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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-29375
SAVVIS COMMUNICATIONS CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1809960
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12851 WORLDGATE DRIVE
HERNDON, VIRGINIA 20170
(Address of principal executive offices) (Zip Code)
(703-234-8000)
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act: Common stock, par
value $.01 per share
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 [X] No [_]
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 registrant's 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. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 15, 2002 was approximately $32,900,000.
The number of shares of the registrant's common stock outstanding as of
March 15, 2002 was 94,025,382.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of the Form 10-K into which the document is incorporated:
Portions of the definitive proxy statement for the 2002 annual meeting of
stockholders to be held on June 7, 2002, to be filed within 120 days after the
end of the registrant's fiscal year, are incorporated by reference into Part
III, Items 10-13 of this Form 10-K.
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SAVVIS COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business ..................................................................... 3
Item 2. Properties ................................................................... 32
Item 3. LegalProceedings ............................................................. 33
Item 4. Submission of Matters to a Vote of Security Holders .......................... 33
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ........ 34
Item 6. Selected Financial Data ...................................................... 35
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 37
Operations ...................................................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................... 49
Item 8. Financial Statements and Supplementary Data .................................. 49
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ................................................................... 49
PART III
Item 10. Directors and Executive Officers of the Registrant ........................... 50
Item 11. Executive Compensation ....................................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and Management ............... 53
Item 13. Certain Relationships and Related Transactions ............................... 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .............. 54
Signatures ................................................................... 60
Index to Consolidated Financial Statement .................................... F-1
2
PART I
ITEM 1. BUSINESS.
Cautionary Statement
Some of the statements contained in this Form 10-K discuss future
expectations, contain projections of results of operations or financial
condition or state other forward-looking information. Any statements in this
report that are not statements of historical facts, are intended to be, and
are, "forward-looking statements" under the safe harbor provided by the Private
Securities Litigation Reform Act of 1995. These statements are subject to known
and unknown risks, uncertainties and other factors that could cause the actual
events to differ materially from those contemplated by the statements. The
forward-looking information is based on various factors and was derived using
numerous assumptions. In some cases, you can identify these so-called
"forward-looking statements" by our use of words such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"project," "intend" or "potential" or the negative of those words and other
comparable words. You should be aware that those statements only reflect our
predictions. Actual events or results may differ substantially. Important
factors that could cause actual events or results to be materially different
from the forward-looking statements include those discussed under the heading
"Business--Risk Factors" and throughout this Form 10-K. Although we believe the
expectations reflected in our forward-looking statements are based upon
reasonable assumptions, we can give no assurance that we will attain these
expectations or that any deviations will not be material. Except as otherwise
required by the federal securities laws, we disclaim any obligations or
undertaking to publicly release any updates or revisions to any forward-looking
statement contained in this annual report on Form 10-K and the information
incorporated by reference in this report to reflect any change in our
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
The terms "SAVVIS," "we," "us," "the Company," and "our" as used in this
report refer to SAVVIS Communications Corporation, a Delaware corporation,
formerly SAVVIS Holdings Corporation, and its subsidiaries, except where by the
context it is clear that such terms mean only SAVVIS Communications
Corporation.
OVERVIEW
SAVVIS is a global network service provider ("NSP") that delivers IP VPNs
(virtual private networks), Internet services, and managed hosting to
medium-sized enterprises and the financial services market.
o The mid-market, which is underserved by traditional data
communications carriers, is the fastest growing segment of the IP VPN
market.
o In financial services, SAVVIS is a leading provider of
high-performance networking services, including Financial Xchange(SM),
which delivers speed-to-market advantages through connectivity to more
than 4,700 financial institutions worldwide.
SAVVIS' services are briefly described below:
o MANAGED IP VPNS combine the advantages of private networks
(reliability, performance and security) with the popular features of
the Internet (scalability and flexibility), at a price often less than
both. Enterprises can connect their offices, partners, remote
employees and telecommuters over an affordable private network, which
was named Product of the Year for 2001 by the editors of Network
Magazine. SAVVIS was selected over well-known VPN providers such as
ATT, WorldCom, Sprint and Genuity.
o INTERNET ACCESS bypasses the bottlenecks of the Internet, based on
SAVVIS' award-winning PrivateNAP(SM) architecture. This service is
available in both managed and unmanaged offerings.
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o MANAGED HOSTING allows our customers to outsource their
mission-critical content in a highly secure, fault tolerant data
center environment. SAVVIS can satisfy both complex hosting needs with
its a la carte service offering, as well as provide pre-packaged
solutions for web, enterprise and database applications that can be
installed in a few as 5 days.
HISTORY
SAVVIS began commercial operations in 1996, offering Internet access
services to local and regional Internet service providers. We pioneered the use
of Private Network Access Points ("PrivateNAPs(SM)"), where SAVVIS exchanges
data through dynamic "on net" connections with the other major Internet network
providers. PrivateNAPs(SM) dramatically minimize latency and packet loss by
bypassing the PublicNAPs, which are the bottlenecks of the Internet.
In April 1999, SAVVIS was acquired by Bridge Information Systems
("Bridge"), a global provider of real-time/historical financial information, as
well as news about stocks, bonds, foreign exchange and commodities. Bridge
constructed a highly redundant, fault tolerant network based on Internet
protocol ("IP") and asynchronous transfer mode ("ATM") technologies to provide
its services to some of the largest financial companies and institutional
investors in the world. In September 1999, the two networks were combined: the
original SAVVIS network, which was constructed to provide high quality Internet
access in the United States, and the IP network of Bridge, which had been
constructed to meet the exacting requirements of the financial services
industry worldwide. Both of these networks have been operational since 1996 and
we refer to the combined network as the "SAVVIS Intelligent IP Network(SM)."
On February 18, 2000 simultaneously with the completion of our initial
public offering, we acquired the Internet protocol network assets of Bridge,
for total consideration of approximately $150 million, and the employees of
Bridge who operate that network were transferred to us. This transaction
significantly expanded our managed IP VPN services, which we began offering in
September 1999.
We currently provide IP VPN, Internet access and hosting services directly
to approximately 1,500 customers. Each of these services is described below:
NETWORK-BASED IP VPNS
Three months after our IPO, SAVVIS enhanced our IP VPN offerings by
introducing network-based IP VPN services across our entire global platform.
SAVVIS was the first global network service provider to provide IP VPNs that
were network-based, i.e., the "intelligence" needed to make networking
decisions resides inside our network, rather than residing inside complex
hardware at the customer's premises.
The SAVVIS Intelligent IP Network(SM) architecture, which interconnects
over 6,000 buildings in 121 of the world's major commercial cities in 45
countries, is based on the unique marriage of two technologies:
o ATM which supports the transmission of all kinds of content and allows
data to be prioritized, and
o IP, a communications protocol that is a core element of the Internet
and is used on computers, but that cannot reliably deliver real-time
data currently, unless operated over an ATM network, such as the
SAVVIS Intelligent IP Network(SM).
We believe that the widely predicted growth in Internet-based IP VPNs was
not realized because of the inherent unpredictable performance of the Internet,
which SAVVIS' unique architecture solves. SAVVIS' Intelligent IP Networking(SM)
combines the security, reliability and performance of private networking with
the affordability and flexibility of the Internet, delivering the ultimate
solution demanded by businesses. Cahners, an Industry Analyst firm, now predicts
that network-based VPNs will become the most prevalent IP VPN implementation,
growing to 90% of the networks implemented by 2003. With over 475 customers and
$200 million in revenue in this new category, SAVVIS is leading the way in this
market.
SAVVIS' Intelligent IP Networking(SM) platform has four other significant
distinctions:
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o First, the service is simple to deploy and easy to scale because there
are no complicated meshing, since the routing and firewalling are virtual
services, provided by the "intelligence" in-net.
o Second, SAVVIS can provide numerous networking solutions over a single
connection to the network, enabling customers to save on expensive "local
loop" charges, as well as quickly and cost-effectively change their
networking requirements as their business changes;
o Third, customers can manage their data services costs by assigning high
Quality of Service ("QoS") levels to mission-critical applications and
lower QoS to less time-sensitive applications such as e-mail. Other
carriers force the customer to pay for the highest common denominator,
since they do not have the flexibility to ascribe different QoS levels to
each application.
o Fourth, SAVVIS' Network Creation System enables us to easily design,
implement and change parameters on customer's individual networks without
adding costly overhead, thereby enabling us to keep our prices
competitive.
All of this capability is provided with simplified pricing more in line
with the price structure of the Internet. Furthermore, the customer does not
need technical staff at each location, which provides further price benefits.
Unburdened by complex IT requirements, businesses can focus on their core
competencies.
We charge each customer an initial installation fee that typically ranges
from $500 to $5,000 and a monthly fixed fee that varies depending on the
services provided, the bandwidth used, and the QoS level chosen. Our customer
agreements are typically for 12 to 36 months.
Our revenue is derived primarily from the sale of IP VPN services. Our two
largest customers, Reuters plc ("Reuters") and MoneyLine Telerate represent
approximately 75% of our revenues. Reuters and MoneyLine Telerate acquired
substantially all of the operating assets of Bridge in September and October
2001, respectively. Reuters and MoneyLine Telerate have each entered into
network service agreements with us providing for aggregate minimum revenue
commitments over five years totaling $566 million, less payments made by Bridge
to the Company in the period from May 3, 2001 to September 28, 2001. Prior to
October 2001, Bridge, which filed for bankruptcy in February 2001, was our
largest customer (representing approximately 80% of our revenues) and our
largest shareholder (holding approximately 48% of our outstanding common
shares). Through December 31, 1999, our revenue was primarily derived from the
sale of Internet access services to local and regional Internet service
providers in the United States. Beginning in late 1998, we expanded our service
offering to corporate customers as well.
INTERNET ACCESS
SAVVIS offers a wide range of Internet access options designed to meet the
needs of businesses of all sizes. From its inception in 1995 as a national
Internet service provider, SAVVIS designed its global network infrastructure to
deliver the superior performance, reliability and security demanded by
companies for whom data transmission is critical to success. Surpassing 36
other well-known service providers, SAVVIS was rated #1 in network performance
for the second year in a row by Keynote Systems, Inc., an independent ISP
auditor, as reported in the Boardwatch Magazine Year 2000 Directory of Internet
Service Providers
SAVVIS pioneered the use of strategically located Private Network Access
Points ("PrivateNAPs(SM)") to provide businesses with the most direct route on
the Internet. Today, SAVVIS has 13 PrivateNAPs on our network, including its
first European PrivateNAP in London and a PrivateNAP in Singapore.
SAVVIS has also deployed 142 Points of Presence ("POPs"), and the global
network currently reaches 121 cities in 45 countries. POPs bring the edge of the
network closer to customers and provide cost-effective geographic outreach.
Customer traffic is then routed through a PrivateNAP, directly reaching the
ultimate Internet destination over 95% of the time, rather than traversing
multiple PublicNAPs as most competitive ISPs must do in order to reach the
desired location.
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SAVVIS offers both fully managed Internet solutions, as well as Internet
access. With managed solutions, we provide all of the equipment, installation
and technical support to manage the circuit. These solutions also provide the
flexibility that growing companies need, as they can add new Internet
applications or increase their bandwidth virtually instantaneously.
MANAGED HOSTING
Intelligent Hosting(SM) services round out SAVVIS' integrated package of
outsourced solutions, bringing to the commercial market more than five years'
experience in managing over 20,000 servers for the financial services industry.
Although simple shared hosting and colocation services have dominated the market
to date, analysts estimate that managed and custom hosting will capture the
lion's share of revenues by 2004.
Four characteristics drive businesses' decision-making for hosting:
reliable, high-performance Internet connectivity; data center security;
scalability; and the ability to monitor performance at the site.
Data Center Availability and Connectivity: SAVVIS has built 150,000 square
feet of data center facilities around the globe, with the highest levels of
security, redundancy, availability and on-site support. We believe that no
other hosting service provider offers guaranteed 100% availability to the
hosting environment, 100% available connectivity to the Internet and 99.9%
availability to systems. The company's main data center is in St. Louis, with
regional centers in San Francisco, London, Singapore and Toronto.
Security and Performance: Power failures, fires, earthquakes, intrusions,
inadvertent tampering and other forces can compromise data. SAVVIS' data
centers have taken safeguards against these possibilities. For instance, in the
St. Louis data center, walls are constructed with reinforced concrete four-feet
thick; tanks hold 20,000 gallons of diesel fuel to protect against power
outages; the Center is built to withstand an earthquake of 7.5 on the Richter
scale. SAVVIS' Intelligent Hosting is further differentiated by the patented
Intelligent RackTM enclosure, which sets a new standard for physical security.
The Intelligent Rack is standard in all SAVVIS data centers and features a
card-based reader that provides access control, authorization and
authentication capabilities.
Superior Scalability: SAVVIS built its data centers to full capacity from
day one, with connectivity to its backbone pre-provisioned to each of its
Intelligent Racks. As a result, the company can bring up customers quickly and
reliably, ensuring the scalability needed by rapidly growing companies.
Integrated Site Monitoring and Reporting: Customers gain full visibility
into their hosted environment through the SAVVIS Customer Command Center, which
is a secure information portal that allows customers remote access to
statistics and information regarding the performance of their site. The
Customer Command Center is unique because it integrates hosting and network
statistics.
In addition to managed hosting services, SAVVIS also provides colocation at
its Private Network Access Point (PrivateNAP(SM)) locations for companies that
want direct access to the top ranked Internet backbone, but prefer to manage
their own hosting environments.
MARKET OVERVIEW
Market opportunity. As the Internet has emerged as a strategic business
component, investment in Internet services has begun to increase dramatically.
According to McKinsey, an independent research firm, the demand for dedicated
Internet access services will grow to $16.3 billion by 2005, a 31% compound
annual growth rate. In addition, demand for data transport services is growing
rapidly as evidenced by International Data Corporation's estimate that Internet
service providers' corporate access revenues will grow to $12 billion by 2003, a
32.5% compound annual growth rate.
IP VPNs. The majority of business data communications today take place
over private or managed corporate data and electronic data interchange
networks. According to Infonetics, the market for IP-VPN's in the United States
will grow to approximately $35 billion in 2004, of which fully $10 billion will
be comprised of network-based IP VPNs, a market in which SAVVIS has a
leadership position.
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Today, organizations employ local data networks, or local area networks,
to interconnect personal computers and workstations. The highly successful use
of local area networks for information-sharing, messaging and other
applications has led organizations to deploy wide area networks aggressively,
which effectively interconnect local area networks and replicate their
functionality across a much broader geographic area. The demand for wide area
networks has grown as a result of today's competitive business environment.
Factors stimulating higher demand include the need to provide broader and more
responsive customer service and to operate faster and more effectively between
operating units, suppliers and other business partners. In addition, as
businesses become more global in nature, the ability to access business
information across the enterprise has become a competitive necessity.
Internet network services. Since the commercialization of the Internet in
the early 1990s, businesses have rapidly established corporate Internet sites
and connectivity as a means to expand customer reach and improve communications
efficiency. Internet access service is still a fast growing segment of the
global telecommunications services market. According to International Data
Corporation, the number of Internet users worldwide is forecasted to grow to
over 600 million by the year 2003. Internet access services represent the means
by which Internet service providers interconnect users to the Internet or to
corporate intranets and extranets. Access services include dial-up access for
mobile workers and small businesses and high-speed dedicated access used
primarily by mid-sized and larger organizations. In addition to Internet access
services, Internet services providers are increasingly providing a range of
value-added services, including shared and dedicated web hosting and server
colocation, security services, and advanced applications such as IP-based
voice, fax and video services.
Convergence between the Internet and corporate data networking. Today,
many businesses are utilizing Internet-related services as lower-cost
alternatives to several traditional telecommunications services. The near
ubiquity and relatively low cost of the Internet have resulted in its
widespread use for specific applications, most notably web access and e-mail.
IP has become the communications protocol of choice for the desktop and for
local area networks. As a result, IP wide area network implementation requires
no protocol conversion, reducing overhead and improving performance. Many
corporations are connecting their remote locations using intranets to enable
more efficient communications with employees, providing remote access for
mobile workers and reducing telecommunications costs by using value-added
services such as IP-based fax and video-conferencing.
Rapid growth in e-commerce. While most corporations' early use of the
Internet in e-commerce was to establish an Internet marketing presence,
businesses today are using the Internet much more aggressively to: generate new
revenues, increase efficiency through improved communications with suppliers
and other third parties, and improve internal communications. The rapid growth
of e-commerce encompasses both business-to-business and business-to-consumer
communications and transactions, and the projected growth of these markets over
the next five years is dramatic. Forrester Research, Inc. projects that the
market for business-to-business e-commerce will grow to $1.3 trillion in 2003.
In addition, Forrester Research, Inc. projects that the market for
business-to-consumer e-commerce will grow to $108 billion over the same period.
Outsourcing of IP based services. In order to capitalize fully on the new
opportunities presented by the Internet and e-commerce, businesses will require
high quality, reliable and flexible data communications and infrastructure
services capable of supporting mission-critical applications. We believe that
an increasing number of businesses will seek to outsource these services to
third-party providers for several reasons. First, the rapid growth of
Internet-related businesses has created a shortage of information technology
personnel skilled in IP and e-commerce development. Second, many companies
believe that establishing leadership in their industry with respect to IP based
services is important to the future of their business. Given this posture, time
to market is critical and turning to a specialized, third-party provider can
often shorten time to market. Finally, many infrastructure services require
significant up-front investment. Many companies will choose to preserve their
capital to invest in activities that are integral to their business strategy
and seek to develop their infrastructure by purchasing services rather than
investing in networks, systems and equipment.
Rapid growth in colocation and web site hosting. Businesses of all sizes
historically house, maintain and monitor their own web and content servers. As
IP-enabled applications became mission-critical, larger, more difficult to
develop, and maintain and required increasing amounts of investment, a
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substantial number of businesses began to outsource their colocation and
hosting requirements to third parties. Forrester Research, Inc. projects that
the managed hosting business will grow from approximately $3.7 billion in 2002
to almost $20 billion by 2004. We believe that companies seeking IP expertise,
high levels of security, fault-tolerant infrastructure, local and remote
support, and the cost benefits of a shared infrastructure will be most likely
to outsource these services.
BUSINESS STRATEGY
Our objective is to tap the rapidly growing market for reliable,
high-speed IP VPN's, Internet, and managed hosting services. Specifically, we
intend to:
Establish SAVVIS as a leading provider of public and private IP transport
solutions for business-to-business communications. We intend to market a
combination of our Intelligent IP Networking(SM) services, Intelligent
Hosting(SM) and Internet services to meet the demand in the market. We see
customers demanding a combination of Internet, extranet and intranet networking
services and believe our Intelligent IP Networking(SM) platform and Private
NAP(SM) architecture sets us apart from the competition in meeting the demand.
Capitalize on our connectivity to financial institutions worldwide. We are
aggressively marketing our services to the traditional and emerging financial
services companies, based on our connectivity to over 4,700 companies, including
75 of the top 100 global banks and 45 of the top 50 brokerages. In today's
rapidly deregulating financial market, financial institutions must be
fast-to-market with innovative delivery methodologies that speed transactions or
they risk obsolescence. We believe we are well positioned to meet the need,
because our community-of interest network, Financial Xchange(SM), provides the
performance and security of a private network with the reach and rapid
deployment of the Internet.
Capitalize on the demand for outsourced services in the VPN, Internet, and
managed hosting markets. Data communications and the Internet are
mission-critical to thousands of businesses worldwide and, according to
industry studies, the market for these services continues to grow rapidly.
Corporations are continually expanding and enhancing existing networks and
deploying new services in response to this growth. By providing a wide range of
services for Internet, hosting and managed data networking services, we offer a
single source solution to the key challenges faced by corporate information
technology managers implementing Internet, intranet and extranet applications.
We are focused on the demand for simple, flexible solutions, and our
market-leading IP-VPN products and managed hosting services to allow us to
address heretofore untapped segments of the business market.
Provide the Application Infrastructure Platform support utilizing the
SAVVIS Intelligent Hosting(SM) services to meet customers e-commerce
requirements, and to complement our IP transport solutions. Many customers are
establishing new or more robust Internet, extranet and intranet sites and want
their service provider to provide the application infrastructure platform for
their servers, operating system and application software. SAVVIS is focused on
providing full management of the customers' application platform, hosted in our
state-of-the-art data centers in St. Louis, San Francisco, Toronto , London and
Singapore. In addition, we intend to provide both private and public IP
transport to the customers hosted site.
Grow domestic and international distribution channels. We intend to grow
our distribution channels aggressively, by expanding our direct channel as well
as utilizing alternate channels. We intend to continue to increase the size of
our direct sales force for VPN, Internet and managed hosting services. We have
entered into agreements with multiple partners, including Science Applications
International Corporation (SAIC), PRIMUS Telecommunications Group and
QuantumShift to resell our services and will continue to sign up additional
partners in 2002.
Leverage our network and PrivateNAPs(SM) infrastructure which include
industry-leading "intelligence" built into our platform. We have completed a
major build out of our global network, now reaching 121 cities in 45 countries.
Four new PrivateNAPs(SM) were added to the network, including a PrivateNAP(SM)
in Singapore and the industry's first European PrivateNAP(SM) in London, for a
total of 13 currently in operation. Since the launch of our Intelligent IP
Network(SM)
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architecture last May, which puts the "smarts" inside our network instead of in
customer premises equipment, we have deployed 58 Nortel Networks Shasta 5000
BSNs. The network also is powered by 324 Lucent ATM backbone switches; 1,747
Lucent ATM edge devices; and 13,254 Nortel, Cisco and digital subscriber lines
("DSL") edge routers.
Provide enabling infrastructure for e-commerce services. We believe that
many of our target customers, particularly financial services companies, are
aggressively pursuing e-commerce strategies. We believe that our network
architecture of ATM technology and PrivateNAPs(SM), provides highly available
domestic and international managed data networking. As well, our managed hosting
offering uniquely positions SAVVIS to help our customers capitalize on the
substantial anticipated growth in e-commerce.
Develop and market new services. We intend to continue to develop new
services, such as IP based voice and video that will enable us to further
leverage our network infrastructure and our customer base. For example, we have
deployed ATM to the edge of our network and will aggressively deploy ATM
devices at customer premises allowing for the provision of multiple network
applications with different Quality of Service levels over the same local
access lines and customer equipment. The deployment of these devices will allow
our customers to combine services that they may currently buy from multiple
vendors, each on a different network. We have also launched the industry's
first network based IP VPN offering, and intend to continue to develop new
tools, such as a web-based Network Creation System, to enable our customers to
outsource the management of their intranets, extranets and Internet services to
us, while maintaining control themselves.
SAVVIS SERVICES
We designed the SAVVIS Intelligent IP Network(SM) to offer a guaranteed
high level of performance for both Internet and data networking services. We
deliver a comprehensive range of high performance, quality of
service-differentiated products, including data networking, Internet access,
intranets, extranets, e-business hosting and other services.
A common feature among all of the services that we provide to our
customers is the substantial flexibility to choose among a range of offerings,
including from a service-only basis to a fully managed basis. On a service-only
basis, the customer is responsible for the design and integration of its
network and the purchase of network hardware, relying on us only for network
services. On a fully managed basis, we are responsible for the design,
implementation, integration and ongoing support of the customer's network.
INTEGRATED NETWORK SOLUTIONS
We put IP Intelligence into our network and extended the benefits all the
way to the customer premises. This enables us to deliver functionality,
security and performance to our customers, and enables our customers to
customize our products according to their needs. Our customers need only to
tell us who they want to talk to, which of four Quality of Service (QoS) levels
is appropriate for each application, and how much bandwidth they require.
SAVVIS then provides them with a bundled solution that delivers the security,
flexibility and affordability they need.
Until now, companies had to work with various service providers, forcing
them to spend lots of time and money patching together different network
configurations to address each of their multifaceted needs. But with the IP
Intelligence in our network, we are able to integrate numerous networking
strategies -- Internet, intranet, extranet and e-business hosting -- into one
simplified and affordable solution over one local loop. Customers can take
advantage of a full continuum of solutions, without having to manage customer
premises equipment for routing or firewalling. Our customers can prioritize
their applications and select the QoS level, from e-mail to video streaming.
Additionally, they can hook up to the Internet or roll out complex extranet
applications, with a fully integrated networking solution from SAVVIS.
Extranet Solutions. Much of business success depends on being able to
exchange information and communicate with suppliers, partners and customers.
SAVVIS' Intelligent IP Network(SM) platform enables our customers to choose
between having their own private extranet or combining a private
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extranet with Internet access to off-net locations. Our customers can
communicate and conduct transactions with multiple partners in a secure and
managed environment, without having to spend lots of time and money deploying
expensive premises-based security. With a SAVVIS extranet, they can take
advantage of our networking capabilities, define who gets access to their
community of users, and determine their own set of rules. We offer a broad
range of ATM-based QoS levels and advanced network-based IP features, with
security policies defined by the customer. The customer is in control, secure
in the knowledge that their extranet application is running on the SAVVIS
Intelligent IP Network(SM).
Intranet Solutions. Intranet communications are confidential, highly
proprietary information that need to be protected from competitors. Businesses
need to maintain tightly controlled user rights and privileges. Until now,
however, businesses only had one choice: spend money on expensive, inflexible
traditional private networks, based on either frame relay or private lines.
Today they have new choices. Now they can get intranet solutions that combine
the security and performance of private networking with the flexibility and
economy of the Internet. Once again, SAVVIS makes everything easy for them.
Customers just need to define whom they want to connect to, choose one of four
different QoS levels, and determine their bandwidth requirements. They won't
have to waste money or resources deploying routers and firewall devices at each
office location. SAVVIS will package everything into one simple, flexible
bundled solution. In addition, customers can use the excess bandwidth of their
local loop for extranet or Internet access.
Internet Solutions. SAVVIS built its global Intelligent IP Network(SM) for
high performance and reliability. Customer data speeds through a controlled,
performance-guaranteed environment that completely bypasses the congested public
Internet exchange points. Through our PrivateNAPs(SM), their data is directly
connected, giving them the most direct route on the Internet and instantaneous
access to the world. SAVVIS offers a wide range of Internet access options,
including DS1, DS3, OC3 and Ethernet. Our customers are able to add new services
easily or change existing applications by using the excess bandwidth of their
existing access circuit to add or change applications virtually instantaneously.
MANAGED HOSTING SERVICES
Whether businesses are deploying an e-business Web site, extranet or
intranet, SAVVIS can help create hosting and networking solutions that will grow
with them. If they want to establish a Web presence on the Internet quickly,
ensure a high level of system availability and assure that their customers and
users have a positive experience, SAVVIS Intelligent Hosting(SM) is the answer.
Intelligent Hosting(SM) includes fully managing their hardware, operating
systems and Web servers within our secure, reliable data center environment and
distributing traffic over our highly rated Internet backbone or over their
intranet or extranet.
Based on their business needs, they can choose other value-added options
including database management, load balancing, security services, back-up and
recovery solutions, WebTrends(TM) reporting and managed storage services
(including business continuance and managed testing environment). Our fully
managed Intelligent Hosting(SM) solutions eliminate the need for our customers
to monitor and manage hardware and operations, stay abreast of the latest
software upgrades and patches, and hire and train the personnel necessary to do
the job. Additional services can then be added as needed for a customized
solution.
By selecting our hosting services, our customers are able to reduce
capital expenditures for expensive networking equipment, eliminate the expense
of supporting their Internet servers and avoid having to spend time and money
on building a secure data center facility. Our customers get direct
connectivity to the SAVVIS network -- giving them reliability, availability and
security -- with no local loop charges, no routers or hubs charges and reduced
staffing expenses. Also, we allow our customers to lease the equipment
necessary to build their site, which helps to further reduce capital costs and
scale the site for future business growth.
ACCESS ALTERNATIVES
How a business connects to the Internet -- speed, performance and security
- -- can be crucial to its success. SAVVIS offers a wide range of scalable
Internet access methods ranging from fractional DS-1
10
through OC-3, and SAVVIS also supports Ethernet access. Whether a customer is
using the Internet to conduct business communications or e-commerce, they'll
get Internet access that is of "mission critical" caliber with SAVVIS. Down the
road, if they decide they also need an intranet or extranet, they will not need
to design a whole new network. SAVVIS enables its customers to use the excess
bandwidth of their existing access circuit to add or change applications
virtually instantaneously. SAVVIS Internet access solutions include dedicated
Internet connections (fractional DS1 through OC3). Our dedicated fractional DS1
access gives customers Internet connection speeds from 128Kbps up to 1.544Mbps.
DS3 gives them speeds up to 45Mbps. And SAVVIS will support OC3 connectivity
providing 155Mbps of bandwidth -- for high-volume businesses that need optimum
connectivity 24 hours a days, seven days a week.
Set Usage At A Fixed Monthly Cost. SAVVIS Internet access options give
customers control over their usage and monthly cost. DS1 service is available
in fractional increments from 128Kbps up to 1.54Mbps. DS3 service is available
in fractional increments from 3Mbps up to 45Mbps. OC3 and OC12 services are
sold on a case by case basis, until we install our fiber rings; then OC3, OC12
and OC48s will be available as standard products.
Manage The Peaks And Flows Of Data Usage. If a customer's bandwidth needs
fluctuate throughout the month, our burstable access option may be an
attractive choice for them because full bandwidth is available as they need it
but they are billed based on their actual usage. With SAVVIS' burstable
Internet access service, our customers are not required to pay for excess
bandwidth that they don't need.
Ethernet. For customers who feel comfortable operating in the 10/100 Mbps
Ethernet environment, SAVVIS Ethernet access serves as a cost-effective
solution to support high volume Internet traffic from a multiple user LAN or
heavy data exchange from a Web server.
SALES AND MARKETING
We contact potential new customers through our direct sales force and our
lead referral program. Our direct salespeople together with our sales engineers
develop sales proposals for potential new customers. After a sale is completed
and the services are implemented, the client solutions team assumes the
management of the customer relationship, handling support issues and selling
additional services and connectivity as the customer's business grows.
Direct Sales. Our direct sales force utilizes a "solution selling"
approach, qualifying the customer's IP networking and hosting requirements. We
then bring in product and engineering experts to design the final solution for
the customer. Under this approach, we are able to manage the relationship
effectively with the customer while utilizing more specialized resources to
ensure that the right solution is proposed and implemented. All sales
representatives take part in an extensive training program designed to develop
in-depth technical expertise so they can better understand customers' complex
networking needs and develop customized solutions. In addition, they
participate in "solution selling" training to teach them the best techniques to
qualify and sell the SAVVIS product line. We employ approximately seventy
people in ten major cities in the U.S. and approximately eighty representatives
based in Herndon, VA and St. Louis, MO. We also have small sales teams in
Europe, Asia and Latin America, who are focused on direct sales and engaging
alternate distribution channels.
Lead Referrals. We believe that additional content providers will be
interested in establishing lead referral programs. We seek to enter into
relationships with content providers to enable them to deliver their services in
a real-time, high quality manner and provide an incremental revenue opportunity
through a lead referral commission.
Alternate Channels. In addition to relationships with content providers,
we are developing new distribution arrangements with small to large partners,
including SAIC, Primus and QuantumShift. To help these companies compete in
today's changing market, our alternate channels strategy provides companies
with network infrastructure, sales and technical support and value added data
services. Our partners have web access to our lead referral program, free
marketing materials and collateral and an exclusive incentive promotion. Our
channel partners will benefit by generating additional revenues,
11
providing a more complete service bundle and reduce customer churn. We have
identified distribution opportunities with Internet service providers,
competitive local exchange carriers, and other communications and
Internet-related companies in the United States, Europe, Asia and Latin
America.
Client Solutions. Our client solutions team is responsible for customer
relationship management. The team alerts customers when their bandwidth
utilization approaches capacity and advises customers on methods to improve the
performance and security of their network using additional SAVVIS services.
This team is also able to cross-sell additional services to existing customers,
such as advising on VPN and managed hosting solutions.
Marketing. Our marketing programs are designed to build national and
global awareness of the SAVVIS brand name and its association with high
performance, high quality VPN, Internet and managed hosting services. We use
brand awareness and direct marketing programs to generate leads, accelerate the
sales process, retain existing customers and promote new products to existing
customers. Our print advertisements are placed in trade journals, newspapers
and special-interest publications. We participate in industry trade shows, from
time to time. We also use direct mail, e-newsletters, widespread fax
distributions, surveys, telemarketing, Internet marketing, on-line and on-site
seminars, collateral materials, advertising, welcome kits and direct response
programs to communicate with existing customers and to reach potential new
customers. Our marketing programs are targeted at information technology
executives, as well as senior marketing and finance managers. We closely track
the impact and effectiveness of our primary marketing programs.
Sales Force Automation. We use our proprietary sales force automation
system to manage all pre-sales communications with our prospective customers.
All distribution and tracking of sales leads occur through this system. Sales
leads are imported from data sources such as corporate web sites,
telemarketing, direct mail and national advertising campaigns, and assigned
regionally to the desktops of the appropriate sales representatives. All
contact with these prospects is documented in the sales force automation system
through every step of the sales cycle, from initial contact to contract
receipt. In addition, this system allows sales management to monitor the sales
activity of their specific sales representatives and generate sales forecasts
based on that activity. Further, our sales force automation system tracks all
marketing communications with the prospective customers, allowing us to measure
the effectiveness of various collateral materials and marketing campaigns in an
effort to maximize our marketing dollars. Lastly, our sales people use our
sales force automation system to track and manage their personal sales
prospects and to send customized packages of sales literature, brochures and
faxes directly from their computer desktops, thereby improving sales
efficiency.
CUSTOMERS
We currently provide services to approximately 1,500 customers. In
September and October 2001 we entered into five year agreements with Reuters
and MoneyLine Telerate providing for aggregate minimum revenue commitments of
$566 million over the contract terms. These contracts replaced the monthly
revenue from the Bridge network services agreement, which we entered into on
February 18, 2000. Bridge, which was our largest customer through the fall of
2001, represented approximately 55% of our 2001 revenues. Reuters and MoneyLine
Telerate represented approximately 12% and 6% respectively in 2001. No other
individual customer accounted for more than 5% of our revenues during the year
ended December 31, 2001. We also provide services to many financial service
companies and mid-sized organizations.
Our contracts with our customers are typically for one to three years in
length. The Reuters and MoneyLine Telerate contracts are five-year contracts.
Many of our customer contracts contain service level agreements that provide
for service credits should we fail to maintain specified levels of quality.
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CUSTOMER SERVICE
Our goal is to provide the highest level of customer service in the
industry. We believe that high quality customer service is critical to
attracting and retaining customers and to satisfying the rapidly growing data
networking, hosting and Internet services needs of these customers. Our
comprehensive approach to customer service and satisfaction includes a focus
on:
o providing written guarantees of service quality;
o providing a choice of services, either standard or fully managed (i.e.
outsourced management and equipment included), and
o providing effective network management, monitoring and support for our
customers' data networks.
We believe our network architecture, proprietary routing policies and
industry leading service level agreements provide our customers with very high
service quality. We are able to offer our customers different levels of service
priority for their different data transmission needs over one high-quality
network. For example, e-commerce and real-time applications, such as market
data delivery, voice service and video conferencing can be assigned higher
quality of service levels, while other applications, such as e-mail, can be
assigned a lower priority of service. By assigning the highest level of service
only to mission-critical or real-time applications, customers can lower their
overall data services costs without compromising their data networking
requirements.
Customer Call Centers. Customer support personnel located in call centers
in St. Louis, Missouri (24 hours a day, 365 days a year), London, England and
Singapore handle service inquiries from our customers from a single, uniform
customer database. These personnel are organized in client teams and are highly
trained to identify and resolve customer issues rapidly and completely. A
portion of our customer call center support services are currently supplied to
us by Reuters, a third party vendor, however we plan to internalize these
functions directly over the course of 2002. To track trouble tickets and
customer information, we use a proprietary management platform based on Vantive
enterprise software, a highly scaleable platform for problem tracking and
customer record access and maintenance that is easily accessible by personnel
at all of our network operations centers. We use an integrated client/circuit
information database that allows our customer support personnel to quickly
access a customer's profile from any of our support centers. In our local
markets, we have outsourced field technical services with firms who are experts
in Internet protocol, Unix, NT and ISDN technology and who are generally able
to respond to customer requests within two hours.
Management, Monitoring and Maintenance. We provide our customers with
detailed monitoring, reporting and management tools that allow them to review
their usage patterns, network availability, outage events, latency and data
loss. These tools allow our customers to evaluate the performance of our
service against our service level guarantee as well as review utilization and
performance data to facilitate their network planning and design activities.
Service Level Agreements. The consistent, reliable performance of the
SAVVIS Intelligent IP Network(SM) enables us to provide effective service level
agreements to our customers. We believe that companies unable to support a
commensurate level of predictable network performance will not be able to
provide service level agreements with value to the customer or will do so at
substantial risk to their own business.
SAVVIS INTELLIGENT IP NETWORK(SM) INFRASTRUCTURE
OVERVIEW
The SAVVIS Intelligent IP Network(SM) reaches 45 countries, with facilities
in 121 major cities, including 64 international cities and 57 U.S. cities. Our
network interconnects over 6,000 buildings worldwide and is based on ATM, frame
relay and Internet protocol technologies. In addition, our network incorporates
13 PrivateNAPs(SM), which allows our Internet traffic to bypass the congested
public Internet access points.
13
We have designed our network to enable us to offer our customers high
speed, high quality services, as well as a range of quality of service levels
and multiple levels of redundancy. Our network is designed with:
Open System Architectures. Our network is based on ATM, frame relay and
Internet protocol technologies. These are open systems networking protocols
that are in widespread use in data communications. Internet protocol is the
most commonly used and fastest growing networking protocol in the world. By
carrying Internet protocol on our network, we generally allow our customers to
connect to their customers, suppliers and remote offices using equipment
already installed in their networks and the networks to which they connect.
Additionally, by using ATM and frame relay in our network, we enhance network
utilization and quality of service, and we are able to easily communicate with
third party networks for the delivery of traffic on and off our network without
procuring special interface technologies or devices.
Quality of Service Differentiation. Our network architecture allows us to
offer and guarantee different levels of service priority for customers'
different data transmission needs. For example, e-commerce and real-time
applications, such as voice, can be assigned the highest level of priority,
while other applications, such as e-mail, can be assigned a lower priority of
service. By offering a quality of service differentiated product, we enable
customers to select a price/performance combination that is appropriate for
their needs. Customer sites where we have deployed ATM devices at the customer
premises enable the customers to run multiple applications, such as Internet
access, intranet and private voice, over the same equipment and local access,
thereby saving on local network transport and equipment costs.
High Reliability. We utilize redundant circuits, switches and physical
locations to substantially reduce the effects of a single point of failure
within our network. This redundancy, combined with our switching and routing
equipment, generally enables us to automatically reroute traffic when a failure
occurs, resulting in higher overall network performance and integrity. Our
backbone switches also incorporate high levels of equipment-specific
redundancies, resulting in higher levels of availability than those found in
basic routing platforms. We also employ uninterruptable power supplies and/or
electric generator back-ups at each switching facility, designed to limit the
impact of local power outages on our network.
GLOBAL NETWORK COMPONENTS
The components of our network include the following:
Switching Facilities. There are over 300 Lucent ATM and frame relay
switches, providing a highly redundant switch backbone deployed throughout the
SAVVIS Intelligent IP Network(SM). We have over 300 backbone routers installed
and there are approximately 14,700 customer premise routers located in office
buildings and customer sites. Our switches are located in secure facilities,
which provide highly reliable, direct access to high-speed telecommunications
infrastructure. In each switching facility, we rent space, install networking
equipment, including ATM or frame relay switches, routers and high-speed analog
and digital modems.
Backbone Capacity. Our network is designed with a highly redundant
backbone infrastructure, including diversely routed long haul and local access
connections from multiple carriers. We interconnect our switching facilities
through high speed lines leased from a variety of carriers, including Qwest
Communications International, Inc., MCI WorldCom, Inc. and Broadwing, Inc., Our
leased line connections range in capacity from 45 Mbps through 620 Mbps in the
U.S. and up to 155 Mbps internationally. This backbone network has generally
been established in ring architecture so that at least two diverse paths exist
between our switching facilities. The "fault tolerant" configuration of our
network allows data packets in ring architecture so that at least two diverse
paths exist between our switching facilities to travel on many alternate paths
to connect points on our network.
PrivateNAPs(SM). For our customers' Internet traffic, we have built private
network access points, or PrivateNAPs(SM), where we connect to the Internet
backbones operated by Sprint Corporation, Cable & Wireless plc and UUNET, an
affiliate of MCI WorldCom. At each of our PrivateNAPs(SM), we are connected to
these carriers through transit agreements that allow us to connect to their
Internet networks for a monthly fee. Since we are a paying customer of each of
these Internet backbone providers, we
14
believe we realize better response times, installation intervals, service levels
and routing flexibility than Internet service providers that rely solely on free
public or private peering arrangements. We currently operate 11 PrivateNAPs(SM)
in the U.S., one in London and one in Singapore. In addition, to enhance our
carrier redundancy, at each of our PrivateNAPs(SM), we connect to other Internet
backbones through peering arrangements where each party to the peering
arrangement agrees to carry the other party's traffic for free. We have peering
arrangements in place with a number of companies, including America Online,
Inc., Broadwing, DIGEX, Incorporated, Exodus Communications, Inc., Level 3
Communications, LLC, Inc. and Williams Communications Group, Inc. These peering
arrangements allow for settlement-free, direct connections between networks,
where local access charges are generally split evenly between the applicable
parties. Smaller Internet service providers typically connect to our network
through transit agreements that allow them to connect to our network for a fee.
Our PrivateNAP(SM) architecture combined with our proprietary routing
policies enables us to route customer traffic directly onto the Internet
backbone of its destination for a substantial portion of global Internet
addresses. This network architecture allows our customers' Internet traffic to
generally bypass congested public Internet network access points, thereby
reducing data loss and latency and improving reliability and performance. In
addition, customers directly connected to the same PrivateNAP(SM) typically get
one-hop access, meaning their data pass through only one router, when
communicating with each other, and two customers connected to different
PrivateNAPs(SM) typically enjoy two-hop access, meaning their data pass through
only two routers, when communicating with each other, in both cases completely
bypassing the public Internet
Managed Hosting. We have approximately 180,000 square feet of data center
facilities located in St. Louis, San Francisco, London, Toronto and Singapore.
All of these facilities are served by high speed connections for local access.
These facilities are built to state-of-the-art levels with high availability,
mission-critical environments, including uninterruptable power supplies,
back-up generators, fire suppression, separate cooling zones and seismically
braced racks. These facilities are accessible 24 hours a day, 365 days a year,
both locally and remotely, and have high levels of physical security.
SAVVIS OPERATIONS CENTERS
Our global network operations center located in St. Louis, Missouri,
operates 24 hours a day, 365 days a year, and is staffed by our skilled
technicians. We also have regional network operations centers in London and
Singapore. These regional centers operate for ensuring backup for the St. Louis
facility. From these SAVVIS operations centers, we remotely monitor the
components of the SAVVIS Intelligent IP Network(SM), including our
PrivateNAPs(SM), and perform network diagnostics and equipment surveillance. The
SAVVIS operations centers use sophisticated, proprietary network management
platforms based on the Lucent NavisCore, HP OpenView, and Nortel Optivity
programs to monitor and manage our switching facilities and our routers. Unlike
most of our competitors, our entire global network is managed by a single
network management system for all SAVVIS products. This makes our customer
service uniform worldwide, and makes rolling out new products far easier than
having to deal with the myriad of legacy systems with which our competitors
often have to contend.
TECHNOLOGY OVERVIEW
Private networks. Private networks typically comprise a number of private,
leased lines that interconnect multiple corporate locations. The advantages of
private lines include quality, since capacity is reserved for the exclusive use
of the network owner, and security, since the owner's data transmissions are
not commingled with those of other customers. Private line networks have been
most popular in the U.S., where capacity prices are lowest. While private lines
are typically secure and reliable, they do not use network capacity efficiently
and are not flexible or scaleable as changes in network topology are
implemented.
Shared networks. Until recently, prices for long-haul telecommunications
capacity outside of the U.S., particularly international capacity, were
relatively expensive. Since the advent of data networking, only users with
extremely high capacity requirements invested in private networks in these
locations. Most other users employed shared networking technologies, whereby
multiple corporate locations would be interconnected with the data network of a
major telecommunications carrier or value-added network
15
service provider for carriage to the appropriate destination. X.25 was an early
open shared network protocol that was designed to support mission-critical
communications over analog networks. X.25 has been extremely popular outside of
the U.S., where until recently private line networks have remained expensive,
and in developing markets where the telecommunications infrastructure is
sometimes unreliable. X.25 contemplates extensive error detection and data
recovery processes, which slows the effective rate of transmission.
Today, ATM, frame relay and Internet protocol are driving the migration of
traffic from private line networks to shared networks and from older open
protocols such as X.25 to newer architectures.
Frame Relay. Frame relay evolved from X.25 networks and today is widely
used for applications such as local area network-to-local area network
communications. Unlike X.25, frame relay does not perform any complex error
detection or error recovery of data. As a result, it is a simpler and faster
technology. Frame relay circuits are effective to create a network of
interconnected sites because each site needs only one link into the frame relay
network to communicate with all other sites. Frame relay is less costly than
point-to-point private networks, and its software-defined "virtual circuits"
make it easier to alter network topology as connectivity requirements change.
One limitation of the frame relay protocol is its application for real-time
services. Frame relay packets are variable in length, and as large data files
transit the network they can cause delays at key aggregation and switching
points, often causing other traffic to be delayed. These delays can materially
degrade the quality of real-time services such as voice and video.
ATM. The ATM protocol was specifically designed to support the
transmission of all types of content, including data, video and voice, over a
single network. ATM generally has the ability to prioritize cells to ensure
that real-time data takes priority over less time-sensitive material when
transiting the network. This enables service providers to offer service
guarantees with a greater degree of confidence and facilitates the introduction
of real-time services that are difficult under other protocols.
Additionally, ATM data cells are small and fixed in size, facilitating
high-speed line transport at speeds up to 2.5 billion bits per second. One
limitation of ATM is that the benefits created by the small, fixed nature of
ATM cells also create incremental traffic on the network. Each cell requires
its own identification and addressing information, which is repeated in each of
many individual ATM cells that comprise a given data transmission. The
replication of this "header" information generates additional overhead for the
network, requiring the network operator to provision additional transmission
capacity.
Internet Protocol. Internet protocol is a simple, highly scaleable
protocol that is a core element of the architecture of the Internet and can be
used across most network technologies in use today. Internet protocol has also
become the communications protocol of choice for the desktop and the local area
network, thus data networking over Internet protocol requires no protocol
conversion, reducing overhead and improving performance. The protocol does not
distinguish among classes of traffic, which limits its ability to deliver
real-time services.
Our Network. We have built the SAVVIS Intelligent IP Network(SM) to take
advantage of the rapid growth of Internet protocol in corporate networks, to
offer customers the ability to run multiple applications on a single network
and to allow customers to choose the quality of service level which best meets
their needs. By building our network to run Internet protocol over ATM, we
allow our customers to overcome the limitations of Internet protocol and
designate the level of priority to be accorded to their traffic.
COMPETITION
The markets that we serve are intensely competitive. In addition, we
expect to face significant additional competition in the future from existing
competitors and new market entrants. Many of our competitors have greater
financial, technical and marketing resources, larger customer bases, greater
name recognition and more established relationships in the industries that we
operate in than we do.
We believe that a highly reliable network infrastructure, a broad range of
quality products and services, a knowledgeable sales force and the quality of
customer support are the primary competitive factors in our targeted markets
and that price is generally secondary to these factors. We believe that we
presently are well positioned to compete favorably with respect to most of
these factors. Our current and potential competitors in our targeted markets
include:
16
VPN and Data Networking Companies. Several data networking companies such
as Equant N.V., Infonet Services Corporation, Concert Management Services Inc.
and Global One offer data networking services to business customers worldwide.
These services include ATM and frame relay, private line, Internet access and
network outsourcing. In addition, many competitors in the U.S. offer
traditional data communications services, such as AT&T, Sprint and WorldCom.
These companies have significant experience in offering tailored services and
market their expertise in providing these services and related technology.
Internet Service Providers. Our current and potential competitors in the
market include Internet service providers with a significant regional, national
or global presence targeting business customers, such as AT&T Corp., Cable &
Wireless plc, Genuity, Sprint Corporation, and UUNET, a MCIWorldcom affiliate.
Many of these companies are developing Internet-based virtual private network
services that attempt to replicate some or all of the functionality of our VPN
services.
Telecommunications Carriers. Many large carriers, including AT&T Corp.,
British Telecommunications plc, Cable & Wireless plc, WorldCom, Inc., Deutsche
Telekom AG and Sprint Corporation, offer data networking and Internet access
services. They compete with us by bundling various services such as local and
long distance voice, data transmission and video services to their business
customers. We believe that there is a move toward horizontal integration by
telecommunications companies through acquisitions of or joint ventures with
Internet service providers to meet the Internet access and data networking
requirements of business customers. Accordingly, we expect to experience
increased competition from these telecommunications carriers.
Managed Hosting Competitors. There are more limited competitors in the
managed hosting market, including Digex, a MCIWorldcom affiliate, and Exodus as
the two primary players. Other carriers and Internet service providers are also
entering the managed hosting market, including AT&T, Sprint and Qwest. Many of
these competitors have struggled in providing managed hosting services, and
have been more focused on colocation services until this year.
REGULATORY MATTERS
OVERVIEW
The following section describes laws and regulatory developments that we
believe are currently applicable to our business. It does not cover all present
or pending federal, state, local or foreign regulations affecting the
communications industry.
REGULATORY ANALYSIS BY SERVICE TYPE
We offer three general categories of services and products today, which we
market under various different trade names: Managed IP, High Bandwidth Internet
Access and Managed Hosting.
Managed IP. The core of our managed IP services business is providing
managed data networking services to corporate customers. The managed data
networking services that we provide are generally characterized as data
transmission services or value added services for licensing purposes. We are
authorized by law or by individual license or a general authorization
obtainable by simple notification or declaration by an automatic "class"
license to provide these services in all countries in which we expect to
generate significant revenue from managed IP services, including the United
States, Canada, France, Germany, Italy, the United Kingdom, Australia, Hong
Kong, Japan, and Singapore.
High Bandwidth Internet Access. The high bandwidth Internet access
services that we offer generally do not require any authorization beyond those
required for managed data networking services and value added services. In many
countries, Internet services are less heavily regulated than other enhanced
data services. In the United States, for instance, no individual authorization
is currently required for provision of Internet access. However, because
Internet and IP technology is so new, regulations concerning Internet access
remain ill defined or in flux in many countries, including in the United
States. Further, voice over the Internet or voice over IP (collectively
referred to as "VOIP") may be regulated as
17
traditional voice service in certain countries. Moreover, countries that today
impose few restrictions on the provision of Internet services, including VOIP,
may, in the future, adopt rules regulating VOIP services similarly to basic
voice telecommunications services. In addition, there is a risk that customers
may attempt to use our network to access the Internet in countries that may
prohibit or restrict such access or, after accessing the Internet, may create
or view content or engage in other activities that certain countries may wish
to prohibit or restrict. We may limit this risk by discontinuing such access if
measures are taken or threatened by the pertinent authorities to restrict the
use of our network for these purposes.
Managed Hosting. The managed hosting services that SAVVIS currently
provides in the United States and other foreign countries are generally not
considered telecommunications service. Our data center facilities are designed
to ensure a secure environment in which customers locate mission critical
networking hardware, which enables us to provide value-added hosting management
and service options including server management, operating system management,
colocation, hardware management and space and environmental provisioning. In
most countries, hosting is a relatively new product offering and therefore
regulations do not specifically address it.
In the United States and abroad we deliver our services over leased
facilities. We do not have current plans to purchase, own and operate our own
fiber. The regulatory regime for facilities-based carriers in the United States
and in many foreign countries may differ from that of providers which use
leased facilities. Therefore, if in the future we elected to acquire our own
dark fiber to provide our services we would need to evaluate the regulatory
implications. In some cases, we may be required to obtain additional licenses
and authorizations.
With respect to all of our current services, we do not foresee the
emergence of any significant regulatory issues that will prevent us from
selling any of them in accordance with our business plan. However, we cannot
guarantee that governments will not institute laws and regulations that may
impact the provision of these services.
US REGULATORY MATTERS
Our existing and planned data networking, Internet and hosting operations
are not actively regulated by the Federal Communications Commission ("FCC") or
any other government agency of the United States at the present time, other
than regulations that apply to businesses generally.
Federal Regulatory Matters. The Telecommunications Act of 1996
distinguishes between telecommunications services, which are regulated at the
federal level by the FCC, and information services, which are not currently
regulated by the FCC. This Act defines "telecommunications services" as
"transmission, between or among points specified by the user, of information of
the user's choosing, without change in the form or content of the information
as sent and received." This Act defines "information services" as "the offering
of a capability for generating, acquiring, storing, transforming, processing,
retrieving, utilizing, or making available information via telecommunications."
The provisioning of telecommunications services on a common carrier basis
requires FCC authorization, as well as contributions to the federal universal
service fund ("USF") based on interstate and international revenues. Providers
of telecommunications services on a private carrier basis are not required to
obtain a specific authorization, but are required to make USF contributions
based on international and interstate telecommunications revenues. Intrastate
telecommunications services are subject to regulation by the relevant state
public utility commission and may be subject to licensing requirements,
tariffs, and/or subsidy mechanisms.
Certain services may have components of both "telecommunications" and
"information." In its 1998 Report to Congress on Universal Service the
("Stevens Report"), the FCC identified such services as "hybrids," defined as
"services in which a provider offers a capability for generating, acquiring,
storing, transforming, processing, retrieving, utilizing or making available
information via telecommunications, and as an inseparable part of that service
transmits information supplied or requested by the user." The FCC has
determined that certain hybrid services are exempt from federal regulation.
We believe that the products and services we offer, whether on a
facilities or resale basis, largely qualify as information services as defined
by the Telecommunications Act or exempt hybrid services as classified by the
FCC and thus are not subject to federal regulation. There remains some
uncertainty at
18
the FCC regarding the distinction between information and telecommunications
services. Moreover, while we provide these services on a resale basis today, we
may elect to acquire the capability to provide certain of theses service on a
facilities basis in the future. If so, we will need to consider at that time
whether such services would qualify as regulated services under the
Telecommunications Act. Moreover, there is also some risk that the FCC could
determine that our products and services as currently provided required
specific authorization or are subject to USF obligations or other regulations.
In such case, we may be required to obtain such authorizations, make such
payments and/or comply with other regulatory obligations.
With respect to universal service, in the Stevens Report, the FCC stated
that "in those cases where an Internet service provider owns transmission
facilities, and engages in data transport over those facilities in order to
provide an information service, we do not currently require it to contribute to
universal service mechanisms." The FCC also explained that while it may be
"advisable" to require facilities-based ISPs to contribute, it would refrain
from doing so because of "significant operational difficulties associated with
determining the amount of an Internet service provider's revenues to be
assessed for universal service purposes and with enforcing such requirements."
These same operational difficulties and enforcement problems could also
theoretically apply to other types of facilities-based enhanced data service
providers.
Subsequently, at least one federal appeals court has found that, when an
ISP owns the transmission facilities, it provides "telecommunications" services
as defined in the 1996 US Telecommunications Act. In response partially to that
decision, the FCC has taken a number of steps to address the regulatory status
of access to the Internet over cable and other facilities. Accordingly, the FCC
continues to consider whether or not facilities-based providers of Internet
access services should be required to unbundle the "information" portion from
the "telecommunications" portion of their services. If the FCC adopts such a
requirement, all facilities-based ISPs could be required to contribute to the
USF based on revenues derived from providing the telecommunications services
underlying provision of their information service offerings. To the extent that
we elect to become or are deemed to be a facilities-based ISP, we would
therefore be required to make these USF contributions.
There are numerous proceedings pending before the FCC regarding the
appropriate regulatory classification of broadband Internet access services,
and other data transmission services. Although the FCC has tentatively
concluded that broadband wireline Internet access services are "information
services", there is no guarantee that the FCC will adopt this tentative
conclusion, or that the FCC will not impose regulatory obligations on providers
of broadband Internet access services, such as USF contribution requirements.
Even if the tentative conclusion is adopted, it is unclear what affect such a
ruling would have on the regulatory classification of our data networking
services.
Further, the FCC is considering revising the methodology for assessment
and recovery of USF contributions. The FCC is reviewing whether to assess
contributions based on the number and capacity of connections provided to the
public network, rather than based on a percentage of end-user
telecommunications revenues. This could lead to the elimination of the
requirement that private carriers which operate private networks contribute to
the USF fund based on telecommunications revenues. However, there is no
guarantee that the FCC will adopt this proposal, and even it if it did, it is
unclear whether or not private network operators will be required to contribute
to USF in some other manner.
Services offered over the Internet or using Internet protocol may present
distinct regulatory issues. Advancements in technology are increasingly
narrowing the distinctions, from a customer's perspective, between traditional
or basic telecommunications services and Internet protocol or Internet based
services, and thus may lead regulators to reassess their treatment of such
services. The regulatory classification and treatment of some of these services
has not been resolved authoritatively in the United States, at either the
federal or state levels, and it is possible that various internet-related
services will be subject to prior authorization and to as yet undefined terms
and conditions under which such authorizations may be granted.
There also is some uncertainty about the regulatory status of voice
services provided over data networks. In the Stevens Report, for instance, the
FCC concluded that some of the services currently offered over the Internet,
such as phone-to-phone IP telephone services, may be functionally
19
indistinguishable from traditional telecommunications service offering, and
that their non-regulatory status may have to be reexamined. Therefore, there is
some risk that Internet telephony and other voice services that we might offer
in the future could be subject to regulation, including requirements to make
USF contributions, and that those services could be treated similarly to voice
services provided over conventional circuit-switched network facilities for
purposes of making payments to local telephone companies for origination and
termination of call and for other purposes.
State Regulatory Matters. States also regulate telecommunications
services, including through certification of providers of intrastate services,
regulation of intrastate rates and services offering, and other regulations.
The Telecommunications Act prohibits state and local governments from enforcing
any law, rule or legal requirement that prohibits or has the effect of
prohibiting any person from providing any interstate or intrastate
telecommunications services. Under the Telecommunications Act, states retain
jurisdiction to adopt regulations necessary to preserve universal services,
protect public safety and welfare, ensure the continued quality of
communications services and safeguard the rights of consumers. Accordingly, the
degree of state involvement in local telecommunications services may be
substantial. Furthermore, states generally give municipal authorities
responsibility over the access to rights-of way franchises, zoning, and other
matters of local concern, which means that localities may also have involvement
in the regulation of the telecommunications industry.
Because SAVVIS bundles its data transmission services with information
services, we do not believe our services are regulated at the state level for
similar reasons that our services are not regulated by the FCC. However, very
little case law exists on the regulation of information or hybrid services at
the state level. As such, it is less clear as to how most states currently
regulate these types of services. However, generally, state public utility
commissions have followed federal interpretations in this area and few of our
competitors in the enhanced data service providers industry have obtained state
certifications.
Future Federal and State Developments. We do not believe we are currently
subject to direct regulation by the FCC or any other federal or state
governmental agency, other than regulations that apply to all business
organizations. However, the FCC and state regulators continue to review their
regulatory positions on the usage of the basic network and communications
facilities by the Internet companies. Moreover, various existing U.S. federal
and state regulations are currently the subject of judicial proceedings,
legislative hearings and administrative proposals which could change, in
varying degrees, the manner in which the telecommunications industry operates.
We cannot predict the outcome of these proceedings, or the impact they may have
on the telecommunications or information services industries generally, or on
us particularly. In addition, we cannot assure you that future legislative,
regulatory or judicial changes in the United States or other countries in which
we operate will not have a material adverse impact on our business. To the
extent that future regulatory licenses or permissions are necessary or useful
for us to provide our services, however, we will seek to obtain those licenses
and permissions and do not believe that such applications will be denied or we
would face processing delays that will have a material adverse effect on us.
Moreover, if new regulations are imposed on our industry, or existing
regulations are extended to cover our industry, these regulations will almost
certainly also apply to all similarly situated parties offering comparable
services, including our competitors.
INTERNATIONAL REGULATORY MATTERS
World Trade Organization Agreement and its Implications. In December 1993,
54 countries during the Uruguay Round of World Trade Organization ("WTO")
negotiations made commitments to permit market access for Value-Added Services.
On February 15, 1997, 69 countries at the WTO reached an agreement to
liberalize basic telecommunications services. This Agreement on Basic
Telecommunications Services (the "BAT") formally entered into force, binding
the signatory countries, on February 5, 1998. Since then, the number of
signatories has increased to over 80. Before the agreement came into force,
only 17 percent of the world's top 20 global markets were open to U.S. firms;
now, measured by annual sales, U.S. companies have gained access to over 95% of
global telecommunications markets, according to the International
Telecommunications Union. Despite the enactment of the BAT, regulatory
obstacles continue to exist in a number of signatory countries. First, some
signatory countries made only limited commitments in terms of the services that
they were willing to liberalize and the timeframe in which they were willing to
do so. Second,
20
some less developed signatory countries are not well prepared for competition
or for effectively regulating a liberalized market; gaining the requisite
experience and expertise is likely to be a long and difficult process. Finally,
even in the more liberalized countries, there remains considerable
"post-liberalization red tape," such as complicated licensing rules, foreign
ownership limits, high fees and undeveloped competition and interconnection
safeguards. Overall, we believe that the BAT, and its implementation by the
signatory countries, offers us significant opportunities to provide our
services to and from these countries.
SAVVIS' International Operations and Authorizations. Our major regional
markets outside the United States consist of Canada, the European Union and the
Asia Pacific Rim. As is true in the United States, the market for our managed
IP VPN, Internet access and managed hosting services in each of the major
economies within these regions are now open to foreign competition, including
Canada, France, Germany, Italy, the United Kingdom, Australia, Hong Kong,
Japan, and Singapore. We believe that we are authorized to provide our services
as an independent operator under the applicable telecommunications regulations
in each of these countries.
As in the United States, no specific license or authorization is required
to provide our services in Australia, France, and the United Kingdom. In
Canada, we hold a Class A License for the Provision of Basic International
Telecommunications Services; no specific license is required to provide
domestic services. In Hong Kong, we hold a Public Non-Exclusive
Telecommunications License. In Japan, we hold a Special Type II
Telecommunications Business License. In Singapore, we hold a Services-Based
Operator (Individual) License. In the countries of Germany and Italy we have
complied with notification requirements.
Most other countries that we believe represent significant revenue
potential have opened their markets to our data networking and Internet access
services, although authorization is required in many of them. We are authorized
in Argentina, Austria, Belgium, Brazil, Chile, Denmark, Finland, Greece,
Ireland, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Puerto Rico,
Spain, Sweden, Switzerland, and Taiwan to provide data networking and Internet
access services. Of these countries, in Belgium, Denmark, Finland, New Zealand,
Norway, Puerto Rico, and Switzerland, no individual license is required. In
Argentina, we hold a Provision of Data and Value Added Services License. In
Brazil we hold a Specialized Network Services License. In Chile, we hold an
Intermediate Concession License for Value Add Services. In Ireland we hold a
Basic Telecommunications License. In Spain, we hold a General Type C
Authorization. In Taiwan, we hold a Type II Telecommunications License. In the
countries of Austria, Greece, Luxembourg, Netherlands, Poland and Sweden we
have complied with notification requirements.
In other countries, including Bahamas, Bermuda, Colombia, India,
Indonesia, Mexico, Panama, Philippines, South Korea, and Turkey, we own network
equipment but are not currently authorized to offer data networking and
Internet access services directly. With respect to each of these countries
other than South Korea, regulatory and market access barriers prevent us from
providing services directly to customers. Our business plan does not
contemplate selling significant services in any of these countries in the near
term. Therefore, we do not believe that our inability to offer services
directly to customers in these countries is significant. We are, however, able
to provide certain services through licensed distributors. We are currently
seeking authorization to offer services directly in South Korea, and although
we expect to obtain the necessary approvals, we cannot assure you when or if we
will obtain any of these approvals. However, because our business plan does not
contemplate selling significant services in South Korea in the near term, we do
not believe that our inability to offer services directly to customers there is
significant.
In addition, we face regulatory and market access barriers in countries in
which we do not operate but in which we have an option to purchase network
assets from MoneyLine Telerate that we did not already acquire in the Bridge
asset transfer. In some of these countries, we are currently unable to offer
services due to regulatory barriers restricting foreign competition. These
countries include Bahrain, China, Kuwait, Saudi Arabia, Thailand, and the
United Arab Emirates. As these countries liberalize their telecommunications
markets, we may elect to seek the authorizations necessary to acquire and
operate the network assets in order to provide services. Our business plan does
not contemplate selling services in these closed markets to customers in the
near term. Therefore, we do not believe that our inability to access these
markets is significant.
21
In a few countries where we have an option to purchase the network assets
from MoneyLine Telerate that we did not already acquire in the Bridge asset
transfer, regulatory conditions now permit us to acquire these assets and
provide services to customers, upon obtaining proper governmental
authorizations. Consequently, we are in the process of seeking regulatory
approvals to offer services in Hungary and Malaysia. Although we expect to
obtain the necessary approvals to provide services to customers in these
countries in the near future, we cannot assure you that we will obtain any of
these approvals. As our business plan does not contemplate selling significant
amounts of services in these markets in the near term, we do not believe that
the failure to obtain the authorizations in these countries will be
significant.
In most jurisdictions around the world, we may provide services only after
first establishing a corporate presence, by way of the incorporation of a
subsidiary or the registration of a branch or representative office. In each
country where we provide services currently we have established such a local
presence where such a presence is legally required and will do so in any other
jurisdiction we may elect to enter in the future with a similar requirement.
SPECIFIC COUNTRY AND REGIONAL REGULATIONS.
Canada. Communications services in Canada are governed by the
Telecommunications Act of 1993 and administered by the Canadian
Radio-Television and Telecommunications Commission ("CRTC"). This Act requires
that providers of international telecommunications services obtain a license;
however, no specific license is required to provide domestic telecommunications
services. SAVVIS has obtained a Class A License for the Provision of Basic
International Telecommunications. With respect to facilities, an entity that
wishes to own or operate a transmission facility to provide telecommunications
services to the public for a fee must qualify as a common carrier. Because
Canada has not fully liberalized its telecommunications market, common carriers
may not be owned and controlled by foreign persons. Currently, we provide our
services in Canada over lines leased from authorized providers. We do not
anticipate becoming a facilities-based provider in Canada in the near term, and
therefore we do not believe that the common carrier restrictions are
significant to us. However, were we to acquire transmissions facilities in
Canada on an Indefeasible Right of Use ("IRU") basis, we do not believe that
that would constitute owning or operating a facility as defined by the Canadian
Telecommunications Act and interpreted by the CRTC. Therefore, even in that
case, we do not believe we would be required to qualify as a common carrier in
order to use such facilities to provide our services in Canada.
European Union. Over the last decade, the European Union has established a
comprehensive and flexible regulatory system, culminating in the full
liberalization of telecommunications networks and services effective on January
1, 1998. By that date, ten European Union member countries adopted a fully
liberalized telecommunications regime. By December 31, 2000 five more had
conformed. All 18 European Union member countries were obligated to incorporate
the principles set forth in the EU legislation into their respective domestic
legal frameworks. However, the impact of the European Union directives has been
affected in some cases by delayed or inadequate implementation, as well as the
irregular enforcement by the domestic regulatory authorities of some European
Union member states. In addition, new market entrants have encountered
cumbersome licensing and reporting requirements, difficulty negotiating
interconnection agreements and obtaining local loops, and burdensome
requirements concerning data protection and privacy.
Telecommunications services are liberalized in varying degrees in European
countries that are not EU members. As a matter of practice, Switzerland and
Norway conform their regulatory frameworks to the European Union model. In
countries such as Poland and Hungary, the markets are open to varying degrees,
although certain market access barriers continue to exist.
United Kingdom. The Telecommunications Act of 1984 provides the regulatory
framework for the provision of telecommunications services in the United
Kingdom, our largest single market in terms of revenue within the European
Union. The authorization regime established by this Act is largely
infrastructure based, meaning that systems or facilities are licensed; services
are generally exempted from individual license requirements. Accordingly, with
minor exceptions, regulatory treatment under this Act does not hinge on whether
the license applies to data or voice. SAVVIS provides its services over
22
international private leased circuits ("IPLCs") and leased local loops which
are not connected to the public switched network and, as such, is not required
to obtain an individual license. Our services are provided under the
Telecommunications Services Class License. This Class License authorizes the
provision of fixed telecommunications services of any description, other than
international voice services, broadcasting and conditional access services. The
class license allows us to connect our network to essentially any other
licensed system and to provide commercial services to third parties from up to
twenty premises. Internet access services are not subject to additional
service-specific regulation.
Asia-Pacific Rim. The last decade has witnessed dramatic changes across
the Asia-Pacific Rim as emerging markets have begun to open their economies to
trade and competition. The Asia-Pacific Economic Cooperation ("APEC"),
established in 1989 in response to the growing interdependence among
Asia-Pacific economies, has become the primary vehicle for promoting open trade
and economic cooperation in the region. APEC includes over 20 member countries,
including the United States. With respect to telecommunications, degrees of
liberalization vary significantly among the APEC members. Australia and New
Zealand have fully liberalized the sectors. While Japan, Singapore, Taiwan,
Malaysia and South Korea have opened their markets to foreign competition, one
or more factors, such as complicated and time-consuming regulatory procedures,
lack of complete independence of regulators, and continued governmental
ownership of incumbent operators, impose costs on new market entrants,
restricting competition. China, India, Indonesia, the Philippines and Thailand
continue to restrict direct foreign investment in the telecommunications sector
to minority ownership or prohibit it all together.
Latin America. Use of the Internet is growing rapidly throughout Latin
America, due in large part to the introduction of competition and the lifting
of foreign ownership constraints in the major markets of Argentina, Brazil and
Chile. Individual licenses are generally required throughout the region in
order to provide data networking and Internet access services. In Mexico,
market barriers remain -- regulator not truly independent, incumbent with
monopoly-like powers, foreign ownership limitations -- and thus complicate our
ability to provide services directly to our customers. The United States is
currently pursuing at the WTO its complaint against Mexico for failing to
comply with its obligations to provide foreign access to its telecommunications
market under Mexico's WTO commitments.
Middle East/Africa. The telecommunications market in much of the Middle
East and Africa remains largely closed to foreign competition in a wide range
of services. In addition, some governments impose strict content restrictions
and hold the network service providers liable for content that runs over the
network. In recent years, South Africa has taken steps to lift certain barriers
to foreign competition, although the incumbent continues to exercise
monopoly-like power in certain sectors.
OTHER PERTINENT REGULATORY DEVELOPMENTS
The laws and regulations relating to the liability of Internet access
providers for information carried on or disseminated through their networks are
currently unsettled both in the United States and abroad. Several private
lawsuits seeking to impose liability on online services companies and Internet
access providers are pending in US courts. The imposition of the potential
liability on us and other Internet access providers for information carried on
or disseminated through our systems could require us to implement measures to
reduce our exposure to this liability, which may in turn require the
expenditure of substantial resources or the discontinuance of various service
offerings. The costs of defending against any claims and potential adverse
outcomes of these claims could have a material adverse effect on our business.
In addition, because of the increased popularity and use of the Internet,
additional laws and regulations are being and will likely continue to be
adopted at the federal, state, and local levels, as well as in the foreign
countries in which we operate, governing such issues as privacy, consumer
protection, child protection, intellectual property, libel, taxation, mass
circulation of unsolicited e-mail, gambling, pornography, law enforcement and
national security, among others. The implementation of any such legislation
could result in direct or indirect regulation of service providers such as
ourselves. In that case, it is likely that we would have to implement
additional policies and procedures, and incur additional costs, designed to
assure our compliance with the particular legislation.
23
INTELLECTUAL PROPERTY
We do not own any patents or registered trademarks except for our business
name and several product and service names. We have also registered various
Internet domain names in the United States and United Kingdom in connection
with the SAVVIS corporate website. In addition, we have applied for patents and
trademark protection for various other products and services. We do not hold
any material licenses, franchises or concessions. We enter into confidentiality
and invention assignment agreements with our employees and consultants and
control access to and distribution of our proprietary information.
EMPLOYEES
As of December 31, 2001, we employed 566 full-time persons, 255 were
engaged in engineering, operations and customer service, 256 in sales and
marketing, and 55 in finance and administration. None of our employees are
represented by a labor union, and we have not experienced any work stoppages to
date. We consider our employee relations to be good.
24
RISK FACTORS
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, set forth below are cautionary statements
identifying important factors that could cause actual events or results to
differ materially from any forward-looking statements made by or on behalf of
us, whether oral or written. We wish to ensure that any forward-looking
statements are accompanied by meaningful cautionary statements in order to
maximize to the fullest extent possible the protections of the safe harbor
established in the Private Securities Litigation Reform Act of 1995.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the following important factors that could cause
actual events or results to differ materially from our forward-looking
statements.
RISKS RELATED TO OUR BUSINESS
THE LOSS OF EITHER OF OUR TWO LARGEST CUSTOMERS, WHO REPRESENT APPROXIMATELY
75% OF OUR REVENUES, WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Reuters and MoneyLine Telerate account for approximately 75% of our
revenue in 2001. The service agreements each contain minimum revenue
commitments. However, material defaults by us under the agreements or failure
by us to maintain the service level commitments could lead to reductions of
these minimum commitments and/or termination of the agreements. In addition, a
business downturn that negatively impacted either Reuters or MoneyLine Telerate
could also lead to a reduction of their minimum commitments. The loss of either
of these customers, or a significant reduction in either's minimum revenue
commitments, would materially reduce our revenues which, to the extent not
offset by cost reductions or new customer additions, would materially reduce
our cash flow. Furthermore, Reuters owns 51% of a joint venture company which
competes directly with SAVVIS and which was formed to be Reuters preferred
network partner. If that company develops and deploys network technologies
which allow for the reliable transmission of real-time IP data, Reuters could
migrate business from SAVVIS to its joint-venture company which would
materially reduce our revenues.
OUR LIMITED HISTORY, AND THE FACT THAT WE ONLY RECENTLY BEGAN OFFERING DATA
NETWORKING AND HOSTING SERVICES, MAKES IT DIFFICULT FOR YOU TO EVALUATE OUR
PERFORMANCE.
Although we began commercial operations in 1996, we only began offering
data networking and hosting services in 2000. We expect to generate a
substantial portion of our revenues from these services in the future. In
addition, many of our executive officers and key technical employees joined us
in late 1999 and in 2000, and we have adopted our business strategies recently.
Because of our short operating history, you have very limited operating and
financial data about us upon which to base an evaluation of our performance and
prospects and an investment in our common stock. Therefore, you should consider
and evaluate our prospects in light of the risks and difficulties frequently
encountered by rapidly growing companies, particularly companies in the rapidly
evolving data networking, Internet access and hosting markets.
WE EXPECT TO CONTINUE TO INCUR SUBSTANTIAL NET LOSSES.
We incurred losses of approximately $46.7 million, $164.9 million and
$288.9 million in 1999, 2000 and 2001 and had negative cash flows from
operating activities of $24.5 million, $79.8 million and $41.9 million in these
years. We expect to incur significant net losses before extraordinary items at
least through 2003.
WE ARE CONTROLLED BY PARTIES WHOSE INTERESTS MAY NOT BE ALIGNED WITH YOURS.
Investment partnerships sponsored by Welsh, Carson, Anderson & Stowe
("Welsh Carson") currently own approximately 56% of our outstanding voting
stock, On March 18, 2002, in order to obtain additional funding for our
operations, we issued $158.1 million of our 11.5% convertible preferred stock
to investment partnerships sponsored by, and individuals affiliated with, Welsh
Carson. The preferred stock is convertible into our common stock at $0.75 per
share, which was the closing bid of our common
25
stock the day prior to the execution of the securities purchase agreement. The
Welsh Carson affiliates have the right to appoint the majority of the Board of
Directors. The terms of the preferred stock contain provisions related to
registration rights, pre-emptive rights and premiums in change of control
situations which among other factors could result in decisions concerning our
operations or financial structure that may present conflicts of interest
between the Welsh Carson affiliates and our other stockholders.
WE DEPEND ON KEY PERSONNEL. IF WE ARE UNABLE TO HIRE AND RETAIN QUALIFIED
PERSONNEL, WE MAY BE UNABLE TO IMPLEMENT OUR BUSINESS STRATEGY EFFECTIVELY.
Our future performance depends to a significant degree on the continued
contributions of our management team, sales force and key technical personnel.
In particular, we depend on Robert McCormick, our Chairman of the Board and
Chief Executive Officer. Mr. McCormick was appointed Chief Executive Officer in
November 1999. In addition, our business plan contemplates the significant
expansion of our field sales organization and the retention of our established
inside sales, marketing and product management staff. The industries in which
we compete are characterized by a high level of employee mobility and
aggressive recruiting of skilled personnel. As a result, we may have difficulty
in hiring and retaining highly skilled employees. Our future performance
depends on our ability to attract, retain and motivate highly skilled
employees. In the event of a change of control at our company, the outstanding
and unvested options held by some of our officers and other key employees will
vest, under certain circumstances, which may make retaining such officers and
key employees more difficult.
FAILURES IN OUR NETWORK OR WITH THE NETWORK OPERATIONS CENTER COULD DISRUPT OUR
ABILITY TO PROVIDE OUR DATA NETWORKING, INTERNET ACCESS AND HOSTING SERVICES,
WHICH COULD HARM OUR BUSINESS AND INCREASE OUR CAPITAL COSTS.
Our ability to successfully implement our business plan depends upon our
ability to provide high quality, reliable services. Interruptions in our
ability to provide our data networking, Internet access and hosting services to
our customers could adversely affect our business and reputation. Our
operations depend upon our ability to protect our equipment and network
infrastructure, including connections to our communications transmission, or
backbone, providers, and our customers' data and equipment, against damage from
natural disasters, as well as power loss, telecommunications failure and
similar events. The occurrence of a natural disaster or other unanticipated
problem could result in interruptions in the services we provide to our
customers and could seriously harm our business and business prospects.
IF OUR ESTIMATES REGARDING OUR TRAFFIC LEVELS ARE NOT CORRECT, WE MAY HAVE TOO
MUCH OR TOO LITTLE CAPACITY IN A GIVEN PERIOD.
We rely on other carriers to provide several data transmission services.
We generally lease or purchase data transmission capacity before we have
secured customers. Our leased or purchased capacity costs are typically fixed
monthly payments based on the capacity made available to us. Our failure to
correctly estimate transmission capacity could increase the cost or reduce the
quality of our services. Underestimation of traffic levels could lead to a
shortage of capacity, requiring us to lease or purchase more capacity, which
may be at unfavorable rates, or could lead to a lower quality of service
because of increased data loss and latency. Overestimation of traffic levels,
because our traffic volumes decrease or do not grow as expected, would result
in idle capacity, thereby increasing our per-unit costs.
WE HAVE EXPERIENCED CUSTOMER TURNOVER IN THE PAST AND MAY CONTINUE TO DO SO IN
THE FUTURE. IF WE CONTINUE TO EXPERIENCE CUSTOMER TURNOVER WITHOUT A
CORRESPONDING GROWTH IN NEW CUSTOMERS, OUR BUSINESS MAY BE ADVERSELY AFFECTED.
Customer turnover in the Internet access business is high. Customer loss
results in loss of future revenue from subscribers who discontinue or reduce
their services. Customer loss occurs for several reasons, such as voluntary
disconnection by subscribers who choose to switch to a competing service and
termination by Internet access providers for nonpayment of bills or abuse of
the network. We have experienced customer turnover in the past and as our
subscriber base grows and the industry matures, our customer loss may continue
or even increase. In addition, due to the downturn in the technology and
26
Internet sector of the economy, we may see increased customer turnover as these
customers reduce their operations or cease to do business. If, in the future,
we were to lose a large number of customers without signing contracts with new
customers, there could be an adverse impact on our business.
OUR BRAND IS NOT AS WELL KNOWN AS SOME OF OUR COMPETITORS. FAILURE TO DEVELOP
BRAND RECOGNITION COULD HURT OUR ABILITY TO COMPETE EFFECTIVELY.
We need to strengthen our brand awareness to realize our strategic and
financial objectives. Many of our competitors have well-established brands
associated with the provision of data networking, Internet access and hosting
services. The promotion and enhancement of our brand also will depend in part
on our success in continuing to provide high quality Internet access services
and in providing high quality data networking and hosting services. We cannot
assure you that we will be able to maintain or achieve these levels of quality.
ANY BREACH OF SECURITY OF OUR NETWORK COULD NEGATIVELY IMPACT OUR BUSINESS.
Our network may be vulnerable to unauthorized access, computer viruses and
other disruptive problems caused by customers, employees or others. Computer
viruses, unauthorized access or other disruptive problems could lead to
interruptions, delays or cessation of service to our customers and these
customers' end users. Unauthorized access also could potentially jeopardize the
security of confidential information stored in the computer systems of our
customers, which might result in our liability to our customers, and also might
deter potential customers. We may be unable to implement security measures in a
timely manner or, if and when implemented, these measures could be circumvented
as a result of accidental or intentional actions. In the past, security
measures employed by others have been circumvented by third parties.
Eliminating computer viruses and alleviating other security problems may
require interruptions, delays or cessation of service to our customers and
these customers' end users. Any breach of security on our network may result in
a loss of customers and damage to our reputation.
WE MAY NOT BE ABLE TO MEET THE OBLIGATIONS UNDER OUR SERVICE LEVEL AGREEMENTS.
We have service level agreements with all of our Internet access and
collocation customers in which we provide various guarantees regarding our
levels of service. In addition, the network services agreements with Reuters
and MoneyLine Telerate require levels of service and we offer service level
agreements to other data networking customers. If we fail to provide the levels
of service required by these agreements, our customers may be entitled to
terminate their relationship with us or receive service credits for their
accounts. If Reuters, MoneyLine Telerate or a significant number of other
customers become entitled to exercise, and do exercise, these rights, our
revenues could be materially reduced.
WE MAY MAKE ACQUISITIONS OR ENTER INTO JOINT VENTURES OR STRATEGIC ALLIANCES,
EACH OF WHICH IS ACCOMPANIED BY INHERENT RISKS.
If appropriate opportunities present themselves, we may make acquisitions
or investments or enter into joint ventures or strategic alliances with other
companies. Risks commonly encountered in such transactions include:
o the difficulty of assimilating the operations and personnel of the
combined companies;
o the risk that we may not be able to integrate the acquired services,
products or technologies with our current services, products and
technologies;
o the potential disruption of our ongoing business;
o the inability to retain key technical and managerial personnel;
o the inability of management to maximize our financial and strategic
position through the successful integration of acquired businesses;
o increases in reported losses as a result of charges for in-process
research and development and amortization of goodwill and other
intangible assets;
27
o the adverse impact on our annual effective tax rate;
o difficulty in maintaining controls, procedures and policies; and
o the impairment of relationships with employees, suppliers and
customers as a result of any integration.
NUMEROUS FACTORS MAY CAUSE FLUCTUATIONS IN OUR QUARTERLY REVENUES AND OPERATING
RESULTS, AS WELL AS IMPACT OUR LONG-TERM VIABILITY.
Our quarterly revenues and operating results have fluctuated in the past
and are likely to fluctuate significantly from quarter to quarter in the future
due to a number of factors. These factors include the following:
o demand for and market acceptance of our data networking, Internet
access and hosting services;
o the timing and magnitude of capital expenditures, including costs
relating to the expansion of operations;
o increasing sales, marketing and other operating expenses;
o the compensation of our sales personnel based on achievement of
periodic sales quotas;
o our ability to generate revenues for our services;
o changes in our revenue mix between usage-based and fixed rate pricing
plans; and
o fluctuations in the duration of the sales cycle for our services.
Other factors, which are beyond our control, may also affect us,
including:
o conditions specific to the data networking, Internet access and
hosting services industries, as well as general economic factors;
o the announcement or introduction of new or enhanced services by our
competitors;
o our ability to obtain, and the pricing for, local access connections;
and,
o changes in the prices we pay Internet backbone providers.
Accordingly, we believe that period-to-period comparisons of our results
of operations are not meaningful and should not be relied upon as indications
of future performance. In addition, these factors may impact our long-term
viability.
It is possible that in some future periods our results of operations may
fall below the expectations of investors. In this event, the price of our
common stock may fall. You should not rely on quarter-to-quarter comparisons of
our results of operations as an indication of future performance.
WE MAY BE LIABLE FOR THE MATERIAL THAT CONTENT PROVIDERS DISTRIBUTE OVER OUR
NETWORK.
The law relating to the liability of private network operators for
information carried on or disseminated through their networks is currently
unsettled. We may become subject to legal claims relating to the content
disseminated on our network. For example, lawsuits may be brought against us
claiming that material on our network on which one of our customers relied was
inaccurate. Claims could also involve matters such as defamation, invasion of
privacy and copyright infringement. Content providers operating private
networks have been sued in the past, sometimes successfully, based on the
content of material. If we need to take costly measures to reduce our exposure
to these risks, or are required to defend ourselves against such claims, our
business could be adversely affected.
28
RISKS RELATED TO OUR INDUSTRY
DATA AND VPN NETWORKING, DEDICATED ACCESS AND HOSTING SERVICES ARE NEW AND
RAPIDLY GROWING MARKETS, BUT THIS GROWTH MAY NOT CONTINUE.
According to International Data Corporation, Forrester Research, Meta
Group, and Infonetics, leading independent research firms, the market for data
networking and VPN's, Internet access, and hosting services has been growing
rapidly. If these markets do not grow as expected, or our anticipated share of
that market does not grow as expected, our revenues could be less than
expected.
In addition the market for VPN's and hosting are in an early stage of
growth. As a consequence, current and future competitors are likely to
introduce competing services, and it is difficult to predict the rate at which
the market will grow or at which new or increased competition will result in
market saturation. We face the risk that the market for VPN networking and
hosting may fail to develop or may develop more slowly than we expect, or that
our services may not achieve widespread market acceptance. Furthermore, we may
be unable to market and sell our services successfully and cost-effectively to
a sufficiently large number of customers.
THE CURRENT GENERAL ECONOMIC DOWNTURN IS ADVERSELY AFFECTING OUR INDUSTRY.
In the last 24 months, the U.S. economy has suffered a sharp decline. The
telecommunications industry has been particularly hard hit by this downturn.
We, like many telecommunications companies, have seen our stock price fall
dramatically, and our ability to raise additional funding in the public and
private markets was severely limited. Many of our customers have reduced their
expenditures for telecommunications services, including our services, and in
some cases delayed decisions to roll out our services or decisions to make
initial evaluations of our services. Some of our customers, which are startup
or emerging businesses themselves, have experienced a sharp decline in their
businesses. We may experience difficulty in the future with respect to the
collections of receivables. Some of our vendors are also telecommunications
companies and are also experiencing difficulties. A continuation of this
economic downturn, and the results thereof, could have a material adverse
effect on our business.
OUR ABILITY TO COMPETE FOR INTERNET ACCESS BUSINESS MAY BE WEAKENED IF THE
PROBLEMS OF INTERNET CONGESTION, TRANSMISSION DELAYS AND DATA LOSS IS RESOLVED.
If the Internet becomes subject to a form of central management, or if
Internet backbone providers establish an economic settlement arrangement
regarding the exchange of traffic between data networks, the problems of
congestion, latency and data loss addressed by our Internet access services
could be largely resolved and our ability to compete for business in this
market could be adversely affected.
THE MARKETS FOR DATA NETWORKING, INTERNET ACCESS AND HOSTING ARE HIGHLY
COMPETITIVE, AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
The markets for data networking, Internet access and hosting services are
extremely competitive, and there are few significant barriers to entry. We
expect that competition will intensify in the future, and we may not have the
financial resources, technical expertise, sales and marketing abilities or
support capabilities to compete successfully in these markets. Many of our
existing Internet access data networking and hosting competitors have greater
market presence, engineering and marketing capabilities and financial,
technological and personnel resources than we do. As a result, as compared to
us, our competitors may:
o develop and expand their networking infrastructures and service
offerings more efficiently or more quickly;
o adapt more rapidly to new or emerging technologies and changes in
customer requirements;
o take advantage of acquisitions and other opportunities more
effectively;
o develop products and services that are superior to ours or have
greater market acceptance;
29
o adopt more aggressive pricing policies and devote greater resources to
the promotion, marketing, sale, research and development of their
products and services;
o make more attractive offers to our existing and potential employees;
o establish cooperative relationships with each other or with third
parties; and
o more effectively take advantage of existing relationships with
customers or exploit a more widely recognized brand name to market and
sell their services.
Our competitors include:
o backbone providers that may provide us connectivity services,
including AT&T, Cable & Wireless plc, GTE Internetworking, Sprint
Corporation and MCIWorldcom;
o global, national and regional telecommunications companies, including
regional Bell operating companies and providers of satellite bandwidth
capacity; and
o global, national and regional Internet service providers.
We expect that new competitors will enter the data networking, Internet
access and hosting markets. Such new competitors could include computer
hardware, software, media and other technology and telecommunications
companies, as well as satellite and cable companies. A number of
telecommunications companies and online service providers currently offer, or
have announced plans to offer or expand, their data networking services.
Further, the ability of some of these potential competitors to bundle other
services and products with their data networking services could place us at a
competitive disadvantage. For example, Reuters Group plc, a news and financial
information distributor, and Equant N.V., an international telecommunications
provider, formed a joint venture for the purposes of offering Internet protocol
network services to the financial services industry. Various companies are also
exploring the possibility of providing, or are currently providing, high-speed
data services using alternative delivery methods, including the cable
television infrastructure, direct broadcast satellites, all optical networks,
gigabit ethernet, wireless cable and wireless local access. In addition,
Internet backbone providers may benefit from technological developments, such
as improved router technology, that will enhance the quality of their services.
OUR FAILURE TO ACHIEVE DESIRED PRICE LEVELS COULD IMPACT OUR ABILITY TO ACHIEVE
PROFITABILITY OR POSITIVE CASH FLOW.
We expect competition and other factors to continue to cause pricing
pressure in the markets we serve. Prices for IP VPN's and Internet access and
services have decreased significantly in recent years, and we expect
significant price declines in the future. In addition, by bundling their
services and reducing the overall cost of their services, telecommunications
companies that compete with us may be able to provide customers with reduced
communications costs in connection with their data networking, Internet access
or hosting services, thereby significantly increasing pricing pressure on us.
We may not be able to offset the effects of any such price reductions even with
an increase in the number of our customers, higher revenues from enhanced
services, cost reductions or otherwise. In addition, we believe that the data
networking and VPN's and Internet access and hosting industries are likely to
continue to encounter consolidation in the future. Increased price competition
or consolidation in these markets could result in erosion of our revenues and
operating margins and could prevent us from becoming profitable.
NEW TECHNOLOGIES COULD DISPLACE OUR SERVICES OR RENDER THEM OBSOLETE.
New technologies or industry standards have the potential to replace or
provide lower cost alternatives to our Internet access services, data
networking and hosting services. The adoption of such new technologies or
industry standards could render these services obsolete or unmarketable. For
example, these services rely on the continued widespread commercial use of the
set of protocols, services and applications for linking computers known as
Internet protocol. Alternative sets of protocols, services and applications for
linking computers could emerge and become widely adopted. Improvements in
Internet protocol could emerge that would allow for the assignment of
priorities to data packets in order
30
to ensure their delivery in the manner customers prefer, as well as other
improvements, which could eliminate one advantage of the ATM architecture of
our network. We cannot guarantee that we will be able to identify new service
opportunities successfully and develop and bring new products and services to
market in a timely and cost-effective manner, or that products, software and
services or technologies developed by others will not render our current and
future services non-competitive or obsolete. In addition, we cannot assure you
that our current and future services will achieve or sustain market acceptance
or be able to address effectively the compatibility and interoperability issues
raised by technological changes or new industry standards. If we fail to
anticipate the emergence of, or obtain access to, a new technology or industry
standard, we may incur increased costs if we seek to use those technologies and
standards or our competitors that use such technologies and standards may use
them more cost-effectively than we do.
THE DATA NETWORKING AND INTERNET ACCESS INDUSTRIES ARE HIGHLY REGULATED IN MANY
OF THE COUNTRIES IN WHICH WE PLAN TO PROVIDE SERVICES, WHICH COULD RESTRICT OUR
ABILITY TO CONDUCT BUSINESS INTERNATIONALLY.
We are subject to varying degrees of regulation in each of the
jurisdictions in which we provide services. Local laws and regulations, and
their interpretation and enforcement, differ significantly among those
jurisdictions. Future regulatory, judicial and legislative changes may have a
material adverse effect on our ability to deliver services within various
jurisdictions.
National regulatory frameworks that are consistent with the policies and
requirements of the World Trade Organization have only recently been, or are
still being, put in place in many countries. Many countries are still in the
early stages of providing for and adapting to a liberalized telecommunications
market. As a result, in these markets, we may encounter more protracted and
difficult procedures to obtain licenses and negotiate interconnection
agreements.
Our operations are dependent on licenses and authorizations from
governmental authorities in most of the foreign jurisdictions in which we
operate or plan to operate. These licenses and authorizations generally will
contain clauses pursuant to which we may be fined or our license may be
revoked. Such revocation may be on short notice, at times as short as 30 days'
written notice to us. We may not be able to obtain or retain the licenses
necessary for our operations.
ADOPTION OR MODIFICATION OF GOVERNMENT REGULATIONS RELATING TO THE INTERNET
COULD HARM OUR BUSINESS.
There is currently only a small body of laws and regulations directly
applicable to access to or commerce on the Internet. However, existing laws
have been applied to Internet transactions in a number of cases. Moreover, due
to the increasing popularity and use of the Internet, international, national,
federal, state and local governments may adopt additional laws and regulations
that affect the Internet. The nature of any new laws and regulations and the
manner in which existing and new laws and regulations may be interpreted and
enforced cannot be predicted accurately. The adoption of any future laws or
regulations might decrease the growth of the Internet, decrease demand for our
services, impose taxes or other costly technical requirements or otherwise
increase the cost of doing business on the Internet or in some other manner
have a significantly harmful effect on us or our customers. The U.S. government
and/or state governments also may seek to regulate some segments of our
activities as it has with basic telecommunications services and/or make changes
in the methodology for assessment and recovery of universal contributions.
Moreover, the applicability to the Internet of existing laws governing
intellectual property ownership and infringement, copyright, trademark, trade
secret, obscenity, libel, employment, personal privacy and other issues is
uncertain and developing. We may also be required to implement costly
technologies and procedures in order to comply with national security or law
enforcement measures. We cannot predict accurately the impact, if any, that
future laws and regulations or changes in laws and regulations may have on our
business.
RISKS RELATED TO OUR COMMON STOCK
OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET IF WE ARE
UNABLE TO MAINTAIN A STOCK PRICE ABOVE $1.00 PER SHARE.
In order to continue being listed on the Nasdaq National Market, our
common stock must maintain a closing bid price of $1.00 per share. March 18,
2002 was the last day on which the closing bid price of our common stock was
$1.00. If our closing bid price remains below a $1.00 for 30 consecutive
trading
31
days, and if the closing bid price is not at least $1.00 for ten consecutive
days within the next 90 calendar days, Nasdaq may delist our common stock from
the Nasdaq National Market. We may consider a reverse stock split in the future
to increase the trading price of our common stock, however, there can be no
assurance that the closing bid of our common stock will remain above $1.00 even
then. If our common stock were delisted, there would be a reduction in the
market liquidity for our common stock. Such a reduction in liquidity would
likely reduce our ability to raise capital and would have a significant negative
impact on our business plans and operations, including our ability to acquire
new businesses and develop new products. If our common stock were not listed or
quoted on another market or exchange an investor would find it more difficult to
dispose of, or to obtain accurate quotations for the price of our common stock.
Additionally, if our common stock is delisted from the Nasdaq National Market
and we fail to obtain listing or quotation on another market or exchange,
broker-dealers may be less willing or able to sell and/or make a market in our
common stock.
A SIGNIFICANT NUMBER OF OUR SHARES HAVE REGISTRATION RIGHTS OR ARE ELIGIBLE FOR
RESALE AND BRIDGE WILL SHORTLY DISTRIBUTE ITS SAVVIS HOLDINGS TO ITS SECURED
CREDITORS. THIS COULD REDUCE OUR STOCK PRICE AND IMPAIR OUR ABILITY TO RAISE
FUNDS IN NEW STOCK OFFERINGS.
We have approximately 94 million shares of common stock outstanding as of
March 18, 2002. Approximately 211 million common shares are issued pursuant to
the conversion of our 11.5% convertible preferred stock and approximately 16
million shares of common stock could be issued pursuant to the exercise of
outstanding warrants. In addition, dividends on our 11.5% convertible preferred
stock accrete quarterly, will also be convertible into shares of our common
stock at $0.75 per share and will be added to the outstanding amount of our
11.5% convertible preferred stock and accrue additional dividends. This will
result in a substantial increase in the number of shares of common stock into
which the 11.5% convertible preferred stock is convertible. The holders of the
preferred and the warrants are entitled to registration rights under those
agreements. Additionally, Bridge will shortly distribute approximately 45
million shares of SAVVIS common stock to its secured creditors, all of which
will be freely tradable. Sales of substantial amounts of shares of our common
stock in the public market, or the perception that those sales will occur, could
cause the market price of our common stock to decline. Those sales also might
make it more difficult for us to sell equity and equity-related securities in
the future at a time and at a price that we consider appropriate.
OUR CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS
THAT COULD DISCOURAGE A TAKEOVER.
Our certificate of incorporation and Delaware law contain provisions which
may make it more difficult for a third party to acquire us, including provisions
that give the board of directors the power to issue shares of preferred stock.
In addition, the terms of our 11.5% convertible preferred stock provide that the
holders thereof are entitled to a premium in the event of a change of control.
We have also chosen to be subject to Section 203 of the Delaware General
Corporation Law, which prevents a stockholder of more than 15% of a company's
voting stock from entering into business combinations set forth under Section
203 with that company.
ITEM 2. PROPERTIES.
Our executive offices are located in St. Louis, Missouri and Herndon,
Virginia which consist of an 80,000 square foot facility with a ten year lease
that is set to expire in 2010. We lease facilities for our sales offices and
network equipment in a number of metropolitan areas. We own a 100,000 square
foot data center in Hazelwood, Missouri on property leased from Reuters for 99
years renewable for one additional period of 99 years. We lease 34,000 square
feet in San Francisco, California for our data center and, 35,000 square feet in
Boston, Massachusetts that may be used for a future data center for which both
leases expire in 2010.
We believe that our existing facilities, including the additional space,
are adequate for our current needs and that suitable additional or alternative
space will be available in the future on commercially reasonable terms as
needed.
ITEM 3. LEGAL PROCEEDINGS.
In June 2000, SAVVIS entered into a series of agreements to acquire
approximately $30 million of telecommunications equipment and related services
with Winstar Wireless, Inc. ("Winstar"), the purchase of which was financed by
Winstar. In addition, Winstar agreed to purchase from SAVVIS certain Internet
services.
32
On April 17, 2001, SAVVIS provided notice to Winstar that a material
breach had occurred under the agreements relating to Winstar's installation of
the wireless equipment components and accordingly, terminated agreements
relating to equipment purchase and installation. On April 18, 2001, Winstar
filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. The
Company to date has not performed all obligations to Winstar, nor has Winstar
performed all of its obligations to the Company. In addition, in March 2001,
the Company ceased making payments on the note issued to it by Winstar to
finance the equipment purchase.
On September 25, 2001, Winstar filed suit in the US Bankruptcy Court for
Delaware seeking a total of approximately $38 million from the Company for the
repayment of the note payable and professional services liabilities, which
includes a refund of $8.5 million of Internet services prepaid by Winstar. In
turn, we have filed proof of claim with the court overseeing the Winstar
bankruptcy proceeding in the amount of approximately $19 million. The court has
agreed to refer the dispute to arbitration. We believe we have substantial
defenses to the suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the shareholders during calendar
year 2001.
33
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(A)(1) MARKET PRICE OF COMMON STOCK.
Our common stock, $.01 par value per share, has been quoted on the Nasdaq
National Market under the symbol "SVVS" since our initial public offering on
February 15, 2000. Prior to February 15, 2000, there was no established trading
market for our shares of common stock. As of March 15, 2002, there were
approximately 797 holders of record of our common stock. The following table
lists, on a per share basis for the periods indicated, the high and low closing
sale prices for the common stock as reported by the Nasdaq National Market:
QUARTER ENDED HIGH LOW
- -------------------------------------- ----------- ------------
March 31, 2000 ..................... $ 24.63 $ 15.94
June 30, 2000 ...................... 17.13 10.88
September 30, 2000 ................. 14.75 7.69
December 31, 2000 .................. 8.00 0.81
March 31, 2001 ..................... $ 3.44 $ 0.44
June 30, 2001 ...................... 1.99 0.25
September 30, 2001 ................. 1.01 0.65
December 31, 2001 .................. 0.85 0.44
We have not declared or paid any cash dividends on our common stock since
our inception. We do not intend to pay cash dividends on our common stock in
the foreseeable future. We anticipate we will retain any earnings for use in
our operations and the expansion of our business. In addition, we are
restricted from paying dividends by the terms of our financing arrangements.
(A)(2) RECENT SALES OF UNREGISTERED SECURITIES
On March 18, 2002, the Company issued $158.1 million of its 11.5% Series A
Convertible Preferred Stock in exchange for $57.5 million in cash and all of the
outstanding principal and interest on its 10% Senior Secured Convertible Notes
due 2006 and its 12% Senior Secured Convertible Notes due 2005. Dividends on the
Series A Preferred Stock will accrue quarterly and be added by accretion to the
accreted value of the Series A Preferred Stock outstanding. The preferred stock
was issued without registration under the Securities Act of 1933 in reliance on
the exemption from registration contained in Rule 506 of the rules promulgated
under the Securities Act of 1933, and the issuances were effected without the
use of an underwriter. The preferred stock is initially convertible into
210,760,000 shares of common stock, at a conversion price of $0.75 per common
share, and is entitled to vote on all matters (other than any voluntary
repurchase of the preferred stock) submitted to the common stockholders on an
as-if-converted basis, representing approximately 69% of the voting stock of the
Company. See note 14 to the consolidated financial statements for additional
disclosure.
On February 16, 2001, we entered into a securities purchase agreement and
certain related agreements and documents with two investment entities sponsored
by Welsh Carson and several individuals affiliated with Welsh Carson. Pursuant
to the terms of the securities purchase agreement, the Welsh Carson entities
and affiliated individuals agreed to purchase $20 million aggregate principal
amount of our 10% convertible senior secured notes due 2006. On May 16, 2001 we
entered into a securities purchase agreement with Reuters Holdings Switzerland
SA. Pursuant to that agreement, we issued $37.5 million principal amount of our
12% convertible senior secured notes due 2005. All of the outstanding principal
and accrued interest on both the 10% and 12% convertible senior secured notes
were exchanged for our 11.5% series A convertible preferred stock on March 18,
2002. The notes were issued without registration under the Securities Act of
1933 in reliance on the exemption from registration contained in Section 4(2)
of the Securities Act, and the issuances were effected without the use of an
underwriter.
34
On January 2, 2001, we granted options to purchase 231,500 shares of our
common stock to our employees at $0.9375 per share. All of these options were
granted pursuant to our stock option plan. Between January 23, 2001 and
December 31, 2001 we granted options to purchase 5,769,603 shares of our common
stock at prices ranging from $0.375 to $3.31 per share. The options, granted
between January 23, 2001 and December 31, 2001, lapsed on January 23, 2002.
These option grants were effected in transactions not subject to, or exempt
from, the registration requirements of the Securities Act of 1933, and these
transactions were effected without the use of an underwriter.
During the fiscal year ended December 31, 2001, proceeds of approximately
$0.06 million were generated from the exercise of options for 126,163 shares of
our common stock. There were no underwriting discounts, commissions or
significant expenses attributable to these proceeds. All of the options had
been granted under our stock option plan. We issued the shares in reliance on
the exemption from registration provided by Rule 701 under the Securities Act
of 1933.
ITEM 6. SELECTED FINANCIAL DATA.
The following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Business", and our consolidated financial statements and related notes
included elsewhere in this report. We derived the selected historical
consolidated financial data presented below from our audited consolidated
financial statements. We began commercial operations in 1996.
On April 7, 1999, Bridge acquired all our equity securities and accounted
for this acquisition as a purchase transaction. Since the purchase transaction
resulted in our company becoming a wholly owned subsidiary of Bridge, SEC rules
required us to establish a new basis of accounting for the purchased assets and
liabilities. The accounting for the purchase transaction has been "pushed down"
to the financial statements of SAVVIS. Therefore, the purchase price has been
allocated to the underlying assets purchased and liabilities assumed based on
the estimated fair market values of these assets and liabilities at the
acquisition date. As a result of the application of fair value accounting,
intangibles, goodwill, other liabilities and stockholders' equity were
increased in the SAVVIS consolidated balance sheet. The consolidated balance
sheet data as of December 31, 2001 and December 31, 2000 and the consolidated
statement of operations data for the year ended December 31, 2001 and 2000 and
the period from April 7, 1999 through December 31, 1999 reflect our acquisition
by Bridge and are labeled "Successor." The financial data for the periods prior
to the acquisition are labeled "Predecessor."
On September 10, 1999, Bridge sold in a private placement approximately
25% of its equity ownership in SAVVIS to existing shareholders of Bridge, at
which time Welsh Carson purchased from Bridge a 12% interest in SAVVIS. On
February 28, 2000, Bridge completed the sale of an additional 6.25 million
shares of SAVVIS common stock to Welsh Carson at $24 per share, for a total
cash consideration of $150 million. As of March 18, 2002, Welsh Carson and
Bridge owned approximately 56% and 16% of our outstanding common stock,
respectively.
The initial public offering of our common stock was completed on February
18, 2000. A total of 14.875 million shares were sold by us in the offering at
$24 per share. We received net proceeds from this transaction of approximately
$333 million, of which approximately $121 million was paid to Bridge for the IP
network, as described below, and $6 million for debt reduction.
Simultaneous with the completion of the public offering, we purchased or
subleased Bridge's global Internet protocol network assets. The final purchase
price of the assets (at Bridge's carrying value), after the determination for
and reconciliations of the specific assets purchased, was approximately $77
million, of which approximately $52 million was paid from the offering
proceeds. We also paid a $69 million preferential distribution to Bridge.
Additionally, we assumed capital lease obligations of approximately $25 million
related to these network assets.
We calculate adjusted EBITDA as consolidated loss before depreciation and
amortization, taxes, interest income and expense, equity based non-cash
compensation, asset impairment and other write down of assets and restructuring
charges. We have included information concerning adjusted EBITDA because our
management believes that in our industry such information is a relevant
measurement of a
35
company's financial performance and liquidity. Adjusted EBITDA is not
determined in accordance with accounting principles generally accepted in the
United States of America, is not indicative of cash used by operating
activities and should not be considered in isolation or as an alternative to,
or more meaningful than, measures of operating performance determined in
accordance with accounting principles generally accepted in the United States
of America. Additionally, our calculation of adjusted EBITDA may not be
comparable to similarly titled measures of other companies, as other companies
may not calculate it in a similar manner.
PREDECESSOR SUCCESSOR
----------------------------- -----------------------------------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1 APRIL 7 TO
----------------------------- TO APRIL 6, DECEMBER 31,
1997 1998 1999 1999 2000 2001
-------------- -------------- -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
STATEMENT OF
OPERATIONS DATA:
Revenues:
Managed IP ...................... $ -- $ -- $ -- $ -- $ 151,733 $ 197,852
Managed hosting ................. 1,991 10,772
Internet access ................. 2,395 12,827 5,303 17,501 30,551 30,694
Other ........................... 363 847 137 1,048 2,049 3,477
----------- ----------- ----------- ----------- ----------- -----------
Total Revenues .................. 2,758 13,674 5,440 18,549 186,324 242,795
Direct costs and operating
expenses:
Data communications and
operations (1) ................ 11,072 20,889 6,371 21,183 211,750 236,336
Sales and marketing (2) ......... 1,777 8,155 2,618 9,924 33,892 35,241
General and administrative
(3) ........................... 3,353 4,090 2,191 8,906 24,361 37,106
Depreciation and
amortization .................. 631 2,288 817 14,351 60,511 88,079
Asset impairment and
other write-downs of
assets ........................ -- -- 1,383 -- 2,000 89,633
Restructuring charges ........... -- -- -- -- -- 4,821
Non-cash equity-based
compensation .................. -- -- -- 1,500 14,459 15,254
----------- ----------- ----------- ----------- ----------- -----------
Total direct costs and
operating expenses ............ 16,833 35,422 13,380 55,864 346,973 506,470
----------- ----------- ----------- ----------- ----------- -----------
Loss from operations ............. (14,075) (21,748) (7,940) (37,315) (160,649) (263,675)
Interest expense, net ............ (482) (100) (135) (1,302) (4,202) (25,221)
----------- ----------- ----------- ----------- ----------- -----------
Loss before income taxes,
minority interest and
extraordinary item .............. (14,557) (21,848) (8,075) (38,617) (164,851) (288,896)
Minority interest in losses,
net of accretion ................ 547 (147) -- -- -- --
Extraordinary gain on debt
extinguishment, net of tax ...... -- 1,954 -- -- -- --
Net loss ......................... $ (14,010) $ (20,041) $ (8,075) $ (38,617) $ (164,851) $ (288,896)
----------- ----------- ----------- ----------- ----------- -----------
Net loss attributable to
common stockholders ............. $ (14,161) $ (22,666) $ (9,025) $ (38,617) $ (164,851) $ (288,896)
Basic and diluted net loss per
share before extraordinary
item ............................ $ (.38) $ (.42) $ (.14) $ (.54) $ (1.89) $ (3.10)
Extraordinary gain on debt
extinguishment, net of tax ...... -- .03 -- -- -- --
Basic and diluted loss per
common share .................... $ (.38) $ (.39) $ (.14) $ (.54) $ (1.89) $ (3.10)
Weighted average shares
outstanding ..................... 36,904,108 58,567,482 66,018,388 72,075,287 87,343,896 93,113,823
----------- ----------- ----------- ----------- ----------- -----------
OTHER FINANCIAL
DATA:
Adjusted EBITDA .................. $ (12,897) $ (17,653) $ (5,740) $ (21,464) $ (83,679) $ (65,889)
Capital expenditures ............. 697 1,688 275 837 152,193 24,085
36
PREDECESSOR SUCCESSOR
------------------------- -----------------------------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1 APRIL 7 TO
------------------------- TO APRIL 6, DECEMBER 31,
1997 1998 1999 1999 2000 2001
------------ ------------ ------------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Cash used in operating
activities ............... (10,502) (20,560) (6,185) (18,273) (79,800) (41,906)
Cash used in investing
activities ............... (697) (2,438) (275) (837) (153,193) (24,085)
Cash provided by financing
activities ............... 12,024 24,121 4,533 21,383 262,835 48,204
- ----------------
(1) excluding $.2 million, $1.9 million and $2.1 million of equity-based
compensation for the 1999 Successor period, 2000 and 2001, respectively
(2) excluding $.5 million, $5.0 million and $6.8 million of equity-based
compensation for the 1999 Successor period, 2000 and 2001, respectively
(3) excluding $.8 million, $7.6 million and $6.4 million of equity-based
compensation for the 1999 Successor period, 2000 and 2001, respectively
As a result of the transactions discussed in Note 14 of the consolidated
financial statements, the Company's financial position changed significantly
including a reduction of debt by $165.6 million, a reduction of payables by
$39.3 million and an increase in cash position by $18.3 million. Additionally,
the Company recognized an extraordinary gain of approximately $61.1 million
related to the extinguishment of debt. The following summary financial
information includes an unaudited pro forma column to illustrate the balance
sheet at December 31, 2001 as if all the transactions had occurred on December
31, 2001. The unaudited pro forma summary financial information has been
adjusted to reflect the impact of these transactions. This information is for
illustrative purposes only and is not meant to be indicative of actual results
that might have been achieved or results that might be attained in the future.
AS OF DECEMBER 31,
----------------------------------------------------------------------------------------
PREDECESSOR SUCCESSOR
--------------------------- ----------------------------------------------------------
1997 1998 1999 2000 2001 PRO FORMA 2001
------------ ------------ ---------- ----------- ------------- ---------------
(UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents ......... $ 1,398 $ 2,521 $ 2,867 $ 32,262 $ 14,405 $ 32,687
Goodwill and intangibles, net -- 1,406 26,250 13,974 2,772 2,772
Total assets ...................... 4,313 11,663 39,296 438,622 255,640 259,918
Debt and capital lease
obligations ...................... 8,814 2,759 29,958 199,610 259,504 93,083
Preferred stock ................... -- -- -- -- -- 157,013
Redeemable preferred stock......... 5,261 36,186 -- -- -- --
Stockholders' equity (deficit) (14,903) (33,197) (2,766) 116,930 (156,586) 64,235
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. Our actual
results may differ significantly from the results discussed in the
forward-looking statements. You should read the following discussion together
with our consolidated financial statements and the related notes to those
financial statements that are included in Part II, Item 8 of this Form 10-K,
beginning on page F-1 of this report.
OVERVIEW
SAVVIS is a growing provider of high quality, high performance IP VPN,
Managed Hosting and Internet related services to medium and large businesses,
multinational corporations and Internet service providers. To provide our
Internet access services, we use the SAVVIS Intelligent IP Network(SM), a data
communications network that uses our twelve PrivateNAPs(SM) and our proprietary
routing policies to reduce data loss and enhance performance by avoiding the
congested public access points on the Internet.
37
SAVVIS began commercial operations in 1996, offering Internet access
services to local and regional Internet service providers. Our customer base
has grown from 15 customers at the end of 1996 to approximately 1,500 at
December 31, 2001.
On April 7, 1999, SAVVIS was acquired by Bridge in a stock-for-stock
transaction that was accounted for as a "purchase transaction" under Accounting
Principles Board Opinion No. 16. Since the purchase transaction resulted in our
Company becoming a wholly owned subsidiary of Bridge, SEC rules required us to
establish a new basis of accounting for the assets purchased and liabilities
assumed. As a result, the purchase price has been allocated to the underlying
assets purchased and liabilities assumed based on estimated fair market value
of these assets and liabilities on the acquisition date, and the difference
between the purchase price and the fair market value was recorded as goodwill.
The accounting for the purchase transaction has been "pushed down" to our
financial statements. The impact of the acquisition on our balance sheet, as a
result of the application of fair value accounting, was to increase
intangibles, goodwill, other liabilities and stockholders' equity. As a result
of the acquisition and the "push down" accounting, our results of operations
following the acquisition, particularly our depreciation and amortization, are
not comparable to our results of operations prior to the acquisition.
The initial public offering of our common stock was completed in February
2000. A total of 17 million shares were sold in the offering; 14.875 million
shares sold by the Company and 2.125 million shares sold by Bridge, all at $24
per share. The Company received net proceeds from this offering of
approximately $333 million. Simultaneously, with the completion of the initial
public offering, we acquired Bridge's global Internet protocol network for
total consideration of approximately, $77 million, plus a payment representing
a preferential distribution to Bridge of approximately $69 million. The
purchase has substantially increased our depreciation and amortization.
At that time, the Company entered into a 10-year network services
agreement with Bridge under which the Company was to provide managed data
networking services to Bridge. SAVVIS' initial network service fees were based
upon the cash cost to Bridge of operating the network as configured on October
31, 1999, adjusted for changes to the network and the associated personnel
related to Bridge's network requirements through February 17, 2000. Our fees
for additional services provided following February 17, 2000, were set for a
three-year term based on an agreed price schedule.
Because the amounts paid to us under the network services agreement for
the services provided over the original network acquired from Bridge were based
upon the cash cost to operate the original network, the provision of such
services did not have an impact on our cash flows from operations. However, due
to amortization and depreciation expenses relating to the network, the
provision of services under the network services agreement resulted in the
Company incurring losses from operations.
On February 15, 2001, Bridge (which represented approximately 55% of our
total revenues for the year ended December 31, 2001) filed a voluntary petition
for relief under Chapter 11 of Title 11 of the United States Code, 11 U.S.C.
Sections 101 et seq. in the United States Bankruptcy Court (the "Bankruptcy
Court") for the Eastern District of Missouri. The monthly revenues from Bridge
have been fully replaced by the Reuters and MoneyLine Telerate agreements and
the Company no longer provides any services to Bridge.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The impact and
any associated risks related to these policies on our business operations is
discussed throughout Management's Discussion and Analysis of Financial
Condition and Results of Operations where such policies affect our reported and
expected financial results. For a detailed discussion on the application of
these and other accounting policies, see Note 1 in the Notes to the
Consolidated Financial Statements in Item 14 of this Annual Report on Form
10-K. Note that our preparation of this Annual Report on Form 10-K requires us
to make estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent liabilities at the date of our financial
statements, and the reported amounts of revenue and expenses during the
reporting period. There can be no assurance that actual results will not differ
from those estimates.
38
Valuation of Long-Lived Assets--The Company periodically evaluates the
estimated carrying value of long-lived assets, including intangible assets,
goodwill and property and equipment, whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. An impairment in the
carrying value of an asset is recognized when the expected future operating cash
flows to be derived from the asset are less than its undiscounted carrying
value. In addition, the Company's evaluation considers non-financial data such
as market trends, product and development cycles, and changes in management's
market emphasis. During 2001, the Company recognized asset impairment charges of
$89.6 million primarily related to equipment.
Revenue Recognition--Service revenues consist primarily of Managed IP
networks, Managed Hosting and Internet access service fees, which are fixed
monthly amounts, and are recognized in the financial statements when earned
during the life of the contract. For all periods, any services billed and
payments received in advance of providing services are deferred until the
period such services are earned. In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements", which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements.
The effect of implementation of SAB 101 was not material to the consolidated
financial statements. The current portion of installation and equipment costs
deferred in accordance with SAB 101 is recorded on the balance sheet in other
assets. Such costs are recognized on a straight-line basis over periods of up
to 24 months, the estimated period over which the related revenues from
installation and equipment sales are recognized.
Concentrations of Credit Risk--Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
accounts receivable. The Company periodically reviews the credit quality of its
customers and generally does not require collateral.
Employee Stock Options--The Company accounts for employee stock options in
accordance with Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees." Under APB No. 25, the Company
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded as determined at the measurement date. The Company is also
subject to disclosure requirements under Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" which
requires pro forma information as if the fair value method prescribed by SFAS
No. 123 had been applied.
REUTERS AND MONEYLINE TELERATE AGREEMENTS
On September 28, 2001 affiliates of Reuters acquired a portion of the
assets of Bridge. In connection with the asset acquisition, on September 28,
2001, Reuters entered into a network services agreement with us, pursuant to
which we agreed to provide internet protocol network services, internet access,
and colocation services for a period of five years with respect to the
customers of Bridge that were acquired by affiliates of Reuters. The network
services agreement calls for a minimum purchase of these services of $96
million in year one, $90 million in year two, $84 million in year three and $48
million in each of years four and five, for a total of $366 million, less
payments made by Bridge to us for services provided to customers acquired by
Reuters between May 3, 2001 and September 28, 2001. The network services
agreement also provides that our network must perform in accordance with
specific quality of service standards. In the event we do not meet the required
quality of service levels, Reuters would be entitled to credits, and, in the
event of a material breach of such quality of service levels, Reuters would be
entitled to terminate the network services agreement. As a result of the
network services agreement, Reuters is our largest customer. In connection with
the network services agreement, we also entered into a transitional services
agreement with Reuters , pursuant to which Reuters has agreed to provide us
with technical, administrative and other services, including help desk support,
installation, maintenance and repair of equipment, customer related services
such as processing service orders, accounting functions and the provision of
warehousing and other facilities, pending us establishing our own capabilities.
On September 28, 2001, we also entered into a co-location agreement with
Reuters, pursuant to which we granted Reuters the right to use portions of our
data center in Missouri. The co-location agreement has an initial term of five
years and may be renewed by Reuters, at its option, for additional one-year
periods. However, the agreement will terminate concurrently with the network
services agreement.
39
In connection with its purchase of assets from Bridge in October 2001,
MoneyLine Telerate entered into a binding letter of intent to enter into a
network services agreement with SAVVIS. The letter of intent requires MoneyLine
Telerate to buy a total of $200 million of services according to the following
minimum spending levels: $70 million in year one, $50 million in year two, $35
million in year three, $25 million in year four, and $20 million in year five.
We expect billings initially to represent approximately 30% of our revenue.
In addition, Reuters and MoneyLine Telerate agreed to provide technical
and administrative services to SAVVIS for a period of up to one year. The
Company is currently engaged in transition plans to perform these services and
will incur additional costs in doing so.
TRANSACTIONS WITH BRIDGE
In connection with Bridge's acquisition of the Company in April 1999,
Bridge funded the Company's operations during 1999 and up through February 18,
2000, the date of SAVVIS' initial public offering. In February 2000, we entered
into several agreements with Bridge, related to the acquisition of its IP
network assets, the provision of network services to Bridge and the provision
of technical and administrative support services to SAVVIS. As a result, Bridge
was our largest customer, accounting for approximately 81% and 55% of revenues,
in 2000 and 2001, respectively.
In February 2002, the Company entered into an agreement with Bridge
wherein the Company agreed to pay Bridge $11.9 million in satisfaction of
$27.5 million representing all amounts due to Bridge. The Company also agreed
not to pursue the collection of $18.7 million of pre-petition receivables owed
to it by Bridge and to assign to Bridge any claims it had against other Bridge
entities with the exception of Bridge Canada where the Company retained its
right to receive a pro rata distribution of assets from the liquidation of
Bridge Canada. All amounts due under the settlement agreement were paid in
March 2002.
TRANSACTIONS WITH WELSH CARSON AND REUTERS
On March 18, 2002 we issued approximately $158 million of our Series A
convertible preferred (the "Preferred") stock to Welsh Carson and Reuters in
exchange for $57.5 million in cash and all of the outstanding principal of and
accrued interest on our 10% and 12% convertible senior notes and the notes
payable originally issued pursuant to our credit agreement with Nortel
Networks. The Series A preferred stock accrues dividends at the rate of 11.5%
per annum on the outstanding accreted value thereof (initially $1,000 per
share). Dividends will not be payable in cash until after the eighth
anniversary of the original issuance date, at the option of the Company.
Accrued but unpaid dividends will be added to the outstanding accreted value
quarterly. The Series A preferred stock is convertible into such number of our
common stock equal to the outstanding accreted value divided by the conversion
price. The Preferred is initially convertible into approximately 211 million
shares of our common stock at a conversion price of $0.75 per share. In
connection with this transaction we granted the holders registration rights
with respect to the shares of our common stock issuable upon conversion of the
Preferred, including demand registration rights and piggy back registration
rights.
On February 16, 2001, we entered into a securities purchase agreement and
related agreements and documents with two investment entities and several
individuals affiliated with Welsh Carson. Pursuant to the terms of the
securities purchase agreement, the entities and individuals affiliated with
Welsh Carson purchased $20.0 million aggregate principal amount of our 10%
convertible senior secured notes due 2006. All of the outstanding principal and
accrued interest on these notes were exchanged for the Preferred on March 18,
2002.
On May 16, 2001, we entered into a securities purchase agreement and
certain related agreements and documents with Reuters Holdings Switzerland SA,
or Reuters, a societe anonym organized under the laws of Switzerland. Pursuant
to the terms of the securities purchase agreement, Reuters purchased $37.5
million aggregate principal amount of our 12% convertible senior secured notes
due 2005. All of the outstanding principal and accrued interest on these notes
were exchanged for the Preferred on March 18, 2002.
40
On May 16, 2001, we also granted Reuters and its successors, assigns and
affiliates the right, for so long as they hold any of our notes or preferred
stock or common stock comprising or convertible into at least 5% of our
outstanding voting stock, among other things, to (1) designate an observer to
attend all meetings of our board of directors or any board committees, and (2)
to nominate and elect such number of directors, but not fewer than one, equal
to the product of the percentage of the voting power held by Reuters on a
fully-diluted, as-converted basis, multiplied by the number of seats on the
registrant's board of directors (rounded down to the nearest whole number). In
accordance with the terms of this letter, Reuters has appointed an observer to
attend all meetings of our board of directors and committee meetings.
REVENUE
Revenue. The Company's revenue is derived primarily from the sale of
managed IP, Internet access and hosting services. For the year 2001, revenue
from related parties (Bridge and Reuters) represented approximately 68% of our
total revenue. Through December 31, 1998, our revenue was primarily derived
from the sale of Internet access services to local and regional Internet
service providers in the United States. Beginning in late 1998, we also began
to offer Internet security and hosting services to corporate customers.
Beginning in September 1999, we began to offer managed data networking
services. We expect our revenues from related parties to decrease as a
percentage of our total revenues as we expand our managed IP, Internet access
and hosting customer base.
We charge each customer an initial installation fee that typically ranges
from $500 to $5,000 and a fixed monthly fee that varies depending on the
services provided, the bandwidth used and the quality of service level chosen.
Our customer agreements are typically for 12 to 36 months in length. These fees
are recognized in income over the average life of the customer contracts.
Prices for telecommunication services, including the services we offer,
have decreased significantly over the past several years and we expect this
trend to continue for the foreseeable future.
DIRECT COSTS AND EXPENSES
Data communications and operations. Data communications and operations
expenses include the cost of:
o leasing local access lines;
o transmission connections;
o salaries and related benefits for engineering and operations personnel;
o connections to other Internet service providers;
o other related repairs and maintenance items;
o leasing routers and switches;
o leasing hosting space; and
o installing local access lines at customer sites.
Data communications and operations expense increased significantly with
the inclusion of the Bridge network. In addition, we expect that these costs
will continue to increase in total dollars as we increase our customer base,
but we expect an eventual decrease as a percentage of revenues.
Sales and Marketing. These expenses include the cost of:
o sales and marketing salaries and related benefits;
o sales commissions and referral payments;
o advertising and direct marketing; and
o travel.
We anticipate that these expenses will continue to increase in total
dollars as we add more sales personnel and increase our marketing initiatives
to support the expansion of our customer base.
41
General and administrative. General and administrative expenses include
the cost of:
o occupancy costs;
o executive, financial, legal, tax and administrative support personnel;
o professional services, including legal, accounting, tax and consulting
o bad debt expense; and
o travel.
These expenses are expected to continue to increase as we continue to add
to our support personnel, infrastructure and back office systems as the
business continues to ramp up.
Depreciation and amortization. Depreciation and amortization expense
consists primarily of the depreciation and amortization of communications
equipment, capital leases, goodwill and intangibles. We expect these expenses
to to decrease as a portion of our fixed assets fully depreciate in 2002, we
have minimized our capital additions requirements with the completion of our
network in 2001 and the adoption of new accounting pronouncements will
eliminate the amortization of certain items in goodwill. Generally,
depreciation is calculated using the straight-line method over the useful life
of the associated asset, which ranges from three to five years. Goodwill
resulting from our acquisition by Bridge was amortized over three years and
other intangibles are amortized over one to three years.
Interest expense. Historical interest expense is related to indebtedness
to banks, vendor financing agreements convertible notes, loans from Bridge and
capitalized leases. The vendor financing agreements, the convertible notes and
the loans from Bridge were settled in a series of transactions described in
Note 14 of the Consolidated Financial Statements. Also described in Note 14 of
the Consolidated Financial Statements was the refinancing of certain capital
leases. Accordingly, we expect our interest expense to significantly decrease
in 2002.
Income tax expense. We incurred operating losses from inception through
December 31, 2001 and, therefore, have not recorded a provision for income
taxes in our historical financial statements. We have recorded a valuation
allowance for the full amount of our net deferred tax assets because the future
realization of the tax benefit is uncertain. As of December 31, 2001, we had
U.S. net operating loss carry forwards of approximately $319 million and
foreign net operating losses of approximately $30 million. Section 382 of the
Internal Revenue Code restricts the utilization of U.S. net operating losses
and other U.S. carryover tax attributes upon the occurrence of an ownership
change, as defined. Such an ownership change occurred during 1999 as a result
of the acquisition of our company by Bridge and in 2002 as a result of the
issuance of $158 million of preferred stock. Management believes that this
limitation may restrict our ability to utilize the net operating losses over
the U.S. Statutory carry-forward periods ranging from 15 to 20 years.
As we continue to increase our employee base to support our expanded
operations and invest in our marketing and sales operations, we expect to incur
net losses at least through 2003.
RESULTS OF OPERATIONS
The historical financial information included in this Form 10-K will not
reflect our future results of operations, financial position and cash flows.
Our results of operations, financial position and cash flows subsequent to the
purchase of Bridge's network and the commencement of the related agreements is
not comparable to prior periods.
THE YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO THE YEAR ENDED DECEMBER 31,
2000
Revenue. Revenue was $242.8 million for the year ended December 31, 2001,
an increase of $56.5 million or 30%, from $186.3 million for the year ended
December 31, 2000. Managed IP revenue increased $46.1 million, or 30%, to
$197.9 million in 2001 from $151.8 million in 2000. Managed Hosting revenues
increased $8.8 million , or 441%, to $10.8 million in 2001 from $2.0 million in
2000. Other revenues, consisting of installation and equipment sales, increased
from $2.0 million in 2000 to $3.5
42
million in 2001. Approximately $15 million of the increase results from a full
year of service provided to Bridge customers through September 2001 versus 10.5
months in 2000 and the balance of the billings to Reuters and MoneyLine
Telerate in the fourth quarter. Internet access revenues were flat for the year
as price reductions and customer losses from the economic downturn offset new
orders.
Data Communications and Operations (exclusive of non-cash compensation).
Data communications and operations expenses were $236.3 million for the year
ended December 31, 2001; an increase of $24.5 million, or 11.6%, from $211.8
million for the year ended December 31, 2000. The increase in expenses related
principally to the expansion of our network capacity during 2000. These
expenses were reduced significantly in the second half of 2001 as unit prices
for communications costs continued to decline and network capacity was reduced
in response to lower customer demand resulting from the downturn in the
financial markets and the general economy.
Sales and Marketing. (exclusive of non-cash compensation) Sales and
marketing expenses were $35.2 million for the year ended December 31, 2001, an
increase of $1.3 million, or 4%, from $33.9 million in the year ended December
31, 2000. This increase is principally attributed to personnel costs.
General and Administrative (exclusive of non-cash compensation). General
and administrative expenses amounted to $37.1 million for the year ended
December 31, 2001 an increase of $12.7 million or 52% from $24.4 million for
the same period in 2000. This result was primarily from the increase in bad
debt expense to $10.0 million in 2001, an increase of $8.2 million, from $1.8
million in 2000. Bad debt expense reflected a write-off of $4.7 million in
connection with the bankruptcy of Bridge Canada. The balance of the increase in
bad debts was directly related to the general economic downturn.
Non-cash Equity-based Compensation. Non-cash equity-based compensation
amounted to $15.3 million for the year ended December 31, 2001 versus a $14.5
million expense in 2000. These expenses represent amortization charges to
earnings for the difference between the estimated fair market value of our
common stock and the exercise price for options granted to employees,
non-employee members of our Board of Directors and employees of Bridge on
various dates in early 2000 and late 1999.
EBITDA. EBITDA, which is defined as consolidated loss before depreciation
and amortization, taxes, interest income and expense, non-cash equity based
compensation, asset impairment and other write down of assets and restructuring
charges improved from $83.7 million in 2000 to $65.9 million in 2001 as gross
margin improvements of $32 million were partially offset by increases to sales
and marketing costs and general and administrative costs. We have included
information concerning adjusted EBITDA because our management believes that in
our industry such information is a relevant measurement of a company's
financial performance and liquidity. Adjusted EBITDA is not determined in
accordance with accounting principles generally accepted in the United States
of America, is not indicative of cash used by operating activities and should
not be considered in isolation or as an alternative to, or more meaningful
than, measures of operating performance determined in accordance with
accounting principles generally accepted in the United States of America.
Additionally, our calculation of adjusted EBITDA may not be comparable to
similarly titled measures of other companies, as other companies may not
calculate it in a similar manner.
Depreciation and Amortization. Depreciation and amortization expense was
$88.1 million for the year ended December 31, 2001, an increase of $27.6
million as compared to $60.5 million for the year ended December 31, 2000. This
increase results primarily from equipment acquisitions to support our network.
Interest. Interest income amounted to $0.8 million in the year ended
December 31, 2001, a decrease of $5.6 million from 2000 a result of the average
cash balance on hand decreasing during the period. Interest expense for the
year ended December 31, 2001 was $26.0 million, an increase of $15.4 million
from 2000. This increase is attributable to interest expense on capital
equipment financing, convertible senior secured notes and the write-off of
deferred financing charges.
Asset impairment & other write-downs of assets. As more fully discussed in
Note 5 to the consolidated financial statements appearing at the end of this
annual report on Form 10-K, asset impairment & other write-downs of assets of
$89.6 million in 2001 represent:
43
o $31.5 million non-cash charge related to optical equipment for which
the Company does not expect to recover its costs either through
operation or disposition of such equipment;
o $44.1 million non-cash charge related to equipment purchased to
support the Company's wireless initiative. Due to technical and
supplier limitations, described in Note 10, the Company abandoned its
wireless plans and deemed the related equipment has no residual value
and no future planned use; and
o $14.0 million non-cash charge related to the write down of other
property and equipment that the Company has deemed without residual
value and has no plans for future use.
Net Loss. The net loss for the year ended December 31, 2001 was $288.9
million, or $3.10 basic and fully diluted loss per share, an increase of $124.0
million from the net loss for 2000 of $164.9 million, or $1.89 per share. The
primary reasons for the increase in net loss are:
o Asset impairment charges of $89.6 million, restructuring charges of
$4.8 million and write-down of deferred financing charges of $3.8
million.
o The $27.6 million increase in depreciation and amortization expense
due to network equipment acquisitions.
o An increase in bad debt expense of $8.2 million primarily related to
the write-off of Bridge Canada accounts receivable balance.
THE YEAR ENDED DECEMBER 31, 2000 AS COMPARED TO THE YEAR ENDED DECEMBER 31,
1999 (1999 AMOUNTS REPRESENTS COMBINED PREDECESSOR AND SUCCESSOR INFORMATION)
Revenue. Revenue was $186.3 million for the year ended December 31, 2000,
an increase of $162.3 million or 677%, from $24.0 million for the year ended
December 31, 1999. The revenue growth resulting from the initiation of managed
data network services, including services provided under the Bridge network
services agreement entered into on February 18, 2000, accounted for $151.7
million of the increase. Internet access revenues increased 43% to $32.5
million in the twelve months of 2000, compared to $22.8 million for 1999. These
increases were driven by an increase in active customer circuits of 161% to
approximately 3,000 as of December 31, 2000 from 1,150 as of December 31, 1999.
Other revenues, consisting of installation and equipment sales, increased from
$1.2 million in 1999 to $2.0 million in 2000.
Data Communications and Operations. (exclusive of non-cash compensation)
Data communications and operations expenses were $211.8 million for the year
ended December 31, 2000; an increase of $184.2 million from $27.6 million for
the year ended December 31, 1999. The increase in expenses related principally
to the costs incurred by SAVVIS to operate the Internet protocol network
acquired from Bridge since February 18, 2000 and other increases in the number
of leased long distance, dedicated customer and dial-up circuits to support the
increased customer circuits in operation.
Sales and Marketing. (exclusive of non-cash compensation) Sales and
marketing expenses were $33.9 million for the year ended December 31, 2000, up
170% or $21.4 million as compared to 1999. This increase is principally
attributed to personnel related costs and sales commissions of $13.6 million
associated with the growth in sales and marketing staff, a $5.0 million
increase in expenditures on advertising and marketing initiatives, and a $2.4
million increase in travel and training-related items.
General and Administrative. (exclusive of non-cash compensation) General
and administrative expenses amounted to $24.4 million for the year ended
December 31, 2000 and $11.1 million for the same period in 1999, an increase of
$13.3 million or 120%. This increase resulted from increased personnel costs of
$2.8 million to support the expansion of the customer base and the overall
growth of the business, increased occupancy costs of $3.8 million related to
the move to the Company's new headquarters during the second quarter and
increased costs for the growing employee base, an increase of $1.8 million for
professional audit, tax, legal and consulting services, an increase of $1.6
million in services provided by Bridge under the Administrative Services
agreement, and an increase of $1.3 million in travel expense associated with
the overall growth of the business. Bad debt expense amounted to $1.8 million
in 2000 versus $.8 million for the year ended December 31, 1999.
Non-cash Equity-based Compensation. Non-cash equity-based compensation
amounted to $14.5 million for the year ended December 31, 2000 versus a $1.5
million expense in 1999. These expenses represent amortization charges to
earnings for the years ended December 31, 2000 and 1999, respectively,
44
for the difference between the estimated fair market value of our common stock
and the exercise price for options granted to employees and non-employee
members of our Board of Directors on various dates in early 2000 and late 1999,
as well as options granted to employees of Bridge in 1999 and early 2000.
EBITDA. EBITDA, which is defined as consolidated loss before depreciation
and amortization, taxes, interest income and expense, non-cash equity based
compensation, asset impairment and other write down of assets and restructuring
charges was $27.2 million and $83.7 million for 1999 and 2000, respectively. We
have included information concerning adjusted EBITDA because our management
believes that in our industry such information is a relevant measurement of a
company's financial performance and liquidity. Adjusted EBITDA is not
determined in accordance with accounting principles generally accepted in the
United States of America, is not indicative of cash used by operating
activities and should not be considered in isolation or as an alternative to,
or more meaningful than, measures of operating performance determined in
accordance with accounting principles generally accepted in the United States
of America. Additionally, our calculation of adjusted EBITDA may not be
comparable to similarly titled measures of other companies, as other companies
may not calculate it in a similar manner.
BECAUSE THE "PREDECESSOR" STATEMENT OF OPERATIONS IN 1999 IS PRESENTED ON A
DIFFERENT BASIS OF ACCOUNTING, THE FOLLOWING AREAS IN THE STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 ARE NOT COMPARED:
Depreciation and Amortization. Depreciation and amortization expense was
$60.5 million for the year ended December 31, 2000. Of this total, $43.7
million is attributed to depreciation on the network acquired on February 18,
2000 and subsequent network equipment acquisitions, and $12.4 million relates
to the amortization of goodwill and intangibles associated with the mandated
"push-down accounting" ascribed to the Bridge acquisition of SAVVIS in April
1999.
Asset Impairment & Other Write-downs of Assets. During 2000, an asset
write down in the amount of $2 million was required to adjust our investment in
specialized customer application software to its estimated net realizable
value.
Interest. Interest income from the investment of the initial public
offering proceeds amounted to $6.4 million for the year ended December 31,
2000. Interest expense during the same period, primarily attributable to
interest expense on capital equipment financing incurred since the acquisition
of the Internet protocol network in February 2000 and amounts payable to
Bridge, amounted to $10.6 million.
Net Loss. The net loss for the year ended December 31, 2000 was $164.9
million, or $1.89 basic and diluted loss per share.
LIQUIDITY AND CAPITAL RESOURCES
On March 18, 2002, the Company issued approximately $158 million of
preferred stock to (i) affiliates of Welsh Carson, in exchange for
approximately $57.5 million in cash, conversion of approximately $22.2 million
in principal and accrued interest in respect to our 10% convertible senior
secured notes and approximately $90.9 million in notes, and accrued interest,
issued pursuant to the credit agreement with Nortel Networks and (ii) Reuters
in exchange for approximately $40.9 million in principal and accrued interest
in respect to the 12% convertible senior secured notes. The terms of the
preferred stock are more fully described in Note 14 of the financial
statements.
In addition, the Company reached agreements with General Electric Capital
Corporation ("GECC"), Nortel Networks ("Nortel"), Bridge Information Systems
and certain other vendors as follows:
o Approximately $57 million of capital lease obligations were amended with
GECC. The amended lease provides for repayment at the end of the fifth
year, 12% interest payable in cash or in kind, at the Company's option,
for the first three years and an excess cash sweep provision.
o Release by Nortel Networks from all obligations to purchase optical
equipment under the Global Purchase Agreement.
45
o The Company entered into an agreement with Bridge wherein the Company
agreed to pay Bridge $11.9 million in satisfaction of $27.5 million
representing all amounts due to Bridge. The Company also agreed not to
pursue the collection of $18.7 million of pre-petition receivables owed to
it by Bridge and to assign to Bridge any claims it had against other
Bridge entities with the exception of Bridge Canada where the Company
retained its right to receive a pro rata distribution of assets from the
liquidation of Bridge Canada.
o A release by a certain vendor from all obligations under the agreements
in exchange for $2.5 million paid in installments over 18 months and other
commercial arrangements.
o In connection with the transactions, the Company also issued five-year
warrants to purchase 16.1 million shares of its common stock at $0.75 per
share.
The balance of the proceeds from the issuance of the Preferred will be
used for general working capital purposes.
As a result of the transactions discussed in Note 14 of the consolidated
financial statements, the Company's financial position changed significantly
including a reduction of debt by $165.6 million, a reduction of payables by
$39.3 million and an increase in cash position by $18.3 million. Additionally,
the Company recognized an extraordinary gain of approximately $61.1 million
related to the extinguishment of debt. The following unaudited summary financial
information includes an unaudited pro forma column to illustrate the balance
sheet at December 31, 2001 as if all the transactions had occurred on December
31, 2001. The unaudited pro forma summary financial information has been
adjusted to reflect the impact of these transactions. This information is for
illustrative purposes only and is not meant to be indicative of actual results
that might have been achieved or results that might be attained in the future.
PRO FORMA
2001 2001
------------- ------------
(UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents ...................... $ 14,405 $ 32,687
Total current assets ........................... 46,005 50,283
Total assets ................................... 255,640 259,918
Total current liabilities ...................... 348,898 94,409
Debt and capital lease obligations ............. 259,504 93,083
Total liabilities .............................. 412,226 195,683
Preferred stock ................................ -- 157,013
Stockholders' equity (deficit) excluding
preferred stock............................... (156,586) (92,778)
Stockholders' equity (deficit) ................. (156,586) 64,235
Negative cash flow from operations decreased to $41.9 million for the year
ended December 31, 2001 from $79.8 million in 2000. This decrease in negative
cash flow was primarily due to a $17.8 million improvement in EBITDA and
improved collections on accounts receivable.
Net cash used in investing activities for the year ended December 31, 2001
was approximately $24.1 million, which reflects the purchase of the property
and equipment not financed. We obtained funds for investing activities in the
year 2001 from a vendor credit facility, issuance of convertible debt
securities and through customer receipts.
In connection with our purchase of the global Internet protocol network
assets from Bridge, we also entered into a network services agreement under
which we provided Bridge with managed data networking services. Because the
amounts paid to us under the network services agreement for the services
provided over the original network acquired from Bridge are based upon the cash
cost to operate the original network, the provision of such services did not
have an impact on our cash flows from operations. However, due to amortization
and depreciation relating to the network, the provision of services under the
network services agreement resulted in our incurring losses from operations.
The
46
effects of such operating losses increased our accumulated deficit and reduced
our stockholders' equity. As of October 2001, this agreement has been replaced
by the Reuters Network Services Agreement and the MoneyLine Telerate amended
letter of intent.
On June 30, 2000, SAVVIS executed an agreement to acquire approximately
$30 million of telecommunications equipment and related services with Winstar
Wireless, Inc. ("Winstar"). Upon execution, the Company took delivery of
certain equipment and paid approximately $5 million to Winstar. Of the
remaining $25 million, approximately $16.5 million, included in Notes Payable
at December 31, 2001, has been financed by Winstar over six years at 11%
interest. Payments commenced in the third quarter of 2000. The remaining
balance of $8.5 million was recorded in the other accrued liabilities, with
payments of approximately $2 million due every three months until July 2001. On
September 29, 2000, the Company executed an additional agreement with Winstar
to acquire $10.1 million in telecommunications equipment. This agreement called
for a down payment of $1.5 million, which was paid by SAVVIS in October 2000.
The remaining $8.6 million, included in Notes Payable at December 31, 2001, was
also financed by Winstar over six years at 11% interest, with payments being
made quarterly beginning in December 2000.
As of December 31, 2001, approximately $4 million remains in other accrued
liabilities related to Winstar. On April 17, 2001, SAVVIS provided notice to
Winstar that a material breach had occurred under the Master Agreement relating
to Winstar's installation of the wireless equipment components and accordingly,
terminated the equipment purchase and installation agreements. On April 18,
2001, Winstar filed for bankruptcy protection under Chapter 11 of the
Bankruptcy Code. The Company to date has not performed all obligations to
Winstar, nor has Winstar performed all of its obligations to the Company. In
addition, the Company ceased making payments on the Winstar notes in March
2001.
On September 25, 2001, Winstar filed suit in the US Bankruptcy Court for
Delaware seeking a total of approximately $38 million from the Company for the
repayment of the note payable and professional services liabilities, which
includes a refund of $8.5 million of Internet services prepaid by Winstar. In
turn, we have filed proof of claim with the court overseeing the Winstar
bankruptcy proceeding in the amount of approximately $19 million. The court has
agreed to refer the dispute to arbitration. We believe we have substantial
defenses to the suit.
In August 2000, the Company entered into a 20-year agreement with Kiel
Center Partners, L.P. ("KCP") pursuant to which it acquired the naming rights
to an arena in St. Louis, MO. Upon execution of the agreement, total
consideration for these rights amounted to approximately $72 million, including
750,000 shares of its common stock issued by the Company to KCP. The related
expense will be recognized over the term of the agreement. On March 21, 2001,
KCP notified the Company that it was in default of the agreement relating to
possible future insolvency of SAVVIS, a claim that KCP subsequently withdrew.
On August 21, 2001 the parties entered into an amendment of the agreement
providing for the payment of $1.25 million on each of December 31, 2002 through
2005. These payments will be deducted from payments otherwise owed under the
agreement in 2007 through 2010. As of December 31, 2001, the Company has
recorded approximately $4.5 million of deferred charges resulting from the
issuance of common stock under this agreement.
We have arrangements with various suppliers of communications services
that require us to maintain minimum spending levels some of which increase over
time. Our aggregate minimum spending level is approximately $59 million, $62
million, $55 million and $15 million in years 2002 to 2005, respectively.
Should SAVVIS not meet the minimum spending level in any given year, decreasing
termination liabilities representing a percentage of the remaining contracted
amount may immediately become due and payable. Furthermore, certain of these
termination liabilities are subject to reduction should SAVVIS experience the
loss of a major customer or suffer a loss of revenues from a downturn in
general economic activity. Before considering the effects of any reductions for
the business downturn provisions, if SAVVIS were to terminate all of these
agreements as of March 31, 2002, the maximum termination liability would amount
to approximately $155 million.
Based upon our current plans, we believe we have the necessary resources
to fund our operating losses, working capital needs and capital expenditure
requirements until the Company reaches operating cash flow positive, which is
expected to occur in 2003.
47
We may meet any additional funding needs through a combination of equity
investments, debt financings, renegotiation of repayment terms on existing debt
and sales of assets and services. If these additional financings were required,
there can be no assurance that we would be successful in completing any of
these financings or that if we were, the terms of such financings would be
favorable to us.
SAVVIS' contractual obligations, including commitments for future payments
under non-cancelable lease arrangements and short and long- term debt
arrangements, are summarized below and are fully disclosed in the notes the
consolidated financial statements.
PAYMENTS DUE BY
--------------------------------------------------------------
LESS THAN 2-3 4-5 AFTER 5
TOTAL 1 YEAR YEARS YEARS YEARS
---------- ----------- ---------- --------- ----------
Capital lease obligations (1) ..... $ 70,508 $ 49,439 $ 21,069 -- --
Operating leases .................. 49,713 8,515 18,357 $ 4,920 $17,921
Unconditional purchase
obligations (2) .................. 190,800 59,200 116,600 15,000
Convertible senior secured
notes(3) ......................... 60,112 60,112
Notes payable (4) ................. 110,291 86,572 23,719 -- --
-------- -------- -------- ------- -------
Total contractual cash
obligations ...................... 481,424 263,838 179,745 19,920 17,921
-------- -------- -------- ------- -------
- ----------------
(1) As disclosed in Note 14 of the consolidated financial statements,
subsequent to December 31, 2001, the Company entered into agreements with
GECC to significantly defer the payment terms of its capital lease
obligations.
(2) As disclosed in Note 14 of the consolidated financial statements,
subsequent to December 31, 2001, the Company entered into an agreement to
relieve itself from significant purchase obligations from various
communications vendors totaling $22.2 million of the $190.8 million
commitment as of December 31, 2001.
(3) As disclosed in Note 14 of the consolidated financial statements,
subsequent to December 31, 2001, the Company issued convertible preferred
stock in exchange for the convertible senior secured notes plus accrued
interest totaling $63.1 million.
(4) As disclosed in Note 14 of the consolidated financial statements,
subsequent to December 31, 2001, the Company issued convertible preferred
stock in satisfaction of all the principal and accrued interest owed in
respect to notes payable totaling $90.9 million.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." The provisions of this statement are required to be applied starting
with fiscal years beginning after December 15, 2001. This statement is required
to be applied at the beginning of an entity's fiscal year and to be applied to
all goodwill and other intangible assets recognized in its financial statements
at that date. SFAS No. 142 addresses how intangible assets should be accounted
for in financial statements upon their acquisition. This statement also
addresses how goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial statements. The
statement requires that goodwill and certain other intangibles with an
indefinite life, as defined in the standard, no longer be amortized. However,
goodwill and intangibles would have to be assessed each year to determine
whether an impairment loss has occurred. Any impairments recognized upon
adoption would be recorded as a change in accounting principle. Future
impairments would be recorded in income from continuing operations. The
statement provides specific guidance for testing goodwill for impairment. The
Company had $2 million of net goodwill at December 31, 2001. Goodwill
amortization was $7.9 million for the year ended December 31, 2001.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" which requires that one accounting model be
used for the long-lived assets to be disposed of by sale, whether previously
held and used or newly acquired. It also broadens the presentation of
discontinued operations to include more disposal transactions.
The adoption of SFAS No. 142 and SFAS No. 144 on January 1, 2002 did not
have a material impact on our financial position or results of operations.
48
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures relate to changes in interest rates.
Following the purchase of Bridge's global Internet protocol network assets in
February 2000, we have begun to expand our business internationally, and as a
result, we are also exposed to changes in foreign currency exchange rates.
We have financial instruments that are sensitive to changes in interest
rates and a number of network equipment financing arrangements. These
instruments were entered into for other than trading purposes, are denominated
in U.S. Dollars and bear interest at a fixed rate. Because the interest rate on
these instruments is fixed, changes in interest rates will not directly impact
our cash flows. As discussed in note 14, in March 2002 a portion of the
Company's borrowings were extinguished for less than their carrying value. As
discussed in note 6, it is not practicable to estimate the fair value of our
unextinguished debt as it is currently in dispute.
Changes in foreign exchange rates did not impact our results of operations.
For the year ended December 31, 2001, 21% of our service revenue was derived
from operations outside the United States, but only 1% of total revenue is
settled in currency other than the U.S. dollar, and approximately 18% of our
total data communications and operations costs were incurred outside the United
States. We expect these percentages to remain relatively constant in the periods
ahead. Because our foreign revenue closely matched our foreign costs, changes in
foreign exchange rates did not have a material impact on our results of
operations in this quarter. In the future, we may engage in hedging transactions
to mitigate foreign exchange risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The 2001 consolidated financial statements and related notes thereto are
included in Part II, Item 8 of this Form 10-K, beginning on page F-1 of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides a brief description of each director's and
executive officer's name, age, principal occupation and business experience and
all positions and offices with SAVVIS currently held by the directors and
executive officers.
NAME AGE POSITION AND OFFICE
- ------------------------------- ----- ------------------------------------------------------
Robert A. McCormick ........... 36 Chief Executive Officer and Chairman of the Board
John M. Finlayson ............. 47 President, Chief Operating Officer and Director
Executive Vice President, Chief Financial Officer and
David J. Frear ................ 45 Director
Executive Vice President and General Manager --
James D. Mori ................. 46 Americas
Executive Vice President and Chief Technology
Richard G. Bubenik ............ 41 Officer
Clyde A. Heintzelman .......... 63 Director
Thomas E. McInerney ........... 60 Director
Patrick J. Welsh .............. 58 Director
Norman K. Korey ............... 43 Director
Kevin J. Wiley ................ 41 Director
Set forth below is a brief description of the principal occupation and
business experience of each of our nominees for director and each of our
executive officers.
ROBERT A. MCCORMICK has served as the Chairman of our board of directors
since April 1999 and as our Chief Executive Officer since November 1999. Mr.
McCormick served as Executive Vice President and Chief Technical Officer of BIS
Administration, Inc., formerly Bridge Information Systems, Inc., or Bridge, a
principal stockholder of our company, from January 1997 to December 1999, and
held various engineering, design and development positions at Bridge from 1989
to January 1997. On February 15, 2001, Bridge's U.S. operating subsidiaries
filed a voluntary petition for relief under Chapter 11 of Title 11 of the
United States Bankruptcy Code. Mr. McCormick attended the University of
Colorado at Boulder.
JOHN M. FINLAYSON has served as our President and Chief Operating Officer
since December 1999 and as a director of our company since January 2000. From
June 1998 to December 1999, Mr. Finlayson served as Senior Vice President of
Global Crossing Holdings, Ltd. and President of Global Crossing International,
Ltd., a provider of internet and long distance communications facilities and
services. Before joining Global Crossing, Mr. Finlayson was employed by
Motorola, Inc., a provider of integrated communications solutions and embedded
electronic solutions, as Corporate Vice President and General Manager of the
Americas Cellular Infrastructure Group from March 1994 to February 1998, and as
Corporate Vice President and General Manager of the Asia Pacific Cellular
Infrastructure Group from March 1998 to May 1998. Before joining Motorola, Mr.
Finlayson was employed by AT&T as Sales Vice President of Business Network
Sales for the Southeastern United States. Mr. Finlayson received a B.S. degree
in Marketing from LaSalle University, an M.B.A. degree in Marketing from St.
Joseph University and a post M.B.A. certification in Information Management
from St. Joseph's University.
DAVID J. FREAR has served as our Executive Vice President and Chief
Financial Officer since July 1999, and as a director of our company since
October 1999. Mr. Frear was an independent consultant in the telecommunications
industry from August 1998 until June 1999. From October 1993 to July 1998, Mr.
Frear was Senior Vice President and Chief Financial Officer of Orion Network
Systems Inc., a Nasdaq-listed international satellite communications company
that was acquired by Loral Space & Communications in March 1998. Mr. Frear was
Chief Financial Officer of Millicom Incorporated, a Nasdaq-listed international
cellular paging and cable television company, from 1990 to 1993. He previously
was an investment banker at Bear, Stearns & Co., Inc. and Credit Suisse. Mr.
Frear received his C.P.A. in 1979 and received an M.B.A. degree from the
University of Michigan.
50
JAMES D. MORI has served as our Executive Vice President and General
Manager--Americas since October 1999. Before joining us, Mr. Mori was employed
by Sprint Corporation as National Account Manager from April 1987 to December
1989, as Branch Manager from January 1990 to December 1991, as Regional Sales
Director from January 1992 to March 1996, as Vice President--Sales from March
1996 to February 1997 and as Area Director from February 1997 to October 1999.
From January 1980 to March 1987, Mr. Mori served as National Account Manager of
Digital Equipment Corporation, Southwestern Bell and AT&T Information Systems.
Mr. Mori received a B.S. in Business Administration from the University of
Missouri.
RICHARD G. BUBENIK joined us in December 1996 and has served as our
Executive Vice President and Chief Technology Officer since July 1999. Dr.
Bubenik served as our Assistant Vice President-- Engineering from December 1996
to September 1997, Vice President--Engineering from October 1997 to April 1999
and Senior Vice President Network Engineering from April 1999 to July 1999.
From May 1993 to December 1996, Dr. Bubenik was a Software Development Manager
for Ascom Nexion, a network switch/router equipment supplier. Dr. Bubenik holds
a Ph.D. in Computer Science from Rice University, M.S. and B.S. degrees in
Computer Science from Washington University and a B.S. degree in Electrical
Engineering from Washington University.
CLYDE A. HEINTZELMAN has served as a director of our company since
December 1998. Mr. Heintzelman has served as the chairman of the board of
Optelecom, a NASDAQ-listed fiber optics component manufacturer, since February
2000 and as its interim President and Chief Executive Officer from June 2001 to
December 2001. From November 1999 to May 2001, he was president of Net2000
Communications, Inc., a provider of broadband business telecommunications
services. On November 16, 2001, Net2000 Communications and its subsidiaries
filed voluntary bankruptcy petitions for relief under Chapter 11 of Title 11 of
the United States Bankruptcy Code. From December 1998 to November 1999,
Mr. Heintzelman served as our President and Chief Executive Officer and from
May 1995 to December 1998, he served as Chief Operating Officer and President
of DIGEX Incorporated, a national internet services provider that was acquired
by Intermedia Communications, Inc. in July 1997. He was retained as a business
consultant by Intermedia from December 1997 to November 1998. In January 1992,
he participated in founding CSI, a company focused on building hardware and
software products for switched wide area networks using ISDN technology. Mr.
Heintzelman spent 28 years with Bell Atlantic and its predecessor companies.
Mr. Heintzelman also serves as a director of TCS, a wireless software company
and Optelcom. Mr. Heintzelman received a B.A. in Marketing from the University
of Delaware and did graduate work at Wharton, University of Pittsburgh and
University of Michigan.
THOMAS E. MCINERNEY has served as a director of our company since October
1999. Mr. McInerney has served as a general partner of Welsh, Carson, Anderson
& Stowe, of Welsh, Carson, and affiliated entities, which collectively are a
principal stockholder of our company, since 1987. Mr. McInerney also served as
the chairman of the executive committee of the board of Bridge, which assumed
the responsibilities of the Chief Executive Officer of Bridge, from November
2000 until February 2001. Before joining Welsh, Carson in 1987, Mr. McInerney
was President and Chief Executive Officer of Dama Telecommunications
Corporation, a voice and data communications services company that he
co-founded in 1982. Mr. McInerney has also been President of the Brokerage
Services Division and later Group Vice President--Financial Services of ADP,
with responsibility for the ADP divisions that serve the securities,
commodities, bank, thrift and electronic funds transfer industries. He has also
held positions with the American Stock Exchange, Citibank and American
Airlines. Mr. McInerney serves as a director of The BISYS Group, Inc.,
Centennial Communications Corp. and Spectra Site Holdings, Inc. He is also a
director of several private companies. From 1995 to February 2001, he was a
director of Bridge. Mr. McInerney received a B.A. from St. Johns University,
and attended New York University Graduate School of Business Administration.
PATRICK J. WELSH has served as a director of our company since October
1999. Mr. Welsh was a co-founder of Welsh, Carson and affiliated entities,
which collectively are a principal stockholder of our company, and has served
as a general partner of Welsh, Carson and affiliated entities since 1979.
Before 1979, Mr. Welsh was President and a director of Citicorp Venture
Capital, Ltd., an affiliate of Citicorp engaged in venture capital investing.
Mr. Welsh serves as a director of Accredo Health, Incorporated. He
51
also serves as a director of several private companies. From April 1995 to
February 2001, he was a director of Bridge. Mr. Welsh received a B.A. from
Rutgers University and an M.B.A. from the University of California at Los
Angeles.
NORMAN K. KOREY has served as a director of our company since January
2002. Mr. Korey has served as the President and Chief Executive Officer of
Korey Consulting, Inc., a telecommunications consulting company focused on
wireless startup companies, since November 2000. From November 1999 to November
2000, Mr. Korey served as the President--International Markets of Wireless
Facilities, Inc., a Nasdaq-listed provider of outsourced services for the
wireless communications industry. Before joining Wireless Facilities, Mr. Korey
was employed by Motorola's cellular infrastructure group as Vice President and
Senior Director--Southeast U.S. and Canada (from July 1994 to March 1998), and
by Motorola's network solutions sector as Vice President and General
Manager--Europe, Middle East, Africa and Russia (from January 1998 to February
1999) and as Vice President and General Manager--Caribbean and Latin America
(from February 1999 to November 1999). From August 1984 to July 1994, Mr. Korey
was employed by AT&T Global Business Communications Systems and AT&T in various
capacities, including as a regional staff director (from March 1991 to January
1993) and as general manager (from January 1993 to July 1994). Mr. Korey
received a B.S. degree in Marketing from Florida State University.
KEVIN J. WILEY has served as a director of our company since January 2002.
Mr. Wiley has served as a Vice President Corporate Business Development of Next
Level Communications, Inc., a Nasdaq-listed company that designs and markets
broadband communications equipment, from April 2001 until November 2001, and as
the Vice President of Sales of Next Level Communications, since November 2001.
Before joining Next Level Communications, Mr. Wiley was employed by Motorola's
network management group as Director of Business Development Support (from July
1997 to October 1998) and as Director of Latin American Cellular Operations
(from October 1998 to April 2001). From July 1995 to July 1997, he was Vice
President--Diversified Operations of Aliant Communications, Inc., a holding
company whose subsidiaries provide local exchange and intraLATA interexchange
services. From 1989 to 1995, he was employed by Nebraska Cellular Telephone
Corporation as Vice President, Chief Operating Officer and general manager
(from August 1989 to December 1992) and as President and Chief Executive
Officer (from December 1992 to July 1995). Before joining Nebraska Cellular
Telephone Corporation, Mr. Wiley was employed by Centel Cellular, a wireless
telecommunications company, in various managerial capacities. Mr. Wiley has
served as a director of Tricom, S.A. since December 1998. Mr. Wiley received a
B.S. degree in finance and management from Creighton University in 1982.
Members of our board of directors are elected each year at our annual
meeting of stockholders, and serve until the next annual meeting of
stockholders and until their respective successors have been elected and
qualified. Our officers are elected annually by our board of directors and
serve at the board's discretion.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities and Exchange Act of 1934 requires
directors and executive officers and persons who own more than 10% of a
registered class of equity securities to file with the SEC initial reports of
ownership and reports of changes in ownership of common stock and other equity
securities of our company. Such reporting persons are required by rules of the
SEC to furnish us with copies of all section 16(a) reports they file. To our
knowledge, based solely upon a review of section 16(a) reports furnished to us
for fiscal 2001 and written representations that no reports on Form 5 were
required, we believe that our directors, executive officers and greater than
ten percent stockholders complied with all Section 16(a) filing requirements
applicable to them with respect to transactions during 2001.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information set forth under the captions "Election
of Directors--Director Compensation," "2001 Executive Compensation" and
"Stockholder Return Performance Graph" appearing in our definitive proxy
statement for our 2002 annual meeting of stockholders to be held June 7, 2002
(the "Proxy Statement") to be filed within 120 days after the end of our fiscal
year, which information is incorporated herein by reference.
52
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED MATTERS
Reference is made to the information set forth under the caption
"Ownership of Securities" appearing in the Proxy Statement to be filed within
120 days after the end of our fiscal year, which information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
Reference is made to the information set forth under the caption
"Transactions with Affiliates" appearing in the Proxy Statement to be filed
within 120 days after the end of our fiscal year, which information is
incorporated herein by reference.
53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) and (2) Financial Statements and Financial Statement Schedules
The following consolidated financial statements are filed pursuant to Item
8 of this report:
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 2000 and 2001.
Consolidated Statements of Operations for the period from January 1,
1999 to April 6, 1999, the period from April 7, 1999 to December 31,
1999, and for each of the two years ended December 31, 2000 and 2001
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for
the period from January 1, 1999 to April 6, 1999, the period from April
7, 1999 to December 31, 1999, and for each of the two years ended
December 31, 2000 and 2001
Consolidated Statements of Cash Flows for the period from January 1,
1999 to April 6, 1999, the period from April 7, 1999 to December 31,
1999, and for each of the two years ended December 31, 2000 and 2001
Notes to Consolidated Financial Statements.
All other financial statement schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission
either have been included in the financial statements, or notes thereto, are
not required under the related instructions or are inapplicable and therefore
have been omitted.
14(a)(3) Exhibits. The following exhibits are either provided with this Form
10-K or are incorporated herein by reference.
EXHIBIT INDEX
NUMBER EXHIBIT DESCRIPTION
- -------- -----------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the Registrant (incorporated by
reference to the same numbered exhibit to the Registrant's Registration Statement on
Form S-1, as amended (File No. 333-90881) (the "Registration Statement"))
3.2 Certificate of Amendment to Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement)
3.3 Amended and Restated Bylaws of the Registrant incorporated by reference to the same
numbered exhibit to the Registrant's Registration Statement)
4.1 Form of Common Stock Certificate (incorporated by reference to the same numbered
exhibit to the Registrant's Registration Statement)
10.1 1999 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.1 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 2000)
10.2 Form of Incentive Stock Option Agreement under the 1999 Stock Option Plan
(incorporated by reference to the same numbered exhibit to the Registrant's Registration
Statement)
10.3 Form of Incentive Stock Option Agreement under the 1999 Stock Option Plan
(incorporated by reference to the same numbered exhibit to the Registrant's Registration
Statement)
10.4 Form of Non-Qualified Stock Option Agreement under the 1999 Stock Option Plan
(incorporated by reference to the same numbered exhibit to the Registrant's Registration
Statement)
10.5 Letter Agreement, dated November 12, 1999, between the Registrant and Clyde A.
Heintzelman (incorporated by reference to Exhibit 10.7 to the Registrant's Registration
Statement)
54
NUMBER EXHIBIT DESCRIPTION
- ---------- -----------------------------------------------------------------------------------------
10.6 Employment Agreement, dated December 20, 1999, between the Registrant and Jack M.
Finlayson (incorporated by reference to Exhibit 10.8 to the Registrant's Registration
Statement)
10.7 Letter Agreement, dated June 14, 1999, between the Registrant and David J. Frear
(incorporated by reference to Exhibit 10.9 to the Registrant's Registration Statement)
10.8 Letter Agreement, dated September 30, 1999, between the Registrant and James D. Mori
(incorporated by reference to Exhibit 10.10 to the Registrant's Registration Statement)
10.9 Master Establishment and Transition Agreement, dated February 9, 2000, between the
Registrant and Bridge Information Systems, Inc., including as Exhibit B a Form of
Administrative Services Agreement, as Exhibit E a Form of Local Contract of Assignment
and Assumption, as Exhibit F a Form of Local Asset Transfer Agreement, as Exhibit H a
Form of Equipment Colocation Permit, as Exhibit I a Form of Promissory Note, as Exhibit
J a Form of Call Asset Transfer Agreement and as Exhibit K the Sublease Agreement
(incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K for the
year ended December 31, 1999)
10.10+ Network Services Agreement, dated February 18, 2000, between SAVVIS Communications
Corporation and Bridge Information Systems, Inc. (incorporated by reference to Exhibit
10.12 to the Annual Report on Form 10-K for the year ended December 31, 1999)
10.11+ Technical Services Agreement, dated February 18, 2000, between SAVVIS
Communications Corporation and Bridge Information Systems, Inc. (incorporated by
reference to Exhibit 10.13 to the Annual Report on Form 10-K for the year ended
December 31, 1999)
10.12 Managed Network Agreement, dated January 31, 1995, between Sprint Communications
Company L.P. and Bridge Data Company (incorporated by reference to Exhibit 10.13 to
the Registrant's Registration Statement)
10.13 Amendment One to the Managed Network Agreement, dated August 23, 1995, between
Sprint Communications Company L.P. and Bridge Data Company (incorporated by
reference to Exhibit 10.14 to the Registrant's Registration Statement)
10.14 Amendment Two to the Managed Network Agreement, dated August 16, 1995, between
Sprint Communications Company L.P. and Bridge Data Company (incorporated by
reference to Exhibit 10.15 to the Registrant's Registration Statement)
10.15+ Amendment Three to the Managed Network Agreement, dated March 1, 1996, between
Sprint Communications Company L.P. and Bridge Data Company (incorporated by
reference to Exhibit 10.16 to the Registrant's Registration Statement)
10.16+ Amendment Four to the Managed Network Agreement, dated July 29, 1996, between
Sprint Communications Company L.P. and Bridge Data Company (incorporated by
reference to Exhibit 10.18 to the Registrant's Registration Statement)
10.17+ Amendment Five to the Managed Network Agreement, dated December 5, 1996, between
Sprint Communications Company L.P. and Bridge Data Company (incorporated by
reference to Exhibit 10.19 to the Registrant's Registration Statement)
10.18+ Amendment Six to the Managed Network Agreement, dated May 23, 1997, between Sprint
Communications Company L.P. and Bridge Data Company (incorporated by reference to
Exhibit 10.20 to the Registrant's Registration Statement)
10.19+ Amendment Seven to the Managed Network Agreement, dated August 28, 1998, between
Sprint Communications Company L.P. and Bridge Data Company (incorporated by
reference to Exhibit 10.21 to the Registrant's Registration Statement)
10.20+ Service Agreement, dated August 15, 1996, between the Registrant and IXC Carrier, Inc.
(incorporated by reference to Exhibit 10.22 to the Registrant's Registration Statement)
10.21+ Amendment No. 1 to the Service Agreement, dated October 22, 1996, between the
Registrant and IXC Carrier, Inc. (incorporated by reference to Exhibit 10.23 to the
Registrant's Registration Statement)
10.22+ Master Internet Services Agreement, effective June 4, 1999, between the Registrant and
UUNET Technologies, Inc. (incorporated by reference to Exhibit 10.24 to the Registrant's
Registration Statement)
55
NUMBER EXHIBIT DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------
10.23+ Internet MCI Dedicated Access Agreement, dated April 16, 1998, between the Registrant
and network MCI, Inc. (incorporated by reference to Exhibit 10.25 to the Registrant's
Registration Statement)
10.24 Registration Rights Agreement, dated February 7, 2000, among the Registrant, Welsh
Carson Anderson & Stowe VIII, L.P. and Bridge Information Systems, Inc. (incorporated
by reference to Exhibit 10.26 to the Registrant's Registration Statement)
10.25 Office Lease between WGP Associates, LLC and SAVVIS Communications (incorporated
by reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1999)
10.26 Amended and Restated Credit Agreement, dated as of September 5, 2000, by and among
the Registrant, as guarantor, SAVVIS Communications Corporation, a Missouri
corporation, as borrower, and Nortel Networks Inc., as administrative agent, and the
lenders named therein (incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000)
10.27 Pledge Agreement, dated as of September 5, 2000, by and between the Registrant and
Nortel Networks Inc., as administrative agent for the lenders (incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2000)
10.28 Amended and Restated Pledge and Security Agreement, dated as of September 5, 2000, by
and between SAVVIS Communications Corporation, a Missouri corporation and Nortel
Networks Inc., as administrative agent for the lenders (incorporated by reference to
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2000)
10.29 Pledge and Security Agreement, dated as of September 5, 2000, by and between Global
Network Assets, LLC and Nortel Networks Inc., as administrative agent for the lenders
(incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2000)
10.30 Amended and Restated Guaranty Agreement, dated as of September 5, 2000, delivered by
the Registrant to and in favor of Nortel Networks Inc., as administrative agent for itself
and the other lenders (incorporated by reference to Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000)
10.31 Amended and Restated Guaranty Agreement, dated as of September 5, 2000, delivered by
Global Network Assets, LLC to and in favor of Nortel Networks Inc., as administrative
agent for itself and the other lenders (incorporated by reference to Exhibit 10.6 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2000)
10.32 First Amendment to Amended and Restated Credit Agreement, dated as of May 21, 2001,
by and among the Registrant, SAVVIS Communications Corporation, a Missouri
corporation and Nortel Networks Inc. and the lenders named therein (incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2001)
10.33 First Amendment to Amended and Restated Pledge and Security Agreement, dated as of
May 21, 2001, by and between SAVVIS Communications Corporation, a Missouri
corporation and Nortel Networks Inc., as administrative agent for the lenders
(incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2001)
10.34+ Long Haul IRU Agreement, dated as of August 2, 2000, between SAVVIS
Communications Corporation, a Missouri corporation and Level 3 Communications, LLC
(incorporated by reference to Exhibit 10.7 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2000)
10.35+ Metro IRU Agreement, dated as of August 2, 2000, between SAVVIS Communications
Corporation, a Missouri corporation and Level 3 Communications, LLC (incorporated by
reference to Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2000)
56
NUMBER EXHIBIT DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------
10.36+ Arena Naming Rights Agreement, dated as of August 17, 2000, among the Registrant, Kiel
Center Partners, L.P. and Bridge Information Systems, Inc. (incorporated by reference to
Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2000)
10.37+ Master Agreement, dated as of June 30, 2000, between SAVVIS Communications
Corporation, a Missouri corporation and Winstar Wireless, Inc., as amended by that certain
Letter Agreement dated September 29, 2000 (incorporated by reference to Exhibit 10.10 to
the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2000)
10.38+ Nortel Networks Global Purchase Agreement, effective as of June 30, 2000, between
SAVVIS Communications Corporation, a Missouri corporation and Nortel Networks Inc.
(incorporated by reference to Exhibit 10.11 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2000)
10.39+ Amendment Eight to the Managed Network Agreement, effective as of August 1, 2000,
between Sprint Communications Company, L.P. and Bridge Data Company (incorporated
by reference to the same numbered exhibit to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2000)
10.40 Securities Purchase Agreement, dated as of February 16, 2001, among the registrant,
Welsh, Carson, Anderson & Stowe VIII, L.P., WCAS Management Corporation and the
various individuals listed as Purchasers on schedule I thereto (incorporated by reference to
the same numbered exhibit to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000)
10.41 Registration Rights Agreement, dated as of February 20, 2001, among the registrant,
Welsh, Carson, Anderson & Stowe VIII, L.P., WCAS Management Corporation and the
various individuals listed on the signature pages thereto (incorporated by to the same
numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2000)
10.42 Missouri Future Advance Deed of Trust and Security Agreement, dated as of February 19,
2001, among SAVVIS Communications Corporation, a Missouri corporation, Steven D.
Korenblat and Welsh, Carson, Anderson & Stowe VII, L.P. (incorporated by reference to
the same numbered exhibit to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000)
10.43 Stipulation and Order, dated April 9, 2001, by and among the Registrant, AT&T Corp.,
Bridge Information Systems, Inc. and its relate debtor entities (incorporated by reference
to the same numbered exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2000)
10.44 Stipulation and Order, dated March 22, 2001, by and among the Registrant, Sprint
Communications Company L.P., Bridge Information Systems, Inc. and its related debtor
entities (incorporated by reference to the same numbered exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2000)
10.45 Stipulation and Order, dated March 23, 2001 by and among the Registrant,
MCI/WorldCom Communications Corporation and certain of its affiliates, Bridge
Information Systems, Inc. and its related debtor entities (incorporated by reference to the
same numbered exhibit to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000)
10.46 Employment Agreement, dated April 2, 2001, between the Registrant and Robert A.
McCormick (incorporated by reference to the same numbered exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2000)
10.47 Modification of Missouri Future Advance Deed Of Trust and Security Agreement,
including Appointment of Successor Trustee, entered into effective as of February 19,
2001, by and between SAVVIS Communications Corporation, a Missouri corporation,
Welsh, Carson, Anderson & Stowe VII, L.P., and WCAS Management Corporation, as
collateral agent. (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2001)
57
NUMBER EXHIBIT DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------
10.48 Stipulation and Order, dated March 22, 2001 between Bridge Information Systems, Inc.
and related entities and the Company. (incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2001)
10.49 Registration Rights Agreement, dated as of May 16, 2001, between the Registrant and
Reuters Holdings Switzerland SA. (incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K dated June 4, 2001)
10.50 Missouri Future Advance Deed Of Trust And Security Agreement, dated as of May 11,
2001, between SAVVIS Communications Corporation, a Missouri corporation, Joseph J.
Trad, as trustee and Reuters Holdings Switzerland SA. (incorporated by reference to
Exhibit 10.3 to the Registrant's Current Report on Form 8-K dated June 4, 2001)
10.51 Side Letter, dated May 16, 2001, between the Registrant and Reuters Holdings Switzerland
SA. (incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form
8-K dated June 4, 2001)
10.52+ Services Agreement Term Sheet, dated as of May 21, 2001, between the Registrant and
Reuters Limited (incorporated by reference to Exhibit 10.5 to the Registrant's Current
Report on Form 8-K dated June 4, 2001)
10.53 Agreement Regarding the Supplemental Terms of the Interim SAVVIS Financing as
Approved by the May 3, 2001 Order of the United States Bankruptcy Court for the
Eastern District of Missouri (incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001)
10.54++ Network Services Agreement, dated as of September 28, 2001, by and between the
Registrant and Reuters Limited (incorporated by reference to Exhibit 10.4 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2001)
10.55++ Transitional Services Agreement, dated as of September 28, 2001, by and between the
Registrant and Reuters Limited (incorporated by reference to Exhibit 10.5 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2001)
10.56++ Co-location Agreement, dated as of September 28, 2001, by and between SAVVIS
Communications Corporation, a Missouri corporation, and Reuters America Inc.
(incorporated by reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2001)
10.57 Ground Lease, effective as of February 18, 2000, by and between SAVVIS
Communications Corporation, a Missouri corporation, and Reuters America Inc.
(incorporated by reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2001)
10.58++ Letter of Intent, dated August 16, 2001, regarding the Network Services Agreement
between Registrant and MoneyLine Corporation.
10.59++ Letter Amendment No. 1, dated October 18, 2002, amending Letter of Intent, dated
August 16, 2001, regarding the Network Services Agreement between Registrant and
MoneyLine Corporation.
21.1 Subsidiaries of the Registrant
- ----------------
+ Confidential treatment has been granted for this exhibit. The copy filed as
an exhibit omits the information subject to the request for confidential
treatment.
++ A request for confidential treatment has been submitted with respect to
this exhibit. The copy filed as an exhibit omits the information subject to
the request for confidential treatment.
(b) Reports on Form 8-K.
On February 2, 2001 and February 22, 2001, we filed Current Reports on
form 8-K relating to the bankruptcy of Bridge Information Systems, Inc.
58
On June 4, 2001, we filed a Current Report on Form 8-K relating to the
execution of a securities purchase agreement and related documents with Reuters
Holdings Switzerland SA. On July 17, 2001, we filed a Current Report on Form
8-K, as amended on July 18, 2002 and July 20, 2002, relating to the approval by
our board of directors for purposes of Section 203 of the Delaware General
Corporation Law of the securities purchase agreement between us and Reuters
Holdings Switzerland SA and the stock option agreement, dated as of May 3, 2001,
among Reuters America, Inc., Reuters S.A., and Bridge Informations Systems, Inc.
(c) Exhibits.
The list of exhibits filed with this report is set forth in response to
Item 14(a)(3). SAVVIS hereby files as part of this report the exhibits listed
in the index to the exhibits.
(d) Financial Statements Schedules.
None.
59
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, on March 29, 2002.
SAVVIS COMMUNICATIONS CORPORATION
By: /s/ Robert McCormick
-------------------------
Robert McCormick
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF
THE BOARD
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant, in
the capacities indicated below and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------------- --------------------------------------- ---------------
/s/ ROBERT MCCORMICK Chief Executive Officer and Chairman March 29, 2002
- --------------------------- of the Board (principal executive
Robert McCormick officer)
/s/ DAVID J. FREAR Executive Vice President, Chief March 29, 2002
- --------------------------- Financial Officer and Director
David J. Frear (principal financial officer and
principal accounting officer)
/s/ JACK M. FINLAYSON President and Chief Operating Officer March 29, 2002
- --------------------------- Director
Jack M. Finlayson
/s/ CLYDE A. HEINTZELMAN Director March 29, 2002
- ---------------------------
Clyde A. Heintzelman
/s/ THOMAS E. MCINERNEY Director March 29, 2002
- ---------------------------
Thomas E. McInerney
/s/ PATRICK J. WELSH Director March 29, 2002
- ---------------------------
Patrick J. Welsh
/s/ NORMAN KOREY Director March 29, 2002
- ---------------------------
Norman Korey
/s/ KEVIN WILEY Director March 29, 2002
- ---------------------------
Kevin Wiley
60
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SAVVIS COMMUNICATIONS CORPORATION
PAGE
-----
Independent Auditors' Report .................................................. F-2
Consolidated Balance Sheets as of December 31, 2000 and 2001 .................. F-3
Consolidated Statements of Operations for the period from January 1, 1999 to
April 6, 1999, the period from April 7, 1999 to December 31, 1999, and for
each of the two years ended December 31, 2000 and 2001 ....................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the
period from January 1, 1999 to April 6, 1999, the period from April 7, 1999 to
December 31, 1999, and for each of the two years ended December 31, 2000
and 2001 ..................................................................... F-5
Consolidated Statements of Cash Flows for the period from January 1, 1999 to
April 6, 1999, the period from April 7, 1999 to December 31, 1999, and for
each of the two years ended December 31, 2000 and 2001 ....................... F-6
Notes to Consolidated Financial Statements .................................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
SAVVIS Communications Corporation:
Herndon, Virginia
We have audited the accompanying consolidated balance sheets of SAVVIS
Communications Corporation and subsidiaries ("SAVVIS") as of December 31, 2000
and 2001, and the related consolidated statements of operations, changes in
stockholders' equity (deficit), and cash flows for the period from January 1,
1999 to April 6, 1999, the period from April 7, 1999 (the date of SAVVIS'
acquisition by Bridge Information Systems, Inc.) to December 31, 1999 and each
of the two years ended December 31, 2000 and 2001. These financial statements
are the responsibility of SAVVIS' management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of SAVVIS Communications Corporation
and subsidiaries as of December 31, 2000 and 2001, and the results of their
operations and their cash flows for the above stated periods, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, SAVVIS
adopted a new accounting basis effective April 7, 1999 in connection with a
change in ownership and recorded net assets as of that date at the new owner's
acquisition cost. Accordingly, the consolidated statements of operations for the
period from April 7, 1999 to December 31, 1999, and for each of the two years
ended December 31, 2000 and 2001 and are not comparable to those of earlier
periods presented.
Deloitte & Touche LLP
McLean, Virginia
March 18, 2002
(March 22, 2002 as to the last paragraph of Note 14)
F-2
SAVVIS COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
---------------------------
2000 2001
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................................ $ 32,262 $ 14,405
Accounts receivable from Bridge Information Systems, Inc. ("Bridge") ............. 32,897 12,795
Trade accounts receivable, less allowance for doubtful accounts of $800 in 2000
and $1,125 in 2001 ............................................................. 11,015 14,332
Prepaid expenses ................................................................. 1,087 1,554
Other current assets ............................................................. 3,119 2,919
---------- ----------
Total current assets .............................................................. 80,380 46,005
PROPERTY AND EQUIPMENT -- Net ..................................................... 319,008 193,282
GOODWILL AND INTANGIBLE ASSETS -- Net of accumulated amortization of $24,606 in
2000 and $35,695 in 2001 ......................................................... 13,974 2,772
RESTRICTED CASH ................................................................... 5,565 4,062
OTHER NON--CURRENT ASSETS ......................................................... 19,695 9,519
---------- ----------
TOTAL ASSETS ...................................................................... $ 438,622 $ 255,640
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ................................................................. $ 81,901 $ 80,447
Accrued compensation payable ..................................................... 5,407 7,045
Due to Bridge Information Systems, Inc. .......................................... 23,090 23,326
Deferred revenue ................................................................. 3,189 12,145
Notes payable -- current portion ................................................. 75,066 86,572
Convertible senior secured notes -- current ...................................... -- 60,112
Current portion of capital lease obligations ..................................... 28,465 45,800
Other accrued liabilities ........................................................ 22,439 33,451
---------- ----------
Total Current Liabilities ......................................................... 239,557 348,898
CAPITAL LEASEOBLIGATIONS, LESS CURRENT PORTION .................................... 47,971 19,975
NOTES PAYABLE -- NONCURRENT PORTION ............................................... 25,018 23,719
DEFERRED REVENUE -- NON CURRENT ................................................... 8,656 6,865
OTHER ACCRUED LIABILITIES ......................................................... 490 12,769
---------- ----------
Total Liabilities ................................................................. 321,692 412,226
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock; 50,000,000 shares authorized; none issued or outstanding ......... -- --
Common stock; $.01 par value, 250,000,000 shares authorized; 93,831,066 and
93,957,229 shares issued in 2000 and 2001, respectively, 93,792,190 and 93,918,353
shares outstanding in 2000 and 2001 respectively. ................................ 938 940
Additional paid-in capital ........................................................ 359,586 356,443
Accumulated deficit ............................................................... (203,468) (492,364)
Deferred compensation ............................................................. (39,581) (21,122)
Treasury stock, at cost, 38,876 shares in 2000 and 2001 ........................... (19) (19)
Accumulated other comprehensive loss:
Cumulative foreign currency translation adjustment ............................... (526) (464)
---------- ----------
Total Stockholders' Equity (Deficit) ............................................. 116,930 (156,586)
---------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT) ................................ $ 438,622 $ 255,640
========== ==========
See notes to consolidated financial statements.
F-3
SAVVIS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PERIOD FROM
JANUARY 1, PERIOD FROM
TO APRIL 7 TO YEAR ENDED YEAR ENDED
APRIL 6, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1999 2000 2001
--------------- -------------- -------------- -------------
(PREDECESSOR) (SUCCESSOR) (SUCCESSOR) (SUCCESSOR)
REVENUES:
Managed IP ......................................... $ -- $ -- $ 151,733 $ 197,852
Managed hosting .................................... -- -- 1,991 10,772
Internet access .................................... 5,303 17,501 30,551 30,694
Other .............................................. 137 1,048 2,049 3,477
----------- ----------- ----------- -----------
Total revenues (including $151,649 and
$168,356 from affiliates in 2000 and 2001,
respectively) ................................... 5,440 18,549 186,324 242,795
----------- ----------- ----------- -----------
DIRECT COSTS AND OPERATING EXPENSES:
Data communications and operations (excluding
$0.2 million, $1.9 million and $2.1 million of
equity-based compensation for the 1999
successor period, 2000 and 2001, respectively) 6,371 21,183 211,750 $ 236,336
Sales and marketing (excluding $0.5 million,
$5.0 million and $6.8 million of equity-based
compensation for the 1999 successor period,
2000 and 2001, respectively) ...................... 2,618 9,924 33,892 35,241
General and administrative (excluding $0.8
million $7.6 million and $6.4 million of
equity-based compensation for the 1999
successor period, 2000 and 2001, respectively) 2,191 8,906 24,361 37,106
Depreciation and amortization ...................... 817 14,351 60,511 88,079
Asset impairment & other write-downs of assets 1,383 -- 2,000 89,633
Restructuring charges .............................. -- -- -- 4,821
Non-cash equity-based compensation ................. -- 1,500 14,459 15,254
----------- ----------- ----------- -----------
Total direct costs and operation expenses ......... 13,380 55,864 346,973 506,470
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS ............................... (7,940) (37,315) (160,649) (263,675)
NONOPERATING INCOME (EXPENSE):
Interest income .................................... 23 48 6,369 782
Interest expense ................................... (158) (1,350) (10,571) (26,003)
----------- ----------- ----------- -----------
Total nonoperating expenses ....................... (135) (1,302) (4,202) (25,221)
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES ........................... (8,075) (38,617) (164,851) (288,896)
INCOME TAXES ....................................... -- -- -- --
----------- ----------- ----------- -----------
NET LOSS ........................................... (8,075) (38,617) (164,851) (288,896)
PREFERRED STOCK DIVIDENDS AND ACCRETION ............ (950) -- -- --
----------- ----------- ----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (9,025) $ (38,617) $ (164,851) $ (288,896)
=========== =========== =========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE ............ $ (.14) $ (.54) $ (1.89) $ (3.10)
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING ................ 66,018,388 72,075,287 87,343,896 93,113,823
=========== =========== =========== ===========
See notes to consolidated financial statements.
F-4
SAVVIS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM JANUARY 1, 1999 THROUGH APRIL 6, 1999 (PREDECESSOR),
PERIOD FROM APRIL 7, 1999 THROUGH DECEMBER 31, 1999 (SUCCESSOR),
AND THE YEARS ENDED DECEMBER 31, 2000 AND 2001 (SUCCESSOR)
(DOLLARS IN THOUSANDS)
NUMBER OF SHARES
----------------------------
COMMON TREASURY
STOCK STOCK
------------ ---------------
BALANCE, JANUARY 1, 1999
(Predecessor) ............................... 69,299,809 5,051,543
Issuance of common stock upon exercise
of stock options ............................ 2,700,191 --
Dividends declared on Series C
Redeemable Preferred Stock .................. -- --
Accretion to carrying values of Series B
and C Redeemable Preferred Stock ............ -- --
Recognition of deferred compensation
cost ........................................ -- --
Net loss and comprehensive loss .............. -- --
---------- ---------
BALANCE, APRIL 6, 1999
(Predecessor) ............................... 72,000,000 5,051,543
Recapitalization related to acquisition of
the Company by Bridge Information
Systems, Inc. ............................... -- (5,051,543)
Issuance of common stock upon exercise
of stock options ............................ 5,210,286 --
Issuance of stock options and restricted
stock ....................................... -- --
Recognition of deferred compensation
cost ........................................ -- --
Net loss and comprehensive loss .............. -- --
---------- ----------
BALANCE, DECEMBER 31, 1999
(Successor) ................................. 77,210,286 --
Net Loss ..................................... -- --
Foreign currency translation adjustment ...... -- --
Comprehensive loss ...........................
Issuance of common stock in initial public
offering .................................... 14,875,000 --
Issuance of common stock upon exercise
of stock options ............................ 995,780 --
Issuance of stock options and restricted
stock ....................................... -- --
Issuance of common stock in payment of
obligations ................................. 750,000 --
Recognition of deferred compensation
cost ........................................ -- --
Purchase of shares for treasury .............. -- (38,876)
Preferential distribution to Bridge
Information Systems, Inc. ................... -- --
---------- ----------
BALANCE, DECEMBER 31, 2000
(Successor) ................................. 93,831,066 (38,876)
Net Loss ..................................... -- --
Foreign currency translation adjustment ...... -- --
Comprehensive loss ........................... -- --
Issuance of common stock upon exercise
of stock options ............................ 126,163 --
Recognition of deferred compensation
costs ....................................... -- --
---------- ----------
BALANCE, DECEMBER 31, 2001
(Successor) ................................. 93,957,229 (38,876)
========== ==========
AMOUNTS
-----------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID--IN COMPREHENSIVE DEFERRED ACCUMULATED TREASURY
STOCK CAPITAL LOSS COMPENSATION DEFICIT STOCK
-------- ------------ -------------- -------------- --------------- ---------
BALANCE, JANUARY 1, 1999
(Predecessor) ............................... $ 693 $ 5,263 $ -- $ (78) $ (39,011) $ (64)
Issuance of common stock upon exercise
of stock options ............................ 27 1 -- -- -- --
Dividends declared on Series C
Redeemable Preferred Stock .................. -- -- -- -- (706) --
Accretion to carrying values of Series B
and C Redeemable Preferred Stock ............ -- -- -- -- (244) --
Recognition of deferred compensation
cost ........................................ -- -- -- 78 -- --
Net loss and comprehensive loss .............. -- -- -- -- (8,075) --
----- --------- ------- ---------- ----------- ------
BALANCE, APRIL 6, 1999
(Predecessor) ............................... 720 5,264 -- -- (48,036) (64)
Recapitalization related to acquisition of
the Company by Bridge Information
Systems, Inc. ............................... -- 25,762 -- -- 48,036 64
Issuance of common stock upon exercise
of stock options ............................ 52 2,553 -- -- -- --
Issuance of stock options and restricted
stock ....................................... -- 51,394 -- (51,394) -- --
Recognition of deferred compensation
cost ........................................ -- -- -- 1,500 -- --
Net loss and comprehensive loss .............. -- -- -- -- (38,617) --
----- --------- ------- ---------- ----------- ------
BALANCE, DECEMBER 31, 1999
(Successor) ................................. 772 84,973 -- (49,894) (38,617) --
Net Loss ..................................... -- -- -- -- (164,851) --
Foreign currency translation adjustment ...... -- -- (526) -- -- --
Comprehensive loss ...........................
Issuance of common stock in initial public
offering .................................... 149 333,215 -- -- -- --
Issuance of common stock upon exercise
of stock options ............................ 9 485 -- -- -- --
Issuance of stock options and restricted
stock ....................................... -- 4,146 -- (4,146) -- --
Issuance of common stock in payment of
obligations ................................. 8 5,758 -- -- -- --
Recognition of deferred compensation
cost ........................................ -- -- -- 14,459 -- --
Purchase of shares for treasury .............. -- -- -- -- -- (19)
Preferential distribution to Bridge
Information Systems, Inc. ................... -- (68,991) -- -- -- --
----- --------- ------- ---------- ----------- ------
BALANCE, DECEMBER 31, 2000
(Successor) ................................. 938 359,586 (526) (39,581) (203,468) (19)
Net Loss ..................................... -- -- -- -- (288,896) --
Foreign currency translation adjustment ...... -- -- 62 -- -- --
Comprehensive loss ...........................
Issuance of common stock upon exercise
of stock options ............................ 2 62 -- -- -- --
Recognition of deferred compensation
costs ....................................... -- (3,205) -- 18,459 -- --
----- --------- ------- ---------- ----------- ------
BALANCE, DECEMBER 31, 2001
(Successor) ................................. $ 940 $ 356,443 $ (464) $ (21,122) $ (492,364) $ (19)
===== ========= ======= ========== =========== ======
TOTAL
---------------
BALANCE, JANUARY 1, 1999
(Predecessor) ............................... $ (33,197)
Issuance of common stock upon exercise
of stock options ............................ 28
Dividends declared on Series C
Redeemable Preferred Stock .................. (706)
Accretion to carrying values of Series B
and C Redeemable Preferred Stock ............ (244)
Recognition of deferred compensation
cost ........................................ 78
Net loss and comprehensive loss .............. (8,075)
-----------
BALANCE, APRIL 6, 1999
(Predecessor) ............................... (42,116)
Recapitalization related to acquisition of
the Company by Bridge Information
Systems, Inc. ............................... 73,862
Issuance of common stock upon exercise
of stock options ............................ 2,605
Issuance of stock options and restricted
stock ....................................... --
Recognition of deferred compensation
cost ........................................ 1,500
Net loss and comprehensive loss .............. (38,617)
-----------
BALANCE, DECEMBER 31, 1999
(Successor) ................................. (2,766)
Net Loss ..................................... (164,851)
-----------
Foreign currency translation adjustment ...... (526)
-----------
Comprehensive loss ........................... (165,377)
Issuance of common stock in initial public
offering .................................... 333,364
Issuance of common stock upon exercise
of stock options ............................ 494
Issuance of stock options and restricted
stock ....................................... --
Issuance of common stock in payment of
obligations ................................. 5,766
Recognition of deferred compensation
cost ........................................ 14,459
Purchase of shares for treasury .............. (19)
Preferential distribution to Bridge
Information Systems, Inc. ................... (68,991)
-----------
BALANCE, DECEMBER 31, 2000
(Successor) ................................. 116,930
Net Loss ..................................... (288,896)
-----------
Foreign currency translation adjustment ...... 62
-----------
Comprehensive loss ........................... (288,834)
Issuance of common stock upon exercise
of stock options ............................ 64
Recognition of deferred compensation
costs ....................................... 15,254
-----------
BALANCE, DECEMBER 31, 2001
(Successor) ................................. $ (156,586)
===========
See notes to consolidated financial statements.
F-5
SAVVIS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
PERIOD FROM
JANUARY 1 TO
APRIL 6,
1999
---------------
(PREDECESSOR)
OPERATING ACTIVITIES:
Net Loss ................................................................. $ (8,075)
Reconciliation of net loss to net cash used in operating activities:
Depreciation and amortization ........................................... 817
Accrued interest ........................................................ --
Asset impairment & other write-downs of Assets .......................... 1,383
Deferred financing costs ................................................ --
Restructuring charges ................................................... --
Stock compensation expense .............................................. 78
Net changes in operating assets and liabilities
Accounts receivable .................................................... (17)
Other current assets ................................................... (18)
Other assets ........................................................... (156)
Prepaid expenses ....................................................... (51)
Accounts payable ....................................................... (127)
Deferred revenue ....................................................... 52
Accrued compensation payable and other accrued liabilities ............. (71)
---------
Net cash used in operating activities ................................. (6,185)
---------
INVESTING ACTIVITIES:
Capital expenditures ..................................................... (275)
Other investments ........................................................ --
---------
Net cash used in investing activities ................................. (275)
---------
FINANCING ACTIVITIES:
Purchase of treasury stock ............................................... --
Proceeds from common stock issuance ...................................... --
Exercise of stock options ................................................ 28
Proceeds from borrowings from Bridge Information Systems, Inc.
("Bridge") .............................................................. 4,700
Repayment of borrowing from Bridge ....................................... --
Preferential distribution to Bridge ...................................... --
Proceeds from vendor financing ........................................... --
Repayment of vendor financed debt ........................................ --
Principal payments under capital lease obligations ....................... (182)
Funding of letters of credit (restricted cash) ........................... --
Proceeds from convertible senior secured notes ........................... --
Principal payments on borrowing from bank ................................ (13)
---------
Net cash provided by financing activities ............................. 4,533
---------
Effect of exchange rate changes on cash and cash equivalents ............. --
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ..................... (1,927)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................... 2,521
---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................. $ 594
=========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Debt incurred under capital lease obligations ........................... $ 2,634
Debt incurred in equipment acquisition .................................. --
Capital expenditures accrued and unpaid ................................. --
Recapitalization related to acquisition of the Company by Bridge ........ --
Netting of amounts due to against amounts due from Bridge ............... --
Stock issued in payment of obligations .................................. --
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest ................................................... $ 99
APRIL 7 TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 2000 2001
-------------- -------------- ---------------
(SUCCESSOR) (SUCCESSOR) (SUCCESSOR)
OPERATING ACTIVITIES:
Net Loss ................................................................. $ (38,617) $ (164,851) $ (288,896)
Reconciliation of net loss to net cash used in operating activities:
Depreciation and amortization ........................................... 14,351 60,511 88,079
Accrued interest ........................................................ -- -- 2,612
Asset impairment & other write-downs of Assets .......................... -- 2,000 89,633
Deferred financing costs ................................................ -- (6,165) 3,845
Restructuring charges ................................................... -- -- 4,821
Stock compensation expense .............................................. 1,500 14,459 15,254
Net changes in operating assets and liabilities
Accounts receivable .................................................... 395 (60,967) 16,785
Other current assets ................................................... (49) (3,031) 190
Other assets ........................................................... (1,407) (8,146) (126)
Prepaid expenses ....................................................... (331) (584) (467)
Accounts payable ....................................................... 721 53,803 8,291
Deferred revenue ....................................................... (123) 11,846 7,164
Accrued compensation payable and other accrued liabilities ............. 5,287 21,325 10,909
---------- ----------- -----------
Net cash used in operating activities ................................. (18,273) (79,800) (41,906)
---------- ----------- -----------
INVESTING ACTIVITIES:
Capital expenditures ..................................................... (837) (152,193) (24,085)
Other investments ........................................................ -- (1,000) --
---------- ----------- -----------
Net cash used in investing activities ................................. (837) (153,193) (24,085)
---------- ----------- -----------
FINANCING ACTIVITIES:
Purchase of treasury stock ............................................... -- (19) --
Proceeds from common stock issuance ...................................... -- 333,364 --
Exercise of stock options ................................................ 2,605 494 64
Proceeds from borrowings from Bridge Information Systems, Inc.
("Bridge") .............................................................. 19,365 1,300 --
Repayment of borrowing from Bridge ....................................... -- (5,585) --
Preferential distribution to Bridge ...................................... -- (68,991) --
Proceeds from vendor financing ........................................... -- 28,924 --
Repayment of vendor financed debt ........................................ -- (1,511) (202)
Principal payments under capital lease obligations ....................... (587) (19,576) (10,661)
Funding of letters of credit (restricted cash) ........................... -- (5,565) 1,503
Proceeds from convertible senior secured notes ........................... -- -- 57,500
Principal payments on borrowing from bank ................................ -- -- --
---------- ----------- -----------
Net cash provided by financing activities ............................. 21,383 262,835 48,204
---------- ----------- -----------
Effect of exchange rate changes on cash and cash equivalents ............. -- (447) (70)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ..................... 2,273 29,395 (17,857)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................... 594 2,867 32,262
---------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................. $ 2,867 $ 32,262 $ 14,405
========== =========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Debt incurred under capital lease obligations ........................... $ 1,281 $ 90,118 $ --
Debt incurred in equipment acquisition .................................. -- 72,670 10,410
Capital expenditures accrued and unpaid ................................. -- 45,641 15,273
Recapitalization related to acquisition of the Company by Bridge ........ 31,746 -- --
Netting of amounts due to against amounts due from Bridge ............... -- 19,326 --
Stock issued in payment of obligations .................................. -- 5,766 --
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest ................................................... $ 429 $ 9,522 $ 6,959
See notes to consolidated financial statements.
F-6
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1, 1999 THROUGH APRIL 6, 1999 (PREDECESSOR),
PERIOD FROM APRIL 7, 1999 THROUGH DECEMBER 31, 1999 (SUCCESSOR),
AND THE YEARS ENDED DECEMBER 31, 2000 AND 2001 (SUCCESSOR)
(TABULAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- SAVVIS Communications Corporation, a Delaware
corporation, formerly SAVVIS Holdings Corporation ("Holdings"), together with
its wholly-owned subsidiary, SAVVIS Communications Corporation, a Missouri
corporation ("SCC"), and its predecessor company, SAVVIS Communications
Enterprises L.L.C. ("LLC"), are referred to herein collectively as the
"Company," "SAVVIS," "we," "us," and "our". The Company was formed in November
1995 and commenced commercial operations in 1996. We are a growing global
network service provider that delivers Managed IP, Managed Hosting and Internet
services to medium sized enterprises , multinational corporations and the
financial services market.
FINANCING AND OPERATIONS -- The accompanying financial statements reflect the
Company's liabilities of $412.2 million and its stockholders' deficit of $156.6
million at December 31, 2001 as well as its net loss for the year then ended of
$288.9 million. As explained more fully in note 14, the Company entered into the
following transactions, among others, in March 2002:
o issued $158.1 million of convertible preferred stock in exchange for
cash of $57.5 million, $90.9 million of the extinguished liabilities
and conversion of an additional $63.1 million of debt owed to
affiliates;
o extinguished liabilities of $65.3 million, including $24.2 million
owed to Bridge Information Systems, Inc. ("Bridge") in exchange
for cash and other consideration totaling $51.7 million; and
o amended and restated a $56.5 million master lease agreement with
General Electric Capital Corporation ("GECC") that provides the
Company with a more favorable cash flow obligation.
Also as explained more fully in note 14, the Company's balance sheet at
December 31, 2001 on a pro forma, unaudited, basis assuming these transactions
had occurred at that date would reflect liabilities of $195.7 million and
stockholders' equity of $64.2 million. As a result of these transactions, and
its expectations for positive cash flows from operations, the Company believes
its business plan is fully funded for the foreseeable future.
On April 7, 1999 (the "acquisition date"), the Company was acquired by a
wholly-owned subsidiary of Bridge Information Systems, Inc. ("Bridge") in an
all stock transaction that was accounted for as a "purchase transaction" under
Accounting Principles Board Opinion No. 16. Pursuant to the terms of the
transaction, Bridge issued approximately 3,011,000 shares of its common stock
together with 239,000 options and warrants to purchase its common stock, in
exchange for all the outstanding equity interests of SAVVIS. To effect the
transaction, the Series A, B and C Preferred shareholders received their
respective liquidation preferences (see Note 3) in the form of Bridge common
stock. The Company's Series C warrant holders also exercised their warrants and
participated with the other common shareholders and employee option holders in
exchanging their common shares for remaining Bridge common shares. Series A
warrant holders and those holding common warrants with a strike price per
warrant of $4.13 exchanged their warrants for warrants to purchase Bridge
common stock. Company stock options outstanding at the date of the transaction
were converted into options to purchase Bridge common stock.
The value of the Bridge shares and options issued and the costs incurred by
Bridge in connection with the acquisition aggregated $31.7 million. In
accordance with the accounting requirements of the Securities and Exchange
Commission, purchase transactions that result in one entity becoming
substantially
F-7
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
wholly-owned by the acquirer establish a new basis of accounting in the
acquired entity's records for the purchased assets and liabilities. Thus, the
purchase price has been allocated to the underlying assets purchased and
liabilities assumed based on their estimated fair values at the acquisition
date. As a result of the application of fair value accounting, intangibles,
goodwill, other liabilities and additional paid-in capital were increased in
the Company's consolidated financial statements.
The following is a summary of unaudited pro forma results of operations
assuming the acquisition had occurred at the beginning of 1999:
1999
-----------
Revenues ..................................... $ 23,989
Net loss ..................................... (54,872)
Net loss per common share .................... (0.76)
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS -- All highly liquid investments with a maturity of
three months or less at the time of maturity are considered to be cash
equivalents.
RESTRICTED CASH -- Restricted cash consists of amounts supporting outstanding
letters of credit, principally related to office space.
PROPERTY AND EQUIPMENT -- Property and equipment are recorded at cost and
depreciated using the straight-line method over estimated useful lives of three
to five years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the term of the related lease.
EQUIPMENT UNDER CAPITAL LEASES -- The Company leases certain of its data
communications equipment and other fixed assets under capital lease agreements.
The assets and liabilities under capital leases are recorded at the lesser of
the present value of aggregate future minimum lease payments, including
estimated bargain purchase options, or the fair value of the assets under
lease. Assets under these capital leases are amortized over the terms of the
leases, which are approximately three years.
OTHER NON-CURRENT ASSETS -- Other non-current assets consist primarily of the
unamortized cost of software licenses for certain customer applications,
deferred financing costs associated with a term-loan facility, and the cost of
naming rights to an arena in St. Louis, Missouri.
GOODWILL AND INTANGIBLE ASSETS -- Goodwill is being amortized over three years
and intangible assets over one to three years, all using the straight-line
method. The goodwill life was determined at the acquisition date based on
market and industry factors. Amortization expense for the period from January
1, 1999 to April 6, 1999, the period from April 7, 1999 to December 31, 1999,
and the years ended December 31, 2000 and 2001 was $0.1 million , $12.2
million, $12.4 million, and $11.1 million respectively.
LONG-LIVED ASSETS -- The Company periodically evaluates the estimated fair
market value of long-lived assets, including intangible assets, goodwill and
property and equipment, whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. An impairment in the carrying
value of an asset is recognized when the expected undiscounted future operating
cash flows to be derived from the asset are less than its carrying value. In
addition, the Company's evaluation considers non-financial data such as market
trends, product and development cycles, and changes in management's market
emphasis.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying values of cash, accounts
receivable and a portion of accounts payable approximate their fair values. As
of December 31, 2000, the fair value of all borrowings approximates their
carrying value. As described in Note 14, in March 2002 a portion of the
F-8
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company's borrowings and accounts payable were extinguished for less than their
carrying value as of December 31, 2001. As discussed in note 6, it is not
practicable to estimate the fair value of our unextinguished debt as it is
currently in dispute.
REVENUE RECOGNITION -- Service revenues consist primarily of Managed IP
networks, Managed Hosting and Internet access service fees, which are fixed
monthly amounts, and are recognized in the financial statements when earned
during the life of the contract. For all periods, any services billed and
payments received in advance of providing services are deferred until the
period such services are earned. In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101("SAB 101"), "Revenue
Recognition in Financial Statements", which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements.
The effect of implementation of SAB 101 was not material to the consolidated
financial statements. Installation and equipment costs deferred in accordance
with SAB 101 is recorded on the balance sheet in other assets. Such costs are
recognized on a straight-line basis over periods of up to 24 months, the
estimated period over which the related revenues from installation and
equipment sales are recognized.
ADVERTISING COSTS -- Advertising costs are expensed as incurred. Advertising
expenses for the period from January 1, 1999 to April 6, 1999, the period from
April 7, 1999 to December 31, 1999, and for the years ended December 31, 2000
and 2001 was $74,000, $0.2 million, $2.9 million and $0.4 million,
respectively.
INCOME TAXES -- Income taxes are accounted for under the asset and liability
method, which provides for the establishment of deferred tax assets and
liabilities for the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
for income tax purposes, applying the enacted statutory tax rates in effect for
the years in which differences are expected to reverse. Valuation allowances
are established when it is more likely than not that some or all of the
deferred tax assets will not be realized.
EMPLOYEE STOCK OPTIONS -- The Company accounts for employee stock options in
accordance with Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees." Under APB No. 25, the Company
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded as determined at the measurement date. The Company is also
subject to disclosure requirements under SFAS No. 123, "Accounting for
Stock-Based Compensation" which requires pro forma information as if the fair
value method prescribed by SFAS No. 123 had been applied (see Note 7).
NON-EMPLOYEE STOCK OPTIONS -- In March 2000, the FASB issued Interpretation No.
44 ("FIN No. 44"), "Accounting for Certain Transactions involving Stock
Compensation, an Interpretation of APB Opinion No. 25", which clarifies the
application of APB No. 25 on certain issues, including the definition of an
employee for purposes of applying APB No. 25. In accordance with FIN 44, the
accounting for stock options granted to non-employees (excluding non-employee
members of the Company's Board of Directors) changed effective July 1, 2000.
These non-employee stock options are now accounted for under the fair value
method of SFAS No. 123 (see Note 7).
FOREIGN CURRENCY -- Results of operations for our foreign subsidiaries are
translated from the functional currency to the U.S. dollar using average
exchange rates during the period, while assets and liabilities are translated at
the exchange rate in effect at the reporting date. Resulting gains or losses
from translating foreign currency financial statements are included in
cumulative foreign currency translation adjustment in stockholders' equity
(deficit).
LOSS PER SHARE -- All loss per share amounts for all periods have been
presented to conform to the provisions of SFAS No. 128. All stock options and
warrants outstanding have been excluded from the computations of diluted loss
per share, as their effect would be anti-dilutive due to our losses, and
accordingly, there is no reconciliation between basic and diluted loss per
share for the periods presented. Also excluded from the computations are shares
of restricted stock subject to repurchase.
F-9
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONCENTRATIONS OF CREDIT RISK -- Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally of accounts
receivable. The Company periodically reviews the credit quality of its
customers and generally does not require collateral.
USE OF ESTIMATES -- The preparation of 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 amounts
reported in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.
DERIVATIVES AND HEDGING TRANSACTIONS -- Effective January 1, 2001, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," and its
amendment in SFAS No. 138. The Company recognizes all derivatives on the
balance sheet as either assets or liabilities, and recorded at fair value.
Additionally, it requires that changes in the derivative instrument's fair
value be recognized in the statement of operations unless specific hedge
accounting criteria are met. The adoption of FASB Statement No. 133 did not
have a material impact on the Company's financial position, results of
operations, or cash flows.
NEW ACCOUNTING STANDARDS -- In June 2001, the FASB issued SFAS No. 142,
"Goodwill and Other Intangible Assets." The provisions of this statement are
required to be applied starting with fiscal years beginning after December 15,
2001. This statement is required to be applied at the beginning of an entity's
fiscal year and to be applied to all goodwill and other intangible assets
recognized in its financial statements at that date. SFAS No. 142 addresses how
intangible assets should be accounted for in financial statements upon their
acquisition. This statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. The statement requires that goodwill and certain other
intangibles with an indefinite life, as defined in the standard, no longer be
amortized. However, goodwill and intangibles would have to be assessed each
year to determine whether an impairment loss has occurred. Any impairments
recognized upon adoption would be recorded as a change in accounting principle.
Future impairments would be recorded in income from continuing operations. The
statement provides specific guidance for testing goodwill for impairment. The
Company had $2 million of net goodwill at December 31, 2001. Goodwill
amortization was $7.9 million for the year ended December 31, 2001.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" which requires that one accounting model be used
for the long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired. It also broadens the presentation of discontinued
operations to include more disposal transactions.
The adoption of SFAS No. 142 and SFAS No. 144 on January 1, 2002 did not have a
material impact on our financial position or results of operations.
RECLASSIFICATIONS -- Certain amounts from prior periods have been reclassified
to conform to current period presentation.
OFFSETTING -- The Company, as a result of the application of rights of offset,
nets certain trade liabilities to Bridge with the accounts receivable for
network services from Bridge.
2. RELATED PARTY TRANSACTIONS
On September 28, 2001 affiliates of Reuters acquired a portion of the assets of
Bridge. In connection with the asset acquisition, on September 28, 2001 Reuters
Limited entered into a network services agreement with us, pursuant to which we
agreed to provide internet protocol network services, internet access, and
colocation services for a period of five years with respect to the customers of
Bridge that were acquired by affiliates of Reuters. The network services
agreement calls for a minimum purchase of these services of $96 million in year
one, $90 million in year two, $84 million in year three and $48 million in each
of years four and five, for a total of $366 million, less payments made by
Bridge to us for services provided to customers acquired by Reuters between May
3, 2001 and September 28, 2001. The network services
F-10
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
agreement also provides that our network must perform in accordance with
specific quality of service standards. In the event we do not meet the required
quality of service levels, Reuters Limited would be entitled to credits, and,
in the event of a material breach of such quality of service levels, Reuters
Limited would be entitled to terminate the network services agreement. As a
result of the network services agreement, Reuters Limited is our largest
customer. In connection with the network services agreement, we also entered
into a transitional services agreement with Reuters Limited, pursuant to which
Reuters Limited has agreed to provide us with technical, administrative and
other services, including help desk support, installation, maintenance and
repair of equipment, customer related services such as processing service
orders, accounting functions and the provision of warehousing and other
facilities, pending us establishing our own capabilities. On September 28,
2001, we also entered into a co-location agreement with Reuters America,
pursuant to which we granted Reuters America the right to use portions of our
data center in Missouri. The co-location agreement has an initial term of five
years and may be renewed by Reuters America, at its option, for additional
one-year periods. However, the agreement will terminate concurrently with the
network services agreement.
In connection with Bridge's acquisition of the Company, as discussed in Note 1,
Bridge funded the Company's operations during 1999 and up through our IPO date.
At December 31, 2001, the Company had amounts payable to Bridge of
approximately $23 million consisting of a note payable and accrued interest on
the note. In addition, at December 31, 2001, the Company had amounts receivable
from Bridge of approximately $12.8 million, relating to network services
provided by us to Bridge. As described in Note 14, in February 2002 the Company
entered into a series of agreements that resolved the outstanding balances,
both due to and due from Bridge. The Company earned $151.6 million and $138.3
million in revenues from transactions with Bridge during the years ended
December 31, 2000 and 2001, respectively, primarily for services rendered under
the Bridge Network Services Agreement. These amounts represented approximately
55% of the Company's revenues for 2000 and 2001.
Bridge also agreed to pay SAVVIS up to $5.25 million in connection with
potential termination liabilities associated with the termination of network
services that will no longer be required following the purchase of Bridge's
assets by Reuters. As of December 31, 2001, $3.5 million of this amount had
been earned upon the closing of the Reuters' acquisition of the Bridge assets.
The Company believes that it will not earn any additional termination
liabilities from Bridge.
Through October 31, 2001, one member of our Board of Directors was also an
Officer of Bridge.
ASSET PURCHASE AND PREFERENTIAL DISTRIBUTION -- Simultaneous with the
completion of our public offering, the Company purchased or subleased Bridge's
global Internet protocol network assets. The purchase price of the assets was
approximately $77 million, of which approximately $52 million was paid from the
offering proceeds. For the balance of the purchase price, the Company entered
into capital leases totaling approximately $25 million with Bridge related to
these network assets. The Company also paid a $69 million preferential
distribution to Bridge.
Concurrent with the asset purchase, the Company also entered into a 10-year
network services agreement with Bridge under which the Company agreed to
provide managed data networking services to Bridge. The Company's fees were
based upon the cash cost to Bridge of operating the network as configured on
the date the Company acquired it, and fees for additional services provided
following the closing of the transfer were set for a three-year term based on
an agreed pricing schedule.
F-11
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Revenue from affiliates was as follows:
2000 2001
----------- -----------
Bridge Information Systems, Inc. .......... $151,649 $138,301
Reuters SA ................................ -- 30,055
-------- --------
Total ..................................... $151,649 $168,356
======== ========
See Note 14 for other related party transactions.
3. CORPORATE REORGANIZATION AND FINANCIAL TRANSACTIONS
The Company was originally organized in November 1995 and operated as SCC.
Holdings was formed in March of 1998 to acquire all of the outstanding capital
of SCC.
On July 1, 1998, Holdings issued 8 million shares of Series C Preferred Stock
and 108,896,798 detachable common stock warrants for $8 million in cash.
The Company, based on an independent valuation, assigned $3.7 million to the
value of the detachable Series C common stock warrants. The $3.7 million was
recorded as a discount on the preferred stock and an increase in additional
paid-in capital. Financing costs of $1.8 million were recorded as a discount
against the preferred stock. This resulted in $24.6 million of value being
assigned to the Series C Preferred Stock, with the difference between such
value and the $30 million redemption value being amortized through the
mandatory redemption date. Amortization was charged to accumulated deficit
until the April 7, 1999 acquisition by Bridge.
STOCK SPLIT & STOCK AUTHORIZATION -- On July 22, 1999, the Board of Directors
of the Company declared a 72,000-for-1 stock split of the Company's shares of
common stock. As a result, the Company had 125 million shares authorized, 72
million shares issued and outstanding with a $0.01 par value for each share of
common stock. All references to shares, options and warrants outstanding have
been adjusted retroactively for this stock split. On January 28, 2000, the
Board of Directors increased the number of authorized shares of the $.01 par
value common stock from 125 million shares to 250 million shares.
PUBLIC OFFERING -- An initial public offering of the Company's common stock was
completed in February 2000. A total of 17 million shares were sold in the
offering, 14,875,000 shares sold by the Company and 2,125,000 shares sold by
Bridge, all at $24 per share. The Company received net proceeds from this
offering of approximately $333 million, of which approximately $127 million was
paid to Bridge. After the offering, Bridge owned approximately 49 percent of
the Company's outstanding stock, and shareholders of Bridge owned approximately
26 percent of the Company's outstanding stock. As of December 31, 2000 and 2001
Bridge owned approximately 48% of the Company's outstanding stock.
As described in Note 14, in March 2002, the Company issued approximately $158.1
million of 11.5% Convertible Preferred Stock in exchange for a combination of
cash and outstanding debt.
4. REDEEMABLE PREFERRED STOCK AND STOCK WARRANTS
HOLDINGS SERIES B PREFERRED STOCK -- The Series B Preferred ranked junior to
the Series C Preferred, but senior to all other classes of the Company's stock
as to liquidation, dividends, redemption, and any other payment or distribution
with respect to capital stock. The Series B Preferred holders were not entitled
to dividends.
HOLDINGS SERIES C PREFERRED STOCK -- The Series C Preferred ranked senior to
all other classes of stock of the Company as to liquidation, dividends,
redemption, and any other payments and had a liquidation preference equal to
the Series C price per share of $1 plus accrued and unpaid dividends. Dividends
accrued quarterly at 8 percent , and to the extent not paid in cash, such
dividends were added to the liquidation preference of the Series C Preferred.
F-12
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
See Note 1 for discussion of the redemption of the above Preferred Stock in
connection with the acquisition of the Company by Bridge in April 1999.
COMMON STOCK WARRANTS -- In March 1998, Holdings issued 13,799,812 warrants to
purchase common stock at a strike price of $0.10 in exchange for an equal
amount of warrants to purchase common stock of SCC with the same strike price.
These warrants were cancelled in connection with the acquisition of the Company
by Bridge in April 1999.
SERIES C WARRANTS -- In connection with the issuance of Series C Preferred
Stock in March and July of 1998, the Company issued 408,362,922 of detachable
warrants to purchase common stock of the Company for a price below $0.01 per
share. These warrants were cancelled in connection with the acquisition of the
Company by Bridge in April 1999.
SERIES A WARRANTS -- In March 1998, Holdings issued 15,000 warrants to purchase
Series A Preferred Stock of Holdings at $10.64 per share in exchange for an
equal amount of Series A Preferred Stock Warrants of SCC with the same strike
price. These warrants were then cancelled in connection with the acquisition of
the Company by Bridge in April 1999.
5. PROPERTY AND EQUIPMENT AND ASSET IMPAIRMENT
Property and equipment consisted of the following at December 31:
USEFUL
LIVES
(IN YEARS) 2000 2001
------------ ------------- -------------
Communications equipment ............... 3 $ 166,767 $ 139,877
Data Center ............................ 20 14,326 59,618
Construction in progress ............... - 83,884 10,365
Equipment under capital leases ......... 3 - 5 95,446 95,872
Other .................................. 3 - 5 7,957 11,631
--------- ----------
368,380 317,363
Less accumulated depreciation and
amortization ........................... (49,372) (124,081)
--------- ----------
Total .................................. $ 319,008 $ 193,282
========= ==========
Accumulated amortization for equipment under capital leases for 2000 and 2001
was $20.6 million and $18.0 million, respectively.
Equipment amortization and depreciation expense was as follows:
AMORTIZATION DEPRECIATION
EXPENSE EXPENSE
PERIOD (IN MILLIONS) (IN MILLIONS)
- ----------------------------------------------- --------------- --------------
January 1, 1999 to April 6, 1999 ........... $ 0.4 $ 0.3
April 7, 1999 to December 31, 1999 ......... 1.4 0.8
2000 ....................................... 19.3 29.6
2001 ....................................... 12.9 64.1
Interest capitalized in 2000, related to the assets under construction,
amounted to $0.3 million.
The Company recognized asset impairment & other write-downs of assets of $89.6
million in 2001, which include:
o $31.5 million non-cash charge related to optical equipment for which the
Company does not expect to recover its costs either through operation or
disposition of such equipment;
F-13
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
o $44.1 million non-cash charge related to equipment purchased to
support the Company's wireless initiative. Due to technical and
supplier limitations, described in Note 10, the Company abandoned its
wireless plans and deemed the related equipment has no residual value
and no future planned use; and
o $14.0 million non-cash charge related to the write down of other
property and equipment that the Company deemed without residual value
and has no plans for future use.
During 2000, the Company recorded a write down in the amount of $2 million to
reduce the carrying value of our investment in specialized customer application
software to its estimated net realizable value. In the period from January 1,
1999 through April 6, 1999, the Company recognized an impairment loss related
to property and equipment of $1.4 million.
6. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
The table below shows Notes payable as of December 31, 2001 and as adjusted for
the pro forma effect of the transactions described in Note 14.
PRO FORMA EFFECT
AS OF DECEMBER 31, AS OF DECEMBER 31,
2000 2001 2001
-------------------- -------------------- -------------------
(UNAUDITED)
Notes payable to Nortel Networks, Inc.
variable interest rate of 9.7% and 7%
as of December 31, 2000 and 2001,
respectively ............................ $ 75,066 $ 85,273 $ --
Note payable to Winstar Wireless, Inc.,
interest at 11% ......................... 16,458 16,458 16,458
Note payable to Winstar Wireless, Inc.,
interest at 11% ......................... 8,560 8,560 8,560
Convertible Senior Secured Notes Payable
to Welsh Carson, interest at 10% ........ -- 21,044 --
Convertible Senior Secured Notes Payable
to Reuters, interest at 12% ............. -- 39,068 --
---------- ---------- --------
Total notes payable ....................... 100,084 170,403 25,018
Less current portion ...................... (75,066) (146,684) (1,299)
---------- ---------- --------
Non-current portion ....................... $ 25,018 $ 23,719 $ 23,719
========== ========== ========
On June 30, 2000, the Company entered into a credit agreement with Nortel
Networks, Inc. ("Nortel") for the financing of approximately $38 million of
network equipment and services. On September 5, 2000, this agreement was
amended and restated, resulting in an increase to a $235 million advancing term
loan facility for the purpose of financing a portion of the Company's costs to
purchase network equipment and installation services from Nortel and to pay
certain third party expenses. As of December 31, 2001, the Company has drawn
approximately $85 million under this financing agreement. Due to the violations
of covenants in this agreement occurring in February 2001, relating to Bridge's
petition in bankruptcy, all amounts due under this agreement have been
classified as current as of December 31, 2001. The notes bear interest at a
variable market-based interest rate, and this interest is paid at the end of
the interest period or three months after the commencement of the interest
period, whichever is earlier. From March 2001 to March 2002 we did not pay
interest and other fees due under the credit agreement. During this period,
Nortel provided waivers on all defaults under the credit agreement. In March
2002, the company repurchased all of the outstanding obligations under the
Nortel credit agreement in a series of transactions described in the Subsequent
Events disclosure in Note 14.
F-14
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During 2000, the Company executed two agreements to acquire telecommunications
equipment and related services with Winstar Wireless, Inc. ("Winstar"),
resulting in the financing by Winstar of approximately $25 million of
equipment, over six years at 11% interest. Principal and interest are payable
quarterly, in installments over the term of the notes. On April 17, 2001,
SAVVIS provided notice to Winstar that a material breach had occurred under the
Master Agreement relating to Winstar's installation of the wireless equipment
components and accordingly, terminated the equipment purchase and installation
agreements. On April 18, 2001, Winstar filed for bankruptcy under Chapter 11 of
the Bankruptcy Code. The Company to date has not performed all obligations to
Winstar, nor has Winstar performed all of its obligations to the Company. In
addition, the Company ceased making payments on the Winstar notes in March
2001.
On September 25, 2001, Winstar filed suit in the Delaware Bankruptcy Court
seeking a total of approximately $38 million from the Company for the repayment
of the note payable and the professional services liabilities described above,
which includes a refund of $8.5 million of services prepaid by Winstar. In
turn, we have filed Savvis proofs of claim with the bankruptcy court overseeing
the Winstar proceeding in the amount of approximately $19 million. The court
has agreed to our motion to submit the dispute to arbitration. We believe we
have substantial defenses to the suit.
In 2001, Welsh Carson Anderson and Stowe ("Welsh Carson") purchased $20 million
of 10% convertible senior secured notes due in 2006, convertible into common
stock at $1 5/16 per share. The notes were collateralized by the Company's data
center building in St. Louis, MO. Interest was payable in kind, compounded on a
semi annual basis, in the form of additional notes, which were convertible into
common stock at a conversion price of $1 5/16 per share commencing August 31,
2001 through maturity. Under the terms of the notes, Welsh Carson had the right
to declare the notes due and payable upon acceleration of any of our
indebtedness. As of December 31, 2001, due to the acceleration of other notes
outstanding, Welsh Carson had the right to call these notes, therefore the
notes are treated as current liabilities. Subsequent to December 31, 2001, the
company exchanged all of the outstanding notes for preferred stock as described
in the Subsequent Events disclosure in Note 14.
In 2001, Reuters purchased $37.5 million of 12% convertible senior secured
notes due in 2005, convertible into common stock at $1.35 per share. The notes
were collateralized by the Company's data center building in St. Louis, MO.
Interest was payable in kind, compounded on a semi annual basis, in the form of
additional notes, which were convertible into common stock at a conversion
price of $1.35 per share commencing August 1, 2001 through maturity. Under the
terms of the notes, Reuters had the right to declare the notes due and payable
upon acceleration of any of our indebtedness. Subsequent to December 31, 2001,
the Company exchanged all of the outstanding notes for preferred stock as
described in the Subsequent Events disclosure in Note 14.
The Company leases various equipment under capital leases. The below table
summarizes future minimum lease payments under capital leases as of December
31, 2001 and as adjusted for the pro forma effect of the transactions described
in Note 14.
PRO FORMA
AS OF EFFECT AS OF
DECEMBER 31, DECEMBER 31,
2001 2001
-------------- -------------
(UNAUDITED)
2002 .................................... $ 49,439 $ 10,641
2003 .................................... 20,023 2,281
2004 .................................... 1,046 --
2005 .................................... -- 7,301
2006 .................................... -- --
Thereafter .............................. -- 52,577
-------- --------
Total capital lease obligations ......... 70,508 72,800
F-15
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Less amount representing imputed interest .................. (4,733) (7,923)
(45,800) (10,145)
Less current portion ....................................... ---------- -----------
Capital lease obligations, less current portion ......... $ 19,975 $ 54,732
======== ========
From April 2001 until March 2002 we did not pay our monthly amounts due to GECC
under capital lease obligations, causing a default in our agreement with GECC.
During this period, GECC provided waivers on all defaults under the capital
lease obligations. In March 2002, the Company renegotiated the terms of these
capital lease agreements, the details of which are included in the Subsequent
Events disclosure in Note 14.
7. EMPLOYEE STOCK OPTIONS
On July 22, 1999, the Company's Board of Directors adopted a new stock option
plan ("the 1999 Stock Option Plan") and authorized 8 million stock options to
be granted under the plan. On December 7, 1999, an additional 4 million stock
options were authorized by the Board of Directors to be granted under this
plan. During the period from April 7, 1999 through December 31, 1999, the
Company granted options to purchase 4,139,000 shares of its common stock to
selected employees of Bridge. Also during the period, the Company granted
options to purchase up to 4,409,508 shares of its common stock to its
employees. Some of these options contain accelerated or immediate vesting
provisions, and shares issued upon exercise of these options are restricted as
to future sale or subject to repurchase. During the period from April 7, 1999
to December 31, 1999, the Company issued 4,477,287 shares of restricted stock
subject to repurchase in connection with the exercise of these options.
During 2000, the Company granted options to purchase 60,000 shares of its
common stock to selected employees of Bridge. Also during the period, the
Company granted options to purchase up to 2,924,500 shares of its common stock
to employees and 45,000 shares of our common stock to three non-employee
members of our Board of Directors. Some of these options contain accelerated or
immediate vesting provisions, and shares issued upon exercise of these options
are restricted as to future sale or subject to repurchase. During the year, the
Company issued 638,500 shares of restricted stock subject to repurchase in
connection with the exercise of these options.
On January 23, 2001, an additional 12,000,000 stock options were authorized by
the Board of Directors under the plan, subject to stockholder approval. This
authorization expired in January 2002.
The Company has elected to follow APB No. 25 and related interpretations in
accounting for its employee stock compensation plans. Under the provisions of
APB No. 25, compensation expense is recognized to the extent the value of the
Company's stock exceeds the exercise price of options or restricted stock at
the measurement date.
In accordance with FIN 44, the accounting for stock options granted to
non-employees (excluding non-employee members of the Company's Board of
Directors) changed effective July 1, 2000. These non-employee stock options are
now accounted for under the fair value method of SFAS No. 123. Further, in
accordance with FASB Interpretation No. 28, "Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans" ("FIN 28"), these
non-employee options are accounted for as variable plan awards, and are
adjusted for changes in the quoted market value of the shares of the Company's
stock covered by the grant each reporting period. The fair value of these
options was estimated at December 31, 2001, using the following assumptions:
expected volatility of 50 percent, a risk-free interest rate of 5.1 percent, an
assumed dividend yield of zero, and an expected life of the
F-16
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
options of up to four years. The weighted average fair value of these options
was $0.50 as of December 31, 2001, and the Company recognized $0.5 million and
$0.6 million in compensation expense in 2000 and 2001, respectively related to
these non-employee grants.
Pro forma information regarding net income is required by SFAS No. 123 and has
been determined as if the Company had accounted for its stock options granted
to employees and non-employee members of its Board of Directors under the fair
value method of the statement. The fair value of the options was estimated at
the date of grant. For periods prior to 2000 the minimum value method was used
to estimate the fair value of these options. Under this method, the expected
volatility of the Company's common stock was not estimated, as there was no
market for the Company's common stock in which to monitor such stock price
volatility. Due to the short period of time that the Company's common stock has
been publicly traded, an expected volatility estimate of 50 percent has been
used for 2001. The calculation of the fair value of the options granted in
1999, 2000 and 2001 assumes a weighted average risk-free interest rate of 6.3
percent, 6.2 percent, and 4.8 percent, respectively, an assumed dividend yield
of zero, and an expected life of the options of four years. The weighted
average fair value of options granted was below $.01 per share for the period
January 1 to April 6, 1999. For the period April 7, 1999 to December 31, 1999,
the weighted average fair value of options granted was $6.51 per share, for
2000 the weighted average fair value of options granted was $7.92 per share and
for 2001, it was $0.41. For purposes of pro forma disclosures, the estimated
fair value of the options is amortized to expense over the options' vesting
periods.
Had compensation cost for the Company's stock option plans above been
determined consistent with the provisions of SFAS No. 123 based on the fair
value at the grant date, the Company's pro forma net loss would have been as
follows:
APRIL 7 TO YEAR ENDED YEAR ENDED
JANUARY 1 TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
APRIL 6, 1999 1999 2000 2001
--------------- -------------- -------------- ---------------
(PREDECESSOR) (SUCCESSOR) (SUCCESSOR) (SUCCESSOR)
Net Loss:
As reported ........................ $ (8,075) $ (38,617) $ (164,851) $ (288,896)
Pro forma .......................... (8,104) (38,683) (165,593) (289,358)
Basic and diluted net loss per share:
As reported ........................ (.14) (.54) (1.89) (3.10)
Pro forma .......................... (.14) (.54) (1.90) (3.11)
The following table summarizes stock option activity:
NUMBER OF WEIGHTED
SHARES OF AVERAGE
COMMON STOCK PRICE PER EXERCISE
OPTIONS SHARE PRICE
--------------- ----------------------- ---------
(IN THOUSANDS)
Balance, January 1, 1999
(predecessor) ................................. $ 115,200 $ 0.01 $ 0.07 $ 0.02
Granted ...................................... 7,409 0.01 0.02 0.03
Exercised .................................... (2,700) 0.01 0.01
Forfeited .................................... (3,789) 0.01 0.02 0.02
---------- -------
Balance, April 7, 1999
(predecessor) ................................. 116,120 0.01 0.07 0.02
Cancelled upon acquisition by Bridge ......... (116,120) 0.01 0.07 0.02
Granted ...................................... 8,549 -- 0.50 $ 0.50
Exercised .................................... (5,210) -- 0.50 0.50
Forfeited .................................... (373) -- 0.50 0.50
---------- -------
F-17
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Balance, December 31, 1999
(successor) .............................. 2,966 -- 0.50 0.50
Granted ................................. 3,029 $ 0.50 24.00 9.22
Exercised ............................... (996) -- 0.50 0.50
Forfeited ............................... (582) 0.50 19.69 6.86
----- -----
Balance, December 31, 2000
(successor) .............................. 4,417 0.50 24.00 7.29
Granted ................................. 232 -- 0.94 0.94
Exercised ............................... (126) -- 0.50 0.50
Forfeited ............................... (1,559) 0.50 19.69 2.91
------ -----
Balance, December 31, 2001
(successor) .............................. 2,964 0.50 24.00 6.20
====== =====
Options exercisable at December 31, 1999 . 1,094 $ 0.50 $ -- $ 0.50
====== ======
Options exercisable at December 31, 2000 . 1,022 $ 0.50 $ 24.00 $ 2.37
====== ======
Options exercisable at December 31, 2001 . 1,316 $ 0.50 $ 24.00 $ 5.02
====== ======
The following table summarizes information regarding stock options outstanding
and exercisable at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------
WEIGHTED WEIGHTED
EXERCISE PRICE NUMBER AVERAGE AVERAGE NUMBER WEIGHTED AVERAGE
RANGE OUTSTANDING REMAINING LIFE EXERCISE PRICES EXERCISABLE EXERCISE PRICES
- -------------------------- ------------- ---------------- ----------------- ------------- -----------------
$0.50 to $1.33 ........... 1,307,710 7.77 $ 0.56 791,725 $ 0.52
$2.00 to $3.69 ........... 391,875 8.89 2.57 101,435 2.57
$8.00 to $10.00 .......... 666,500 8.46 9.19 223,554 9.40
$11.75 to $14.94 ......... 357,500 8.48 13.36 89,375 13.36
$24.00 ................... 240,000 8.12 24.00 110,000 24.00
--------- ---- -------- ------- --------
$.50 to $24.00 ........... 2,963,585 8.19 $ 6.20 1,316,089 $ 5.02
========= ==== ======== ========= ========
Included in the option grants discussed above, during the period from October
1999 through February 2000 , the Company granted 3,108,758 stock options at an
exercise price of $.50 per share, and 618,500 stock options at an exercise
price of $10 per share, to employees of SAVVIS and Bridge. Non-cash
compensation cost based upon the difference between the exercise price and the
imputed fair value of the Company's stock as of the respective option grant
dates totaling approximately $61.2 million will be recorded over the vesting
periods of such options, which periods range from immediate up to four years.
Approximately $1.5 million, $14.5 million and $15.3 million in non-cash equity
based compensation was recorded in the period from April 7, 1999 to December
31, 1999, the years ended December 31, 2000 and 2001, respectively. No non-cash
equity based compensation was recorded in the period from January 1, 1999 to
April 6, 1999.
8. EMPLOYEE SAVINGS PROGRAM
The predecessor Company sponsored an employee savings plan that qualified as a
defined contribution arrangement under Section 401(k) of the Internal Revenue
Code. All employees were allowed to contribute a percentage of their base
salary, subject to limitations. The Company made no contributions to the plan
during 1998 or the 1999 predecessor period. Effective with the acquisition of
the Company
F-18
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
by Bridge, the plan administrator and investment options were changed, and the
plan was amended to incorporate an employer matching contribution. The Company
matches 50% of employee contributions up to a maximum of 6% of total
compensation or $2,400, whichever is less. Company contributions under this
plan vest ratably over five years, and totaled $0.2 million for the period from
April 7, 1999 to December 31, 1999, $0.5 million for 2000 and $0.8 million for
2001.
9. INCOME TAXES
We incurred operating losses from inception through December 31, 2001 and,
therefore, have not recorded a provision for income taxes.
No U.S. and Foreign Income taxes were provided for the periods from January 1,
1999 to April 6, 1999, April 7, 1999 to December 31, 1999 and for the years
ended December 31, 2000 and 2001, respectively, as the potential deferred tax
benefit, resulting primarily from the net operating losses, was fully offset by
a valuation allowance against such deferred tax benefit.
At December 31, 2000 and 2001, the Company recorded a valuation allowance of
$71.2 million and $172.8 million respectively, against the net deferred tax
asset due to the uncertainty of its ultimate realization. The valuation
allowance increased by $4.9 million from December 31, 1998 to December 31, 1999,
$55.0 million from December 31, 1999 to December 31, 2000 and $101.6 million
from December 31, 2000 to December 31, 2001.
The components of deferred tax assets and liabilities are as follows at
December 31:
2000 2001
----------- ------------
Deferred tax assets:
Net operating loss carry forwards ......... $ 67,643 $ 132,254
Fixed assets .............................. 1,541 --
Asset impairment .......................... -- 32,202
Deferred revenue .......................... -- 5,900
Accrued payroll ........................... 950 2,832
Other ..................................... 2,059 3,852
--------- ----------
Gross deferred tax assets ................ $ 72,193 $ 177,040
Deferred tax liabilities:
Intangible assets ......................... (1,004) --
Fixed assets -- (4,272)
--------- ----------
Gross deferred tax liabilities ........... (1,004) (4,272)
71,189 172,768
Valuation allowances ........................ (71,189) (172,768)
Net deferred tax assets ..................... $ -- $ --
========= ==========
The components of loss before income taxes consist of the following:
THE PERIOD FROM THE PERIOD
JANUARY 1, 1999 FROM APRIL 7 THE YEARS ENDED DECEMBER 31,
TO APRIL 6 TO DECEMBER 31, -------------------------------
1999 1999 2000 2001
----------------- ----------------- --------------- ---------------
Domestic ............................... $ (8,075) $ (38,617) $ (155,739) $ (268,506)
Foreign ................................ -- -- (9,112) (20,390)
--------- ---------- ----------- -----------
Total loss before income Taxes ......... $ (8,075) $ (38,617) $ (164,851) $ (288,896)
========= ========== =========== ===========
At December 31, 2001, the Company has approximately $319 million in U.S. net
operating loss carryforwards expiring between 2011 and 2021. The net operating
losses generated by the Company during the period between April 7, 1999 and
September 10, 1999 may be utilized by Bridge in its consolidated tax return.
F-19
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Section 382 of the Internal Revenue Code restricts the utilization of U.S. net
operating losses and other U.S. carryover tax attributes upon the occurrence of
an ownership change, as defined. Such an ownership change occurred during 1998,
again in 1999 as a result of the acquisition of our company by Bridge and in
2002 in connection with the transaction described in Note 14. This limitation
restricts our ability to utilize the net operating losses over the U.S.
Statutory carryforward periods ranging from 15 to 20 years. Under Section 382
of the Internal Revenue Code, the amount of income that a corporation may
offset each year after an ownership change against a net operating loss is
limited to an amount determined by multiplying the value of the equity of the
corporation just prior to the ownership change by the Federal Long Term tax
exempt rate which was approximately 5% on the date of the change of ownership.
At December 31, 2001, net operating loss carryforwards for our foreign
subsidiaries are about $30 million primarily from the United Kingdom,
Singapore, Switzerland, Germany, Australia, Hong Kong and Canada. The
aforementioned countries each have unlimited carryforward periods except
Switzerland and Canada which are seven years.
The effective income tax rate differed from the statutory federal income tax
rate as follows:
PERIOD FROM PERIOD FROM
JANUARY 1 TO APRIL 7 TO
APRIL 6, DECEMBER 31, YEARS ENDED DECEMBER 31,
1999 1999 2000 2001
--------------- --------------- ------------- ------------
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
Federal statutory rate ....................... 34% 34% 34% 34%
State taxes, net of federal benefit .......... 4% 4% 4% 4%
Change in valuation allowance primarily
due to net operating loss carry forwards . (38)% (3)% (34)% (30)%
Attribution of net operating loss to Bridge . -- (23)% -- --
Non-deductible goodwill amortization ......... -- (12)% (2)% (3)%
Non-deductible compensation .................. -- -- (2)% (5)%
--- ----- ----- -----
Effective income tax rate .................... 0% 0% 0% 0%
=== ===== ===== =====
10. COMMITMENTS AND CONTINGENCIES
The Company leases communications equipment and office space under various
operating leases. Future minimum lease payments at December 31, 2001 are as
follows:
COMMUNICATIONS OFFICE
EQUIPMENT SPACE TOTAL
---------------- ---------- ----------
2002 ............... $ 64 $ 8,451 $ 8,515
2003 ............... 60 7,292 7,352
2004 ............... 40 5,767 5,807
2005 ............... 16 5,182 5,198
2006 ............... 8 4,912 4,920
Thereafter ......... -- 17,921 17,921
----- -------- --------
Total ............... $ 188 $ 49,525 $ 49,713
===== ======== ========
Rental expense under operating leases for the periods from January 1, 1999
through April 6, 1999 and from April 7, 1999 through December 31, 1999 was $0.6
million and $1.9 million, respectively. Rental expense under operating leases
for 2001 and 2000 was $12.6 and $8.4 million, respectively.
From April 2001 until March 2002 we did not pay our monthly amounts due to GECC
under capital lease obligations, causing a default in our agreement with GECC.
During this period, GECC provided waivers on all defaults under the capital
lease obligations. In March 2002, the Company renegotiated the terms of these
capital lease agreements, the details of which are included in the Subsequent
Events disclosure in Note 14.
F-20
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SAVVIS has employment agreements with several key executive officers. These
agreements contain provisions with regard to base salary, bonus, stock options,
and other employee benefits. These agreements also provide for severance
benefits in the event of employment termination or a change in control of the
Company.
In August 2000, the Company entered into a 20-year agreement with Kiel Center
Partners, L.P. ("KCP") pursuant to which it acquired the naming rights to an
arena in St. Louis, MO. Upon execution of the agreement, total consideration
for these rights amounted to approximately $72 million, including 750,000
shares of its common stock issued by the Company to KCP. The related expense
will be recognized over the term of the agreement. On March 21, 2001, KCP
notified the Company that it was in default of the agreement relating to
possible future insolvency of SAVVIS, a claim KCP subsequently withdrew. The
parties entered into an amendment, dated August 21, 2001, of the agreement
providing for the payment of $1.25 million on each December 31, through 2005.
These payments will be deducted from payments otherwise owed under the
agreement in 2007 through 2010. As of December 31, 2001, the Company has
recorded approximately $4.5 million of deferred charges resulting from the
issuance of common stock under this agreement.
On June 30, 2000, the Company entered into a Global Purchase Agreement (the
"Global Purchase Agreement") with Nortel Networks, Inc. ("Nortel"). This
agreement called for the Company to purchase and take delivery of products and
services from Nortel in the amount of $155 million from the date of the
agreement through December 31, 2003. These products and services were to be
financed by Nortel pursuant to a credit agreement. Concurrent with the
execution of the Global Purchase Agreement, on June 30, 2000, the Company
entered into a credit agreement with Nortel Networks Inc. ("Nortel") for the
financing of approximately $38 million of network equipment and services. On
September 5, 2000, this credit agreement was amended and restated, resulting in
an increase to a $235 million advancing term loan facility (the "Term Loan")
for the purpose of financing a portion of the Company's costs to purchase
network equipment and installation services from Nortel and to pay certain
third party expenses. As of December 31, 2001, the Company had drawn
approximately $85 million under this financing arrangement for the purchase of
equipment and services and other third-party costs. As disclosed in Note 14,
the Company entered into a series of agreements that resulted in the
elimination of any future purchase commitments from Nortel.
Bridge's Voluntary Petition constituted an event of default under the Nortel
Term Loan Facility. As a consequence, the unused portion of the Nortel Term
Loan Facility was terminated and the amounts owed became immediately due and
payable. The Company has reported the full balance of the Nortel Term Loan
Facility as of December 31, 2001 in notes payable -- current portion (See Note
7). As of December 31, 2001, $4.4 million of interest was due to Nortel. The
Company repurchased all of the outstanding notes issued pursuant to the credit
agreement in March 2002 as more fully described in Note 14.
As of December 31, 2001, deferred financing costs of $2.7 million associated
with the Nortel Term Loan Facility are included as Other Non-current Assets on
the Company's balance sheet. No provision for any possible impairment of these
deferred financing costs has been made in the accompanying financial
statements.
On August 2, 2000, the Company entered into two agreements with a
communications services providor. These agreements granted to SAVVIS exclusive
indefeasible rights of use ("IRU") in certain segments of a multi-conduit fiber
optic communications system. The term of each agreement was for a 20-year
period beginning with the acceptance of a segment and payment by SAVVIS of the
segment IRU fee. The agreements stipulated payments by SAVVIS totaling
approximately $36.2 million. As of December 31, 2001, the Company had paid
approximately $11.5 million pursuant to these agreements, which amounts were
funded by drawings on the Nortel Term Loan. As disclosed in Note 14 the Company
F-21
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
entered into an agreement with this vendor providing for a payment of $2.5
million over 18 months, the lease of communications capacity and the release of
the Company from its obligations under the IRU agreements.
On June 30, 2000, SAVVIS executed two agreements to acquire approximately $30
million of telecommunications equipment and related services with Winstar
Wireless, Inc. ("Winstar"). Upon execution, the Company took delivery of
certain equipment and paid approximately $5 million to Winstar. Of the
remaining $25 million, approximately $16.5 million, included in Notes Payable
at December 31, 2001, has been financed by Winstar over six years at 11%
interest. Payments commenced in the third quarter of 2000. The remaining
balance of $8.5 million was recorded in other accrued liabilities, with
payments of approximately $2 million due every three months until July 2001. On
September 29, 2000, the Company executed an additional agreement with Winstar
to acquire $10.1 million in telecommunications equipment. This agreement called
for a down payment of $1.5 million, which was paid by SAVVIS in October 2000.
The remaining $8.6 million, included in Notes Payable at December 31, 2001, was
also financed by Winstar over six years at 11% interest, with payments being
made quarterly beginning in December 2000.
On April 17, 2001, SAVVIS provided notice to Winstar that a material breach had
occurred under the Master Agreement relating to Winstar's installation of the
wireless equipment components and accordingly, terminated the equipment purchase
and installation agreements. On April 18, 2001, Winstar filed for bankruptcy
under Chapter 11 of the Bankruptcy Code. The Company to date has not performed
all obligations to Winstar, nor has Winstar performed all of its obligations to
the Company. In addition, the Company ceased making payments on the Winstar
notes in March 2001. As of December 31, 2001, approximately $4 million remains
in other accrued liabilities.
On September 25, 2001, Winstar filed suit in the US Bankruptcy Court for
Delaware seeking a total of approximately $38 million from the Company for the
repayment of the note payable and professional services liabilities, as well as
the refund of $8.5 million of Internet services prepaid by Winstar. In turn, we
have filed a proof of claim with the court overseeing the Winstar bankruptcy
proceeding in the amount of approximately $19 million. The court has agreed to
refer the dispute to arbitration. We believe we have substantial defenses to the
suit.
During the year ended December 31, 2000, the Company invested $45.5 million to
construct and equip a 100,000 square foot data center in Hazelwood, MO. In May
2001, Bridge and SAVVIS executed a ninety-nine year land lease, effective
February 18, 2000 (subsequently acquired by Reuters in connection with the
Reuters Asset Acquisition from Bridge), with monthly rental payments of $27,443
for the first twenty-four months, beginning in December 2000, for the land on
which the St.Louis data center resides. Thereafter, the rent for each
subsequent year is increased at a rate of 2% per annum. In the lease, SAVVIS
has the option to purchase the land from Reuters at the greater of $3 million
or at the Fair Option Value, as defined in the agreement. In addition, Reuters
has a put right option during the first ten years of the lease agreement to
require SAVVIS to purchase the land from Reuters at a price of $3 million in
the first year; reduced by $0.3 million each year thereafter. The put right
option can only be exercised should the data center be damaged, SAVVIS is
unwilling to repair the damage, and SAVVIS is in default under the lease.
At December 31, 2001, the Company, as lessee, had network assets under capital
leases with Bridge, as sublessor, of $25 million. Bridge leased the underlying
assets from General Electric Capital Corporation ("GECC"). In 2002, we entered
into a direct lease with GECC on similar economic terms as our sublease with
Bridge. The amount of the remaining obligation at December 31, 2001 was $6.2
million.
We have arrangements with various suppliers of communications services that
require us to maintain minimum spending levels some of which increase over
time. Our aggregate minimum spending level is approximately $59 million, $62
million, $55 million and $15 million in years 2002 to 2005, respectively.
F-22
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Should SAVVIS not meet the minimum spending level in any given year, decreasing
termination liabilities representing a percentage of the remaining contracted
amount may immediately become due and payable. Furthermore, certain of these
termination liabilities are subject to reduction should SAVVIS experience the
loss of a major customer or suffer a loss of revenues from a downturn in
general economic activity. Before considering the effects of any reductions for
the business downturn provisions, if SAVVIS were to terminate all of these
agreements as of March 31, 2002, the maximum termination liability would amount
to approximately $155 million.
The Company is subject to various other legal proceedings and other actions
arising in the normal course of its business. While the results of such
proceedings and actions cannot be predicted, management believes, based on the
advice of legal counsel, that the ultimate outcome of such proceedings and
actions will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
11. VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's allowance for doubtful accounts was as follows for
the periods presented:
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
PERIOD ENDED OF PERIOD EXPENSES DEDUCTIONS PERIOD
- ------------------------------------------ ------------ ------------ ------------ -----------
April 6, 1999 (Predecessor) ........... $ 149 $ 61 $ (35) $ 175
December 31, 1999 (Successor) ......... 175 781 (581) 375
December 31, 2000 (Successor) ......... 375 2,066 (1,641) 800
December 31, 2001 (Successor) ......... 800 10,020 (9,695) 1,125
12. INDUSTRY SEGMENT AND GEOGRAPHIC REPORTING
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information," established standards for reporting information about operating
segments in financial statements. Operating segments are defined as components
of an enterprise engaging in business activities about which separate financial
information is available that is evaluated regularly by management in to assess
performance and to allocate resources.
The Company's operations are organized into three geographic operating segments
Americas, Europe and Asia. The Company evaluates the performance of its segments
and allocates resources to them based on revenue and adjusted EBITDA, which is
defined as the respective consolidated loss before interest, taxes,
depreciation, amortization, non-cash equity-based compensation, asset impairment
and other write-downs of assets and restructuring charges. Adjusted EBITDA is
not determined in accordance with accounting principles generally accepted in
the United States of America, is not indicative of cash used by operating
activities and should not be considered in isolation or as an alternative to, or
more meaningful than, measures of operating performance determined in accordance
with accounting principles generally accepted in the United States of America.
Additionally, our calculation of adjusted EBITDA may not be camparable to
similarly titled measures of other companies, as other companies may not
calculate it in a similar manner. Financial information for the Company's
geographic segments for 2000 and 2001 is presented below. In the periods prior
to 2000, the company had one operating segment -- the Americas. In 2000 and
2001, revenues earned in the United States represented approximately 72% and
79%, respectively, of total revenues. Revenues in no other country exceeded 10%
of total revenues.
2000 AMERICAS EUROPE ASIA ELIMINATIONS TOTAL
- ---------------------------- ------------ ----------- ----------- -------------- ------------
Revenue .................... $ 149,602 $ 21,818 $ 14,904 $ -- $ 186,324
Adjusted EBITDA ............ (80,382) (3,017) (280) -- (83,679)
Assets ..................... 434,391 4,127 402 (298) 438,622
Capital Additions .......... 339,654 12,020 8,948 -- 360,622
2001 AMERICAS EUROPE ASIA ELIMINATIONS TOTAL
- ---------------------------- ------------ ----------- ----------- -------------- ------------
Revenue .................... $ 207,975 $ 20,395 $ 14,425 $ -- $ 242,795
Adjusted EBITDA ............ (59,338) (4,006) (2,545) -- (65,889)
Assets ..................... 267,426 8,581 5,061 (25,428) 255,640
Capital Additions .......... 34,105 507 372 -- 34,984
F-23
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Adjusted EBITDA for all reportable segments differs from the consolidated loss
before income taxes reported in the consolidated statement of operations as
follows:
2000 2001
------------- -------------
Adjusted EBITDA ................................. $ (83,679) $ (65,889)
Plus adjustments as follows:
Depreciation and amortization ................. (60,511) (88,079)
Interest, net ................................. (4,202) (25,221)
Non-cash equity based compensation ............ (14,459) (15,253)
Asset impairment and other write-downs of asset (2,000) (89,633)
Restructuring charges ......................... -- (4,821)
---------- ----------
Consolidated loss before income taxes ........... $ (164,851) $ (288,896)
========== ==========
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is summary information for the 2000 and 2001 quarters.
FIRST SECOND THIRD FOURTH
------------ ------------ ------------ -----------
2000
Revenues ............................ $ 24,463 $ 50,241 $ 52,811 $ 58,809
Operating loss ...................... (27,330) (39,554) (46,071) (47,694)
Net loss ............................ (26,864) (39,011) (47,166) (51,810)
Basic and diluted loss per common share $ (.34) $ (.44) $ (.53) $ (.57)
2001
Revenues ............................ $ 59,744 $ 57,744 $ 58,352 $ 66,955
Operating loss ...................... (51,722) (114,453) (75,534) (21,966)
Net loss ............................ (56,454) (123,284) (81,392) (27,766)
Basic and diluted loss per common share $ (0.62) $ (1.35) $ (0.89) $ (0.30)
Quarterly and year-to-date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may not
agree with per share amounts for the year.
In the second and third quarter of 2001, the Company experienced a significant
increase in losses primarly due to asset impairment charges and other
write-down of assets as disclosed in Note 5.
14. SUBSEQUENT EVENTS
In March 2002, the Company issued $158.1 million of convertible preferred stock
(the "Preferred"). Preferred totaling $117.2 million was issued to Welsh Carson
and its affiliates in exchange for $57.5 million in cash, satisfaction of all of
the outstanding principal and accrued interest on the Company's 10% convertible
senior notes totaling $22.2 million, and satisfaction of all of the principal
and interest owed in respect of notes issued pursuant to the Credit Agreement
with Nortel Networks, Inc. totaling $90.9 million. Preferred totaling $40.9
million was also issued to Reuters Holdings Switzerland S.A. in satisfaction of
all of the outstanding principal and accrued interest on the Company's 12%
convertible senior notes totaling $40.9 million.
The Preferred accrues dividends at the rate of 11.5% per annum on the
outstanding accreted value thereof (initially $1,000 per share). Dividends may
not be paid in cash until after the eighth anniversary of the original issuance
date. Accrued but unpaid dividends will be added to the outstanding accreted
value quarterly. The Preferred is convertible into such number of our common
stock equal to the outstanding accreted value divided by the conversion price.
The Preferred is initially convertible into approximately 210.8 million shares
of common stock, at a conversion price of $0.75 per common share, and is
entitled to vote on all matters (other than any voluntary repurchase of the
Preferred) submitted to the common
F-24
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
stockholders on an as-if-converted basis, representing approximately 69% of the
voting stock of the Company. The conversion price of $0.75 was set a few days
before the commitment date for the Preferred. On the commitment date, the
closing price of the Company's common stock was $1.00. Accordingly, the Company
also recorded a non-cash beneficial conversion feature of $52.7 million,
representing the $0.25 per share intrinsic value of that feature, as a return
to the Preferred shareholders in March 2002.
In March 2002, the Company also entered into a $56.5 million amended and
restated master lease agreement with GECC. The amended lease carries a 12%
interest rate, which accrues through December 31, 2004, and payable in cash
thereafter. The principal amount of the amended lease is due on March 8, 2007.
The amended lease calls for excess cash flow, as defined, to be used first for
the payment of any accrued and unpaid interest and second for the prepayment of
principal on the capital leases. The amended lease places limits on the level
of capital expenditures that can be made by the Company and restricts the
payment of dividends. In connection with this transaction, the Company also
issued five year warrants to purchase 9.6 million shares of its common stock at
$0.75 per share.
In February 2002, the Company entered into an agreement with Bridge wherein the
Company agreed to pay Bridge $11.9 million in satisfaction of $27.5 million
representing all amounts due to Bridge. The Company also agreed not to pursue
the collection of $18.7 million of pre-petition receivables owed to it by
Bridge and to assign to Bridge any claims it had against other Bridge entities
with the exception of Bridge Canada where the Company retained its right to
receive a pro rata distribution of assets from the liquidation of Bridge
Canada. All amounts due under the settlement agreement were paid in March 2002.
In March 2002, the Company entered into agreements with three of its vendors to
settle certain obligations of the Company as follows: amended its Global
Purchase Agreement with Nortel releasing the Company from its obligation to
purchase optical equipment; entered into an agreement with a communications
services vendor providing for the payment of $2.5 million over 18 months, the
lease of communications capacity and the release of the Company from its
obligations under the IRU agreements entered into in August 2000 so long as the
Company is not in default under the communications capacity agreement; and
satisfied all of its outstanding obligations to a vendor for a cash payment of
$10.0 million. In connection with these vendor transactions, the Company also
issued five year warrants to purchase 6.4 million shares of its common stock at
$0.75 per share.
As a result of these transactions the Company expects to record an
extraordinary net gain of $61.1 million in the first quarter of 2002.
The balance of the proceeds will be used for general working capital purposes.
The following summary financial information includes an unaudited pro forma
column to illustrate the balance sheet at December 31, 2001 as if all the
transactions had occurred on December 31, 2001. the unaudited pro forma summary
financial information has been adjusted to reflect the impact of these
transactions. This information is for illustrative purposes only and is not
meant to be indicative of actual results that might have been achieved or
results that might be attained in the future.
F-25
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2001 PRO FORMA 2001
------------- ----------------
(UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents .................... $ 14,405 $ 32,687
Total current assets ......................... 46,005 50,283
Total assets ................................. 255,640 259,918
Total current liabilities .................... 348,898 94,409
Debt and capital lease obligations ........... 259,504 93,083
Total liabilities ............................ 412,226 195,683
Preferred stock .............................. -- 157,013
Stockholders' equity (deficit),
excluding preferred stock .................. (156,586) (92,778)
Stockholders' equity (deficit) ............... (156,586) 64,235
On March 22, 2002, Yipes Communications, Inc. ("Yipes") filed a voluntary
petition for reorganization under Chapter 11 of Title 11 of the United States
Bankruptcy Code. The Company is still evaluating its $1.0 million investment in
Yipes to determine if impairment has occured. Management does not believe that
the loss of its investment would have a material adverse effect on the financial
condition of the Company.
F-26