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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-29375
SAVVIS COMMUNICATIONS CORPORATION
(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, VA 20170
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(703) 234-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
COMMON STOCK, $.01 PAR VALUE - 94,026,640 SHARES AS OF August 1, 2002
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE)
The Index of Exhibits appears on page 29.
SAVVIS COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements - UNAUDITED:
Condensed Consolidated Balance Sheets as of December 31, 2001 and June 30, 2002 3
Condensed Consolidated Statements of Operations for the three and six-months ended June 30,
2001 and 2002 5
Condensed Consolidated Statements of Cash Flows for the three and six-months ended June 30,
2001 and 2002 7
Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) and
Comprehensive Income for the period January 1, 2002 to June 30, 2002 9
Notes to Condensed Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 6. Exhibits and Reports On Form 8-K 29
Signatures 30
Exhibits
- --------------------------------------------------------------------------------
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS-UNAUDITED
SAVVIS COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
DECEMBER 31, JUNE 30,
2001 2002
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,405 $ 38,860
Trade accounts receivable (including
non-Bridge affiliates), less
allowance for doubtful accounts of
$1,125 in 2001 and $500 in 2002 14,332 15,687
Accounts receivable from Bridge
Information Systems, Inc. ("Bridge") 12,795 390
Prepaid expenses 1,554 1,933
Other current assets 2,919 1,002
-------- --------
TOTAL CURRENT ASSETS $ 46,005 $ 57,872
Property and equipment- net 193,282 164,313
Goodwill and intangible assets-net of
accumulated amortization of $35,695
in 2001 2,772 --
Restricted cash 4,062 6,584
Other non-current assets 9,519 10,525
-------- --------
TOTAL ASSETS $255,640 $239,294
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable 80,447 43,762
Accrued compensation payable 7,045 6,738
Due to Bridge Information Systems, Inc. 23,326 --
Deferred revenue - current 12,145 5,042
Notes payable - current 86,572 1,299
Convertible senior secured notes -
current 60,112 --
Current portion of capital lease
obligations 45,800 4,838
Other accrued liabilities 33,451 25,511
-------- --------
TOTAL CURRENT LIABILITIES $348,898 $ 87,190
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- --------------------------------------------------------------------------------
3
SAVVIS COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(Dollars in thousands except, per share amounts)
(Unaudited)
DECEMBER 31, JUNE 30,
2001 2002
--------- ---------
NON-CURRENT LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Capital lease obligations, less current $ 19,975 $ 59,483
Notes payable - non-current 23,719 23,719
Deferred revenue - non-current 6,865 6,537
Other accrued liabilities 12,769 13,790
--------- ---------
TOTAL LIABILITIES 412,226 190,719
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock; 210,000 shares
authorized, 180,470 issued and outstanding in 2002
(Note 3) -- 182,834
Common stock; $.01 par value, 250,000,000 shares
authorized, 93,957,229 and 94,059,956 shares issued
in 2001 and 2002, respectively, 93,918,353 and
94,026,640 shares outstanding in 2001 and 2002,
respectively 940 941
Additional paid-in capital 356,443 363,434
Accumulated deficit (492,364) (479,960)
Deferred compensation (21,122) (17,843)
Treasury stock, at cost, 38,876 and 33,316 shares in 2001 and 2002,
respectively (19) (17)
Accumulated other comprehensive loss
Cumulative foreign currency translation adjustment (464) (814)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (156,586) 48,575
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 255,640 $ 239,294
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- --------------------------------------------------------------------------------
4
SAVVIS COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------
2001 2002 2001 2002
------------------------------------------------
Managed IP $ 46,308 $ 50,425 $ 94,475 $ 100,976
Managed Hosting 2,826 4,230 4,858 9,982
Internet Access 7,524 4,624 16,384 9,581
Other 1,087 1,933 1,770 2,853
------------------------------------------------
TOTAL REVENUES (1) 57,745 61,212 117,487 123,392
------------------------------------------------
Data communications and
operations (2) 64,484 43,512 131,579 88,607
------------------------------------------------
GROSS MARGIN (6,739) 17,700 (14,092) 34,785
Sales and marketing (3) 8,596 9,311 19,291 18,535
General and administrative (4) 8,733 7,844 17,046 14,541
Depreciation and amortization 24,027 14,971 46,149 31,420
Asset impairment & other write-
downs of assets 58,133 -- 58,133 1,000
Restructuring charges 4,821 -- 4,821 --
Non-cash equity-based
compensation 3,403 2,786 6,644 5,461
------------------------------------------------
LOSS FROM OPERATIONS (114,452) (17,212) (166,176) (36,172)
Interest income 139 134 550 212
Interest expense (8,971) (2,344) (14,113) (7,149)
------------------------------------------------
LOSS BEFORE EXTRAORDINARY GAIN AND
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE (123,284) (19,422) (179,739) (43,109)
------------------------------------------------
Extraordinary gain -- (340) -- 58,285
------------------------------------------------
(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (123,284) (19,762) (179,739) 15,176
------------------------------------------------
Cumulative effect of change in
accounting principle -- -- -- (2,772)
------------------------------------------------
NET (LOSS) INCOME (123,284) (19,762) (179,739) 12,404
Accreted and deemed dividend on
preferred stock -- (6,108) -- (59,741)
================================================
LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $(123,284) $ (25,870) $(179,739) $ (47,337)
------------------------------------------------
- --------------------------------------------------------------------------------
5
SAVVIS COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
BASIC AND DILUTED LOSS PER SHARE
BEFORE EXTRAORDINARY GAIN AND
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE $ (1.35) $ (0.27) $ (1.98) $ (1.10)
Extraordinary gain -- (0.01) -- 0.62
Cumulative effect of change in
accounting principle -- -- -- (0.03)
------------------------------------------------------------------
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (1.35) $ (0.28) $ (1.98) $ (0.51)
==================================================================
WEIGHTED AVERAGE SHARES
OUTSTANDING 91,024,695 93,537,278 90,962,612 93,462,329
- -------------------------
(1) Including $42.0 million and $87.7 million from affiliates in the three and
six months ended June 30, 2001, respectively and $28.3 million and $55.8
million from affiliates in the three and six months ended June 30, 2002,
respectively
(2) Excluding $0.5 million and $0.9 million of equity-based compensation in the
three months and six months ended in June 30, 2001, respectively, and $0.4
million and $0.8 million of equity-based compensation in the three months
and six months ended in June 30, 2002, respectively.
(3) Excluding $1.5 million and $2.9 million of equity-based compensation in the
three months and six months ended in June 30, 2001, respectively, and $1.2
million and $2.4 million of equity-based compensation in the three months
and six months ended in June 30, 2002, respectively.
(4) Excluding $1.4 million and $2.8 million of equity-based compensation in the
three months and six months ended in June 30, 2001, respectively, and $1.2
million and $2.3 million of equity-based compensation in the three months
and six months ended in June 30, 2002, respectively.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- --------------------------------------------------------------------------------
6
SAVVIS COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
---------------------------
SIX MONTHS ENDED
JUNE 30,
---------------------------
2001 2002
---------------------------
OPERATING ACTIVITIES:
Net (Loss) Income $(179,739) $ 12,404
Reconciliation of net (loss)income
to net cash used in operating
activities:
Extraordinary gain -- (58,285)
Asset impairment & other write-
downs of assets 58,133 1,000
Restructuring charges 4,821 --
Deferred financing costs 3,845 --
Cumulative effect of change in
accounting principle -- 2,772
Accrued interest -- 5,095
Depreciation and amortization 46,149 31,420
Stock compensation expense 6,644 5,461
Net changes in operating assets
and liabilities:
Trade accounts receivable 5,754 (12,587)
Other current assets (224) 1,917
Other non-current assets (130) 1,547
Prepaid expenses (2,546) (378)
Accounts payable 14,600 (23,755)
Deferred revenue 513 (7,431)
Accrued compensation payable and
other accrued liabilities 3,394 1,503
---------------------------
Net cash used in operating
activities (38,786) (39,317)
---------------------------
INVESTING ACTIVITIES:
Capital Expenditures (20,302) (2,162)
---------------------------
Net cash used in investing
activities (20,302) (2,162)
---------------------------
FINANCING ACTIVITIES:
Exercise of stock options 31 52
Proceeds from convertible senior
secured notes 40,000 (7)
Issuance of preferred stock, net
of issue costs -- 76,971
Principal payments under capital
lease obligations (4,978) (7,596)
Funding of letters of credit
(restricted cash) 290 (2,522)
---------------------------
Net cash provided by financing
activities 35,343 66,898
---------------------------
Effect of exchange rate changes on
cash and cash equivalents (738) (964)
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (24,483) 24,455
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 32,262 14,405
---------------------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 7,779 $ 38,860
===========================
- --------------------------------------------------------------------------------
7
SAVVIS COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
---------------------
SIX MONTHS ENDED
JUNE 30,
---------------------
2001 2002
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Debt incurred in equipment
acquisition $ 6,755 $ --
Issuance of warrants -- 10,053
Capital expenditures accrued and
unpaid 15,193 419
Netting of amounts due to against
amounts due from Bridge
Information Systems, Inc. 6,566 --
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 4,637 $ 2,330
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- --------------------------------------------------------------------------------
8
SAVVIS COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
NUMBER OF SHARES
------------------------------------------
CONVERTIBLE
TREASURY PREFERRED
COMMON STOCK STOCK STOCK
------------------------------------------
BALANCE, JANUARY 1, 2002 93,957,229 (38,876) --
Issuance of preferred stock -- -- 180,470
Issuance of common and/or treasury stock
upon exercise of stock options 102,727 5,560 --
----------------------------------------
BALANCE, JUNE 30, 2002 94,059,956 (33,316) 180,470
========================================
AMOUNTS
---------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
COMPREHENSIVE
LOSS:
CUMULATIVE
FOREIGN
CONVERTIBLE ADDITIONAL CURRENCY
PREFERRED COMMON PAID-IN TRANSLATION DEFERRED ACCUMULATED TREASURY
STOCK STOCK CAPITAL ADJUSTMENT COMPENSATION DEFICIT STOCK TOTAL
-----------------------------------------------------------------------------------------------
BALANCE, January 1, 2002 $ -- $ 940 $356,443 $ (464) $ (21,122) $(492,364) $ (19) $ (156,586)
Net Income 12,404 12,404
Foreign currency translation
adjustment (350) (350)
----------
Comprehensive income 12,054
Issuance of preferred stock 177,541 177,541
Proceeds of preferred stock
issuance allocated to
beneficial conversion
feature (54,448) 54,448
Deemed dividends on preferred
stock 59,741 (59,741)
Issuance of common and treasury
stock upon exercise of
stock options 1 49 2 52
Issuance of warrants 10,053 10,053
Recognition of deferred
compensation cost 2,182 3,279 5,461
-----------------------------------------------------------------------------------------------
BALANCE, June 30, 2002 $182,834 $ 941 $363,434 $ (814) $ (17,843) $(479,960) $ (17) $ 48,575
===============================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- --------------------------------------------------------------------------------
9
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollars in thousands, except per share amounts)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
These unaudited condensed consolidated financial statements have been prepared
under the rules and regulations of the Securities and Exchange Commission on a
basis substantially consistent with the audited consolidated financial
statements of SAVVIS Communications Corporation and its subsidiaries
(collectively, "SAVVIS" or the "Company") as of and for the year ended December
31, 2001 included in the Company's Annual Report on Form 10-K (the "Annual
Report") as filed with the Securities and Exchange Commission. These financial
statements should be read in conjunction with the audited consolidated financial
statements and the related notes to the consolidated financial statements of the
Company included in the Annual Report. In the opinion of management, the
accompanying condensed consolidated financial statements contain all adjustments
(consisting of normal, recurring adjustments), which management considers
necessary to present fairly the condensed consolidated financial position of the
Company at June 30, 2002 and the results of its operations and cash flows for
the three-month and six-month periods ended June 30, 2002. See Note 3. The
results of operations for the three-month period ended June 30, 2002 may not be
indicative of the results expected for any succeeding quarter or for the entire
year ending December 31, 2002.
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. Installation and equipment costs
and related revenues deferred in accordance with SAB 101 are recorded on the
balance sheet in other assets and deferred revenue, respectively. Such costs are
recognized on a straight line basis over the expected customer relationship
period of up to 24 months, the estimated period over which the related revenues
from installation and equipment sales are recognized.
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.
NEW ACCOUNTING STANDARDS - In June 2001, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("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. As a result of the adoption of SFAS No. 142, the Company recognized
a $2.8 million charge in the three months ended March 31, 2002.
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. 144
on January 1, 2002 did not have a material impact on our financial position or
results of operations.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
Effective January 1, 2003, SFAS No. 145 requires gains and losses from the
extinguishment or repurchase of debt to be classified as
- --------------------------------------------------------------------------------
10
extraordinary items only if they meet the criteria for such classification in
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations, Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (APB
No. 30). Until January 1, 2003, gains and losses from the extinguishment or
repurchase of debt must be classified as extraordinary items, as SAVVIS has
done. After January 1, 2003, any gain or loss resulting from the extinguishment
or repurchase of debt classified as an extraordinary item in a prior period that
does not meet this criteria for such classification under APB No. 30 must be
reclassified.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
the recognition of costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit or disposal plan
and also establishes fair value as the objective for initial measurement of the
costs. SFAS No. 146 will be adopted by the Company for exit or disposal
activities that are initiated after December 31, 2002. Adoption will not have a
material impact on the consolidated financial statements of the Company.
NOTE 2 - RELATED PARTY TRANSACTIONS
At December 31, 2001, the Company had amounts payable to BIS Administration,
Inc., the successor to Bridge Information Systems, Inc., or Bridge, of
approximately $23.3 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 the Company to Bridge. As described in Note 3, the Company entered
into a series of agreements that resolved substantially all of the outstanding
balances, both due to and due from Bridge (see Note 3).
In March 2002, the Company issued $40.9 million of convertible preferred stock
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 due
(see Note 3).
Revenue from affiliates was as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-----------------------------------
2001 2002 2001 2002
------ ------ ------ ------
Bridge Information Systems, Inc. $ 43.3 $ -- $ 90.0 $ --
Reuters SA 28.3 -- 55.8
------ ------ ------ ------
Total $ 43.3 $ 28.3 $ 90.0 $ 55.8
====== ====== ====== ======
NOTE 3 - SIGNIFICANT TRANSACTIONS
In June 2002, the Company's Series A convertible preferred stock (the
"Preferred") totaling $20.0 million was issued to Constellation Ventures in
exchange for cash. The Company also issued five-year performance warrants to
Constellation Ventures to acquire shares of common stock at $0.75 per share
which it will earn the right to exercise if it meets certain performance
criteria related to aiding the Company in winning new business. In addition, the
Company issued $2.4 million of Preferred in satisfaction of certain vendor
obligations. The Preferred was issued in reliance on Rule 506 of Regulation D of
the Securities Act of 1933.
In March 2002, the Company issued $158.1 million of Preferred. Preferred
totaling $117.2 million was issued to entities and individuals affiliated with
Welsh, Carson, Anderson and Stowe, or 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., or Nortel 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 Company incurred $2.9
million in offering costs related to the issuance of 180,470 shares of the
Preferred which is recorded net of proceeds.
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 entitled to vote on all matters (other than any voluntary
repurchase of the Preferred) submitted to
- --------------------------------------------------------------------------------
11
the common stockholders on an as-if-converted basis and represented
approximately 72% of the voting stock of the Company as of June 30, 2002. The
conversion price of $0.75 was set a few days before the commitment date for the
Preferred issued in March 2002. On the commitment date, the closing price of the
Company's common stock was $1.00. Accordingly, the Company 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. The Company also recorded a non-cash beneficial conversion feature
of $1.7 million related to accrued dividends for the six-month period ended June
30, 2002.
In March 2002, the Company also entered into a $56.5 million amended and
restated master lease agreement with General Electric Capital Corporation, or
GECC. The amended lease carries a 12% interest rate, which accrues through
December 31, 2004, and is 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 approximately 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 approximately 6.4 million shares of its
common stock at $0.75 per share.
As a result of these transactions the Company recorded an extraordinary net gain
of $58.3 million in the six-month period ended June 30, 2002.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, 2001 JUNE 30, 2002
----------------------------------------
Communications equipment $ 139,877 $ 151,796
Data centers 59,618 61,023
Construction in progress 10,365 --
Equipment under capital leases 95,872 96,383
Other 11,631 11,683
------------------------------------
Total 317,363 320,885
Less accumulated depreciation and
amortization (124,081) (156,572)
------------------------------------
Total $ 193,282 $ 164,313
====================================
NOTE 5 - ASSET IMPAIRMENT
Goodwill
The changes in the carrying amount of goodwill for the six-month period ended
June 30, 2002:
NET
ASSETS
-------
BALANCE AS OF DECEMBER 31, 2001 $ 2,772
Impairment (2,772)
-------
BALANCE AS OF JUNE 30, 2002 $ 0
=======
- --------------------------------------------------------------------------------
12
Amortization expense related to goodwill was $2.8 million and $5.5 million for
the three and six-month periods ended June 30, 2001.
In accordance with the provisions of SFAS 142 adopted on January 1, 2002, SAVVIS
recognized a $2.8 million charge, as the balance of goodwill was impaired. The
following pro forma information presents a reconciliation of net loss and loss
per common share reported in the Condensed Consolidated Statements of Operations
adjusted to exclude the goodwill amortization. The effective tax rate used in
this table is 0.0%.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------ ------------------------------
2001 2002 2001 2002
------------------------------ ------------------------------
Net loss, as reported $ (123,284) $ (19,762) $ (179,739) $ 12,404
Add: Goodwill
amortization, net of
income tax 2,772 5,544
Net loss, pro forma $ (120,512) $ (19,762) $ (174,195) $ 12,404
Basic and diluted loss
per share:
Net loss, as reported $ (1.35) $ (0.21) $ (1.98) $ (0.13)
Add: Goodwill
amortization, net of
income tax 0.03 0.06
Loss per share, pro
forma $ (1.32) $ (0.21) $ (1.92) $ (0.13)
Weighted average shares
outstanding 91,024,695 93,537,278 90,962,612 93,462,329
------------------------------ ------------------------------
FOR THE PERIOD FROM FOR THE YEAR ENDED DECEMBER 31,
------------------------------ ------------------------------
APRIL 7, TO
JANUARY 1, TO DECEMBER 31,
APRIL 6, 1999 1999
(PREDECESSOR) (SUCCESSOR) 2000 2001
------------------------------ ------------------------------
Net loss, as reported $ (9,025) $ (38,617) $ (164,851) $ (288,896)
Add: Goodwill amortization, net of
income tax 8,171 11,088 11,088
Net loss, pro forma $ (9,025) $ (30,446) $ (153,763) $ (277,808)
Basic and diluted loss
per share:
Net loss, as reported $ (0.14) $ (0.54) $ (1.89) $ (3.10)
Add: Goodwill
amortization, net of
income tax 0.12 0.13 0.12
Loss per share, pro
forma $ (0.14) $ (0.42) $ (1.76) $ (2.98)
Weighted average shares
outstanding 66,018,388 72,075,287 87,343,896 93,113,823
- --------------------------------------------------------------------------------
13
On March 22, 2002, Yipes Communications, Inc. ("Yipes") filed voluntary petition
for reorganization under Chapter 11 of Title 11 of the United States Bankruptcy
Code. As a result of these proceedings, the Company has recorded a $1.0 million
impairment charge related to its investment in Yipes.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
In May 2002, SAVVIS entered into a 15 year, office facility lease agreement with
Duke Realty Limited Partnership (Duke) with total minimum rent payments of
approximately $39.9 million. The Company also entered into an agreement with
Duke in which SAVVIS may be required to make payments of up to $2 million plus
interest accruing at 4.88% from the date of the agreement if certain events do
not occur prior to June 2004. These payments, if required, would be made from
July 2005 to June 2007.
In March 2002, the Company entered into a lease agreement with GECC (see note
3). 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.
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. The parties entered into an amendment
of the agreement, dated August 21, 2001, providing for the payment of $1.25
million on each December 31, from 2002 through 2005. These payments will be
deducted from payments otherwise owed under the agreement in 2007 through 2010.
As of June 30, 2002, the Company has recorded in other non-current assets
approximately $4.0 million of deferred charges resulting from the issuance of
common stock under this agreement.
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 June 30,
2002, 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. As of June 30, 2002, approximately
$4.1 million remains in other accrued liabilities related to this agreement. 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 June 30, 2002, was also
financed by Winstar over six years at 11% interest, with payments due 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. In addition, the Company ceased making
payments to Winstar under all agreements 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, professional services liabilities and the prepaid
Internet services. In turn, SAVVIS has filed proof of claim with the court
overseeing the Winstar bankruptcy proceeding in the amount of approximately $19
million. In December 2001, the court agreed to refer the dispute to binding
arbitration, however, no arbitration date has been scheduled. Management
believes SAVVIS has substantial defenses to the suit.
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.
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, $64 million,
$57 million and $18 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
- --------------------------------------------------------------------------------
14
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 June 30, 2002, the maximum termination liability
would amount to approximately $130.2 million.
On May 2, 2002, Cable & Wireless, USA, Inc. ("Cable & Wireless") filed suit
against the Company in the Circuit Court for Fairfax County, Virginia, for $5.7
million, alleging that SAVVIS breached a series of agreements with Cable &
Wireless for the provision of Internet connections at locations throughout the
United States. On June 28, 2002, SAVVIS filed various defenses and counter
claims against Cable & Wireless. A trial date has been set for February 2003.
Including the foregoing matters, 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 facts known to management today, that the ultimate
outcome of such proceedings and actions will not have a material adverse effect
on the Company's financial position or results of operations or cash flows.
NOTE 7 - INDUSTRY SEGMENT AND GEOGRAPHIC REPORTING
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, extraordinary gain, change in accounting
principle and restructuring charges. Adjusted EBITDA is not 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. Financial information for the Company's
geographic segments for the three and six months ended June 30, 2001 and 2002 is
presented below.
AMERICAS EUROPE ASIA ELIMINATIONS TOTAL
---------------------------------------------------------------------------------
THREE MONTHS ENDED
JUNE 30, 2001
Revenue $ 48,919 $ 5,051 $ 3,775 $ -- $ 57,745
Adjusted EBITDA (22,485) (812) (771) -- (24,068)
Assets 330,305 12,875 7,440 (25,699) 324,921
Capital Additions 15,638 -- -- -- 15,638
THREE MONTHS ENDED
JUNE 30, 2002
Revenue $ 39,874 $ 9,839 $ 11,499 $ -- $ 61,212
Adjusted EBITDA (4,847) 1,706 3,686 -- 545
Assets 260,589 5,815 4,398 (31,508) 239,294
Capital Additions 3,189 11 25 -- 3,225
AMERICAS EUROPE ASIA ELIMINATIONS TOTAL
---------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 2001
Revenue $ 99,403 $ 10,244 $ 7,840 $ -- $ 117,487
Adjusted EBITDA (47,041) (2,468) (920) -- (50,429)
Assets 330,305 12,875 7,440 (25,699) 324,921
Capital Additions 28,967 -- -- -- 28,967
SIX MONTHS ENDED
JUNE 30, 2002
Revenue $ 81,034 $ 19,089 $ 23,269 $ -- $ 123,392
Adjusted EBITDA (12,497) 4,366 9,839 -- 1,708
Assets 260,589 5,815 4,398 (31,508) 239,294
Capital Additions 3,464 11 47 -- 3,522
- --------------------------------------------------------------------------------
15
Adjusted EBITDA for all reportable segments differs from the consolidated loss
before income taxes reported in the condensed consolidated statement of
operations as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------------------
2001 2002 2001 2002
------------------------------------------------------------------
Adjusted EBITDA $ (24,068) $ 545 $ (50,429) $ 1,708
Plus adjustments as follows:
Depreciation and
amortization (24,026) (14,971) (46,149) (31,420)
Interest, net (8,832) (2,210) (13,563) (6,937)
Non-cash equity-based
compensation (3,404) (2,786) (6,644) (5,460)
Asset impairment & other
write-downs of assets (58,133) -- (58,133) (1,000)
Extraordinary gain (340) -- 58,285
Restructuring charges (4,821) -- (4,821) --
Cumulative effect of change in
accounting principle -- -- (2,772)
------------------------------------------------------------------
Net (loss)income $(123,284) $ (19,762) $(179,739) $ 12,404
------------------------------------------------------------------
- --------------------------------------------------------------------------------
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH (1) OUR
ACCOMPANYING UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO, AND (2) OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS, NOTES THERETO
AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2001 INCLUDED IN OUR ANNUAL
REPORT on Form 10-K FOR SUCH PERIOD AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. THE RESULTS SHOWN HEREIN ARE NOT NECESSARILY INDICATIVE OF THE
RESULTS TO BE EXPECTED IN ANY FUTURE PERIODS. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995) BASED ON CURRENT EXPECTATIONS WHICH INVOLVE RISKS
AND UNCERTAINTIES. ACTUAL RESULTS AND THE TIMING OF EVENTS COULD DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF
FACTORS. FOR A DISCUSSION OF THE MATERIAL FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS, YOU SHOULD
READ "RISK FACTORS" INCLUDED IN PART I, ITEM 1 OF OUR 2001 ANNUAL REPORT ON FORM
10-K.
GENERAL
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 NetworkSM, a data
communications network that uses our twelve PrivateNAPsSM and our proprietary
routing policies to reduce data loss and enhance performance by avoiding the
congested public access points on the Internet.
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 1,600 at June 30, 2002.
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 and the
provision of warehousing and other facilities, pending us establishing our own
capabilities. Effective July 2002, SAVVIS has assumed responsibility for these
services and reliance on Reuters for future services will be minimal. On
September 28, 2001, we also entered into a colocation 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.
In connection with its purchase of assets from Bridge in October 2001, Moneyline
Telerate entered into a binding letter of intent dated October 18, 2001, 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.
In addition, 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
- --------------------------------------------------------------------------------
17
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 Anderson, & Stowe (Welsh Carson), Reuters and
Constellation Ventures
In June 2002, the Company's Series A convertible preferred stock (the
"Preferred") totaling $20.0 million was issued to Constellation Ventures in
exchange for cash. The Company also issued five-year performance warrants to
Constellation Ventures to acquire shares of common stock at $0.75 per share
which it will earn the right to exercise if it meets certain criteria related to
aiding the Company in winning new business. In addition, the Company issued $2.4
million of Preferred in satisfaction of certain vendor obligations.
On March 18, 2002 we issued approximately $158.1 million of Preferred 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 Preferred will accrue dividends at the rate
of 11.5% per annum on the outstanding accreted value thereof (initially $1,000
per share) through March 18, 2010. Thereafter, dividends will be payable in cash
or in kind at the option of the Company. 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, $.075 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 anonyme 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.
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 audit committee meetings.
RESULTS OF OPERATIONS
The historical financial information included in this Form 10-Q does not reflect
our future results of operations, financial position and cash flows.
THREE MONTHS ENDED JUNE 30, 2002 AS COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2001
Summary
The Company's revenues increased 6% in the quarter as growth in the Managed IP
product line offset continuing declines in Internet access revenues. Gross
margin increased by approximately $24.4 million as the $3.5 million increase in
our revenues was combined with a $21.0 million reduction in data communications
costs due to reductions in capacity, unit costs and accruals for such costs.
This gross margin improvement led to a $24.6 million improvement in adjusted
EBITDA. Net loss
- --------------------------------------------------------------------------------
18
improved by $103.5 million due to the improvement in adjusted
EBITDA, a $9 million reduction in depreciation and amortization, a $6.6 million
reduction in interest expense and $63 million of asset impairment and
restructuring charges recorded in 2001.
Revenues
THREE MONTHS ENDED JUNE 30,
(IN MILLIONS)
---------------------------
2001 2002
----------- ------------
Bridge Information Systems, Inc. $ 42.0 $ --
Reuters SA -- 26.7
Moneyline Telerate -- 15.2
Managed IP 4.3 8.5
------- -------
Total Managed IP 46.3 50.4
Managed Hosting 2.8 4.2
Internet Access 7.5 4.6
Other 1.1 2.0
------- -------
Total Other 11.4 10.8
Total Revenue $ 57.7 $ 61.2
======= =======
Revenue was $61.2 million for the three-months ended June 30, 2002, an increase
of $3.5 million or 6%, from $57.7 million for the three-months ended June 30,
2001. Managed IP revenues increased 9% to $50.4 million compared to $46.3
million in the same period in 2001. Managed IP revenues provided to Reuters and
Moneyline declined 4% to $40.5 million, after the elimination of a non-recurring
service charge of $1.4 million, versus $42.0 million of services provided to
Bridge in the prior period. The decline resulted from the elimination of excess
circuits by Bridge prior to the sale of its assets, the termination of service
locations by Reuters and Moneyline in connection with their integration of the
Bridge acquisition and reduced pricing for some services. The effect of these
factors is expected to result in a decline in Reuters revenues for the third
quarter. Managed IP services provided to other customers increased 98% to $8.5
million in the quarter as we added 174 new managed IP customers. Managed Hosting
revenue was $4.2 million, a $1.4 million or 50% increase over the second quarter
of 2001. The increase in Managed Hosting revenue is attributable to
approximately $2.5 million related to colocation charges for Reuters and
Moneyline over previous billings to Bridge. Internet access revenues decreased
39% to $4.6 million in the second quarter of 2002, compared to $7.5 million for
the comparable period in 2001. The decrease in Internet access revenue was due
to the economic downturn affecting the Internet sector which resulted in the
loss of customers, pricing pressure in the Internet access business and the
Company's continued initiatives designed to encourage customers to purchase
access services as part of their managed network service. Other revenues,
consisting of installation and equipment sales, increased from $1.1 million in
2001 to $2.0 million for the comparable period of 2002 as a result of the
acceleration of $1.3 million of installation fees, previously deferred under SAB
101, associated with the now terminated Bridge contract.
Data Communications and Operations
Data communications and operations expenses consist primarily of leased long
distance and local circuit costs, internet connectivity costs, leased hosting
and colocation space, as well as related operating expenses such as repairs and
maintenance associated with network operations, operating leases for network
equipment, customer support and field service, and engineering personnel costs.
Data communications and operations expenses were $43.5 million for the quarter
ended June 30, 2002; a decrease of $21.0 million from $64.5 million for the
quarter ended June 30, 2001. The 33% decline in data communications costs is a
result of significant unit price reductions for long-haul capacity, reductions
in internet connectivity capacity and unit prices and reductions in local
circuit costs resulting from the elimination of excess circuits in the Bridge
network, reductions in connections with Reuters and Moneyline and unit price
reductions from vendors. These costs were also reduced by $6.5 million as a
result of reductions in estimated accruals for such costs which we believe are
no longer required. Cost reductions in data communications costs were partially
offset by additional employees needed in operations to assume services
previously provided by Reuters and Moneyline, transitional costs associated with
taking over certain services from Reuters and $1.3 million in costs related to
the non-recurring service charge to Reuters and the accelerated installation
revenues discussed above. Total operational employees increased by 19% to 281 at
June 2002 versus 237 in June 2001. Data communications costs are expected to
decline further in the third quarter.
Sales and Marketing
Sales and marketing expenses consist of personnel and related sales commission
costs, advertising and direct marketing, and travel. Sales and marketing
expenses were $9.3 million for the three-months ended June 30, 2002, down 8% or
$0.7 million as compared to the second quarter of 2001. This change is
principally attributed to a decrease in advertising and direct marketing in the
second quarter of
- --------------------------------------------------------------------------------
19
2002. Sales and marketing employees increased 3% to 268 at June 2002 compared to
260 at June 2001. The Company expects personnel, advertising and marketing
expenses to increase through the end of 2002 to accelerate the growth of our
revenues.
General and Administrative
General and administrative expenses consist primarily of compensation and
occupancy costs for executive, financial, legal, tax and support personnel,
travel, and bad debt costs. General and administrative expenses amounted to $7.8
million for the three-months ended June 30, 2002 and $8.7 million for the
three-months ended June 30, 2001, a decrease of $0.9 million or 10%. This change
resulted primarily from a decrease in employee expenses of $0.3 million as well
as a decrease in expenses related to Bridge Administrative Services, legal, and
audit fees of $1.2 million. This was offset by an increase in rent expense of
$0.6 million.
Non-cash Equity-based Compensation
Non-cash equity-based compensation expense was $2.8 million for the three-months
ended June 30, 2002, a decrease of $0.6 million from the three-months ended June
30, 2001. These expenses represent the amortization charge to earnings for the
difference between the imputed 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 on March 6, 2002.
Depreciation and Amortization
Depreciation and amortization expense was $15.0 million for the three-months
ended June 30, 2002, a decrease of $9.1 million from the three-months ended June
30, 2001. This change is a result of a decrease in amortization expense of $2.8
million related to a change in accounting principle for goodwill and certain
assets related to the network being fully depreciated during the period ended
March 31, 2002.
Interest
Interest income amounted to $0.1 million in the quarter ended June 30, 2002,
which is comparable to interest earned in the three-months ended June 30, 2001.
Interest expense for the quarter-ended June 30, 2002 amounted to $2.3 million, a
decrease of $6.6 million from the comparable period in 2001. The decrease in
interest expense is largely due to financing and debt restructuring that
occurred in March 2002 which eliminated approximately $171.7 million in debt
from the financial statements.
Net Income(Loss)
The net loss for the three months ended June 30, 2002 was $19.8 million, or
$0.28 basic and fully diluted loss per share, a decrease of $103.5 million from
the net loss for the three-months ended June 30, 2001 of $123.3 million, or
$1.35 per share. The primary reasons for the decrease in net loss are:
o Increase in total revenue of $3.5 million
o Decrease in data communications costs of $21.0 million.
o Decrease in depreciation and amortization expenses of $9 million.
o Decrease in asset impairment and restructuring charges of $63 million
SIX MONTHS ENDED JUNE 30, 2002 AS COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2001
Summary
The Company's revenues increased 5% in the first half as growth in the Managed
IP product line offset continuing declines in Internet access revenues. Gross
margin increased by approximately $48.9 million as the $5.9 million increase in
our revenues was combined with a $43.0 million reduction in data communications
costs due to reductions in capacity, unit costs and accruals for such costs.
This gross margin improvement led to a $52.1 million improvement in adjusted
EBITDA. Net loss improved by $192.1 million, resulting in net income of $12.4
million, due to the improvement in adjusted EBITDA, an extraordinary gain of
$58.3 million resulting from the recapitalization in March 2002, a $14.7 million
reduction in depreciation and amortization, a $6.6 million reduction in net
interest expense and $63 million of asset impairment and restructuring charges
recorded in 2001.
- --------------------------------------------------------------------------------
20
Revenues
SIX MONTHS ENDED JUNE 30,
(IN MILLIONS)
-------------------------
2001 2002
---------- ------------
Bridge Information Systems, Inc. $ 87.7 $ --
Reuters SA -- 51.6
Moneyline Telerate -- 33.1
Managed IP 6.8 16.3
-------- --------
Total Managed IP 94.5 101.0
Managed Hosting 4.9 10.0
Internet Access 16.4 9.6
Other 1.7 2.8
-------- --------
Total Other 23.0 22.4
Total Revenue $ 117.5 $ 123.4
======== ========
Revenue was $123.4 million for the six-months ended June 30, 2002, an increase
of $5.9 million or 5%, from $117.5 million for the six-months ended June 30,
2001. Managed IP revenues increased 7% to $101.0 million compared to $94.5
million in the same period in 2001. Managed IP revenues provided to Reuters and
Moneyline decreased 5% to $83.3 million, after the elimination of a
non-recurring service charge of $1.4 million, versus $87.7 million of services
provided to Bridge in the prior period. The decline resulted from the
elimination of excess circuits by Bridge prior to the sale of its assets, the
termination of service locations by Reuters and Moneyline in connection with
their integration of the Bridge acquisition and reduced pricing for some
services. The effect of these factors is expected to result in a decline in
Reuters revenues for the third quarter. Managed IP services provided to other
customers increased 135% to $16.3 million in the six months ended June 30, 2002
as we added 174 new managed IP customers. Managed Hosting revenue was $10.0
million, a $5.0 million or 102% increase over the six months ended June 30,
2001. The increase in Managed Hosting revenue is attributable to an increase in
colocation charges billed to Reuters and Moneyline over previous billings to
Bridge. Internet access revenues decreased 42% to $9.6 million in the six months
ended June 30, 2002, compared to $16.4 million for the comparable period in
2001. The decrease in Internet access revenue was due to the economic downturn
affecting the Internet sector which resulted in the loss of customers, pricing
pressure in the Internet access business and the Company's continued initiatives
designed to encourage customers to purchase access services as part of their
managed network service. Other revenues, consisting of installation and
equipment sales, increased from $1.7 million in 2001 to $2.8 million for the
comparable period in 2002 as a result of the acceleration of $1.3 million of
installation fees, previously deferred under SAB 101, associated with the now
terminated Bridge contract.
Data Communications and Operations
Data communications and operations expenses consist primarily of leased long
distance and local circuit costs, internet connectivity costs, leased hosting
and colocation space, as well as related operating expenses such as repairs and
maintenance associated with network operations, operating leases for network
equipment, customer support and field service, and engineering personnel costs.
Data communications and operations expenses were $88.6 million for the six
months ended June 30, 2002; a decrease of $43.0 million, from $131.6 million for
the six months ended June 30, 2001. The 33% decline in data communications costs
is a result of significant unit price reductions for long-haul capacity,
reductions in internet connectivity capacity and unit prices, reductions in
local circuit costs resulting from the elimination of excess circuits in the
Bridge network, reductions in connections with Reuters and Moneyline and unit
price reductions from vendors. These costs were also reduced by $6.5 million as
a result of reductions in estimated accruals for such costs which we believe are
no longer required. Cost reductions in data communications costs were partially
offset by additional employees needed in operations to assume services
previously provided by Reuters and Moneyline, transitional costs associated with
taking over certain services from Reuters and $1.3 million in costs related to
the non-recurring service charge to Reuters and the accelerated installation
revenues discussed above. Data communications costs are expected to decline
further in the third quarter.
Sales and Marketing
Sales and marketing expenses consist of personnel and related sales commission
costs, advertising and direct marketing, and travel. Sales and marketing
expenses were $18.5 million for the six-months ended June 30, 2002, down 4% or
$0.8 million as compared to the six months ended June 30, 2001. This change is
principally attributed to a decrease in advertising and direct marketing in the
second quarter of 2002. The Company expects personnel, advertising and marketing
expenses to increase through the end of 2002 to accelerate the growth of our
revenues.
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21
General and Administrative
General and administrative expenses consist primarily of compensation and
occupancy costs for executive, financial, legal, tax and support personnel,
travel, and bad debt costs. General and administrative expenses amounted to
$14.5 million for the six-months ended June 30, 2002 and $17.0 million for the
six-months ended June 30, 2001, a decrease of $2.5 million or 15%. This change
resulted primarily from decreased bad debt expense of $1.1 million, a decline of
legal, audit, and administrative service expenses of $2.2 million, and a
reduction of employee related and sponsorship expenses of $0.4 million. This was
offset by an increase in office rent of $1.1 million.
Non-cash Equity-based Compensation
Non-cash equity-based compensation expense was $5.5 million for the six-months
ended June 30, 2002, a decrease of $1.1 million from the six-months ended June
30, 2001. These expenses represent the amortization charge to earnings for the
difference between the imputed 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 on March 6, 2002.
Depreciation and Amortization
Depreciation and amortization expense was $31.4 million for the six-months ended
June 30, 2002, a decrease of $14.8 million from the six-months ended June 30,
2001. This change is a result of a decrease in amortization expense of $2.8
million related to a change in accounting principle for goodwill and certain
assets related to the network being fully depreciated during the period ended
March 31, 2002.
Interest
Interest income amounted to $0.2 million in the six months ended June 30, 2002,
a decrease of $0.3 million from the comparable period in 2001. Interest expense
for the six months-ended June 30, 2002 amounted to $7.1 million, a decrease of
$7.0 million from the comparable period in 2001. The decrease in interest
expense is largely due to financing and debt restructuring that occurred in
March 2002 which eliminated approximately $171.7 million in debt. Cash interest
during the period ended June 30, 2002 was $1.7 million a reduction of
approximately $2.9 million from the same period of 2001.
Net Income(Loss)
The net income for the six months ended June 30, 2002 was $12.4 million, or
$0.51 basic and fully diluted loss per share, an improvement of $192.1 million
from the net loss for the six-months ended June 30, 2001 of $179.7 million, or
($1.98) per share. The primary reasons for the improvement in net income (loss)
are:
o Increase in gross margin of $48.9 million.
o Decrease in depreciation and amortization expenses of $14.8 million.
o Decrease due to cumulative effect of change in accounting principle of
$2.8 million.
o Increase in extraordinary gain of $58.3 million related to the
extinguishment of debt.
o Decrease in asset impairment and restructuring charges of $62 million
o Decrease in net interest expense of $6.6 million
LIQUIDITY AND CAPITAL RESOURCES
In June 2002, convertible preferred stock (the "Preferred") totaling $20.0
million was issued to Constellation Ventures in exchange for cash. The Company
also issued five-year performance warrants to Constellation Ventures to acquire
shares of common stock at $0.75 per share which it will earn the right to
exercise if it meets certain performance criteria related to aiding the Company
in winning new business. In addition, the Company issued $2.4 million of
Preferred in satisfaction of certain vendor obligations.
In May 2002, SAVVIS entered into a 15 year, office facility lease agreement with
Duke Realty Limited Partnership (Duke) with total minimum rent payments of
approximately $39.9 million. The Company also entered into an agreement with
Duke in which SAVVIS may be required to make payments of up to $2 million plus
interest accruing at 4.88% from the date of the agreement if certain events do
not occur prior to June 2004. These payments, if required, would be made from
July 2005 to June 2007.
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22
On March 18, 2002, the Company issued approximately $158.1 million of Preferred
to (i) entities and affiliates of Welsh Carson in exchange for approximately
$57.5 million in cash, 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 upon conversion of
approximately $40.9 million in principal and accrued interest in respect to the
12% convertible senior secured notes. The terms of the Preferred are more fully
described in Note 3 of the financial statements.
In addition, the Company reached agreements with GECC, Nortel, Bridge and
certain other vendors as follows:
Approximately $56.5 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.
Release by Nortel from all obligations to purchase optical equipment
under the Global Purchase Agreement.
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.
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.
In connection with these transactions, the Company also issued
five-year warrants to purchase 16.0 million shares of its common stock
at $0.75 per share.
The balance of the proceeds of $57.5 million from the issuance of the Preferred
will be used for working capital and general corporate purposes.
As a result of the transactions discussed in Note 3 of the consolidated
financial statements, the Company's financial position changed significantly
including a reduction of debt by $171.7 million, a reduction of payables by
$32.3 million and an increase in cash position by $18.8 million. Additionally,
the Company recognized an extraordinary gain of approximately $58.3 million
related to the extinguishment of debt and 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. The
Company also recorded a non-cash beneficial conversion feature of $1.7 million
related to the accrued dividendsfor the six-month period ending June 30, 2002.
Negative cash flow from operations increased to $39.3 million for the six months
ended June 30, 2002 from $38.8 million in 2001. This is primarily related to the
payment of accounts payable following the issuance of the Preferred on March 18,
2002 and the deferral of $5.3 million of receivables by Moneyline. Moneyline is
required to pay these deferred balances in October and November 2002.
Net cash used in investing activities for the six months ended June 30, 2002 was
approximately $2.1 million, a decrease from the $20.3 million used in the first
six months ended June 30, 2001. The cash used in investing activities reflects
the purchase of the property and equipment not financed. We also purchased an
additional $1.1 million of capital equipment during the period for which payment
will be made in the third quarter.
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 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 binding 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
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23
June 30, 2002, 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, as of June 30, 2002,
approximately $4.1 million remains in other accrued liabilities related to
Winstar.
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 June 30, 2002, was also
financed by Winstar over six years at 11% interest, with payments due 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
protection under Chapter 11 of the Bankruptcy Code. 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, professional services liabilities and the prepaid
Internet services. In turn, we have filed proof of claim with the court
overseeing the Winstar bankruptcy proceeding in the amount of approximately $19
million. In December 2001, the court agreed to refer the dispute to binding
arbitration however, no arbitration proceeding has been scheduled. 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. The parties entered into an amendment
of the agreement, dated August 21, 2001, providing for the payment of $1.25
million on each December 31, from 2002 through 2005. These payments will be
deducted from payments otherwise owed under the agreement in 2007 through 2010.
As of June 30, 2002, the Company has approximately $4.0 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, $64 million,
$57 million and $18 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
June 30, 2002, the maximum termination liability would amount to approximately
$130.2 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.
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.
PAYMENTS DUE BY
LESS THAN 2 - 3 4 - 5 AFTER 5
TOTAL 1 YEAR YEARS YEARS YEARS
----------------------------------------------------
Capital lease obligations $ 64,321 $ 4,838 $ 59,483 $ -- $ --
Operating leases 89,140 9,500 17,417 14,721 47,502
Unconditional purchase
obligations 194,950 55,314 121,336 18,300 --
Notes payable 25,018 1,299 23,719 -- --
----------------------------------------------------
Total contractual cash
obligations $373,429 $ 70,951 $221,955 $ 33,021 $ 47,502
====================================================
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SAVVIS' contractual obligations, including commitments for future payments under
non-cancelable lease arrangements and short and long- term debt arrangements,
are fully disclosed in the Notes to the condensed consolidated financial
statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (("FASB") issued
Statement of Financial Accounting Stands ("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. As a
result of the adoption of SFAS No. 142, the Company recognized a $2.8 million
charge in the three months ended March 31, 2002.
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. 144
on January 1, 2002 did not have a material impact on our financial position or
results of operations.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
Effective January 1, 2003, SFAS No. 145 requires gains and losses from the
extinguishment or repurchase of debt to be classified as extraordinary items
only if they meet the criteria for such classification in Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations, Reporting the
Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" (APB No. 30). Until January 1,
2003, gains and losses from the extinguishment or repurchase of debt must be
classified as extraordinary items, as SAVVIS has done. After January 1, 2003,
any gain or loss resulting from the extinguishment or repurchase of debt
classified as an extraordinary item in a prior period that does not meet this
criteria for such classification under APB No. 30 must be reclassified.
In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires the
recognition of costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan and
also establishes fair value as the objective for initial measurement of the
costs. SFAS No. 146 will be adopted by the Company for exit or disposal
activities that are initiated after December 31, 2002. Adoption will not have a
material impact on the consolidated financial statements of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures relate to changes in interest rates. As the
Company continues to expand our business internationally, 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 3, 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 materially impact our results of
operations. For the three months ended June 30, 2002, 34% of our service revenue
was derived from operations outside the United States and approximately 35% of
our total data communications and operations costs were incurred outside the
United States. We expect these percentages to remain relatively constant in
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25
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Winstar
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.
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, professional services liabilities and the prepaid
Internet services. In turn, we have filed proof of claim with the court
overseeing the Winstar bankruptcy proceeding in the amount of approximately $19
million. In December 2001, the court agreed to refer the dispute to binding
arbitration however, to date no arbitration proceeding has been scheduled. We
believe we have substantial defenses to the suit.
Cable & Wireless
On May 2, 2002, Cable & Wireless, USA, Inc. filed suit against the Company in
the Circuit Court for Fairfax County, Virginia, for $5.7 million, alleging that
SAVVIS breached a series of agreements with Cable & Wireless for the provision
of Internet connections at locations throughout the United States. On June 28,
2002, SAVVIS filed various defenses and counter claims against Cable & Wireless.
A trial date has been set for February 2003.
Including the foregoing matters, the Company is subject to various legal
proceedings and actions arising in the normal course of its business. While the
results of such proceedings and actions cannot be predicted, management
believes, based on facts known to management today, that the ultimate outcome of
such proceedings and actions will not have a material adverse effect on the
Company's financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In June 2002, the Company's Series A convertible preferred stock (the
"Preferred") totaling $20.0 million was issued to Constellation Ventures in
exchange for cash. The Company also agreed to issue five-year warrants to
Constellation Ventures to acquire shares of common stock at $0.75 per share
which it will earn the right to exercise if it aids the Company in winning new
business. In addition, the Company issued $2.4 million of preferred stock in
satisfaction of certain vendor obligations. The Preferred was issued in reliance
on Rule 506 of Regulation D of the Securities Act of 1933.
In March 2002, the Company issued $158.1 million of convertible preferred stock
(the "Preferred"). Preferred totaling $117.2 million was issued to entities and
individuals affiliated with Welsh Carson 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 totaling $90.9 million. Preferred totaling
$40.9 million was also issued to Reuters Holdings Switzerland S.A. upon
conversion of all of the outstanding principal and accrued interest on the
Company's 12% convertible senior notes totaling $40.9 million. The Company
incurred $2.9 million in offering costs related to the issuance of the Preferred
which is recorded net of proceeds. The proceeds from the issuance of the
Preferred will be used for working capital and general corporate purposes.
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
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26
entitled to vote on all matters (other than any voluntary repurchase of the
Preferred) submitted to the common stockholders on an as-if-converted basis, and
represented approximately 72% of the voting stock of the Company as of June 30,
2002. The conversion price of $0.75 was set a few days before the commitment
date for the Preferred issued in March 2002. 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. The Company also recorded a non-cash
beneficial conversion feature of $1.7 million related to accrued dividends for
the six-month period ending June 30, 2002.
Between January 1, 2002 and June 30, 2002, we granted options to purchase
32,670,071 shares of our common stock at exercises prices from $0.375 to $0.75.
All of these options were granted pursuant to our 1999 Stock Option Plan as
amended. Of this total, 195,000 shares of stock options were granted to three
independent members of our Board of Directors. These issuances 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 quarter ended June 30, 2002, proceeds of approximately $20,000 were
generated from the exercise of options for 40,133 shares of our common stock.
There were no significant expenses, underwriting discounts or commissions
attributable to these proceeds. We used the proceeds for general working capital
expenses incurred in the ordinary course of business. These options had been
granted under our 1999 Incentive Stock Option Plan. We issued the shares in
reliance on the exemption from registration provided by Rule 701 under the
Securities Act of 1933.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2002 Annual Meeting of Stockholders of SAVVIS Communications Corporation was
held on June 7, 2002. The following matters were voted upon at the meeting: (i)
the election of nine directors; (ii) the approval of the proposal to authorize
the board of directors, in its discretion, to amend the certificate of
incorporation to effect a 1-for-3 reverse stock split; (iii) the approval of the
proposal to authorize the board of directors, in its discretion, to amend the
certificate of incorporation to effect a 1-for-7 reverse stock split; (iv) the
approval of the proposal to authorize the board of directors, in its discretion,
to amend the certificate of incorporation to effect a 1-for-10 reverse stock
split; and (v) the ratification of the appointment of Deloitte & Touche LLP as
SAVVIS's independent auditors for the year ending December 31, 2002.
(i) The entire nominated board of directors was elected and the votes cast for
or withheld with respect to the election of each director were as follows:
Number of Votes in Favor of Withhold Authority to Vote
Nominee for Director of Nominees
- -------------------- --------------------------- --------------------------
Robert A. McCormick 292,075,102 1,195,652
John D. Clark 292,173,002 1,097,752
John M. Finlayson 292,172,545 1,098,209
David J. Frear 292,175,127 1,095,627
Clyde A. Heintzelman 292,160,352 1,110,402
Thomas E. McInerney 292,144,246 1,126,508
Patrick J. Welsh 292,127,533 1,143,221
James E. Ousley 292,193,335 1,077,419
James P. Pellow 292,199,027 1,071,727
(ii) The votes cast for, against or abstaining and the broker non-votes, with
respect to the approval of the proposal to authorize the board of
directors, in its discretion, to amend the certificate of incorporation to
effect a 1-for-3 reverse stock split were as follows:
Number of Votes in Number of Votes Number of Votes Number of Broker Non-
Favor Against Abstained Votes
------------------- --------------- --------------- ---------------------
292,047,647 1,111,729 111,378 0
(iii) The votes cast for, against or abstaining and the broker non-votes,
with respect to the approval of the proposal to authorize the board of
directors, in its discretion, to amend the certificate of incorporation
to effect a 1-for-7 reverse stock split were as follows:
Number of Votes in Number of Votes Number of Votes Number of Broker Non-
Favor Against Abstained Votes
------------------- --------------- --------------- ---------------------
291,391,162 1,758,723 120,869 0
(iv) The votes cast for, against or abstaining and the broker non-votes, with
respect to the approval of the proposal to authorize the board of
directors, in its discretion, to amend the certificate of incorporation to
effect a 1-for-10 reverse stock split were as follows:
Number of Votes in Number of Votes Number of Votes Number of Broker Non-
Favor Against Abstained Votes
------------------- --------------- --------------- ---------------------
291,548,280 1,627,071 95,403 0
(iv) The votes cast for, against or abstaining, with respect to the approval of
the proposal to ratify the appointment of Deloitte & Touche LLP as the
Company's independent auditors for the year ending December 31, 2002 were
as follows:
Number of Votes in Number of Votes Number of Votes
Favor Against Abstained
------------------- --------------- ---------------
293,020,287 154,757 95,710
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are either provided with this Form 10-Q or
are incorporated herein by reference.
EXHIBIT INDEX
Number Exhibit Description
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3.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to the same numbered exhibit to SAVVIS'
Registration Statement on Form S-1, as amended (File No. 333-90881))
3.2 Certificate of Amendment to Amended and Restated Certificate of
Incorporation of the Registrant (incorporated by reference to the
same numbered exhibit to SAVVIS' Registration Statement on Form S-1,
as amended (File No. 333-90881))
3.3 Certificate of Amendment to Amended and Restated Certificate of
Incorporation of the Registrant
3.4 Amended and Restated Bylaws of the Registrant (incorporated by
reference to Exhibit 3.3 to SAVVIS' Registration Statement on Form
S-1, as amended (File No. 333-90881))
4.1 Form of Common Stock Certificate (incorporated by reference to the
same numbered exhibit to SAVVIS' Registration Statement on Form S-1,
as amended (File No. 333-90881))
4.2 Certificate of Designations relating to the Registrant's Series A
Convertible Preferred Stock (incorporated by reference to the same
numbered exhibit to SAVVIS' Current Report on Form 8-K dated March
27, 2002)
4.3 Warrant Agreement, dated as of March 7, 2002, between the Registrant
and General Electric Capital Corporation (incorporated by reference
to the same numbered exhibit to SAVVIS' Quarterly Report on Form
10-Q, dated May 15, 2002)
4.4 Warrant Agreement, dated as of March 15, 2002, between the Registrant
and Nortel Networks Inc. (incorporated by reference to the same
numbered exhibit to SAVVIS' Quarterly Report on Form 10-Q, dated May
15, 2002)
4.5 Warrant, dated March 18, 2002, to purchase the Registrant's common
stock issued to General Electric Capital Corporation (incorporated by
reference to the same numbered exhibit to SAVVIS' Quarterly Report on
Form 10-Q, dated May 15, 2002)
4.6 Warrant, dated March 18, 2002, to purchase the Registrant's common
stock issued to Nortel Networks Inc. (incorporated by reference to
the same numbered exhibit to SAVVIS' Quarterly Report on Form 10-Q,
dated May 15, 2002)
4.7+ Warrant, dated June 28, 2002, to purchase the Registrant's common
stock issued to Constellation Venture Capital II, L.P. (incorporated
by reference to the same numbered exhibit to SAVVIS' Current Report
on Form 8-K, dated July 8, 2002)
4.8+ Warrant, dated June 28, 2002, to purchase the Registrant's common
stock issued to Constellation Venture Capital Offshore II, L.P.
(incorporated by reference to the same numbered exhibit to SAVVIS'
Current Report on Form 8-K, dated July 8, 2002)
4.9+ Warrant, dated June 28, 2002, to purchase the Registrant's common
stock issued to The BSC Employee Fund IV, L.P. (incorporated by
reference to the same numbered exhibit to SAVVIS' Current Report on
Form 8-K, dated July 8, 2002)
4.10+ Warrant, dated, June 28, 2002, to purchase the Registrant's common
stock issued to CVC II Partners, L.L.C. (incorporated by reference to
the same numbered exhibit to SAVVIS' Current Report on Form 8-K,
dated July 8, 2002)
10.1 Amendment No. 1 to 1999 Stock Option Plan
10.2 Amendment No. 2 to 1999 Stock Option Plan
10.3 Amendment No. 3 to 1999 Stock Option Plan
10.4 Employee Stock Purchase Plan
10.5 Amended and Restated Lease Agreement, dated as of January 25, 2002,
by and between General Electric Capital Corporation and SAVVIS
Communications Corporation, a Missouri corporation
10.6 Lease Agreement, dated as of May 24, 2002, by and between Duke Realty
Limited Partnership and SAVVIS Communications Corporation, a Missouri
corporation
10.7 Missouri Leasehold Deed of Trust, Security Agreement and Fixture
Filing, dated June 12, 2002, among SAVVIS Communications Corporation,
a Missouri corporation and General Electric Capital Corporation
10.8 Amendment No.1 and Consent, dated May 28, 2002, to the Amended and
Restated Master Lease Agreement, dated as of March 8, 2002, by and
among SAVVIS Communications Corporation, a Missouri corporation,
other signatories named therein and General Electric Capital
Corporation
11.1 Calculation of Basic and Diluted per share and weighted average
shares used in EPS calculation
- ----------------
+ 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.
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29
(b) Reports on Form 8-K. On May 24, 2002 and July 8, 2002, we filed Current
Reports on Form 8-K with respect to Item 5, Other Events.
SIGNATURES
Pursuant to the requirements 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.
SAVVIS Communications Corporation
Date August 14, 2002 By: /s/ Robert McCormick
------------------------- --------------------------------
Robert McCormick
Chief Executive Officer
Date August 14, 2002 By: /s/ David J. Frear
------------------------- ---------------------------------
David J. Frear
EVP & Chief Financial Officer
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