NAVISITE INC - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended April 30, 2003
or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission file number: 0-27597

NaviSite, Inc.

(Exact name of registrant as specified in its charter)


Delaware		52-2137343
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)

400 Minuteman Road Andover, Massachusetts (Address of principal executive offices)		01810 (Zip Code)

(978) 682-8300

(Registrant’s telephone number, including area code)

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of June 16, 2003, there were 12,852,709 shares outstanding of the registrant’s common stock, par value $.01 per share.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
Ex-10.1 Offer of Employment Letter
Ex-10.2 Agreement, dated as of April 4, 2003
Ex-10.3 Severance Agreement and General Release
Ex-10.4 Accounts Receivable Financing Agreement
EX-10.5 Registration Rights Agreement
Ex-10.6 Intellectual Property Security Agreement
Ex-10.7 Form of Warrant, dated as of May 27, 2003
Ex-10.8 First Amendment to the Loan and Security
Ex-99.1 Certifications

NAVISITE, INC.

FORM 10-Q FOR THE QUARTER ENDED APRIL 30, 2003

INDEX


		Page
		Number

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements		2
	Consolidated Balance Sheets as of April 30, 2003 (unaudited) and July 31, 2002		2
	Consolidated Statements of Operations for the three and nine months ended April 30, 2003 and 2002 (unaudited)		3
	Consolidated Statements of Cash Flows for the nine months ended April 30, 2003 and 2002 (unaudited)		4
	Notes to Interim Consolidated Financial Statements (unaudited)		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		44
Item 4.	Controls and Procedures		44
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		45
Item 2.	Changes in Securities and Use of Proceeds		45
Item 3.	Defaults Upon Senior Securities		45
Item 4.	Submission of Matters to a Vote of Security Holders		45
Item 5.	Other Information		45
Item 6.	Exhibits and Reports on Form 8-K		45
	Signature		45

PART I. FINANCIAL INFORMATION


Item 1.	*Financial Statements*

NAVISITE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


			4/30/2003			7/31/2002


			(In thousands, except par value)
			(unaudited)
Assets
Current assets:
	Cash and cash equivalents		$	7,346		$	21,842
	Accounts receivable, less allowance for doubtful accounts of $427 and $617 at April 30, 2003 and July 31, 2002, respectively			10,419			3,553
	Due from affiliates			4,141			3,724
	Prepaid expenses and other current assets			2,155			3,292
	Assets held for sale			80			1,022

		Total current assets		24,141			33,433
Property and equipment, net				16,441			12,412
Other assets				5,511			3,839
Intangible assets				4,560			—
Goodwill				3,693			—
Restricted cash				3,865			3,850

	Total assets		$	58,211		$	53,534

Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
	Due to affiliate		$	3,000		$	—
	Due to CMGI			—			3,241
	Accounts payable			4,618			1,803
	Accrued expenses			21,344			7,932
	Deferred revenue			1,222			1,619
	Customer deposits			188			199
	Capital lease obligations, current portion			2,736			2,123

		Total current liabilities		33,108			16,917
Capital lease obligations, less current portion				2,354			378
Long term note payable				6,000			—
Convertible notes payable to affiliate, net				22,868			27,695

	Total liabilities			64,330			44,990
Stockholders’ equity (deficit):
	Preferred Stock, $0.01 par value. Authorized 5,000 shares; no shares issued or outstanding at April 30, 2003 and July 31, 2002			—			—
	Common Stock, $0.01 par value. Authorized 395,000 shares; issued and outstanding 12,852 and 6,248 shares at April 30, 2003 and July 31, 2002, respectively			129			62
	Translation adjustment			(1	)
	Additional paid-in capital			371,596			345,820
	Accumulated deficit			(377,843	)		(337,338	)

		Total stockholders’ equity (deficit)		(6,119	)		8,544

		Total liabilities and stockholders’ equity (deficit)	$	58,211		$	53,534

See accompanying notes to interim consolidated financial statements.

NAVISITE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



			Three Months Ended						Nine Months Ended

			4/30/2003			4/30/2002			4/30/2003			4/30/2002


			(In thousands, except per						(In thousands, except per
			share data)						share data)

			(unaudited)						(unaudited)
Revenue:
	Revenue		$	15,877		$	9,113		$	42,818		$	34,343
	Revenue, related parties			—			5,604			1,310			15,327

		Total revenue		15,877			14,717			44,128			49,670
Cost of revenue				13,633			14,150			40,246			55,834
Impairment of long-lived assets				—			(3,985	)		—			30,600

		Total cost of revenue		13,633			10,165			40,246			86,434

		Gross margin (deficit)		2,244			4,552			3,882			(36,764	)
Operating expenses:
	Product development			121			1,003			624			4,925
	Selling and marketing			1,367			2,731			3,632			7,869
	General and administrative			4,729			2,622			12,949			16,543
	Costs associated with abandoned leased facilities and restructuring/impairment			3,819			(2,495	)		6,127			(2,495	)

		Total operating expenses		10,036			3,861			23,332			26,842

		Loss from operations		(7,792	)		691			(19,450	)		(63,606	)
Other income (expense):
	Interest income			157			389			630			721
	Interest expense			(2,448	)		(3,763	)		(20,073	)		(10,948	)
	Other income (expense), net			(909	)		639			(1,096	)		670

		Net loss	$	(10,992	)	$	(2,044	)	$	(39,989	)	$	(73,163	)

Basic and diluted net loss per common share			$	(0.86	)	$	(0.35	)	$	(4.17	)	$	(13.95	)

Basic and diluted weighted average number of common shares outstanding				12,845			5,917			9,587			5,243

See accompanying notes to interim consolidated financial statements.

NAVISITE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



					Nine Months Ended

					4/30/2003			4/30/2002


					(In thousands)

					(unaudited)
Cash flows from operating activities:
	Net loss				$	(39,989	)	$	(73,163	)
	Adjustments to reconcile net loss to net cash used for operating activities:
		Depreciation and amortization				7,786			15,999
		Amortization of beneficial conversion feature to interest expense				15,173			3,389
		Interest on debt paid in stock				2,098			3,118
		Costs associated with abandoned lease facilities				6,127			—
		Impairment of assets held for sale				1,042			—
		Impairment of long-lived assets				—			30,600
		(Gain) loss on disposal of assets				250			(681	)
		Provision for bad debts				333			3,609
		Amortization of interest related to stock warrants issued with notes to CMGI				—			1,172
		Changes in operating assets and liabilities:
			Accounts receivable			1,357			2,978
			Prepaid expenses and other current assets			986			(189	)
			Other assets			341			(379	)
			Due to affiliates			(292	)		1,145
			Due to CMGI			(3,241	)		6,381
			Accounts payable			(1,132	)		(8,373	)
			Customer deposits			(11	)		30
			Accrued expenses and deferred revenue			(904	)		(6,784	)

				Net cash used for operating activities		(10,076	)		(21,148	)
Cash flows from investing activities:
	Purchases of property and equipment					(331	)		(3,639	)
	Purchase of debt securities					(1,963	)		—
	Cash acquired, net of cash paid for businesses					3,759			—
	Proceeds from sale of Streaming Media Division assets					—			1,600
	Proceeds from the sale of equipment					395			646
	Loans to related parties					(1,396	)		—
	Other assets					—			(237	)
	Restricted cash					637			1,201

				Net cash provided/(used) for investing activities		1,101			(429	)
Cash flows from financing activities:
	Issuance of convertible notes payable					—			30,000
	Proceeds from exercise of stock options and employee stock purchase plan					—			35
	Payment of capital lease obligations					(2,421	)		(1,165	)
	Payments under note payable					—			(937	)
	Debt repayment to AppliedTheory Estate					(6,100	)		—
	Borrowing under note payable to affiliate					5,600			—
	Payments under note payable to affiliate					(2,600	)		—
	Payments of software vendor obligations					—			(679	)

				Net cash used for financing activities		(5,521	)		27,254

				Net (decrease)/increase in cash and cash equivalents		(14,496	)		5,677
Cash and cash equivalents, beginning of period						21,842			22,214

Cash and cash equivalents, end of period					$	7,346		$	27,891

Supplemental disclosure of cash flow information:
	Cash paid during the period for:
		Interest			$	1,559		$	2,217

Acquisitions of businesses:
	Assets acquired				$	12,122
	Liabilities assumed					(7,993	)
	Common Stock issued					(370	)

	Cash acquired, net of cash paid for businesses				$	3,759

See accompanying notes to interim consolidated financial statements.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

The accompanying interim consolidated financial statements have been prepared by NaviSite, Inc. (NaviSite, we, us or our) in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. It is suggested that the interim consolidated financial statements be read in conjunction with the audited consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K which was filed with the Securities and Exchange Commission on October 29, 2002.

The information furnished reflects all adjustments, which, in the opinion of management, are of a normal recurring nature and are considered necessary for a fair presentation of results for the interim periods. Such adjustments consist only of normal recurring items. It should also be noted that results for the interim periods are not necessarily indicative of the results expected for the full year or any future period.

The preparation of these interim consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

On Dece

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents