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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 September 30, 2005
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number:0-29375
SAVVIS, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 43-1809960 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
1 SAVVIS Parkway
Town & Country, Missouri 63017
(Address of Principal Executive Offices) (Zip Code)
(314) 628-7000
(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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common stock, $0.01 par value – 181,593,031 shares as of October 26, 2005
The Exhibit Index begins on page 30.
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QUARTERLY REPORT ON FORM 10-Q
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CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
September 30, 2005 | December 31, 2004 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 50,790 | $ | 55,369 | ||||
Trade accounts receivable, less allowance for credits and uncollectibles of $14,310 and $13,750 as of September 30, 2005 and December 31, 2004, respectively | 51,490 | 48,050 | ||||||
Prepaid expenses and other current assets | 17,053 | 15,004 | ||||||
Total Current Assets | 119,333 | 118,423 | ||||||
Property and equipment, net | 243,735 | 264,542 | ||||||
Intangible assets, net | 9,776 | 15,218 | ||||||
Other non-current assets | 8,561 | 8,067 | ||||||
Total Assets | $ | 381,405 | $ | 406,250 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
Current Liabilities: | ||||||||
Payables and other trade accruals | $ | 48,265 | $ | 50,350 | ||||
Current portion of capital lease obligations | 483 | 505 | ||||||
Other accrued liabilities | 72,957 | 66,150 | ||||||
Total Current Liabilities | 121,705 | 117,005 | ||||||
Long-term debt | 263,262 | 171,051 | ||||||
Capital lease obligations, net of current portion | 59,676 | 113,529 | ||||||
Other accrued liabilities | 56,066 | 68,606 | ||||||
Total Liabilities | 500,709 | 470,191 | ||||||
Stockholders’ Deficit: | ||||||||
Series A Convertible Preferred stock at accreted value; $0.01 par value, 210,000 shares authorized; 203,070 shares issued as of September 30, 2005 and December 31, 2004; 202,490 shares outstanding as of September 30, 2005 and December 31, 2004 | 296,560 | 272,137 | ||||||
Common stock; $0.01 par value, 1,500,000,000 shares authorized; 181,572,935 and 180,361,264 shares issued as of September 30, 2005 and December 31, 2004, respectively; 181,572,935 and 180,329,963 shares outstanding as of September 30, 2005 and December 31, 2004, respectively | 1,816 | 1,804 | ||||||
Additional paid-in capital | 377,755 | 384,847 | ||||||
Accumulated deficit | (777,211 | ) | (721,263 | ) | ||||
Deferred compensation | (16,384 | ) | (515 | ) | ||||
Treasury stock, at cost, 31,301 shares as of December 31, 2004 | — | (16 | ) | |||||
Accumulated other comprehensive loss | (1,840 | ) | (935 | ) | ||||
Total Stockholders’ Deficit | (119,304 | ) | (63,941 | ) | ||||
Total Liabilities and Stockholders’ Deficit | $ | 381,405 | $ | 406,250 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share data)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Revenue | $ | 166,127 | $ | 169,389 | $ | 495,499 | $ | 450,515 | ||||||||
Operating Expenses: | ||||||||||||||||
Cost of revenue(1) | 106,916 | 119,816 | 324,623 | 327,102 | ||||||||||||
Sales, general, and administrative expenses(2) | 37,307 | 44,521 | 113,907 | 127,438 | ||||||||||||
Depreciation, amortization, and accretion | 19,066 | 20,525 | 56,600 | 51,570 | ||||||||||||
Restructuring charges, net | — | — | 3,340 | — | ||||||||||||
Integration costs | — | 3,715 | 2,745 | 25,786 | ||||||||||||
Non-cash equity-based compensation(3) | 528 | 156 | 796 | 10,937 | ||||||||||||
Total Operating Expenses | 163,817 | 188,733 | 502,011 | 542,833 | ||||||||||||
Income (Loss) from Operations | 2,310 | (19,344 | ) | (6,512 | ) | (92,318 | ) | |||||||||
Net interest expense and other | 16,041 | 13,545 | 49,436 | 34,807 | ||||||||||||
Net Loss | (13,731 | ) | (32,889 | ) | (55,948 | ) | (127,125 | ) | ||||||||
Accreted and deemed dividends on Series A Convertible Preferred stock | 10,572 | 9,439 | 30,839 | 27,540 | ||||||||||||
Net Loss Attributable to Common Stockholders | $ | (24,303 | ) | $ | (42,328 | ) | $ | (86,787 | ) | $ | (154,665 | ) | ||||
Basic and Diluted Loss Per Common Share | $ | (0.13 | ) | $ | (0.38 | ) | $ | (0.48 | ) | $ | (1.43 | ) | ||||
Basic and Diluted Weighted Average Common Shares Outstanding(4) | 181,234,188 | 111,971,576 | 180,761,413 | 107,912,319 | ||||||||||||
(1) | Excludes $0.1 million of non-cash equity-based compensation for the three and nine months ended September 30, 2005 and less than $0.1 million and $0.1 million of non-cash equity-based compensation for the three and nine months ended September 30, 2004, respectively, which are reported separately; also excludes depreciation, amortization, and accretion reported separately. |
(2) | Excludes $0.4 million and $0.6 million of non-cash equity-based compensation for the three and nine months ended September 30, 2005, respectively, and $0.1 million and $10.8 million of non-cash equity-based compensation for the three and nine months ended September 30, 2004, respectively, which are reported separately. |
(3) | Includes $10.3 million of non-cash equity-based compensation relating to the vesting of certain Constellation Ventures performance warrants for the nine months ended September 30, 2004. |
(4) | As the effects of including the incremental shares associated with options, warrants, unvested restricted stock units, Series A Convertible Preferred stock, and Series B Convertible Preferred stock are anti-dilutive, they are not included in diluted weighted average common shares outstanding. Diluted common shares on an as converted basis were 606,252,560 and 570,483,473 as of September 30, 2005 and 2004, respectively. |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Nine Months Ended September 30, | ||||||||
2005 | 2004 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net loss | $ | (55,948 | ) | $ | (127,125 | ) | ||
Reconciliation of net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation, amortization, and accretion | 56,600 | 51,570 | ||||||
Non-cash portion of restructuring charges | (2,365 | ) | — | |||||
Non-cash equity-based compensation | 796 | 10,937 | ||||||
Accrued interest | 36,094 | 35,488 | ||||||
Write-off of deferred financing costs | 2,666 | — | ||||||
Net changes in operating assets and liabilities, net of effects from acquisition: | ||||||||
Trade accounts receivable | (3,820 | ) | (9,632 | ) | ||||
Prepaid expenses and other current and other non-current assets | (6,316 | ) | 7,481 | |||||
Payables and other trade accruals | 2,164 | (1,394 | ) | |||||
Other accrued liabilities | 1,718 | (2,344 | ) | |||||
Net cash provided by (used in) operating activities | 31,589 | (35,019 | ) | |||||
Cash Flows from Investing Activities: | ||||||||
Capital expenditures | (35,795 | ) | (24,084 | ) | ||||
Acquisition, net of cash received | — | (117,136 | ) | |||||
Other investing activities, net | (600 | ) | 1,944 | |||||
Net cash used in investing activities | (36,395 | ) | (139,276 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Payments under capital lease obligations | (53,807 | ) | (9,784 | ) | ||||
Proceeds from issuance of subordinated debt and associated warrants | — | 200,000 | ||||||
Proceeds from borrowings on revolving credit facility | 58,000 | — | ||||||
Net changes in restricted cash | — | 7,973 | ||||||
Other financing activities, net | (3,213 | ) | 1,262 | |||||
Net cash provided by financing activities | 980 | 199,451 | ||||||
Effect of exchange rate changes on cash and cash equivalents | (753 | ) | 69 | |||||
Net Increase (Decrease) in Cash and Cash Equivalents | (4,579 | ) | 25,225 | |||||
Cash and Cash Equivalents, Beginning of Period | 55,369 | 28,173 | ||||||
Cash and Cash Equivalents, End of Period | $ | 50,790 | $ | 53,398 | ||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash paid for interest | $ | 11,054 | $ | 245 | ||||
Non-cash Investing and Financing Activities: | ||||||||
Accreted and deemed dividends on Series A Convertible Preferred stock | $ | 30,839 | $ | 27,540 | ||||
Assets and obligations acquired under capital leases (Note 3) | $ | — | $ | 52,000 | ||||
Accrual of WAM!NET earn-out | $ | — | $ | 3,837 | ||||
Issuance of common stock for WAM!NET earn-out | $ | — | $ | 5,394 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(dollars in thousands)
Number of Shares Outstanding | ||||||||||||||||||||||||||||||||||||||
Series A Convertible Preferred Stock | Common Stock | Treasury Stock | Series A Convertible Preferred Stock | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Deferred Compensation | Treasury Stock | Accumulated Other Comprehensive Loss | Total Stockholders’ Deficit | ||||||||||||||||||||||||||||
Balance at December 31, 2004 | 202,490 | 180,361,264 | (31,301 | ) | $ | 272,137 | $ | 1,804 | $ | 384,847 | $ | (721,263 | ) | $ | (515 | ) | $ | (16 | ) | $ | (935 | ) | $ | (63,941 | ) | |||||||||||||
Net loss | — | — | — | — | — | — | (55,948 | ) | — | — | — | (55,948 | ) | |||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | — | — | — | — | (905 | ) | (905 | ) | |||||||||||||||||||||||||
Comprehensive loss | — | — | — | — | — | — | — | — | — | — | (56,853 | ) | ||||||||||||||||||||||||||
Deemed dividends on Series A Convertible Preferred stock | — | — | — | 30,839 | — | (30,839 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Beneficial conversion feature of deemed dividends on Series A Convertible Preferred stock | — | — | — | (6,416 | ) | — | 6,416 | — | — | — | — | — | ||||||||||||||||||||||||||
Issuance of common stock upon exercise of stock options | — | 1,061,671 | 31,301 | — | 11 | 667 | — | — | 16 | — | 694 | |||||||||||||||||||||||||||
Issuance of restricted stock and restricted stock units | — | 150,000 | — | — | 1 | 16,682 | — | (16,683 | ) | — | — | — | ||||||||||||||||||||||||||
Recognition of deferred compensation costs | — | — | — | — | — | (18 | ) | — | 814 | — | — | 796 | ||||||||||||||||||||||||||
Balance at September 30, 2005 | 202,490 | 181,572,935 | — | $ | 296,560 | $ | 1,816 | $ | 377,755 | $ | (777,211 | ) | $ | (16,384 | ) | $ | — | $ | (1,840 | ) | $ | (119,304 | ) | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data and where indicated)
NOTE 1—DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
SAVVIS, Inc., together with its subsidiaries (the Company), is a leading global provider of outsourced information technology services, delivering secure, reliable, and scalable hosting, network services, and digital content services. The Company’s strategic approach combines the use of virtualization technology, a utility services model, and an automated software management and provisioning system. This allows customers to focus on their core business while the Company ensures the quality of their IT infrastructure.
These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, under the rules and regulations of the U.S. Securities and Exchange Commission (the SEC), and on a basis substantially consistent with the audited consolidated financial statements of the Company as of and for the year ended December 31, 2004. Such audited financial statements are included in the Company’s Annual Report on Form 10-K (the Annual Report) filed with the SEC. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in the Annual Report.
The accompanying condensed consolidated financial statements are unaudited. In the opinion of management, such financial statements include all adjustments, which consist of only normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. All intercompany balances and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results for a full year or results that may be achieved in the future. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from such estimates and assumptions. Estimates used in the Company’s condensed consolidated financial statements include accruals for commercial disputes and billing errors by vendors, allowance for credits and uncollectibles, valuation of its Series A Subordinated Notes (the Subordinated Notes) and warrants, valuation of the fair value of certain liabilities assumed in the acquisition of Cable & Wireless USA, Inc. and Cable & Wireless Internet Services, Inc. (collectively, CWA—see Note 3), valuation of long-lived assets, and the valuation of intangible assets. In addition, certain amounts from prior periods have been reclassified to conform to current period presentation.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition and Allowance for Credits and Uncollectibles
The Company derives the majority of its revenue from recurring revenue streams, consisting primarily of managed IP VPN, hosting, other network services, and digital content services. Revenue from recurring revenue streams is billed monthly as services are provided. Installation fees, although generally billed upon installation, are deferred and recognized ratably over the estimated average life of a customer contract.
Revenue is recognized only when the related service has been provided and there is persuasive evidence of an arrangement, the fee is fixed and determinable, and collection is reasonably assured. It is customary business practice to obtain a signed master services agreement or sales order prior to recognizing revenue in an arrangement.
The Company occasionally guarantees certain service levels as outlined in individual customer contracts. To the extent that such service levels are not achieved, the Company estimates the amount of credits to be issued based on historical credits provided and known disputes and records a reduction to revenue and a corresponding increase in the allowance for credits and uncollectibles.
The Company assesses collectibility based on a number of factors, including customer transaction history and creditworthiness. The Company generally does not request collateral from its customers although in certain cases the Company obtains a security deposit. The Company maintains an allowance for uncollectibles and specifically analyzes accounts receivable, current economic conditions and trends, historical bad debt write-offs, customer concentrations, customer creditworthiness and changes in customer payment terms when evaluating revenue recognition and the adequacy of allowances. Delinquent account balances are written-off after management has determined that the likelihood of collection is not probable.
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Trade Accounts Receivable
The Company classifies as trade accounts receivable amounts owed to it within twelve months arising from the provision of services in the normal course of business.
Employee Stock Options
As permitted under Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” the Company accounts for employee stock options in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). Under APB 25, compensation expense is recognized based on the intrinsic value of equity instruments awarded as determined at the measurement date. Compensation expense related to option grants was $0.1 million and $0.4 million during the three and nine months ended September 30, 2005, respectively, and $0.2 million and $0.6 million during the three and nine months ended September 30, 2004, respectively.
Pro forma information regarding net loss and net loss per common share has been determined as if the Company had accounted for its stock options granted to employees and non-employee members of its Board of Directors using the fair value method prescribed by SFAS 123. The fair value of options was estimated at the date of grant utilizing the Black-Scholes option pricing model. For purposes of pro forma disclosures, the estimated fair value of the options is amortized on a straight-line basis over the applicable vesting periods. The following table presents what the Company’s pro forma net loss would have been had compensation cost for stock options been determined using the fair value method:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net loss attributable to common stockholders, as reported | $ | (24,303 | ) | $ | (42,328 | ) | $ | (86,787 | ) | $ | (154,665 | ) | ||||
Adjusted for: | ||||||||||||||||
Stock-based compensation expense(1) | 125 | 156 | 375 | 599 | ||||||||||||
Pro forma stock-based compensation expense | (1,593 | ) | (1,591 | ) | (5,015 | ) | (3,882 | ) | ||||||||
Pro forma net loss attributable to common stockholders | $ | (25,771 | ) | $ | (43,763 | ) | $ | (91,427 | ) | $ | (157,948 | ) | ||||
Basic and diluted net loss per common share: | ||||||||||||||||
As reported | $ | (0.13 | ) | $ | (0.38 | ) | $ | (0.48 | ) | $ | (1.43 | ) | ||||
Pro forma | $ | (0.14 | ) | $ | (0.39 | ) | $ | (0.51 | ) | $ | (1.46 | ) |
(1) | Excludes $10.3 million of non-cash equity-based compensation relating to the issuance of performance warrants to entities affiliated with Constellation Ventures for the nine months ended September 30, 2004. There was not any non-cash equity-based compensation relating to the issuance of performance warrants to entities affiliated with Constellation Ventures for the three months ended September 30, 2004. Also excludes $0.4 million of non-cash equity-based compensation relating to the issuance of restricted stock for the three and nine months ended September 30, 2005. |
Income Taxes
Income taxes are accounted for using the asset and liability method, which provides for the establishment of deferred tax assets and liabilities for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and for income tax purposes, applying the enacted statutory tax rates in effect for the years in which differences are expected to reverse. Valuation allowances are established when it is more likely than not the deferred tax assets will not be realized. The Company has provided a full valuation allowance on tax loss carryforwards and other potential tax benefits according to SFAS 109, “Accounting for Income Taxes,” because the future realization of the tax benefit is uncertain. As a result, to the extent that those benefits are realized in future periods, they will favorably affect net income. At September 30, 2005, the Company had approximately $515 million in net operating loss carryforwards scheduled to expire between 2009 and 2024, of which approximately $250 million is subject to the Section 382 limitation of the Internal Revenue Code, which limits the amount of net operating losses that the Company may deduct for income tax purposes.
Loss Per Common Share
All loss per common share amounts for all periods presented herein conform to the provisions of SFAS 128, “Earnings Per Share.” All stock options, warrants, and Series A Convertible Preferred shares outstanding have been excluded from the computations of diluted loss per share, as their effect would be anti-dilutive. Accordingly, there is no reconciliation between basic and diluted loss per common share for the periods presented.
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Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), “Share-Based Payment” (SFAS
123(R)), effective January 1, 2006, which is a revision of SFAS 123. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, restricted stock, and other stock-based instruments, to be recognized in the financial statements based on their fair values. As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using the intrinsic value method under APB 25 and, as such, only recognizes compensation cost for employee stock options to the extent that options have been issued with an exercise price below the fair market value of the Company’s common stock on the date of grant. Accordingly, the adoption of SFAS 123(R) will have an impact on the Company’s results of operations, although it will have no impact on its overall financial position. Based on employee stock options outstanding as of September 30, 2005, the Company estimates it will recognize $5.2 million in compensation cost for the year ended December 31, 2006. Had the Company adopted SFAS 123(R) in prior periods, the impact of adoption would have approximated the fair value disclosure of pro forma net loss and net loss per common share previously disclosed in the Company’s Quarterly and Annual Reports filed on Forms 10-Q and 10-K.
In March 2005, the SEC staff issued Staff Accounting Bulletin No. 107 (SAB 107), which expresses the SEC’s views regarding the interaction between SFAS 123(R) and certain SEC rules and regulations. SAB 107 also provides guidance related to, among other things, share-based payment transactions with non-employees, valuation methods and assumptions, classification of compensation expense, first-time adoption of SFAS 123(R) and related income tax effects, modification of existing employee stock options, and disclosures in SEC filings. The Company will apply the principles of SAB 107 in conjunction with its adoption of SFAS 123(R).
In March 2005, the FASB issued Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations,” that requires an entity to recognize a liability for a conditional asset retirement obligation when incurred if the liability can be reasonably estimated. FIN 47 clarifies that the term Conditional Asset Retirement Obligation refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Adoption of FIN 47 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
NOTE 3—CWA ACQUISITION
In January 2004, the Company signed a definitive agreement to purchase substantially all of the assets of CWA. CWA, wholly-owned by Cable & Wireless plc, provided a range of network and hosting services, including Internet access to a Tier 1 IP network, colocation, hosting and other value-added services such as managed security and content distribution. The transaction, following approval by the U.S. Bankruptcy Court and other federal regulatory agencies, closed on March 5, 2004. The operating results of CWA have been included in the Company’s results of operations from the closing date of the acquisition.
The total purchase price consisted of $155.0 million in cash, the assumption of certain liabilities and leases for certain data centers and other facilities, and the funding of CWA’s working capital losses from January 28, 2004 through March 5, 2004, which totaled $13.5 million. Additionally, the Company entered into an agreement to transfer its rights at closing to acquire four of the CWA data centers and one office facility to DuPont Fabros Interests LLC (DuPont Fabros) for $52.0 million paid directly to the CWA bankruptcy estate. The Company subsequently leased those facilities back from DuPont Fabros for 15 years. As a result, the total cash cost of the CWA acquisition was $116.5 million. DuPont Fabros subsequently sold the above mentioned leased facilities to Digital Realty Trust, L.P. in June 2005.
The acquisition has been accounted for as a purchase under SFAS 141, “Business Combinations.” The following table presents the allocation of purchase price to assets acquired and liabilities assumed:
Allocation of Purchase Price | ||||
Trade accounts receivable and other current assets | $ | 44,869 | ||
Property and equipment | 172,632 | |||
Intangible assets | 11,399 | |||
Other non-current assets | 3,565 | |||
Trade accounts payable and other current liabilities | (68,801 | ) | ||
Capital lease obligations | (1,756 | ) | ||
Other long-term liabilities | (45,431 | ) | ||
Total purchase price | $ | 116,477 | ||
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The estimated fair value of net assets acquired exceeded the acquisition cost. Therefore, in accordance with SFAS 141, the excess value over the acquisition cost has been allocated as a pro rata reduction of acquired property and equipment and intangible assets.
Certain amounts reflected in the purchase price allocation represent the Company’s estimate of fair value of liabilities relating to contractual agreements. Additionally, the liabilities assumed by the Company include adjustments to properly reflect the fair market value of long-term facility leases totaling $11.3 million; idle capacity related to a long-term indefeasible right of use (IRU), maintenance and power contract totaling $16.3 million; idle capacity of certain leased facilities totaling $15.3 million; and the obligation to rehabilitate leased facilities with varying termination dates totaling $16.5 million. The fair value of the long-term facility leases was calculated considering the difference between fair market rents and contractually required rents. The idle capacity of certain leased facilities was determined based on discounted future cash flows of such facilities. Contracts have been reflected at their fair market value of the services to be provided at the time of the acquisition, in addition to any inherited purchase commitments the combined entity does not plan to utilize. The asset retirement obligation liability was calculated and recorded at the present value of expected future payments required to restore certain leased facilities to original condition.
The Company recorded $6.6 million of involuntary employee termination costs in the opening balance sheet as a liability and paid $1.3 million and $3.9 million in severance payments during the nine months ended September 30, 2005 and 2004, respectively. As of September 30, 2005, the Company has paid all involuntary employee termination costs. In total, approximately 300 employees have been terminated in various departments.
The table which follows presents unaudited pro forma combined results of operations of the Company and CWA, as if the acquisition had occurred as of January 1, 2004, giving effect to certain adjustments, including depreciation, accretion, interest, the issuance of Series B Convertible Preferred stock (Series B Preferred), and the issuance of additional debt. The Company believes that actual results of the combined business would differ if CWA had been under the Company’s management during that time.
Nine Months Ended September 30, | ||||||||
2005 | 2004 | |||||||
Actual | Pro Forma | |||||||
Revenue | $ | 495,499 | $ | 513,022 | ||||
Net loss | (55,948 | ) | (152,715 | ) | ||||
Basic and diluted net loss per common share | (0.48 | ) | (1.67 | ) |
NOTE 4—PROPERTY AND EQUIPMENT
Communications and data center equipment, office equipment, and other equipment is recorded at cost and depreciated using the straight-line method over estimated useful lives ranging from three to fifteen years. Facilities and leasehold improvements are amortized over the shorter of their estimated useful lives or the initial term of the related lease, ranging from two to fifteen years. The following table presents property and equipment, by major category, as of September 30, 2005, and December 31, 2004:
Useful | September 30, 2005 | December 31, 2004 | ||||||||
Communications and data center equipment | 5 – 15 | $ | 390,604 | $ | 374,765 | |||||
Facilities and leasehold improvements | 2 – 15 | 146,878 | 146,678 | |||||||
Office equipment and other | 3 – 7 | 44,137 | 37,206 | |||||||
581,619 | 558,649 | |||||||||
Less accumulated depreciation and amortization | (337,884 | ) | (294,107 | ) | ||||||
Property and equipment, net | $ | 243,735 | $ | 264,542 | ||||||
Depreciation expense was $13.6 million and $39.9 million for the three and nine months ended September 30, 2005, respectively. Depreciation expense was $14.0 million and $36.3 million for the three and nine months ended September 30, 2004, respectively. Amortization expense for equipment and facilities held under capital lease was $2.1 million and $6.3 million for the three and nine months ended September 30, 2005, respectively. Amortization expense for equipment and facilities held under capital lease was $2.1 million and $6.1 million for the three and nine months ended September 30, 2004, respectively.
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NOTE 5—INTANGIBLE ASSETS
The Company accounts for identified intangible assets acquired in accordance with SFAS 142, “Goodwill and Other Intangible Assets,” and SFAS 141. The Company’s intangible assets were acquired and, as such, were recorded at estimated fair value. Identifiable intangible assets primarily include customer relationships, trademarks, patents, and peering agreements. Useful lives of these specifically identified intangible assets are: five years for trademarks; eleven to fifteen years for patents; three to four years for customer relationships; and seven years for peering agreements. The following table presents intangible assets as of September 30, 2005 and December 31, 2004:
Weighted Average Amortization Period (in years) | Useful Lives (in years) | September 30, 2005 | December 31, 2004 | |||||||||
Intangible assets: | ||||||||||||
Customer relationships | 3.4 | 3-4 | $ | 13,160 | $ | 14,073 | ||||||
Other intangible assets | 6.7 | 5-15 | 5,550 | 6,343 | ||||||||
Subtotal | 4.4 | 18,710 | 20,416 | |||||||||
Less accumulated amortization: | ||||||||||||
Customer relationships | (7,629 | ) | (4,565 | ) | ||||||||
Other intangible assets | (1,305 | ) | (633 | ) | ||||||||
Subtotal | (8,934 | ) | (5,198 | ) | ||||||||
Intangible assets, net | $ | 9,776 | $ | 15,218 | ||||||||
Amortization expense for intangible assets was $1.2 million and $3.7 million for the three and nine months ended September 30, 2005, respectively, and $1.3 million and $3.3 million for the three and nine months ended September 30, 2004, respectively.
NOTE 6—LONG-TERM DEBT
The following table presents long-term debt as of September 30, 2005 and December 31, 2004:
September 30, 2005 | December 31, 2004 | |||||||
Proceeds from issuance of the Subordinated Notes | $ | 200,000 | $ | 200,000 | ||||
Adjustment for the valuation of warrants issued for Series B Preferred (original issue discount) | (65,872 | ) | (65,872 | ) | ||||
Adjusted value of the Subordinated Notes | 134,128 | 134,128 | ||||||
Accrued interest on the Subordinated Notes | 51,982 | 26,791 | ||||||
Accretion of the original issue discount | 19,152 | 10,132 | ||||||
Balance of the Subordinated Notes | 205,262 | 171,051 | ||||||
Revolving Credit Facility | 58,000 | — | ||||||
Total long-term debt | $ | 263,262 | $ | 171,051 | ||||
Revolving Credit Facility
On June 10, 2005, the Company and certain of its subsidiaries entered into a credit agreement with Wells Fargo Foothill, Inc., as arranger and administrative agent, and certain other lenders to provide the Company with an $85.0 million revolving credit facility (the Revolving Facility), which includes a $15.0 million letter of credit facility. The Revolving Facility may be used for working capital and other general corporate purposes. A portion of the proceeds from the Revolving Facility were used to fully retire $53.9 million in outstanding principal and accrued interest under the Company’s master lease agreement with General Electric Capital Corporation (GECC), achieving more favorable borrowing rates and a longer borrowing term. In conjunction with the repayment of the GECC master lease, $2.7 million of previously deferred financing costs were written off to interest expense. In addition, $3.8 million of the proceeds were used to pay fees and expenses associated with the Revolving Facility, which were recorded as other current and other non-current assets in the accompanying condensed consolidated balance sheet as of September 30, 2005 and are being amortized over the term of the Revolving Facility. The Revolving Facility matures, and all outstanding borrowings and unpaid interest are due, on December 9, 2008. In addition, all outstanding borrowings are subject to mandatory prepayment upon certain events, including the
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availability of less than $7.0 million in borrowing capacity and qualified cash balances, as defined by the Revolving Facility. As of September 30, 2005, the $85.0 million Revolving Facility included outstanding principal of $58.0 million, outstanding letters of credit of $11.9 million (see Note 10), and unused availability of $15.1 million. The Company may terminate the Revolving Facility prior to maturity, provided that the Company pays a premium of 2.0% of the revolver amount if terminated during the first 12 months of the Revolving Facility term, a premium of 0.5% of the revolver amount if terminated during the 12 months thereafter, and no premium during the remainder of the term.
The Revolving Facility contains affirmative covenants, negative covenants, and financial covenants that are more favorable than those under the master lease agreement with GECC. The negative covenants place restrictions on, among other things, levels of investments, indebtedness, and dividend payments that the Company may make or incur. The financial covenants, which apply only if the Company maintains qualified cash and availability of less than $35.0 million, require the maintenance of certain financial ratios at defined levels. Under the Revolving Facility, borrowings bear interest at a base LIBOR rate of one to six months plus an additional 2.75% to 3.25%, determined by certain financial ratios, with a minimum interest rate at all times of 5.25%. As of September 30, 2005, the Revolving Facility bears interest at 7.02% based on the six-month LIBOR set in August 2005 of 4.02%. The six-month LIBOR was 4.29% as of September 30, 2005. Interest is payable at varying dates, as outlined in the Revolving Facility agreement, generally every one to three months. Unused commitments on the Revolving Facility are subject to a 0.5% annual commitment fee. The Revolving Facility is secured by substantially all of the Company’s domestic properties and assets. The carrying amount of the Company’s obligations under the Revolving Facility approximate fair value because the interest rates are based on floating interest rates identified by reference to market rates.
Subordinated Notes
In the first quarter of 2004, the Company issued $200.0 million of Subordinated Notes. The proceeds were used to fund the CWA acquisition and related operational, working capital, and capital expenditure requirements. Debt issuance costs associated with the Subordinated Notes were $2.0 million, consisting of fees paid to the purchasers of the Subordinated Notes, which were capitalized in other non-current assets and are being amortized to interest expense using the effective interest method until maturity. The Subordinated Notes accrue interest based on a 365-day year at a rate of 12.5% per annum until February 3, 2005 and 15% per annum thereafter, payable in kind semi-annually on June 30 and December 31 through the issuance of additional Subordinated Notes equal to the accrued interest payable at the time of settlement. Among other requirements, the provisions of the Subordinated Notes include an early redemption feature, a make-whole premium and a change of control clause. Upon a change of control, the holders of the Subordinated Notes have the right to require the Company to redeem any or all of the Subordinated Notes at a cash price equal to 100% of the principal amount of the Subordinated Notes, plus all accrued and unpaid interest as of the effective date of such change in control. The Subordinated Notes mature in a single installment on February 9, 2009.
Warrants immediately exercisable for Series B Preferred were issued with the Subordinated Notes. The $200.0 million in proceeds from issuance were allocated between the Subordinated Notes and the warrants for Series B Preferred, based on their relative fair values, resulting in an original issue discount of $65.9 million. The allocated value of the Subordinated Notes at date of issuance, plus accrued interest on the face value and accreted interest on the original issue discount, are reflected as long-term debt in the accompanying condensed consolidated balance sheets. The fair value of the Series B Preferred was determined with the assistance of an independent third-party valuation firm. The allocated fair value of the warrants for Series B Preferred is reflected in additional paid-in capital in stockholders’ deficit in the accompanying condensed consolidated balance sheets. The purchasers of the Subordinated Notes exercised their warrants immediately upon closing for shares of Series B Preferred, which were subsequently converted into shares of the Company’s common stock in December 2004. The outstanding principal and payable in kind interest of the Subordinated Notes, excluding the original issue discount, was $248.1 million and $223.0 million as of September 30, 2005 and December 31, 2004, respectively.
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Debt Covenants
The provisions of the Company’s Revolving Facility and Subordinated Notes contain a number of covenants that could restrict or limit the Company’s ability to:
• | incur more debt; |
• | pay dividends, subject to financial ratios and other conditions; |
• | make other distributions; |
• | issue stock of subsidiaries; |
• | make investments or acquisitions; |
• | repurchase stock; |
• | create subsidiaries; |
• | create liens; |
• | enter into transactions with affiliates; |
• | merge or consolidate; and |
• | transfer and sell assets. |
The ability to comply with these provisions may be affected by events beyond the Company’s control. The breach of any of these covenants could result in a default under the Company’s debt agreements and could trigger acceleration of repayment. Any default under such agreements might adversely affect the Company’s growth, financial condition, results of operations and the ability to make payments on indebtedness or meet other obligations. As of and during the nine months ended September 30, 2005 and 2004, the Company was in compliance with all covenants under the Revolving Facility and Subordinated Notes, as applicable.
Future Principal Payments
As of September 30, 2005, aggregate future principal payments of long-term debt are zero in each of the years 2005, 2006, and 2007 and $58.0 million in 2008 and $401.9 million in 2009, consisting of $200.0 million in principal and $201.9 million of accrued paid in kind interest, with no payments thereafter. The weighted average interest rate applicable to the Company’s outstanding borrowings under the Revolving Facility and Subordinated Notes was 12.85% as of September 30, 2005 and 14.50% as of December 31, 2004.
NOTE 7—CAPITAL LEASE OBLIGATIONS
The following table presents future minimum lease payments under capital leases as of September 30, 2005 and December 31, 2004:
September 30, 2005 | December 31, 2004 | |||||||
Remainder of 2005 | $ | 2,952 | $ | 15,858 | ||||
2006 | 10,462 | 17,002 | ||||||
2007 | 10,777 | 66,249 | ||||||
2008 | 10,984 | 10,987 | ||||||
2009 | 11,304 | 11,307 | ||||||
Thereafter | 120,735 | 120,774 | ||||||
Total capital lease obligations | 167,214 | 242,177 | ||||||
Less amount representing interest | (107,055 | ) | (128,143 | ) | ||||
Less current portion | (483 | ) | (505 | ) | ||||
Capital lease obligations, net of current portion | $ | 59,676 | $ | 113,529 | ||||
As described in Note 6, in June 2005, the Company fully repaid $53.9 million in outstanding principal and accrued interest under the Company’s master lease agreement with GECC.
NOTE 8—RESTRUCTURING CHARGES
In June 2005, the Company recorded restructuring charges related to the termination of a naming rights agreement for use of the Company’s name on a sports and entertainment arena in St. Louis, Missouri. In connection with the termination of the naming rights agreement, the Company paid $5.5 million in cash and wrote off a $1.6 million naming rights asset, both of which were recorded as restructuring charges in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2005. Termination of the naming rights agreement relieved the Company of $62.1 million in future cash obligations through June 2020. No further costs or obligations exist relative to the terminated naming rights agreement.
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Also in June 2005, the Company terminated an operating lease relating to unutilized space for which a restructuring liability had previously been established for the net present value of future minimum lease payments. In connection with the termination of the lease, the Company paid $2.0 million in cash, which was recorded as a reduction of the existing restructuring liability included in non-current other accrued liabilities. The remaining restructuring liability balance of $3.9 million was reversed through restructuring charges in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2005. Termination of the operating lease relieved the Company of $5.8 million in future cash obligations through March 2011. No further costs or obligations exist relative to the terminated operating lease.
NOTE 9—OTHER ACCRUED LIABILITIES
The following table presents the components of other accrued liabilities as of September 30, 2005 and December 31, 2004:
September 30, 2005 | December 31, 2004 | |||||
Current other accrued liabilities: | ||||||
Wages, employee benefits, and related taxes | $ | 20,457 | $ | 17,786 | ||
Deferred revenue | 12,833 | 9,267 | ||||
Acquired contractual obligations in excess of fair value and other | 8,454 | 9,995 | ||||
Other current liabilities | 31,212 | 29,102 | ||||
Total current other accrued liabilities | $ | 72,957 | $ | 66,150 | ||
Non-current other accrued liabilities: | ||||||
Deferred revenue | $ | 2,767 | $ | 2,201 | ||
Acquired contractual obligations in excess of fair value and other | 18,055 | 31,917 | ||||
Asset retirement obligation | 21,162 | 19,157 | ||||
Other non-current liabilities | 14,082 | 15,331 | ||||
Total non-current other accrued liabilities | $ | 56,066 | $ | 68,606 | ||
NOTE 10—COMMITMENTS AND CONTINGENCIES
The Company’s customer contracts generally span multiple periods, which result in the Company entering into arrangements with various suppliers of communications services that require the Company to maintain minimum spending levels, some of which increase over time, to secure favorable pricing terms. The Company’s remaining aggregate minimum spending levels, allocated ratably over the terms of such contracts, are $18.0 million, $36.7 million, $12.9 million, and $1.1 million in years 2005, 2006, 2007, and thereafter, respectively. Should the Company not meet the minimum spending levels in any given term, decreasing termination liabilities representing a percentage of the remaining contracted amount may become immediately due and payable. Furthermore, certain of these termination liabilities are subject to reduction should the Company experience the loss of a major customer or suffer a loss of revenue from a general economic downturn. Before considering the effects of any potential reductions for the business downturn provisions, if the Company had terminated all of these agreements as of September 30, 2005, the maximum liability would have been $35.1 million.
In the normal course of business, the Company is a party to certain guarantees and financial instruments with off-balance sheet risk, such as letters of credit and indemnifications, which are not reflected in its consolidated balance sheets. The agreements associated with such guarantees and financial instruments mature at various dates through July 2017 and may be renewed as circumstances warrant. As of September 30, 2005, the Company had $11.9 million in letters of credit pledged as collateral to support various property leases and utilities. In addition, certain of the operating leases assumed by the Company in the CWA acquisition were collateralized by Cable & Wireless plc with letters of credit and guarantees. Such collateral remained in place following the acquisition, and the Company agreed to reimburse Cable & Wireless plc for any payments made under the collateral. Such collateral totals $15.1 million and will be replaced by the Company on or before July 2007. The Company’s financial instruments are valued based on the amount of exposure under the instruments and the likelihood of performance being required. In management’s past experience, no claims have been made against these financial instruments nor does it expect the exposure to material losses resulting therefrom to be anything other than remote. As a result, the Company determined such financial instruments do not have significant value and has not recorded any related amounts in its condensed consolidated financial statements.
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The Company is lessee under a number of equipment and property leases. It is common in such commercial lease transactions for the lessee to agree to indemnify the lessor for the value of the property or equipment leased should it be damaged during the course of operations. Except as otherwise recorded and described herein, the Company expects that any losses that may occur with respect to its leased facilities would be covered by insurance, subject to deductible amounts, and has not recorded any related amounts in its condensed consolidated financial statements.
The Company is subject to various legal proceedings and other actions arising in the normal course of 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 consolidated financial position, results of operations or cash flows.
The Company has employment agreements with key executive officers that contain provisions with regard to base salary, bonus, stock options, and other employee benefits. These agreements also provide for severance benefits in the event of employment termination or a change in control of the Company.
NOTE 11—STOCKHOLDERS’ EQUITY
Restricted Stock Units
In the third quarter of 2005, the Compensation Committee of the Company’s Board of Directors granted 19.9 million restricted common stock units (RSUs), of which 1.5 million were subsequently forfeited when a recipient terminated employment with the Company, governed by the terms of the 2003 Incentive Compensation Plan (the Plan). No cash consideration will be received by the Company for the RSUs. RSUs issued under the Plan are subject to the recipient’s continued employment by the Company and vesting conditions based on the Company’s achievement of financial performance targets or otherwise over a period of up to four years. If the Company fails to achieve the performance targets and the recipient is still employed by the Company, any unvested RSUs shall become fully vested on the fourth anniversary of the date of grant. RSUs represent common stock but do not give the recipient any actual ownership interest in the Company’s common stock, such as voting rights or the right to receive dividends, until vested and shares of common stock are delivered to the recipient. The Company recorded $16.5 million of deferred compensation in conjunction with the grant of the RSUs, excluding the aforementioned 1.5 million forfeited RSUs, representing the fair value of the RSUs on the date of grant. Deferred compensation is being amortized on a straight-line basis and recognized as non-cash equity-based compensation over the requisite service period and was $0.4 million for the three and nine months ended September 30, 2005. If the Company achieves its performance targets, non-cash equity-based compensation will be accelerated to ensure that the amount of non-cash equity-based compensation recorded is reflective of the vested RSUs.
Restricted Stock Awards
In the first quarter of 2005, the Compensation Committee of the Company’s Board of Directors granted 0.2 million shares of restricted common stock (RSAs), governed by the terms of the Plan. The related RSA agreements provide for the issuance of nonvested RSAs to certain nonemployee members of the Company’s Board of Directors. RSAs issued under the Plan vest ratably on the anniversary of the grant date over a period of three years based on the recipient’s continued service to the Company. RSAs provide the recipient on the grant date with actual ownership interests in the common stock such as voting rights and the right to receive dividends. The Company recorded $0.1 million of deferred compensation in conjunction with the grant of the RSAs, representing the fair value of the RSAs on the date of grant. Deferred compensation is being amortized on a straight-line basis and recognized as non-cash equity-based compensation over the three-year vesting period and was less than $0.1 million for the three and nine months ended September 30, 2005.
NOTE 12—COMPREHENSIVE LOSS
The following table presents comprehensive loss for the periods indicated:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net loss | $ | (13,731 | ) | $ | (32,889 | ) | $ | (55,948 | ) | $ | (127,125 | ) | ||||
Foreign currency translation adjustments | (194 | ) | (82 | ) | (905 | ) | 316 | |||||||||
Comprehensive loss | $ | (13,925 | ) | $ | (32,971 | ) | $ | (56,853 | ) | $ | (126,809 | ) | ||||
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NOTE 13—INDUSTRY SEGMENT AND GEOGRAPHIC REPORTING
The Company conducts business in one reportable segment but its operations are organized by three geographic regions: Americas, Europe and Asia. Each geographic region provides outsourced managed network, hosting, and application services to businesses in the legal, media, retail, professional services, health care, manufacturing, and financial services industries. The Company evaluates the performance of its regions and allocates resources to them based primarily on revenue. Selected financial information for the Company’s geographic regions as of and for the three and nine months ended September 30, 2005 and 2004 is presented below. For the three months ended September 30, 2005 and 2004, revenue earned in the U.S. represented approximately 82% and 83% of total revenue, respectively, and for the nine months ended September 30, 2005 and 2004, the comparable percentage of U.S. revenue to total revenue was 82%.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||
Revenue: | ||||||||||||
Americas | $ | 136,216 | $ | 140,478 | $ | 408,210 | $ | 367,800 | ||||
Europe | 18,921 | 17,262 | 54,538 | 47,021 | ||||||||
Asia | 10,990 | 11,649 | 32,751 | 35,694 | ||||||||
Total revenue | $ | 166,127 | $ | 169,389 | $ | 495,499 | $ | 450,515 | ||||
September 30, 2005 | December 31, 2004 | |||||||||||
Property and equipment, net (end of period): | ||||||||||||
Americas | $ | 234,120 | $ | 256,369 | ||||||||
Europe | 7,766 | 6,558 | ||||||||||
Asia | 1,849 | 1,615 | ||||||||||
Total property and equipment, net | $ | 243,735 | $ | 264,542 | ||||||||
Revenue from our largest customer, Reuters, comprised 15% of total revenue for the three and nine months ended September 30, 2005.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion in conjunction with our accompanying unaudited condensed consolidated financial statements and notes thereto, and 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, 2004, included in our Annual Report on Form 10-K for such period as filed with the U.S. 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 2004 Annual Report on Form 10-K.
EXECUTIVE SUMMARY
SAVVIS is a leading global provider of outsourced information technology services, delivering secure, reliable, and scalable hosting services, network services, and digital content services. Our strategic approach combines the use of virtualization technology, a utility services model, and an automated software management and provisioning system. This allows customers to focus on their core business while we ensure the quality of their IT infrastructure.
Services
Although we conduct business in one operating segment, separated by geographic location, the following information briefly describes our services by major revenue category:
Managed IP VPN
Our managed IP VPN services, called Intelligent IPSM networking, is a high performance network platform for managed voice, video, and data applications.
Hosting
Hosting services represent managed hosting solutions which combine hosting network, computing and storage services to provide customers with application platforms that deliver better performance, higher availability and lower total cost than traditional service provider models. Hosting also represents security services, colocation, storage, monitoring and professional services.
Other Network Services
Our other network services are comprised of Internet access, managed voice services, private line services and layer-2 VPNs. These services can be purchased individually or in combination with our other services.
Digital Content Services
Digital content services include our WAM!NET services, digital media services and Content Delivery Network (CDN) services. Our WAM!NET services are custom designed for the media industry and provide a shared-managed infrastructure tied to applications that streamline process and workflow around the creation, production and distribution of digital content. Our CDN services enable customers to distribute their web content easily, rapidly and reliably to end-users from a global network of servers.
Our industry solutions and professional services combine the services described above, and revenue from such services is recorded in each of their respective categories.
Business Trends
We expect competitive factors in our industry to continue to affect the prices for our services and our results of operations. Prices for telecommunications services, including the services we offer, have decreased significantly over the past several years, and we expect continued decreases for the foreseeable future. To some extent, the impact of lower prices that we charge our customers has been offset by lower costs incurred to provide services. Price pressure, however, varies by product, with unmanaged bandwidth services experiencing significant price pressure. In contrast, managed IP VPN services have experienced more stable pricing, and we believe these services will continue to maintain stability as we provide more value-added services to customers. Historically, pricing in the colocation portion of our hosting business has been decreasing; however, pricing is beginning to stabilize in certain markets. We believe this is a result of limited capacity in state-of-the-art data centers.
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We have addressed industry-wide price competition and price decreases by broadening the range of services that we offer. In 2004, we began offering CDN services, colocation services, carrier wholesale services, consulting services, and an expanded portfolio of managed security services as a result of our acquisition of the assets of Cable & Wireless USA, Inc. and Cable & Wireless Internet Services, Inc. (collectively referred to herein as CWA). We also introduced our suite of virtual utility managed services, our industry solutions services such as “Retail Avenue,” a suite of IT solutions targeted at the retail industry, and managed utility applications, such as our Intelligent Messaging.
The addition of CWA’s IP network and hosting assets to our existing IP network and hosting business enabled us to expand the range of our existing IP network services, consulting and infrastructure services.
In evaluating our financial results and the performance of our business, our management reviews, among other information, our revenue, gross profit, gross margin, and income (loss) from operations. The following table presents a quarterly overview of these indicators for the periods indicated (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||
September 30, 2005 | June 30, 2005 | March 31, 2005 | December 31, 2004 | September 30, 2004 | September 30, 2005 | September 30, 2004 | ||||||||||||||||||||||
Revenue | $ | 166,127 | $ | 167,200 | $ | 162,172 | $ | 166,308 | $ | 169,389 | $ | 495,499 | $ | 450,515 | ||||||||||||||
Gross profit(1) | 59,211 | 58,566 | 53,109 | 55,447 | 49,573 | 170,876 | 123,413 | |||||||||||||||||||||
Gross margin(2) | 36 | % | 35 | % | 33 | % | 33 | % | 29 | % | 34 | % | 27 | % | ||||||||||||||
Income (loss) from operations | 2,310 | (3,502 | ) | (5,320 | ) | (4,131 | ) | (19,344 | ) | (6,512 | ) | (92,318 | ) |
(1) | Gross profit is total revenue less cost of revenue, which excludes depreciation, amortization, and accretion. |
(2) | Represents gross profit, as defined above, as a percentage of revenue. |
Revenue
Prior to our acquisition of CWA in March 2004, we were heavily dependent on our largest customer, Reuters, which comprised 54% of total revenue during 2003. Most of our remaining revenue was generated from our managed IP VPN services. However, after we acquired CWA, our revenue profile changed significantly. Reuters revenue comprised only 15% of total revenue for the three and nine months ended September 30, 2005. Moreover, the acquisition increased our revenue from hosting services, which represented 45% of total revenue for the three months ended September 30, 2005 and 43% of total revenue for the nine months ended September 30, 2005, compared to 38% of total revenue for the three months ended September 30, 2004 and 35% of total revenue for the nine months ended September 30, 2004.
Our revenue grew by 10% during the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004. As described further below, much of this growth is attributable to the acquisition of CWA. For the third quarter of 2005, our revenue decreased 1% sequentially compared to the second quarter of 2005. This was due primarily to decreases in revenue from other network services of $1.6 million, digital content services $1.1 million, and Reuters of $2.1 million, partially offset by increases in revenue from hosting of $2.9 million and managed IP VPN of $0.9 million. Decreases in revenue of other network services continue to relate to unmanaged bandwidth pricing pressures in the market. We expect such revenue will continue to decline in 2005, but at a slower rate than in 2004.
In June 2005, Reuters announced that it completed its acquisition of Telerate for cash and all of our Series A Convertible Preferred stock owned by Reuters, which represented approximately 14% of our outstanding voting stock. In the first quarter of 2005, Reuters also announced it signed a long-term agreement for the provision of network services with a competing telecommunications provider. In the second quarter of 2005, we signed a new three-year contract with Reuters to continue providing network delivery of Reuters’ market data services worldwide and to create the opportunity for us to provide to Reuters a broad array of additional services. As a result of the new agreement, we reduced pricing for certain Reuters services and eliminated existing contractual minimum amounts. Accordingly, we expect revenue from Reuters to continue to decline in the fourth quarter of 2005 from the previous year and contribute approximately 13-14% of our total annual revenue in 2005.
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Gross Profit and Gross Margin
We use gross profit and gross margin to evaluate our business. Gross profit, defined as revenue less cost of revenue but excluding depreciation, amortization, and accretion, was $59.2 million for the three months ended September 30, 2005, an increase of $9.6 million, or 19%, from $49.6 million for the three months ended September 30, 2004. Gross profit was $170.9 million for the nine months ended September 30, 2005, an increase of $47.5 million, or 38%, from $123.4 million for the nine months ended September 30, 2004. The improvement of gross profit throughout 2004 and the first three quarters of 2005 reflects our efforts to rationalize network operations, reduce our fixed network cost, and reduce our service cost of our hosting data centers as a result of the synergies from the CWA acquisition. As a result, gross margin, defined as gross profit as a percentage of revenue, was 36% for the three months ended September 30, 2005 compared to 29% for the three months ended September 30, 2004, and 34% for the nine months ended September 30, 2005 compared to 27% for the nine months ended September 30, 2004.
Income (Loss) from Operations
Income from operations for the three months ended September 30, 2005 was $2.3 million, an improvement of $21.6 million, or 112%, compared to a loss from operations of $19.3 million for the three months ended September 30, 2004. The improvement was primarily driven by reductions in the following areas: cost of revenue of $12.9 million; sales, general, and administrative expenses of $7.2 million; depreciation, amortization, and accretion of $1.5 million; and integration costs of $3.7 million. This improvement was partially offset by a $3.3 million decrease in revenue and the addition of $0.4 million in non-cash equity-based compensation. Loss from operations for the nine months ended September 30, 2005 was $6.5 million, an improvement of $85.8 million, or 93%, compared to $92.3 million for the nine months ended September 30, 2004. This improvement was primarily driven by an increase in revenue of $45.0 million and reductions in the following areas: sales, general, and administrative expenses of $13.5 million; integration costs of $23.0 million; and non-cash equity-based compensation of $10.1 million. This improvement was partially offset by increases in depreciation, amortization, and accretion of $5.0 million and the addition of net restructuring charges of $3.3 million.
SIGNIFICANT TRANSACTIONS
Restructuring Charges
In June 2005, we recorded restructuring charges related to the termination of a naming rights agreement for use of our name on a sports and entertainment arena in St. Louis, Missouri. In connection with the termination of the naming rights agreement, we paid $5.5 million in cash and wrote off a $1.6 million naming rights asset, both of which were recorded as restructuring charges in our condensed consolidated statement of operations for the nine months ended September 30, 2005. Termination of the naming rights agreement relieved us of $62.1 million in future cash obligations through June 2020. No further costs or obligations exist relative to the terminated naming rights agreement.
Also in June 2005, we terminated an operating lease relating to unutilized space for which a restructuring liability had previously been established for the net present value of future minimum lease payments. In connection with the termination of the lease, we paid $2.0 million in cash, which was recorded as a reduction of the existing restructuring liability included in noncurrent other accrued liabilities. The remaining restructuring liability balance of $3.9 million was reversed through restructuring charges in our condensed consolidated statement of operations for the nine months ended September 30, 2005. Termination of the operating lease relieved us of $5.8 million in future cash obligations through March 2011. No further costs or obligations exist relative to the terminated operating lease.
Restricted Stock Units
In the third quarter of 2005, the Compensation Committee of our Board of Directors granted 19.9 million restricted common stock units (RSUs), of which 1.5 million were subsequently forfeited when a recipient terminated employment with us, governed by the terms of the 2003 Incentive Compensation Plan (the Plan). No cash consideration will be received by us for the RSUs. RSUs issued under the Plan are subject to the recipient’s continued employment with us and vesting conditions based on our achievement of financial performance targets or otherwise over a period of up to four years. If we fail to achieve the performance targets and the recipient is still employed by us, any unvested RSUs shall become fully vested on the fourth anniversary of the date of grant. RSUs represent common stock but do not give the recipient any actual ownership interest in our common stock, such as voting rights or the right to receive dividends, until vested and shares of common stock are delivered to the recipient. We recorded $16.5 million of deferred compensation in conjunction with the grant of the RSUs, excluding the aforementioned 1.5 million RSUs forfeited, representing the fair value of the RSUs on the date of grant. Deferred compensation is being amortized on a straight-line basis and recognized as non-cash equity-based compensation over the requisite service period and was $0.4 million for the three and nine months ended September 30, 2005.
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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 September 30, 2005 Compared to the Three Months Ended September 30, 2004
Executive Summary of Results of Operations
Revenue decreased $3.3 million, or 2%, for the three months ended September 30, 2005 compared to the three months ended September 30, 2004, primarily as a result of declines in other network services, digital content services, and Reuters revenue, partially offset by increases in managed IP VPN and hosting. Income from operations improved $21.7 million, or 112%, for the three months ended September 30, 2005 compared to the three months ended September 30, 2004, primarily as a result of reductions in the following areas: cost of revenue of $12.9 million; sales, general, and administrative expenses of $7.2 million; depreciation, amortization, and accretion of $1.5 million; and integration costs of $3.7 million. This improvement was partially offset by a $3.3 million decline in revenue and the addition of $0.4 million in non-cash equity-based compensation. Net loss improved $19.2 million, or 58%, for the three months ended September 30, 2005 compared to the three months ended September 30, 2004, as a result of the factors previously described.
Revenue.The following table presents diversified revenue by major category and revenue from our largest customer:
Three months ended September 30, | |||||||||||||
(dollars in thousands) | 2005 | 2004 | Dollar Change | Percent Change | |||||||||
Diversified Revenue: | |||||||||||||
Managed IP VPN | $ | 28,321 | $ | 22,582 | $ | 5,739 | 25 | % | |||||
Hosting | 74,590 | 63,639 | 10,951 | 17 | % | ||||||||
Other Network Services | 28,654 | 38,424 | (9,770 | ) | (25 | )% | |||||||
Digital Content Services | 10,260 | 14,081 | (3,821 | ) | (27 | )% | |||||||
Total Diversified Revenue | 141,825 | 138,726 | 3,099 | 2 | % | ||||||||
Reuters | 24,302 | 30,663 | (6,361 | ) | (21 | )% | |||||||
Total Revenue | $ | 166,127 | $ | 169,389 | $ | (3,262 | ) | (2 | )% | ||||
Revenue was $166.1 million for the three months ended September 30, 2005, a decrease of $3.3 million, or 2%, from $169.4 million for the three months ended September 30, 2004. Diversified managed IP VPN revenue was $28.3 million for the three months ended September 30, 2005, an increase of $5.7 million, or 25%, from $22.6 million for the three months ended September 30, 2004. This increase was mainly attributed to new sales activity and growth in existing services. Diversified hosting revenue was $74.6 million for the three months ended September 30, 2005, an increase of $11.0 million, or 17%, from $63.6 million for the three months ended September 30, 2004. The increase was due primarily to growth in existing services, stabilized pricing, and lower customer churn. Other network services includes the legacy and CWA internet access revenue and CWA private line services and was $28.7 million for the three months ended September 30, 2005, a decrease of $9.7 million, or 25%, from $38.4 million for the three months ended September 30, 2004. The decrease was due primarily to pricing pressures in unmanaged bandwidth for such services. Digital content services revenue, which includes CDN and WAM!NET revenue, was $10.3 million for the three months ended September 30, 2005, a decrease of $3.8 million, or 27%, from $14.1 million for the three months ended September 30, 2004. The decrease was due primarily to usage volatility and reduced pricing for CDN services during the three months ended September 30, 2005 compared to the three months ended September 30, 2004.
Reuters revenue was $24.3 million for the three months ended September 30, 2005, a decrease of $6.4 million, or 21%, from $30.7 million for the three months ended September 30, 2004. The decline was due primarily to pricing reductions and the elimination of minimum revenue commitments from Reuters. We expect 2005 revenue to be lower than 2004 as a result of revised competitive pricing and the elimination of minimum revenue commitments based on the terms of the new agreement with Reuters described elsewhere in this Quarterly Report. We expect Reuters to contribute approximately 13-14% of total annual revenue in 2005.
Cost of Revenue.Cost of revenue, which excludes depreciation, amortization, and accretion and non-cash equity-based compensation, which are reported separately, was $106.9 million for the three months ended September 30, 2005, a decrease of $12.9 million, or 11%, from $119.8 million for the three months ended September 30, 2004. The decrease was due primarily to the realization of a number of cost-savings initiatives executed during the past 12 months, some of which were synergies realized in connection with the CWA acquisition. Gross profit, defined as total revenue less cost of revenue, was $59.2 million for the three months ended September 30,
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2005, an increase of $9.6 million, or 19%, from $49.6 million for the three months ended September 30, 2004. Gross profit as a percentage of revenue, or gross margin, increased to 36% for the three months ended September 30, 2005 compared to 29% reported for the three months ended September 30, 2004, primarily resulting from continued cost savings initiatives and completion of our integration activities.
Sales, General, and Administrative Expenses.Sales, general, and administrative expenses include all costs associated with the selling of our services and administrative functions such as finance, legal and human resources, but excludes non-cash equity-based compensation, which is reported separately. Such expenses were $37.3 million for the three months ended September 30, 2005, a decrease of $7.2 million, or 16%, from $44.5 million for the three months ended September 30, 2004. Sales, general, and administrative expenses as a percentage of revenue were 22% for the three months ended September 30, 2005 compared to 26% of revenue for the three months ended September 30, 2004. This improvement was due primarily to the realization of a number of cost-savings initiatives executed during the past 12 months, some of which were synergies realized in connection with the CWA acquisition.
Depreciation, Amortization, and Accretion. Depreciation, amortization, and accretion includes depreciation of long-lived assets, amortization of intangible assets, and accretion of the discounted present value of certain liabilities and long-term fixed price contracts assumed in the CWA acquisition. Depreciation, amortization, and accretion was $19.1 million for the three months ended September 30, 2005, a decrease of $1.4 million, or 7%, from $20.5 million for the three months ended September 30, 2004.
Integration Costs.Integration costs represent the incremental costs to the combined organization after the CWA acquisition, which provide current or future benefit to the combined company. We did not expense any integration costs associated with the CWA acquisition for the three months ended September 30, 2005 as integration activities have been completed. Integration costs were $3.7 million for the three months ended September 30, 2004. Such costs included $0.4 million for consulting services related to integration; $1.1 million for payroll costs and stay bonuses; and $1.9 million for PoP consolidation and network restructuring.
Non-cash Equity-based Compensation. Non-cash equity-based compensation was $0.5 million for the three months ended September 30, 2005, an increase of $0.3 million, or 150%, compared to $0.2 million for the three months ended September 30, 2004. This increase relates to amortization of deferred compensation associated with the issuance of restricted common stock units.
Net Interest Expense and Other. Net interest expense and other represents interest on the Subordinated Notes, capital leases, and our credit agreement executed in June 2005 with Wells Fargo Foothill, Inc. and certain other lenders, which provided us with an $85.0 million revolving credit facility (the Revolving Facility). Net interest expense and other was $16.0 million for the three months ended September 30, 2005, an increase of $2.5 million, or 18%, from $13.5 million for the three months ended September 30, 2004. The increase was primarily due to the compounding of payable in kind interest and the amortization of the original issue discount associated with the Subordinated Notes of $2.7 million and the addition of $1.3 million in interest expense and amortization of debt issuance costs related to the Revolving Facility. The increase was partially offset by the absence of $1.9 million of interest expense and deferred financing costs associated with the GECC capital lease, which was repaid in June 2005. Management expects payments for cash interest expense to be approximately $14-15 million for 2005 under our current financing arrangements.
Net Loss. Net loss for the three months ended September 30, 2005 was $13.7 million, an improvement of $19.2 million, or 58%, from $32.9 million for the three months ended September 30, 2004, primarily driven by the factors previously described.
Nine Months Ended September 30, 2005 Compared to the Nine Months Ended September 30, 2004
Executive Summary of Results of Operations
Our operating results for the nine months ended September 30, 2004 are not directly comparable to operating results for the nine months ended September 30, 2005, as the 2004 information includes the operating results of CWA only from March 5, 2004, the date of acquisition. Revenue increased $45.0 million, or 10%, for the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004, primarily as a result of increases in managed IP VPN and hosting services, partially offset by declines in other network services, digital content services, and Reuters revenue. Loss from operations improved $85.8 million, or 93%, for the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004, primarily as a result of the increase in revenue, as well as reductions in the following areas: sales, general, and administrative expenses of $13.5 million; integration costs of $23.0 million; and non-cash equity-based compensation of $10.1 million. This improvement was partially offset by increases in depreciation, amortization, and accretion of $5.0 million and net restructuring charges of $3.3 million. Net loss improved $71.2 million, or 56%, for the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004, as a result of the factors previously described.
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Revenue.The following table presents diversified revenue by major category and revenue from our largest customer:
Nine Months Ended September 30, | |||||||||||||
(dollars in thousands) | 2005 | 2004 | Dollar Change | Percent Change | |||||||||
Diversified Revenue: | |||||||||||||
Managed IP VPN | $ | 82,149 | $ | 62,337 | $ | 19,812 | 32 | % | |||||
Hosting | 215,056 | 157,015 | 58,041 | 37 | % | ||||||||
Other Network Services | 90,607 | 102,863 | (12,256 | ) | (12 | )% | |||||||
Digital Content Services | 31,207 | 35,055 | (3,848 | ) | (11 | )% | |||||||
Total Diversified Revenue | 419,019 | 357,270 | 61,749 | 17 | % | ||||||||
Reuters | 76,480 | 93,245 | (16,765 | ) | (18 | )% | |||||||
Total Revenue | $ | 495,499 | $ | 450,515 | $ | 44,984 | 10 | % | |||||
Revenue was $495.5 million for the nine months ended September 30, 2005, an increase of $45.0 million, or 10%, from $450.5 million for the nine months ended September 30, 2004. Diversified managed IP VPN revenue was $82.1 million for the nine months ended September 30, 2005, an increase of $19.8 million, or 32%, from $62.3 million for the nine months ended September 30, 2004. This increase was mainly attributed to new sales activity and growth in existing services. Diversified hosting revenue was $215.1 million for the nine months ended September 30, 2005, an increase of $58.1 million, or 37%, from $157.0 million for the nine months ended September 30, 2004, due primarily to the CWA acquisition, stabilized pricing, and lower customer churn. Other network services revenue was $90.6 million for the nine months ended September 30, 2005, a decrease of $12.3 million, or 12%, from $102.9 million for the nine months ended September 30, 2004. The decrease was due primarily to unmanaged bandwidth pricing pressures for such services. Digital content services revenue was $31.2 million for the nine months ended September 30, 2005, a decrease of $3.9 million, or 11%, from $35.1 million for the nine months ended September 30, 2004. The decrease was due primarily to usage volatility and reduced pricing for CDN services during the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004.
Reuters revenue was $76.5 million for the nine months ended September 30, 2005, a decrease of $16.7 million, or 18%, from $93.2 million for the nine months ended September 30, 2004. The decline was due primarily to pricing reductions and the elimination of minimum revenue commitments from Reuters. We expect 2005 revenue to be lower than 2004 as a result of revised competitive pricing and the elimination of minimum revenue commitments based on the terms of the new agreement with Reuters described elsewhere in this Quarterly Report.
Cost of Revenue.Cost of revenue, which excludes depreciation, amortization, and accretion and non-cash equity-based compensation, which are reported separately, was $324.6 million for the nine months ended September 30, 2005, a decrease of $2.5 million, or 1%, from $327.1 million for the nine months ended September 30, 2004. The increase was primarily related to the CWA acquisition to support the increase in revenue, partially offset by the realization of a number of cost-savings initiatives executed during the past 12 months, some of which were synergies realized in connection with the CWA acquisition. Gross profit, defined as total revenue less cost of revenue, was $170.9 million for the nine months ended September 30, 2005, an increase of $47.5 million, or 38%, from $123.4 million for the nine months ended September 30, 2004. Gross profit as a percentage of revenue, or gross margin, increased to 34% for the nine months ended September 30, 2005 compared to 27% reported for the nine months ended September 30, 2004, primarily resulting from continued cost savings initiatives and integration activities achieved through the realization of synergies from the acquisition of CWA.
Sales, General, and Administrative Expenses.Sales, general, and administrative expenses, which excludes non-cash equity-based compensation reported separately, were $113.9 million for the nine months ended September 30, 2005, a decrease of $13.5 million, or 11%, from $127.4 million for the nine months ended September 30, 2004. Sales, general, and administrative expenses as a percentage of revenue were 23% for the nine months ended September 30, 2005 compared to 28% of revenue for the nine months ended September 30, 2004. This improvement was due primarily to the realization of a number of cost-savings initiatives executed during the past 12 months, some of which were synergies realized in connection with the CWA acquisition.
Depreciation, Amortization, and Accretion. Depreciation, amortization, and accretion was $56.6 million for the nine months ended September 30, 2005, an increase of $5.0 million, or 10%, from $51.6 million for the nine months ended September 30, 2004. The increase was primarily due to the acquisition of CWA, which significantly increased depreciable assets and intangible assets, as much of the value was assigned to IRUs, communications equipment, and leasehold improvements, as well as accretion of the discounted present value of certain liabilities and long-term fixed price contracts assumed in the acquisition.
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Restructuring Charges, Net.Restructuring charges, net represent the termination of a naming rights agreement for use of our name on a sports and entertainment arena and the termination of an operating lease relating to unutilized space for which a restructuring liability had previously been established for the net present value of future minimum lease payments and were $3.3 million for the nine months ended September 30, 2005, with no comparative costs for the nine months ended September 30, 2004.
Integration Costs.Integration costs were $2.7 million for the nine months ended September 30, 2005, a decrease of $23.1 million, or 89%, from $25.8 million for the nine months ended September 30, 2004. Such costs in 2005 included $1.7 million for payroll costs and stay bonuses and $1.0 million for PoP consolidation and network restructuring. For the nine months ended September 30, 2004, these costs included $7.5 million for specific contractual costs enumerated in the CWA asset purchase agreement; $3.7 million for consulting services related to integration; $5.5 million for payroll costs and stay bonuses; $3.4 million for PoP consolidation and network restructuring and $4.6 million for rationalization and migration from rejected vendor circuits.
Non-cash Equity-based Compensation. Non-cash equity-based compensation was $0.8 million for the nine months ended September 30, 2005, a decrease of $10.1 million, or 93%, compared to $10.9 million for the nine months ended September 30, 2004. The decrease primarily relates to compensation expense of $10.3 million recognized from the vesting of Constellation Ventures performance warrants in the first half of 2004.
Net Interest Expense and Other. Net interest expense and other was $49.4 million for the nine months ended September 30, 2005, an increase of $14.6 million, or 42%, from $34.8 million for the nine months ended September 30, 2004. The increase was primarily due to the compounding of payable in kind interest and the amortization of the original issue discount associated with the Subordinated Notes of $10.5 million; the addition of $1.5 million in interest expense and amortization of debt issuance costs related to the Revolving Facility; the recognition of nine months of interest connected to the Digital Realty Trust, L.P. capital leases of $2.3 million; and the write-off of $2.7 million of previously deferred financing costs associated with the repayment of the GECC capital lease in June 2005. The increase was partially offset by the absence of $3.2 million of interest expense and deferred financing costs connected with the GECC capital lease. Cash paid for interest was $11.1 million for the nine months ended September 30, 2005, an increase of $10.9 million from $0.2 million for the nine months ended September 30, 2004. This increase relates to interest payments on our Revolving Facility of $0.6 million as well as interest payments on our noncurrent capital leases of $10.1 million. Interest payments on our noncurrent capital leases commenced in the fourth quarter of 2004. Management expects payments for cash interest expense to be approximately $14-15 million for 2005 under our current financing arrangements.
Net Loss. Net loss for the nine months ended September 30, 2005 was $55.9 million, an improvement of $71.2 million, or 56%, from $127.1 million for the nine months ended September 30, 2004, primarily driven by the factors previously described.
LIQUIDITY AND CAPITAL RESOURCES
Executive Summary
As of September 30, 2005, our cash balances were $50.8 million. We had $31.6 million in net cash provided by operating activities during the nine months ended September 30, 2005, an increase of $66.6 million from net cash used in operating activities of $35.0 million for the nine months ended September 30, 2004. This change was primarily driven by improvements in our results of operations, partially offset by cash payments for restructuring activities and acquisition and integration-related costs necessary to realize synergies. Net cash used in investing activities for the nine months ended September 30, 2005 was $36.4 million, a decrease of $102.9 million from net cash used in investing activities of $139.3 million for the nine months ended September 30, 2004. This change was primarily related to the 2004 acquisition of the CWA assets, partially offset by an increase of $11.7 million in capital expenditures. Net cash provided by financing activities for the nine months ended September 30, 2005 was $1.0 million, a decrease of $198.5 million from net cash provided by financing activities of $199.5 million for the nine months ended September 30, 2004. This decrease primarily relates to $200.0 million in financing for the 2004 acquisition of the CWA assets.
Historically, we have not been cash flow positive. However, in 2005, we expect to fund our business needs primarily through cash flows from operations. Management does not consider the cash flows from 2004 to be representative of the expected future cash flows as significant acquisition and integration costs were paid during that year. We ended 2004 with positive cash flows from operations for the fourth quarter and continued that trend in 2005. The achievement of this goal is reflected in the quarterly trend analysis below, which presents cash flows from operations for the four consecutive quarters through September 30, 2005. Due to the dynamic nature of our industry and unforeseen circumstances, if we are unable to fully fund cash requirements through operations, we may need to obtain additional financing through a combination of equity and debt financings, renegotiation of terms on our existing debt, and sales of assets and services. If any such activities are required, there can be no assurance that we would be successful in completing any of these activities on terms that would be favorable to us. As of September 30, 2005, our unused availability under the Revolving Facility was $15.1 million, which is reflective of $11.9 million of letters of credit outstanding and $58.0 million of outstanding principal.
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The following table presents a quarterly overview of key components of our cash flows (in thousands):
Three Months Ended | ||||||||||||||||
September 30, 2005 | June 30, 2005 | March 31, 2005 | December 31, 2004 | |||||||||||||
Net cash provided by operating activities | $ | 21,445 | $ | 164 | $ | 9,980 | $ | 8,262 | ||||||||
Net cash used to pay acquisition, integration, and restructuring costs(1) | (594 | ) | (10,773 | ) | (3,303 | ) | (5,580 | ) | ||||||||
Net cash used in investing activities | (7,826 | ) | (13,614 | ) | (14,955 | ) | (6,861 | ) | ||||||||
Capital expenditures(2) | (7,826 | ) | (13,848 | ) | (14,121 | ) | (7,224 | ) | ||||||||
Net cash provided by (used in) financing activities | 315 | 711 | (46 | ) | 16 | |||||||||||
Net increase (decrease) in cash and cash equivalents | 13,776 | (13,252 | ) | (5,103 | ) | 1,971 |
(1) | Such costs are components of net cash provided by operating activities |
(2) | Capital expenditures is a component of net cash used in investing activities |
Discussion of Changes in Liquidity and Capital Resources
Net cash provided by operating activities was $31.6 million for the nine months ended September 30, 2005, an increase of $66.6 million from net cash used of $35.0 million for the nine months ended September 30, 2004. This increase for the nine months ended September 30, 2005 is primarily driven by improvements in our cash results from operations, partially offset by cash used to pay restructuring activities of $7.5 million and acquisition and integration-related costs to achieve synergies of $7.2 million. Such increase also reflects the negotiation of telecommunications provider service credits of $15.1 million for the nine months ended September 30, 2005. We will not incur any integration expenses in the fourth quarter of 2005, as integration activities have been completed. However, we do expect to pay up to $2.7 million of previously expensed integration-related costs throughout the first quarter of 2006. We also expect to benefit by approximately $4-5 million from remaining negotiated telecommunications provider service credits in the fourth quarter of 2005 and approximately $1-2 million throughout the first quarter of 2006. Net cash provided by operations, before considering the aforementioned items, was $31.2 million for the nine months ended September 30, 2005 compared to $2.0 million of cash used in operations for the nine months ended September 30, 2004.
Net cash used in investing activities for the nine months ended September 30, 2005 was $36.4 million, a decrease of $102.9 million compared to $139.3 million in net cash used in investing activities for the nine months ended September 30, 2004. This decrease primarily relates to net cash used of $117.1 million for the acquisition of CWA for the nine months ended September 30, 2004, which was partially offset by an increase in capital expenditures of $11.7 million for the nine months ended September 30, 2005. The increase in capital expenditures supports the growth in hosting and managed IP VPN services.
Net cash provided by financing activities for the nine months ended September 30, 2005 was $1.0 million, a decrease of $198.5 million from net cash provided by financing activities of $199.5 million for the nine months ended September 30, 2004. This decrease primarily relates to the $200.0 million issuance of Subordinated Notes and warrants to purchase Series B Preferred and the $8.0 million of restricted cash released offset by $9.8 million of capital lease payments for the nine months ended September 30, 2004. This decrease in net cash provided by financing activities was partially offset by $58.0 million of proceeds from borrowings against the Revolving Facility, of which $53.7 million was used to repay outstanding principal and accrued interest under our master lease agreement with GECC and $3.9 million used to pay debt issuance costs associated with the Subordinated Notes and Revolving Facility for the nine months ended September 30, 2005.
Revolving Credit Facility
On June 10, 2005, we and certain of our subsidiaries entered into a credit agreement with Wells Fargo Foothill, Inc., as arranger and administrative agent, and certain other lenders to provide us with an $85.0 million Revolving Facility, which includes a $15.0 million letter of credit facility. The Revolving Facility may be used for working capital and other general corporate purposes. A portion of the proceeds from the Revolving Facility were used to fully retire $53.9 million in outstanding principal and accrued interest under our master lease agreement with GECC, achieving more favorable borrowing rates and a longer borrowing term. In conjunction with the repayment of the GECC master lease, $2.7 million of previously deferred financing costs were written off to interest expense. In addition, $3.8 million of the proceeds were used to pay fees and expenses associated with the Revolving Facility, which were recorded
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as other current and other non-current assets in our condensed consolidated balance sheet as of September 30, 2005 and are being amortized over the term of the Revolving Facility. The Revolving Facility matures, and all outstanding borrowings and unpaid interest are due, on December 9, 2008. In addition, all outstanding borrowings are subject to mandatory prepayment upon certain events, including the availability of less than $7.0 million in borrowing capacity and qualified cash balances, as defined by the Revolving Facility. As of September 30, 2005, the $85.0 million Revolving Facility included outstanding principal of $58.0 million, outstanding letters of credit of $11.9 million (see Note 10), and unused availability of $15.1 million. We may terminate the Revolving Facility prior to maturity, provided that we pay a premium of 2.0% of the revolver amount if terminated during the first 12 months of the Revolving Facility term, a premium of 0.5% of the revolver amount if terminated during the 12 months thereafter, and no premium during the remainder of the term.
The Revolving Facility contains affirmative covenants, negative covenants and financial covenants that are more favorable than those under the master lease agreement with GECC. The negative covenants place restrictions on, among other things, levels of investments, indebtedness, and dividend payments that we may make or incur. The financial covenants, which apply only if we maintain qualified cash and availability of less than $35.0 million, require the maintenance of certain financial ratios at defined levels. Under the Revolving Facility, borrowings bear interest at a base LIBOR rate of one to six months plus an additional 2.75% to 3.25%, determined by certain financial ratios, with a minimum interest rate at all times of 5.25%. As of September 30, 2005, the Revolving Facility bears interest at 7.02% based on the six-month LIBOR set in August 2005 of 4.02%. The six-month LIBOR was 4.29% as of September 30, 2005. Interest is payable at varying dates, as outlined in the Revolving Facility agreement, generally every one to three months. Unused commitments on the Revolving Facility are subject to a 0.5% annual commitment fee. The Revolving Facility is secured by substantially all of our domestic properties and assets. The carrying amount of our obligations under the Revolving Facility approximate fair value because the interest rates are based on floating interest rates identified by reference to market rates.
Subordinated Notes
As previously described, in the first quarter of 2004, we issued $200.0 million of Subordinated Notes, the proceeds of which were used to fund the CWA acquisition and to fund operational, working capital and capital expenditure requirements related to the CWA acquired assets or caused by the CWA acquisition. Debt issuance costs associated with the Subordinated Notes were $2.0 million, consisting of fees paid to the purchasers of the Subordinated Notes, which were capitalized in other non-current assets and are being amortized to interest expense using the effective interest method until maturity. The Subordinated Notes accrue interest based on a 365-day year at a rate of 12.5% per annum until February 3, 2005 and 15% per annum thereafter, payable in kind semi-annually on June 30 and December 31 through the issuance of additional Subordinated Notes equal to the accrued interest payable at the time of settlement. Among other requirements, the provisions of the Subordinated Notes include an early redemption feature, a make-whole premium, and a change of control clause. Upon a change of control, the holders of the Subordinated Notes have the right to require the Company to redeem any or all of the Subordinated Notes at a cash price equal to 100% of the principal amount of the Subordinated Notes, plus all accrued and unpaid interest as of the effective date of such change in control. The Subordinated Notes mature in a single installment on February 9, 2009.
Warrants immediately exercisable for Series B Preferred were issued with the Subordinated Notes. The $200.0 million in proceeds from issuance were allocated between the Subordinated Notes and the warrants for Series B Preferred, based on their relative fair values, resulting in an original issue discount of $65.9 million. The allocated value of the Subordinated Notes at date of issuance, plus accrued interest on the face value and accreted interest on the original issue discount, are reflected as long-term debt. The fair value of the Series B Preferred was determined with the assistance of an independent third-party valuation firm. The allocated fair value of the warrants for Series B Preferred is reflected in additional paid-in capital in stockholders’ deficit in our condensed consolidated balance sheets. The purchasers of the Subordinated Notes exercised their warrants immediately upon closing for shares of Series B Preferred, which were converted into shares of our common stock in December 2004. The outstanding principal and payable in kind interest of the Subordinated Notes, excluding the original issue discount was $248.1 million as of September 30, 2005 and $223.0 million as of December 31, 2004.
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Debt Covenants
The provisions of our Revolving Facility and Subordinated Notes contain a number of covenants that could restrict or limit our ability to:
• | incur more debt; |
• | pay dividends, subject to financial ratios and other conditions; |
• | make other distributions; |
• | issue stock of subsidiaries; |
• | make investments or acquisitions; |
• | repurchase stock; |
• | create subsidiaries; |
• | create liens; |
• | enter into transactions with affiliates; |
• | merge or consolidate; and |
• | transfer and sell assets. |
The ability to comply with these provisions may be affected by events beyond our control. The breach of any of these covenants could result in a default under our debt agreements and could trigger acceleration of repayment. Any default under such agreements might adversely affect our growth, financial condition, results of operations and the ability to make payments on indebtedness or meet other obligations. As of and during the nine months ended September 30, 2005 and 2004, we were in compliance with all covenants under the Revolving Facility and Subordinated Notes, as applicable.
Future Principal Payments
As of September 30, 2005, aggregate future principal payments of long-term debt are zero in each of the years 2005, 2006, and 2007 and $58.0 million in 2008 and $401.9 million in 2009, consisting of $200.0 million in principal and $201.9 million of accrued paid in kind interest, with no payments thereafter. The weighted average interest rate applicable to our outstanding borrowings under the Credit Agreement and Subordinated Notes was 12.85% as of September 30, 2005 and 14.50% as of September 30, 2004.
Other Financing Activities
In connection with the execution of the Revolving Facility previously described, we repaid all outstanding principal and interest under our master lease agreement with GECC in June 2005. We made cash interest payments of $11.1 million for the nine months ended September 30, 2005 and $0.2 million for the nine months ended September 30, 2004.
Commitments and Contingencies
Our customer contracts generally span multiple periods, which result in us entering into arrangements with various suppliers of communications services that require us to maintain minimum spending levels, some of which increase over time, to secure favorable pricing terms. Our remaining aggregate minimum spending levels, allocated ratably over the terms of such contracts, are $18.0 million in year 2005; $36.7 million in year 2006; $12.9 million in year 2007; and $1.1 million thereafter. Should we not meet the minimum spending levels in any given term, decreasing termination liabilities representing a percentage of the remaining contracted amount may become immediately due and payable. Furthermore, certain of these termination liabilities are subject to reduction should we experience the loss of a major customer or suffer a loss of revenue from a general economic downturn. Before considering the effects of any potential reductions for the business downturn provisions, if we had terminated all of these agreements as of September 30, 2005, the maximum liability would have been $35.1 million.
In the normal course of business, we are a party to certain guarantees and financial instruments with off-balance sheet risk, such as letters of credit and indemnifications, which are not reflected in our consolidated balance sheets. The agreements associated with such guarantees and financial instruments mature at various dates through July 2017 and may be renewed as circumstances warrant. As of September 30, 2005, we had $11.9 million in letters of credit pledged as collateral to support various property leases and utilities. In addition, certain of the operating leases assumed by us in the CWA acquisition were collateralized by Cable & Wireless plc with letters of credit and guarantees. Such collateral remained in place following the acquisition and we agreed to reimburse Cable & Wireless plc for any payments made under the collateral. Such collateral totals $15.1 million and will be replaced by us on or before July 2007. Our financial instruments are valued based on the amount of exposure under the instruments and the likelihood of performance being required. In our past experience, no claims have been made against these financial instruments nor do we expect the exposure to material losses resulting therefrom to be anything other than remote. As a result, we determined such financial instruments did not have significant value and have not recorded any related amounts in our condensed consolidated financial statements.
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We are lessee under a number of equipment and property leases. It is common in such commercial lease transactions for the lessee to agree to indemnify the lessor for the value of the property or equipment leased should it be damaged during the course of operations. Except as otherwise recorded and described herein, we expect that any losses that may occur with respect to our leased facilities would be covered by insurance, subject to deductible amounts, and have not recorded any related amounts in our condensed consolidated financial statements.
We are subject to various legal proceedings and other actions arising in the normal course of business. While the results of such proceedings and actions cannot be predicted, we believe, based on facts known to management today, that the ultimate outcome of such proceedings and actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
We have employment agreements with key executive officers that contain provisions with regard to base salary, bonus, stock options, and other employee benefits. These agreements also provide for severance benefits in the event of employment termination or a change in control.
The following table presents our undiscounted contractual cash obligations as of September 30, 2005 (in thousands):
Payments Due by Period | |||||||||||||||
Total | Less Than 1 Year | 2 – 3 Years | 4 – 5 Years | After 5 Years | |||||||||||
Long-term debt(1) | $ | 459,893 | $ | — | $ | — | $ | 459,893 | $ | — | |||||
Asset retirement obligation | 50,118 | 428 | 1,008 | 20,660 | 28,022 | ||||||||||
Operating leases | 395,052 | 58,009 | 105,484 | 90,266 | 141,293 | ||||||||||
Capital lease obligations(2) | 167,214 | 10,784 | 21,633 | 22,779 | 112,018 | ||||||||||
Unconditional purchase obligations | 202,299 | 76,940 | 31,843 | 14,357 | 79,159 | ||||||||||
Total contractual cash obligations | $ | 1,274,576 | $ | 146,161 | $ | 159,968 | $ | 607,955 | $ | 360,492 | |||||
(1) | Includes interest accrued of $201.9 million over the remaining term of the Subordinated Notes. Interest is payable in kind through the issuance of additional Subordinated Notes equal to the accrued interest payable at the time of settlement. |
(2) | Includes interest payments of $107.1 million over the remaining term of the obligations. |
CRITICAL ACCOUNTING POLICIES
While all of the significant accounting policies described in the notes to our consolidated financial statements are important, some of these policies may be viewed as being critical. Such policies are those that are most important to the portrayal of our financial condition and require our most difficult, subjective or complex estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates and assumptions on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from these estimates and assumptions. For further information regarding the application of these and other accounting policies, see Note 2 of Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report and Part II, Item 7 of the 2004 Form 10-K.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123(R), “Share-Based Payment” (SFAS 123(R)), effective January 1, 2006, which is a revision of SFAS 123. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, restricted stock, and other stock-based instruments, to be recognized in the financial statements based on their fair values. As permitted by SFAS 123, we currently account for share-based payments to employees using the intrinsic value method under APB 25 and, as such, only recognize compensation cost for employee stock options to the extent that options have been issued with an exercise price below the fair market value of our common stock on the date of grant. Accordingly, the adoption of SFAS 123(R) will have an impact on our results of operations, although it will have no impact on our overall financial position. Based on employee stock options outstanding as of September 30, 2005, we estimate that we will recognize $5.2 million in compensation cost for the year ended December 31, 2006. Had we adopted SFAS 123(R) in prior periods, the impact of adoption would have approximated the fair value disclosure of pro forma net loss and net loss per common share previously disclosed in our Quarterly and Annual Reports filed on Forms 10-Q and 10-K.
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In March 2005, the SEC staff issued Staff Accounting Bulletin No. 107 (SAB 107), which expresses the SEC’s views regarding the interaction between SFAS 123(R) and certain SEC rules and regulations. SAB 107 also provides guidance related to, among other things, share-based payment transactions with non-employees, valuation methods and assumptions, classification of compensation expense, first-time adoption of SFAS 123(R) and related income tax effects, modification of existing employee stock options, and disclosures in SEC filings. We will apply the principles of SAB 107 in conjunction with its adoption of SFAS 123(R).
In March 2005, the FASB issued Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations,” that requires an entity to recognize a liability for a conditional asset retirement obligation when incurred if the liability can be reasonably estimated. FIN 47 clarifies that the term Conditional Asset Retirement Obligation refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Adoption of FIN 47 is not expected to have a material impact on our financial position, results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
We are subject to market risks arising from changes in interest rates that affect our variable rate debt. As of September 30, 2005, we had borrowed a total of $58.0 million under our Revolving Facility. Amounts borrowed under the Revolving Facility bear interest at LIBOR rates plus an applicable margin. As LIBOR rates fluctuate, interest expense on amounts borrowed fluctuates. The interest rate on our variable rate debt as of September 30, 2005, was 7.02%. A hypothetical increase in the interest rate by 1% on our variable rate debt would increase annual interest expense by approximately $0.6 million. The change in interest rates is based on hypothetical movements and is not necessarily indicative of the actual results that may occur. Future results of operations will be affected by actual fluctuations in interest rates.
There have been no other material changes in our assessment of market risk sensitivity since our presentation of “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of September 30, 2005, we conducted an evaluation, under the supervision and with the participation of management, including the Acting Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Securities Act)) as of the end of the period covered by this report. Based upon that evaluation, the Acting Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Act) during the quarter ended September 30, 2005, that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
We are subject to various legal proceedings and actions arising in the normal course of business. While the results of such proceedings and actions cannot be predicted, we believe, based on facts known to management today, that the ultimate outcome of such proceedings and actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
On October 19, 2005, a lawsuit was filed by American Express Travel Related Services Company, Inc. against us and our Chief Executive Officer, Robert A. McCormick, in the Supreme Court of the State of New York, in connection with the nonpayment of charges on a corporate credit card issued to Mr. McCormick.
On October 24, 2005, we announced that our audit committee was conducting a full investigation into the matters relating to the American Express lawsuit and that, pending completion of the investigation, Mr. McCormick has been placed on an unpaid leave of absence. John M. Finlayson, our President and Chief Operating Officer, has been appointed as Acting Chief Executive Officer.
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The following exhibits are either provided with this Form 10-Q or are incorporated herein by reference.
Exhibit | Exhibit Description | Filed with the Form 10-Q | Incorporated by Reference | |||||||
Form | Filing Date with | Exhibit Number | ||||||||
3.1 | Amended and Restated Certificate of Incorporation of the Registrant | S-1 | November 12, 1999 | 3.1 | ||||||
3.2 | Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant | S-1/A | January 31, 2000 | 3.2 | ||||||
3.3 | Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant | 10-Q | August 14, 2002 | 3.3 | ||||||
3.4 | Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant | 10-Q | August 13, 2004 | 3.4 | ||||||
3.5 | Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant | 10-Q | August 5, 2005 | 3.5 | ||||||
3.6 | Amended and Restated Bylaws of the Registrant | 10-Q | May 15, 2003 | 3.4 | ||||||
4.1 | Form of Common Stock Certificate | S-1/A | January 31, 2000 | 4.1 | ||||||
4.2 | Certificate of Designations relating to the Registrant’s Series A Convertible Preferred Stock | 8-K | March 27, 2002 | 4.2 | ||||||
4.3 | Amended and Restated Certificate of Designations for Registrant’s Series B Convertible Preferred Stock | 10-Q | August 13, 2004 | 4.4 | ||||||
4.4 | Warrant Agreement, dated as of March 15, 2002, between the Registrant and Nortel Networks Inc. | 10-Q | May 15, 2002 | 4.4 | ||||||
4.5 | Warrant, dated March 18, 2002, to purchase the Registrant’s common stock issued to Nortel Networks Inc. | 10-Q | May 15, 2002 | 4.6 | ||||||
4.6+ | Warrant, dated June 28, 2002, to purchase the Registrant’s common stock issued to Constellation Venture Capital II, L.P. | 8-K | July 8, 2002 | 4.7 | ||||||
4.7+ | Warrant, dated June 28, 2002, to purchase the Registrant’s common stock issued to Constellation Venture Capital Offshore II, L.P. | 8-K | July 8, 2002 | 4.8 | ||||||
4.8+ | Warrant, dated June 28, 2002, to purchase the Registrant’s common stock issued to The BSC Employee Fund IV, L.P. | 8-K | July 8, 2002 | 4.9 | ||||||
4.9+ | Warrant, dated, June 28, 2002, to purchase the Registrant’s common stock issued to CVC II Partners, L.L.C. | 8-K | July 8, 2002 | 4.10 | ||||||
4.10 | Form of Series A Subordinated Note | 8-K | February 25, 2004 | 4.12 | ||||||
10.1 | Form of Stock Unit Agreement under the 2003 Incentive Compensation Plan | 8-K | August 23, 2005 | 10.1 | ||||||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | ||||||||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | ||||||||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | ||||||||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X |
+ | Confidential treatment has been granted for this exhibit. The copy filed as an exhibit omits the information subject to the request for confidential treatment. |
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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, Inc. | ||||||
Date: | November 1, 2005 | By: | /s/ John M. Finlayson | |||
John M. Finlayson | ||||||
Acting Chief Executive Officer, President, and Chief Operating Officer | ||||||
(principal executive officer) | ||||||
Date: | November 1, 2005 | By: | /s/ Jeffrey H. VonDeylen | |||
Jeffrey H. VonDeylen | ||||||
Chief Financial Officer | ||||||
(principal financial officer and principal accounting officer) |
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