EXHIBIT 99.1
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The unaudited pro forma Condensed Combined Statement of Operations for
the year ended July 31, 2004 is included in this report.
The unaudited pro forma condensed combined statement of operations for the
year ended July 31, 2004 combines the unaudited pro forma condensed consolidated
statement of operations of NaviSite for the fiscal year ended July 31, 2004 with
the unaudited condensed consolidated results of operations of Surebridge for the
ten months and nine days ended June 9, 2004. As required under Article 11(c)(3)
of Regulation S-X, Surebridge's December 31, 2003 fiscal year end has been
conformed to be within 93 days of NaviSite's July 31, 2004 fiscal year end by
using Surebridge's results of operations for the ten months and nine days ended
June 9, 2004 (actual Surebridge results of operations for the one month and
twenty-one days ended July 31, 2004 are included in NaviSite's condensed
consolidated results of operations for the year ended July 31, 2004).
The unaudited pro forma financial information is not necessarily indicative of
the results of operations of NaviSite had the transaction assumed therein
occurred, nor is it necessarily indicative of the results of operations which
may be expected to occur in the future. Furthermore, the unaudited pro forma
financial information is based on assumptions that NaviSite believes are
reasonable and should be read in conjunction with NaviSite's previously filed
Form 10-K for the fiscal year ended July 31, 2004, Form 8-K dated June 10, 2004
(filed June 14, 2004) and Form 8-K dated (and filed) on September 2, 2004.
NAVISITE, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED
NAVISITE SUREBRIDGE PRO FORMA
TWELVE MONTHS ENDED TEN MONTHS & NINE DAYS ENDED PRO FORMA TWELVE MONTHS ENDED
JULY 31, 2004 JUNE 9, 2004 ADJUSTMENTS JULY 31, 2004
------------------ ---------------------------- ----------- -------------------
Total revenue $ 91,172 $ 38,592 $ -- $ 129,764
--------- --------- --------- ---------
Cost of revenue:
Cost of revenue 68,379 26,746 872 (a) 95,997
Impairment, restructuring and other 917 -- 917
--------- --------- --------- ---------
Total cost of revenue 69,296 26,746 872 96,914
--------- --------- --------- ---------
Gross profit (loss) 21,876 11,846 (872) 32,850
Operating expenses:
Product development 1,075 -- -- 1,075
Selling and marketing 9,567 7,622 -- 17,189
General and administrative 24,714 10,071 -- 34,785
Impairment, restructuring and other 5,286 -- -- 5,286
--------- --------- --------- ---------
Total operating expenses 40,642 17,693 -- 58,335
--------- --------- --------- ---------
Loss from operations (18,766) (5,847) (872) (25,485)
Other income (expense):
Interest income 126 12 -- 138
Interest expense (3,181) (292) (3,371) (b) (6,844)
Other income (expense), net 468 -- -- 468
--------- --------- --------- ---------
Loss before income tax expense (21,353) (6,127) (4,243) (31,723)
Income tax expense 1 -- -- 1
--------- --------- --------- ---------
Net loss $ (21,354) $ (6,127) $ (4,243) $ (31,724)
========= ========= ========= =========
Basic and diluted net loss per share $ (0.85) $ (1.14)
========= =========
Weighted average basic and diluted
shares used in computing net loss
per share 25,160 2,574 (c) 27,734
========= ========= =========
NAVISITE, INC. AND SUBSIDIARIES
NOTES TO THE PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(UNAUDITED)
On June 10, 2004, we completed the acquisition of substantially all of
the assets and liabilities of Surebridge, Inc., or Surebridge, a privately held
provider of managed application services for mid-market companies, in exchange
for two promissory notes in the aggregate principal amount of approximately
$39.3 million, three million shares of our common stock and the assumption of
certain liabilities of Surebridge at closing. The primary reasons for the
acquisition included the addition of service offerings, specific contractual
relationships with PeopleSoft and Microsoft, and established contractual revenue
base, as well as potential operational savings. As the primary reasons for the
acquisition were not related to the tangible net assets of Surebridge, the
purchase price was significantly in excess of the fair value of the net assets
acquired. The acquisition was accounted for under the purchase method of
accounting. The final purchase accounting is subject to final resolution of a
net worth calculation. We have included the financial results of Surebridge in
our consolidated financial statements beginning June 10, 2004, the date of
acquisition.
The following table summarizes the fair value of the assets acquired and
liabilities assumed at the date of acquisition:
Surebridge
--------------
(In thousands)
Accounts receivable $ 5,201
Other current assets 1,745
Long-term assets 560
Property and equipment 5,725
Goodwill 42,714
Customer lists 14,000
--------
Total assets acquired 69,945
--------
Accounts payable and accrued expenses 9,030
Other current liabilities 6,496
Long-term liabilities 1,002
--------
Total liabilities assumed 16,528
--------
Net assets acquired $ 53,417
--------
PRO FORMA ADJUSTMENTS AND ASSUMPTIONS
(A) AMORTIZATION EXPENSE OF THE CUSTOMER LISTS
The amortization expense adjustment to cost of revenue in the pro forma
condensed combined statement of operations was determined as follows (in
thousands):
Elimination of pre-existing Surebridge amortization expense ................... $(1,200)
Amortization expense of customer lists resulting from the acquisition ......... 2,072
-------
Net adjustment................................................................. $ 872
========
The net pro forma adjustment includes ten months and nine days of amortization
expense of customer lists, as actual Surebridge results of operations for the
one-month and twenty-one days ended July 31, 2004 are included in NaviSite's
condensed consolidated results of operations for the year ended July 31, 2004.
Customer lists are being amortized over estimated useful lives ranging from five
to eight years.
(B) INTEREST EXPENSE ON THE PROMISSORY NOTES
Interest expense on the two promissory notes payable, in the aggregate
principal amount of approximately $39.3 million, is calculated at 10% annually.
The pro forma condensed consolidated statement of operations assumes interest
will be paid in full. The pro forma adjustment represents ten months and nine
days of interest expense, as actual Surebridge results of operations for the one
month and twenty one days ended July 31, 2004 are included in NaviSite's
condensed consolidated results of operations for the year ended July 31, 2004.
The interest expense recorded in the pro forma condensed combined statement of
operations was calculated as follows (in thousands):
Ten Months &
Nine Days Ended
June 9, 2004
---------------
Promissory notes principal $39,267
Interest rate 10%
Interest expense recorded $ 3,371
We must repay the outstanding principal of the promissory notes, with all
accrued interest thereon, no later than June 10, 2006. In addition, if at any
time during the first six months after the date of issuance of the notes we
complete certain equity or debt financings, we are obligated to use a
significant portion of the proceeds to make payments on the notes, depending on
the total net proceeds received by us in the financing. If we receive net
proceeds of less than $20 million in a debt or equity financing, then we would
be obligated to make a payment on the notes equal to 75% of the net proceeds. If
we receive net proceeds of between $20 million and $30 million, then we would be
obligated to make a payment on the notes equal to $15 million. If we receive net
proceeds in excess of $30 million, then we would be obligated to make a payment
on the notes equal to 50% of the net proceeds.
In addition, if we realize net proceeds in excess of $1.0 million from certain
equity or debt financings or sales of assets at any time after six months from
the date the notes were issued, we are obligated to use a significant portion of
the proceeds to make payments on the notes, depending on the total payments, if
any, made on the notes during the first six months after the notes were issued.
If the amount we paid on the notes during the first six months the notes were
outstanding is less than $10 million, we would be obligated to make a payment on
the notes equal to 75% of the net proceeds. If the amount we paid on the notes
during the first six months the notes were outstanding was greater than $15
million, we would be obligated to make a payment on the notes equal to 50% of
the net proceeds. If the amount we paid on the notes during the first six months
the notes were outstanding is between $10 million and $15 million, we would be
obligated to make a payment on the notes equal to a percentage between 50% and
75% of the net proceeds received, such percentage to be calculated in accordance
with a formula set forth in the notes.
(C) WEIGHTED AVERAGE BASIC AND DILUTED SHARES
The weighted average basis and diluted shares adjustment in the pro forma
condensed consolidated statement of operations was determined as follows (in
thousands):
Common Stock resulting from shares issued in conjunction with the acquisition 3,000
Less weighted average effect of shares issued in conjunction with the
acquisition for the one month and twenty-one days the shares were outstanding
(426)
------
Net adjustment 2,574