2008, the carrying cost
of these instruments approximated their fair value.
Financial instruments that may subject us to concentrations of
credit risk consist primarily of accounts receivable.
Concentration of credit risk with respect to trade receivables
is limited due to our broad and diverse customer base. No
customer accounted for more than 5% of total revenues in fiscal
years 2009 and 2008 or 5% of the total accounts-receivable
balance as of July 31, 2009 and 2008. One third-party
customer accounted for 8% of our total revenue for the fiscal
year ended July 31, 2007. Accounts receivable included
approximately $1.6 million due from this third-party
customer at July 31, 2007.
(h) Comprehensive
Income (Loss)
Comprehensive income (loss) is defined as the change in equity
of a business enterprise during the reporting period from
transactions and other events and circumstances from non-owner
sources. We record the components of comprehensive income
(loss), primarily foreign-currency-translation adjustments, in
our consolidated balance sheets as a component of
stockholders deficit.
(i) Property
and Equipment
Property and equipment are stated at cost. Depreciation is
computed using the straight-line method over the estimated
useful lives of the assets, generally three to five years.
Leasehold improvements and assets acquired under capital leases
are amortized using the straight-line method over the shorter of
the lease term or the estimated useful life of the asset. Assets
acquired under capital leases in which title transfers to us at
the end of the agreement are amortized over the useful life of
the asset. Expenditures for maintenance and repairs are charged
to expense as incurred.
Renewals and betterments that materially extend the life of an
asset are capitalized and depreciated. Upon disposal of an
asset, its cost and the related accumulated depreciation are
removed from their respective accounts and any gain or loss
reflected within Other income, net, in our
consolidated statements of operations.
(j) Long-Lived
Assets, Goodwill and Other Intangibles
We follow the provisions of Statement of Financial Accounting
Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 144 requires that
long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of an asset to be held and
used is measured by a comparison of the carrying amount of the
asset to the undiscounted future net cash flows expected to be
generated by the asset. If such asset is considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its
fair value. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less cost to sell.
We review the valuation of goodwill in accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets. Under the provisions of
SFAS No. 142, goodwill is required to be tested for
impairment annually in lieu of being amortized. This testing is
done in the fourth fiscal quarter of each year. In addition to
annual testing, goodwill is required to be tested for impairment
on an interim basis if an event or circumstance indicates that
it is more likely than not that an impairment loss has been
incurred. An impairment loss is recognized to the extent that
the carrying amount of goodwill exceeds its implied fair value.
Impairment losses are recognized in operations. Our valuation
methodology for assessing impairment requires us to make
F-9
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
judgments and assumptions based on historical experience and
projections of future operating performance. If these
assumptions differ materially from future results, we may record
additional impairment charges in the future.
(k) Advertising
Costs
We charge advertising costs to expense in the period incurred.
Advertising expense for the years ended July 31, 2009, 2008
and 2007, were approximately $0.7 million,
$0.7 million and $0.4 million, respectively.
(l) Income
Taxes
Income taxes are accounted for using the
asset-and-liability
method in accordance with SFAS No. 109,
Accounting for Income Taxes. Deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the
financial-statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating-loss
and tax-credit carryforwards. Deferred-tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income, if any, in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred-tax assets and liabilities of a change in
tax rates is recognized in income in the period in which the
rate change is enacted.
On August 1, 2007, we adopted the provisions of FASB
Interpretation No. 48, Accounting for Uncertainty
in Income Taxes (FIN 48). The
purpose of FIN 48 is to increase the comparability in
financial reporting of income taxes. FIN 48 requires that,
in order for a tax benefit to be recorded in the income
statement, the item in question must meet the
more-likely-than-not threshold, which is met if the benefit has
a likelihood of greater than 50% of being sustained upon
examination by the taxing authorities. The adoption of
FIN 48 did not have a material effect on our financial
statements. No cumulative effect was booked through beginning
retained earnings.
As of the adoption date, we have determined that we do not have
any gross unrecognized tax benefits. We do not expect
significant changes in the amounts of unrecognized tax benefits
within the next 12 months.
(m) Derivative
Financial Instruments
Derivative instruments are recorded as either assets or
liabilities and measured at fair value. Changes in fair value
are recognized currently in earnings, within Other income,
net, in our consolidated statements of operations. We
utilize interest-rate derivatives to minimize the risk related
to rising interest rates on a portion of our floating-rate debt
and did not qualify to apply hedge accounting. The interest-rate
differentials to be received under such derivatives and the
changes in the fair value of the instruments are recognized as
adjustments to Other income, net, each reporting period. The
principal objectives of the derivative instruments are to
minimize the risks and reduce the expenses associated with
financing activities. We do not use derivatives financial
instruments for trading purposes.
(n) Lease
Expense
Lease expense for our real estate leases, which generally have
escalating lease payments over their terms, is recorded on a
straight-line basis over the lease term, as defined in
SFAS No. 13, Accounting for
Leases. The difference between the expense
recorded in our consolidated statements of operations and the
amount paid is recorded as deferred rent and is included in our
consolidated balance sheets. We had deferred rent of
$4.4 million and $3.1 million as of July 31, 2009
and 2008, respectively. Included in these amounts are long-term
deferred rent balances of $4.3 million and
$2.9 million as of July 31, 2009 and 2008,
respectively, which amounts are included in the Other
long-term liabilities caption in our consolidated balance
sheets.
F-10
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(o) Stock-Based
Compensation Plans
In December 2004 the FASB issued SFAS No. 123(R),
Share-Based Payment, an amendment of FASB Statements
Nos. 123 and 95, which addresses the accounting for
share-based payment transactions in which a company receives
employee services in exchange for either (i) equity
instruments of the company or (ii) liabilities that
(A) are based on the fair value of the companys
equity instruments or (B) may be settled by the issuance of
such equity instruments. SFAS 123(R) eliminates the ability
to account for share-based compensation transactions using the
intrinsic-value method and generally requires that such
transactions be accounted for using a fair-value-based method
and recognized as expense in our consolidated statement of
operations. In March 2005 the SEC issued Staff Accounting
Bulletin (SAB) No. 107 regarding
its interpretation of SFAS 123(R). SAB No. 107
provides the SECs views regarding interpretations of
SFAS 123(R) in light of certain SEC rules and regulations
and provides guidance related to the valuation of share-based
payments for public companies. The interpretive guidance is
intended to assist companies in applying the provisions of
SFAS 123(R) and investors and users of financial statements
in analyzing the information provided.
Following the guidance in SAB No. 107, on
August 1, 2005, we adopted SFAS 123(R) using the
modified-prospective method, and, accordingly, we have not
restated our consolidated results of operations from prior
interim periods and fiscal years. SFAS 123(R) requires us
to measure compensation cost for all share-based awards at fair
value on the date of grant and to recognize compensation expense
over the service period during which the awards are expected to
vest for each separately vesting portion of each award. We
generally grant options under its equity plans that vest as to
25% of the original number of shares six months after the grant
date and thereafter in equal monthly amounts over the three-year
period commencing six months after the grant date.
Upon adoption of SFAS 123(R), we began recognizing
compensation expense associated with awards granted after
August 1, 2005, and the unvested portion of previously
granted awards that were outstanding as of August 1, 2005,
in our consolidated statement of operations.
Stock
Options
The following table summarizes stock-based compensation expense
related to employee stock options under SFAS 123(R) for the
fiscal years ended July 31, 2009, 2008, and 2007,
respectively, and the allocation of such expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
1,052
|
|
|
$
|
1,724
|
|
|
$
|
1,342
|
|
Selling and marketing
|
|
|
457
|
|
|
|
710
|
|
|
|
570
|
|
General and administrative
|
|
|
507
|
|
|
|
903
|
|
|
|
1,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,016
|
|
|
$
|
3,337
|
|
|
$
|
3,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We included in our 2007 expense $0.8 million of stock-based
compensation relating to a modification of stock options held by
our former chief financial officer, who resigned in January
2007. Pursuant to a
lock-up
agreement, we amended his option agreements to extend the time
before which those of his options that had vested as of his last
date of employment could be exercised from 90 days from his
date of termination to 227 days therefrom. Modifications to
option agreements under SFAS 123(R) require re-measurement
of the fair value of the option based on a comparison of the
fair value immediately before and after the modification and a
corresponding charge to earnings.
F-11
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of each stock-option grant is estimated on the
date of grant using the Black-Scholes Model, assuming no
expected dividends and the following weighted average
assumptions. The weighted average risk-free interest-rate
assumption is based on the U.S. Treasury rates as of the
month of grant. The expected volatility is based on the
historical volatility of our stock price over the expected term
of the option. The estimate of the expected life of an option is
based on its contractual term and past employee-exercise
behavior.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Risk-free interest rate
|
|
|
1.67
|
%
|
|
|
3.40
|
%
|
|
|
4.62
|
%
|
Expected volatility
|
|
|
90.91
|
%
|
|
|
82.65
|
%
|
|
|
99.03
|
%
|
Expected life (years)
|
|
|
2.72
|
|
|
|
2.50
|
|
|
|
3.00
|
|
Weighted average fair value of options granted
|
|
$
|
0.70
|
|
|
$
|
3.21
|
|
|
$
|
3.19
|
|
SFAS 123(R) requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. During the
fiscal years ended July 31, 2009, 2008 and 2007, we
estimated that 5% of options granted would be forfeited before
the end of the first vesting tranche. Forfeitures after the
first vesting tranche are not considered to be material.
The following table reflects stock-option activity under our
equity-incentive plans for the fiscal year ended July 31,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
of
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
(Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(Thousands)
|
|
|
Options outstanding, beginning of year
|
|
|
6,722,165
|
|
|
$
|
3.94
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
867,225
|
|
|
$
|
1.33
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(85,701
|
)
|
|
$
|
1.55
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
(1,132,486
|
)
|
|
$
|
4.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, July 31, 2009
|
|
|
6,371,203
|
|
|
$
|
3.58
|
|
|
|
6.53
|
|
|
$
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, July 31, 2009
|
|
|
5,064,249
|
|
|
$
|
3.57
|
|
|
|
5.98
|
|
|
$
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options exercised during the
fiscal years ended July 31, 2009, 2008 and 2007, was
approximately $0.1 million, $3.0 million and
$5.4 million, respectively.
As of July 31, 2009, unrecognized stock-based compensation
related to stock options was approximately $5.0 million.
This cost is expected to be expensed over a weighted average
period of 2.18 years.
Non-Vested
Shares
Non-vested stock is shares of common stock that are subject to
restrictions on transfer and risk of forfeiture until the
fulfillment of specified conditions. Non-vested stock is
expensed ratably over the term of the restriction period.
F-12
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes stock-based compensation expense
related to non-vested shares under SFAS 123(R) for the
fiscal years ended July 31, 2009, 2008, and 2007, and the
allocation of such expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
129
|
|
|
$
|
3
|
|
|
$
|
|
|
Selling and marketing
|
|
|
66
|
|
|
|
2
|
|
|
|
|
|
General and administrative
|
|
|
773
|
|
|
|
898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
968
|
|
|
$
|
903
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of non-vested shares is based on the market price
of our common stock on the grant date. The total grant-date fair
value of non-vested stock that vested during the fiscal years
ended July 31, 2009 and 2008, was approximately $0.3 and
$0.2 million, respectively. As of July 31, 2009, there
was approximately $2.0 million of total unrecognized
compensation expense related to non-vested stock to be
recognized over a weighted average period of 4.69 years.
Employee
Stock Purchase Plan
Under our 1999 Employee Stock Purchase Plan (the
ESPP), employees who elect to participate
instruct the Company to withhold a specified amount through
payroll deductions during the offering period of six months. On
the last business day of each offering period, the amount
withheld is used to purchase newly issued shares of our common
stock at an exercise price equal to 85% of the lower of the
market price on the first or last business day of the offering
period.
Stock-compensation expense for the ESPP is recognized over the
offering period. Each offering period consists of six months.
The following table summarizes stock-based compensation expense
related to the ESPP under SFAS 123(R) for the fiscal years
ended July 31, 2009, 2008 and 2007, and the allocation of
such expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
93
|
|
|
$
|
67
|
|
|
$
|
|
|
Selling and marketing
|
|
|
34
|
|
|
|
34
|
|
|
|
|
|
General and administrative
|
|
|
31
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
158
|
|
|
$
|
130
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We issued 433,901 and 66,074 shares of common stock in
fiscal years ended July 31, 2009 and 2008, respectively. As
of July 31, 2009, there was approximately $128,000 of
unrecognized compensation expense related to the offering
periods in progress at July 31, 2009. The expense is to be
recognized over a period of five months. Although the ESPP
existed in fiscal year 2007, there were limited shares available
for issuance.
(p) Basic
and Diluted Net Loss per Common Share
Basic net loss per share is computed by dividing net loss
attributable to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted net
loss per share is computed using the weighted average number of
common and diluted common-equivalent shares outstanding during
the
F-13
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
period. We utilize the treasury-stock method for options,
warrants and non-vested shares and the if-converted
method for convertible preferred stock and notes, unless such
amounts are anti-dilutive.
The following table sets forth common-stock equivalents that are
not included in the calculation of diluted net loss per share
available to common stockholders because to do so would be
anti-dilutive for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended July 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Common-stock options
|
|
|
105,765
|
|
|
|
1,943,861
|
|
|
|
1,984,040
|
|
Common-stock warrants
|
|
|
1,188,783
|
|
|
|
1,197,992
|
|
|
|
1,428,209
|
|
Non-vested stock
|
|
|
134,222
|
|
|
|
151,604
|
|
|
|
|
|
Series A convertible preferred stock
|
|
|
3,724,844
|
|
|
|
3,356,202
|
|
|
|
|
|
ESPP
|
|
|
|
|
|
|
28,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,153,614
|
|
|
|
6,677,778
|
|
|
|
3,412,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(q) Segment
Reporting
We currently operate in one reportable segment, managed IT
services. Our chief operating decision-maker reviews financial
information at a consolidated level.
(r) Recent
Accounting Pronouncements
In September 2009 the FASBs Emerging Issues Task Force
issued
EITF 08-1,
Revenue Arrangements with Multiple Deliverables.
EITF 08-1
addresses how to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting
and how the arrangement consideration should be allocated among
the separate units of accounting. The new guidance also requires
enhanced financial-statement disclosures. We are currently
assessing the impact that
EITF 08-1
will have on our consolidated financial statements.
In November 2008 the SEC issued for comment a proposed roadmap
regarding the potential use by U.S. issuers of financial
statements prepared in accordance with IFRS. IFRS is a
comprehensive series of accounting standards published by the
IASB. Under the proposed roadmap, we could be required in fiscal
2015 to prepare financial statements in accordance with IFRS,
and the SEC will make a determination in 2011 regarding the
mandatory adoption of IFRS. We are currently assessing the
impact that this change would have on our consolidated financial
statements, and we will continue to monitor the development of
the potential implementation of IFRS.
In June 2009 the FASB issued SFAS No. 168,
The FASB Accounting Standards
Codificationtm
and the Hierarchy of Generally Accepted Accounting
Principles A Replacement of FASB Statement
No. 162. SFAS 168 established the FASB
Accounting Standards Codification (the
Codification) as the single source of
authoritative nongovernmental U.S. GAAP and was launched on
July 1, 2009. The Codification does not change current
U.S. GAAP but is intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. All
existing accounting-standard documents are to be superseded, and
all accounting literature excluded from the Codification is to
be considered nonauthoritative. The Codification is effective
for us for the interim period ending October 31, 2009, but
will not have an impact on our financial position or results of
operations. We are currently evaluating the impact on our
financial-reporting process of providing Codification references
in our public filings.
F-14
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In April 2008 the FASB issued FSP
FAS 142-3,
Determination of the Useful Life of Intangible
Assets. FSP
FAS 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible
Assets. FSP
FAS 142-3
is effective for us beginning in fiscal 2010. We have evaluated
the impact that the adoption of FSP
FAS 142-3
will have on our financial position and results of operations
and do not believe that it will have a material impact.
In March 2008 the FASB issued SFAS 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133. SFAS 161 requires enhanced
disclosures about an entitys derivative and hedging
activities and thereby improves the transparency of financial
reporting. SFAS 161 is effective for fiscal years beginning
on or after November 15, 2008. We have evaluated the impact
that the adoption of SFAS 161 will have on our financial
position and results of operations and do not believe that it
will have a material impact.
In December 2007 the FASB issued SFAS No. 160,
Non-Controlling Interests in Consolidated Financial
Statements, an amendment of ARB No. 151, which
requires non-controlling interests (previously referred to as
minority interests) to be treated as a separate component of
equity rather than a liability, as is current practice.
SFAS 160 applies to non-controlling interests and
transactions with non-controlling-interest holders in
consolidated financial statements. We adopted SFAS 160
beginning February 1, 2009. The adoption of SFAS 160
did not have a material impact on our consolidated financial
position or results of operations.
In December 2007 the FASB issued SFAS No. 141(R),
Business Combinations, which requires most
identifiable assets, liabilities, non-controlling interests and
goodwill acquired in a business combination to be recorded at
full fair value. Under SFAS 141(R) all business
combinations will be accounted for under the acquisition method.
Significant changes from current guidance resulting from
SFAS 141(R) include, among others, the requirement that
contingent assets, liabilities and consideration be recorded at
estimated fair value as of the acquisition date, with any
subsequent changes in fair value charged or credited to
earnings. Further, acquisition-related costs are to be expensed
rather than treated as part of the acquisition. SFAS 141(R)
is effective prospectively to business combinations for which
the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15,
2008. We will apply the provisions of SFAS 141(R) to any
acquisitions after July 31, 2009. The impact of this
standard, if any, will not be known until the consummation of a
business combination under the new standard.
(s) Foreign
Currency
The functional currencies of our international subsidiaries are
the local currencies. The financial statements of the
subsidiaries are translated into U.S. dollars using
period-end exchange rates for assets and liabilities and average
exchange rates during the corresponding period for revenue, cost
of revenue and expenses. Translation gains and losses are
deferred and accumulated as a separate component of
stockholders deficit under Accumulated other
comprehensive income (loss).
(t) Subsequent
Event
Effective July 2009 we adopted the provisions of the FASB-issued
SFAS No. 165, Subsequent Events.
SFAS 165 establishes general standards of accounting for,
and disclosure of, events that occur after the balance-sheet
date but before financial statements are issued or are available
to be issued. SFAS 165 requires the disclosure of the date
through which an entity has evaluated subsequent events and the
basis for that date; that is, whether the date represents the
date on which the financial statements were issued or were
available to be issued. In accordance with SFAS 165, we
have evaluated subsequent events through October 27, 2009,
the date of issuance of our consolidated financial statements.
During the period from August 1, 2009, to October 27,
2009, we did not have any material recognizable subsequent
events.
F-15
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(u) Reclassifications
Certain fiscal-year 2008 and 2007 amounts have been reclassified
to conform to the fiscal-year 2009 financial-statement
presentation.
|
|
(3)
|
Impairment
of Long-Lived Assets
|
During the fiscal year ended July 31, 2007, we recorded a
recovery of a previously impaired lease totaling
$0.3 million. This recovery reflected a change in sublease
assumptions related to a lease impairment recorded in a prior
reporting period. In the fourth quarter of our fiscal year 2007,
we recorded an impairment charge related to our Syracuse, New
York, facility reflecting abandoned space in that facility. The
charge totaled $0.06 million. The net impairment recovery
of $0.2 million is reported in our consolidated statement
of operations for the fiscal year ending July 31, 2007, as
a component of operating expenses.
Impairment charges are recorded in our consolidated statements
of operations based upon the nature of the asset being impaired
and the nature of the assets use. The impairments that we
recorded as a separate component of cost of revenue related to
assets that were either being utilized or had at some time been
utilized to generate revenue. The determination was based on how
the assets had historically been expensed, either as lease
expense or depreciation or amortization.
|
|
(4)
|
Property
and Equipment
|
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Office furniture and equipment
|
|
$
|
4,208
|
|
|
$
|
4,522
|
|
Computer equipment
|
|
|
75,766
|
|
|
|
68,968
|
|
Software licenses
|
|
|
15,798
|
|
|
|
15,270
|
|
Leasehold improvements
|
|
|
25,838
|
|
|
|
26,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,610
|
|
|
|
115,741
|
|
Less: Accumulated depreciation and amortization
|
|
|
(89,562
|
)
|
|
|
(77,600
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
32,048
|
|
|
$
|
38,141
|
|
|
|
|
|
|
|
|
|
|
The estimated useful lives of our property and equipment are as
follows: office furniture and equipment,
5 years; computer equipment, 3 years; software
licenses, 3 years or the life of the license; and leasehold
improvements, the lesser of the lease term and the assets
estimated useful life.
Property and equipment held under capital leases, which are
classified primarily as computer equipment and leasehold
improvements above, was as follows:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Computer equipment
|
|
$
|
20,637
|
|
|
$
|
15,582
|
|
Leasehold improvements
|
|
|
12,119
|
|
|
|
14,660
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
$
|
32,756
|
|
|
$
|
30,242
|
|
Accumulated depreciation and amortization
|
|
|
(15,324
|
)
|
|
|
(11,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,432
|
|
|
$
|
18,465
|
|
|
|
|
|
|
|
|
|
|
F-16
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The estimated useful lives of assets held under capital leases
in circumstances in which the lease does not transfer ownership
of the property by the end of the lease term or contains a
bargain purchase option are determined in a manner consistent
with our normal depreciation policy except that the period of
amortization is the lease term.
Intangible assets, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2009
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Customer lists
|
|
$
|
39,392
|
|
|
$
|
(26,498
|
)
|
|
$
|
12,894
|
|
Customer contract backlog
|
|
|
14,600
|
|
|
|
(7,619
|
)
|
|
|
6,981
|
|
Developed technology
|
|
|
3,140
|
|
|
|
(1,506
|
)
|
|
|
1,634
|
|
Vendor contracts
|
|
|
700
|
|
|
|
(637
|
)
|
|
|
63
|
|
Trademarks
|
|
|
670
|
|
|
|
(220
|
)
|
|
|
450
|
|
Non-compete agreements
|
|
|
206
|
|
|
|
(135
|
)
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,708
|
|
|
$
|
(36,615
|
)
|
|
$
|
22,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2008
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Customer lists
|
|
$
|
39,670
|
|
|
$
|
(23,400
|
)
|
|
$
|
16,270
|
|
Customer-contract backlog
|
|
|
14,600
|
|
|
|
(4,845
|
)
|
|
|
9,755
|
|
Developed technology
|
|
|
3,140
|
|
|
|
(966
|
)
|
|
|
2,174
|
|
Vendor contracts
|
|
|
700
|
|
|
|
(314
|
)
|
|
|
386
|
|
Trademarks
|
|
|
670
|
|
|
|
(105
|
)
|
|
|
565
|
|
Non-compete agreements
|
|
|
206
|
|
|
|
(66
|
)
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,986
|
|
|
$
|
(29,696
|
)
|
|
$
|
29,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible-asset amortization expense for the years ended
July 31, 2009, 2008 and 2007, aggregated $7.2 million,
$7.9 million and $3.9 million, respectively. During
fiscal years 2009 and 2008, we adjusted the intangible assets
and accumulated amortization by $0.3 million and
$0.3 million, respectively, to reflect the disposal of one
of our acquired intangibles in each year. Intangible assets are
being amortized over estimated useful lives ranging from two to
eight years.
Amortization expense related to intangible assets for the next
five years is as follows:
|
|
|
|
|
Year Ending July 31,
|
|
|
|
|
|
(In thousands)
|
|
|
2010
|
|
$
|
6,068
|
|
2011
|
|
$
|
5,921
|
|
2012
|
|
$
|
5,776
|
|
2013
|
|
$
|
2,307
|
|
2014
|
|
$
|
1,869
|
|
F-17
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table details the carrying amount of goodwill for
the fiscal years ended July 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Goodwill as of August 1
|
|
$
|
66,683
|
|
|
$
|
43,159
|
|
|
$
|
43,159
|
|
Acquired goodwill
|
|
|
|
|
|
|
23,524
|
|
|
|
|
|
Adjustments to goodwill
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill as of July 31
|
|
$
|
66,566
|
|
|
$
|
66,683
|
|
|
$
|
43,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired during the fiscal year ended July 31,
2008, was related to our acquisitions of Jupiter, Alabanza,
netASPx and iCommerce. Goodwill was adjusted during fiscal year
2009, reflecting the finalization of purchase-accounting
reserves made within one year of the acquisition date.
|
|
(7)
|
Discontinued
Operations
|
In August 2007 we launched AJE, an employment-services website.
This site utilizes technology developed in connection with the
provision of services to a former customer. Upon termination of
the use of the service by our customer, AJE was launched as an
independent employment-services site utilizing an
advertising-revenue and premium-enhanced-services model. In
August 2007 we determined that AJE is not core to our business.
Pursuant to a plan developed in August 2007, we were actively
seeking to dispose of AJE, and, accordingly, the results of its
operations, its assets and liabilities and its cash flows had
been presented as discontinued operations in our condensed
consolidated financial statements. During the fourth quarter of
fiscal 2009, we determined that it was no longer probable that a
transaction would be completed within one year and therefore
have reclassified AJE operations back into continuing operations
for both the most current year and previously reported periods.
Revenue for the fiscal years ending July 31, 2009 and 2008,
was $1,532 and $313, respectively.
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Accrued payroll, benefits and commissions
|
|
$
|
4,086
|
|
|
$
|
4,561
|
|
Accrued legal
|
|
|
636
|
|
|
|
229
|
|
Accrued accounts payable
|
|
|
2,408
|
|
|
|
3,214
|
|
Accrued sales, use, property and miscellaneous taxes
|
|
|
421
|
|
|
|
599
|
|
Accrued other
|
|
|
1,939
|
|
|
|
2,467
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,490
|
|
|
$
|
11,070
|
|
|
|
|
|
|
|
|
|
|
F-18
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Total debt
|
|
$
|
116,757
|
|
|
$
|
113,950
|
|
Less current portion, term loan, revolver and other debt
|
|
|
10,603
|
|
|
|
6,100
|
|
|
|
|
|
|
|
|
|
|
Long-term term loan
|
|
$
|
106,154
|
|
|
$
|
107,850
|
|
|
|
|
|
|
|
|
|
|
(a) Senior
Secured Credit Facility
In June 2007 we entered into a senior secured credit agreement
(the Credit Agreement) with a syndicated
lending group. The Credit Agreement consisted of a six-year
single-draw term loan (the Term Loan)
totaling $90.0 million and a five-year $10.0 million
revolving-credit facility (the Revolver).
Proceeds from the Term Loan were used to pay our obligations
under the Silver Point Debt (which we describe in
subsection (b) below), to pay fees and expenses totaling
approximately $1.5 million related to the closing of the
Credit Agreement, to provide financing for data-center expansion
(totaling approximately $8.7 million) and for general
corporate purposes. Borrowings under the Credit Agreement were
guaranteed by the Company and certain of its subsidiaries.
Under the Term Loan we are required to make principal
amortization payments during the six-year term of the loan in
amounts totaling $0.9 million per annum, paid quarterly on
the first day of our fiscal quarters. In June 2013 the balance
of the Term Loan becomes due and payable. The outstanding
principal under the Credit Agreement is subject to prepayment in
the case of an Event of Default, as defined in the Credit
Agreement. In addition, amounts outstanding under the Credit
Agreement are subject to mandatory prepayment in certain cases,
including, among others, a change in control of the Company, the
incurrence of new debt and the issuance of equity of the
Company. In the case of a mandatory prepayment resulting from a
debt issuance, 100% of the proceeds must be used to prepay
amounts owed under the Credit Agreement. In the case of an
equity offering, we are entitled to retain the first
$5.0 million raised and must prepay amounts owed under the
Credit Agreement with 100% of any equity-offering proceeds that
exceed $5.0 million.
Amounts outstanding under the initial Credit Agreement bore
interest at either (a) the LIBOR rate plus 3.5% or, at our
option, (b) the Base Rate, as defined in the Credit
Agreement, plus the Federal Funds Effective Rate plus 0.5%. Upon
the attainment of a Consolidated Leverage Ratio, as defined, of
no greater than 3:1, the interest rate under the LIBOR option
can decrease to LIBOR plus 3.0%. Interest becomes due and is
payable quarterly in arrears. The Credit Agreement requires us
to maintain interest-rate arrangements to minimize exposure to
interest-rate fluctuations on an aggregate notional principal
amount of 50% of amounts borrowed under the Term Loan.
The Credit Agreement requires us to maintain certain financial
and non-financial covenants. Financial covenants include a
minimum fixed-charge-coverage ratio, a maximum total-leverage
ratio and an annual capital-expenditure limitation. At
July 31, 2007, we had exceeded the maximum allowable annual
capital expenditures under the terms of the Credit Agreement for
the fiscal year ended July 31, 2007. In September 2007, in
connection with an amendment to the Credit Agreement that waived
the violation as of July 31, 2007, we received an increase
in the maximum allowable annual capital expenditures for the
fiscal year ended July 31, 2007. Non-financial covenants
include restrictions on our ability to pay dividends, to make
investments, to sell assets, to enter into merger or acquisition
transactions, to incur indebtedness or liens, to enter into
leasing transactions, to alter our capital structure and to
issue equity. In addition, under the Credit Agreement, we are
allowed to borrow, through one or more of our foreign
subsidiaries, up to $10.0 million to finance data-center
expansion in the United Kingdom.
F-19
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Proceeds from the Term Loan were used to extinguish all of our
outstanding debt with Silver Point Finance LLC (Silver
Point). At the closing of the Credit Agreement, we had
$75.5 million outstanding with Silver Point, which amount
was paid in full. In addition, we incurred a $3.0 million
prepayment penalty, which we paid with the proceeds of the Term
Loan. At the closing of the Credit Agreement, our revolving
commitment with Atlantic (see below) was also terminated.
In August 2007 we entered into Amendment, Waiver and Consent
Agreement No. 1 to the Credit Agreement (the
Amendment). The Amendment permitted us
(a) to use approximately $8.7 million of cash
originally borrowed under the Credit Agreement, which amount was
restricted for data-center expansion to partially fund the
acquisition of Jupiter and Alabanza, and (b) to issue up to
$75.0 million of indebtedness, so long as such indebtedness
is unsecured, requires no amortization payment and becomes due
or payable no earlier than 180 days after the maturity date
of the Credit Agreement in June 2013.
In September 2007 we entered into an Amended and Restated Credit
Agreement (the Amended Credit Agreement). The
Amended Credit Agreement provided us with an incremental
$20.0 million in term-loan borrowings and amended the rate
of interest to LIBOR plus 4.0%, with a step-down to LIBOR plus
3.5% upon attainment of a 3:1 leverage ratio. All other terms of
the Credit Agreement remained substantially the same. We
recorded a loss on debt extinguishment of approximately
$1.7 million for the six months ended January 31,
2008, to reflect this extinguishment of the Credit Agreement, in
accordance with
EITF 96-19
Debtors Accounting for a Modification or Exchange
of Debt Instruments.
In January 2008 we entered into Amendment, Waiver and Consent
Agreement No. 3 to the Amended Credit Agreement (the
January Amendment). The January Amendment
amended the definition of Permitted UK Datasite Buildout
Indebtedness (as that term is defined in the Amended Credit
Agreement) to total $16.5 million, as compared to
$10.0 million, and requires the reduction of the
$16.5 million to no less than $10.0 million as such
indebtedness is repaid as to principal.
In June 2008 we entered into Amendment and Consent Agreement
No. 4 to the Amended Credit Agreement (the June
Amendment). The June Amendment (i) amended the
definition of Permitted UK Datasite Buildout Indebtedness (as
that term is defined in the Amended Credit Agreement) to total
$33 million, as compared to $16.5 million,
(ii) increased to $20 million the maximum amount of
contingent obligations relating to all leases for any period of
12 months and (iii) increased the rate of interest to
either (x) LIBOR plus 5.0% or (y) the Base Rate, as
defined in the Amended Credit Agreement, plus 4.0%.
At July 31, 2008, we were not in compliance with our
financial covenants of leverage, fixed charges and annual
capital expenditures. In October 2008 we entered into Amendment,
Waiver and Consent Agreement No. 5 to the Amended Credit
Agreement (the October Amendment), which
waived these violations as of July 31, 2008. In addition,
the October Amendment (i) increased the rate of interest to
either (x) LIBOR plus 6% or (y) the Base Rate, as
defined in the Amended Credit Agreement, plus 5%, (ii) adds
a 2% accruing PIK interest until the leverage ratio has been
lowered to 3:1, (iii) changes the excess cash flow sweep to
75% to be performed quarterly, (iv) requires certain
settlement and asset sale proceeds to be used for debt
repayment, (v) modifies certain financial covenants for
future periods, and (vi) requires a payment to the lenders
of 3% the outstanding term and revolving loans if a leverage
ratio of 3:1 is not achieved by January 31, 2010. We were
in compliance with the covenants under the Amended Credit
Agreement as July 31, 2009.
At July 31, 2009, $116.8 million was outstanding under
the Amended Credit Agreement, of which $10.0 million was
outstanding under the Revolver.
In order for us to comply with our credit agreements
senior-leverage ratio and fixed-charges covenants for quarterly
periods in 2010 and beyond, we will need to achieve some of the
following measures: (i) increase our EBITDA,
(ii) successfully complete the sale of certain non-core
assets (e.g., certain co-location data centers or other
non-strategic assets), a portion of the proceeds from which
would be used to repay debt, (iii) execute a debt-reduction
plan, (iv) refinance our existing debt arrangement and
(v) modify one of our
F-20
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
significant data-center lease agreements. If the aforementioned
measures are not sufficient to maintain compliance with our
financial covenants, we would need to seek a waiver or amendment
from the syndicated lending group. However, there can be no
assurance that we could obtain such a waiver or amendment, in
which case our debt would immediately become due and payable in
full, an event that would adversely affect our liquidity and our
ability to manage our business. We believe that our execution of
some combination of the above measures will be sufficient for us
to maintain compliance with our financial covenants throughout
2010.
(b) Term
Loans and Revolving Credit Facilities
In April 2006 we entered into a senior secured term loan and
senior secured revolving-credit facility, (the Silver
Point Debt) with Silver Point. The term loan consisted
of a five-year single-draw term loan in the aggregate amount of
$70 million. Proceeds under the term loan were used to
repay certain maturing debt, to pay fees expenses totaling
approximately $4.9 million related to the closing of the
credit facility and to increase borrowing available for general
corporate purposes. Borrowings under the term loan were
guaranteed by the Company and all of our subsidiaries. During
the first 12 months of the loan, we were required to make
quarterly interest-only payments to Silver Point. Commencing one
year after the closing date of the loan, we were scheduled to
begin making quarterly principal payments. The original maturity
date of the Silver Point term loan was April 11, 2011.
Silver Point was entitled to prepayment of the outstanding
balance under the term loan, if any, upon the occurrence of
various events, including, among others, if we sell assets and
do not reinvest the proceeds in assets or receive cash proceeds
from the incurrence of any indebtedness, have excess cash or
close an equity-financing transaction, provided that the
first $10 million plus 50% of the remaining net proceeds
from an equity financing was not subject to the
mandatory-prepayment requirement. Generally, prepayments were
subject to a prepayment premium ranging from 8% to 1%, depending
on the timing of the prepayment. The unpaid amount of the term
loan and accrued interest thereon and all other obligations
related to the Silver Point Debt would become due and payable
immediately upon the occurrence and continuation of any event of
default. Under the term-loan agreement, we complied with various
financial and non-financial covenants. The financial covenants
included, among others, a minimum fixed-charge-coverage ratio, a
maximum consolidated-leverage ratio, a minimum
consolidated-EBITDA requirement and a maximum
annual-capital-expenditure limitation. The primary non-financial
covenants restricted our ability to pay dividends, to make
investments, to engage in transactions with affiliates, to sell
assets, to conduct mergers or acquisitions, to incur
indebtedness or liens, to alter our capital structure and to
sell stock.
Amounts outstanding under the Silver Point term loan bore
interest at either (a) 7% per annum plus the greater of
(i) the Prime Rate and (ii) the Federal Funds
Effective Rate plus 3% or (b) 8% plus LIBOR. To the extent
interest payable on the term loan (a) exceeded the LIBOR
rate plus 5% in the first year after the draw-down date or
(b) exceeded the LIBOR Rate plus 7% for subsequent years,
such amounts exceeding the threshold would have been
capitalized, added to the outstanding principal amount of the
term loan and borne interest. Outstanding amounts under the
Silver Point revolving-credit facility bore interest at either
(a) 7% per annum plus the greater of (i) Prime
Rate and (ii) the Federal Funds Effective Rate plus 3% or
(b) 8% plus LIBOR. Interest was payable in arrears on the
last day of the month for non-LIBOR-rate loans and the last day
of the chosen interest period (one, two or three months) for
LIBOR-rate loans. In connection with the Silver Point
borrowings, we were required to maintain interest-rate
arrangements to minimize exposure to interest-rate fluctuations
on an aggregate notional principal amount of a portion of the
loan.
In connection with the Silver Point borrowing, we issued two
warrants to purchase an aggregate amount of
3,514,933 shares of our common stock at an exercise price
of $0.01 per share. These warrants were not exercisable until
after 90 days following the closing date of the Silver
Point borrowings and will expire on April 11, 2016. The
warrants were valued using the Black-Scholes Model and were
recorded in our consolidated balance sheet as a discount to the
loan amount of $9.1 million at inception and were being
amortized into interest expense over the five-year term of the
credit facility.
F-21
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In February 2007 we entered into Amendment No. 4 and Waiver
to Credit and Guaranty Agreement (the SP
Amendment) with Silver Point. Under the SP Amendment,
Silver Point provided to the Company an additional term loan in
the original principal amount of $3,762,753, (the
Supplemental Term Loan). The terms of the
Supplemental Term Loan were identical to the original terms of
the Silver Point Debt. Amounts borrowed under the Supplemental
Term Loan were used for working capital and other general
corporate purposes.
In February 2007, in connection with the SP Amendment, we issued
warrants to Silver Point to purchase an aggregate of
415,203 shares of common stock at an exercise price of
$0.01 per share. The warrants were fair-valued using the
Black-Scholes Model, recorded in our consolidated balance sheet
at inception as a discount to the loan amount of
$2.2 million and were being amortized, as an interest
expense, over the
five-year
term of the credit facility.
The fair value of the warrants issued in connection with the
issuance of the debt to Silver Point Debt (noted above) was
determined using the Black-Scholes Model with the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
Warrant Issue Date:
|
|
|
|
April 2006
|
|
|
February 2007
|
|
|
Expected life (in years)
|
|
|
10
|
|
|
|
10
|
|
Expected volatility
|
|
|
101.21
|
%
|
|
|
105.96
|
%
|
Expected dividend rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Risk-free interest rate
|
|
|
4.44
|
%
|
|
|
4.58
|
%
|
The proceeds of the borrowings from Silver Point in April 2006
and February 2007 were allocated to the debt and the warrants by
measuring each components relative fair value. The debt
agreements were entered into at market value, and, as such, the
difference between the total proceeds received and the fair
value of the warrants represented both the residual and relative
fair value of the debt. Therefore, the debt and equity
components of the arrangement were recorded at their relative
fair values.
The fair values of $9.1 million and $2.2 million for
the warrants issued in April 2006 and February 2007,
respectively, were recorded as additional paid-in capital and as
discounts to the loan amount in our consolidated balance sheets
upon issuance. The loan-discount amounts were being amortized
into interest expense over the five-year term of the credit
facility.
The Silver Point Debt was paid in full in June 2007, as
discussed above.
(c) Note
Payable to Atlantic Investors, LLC
In January 2003 we entered into a $10.0 million Loan and
Security Agreement (the Atlantic Loan) with
Atlantic, a related party. The Atlantic Loan bore interest rate
at 8% per annum. In April 2006 we entered into an Amended and
Restated Loan Agreement with Atlantic, in connection with, and
as a condition precedent to, the credit facility with Silver
Point, which agreement amended and restated the existing loan
agreement between us and Atlantic. Under the Atlantic amendment
and related transaction documents, Atlantic agreed (i) to
reduce the availability of the Atlantic Loan to the amount
outstanding as of April 2006 of $3.0 million and
approximately $0.7 million of accrued interest,
(ii) that this indebtedness is to become an unsecured
obligation of the Company, (iii) to subordinate this
indebtedness to amounts we owed Silver Point and (iv) to
extend the maturity date of the loan to the date that is
90 days after the earlier of (a) April 11, 2011,
and (b) the date all obligations under the Silver Point
Debt have been paid in full.
The principal and accrued interest of the Atlantic Loan from
time to time became convertible into shares of our common stock
at $2.81 per share (the market price of such stock on
April 11, 2006), 90 days following April 11, 2006.
F-22
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In January 2007 Atlantic converted all of the remaining
principal and accrued interest of $3,863,610 into
1,374,950 shares of our common stock.
(d) Revolving
Credit Facility with Atlantic Investors, LLC
On April 11, 2006, we entered into an unsecured
subordinated Revolving Credit Agreement with Atlantic in
connection with, and as a condition precedent to, the Silver
Point Debt, whereby we established a subordinated
revolving-credit facility with Atlantic (the Atlantic
Facility) in an amount not to exceed $5 million.
Credit advances under the Atlantic Facility bore interest at
either (a) 7% per annum plus the greater of (i) Prime
Rate or (ii) the Federal Funds Effective Rate plus 3% or
(b) 8% plus LIBOR. Interest was, at our option, to be paid
in cash or promissory notes. All outstanding amounts under the
Atlantic Facility were to be paid in full by us no later than
the date that is 90 days after the earlier of
(a) April 11, 2011, and (b) the date all
obligations under the Silver Point Debt have been paid in full.
The Atlantic Facility was terminated in connection with our debt
refinancing in June 2007.
(e) Notes
Payable to the AppliedTheory Estate
As part of CBTMs acquisition of certain AppliedTheory
assets, CBTM made and issued two unsecured promissory notes
totaling $6.0 million (the Estate
Liability) due to the AppliedTheory estate in June
2006. The Estate Liability bears interest at 8% per annum, which
is due and payable annually. In July 2006 we reached agreement
with the secured creditors of AppliedTheory to settle certain
claims against the estate of AppliedTheory and repay the
outstanding notes including accrued interest for approximately
$5.0 million. At July 31, 2007, we had approximately
$0.5 million in accrued interest related to these notes. In
June 2008 the settlement agreement was approved by the
bankruptcy court, the $5.0 million was released from escrow
and we recognized a gain on the settlement of $1.6 million.
|
|
(10)
|
Fair
Value Measures and Derivative Instruments
|
In May 2006 we purchased an interest-rate cap on a notional
amount of 70% of the then-outstanding principal of the Silver
Point Debt (see Note 9). We paid approximately $320,000 to
lock in a maximum variable interest rate of 6.5% that could be
charged on the notional amount during the term of the agreement.
In June 2007, upon refinancing of the Silver Point Debt, we
maintained the interest-rate cap, as the Credit Agreement
required a minimum notional amount of 50% of the outstanding
principal of the Credit Agreement (see Note 9). In October
2007, in connection with the execution of the Amended Credit
Agreement in September 2007, we purchased a second interest-rate
cap, totaling $10.0 million of notional amount, as the
Amended Credit Agreement required a minimum notional amount of
50% of all Indebtedness, as defined in the Amended Credit
Agreement. As of July 31, 2007, the fair value of the
interest-rate cap was approximately $0.1 million, which is
included in Other Assets in our consolidated balance
sheets. The change in fair value during fiscal year 2007 of
approximately $0.1 million was charged to Other income,
net, during the fiscal year ended July 31, 2007.
In October 2007, in connection with the execution of the Amended
Credit Agreement in September 2007, (See Note 9), we
purchased a second interest-rate cap, totaling
$10.0 million of notional amount, as the Amended Credit
Agreement required that we hedge a minimum notional amount of
50% of all Indebtedness, as defined in the Amended Credit
Agreement. In March and July 2009, we amended the interest-rate
cap previously purchased to increase the notional amount by
$3.0 million and $3.0 million, respectively, to a
total of $16.0 million. As of July 31, 2009, the fair
value of these interest-rate derivatives (representing a
notional amount of approximately $55.8 million at
July 31, 2009) was approximately $0.1 million,
which is included in Other Assets in our
consolidated balance sheets. The change in fair value during
fiscal year 2009 of approximately $0.1 million was charged
to Other income, net, during the fiscal year ended July 31,
2009.
F-23
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Silver Point Debt carried a prepayment penalty that was
determined to be an embedded derivative and required to be
separately valued from the Silver Point Debt (see Note 9).
In accordance with SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, we
calculated the fair value of this embedded derivative to be
approximately $867,000 upon the closing of the Silver Point
Debt, the total of which we included in our consolidated balance
sheets at the time of issuance as a discount to the Silver Point
Debt with an offsetting amount included in Other long-term
liabilities. Major assumptions used to determine the fair
value of the embedded derivative included future value of our
common stock and the probability of early repayment of the
Silver Point Debt. In accordance with SFAS 133,
amortization of the embedded derivative, calculated on a
straight-line basis, was included in interest expense and
reduced the discount to the Silver Point Debt over the term that
the Silver Point Debt was outstanding. The value of the embedded
derivative was evaluated quarterly with changes in the value of
the embedded derivative recorded as an adjustment to previously
recorded interest expense and to the discount to the Silver
Point Debt, with an offsetting adjustment to Other
long-term liabilities. Upon execution of the Credit
Agreement (see Note 9), the unamortized discount to the
debt and the fair value of the embedded derivative were written
off and included in Loss on Debt Extinguishment in our
consolidated statement of operations for the fiscal year ended
July 31, 2007.
Fair value of derivative financial
instruments. Derivative instruments are recorded
in the balance sheet as either assets or liabilities, measured
at fair value. Changes in fair value are recognized currently in
earnings. We have utilized interest-rate derivatives to mitigate
the risk of rising interest rates on a portion of our
floating-rate debt and have not qualified for hedge accounting.
The interest-rate differentials to be received under such
derivatives are recognized as adjustments to interest expense,
and the changes in the fair value of the instruments is
recognized over the life of the agreements as Other income
(expense), net. The principal objectives of the derivative
instruments are to minimize the risks and reduce the expenses
associated with financing activities. We do not use derivative
financial instruments for trading purposes.
Effective August 1, 2008, we adopted SFAS 157
Fair Value Measurements, which establishes a
framework for measuring fair value and requires enhanced
disclosures about fair-value measurements. SFAS 157
requires disclosure about how fair value is determined for
assets and liabilities and establishes a hierarchy for which
these assets and liabilities must be grouped, based on
significant levels of inputs as follows:
Level 1 quoted prices in active markets
for identical assets or liabilities;
Level 2 quoted prices in active markets
for similar assets and liabilities and inputs that are
observable for the asset or liability; and
Level 3 unobservable inputs, such as
discounted-cash-flow models or valuations.
The determination of where assets and liabilities fall within
this hierarchy is based upon the lowest level of input that is
significant to the fair-value measurement. Our interest-rate
derivatives required to be measured at fair value on a recurring
basis, and where they are classified within the hierarchy, as of
July 31, 2009, are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Interest-rate derivatives
|
|
|
|
|
|
$
|
93,000
|
|
|
|
|
|
|
$
|
93,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
93,000
|
|
|
|
|
|
|
$
|
93,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-rate derivatives. The initial fair
values of these instruments were determined by our
counterparties, and we continue to value these securities based
on quotes from our counterparties. Our interest-rate derivative
is classified within Level 2, as the valuation inputs are
based on quoted prices and market-observable data. The change in
fair value for the fiscal years ended July 31, 2009 and
2008, was a loss of approximately $73,000 and $91,000,
respectively.
F-24
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair value of non-derivative financial
instruments. Long-term debt is carried at
amortized cost. However, we are required to estimate the fair
value of long-term debt under SFAS 107,
Disclosures about Fair Value of Financial
Instruments. The fair value of the term loan was
determined using current trading prices obtained from indicative
market data on the term debt.
A summary of the estimated fair value of our financial
instruments as of July 31, 2009 and 2008, follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Term loan short term
|
|
$
|
546
|
|
|
$
|
368
|
|
|
$
|
1,100
|
|
|
$
|
1,001
|
|
Term loan long term
|
|
|
106,154
|
|
|
|
71,654
|
|
|
|
107,850
|
|
|
|
98,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total term loan
|
|
$
|
106,700
|
|
|
$
|
72,022
|
|
|
$
|
108,950
|
|
|
$
|
99,145
|
|
Revolver
|
|
$
|
10,018
|
|
|
$
|
6,261
|
|
|
$
|
5,000
|
|
|
$
|
4,300
|
|
|
|
(11)
|
Commitments
and Contingencies
|
(a) Leases
Abandoned Leased Facilities. During fiscal
year 2003 we abandoned our administrative space on the second
floor of our 400 Minuteman Road, Andover, Massachusetts, leased
location. We continue to maintain and operate our data center on
the first floor of the building. While we remain obligated under
the terms of the lease for the rent and other costs associated
with the second floor of the building, we ceased to use the
space on January 31, 2003. Therefore, in accordance with
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, we recorded a charge
to our earnings in fiscal year 2003 of approximately
$5.4 million to recognize the costs of exiting the space.
The liability is equal to the total amount of rent and other
direct costs for the period of time the second floor of the
building was expected to remain unoccupied plus the present
value of the amount by which the rent paid by us to the landlord
exceeds any rent paid to us by a tenant under the terms of a
sublease over the remainder of the initial lease term, which is
January 2012. During fiscal year 2004, $2.2 million of our
future payments to the landlord of our 400 Minuteman Road
facility were transferred into a note payable, which was paid in
full as of July 31, 2007.
During fiscal year 2004, we abandoned administrative office
spaces in Houston, Texas; San Jose, California; and
Syracuse, New York. While we remain obligated under the terms of
these leases for the rent and other costs associated with these
leases, we made the decision to cease using these spaces during
fiscal year 2004 and have no foreseeable plans to occupy them in
the future. Therefore, in accordance with
SFAS No. 146, we recorded a charge to our earnings in
fiscal year 2004 of approximately $2.7 million to recognize
the costs of exiting these spaces. The liability is equal to the
total amount of rent and other direct costs for the period of
time the spaces are expected to remain unoccupied plus the
present value of the amount by which the rent paid by us to the
landlord exceeds any rent paid to us by a tenant under a
sublease over the remainder of the lease terms, which expired in
October 2008 for Houston, Texas; November 2006 for
San Jose, California; and December 2007 for Syracuse, New
York.
We recorded $1.2 million of net lease-impairment charges
during fiscal year 2005, resulting from costs associated with
the abandonment of administrative space at 10 Maguire Road in
Lexington, Massachusetts; adjustments relating to lease
modifications for our Syracuse, New York, and Vienna, Virginia,
facilities and revisions in assumptions associated with other
impaired facilities, offset by a $0.6 million impairment
credit to operating expense, resulting from a settlement with
the landlord of our abandoned property in La Jolla,
California.
We recorded $1.4 million of net lease-impairment charges
during fiscal year 2006, resulting from an adjustment to a lease
modification for our Chicago facility and revisions in
assumptions associated with other
F-25
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
impaired facilities, offset by a $0.2 million impairment
credit to operating expense, resulting from a settlement with
the landlord of our abandoned property in Lexington,
Massachusetts.
We recorded $0.2 million of net lease-impairment recoveries
during fiscal year 2007, resulting from an adjustment to a lease
modification for our Chicago facility and revisions in
assumptions associated with other impaired facilities, offset by
a $0.06 million impairment charge to operating expenses
resulting from the abandonment of certain space in our Syracuse,
New York, facility.
All impairment-expense amounts recorded are included in the
caption Impairment, restructuring and other, net, in
the accompanying consolidated statements of operations.
Details of activity in the lease-exit accrual for the year ended
July 31, 2009, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting
|
|
|
Payments, Less
|
|
|
|
|
Lease Abandonment
|
|
Balance at
|
|
|
|
|
|
and Other
|
|
|
Accretion of
|
|
|
Balance at
|
|
Costs for:
|
|
July 31, 2008
|
|
|
Expense
|
|
|
Adjustments
|
|
|
Interest
|
|
|
July 31, 2009
|
|
|
Andover, MA
|
|
$
|
262
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(102
|
)
|
|
$
|
160
|
|
Chicago, IL
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
(250
|
)
|
|
|
|
|
Houston, TX
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
(113
|
)
|
|
|
|
|
Syracuse, NY
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
Santa Clara, CA
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
(77
|
)
|
|
|
|
|
Herndon, VA
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
34
|
|
Minneapolis, MN
|
|
|
506
|
|
|
|
|
|
|
|
|
|
|
|
(272
|
)
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,285
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(857
|
)
|
|
$
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum annual rental commitments under operating leases and
other commitments are, as of July 31, 2009, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
Description
|
|
Total
|
|
|
1 Year
|
|
|
Year 2
|
|
|
Year 3
|
|
|
Year 4
|
|
|
Year 5
|
|
|
Year 5
|
|
|
|
(In thousands)
|
|
|
Short/long-term debt
|
|
$
|
116,757
|
|
|
$
|
10,603
|
|
|
$
|
1,092
|
|
|
$
|
1,092
|
|
|
$
|
103,970
|
|
|
$
|
|
|
|
$
|
|
|
Interest on debt(a)
|
|
|
39,936
|
|
|
|
11,456
|
|
|
|
9,945
|
|
|
|
9,847
|
|
|
|
8,688
|
|
|
|
|
|
|
|
|
|
Capital leases(b)
|
|
|
22,447
|
|
|
|
4,796
|
|
|
|
2,799
|
|
|
|
2,320
|
|
|
|
2,290
|
|
|
|
2,290
|
|
|
|
7,952
|
|
Bandwidth commitments
|
|
|
1,592
|
|
|
|
1,535
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property leases(b)(c)(d)
|
|
|
84,945
|
|
|
|
10,162
|
|
|
|
9,113
|
|
|
|
9,064
|
|
|
|
9,046
|
|
|
|
9,009
|
|
|
|
38,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
265,677
|
|
|
$
|
38,552
|
|
|
$
|
23,006
|
|
|
$
|
22,323
|
|
|
$
|
123,994
|
|
|
$
|
11,299
|
|
|
$
|
46,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Interest on debt assumes that LIBOR is fixed at 3.15% and that
our leverage ratio drops below 3:1 as of January 31, 2010,
resulting in a 2% interest-rate decrease. The 2% accruing PIK
interest will be paid in full at the end of the loan term. |
|
(b) |
|
Future commitments denominated in foreign currency are fixed at
the exchange rates as of July 31, 2009. |
|
(c) |
|
Amounts exclude certain common area maintenance and other
property charges that are not included within the lease payment. |
|
(d) |
|
On February 9, 2005, we entered into an assignment and
assumption agreement with a Las Vegas-based company, whereby
this company bought our right to use 29,000 square feet in
our Las Vegas data center, along with the infrastructure and
equipment associated with this space. In exchange, we received
an initial payment of $600,000 and were to receive $55,682 per
month over two years. On May 31, 2006, we |
F-26
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
received full payment for the remaining unpaid balance. This
agreement shifts the responsibility for management of the data
center and its employees, along with the maintenance of the
facilitys infrastructure, to this Las Vegas-based company.
Pursuant to this agreement, we have subleased back
2,000 square feet of space, allowing us to continue
servicing our existing customer base in this market. Commitments
related to property leases include an amount related to the
2,000-square-foot sublease. |
Total bandwidth expense for bandwidth commitments was
$4.7 million, $5.9 million, and $4.0 million for
the fiscal years ended July 31, 2009, 2008 and 2007,
respectively.
Total rent expense for property leases was $13.4 million,
$13.2 million and $11.0 million for the fiscal years
ended July 31, 2009, 2008 and 2007, respectively.
With respect to the property-lease commitments listed above,
certain cash amounts are restricted pursuant to terms of lease
agreements with landlords. At July 31, 2009, restricted
cash of approximately $1.8 million related to these lease
agreements consisted of certificates of deposit and a treasury
note and are recorded at cost, which approximates fair value.
(b) Legal
Matters
IPO
Securities Litigation
In 2001, lawsuits naming more than 300 issuers and over 50
investment banks were filed in the United States District Court
for the Southern District of New York and assigned to the
Honorable Shira A. Scheindlin (the Court) for
all pretrial purposes (the IPO Securities
Litigation). Between June 13, 2001, and
July 10, 2001, five purported
class-action
lawsuits seeking monetary damages were filed against us; Joel B.
Rosen, our then chief executive officer; Kenneth W. Hale, our
then chief financial officer; Robert E. Eisenberg, our then
president; and the underwriters of our initial public offering
of October 22, 1999. On September 6, 2001, the Court
consolidated the five similar cases and a consolidated, amended
complaint was filed on April 19, 2002 (the
Class-Action
Litigation) against us and Messrs. Rosen, Hale
and Eisenberg (collectively, the NaviSite
Defendants) and against underwriter defendants
Robertson Stephens (as
successor-in-interest
to BancBoston), BancBoston, J.P. Morgan (as
successor-in-interest
to Hambrecht & Quist), Hambrecht & Quist and
First Albany. The plaintiffs uniformly alleged that all
defendants, including the NaviSite Defendants, violated
Sections 11 and 15 of the Securities Act,
Sections 10(b) and 20(a) of the Exchange Act and
Rule 10b-5
by issuing and selling our common stock in the offering, without
disclosing to investors that some of the underwriters, including
the lead underwriters, allegedly had solicited and received
undisclosed agreements from certain investors to purchase
aftermarket shares at pre-arranged, escalating prices and also
to receive additional commissions or other compensation from
those investors. The
Class-Action
Litigation seeks certification of a plaintiff class consisting
of all persons who acquired shares of our common stock between
October 22, 1999 and December 6, 2000. The claims
against Messrs. Rosen, Hale and Eisenberg were dismissed
without prejudice on November 18, 2002, in return for their
agreement to toll any statute of limitations applicable to those
claims. Plaintiffs did not specify the amount of damages they
sought in the Class Action Litigation. On October 13,
2004, the Court certified a class in a
sub-group of
cases (the Focus Cases) in the IPO Securities
Litigation, which was vacated on December 5, 2006, by the
United States Court of Appeals for the Second Circuit (the
Second Circuit). The
Class-Action
Litigation is not one of the Focus Cases.
Plaintiffs-appellees January 5, 2007, petition with
the Second Circuit for rehearing and rehearing en banc was
denied by the Second Circuit on April 6, 2007. Plaintiffs
renewed their certification motion in the Focus Cases on
September 27, 2007, as to redefined classes pursuant to
Fed. R. Civ. P. 23(b)(3) and 23(c)(4). On October 3, 2008,
after briefing in connection with the renewed
class-certification
proceedings was completed, plaintiffs withdrew without prejudice
the renewed certification motion in the Focus Cases. On
October 10, 2008, the Court confirmed plaintiffs
request and directed the clerk to close the renewed
certification motion. On April 2, 2009, a stipulation and
agreement of settlement among the plaintiffs, issuer defendants
and underwriters was submitted to the Court for preliminary
approval (the Proposed Global
F-27
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Settlement). Pursuant to the Proposed Global
Settlement, all claims against the NaviSite Defendants would be
dismissed with prejudice and our pro rata share of the
settlement consideration would be fully funded by insurance. On
June 10, 2009, the Court issued an opinion and order
granting preliminary approval of the Proposed Global Settlement,
preliminarily certifying for settlement purposes only the
proposed classes and directing issuance of notice to putative
settlement class members. On September 10, 2009, the Court
held a settlement fairness hearing. On October 5, 2009, the
Court entered an opinion and order granting final approval to
the Proposed Global Settlement and directing the clerk to close
each of the more than 300 actions comprising the IPO Securities
Litigation, including the
Class-Action
Litigation. Any appeal of the Courts final approval of the
Proposed Global Settlement must be filed within 30 days of
the date judgment is entered.
The settlement remains subject to numerous conditions, including
potential appeals, and there can be no assurance that
Courts approval of the Proposed Global Settlement will be
upheld in all respects if it is appealed. We believe that the
allegations against us are without merit, and if the litigation
continues, we intend to vigorously defend against the
plaintiffs claims. Due to the inherent uncertainty of
litigation, and because the settlement remains subject to
numerous conditions and potential appeals, we are not able to
predict the possible outcome of the suits and their ultimate
effect, if any, on our business, financial condition, results of
operations or cash flows.
On October 12, 2007, a purported shareholder of the Company
filed a complaint for violation of Section 16(b) of the
Exchange Act, which provision prohibits short-swing trading,
against two of the underwriters of the public offering at issue
in the Class Action Litigation. The complaint is pending in
the United States District Court for the Western District of
Washington and is captioned Vanessa Simmonds v. Bank of
America Corp., et al. An amended complaint was filed on
February 28, 2008. Plaintiff seeks the recovery of
short-swing profits from the underwriters on behalf of the
Company, which is named only as a nominal defendant and from
which no recovery is sought. Similar complaints have been filed
against the underwriters of the public offerings of
approximately 55 other issuers also involved in the IPO
Securities Litigation. A joint status conference was held on
April 28, 2008, at which the Court stayed discovery and
ordered the parties to file motions to dismiss by July 25,
2008. On July 25, 2008, we joined 29 other nominal
defendant issuers and filed a joint motion to dismiss the
amended complaint. On the same date, the underwriter defendants
also filed a joint motion to dismiss. On September 8, 2008,
plaintiff filed her oppositions to the motions. The replies in
support of the motions to dismiss were filed on October 23,
2008. Oral arguments on all motions to dismiss were held on
January 16, 2009, at which time the Court took the pending
motions to dismiss under advisement. On March 12, 2009, the
Court entered an order granting the motions to dismiss filed by
the issuer defendants and the underwriter defendants.
Specifically, the Court granted the issuer defendants
joint motion to dismiss, dismissing the complaint without
prejudice on the grounds that the plaintiff had failed to make
an adequate demand on us prior to filing her complaint. In its
order, the Court stated that it would not permit the plaintiff
to amend her demand letters while pursuing her claims in the
litigation. Because the Court dismissed the case on the grounds
that it lacked subject-matter jurisdiction, it did not
specifically reach the issue of whether the plaintiffs
claims were barred by the applicable statute of limitations.
However, the Court also granted the underwriter defendants
joint motion to dismiss with respect to cases involving
non-moving issuers, holding that the cases were barred by the
applicable statute of limitations because the issuers
shareholders had notice of the potential claims more than five
years prior to filing suit.
The plaintiff filed a notice of appeal with the Ninth Circuit
Court of Appeals on April 10, 2009. The underwriter
defendants filed a cross-appeal in each of the cases, wherein
the issuers moved for dismissal (including the appeal relating
to our IPO) and the claims against them were dismissed without
prejudice. The parties moved to consolidate the 54 cases for
purposes of appeal, which the Ninth Circuit granted. The
plaintiffs opening brief on appeal was filed on
August 26, 2009. The issuers (including us) and the
underwriters responses were filed on October 2, 2009.
The plaintiff may file a reply brief by November 2, 2009,
and the underwriters may file a reply brief on their
cross-appeal by November 17, 2009. We do not expect that
this claim will have a material impact on our financial position
or results of operations.
F-28
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
litigation
Alabanza
Class Actions
In October 2007, we, pursuant to our integration plans, closed
the former Alabanza data center in Baltimore, Maryland, and
moved all equipment to our data center in Andover, Massachusetts
(the Data Migration). In connection with the
Data Migration, we encountered unforeseen circumstances that led
to extended downtime for certain of our customers.
On November 14, 2007, Pam Kagan Marketing, Inc., d/b/a
Earthplaza, filed a complaint in the United States District
Court for the District of Maryland (the
Court) against us and Alabanza seeking a
class status for the customers who experienced web-hosting
service interruptions as a result of the Data Migration (the
November
Class-Action
Litigation). The total damages claimed approximate
$5.0 million. On January 4, 2008, Palmatec, LLC; NYC
Merchandise; and Taglogic RFID, Ltd., filed a complaint in the
Maryland State Court, Circuit Court for Baltimore, against us
seeking a class status for the direct customers (the
Direct Subclass) and the entities that
purchased hosting services from those direct customers (the
Non-Privity Subclass) (the January
Class-Action
Litigation). The total damages claimed approximate
$10.0 million. The January
Class-Action
Litigation was removed to the Court by us. On May 11, 2008,
the Court issued an order consolidating the two cases. On
August 5, 2008, the plaintiffs in the January
Class-Action
Litigation voluntarily withdrew their case, without prejudice,
because of the inadequacy of their class representative. On
January 7, 2009, the District Court issued a Preliminary
Approval Order in Connection with Settlement Proceedings,
providing initial approval to a proposed class settlement. The
settlement provides for a payment to each Alabanza customer of
four times their respective minimum monthly recurring fee, with
a total maximum liability of $1.7 million, plus attorneys
fees and incentive fees. After a May 8, 2009, hearing, the
District Court issued an order granting final approval of the
settlement. The insurance company has funded the escrow account
out of which payments will be made under this settlement. As of
July 31, 2009 less than $0.3 million of the escrow had
yet to be disbursed.
La Touraine,
Inc.
On November 26, 2007, La Touraine, Inc.
(LTI), commenced an arbitration against us
with the American Arbitration Association, File No. 74 494
Y 01377 07 LUCM (the Demand). The Demand
alleged that Jupiter Hosting, Inc. (Jupiter),
an entity that we acquired in 2007, breached two agreements with
LTI and fraudulently induced both of those agreements. LTI
contended that we were liable for Jupiters alleged
misconduct and sought rescission of those contracts and damages.
LTI also claimed that we intentionally interfered with the
operations of certain LTI websites, causing damages. LTIs
Demand followed our demand on LTI for payment of money due under
the agreements that LTI then alleged Jupiter induced by fraud.
We then counterclaimed in the arbitration. On June 26,
2009, we entered into a settlement agreement with LTI and
certain of its affiliates under which we and certain of our
affiliates and LTI settled all pending litigation, resolved all
claims and signed a full waiver and release of all claims, in
each case, by and between the parties. Under the settlement
agreement, we paid $5.0 million to LTI and agreed to pay up
to approximately $730,000, minus certain fees, that may be
recovered from the existing escrow account between the former
stockholders of Jupiter and us.
F-29
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Total income tax expense (benefit) for the years ending
July 31, 2009, 2008 and 2007, consisted of the following:
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July 31, 2009
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July 31, 2008
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July 31, 2007
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Current
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Deferred
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Total
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Current
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Deferred
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Total
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Current
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Deferred
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Total
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(In thousands)
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Federal
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$
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$
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1,445
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$
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1,445
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$
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$
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1,461
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$
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1,461
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$
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$
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868
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$
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868
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Foreign
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(78
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(78
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State
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449
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449
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451
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451
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305
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305
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$
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$
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1,894
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$
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1,894
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$
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$
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1,834
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$
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1,834
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$
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$
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1,173
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1,173
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The actual tax expense for the years ending July 31, 2009,
2008 and 2007, differs from the expected tax expense for the
three years as follows:
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July 31, 2009
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July 31, 2008
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July 31, 2007
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(In thousands)
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Computed expected tax expense (benefit)
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$
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(4,494
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$
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(2,087
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$
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(8,411
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State taxes, net of federal income tax benefit
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296
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298
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201
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Losses not benefited
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6,092
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3,623
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9,383
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Total
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$
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1,894
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$
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1,834
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$
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1,173
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Temporary differences between the financial statement carrying
and tax bases of assets and liabilities that give rise to
significant portions of deferred tax assets (liabilities) are
comprised of the following:
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July 31, 2009
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July 31, 2008
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(In thousands)
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Deferred tax assets:
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Accruals and reserves
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$
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12,960
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$
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12,407
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Loss carryforwards
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73,116
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71,259
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Depreciation and amortization
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12,021
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11,818
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Total deferred tax assets
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$
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98,097
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$
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95,484
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Less: Valuation allowance
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(98,097
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(95,484
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Deferred tax liabilities:
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Amortization of tax goodwill
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$
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(7,492
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$
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(5,597
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Net deferred assets/(liabilities)
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$
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(7,492
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$
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(5,597
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The valuation allowance increased by $2.6 million and
$10.2 million for the years ended July 31, 2009 and
2008, respectively.
We have recorded a full valuation allowance against our deferred
tax assets since we believe that, after considering all the
available objective evidence-both positive and negative,
historical and prospective, with greater weight given to
historical evidence-it is not more likely than not that these
assets will be realized.
We may have experienced a change in ownership as defined in
Section 382 of the Internal Revenue Code during calendar
year 2008. An analysis is currently ongoing to determine if an
ownership change did take place. An ownership change could
severely restrict the use of our net operating losses going
forward. As a result of a previous change in ownership that
occurred in September 2002, the utilization of our federal and
F-30
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
state tax net operating losses generated prior to this 2002
change is subject to an annual limitation of approximately
$1.2 million (not including any further restrictions that
may apply based on a potential ownership change in 2008). We
expect that, as a result of this limitation, a substantial
portion of our federal and state net operating loss
carryforwards will expire unused.
We have net operating loss carryforwards for federal and state
tax purposes of approximately $187.3 million after taking
into consideration net operating losses expected to expire
unused due to the 2002 Section 382 limitation for ownership
changes. The federal net operating loss carryforwards will
expire from fiscal year 2015 to fiscal year 2029 and the state
net operating loss carryforwards will expire from fiscal year
2012 to fiscal year 2029. The utilization of these net operating
loss carryforwards may be further limited if we experience
additional ownership changes as defined in Section 382 of
the Internal Revenue Code in calendar year 2008, as described
above, or in future years. We have foreign net operating loss
carryforwards of $4.7 million that may be carried forward
indefinitely.
As of July 31, 2009, we have not provided for
U.S. deferred income taxes on the undistributed earnings of
approximately $1.9 million for our
non-U.S. subsidiaries since these earnings are to be
reinvested indefinitely. It is not practicable to determine the
taxes on such undistributed earnings.
Our subsidiary in India benefits from certain tax incentives
provided to software and technology firms under Indian tax laws.
These incentives presently include an exemption from payment of
Indian corporate income taxes for a period of ten consecutive
years of operation of software development facilities designated
as Software Technology Parks. This exemption will
expire by 2011.
We currently file income tax returns in the US and the UK which
are subject to audit by federal, state, and international tax
authorities. These audits can involve complex matters that may
require an extended period of time for resolution. We remain
subject to US federal and state income tax examinations for the
tax years 1999 through 2008, and to UK income tax examinations
for the tax year 2008. One state income tax examination was
concluded in 2009. This state audit resulted in no income tax
due.
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(13)
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Stockholders
Equity
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Issuance
of Common Stock
In April 2006 we entered into a senior secured term loan and
senior secured revolving-credit facility with Silver Point to
repay certain maturing debt and increase borrowing available for
corporate purposes. In connection with this facility, we issued
two warrants to purchase an aggregate of 3,514,933 shares
of our common stock at an exercise price of $0.01 per share. The
warrants will expire in April 2016. The warrants were valued
using the Black-Scholes Model and recorded in our consolidated
balance sheet as a discount to the loan amount, based on a
determined fair value of $9.1 million. In February 2007, in
connection with the Supplemental Term Loan, we issued warrants
to purchase an aggregate of 415,203 shares of our common
stock at an exercise price of $0.01 per share. The warrants will
expire in February 2017. The warrants were valued using the
Black-Scholes Model and recorded in our consolidated balance
sheet as a discount to the loan amount, based on a determined
fair value of $2.2 million. During the years ended
July 31, 2008 and 2007, Silver Point exercised 999,500 and
1,730,505 warrants, respectively, to purchase shares of our
common stock. At July 31, 2009, the remaining outstanding
warrants were 1,200,131.
The value of all warrants was being amortized into interest
expense, using the effective-interest method over the five-year
term of the credit facility. For the years ended July 31,
2007 and 2006, respectively, we amortized $1.9 million and
$0.6 million into interest expense associated with these
warrants.
F-31
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2007 the remaining unamortized value of the warrants was
charged to income in connection with our execution of the Credit
Agreement and included in Loss on Debt Extinguishment in our
consolidated statement of operations for the fiscal year ended
July 31, 2007.
In January 2007 Atlantic converted all the remaining principal
and accrued interest of $3,863,610 on the Atlantic Loan into
1,374,950 shares of our common stock.
Redeemable
Preferred Stock
In connection with the acquisition of netASPx, we issued
3,125,000 shares of the Preferred Stock. The Preferred
Stock was initially recorded at its fair value at the date of
issue of $24.9 million. The Preferred Stock accrues PIK
dividends at 8% per annum, increasing to 10% per annum in
September 2008 and 12% per annum in March 2009. During the
12 months ending July 31, 2009 and 2008, we issued
344,560 and 194,887 shares of Preferred Stock dividends,
respectively. The Preferred Stock is convertible into our common
stock, at the option of the holder, at $8.00 per share, adjusted
for stock splits, dividends and other similar adjustments. The
Preferred Stock carries customary liquidation preferences
providing it preference to common shareholders in the event of a
liquidation, subject to certain limitations, as defined. We can
redeem the Preferred Stock at any time at $8.00 per share, plus
accrued but unpaid PIK dividends thereon. On or after August
2013, the Preferred Stock is redeemable at the option of the
holders at the then-applicable redemption price. For matters
that require stockholder approval, the holders of the Preferred
Stock are entitled to vote as one class together with the
holders of common stock on an as-converted basis.
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(14)
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Stock-Option
Plans and Non-Vested Stock Awards
|
(a) NaviSite
1998 Equity Incentive Plan
In December 1998 our board of directors and stockholders
approved the 1998 Equity Incentive Plan, as amended (the
1998 Plan). Under the 1998 Plan nonqualified
stock options or incentive stock options may be granted to our
or our affiliates employees, directors, and consultants,
as defined, up to a maximum number of shares of our common stock
not to exceed 1,000,000 shares. Our board of directors
administers this plan, selects the individuals who are eligible
to be granted options under the 1998 Plan and determines the
number of shares and exercise price of each option. The chief
executive officer, upon authority granted by the board of
directors, is authorized to approve the grant of options to
purchase common stock under the 1998 Plan to certain persons.
Options are granted at fair market value. The majority of the
outstanding options under the 1998 Plan had a ten-year maximum
term and vested over a one-year period, with 50% vesting on the
date of the grant and the remaining 50% vesting monthly over the
following 12 months. On December 9, 2003, our
stockholders approved the 2003 Stock Incentive Plan, and no
additional options will be granted under the 1998 Plan.
F-32
NAVISITE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table refle