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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-29375
SAVVIS COMMUNICATIONS CORPORATION
--------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1809960
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12851 WORLDGATE DRIVE
HERNDON, VIRGINIA 20170
(Address of principal executive offices) (Zip Code)
(703-234-8000)
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act: Common stock, par
value $.01 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 30, 2001 was approximately $14,418,149.
The number of shares of the registrant's common stock outstanding as of March
31, 2001 was 93,842,498.
DOCUMENTS INCORPORATED BY REFERENCE
None
SAVVIS COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
PART I
Item 1. Business ..................................................................................................... 3
Item 2. Properties ................................................................................................... 33
Item 3. Legal Proceedings ............................................................................................ 33
Item 4. Submission of Matters to a Vote of Security Holders .......................................................... 33
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ........................................ 34
Item 6. Selected Financial Data ...................................................................................... 35
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations. ............................................................................................ 36
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................................... 43
Item 8. Financial Statements and Supplementary Data .................................................................. 44
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure .............................................................................................. 44
PART III
Item 10. Directors and Executive Officers of the Registrant ........................................................... 45
Item 11. Executive Compensation ....................................................................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................................... 56
Item 13. Certain Relationships and Related Transactions ............................................................... 57
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .............................................. 60
Signatures .............................................................................................. 63
Index to Consolidated Financial Statements .............................................................. F-1
2
PART I
ITEM 1. BUSINESS.
Cautionary Statement
Except for any historical information, the matters we discuss in this
report on Form 10-K concerning our company contain forward-looking statements.
Any statements in this report on Form 10-K that are not statements of historical
fact, are intended to be, and are, "forward-looking statements" under the safe
harbor provided by Section 27(a) of the Securities Act of 1933. Without
limitation, the words "anticipate," "believe," "estimate," "expect," "intend,"
"plan" and similar expressions are intended to identify forward-looking
statements. The important factors we discuss below and under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as other factors identified in our filings with the SEC and
those presented elsewhere by our management from time to time, could cause
actual results to differ materially from those indicated by the forward-looking
statements made in this report. These factors include those set forth in Item I
under the heading "Business -- Risk Factors."
The terms "SAVVIS," "we," "us," "the Company," and "our" as used in this
report refer to SAVVIS Communications Corporation, a Delaware corporation,
formerly SAVVIS Holdings Corporation, and its subsidiaries, except where by the
context it is clear that such terms mean only SAVVIS Communications Corporation.
The term "Bridge" as used in this report refers to Bridge Information Systems,
Inc., a Missouri corporation, which currently owns approximately 48% of our
outstanding common stock.
OVERVIEW
We are a growing provider of high quality, high performance global data
networking, Internet-related and managed hosting services to medium and large
businesses, multinational corporations and Internet service providers. We
currently offer the following services:
o MANAGED DATA NETWORKING SERVICES that provide secure, high quality data
communication links over our network to connect a customer's geographically
dispersed offices, known as intranets, or to connect with its customers and
suppliers, known as extranets. These are also referred to VPN's.
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o HIGH BANDWIDTH INTERNET ACCESS SERVICES including dedicated access and
digital subscriber line, commonly known as DSL, services and Internet
security services which connect our customers to the Internet at high
speeds.
o MANAGED HOSTING services that allow our customers to outsource their
mission-critical content management to us and have us host their website
and networking hardware in our data centers which provide a highly secure,
fault tolerant environment.
We began commercial operations in 1996, offering Internet access services
to local and regional Internet service providers. In April 1999, we were
acquired by Bridge, a global provider of real-time and historical financial
information and news regarding stocks, bonds, foreign exchange and commodities
to the financial services industry. Bridge constructed a highly redundant, fault
tolerant network based on Internet protocol and ATM technologies to service some
of the largest financial institutions and institutional investors in the world.
In September 1999, the SAVVIS Intelligent IP Network(SM) was created through the
combination of the Internet protocol network of Bridge, which was constructed to
meet the exacting requirements of the financial services industry worldwide, and
the SAVVIS network, which was constructed to provide high quality Internet
access in the United States. Both of these networks have been operational since
1996 and we refer to the combined network as the "SAVVIS Intelligent IP
Network(SM)."
On February 18, 2000 simultaneously with the completion of our initial
public offering, we acquired the Internet protocol network assets of Bridge for
total consideration of approximately $150 million and the employees of Bridge
who operate that network were transferred to us. This transaction significantly
expanded our managed data networking services, which we began offering in
September 1999. We also entered into a network services agreement with Bridge
pursuant to which Bridge agreed to use the SAVVIS Intelligent IP Network(SM) to
deliver Bridge's content and applications to its customers.
We currently provide our data networking, Internet access and hosting
services directly to approximately 2,550 customers.
The SAVVIS Intelligent IP Network(SM) architecture, which interconnects
over 6,000 buildings in 121 of the world's major commercial cities in 46
countries, is based on the following technologies:
o asynchronous transfer mode, commonly known as ATM, which supports the
transmission of all kinds of content and allows data to be
prioritized;
o frame relay, which is a shared network technology commonly used in
communications networks; and
o Internet protocol, a communications protocol that is a core element of
the Internet and is used on computers, but that cannot reliably
deliver real-time data currently, unless operated over an ATM network,
such as the SAVVIS Intelligent IP Network(SM).
Additionally, our 121 city global system connects to twelve private
Internet access points, which we call PrivateNAPs(SM), where our network
connects to a number of Internet service providers, including Sprint
Corporation, Cable & Wireless plc and UUNET, an MCI WorldCom company, allowing
us to bypass the congested public Internet access points. This network design
enables us to provide real-time data delivery and guarantee low latency and low
data loss. It also allows us to tailor our service offerings to our customers'
needs and to offer a range of quality of service levels.
We charge each customer an initial installation fee that typically ranges
from $500 to $5,000 and a monthly fixed fee that varies depending on the
services provided, the bandwidth used and the quality of service level chosen.
Our customer agreements are typically for 12 to 36 months.
Currently, our revenue is derived primarily from the sale of data
networking and Internet access services with Bridge representing approximately
81% of our total revenue. Through December 31, 1999, our revenue was primarily
derived from the sale of Internet access services to local and regional Internet
service providers in the United States. Beginning in late 1998, we expanded our
service offering to corporate customers as well.
THE BRIDGE BANKRUPTCY
On February 15, 2001, Bridge's U.S. operating subsidiaries filed for
protection under Chapter 11 of Title 11 of the United States Bankruptcy Code
(the "Bankruptcy Code") in the United States Bankruptcy Court in the Eastern
District of Missouri. In 2000, Bridge accounted for approximately 81% of our
revenues. Pursuant to a network services agreement with us, Bridge has committed
to purchase network services from us through February 2009, including a minimum
of $132 million and $145 million of services in 2001 and 2002, respectively.
Bridge's financial condition and ability and willingness to meet its payment
obligations under the network services agreement will affect our revenues and
our ability to run our business. We may not receive timely payments owed to us
under the network services agreement from Bridge. The Bankruptcy Code may
restrict the amount and recoverability of our claims against Bridge. In
addition, under the automatic stay provisions of the Bankruptcy Code, we are
currently prevented from exercising certain rights and remedies under our
network services agreement with Bridge and from taking certain enforcement
actions against Bridge. As of March 31, 2001, Bridge owed us approximately $33
million (before offsetting our note due to Bridge), of which approximately $17
million represented claims that arose before Bridge filed for bankruptcy,
approximately $2 million represented claims that arose after the commencement of
the bankruptcy, and $14 million represented claims with respect to Bridge's
international operations which are not part of the bankruptcy proceedings. In
addition, Bridge has the right, subject to bankruptcy court approval and certain
other limitations, to assume and assign or reject executory, pre-petition
contracts and unexpired leases, which would include the network services
agreement. In this context, "assumption" requires Bridge to perform its
obligations and cure all existing defaults under the assumed contract or lease
and "rejection" means that Bridge is relieved from its obligations to perform
further under the rejected contract or lease, but is subject to a claim for
damages for the breach thereof subject to certain limitations contained in the
Bankruptcy Code. Generally, any damages resulting from rejection are treated as
general unsecured claims in the reorganization cases. Pre-petition claims that
were contingent or unliquidated at the commencement of the Chapter 11 cases are
generally allowable against the debtor in amounts to be fixed by the bankruptcy
court or otherwise agreed upon. Bridge has announced that it intends to sell its
assets in bankruptcy, including the shares in our Company that it owns. For
further discussions, see Part I, Item 1 "Risks Related to our Business" on page
21, Management's Discussion and Analysis of Financial Condition and Results of
Operations beginning on page 36, and Note 1 to the Consolidated Financial
Statements in Part IV, Item 14 on page F-7.
RELATIONSHIP WITH BRIDGE AND WELSH CARSON
Bridge is a privately held company whose principal shareholders are
investment partnerships managed by Welsh, Carson, Anderson & Stowe, or Welsh
Carson, a sponsor of private equity funds with extensive experience in the
communication and information services industries. On September 10, 1999, Bridge
sold in a private placement approximately 25% of its equity ownership in SAVVIS
to existing stockholders of Bridge, including Welsh Carson. On February 28,
2000, Bridge sold 6,250,000 shares of SAVVIS common stock to an investment
partnership sponsored by Welsh Carson at a price equal to the initial public
offering price of our common stock of $24 per share, totaling $150 million. On
February 20, 2001, we entered into a securities
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purchase agreement and certain related agreements and documents with two
investment entities sponsored by Welsh Carson and several individuals affiliated
with Welsh Carson. Pursuant to the terms of the securities purchase agreement,
the Welsh Carson entities and affiliated individuals purchased $20 million
aggregate principal amount of our 10% convertible senior secured notes due 2006.
The notes, including notes to be issued as payment-in-kind interest thereunder,
are convertible into common stock at a conversion price of $1 5/16 per share
through maturity at the option of the holders into a total of approximately 25
million shares of our common stock.
As of March 31, 2001, Bridge owned approximately 48% of our outstanding
common stock and investment partnerships sponsored by and individuals affiliated
with Welsh Carson owned approximately 16% of our outstanding common stock. After
giving effect to the conversion of $20 million in the aggregate of our senior
secured convertible notes held by Welsh Carson affiliates, Welsh Carson
affiliates would own approximately 34% of our outstanding common stock and
Bridge would own 38%.
In connection with our acquisition of Bridge's network, we entered into a
10-year network services agreement with Bridge that commits Bridge to purchase a
minimum of $132 million and $145 million of network services from us in 2001 and
2002, respectively. Thereafter, Bridge will be required to purchase at least 80%
of its network services from us, declining to 60% in 2006 through the end of the
agreement in 2010. We incur losses from the operation of the network under the
network services agreement, and for the year 2000 Bridge represented
approximately 81% of our revenues. We also entered into a number of other
agreements with Bridge, including a master establishment and transition
agreement, an equipment colocation permit, an administrative services agreement,
a technical services agreement, a GECC sublease and a local network services
agreement. Together these agreements provided for, among other things, the
transfer of Bridge's technical and support personnel to us, and our purchase
from Bridge of support and administrative services, including help-desk services
and network operations center services. These agreements are described in more
detail in Item 13 of this report.
MARKET OVERVIEW
Market opportunity. As the Internet has emerged as a strategic business
component, investment in Internet services has begun to increase dramatically.
According to International Data Corporation, an independent research firm, the
demand for U.S. dedicated Internet access services was $3.4 billion in 1999 and
is expected to grow to $9.7 billion by 2003, a 30% compound annual growth rate.
In addition, demand for data transport services is growing rapidly as evidenced
by International Data Corporation's estimate that Internet service providers'
corporate access revenues will grow from $2.9 billion in 1998 to $12 billion by
2003, a 32.5% compound annual growth rate. We believe a significant Internet
market will continue to be Internet infrastructure and usage.
Internet network services. Since the commercialization of the Internet in
the early 1990s, businesses have rapidly established corporate Internet sites
and connectivity as a means to expand customer reach and improve communications
efficiency. Internet access service is now one of the fastest growing segments
of the global telecommunications services market. According to International
Data Corporation, the number of Internet users worldwide reached 240 million in
1999, 327 million in 2000, and is forecasted to grow to over 600 million by the
year 2003. Internet access services represent the means by which Internet
service providers interconnect users to the Internet or to corporate intranets
and extranets. Access services include dial-up access for mobile workers and
small businesses and high-speed dedicated access used primarily by mid-sized and
larger organizations. In addition to Internet access services, Internet services
providers are increasingly providing a range of value-added services, including
shared and dedicated web hosting and server colocation, security services, and
advanced applications such as Internet protocol-based voice, fax and video
services.
Corporate data network services. Other than Internet related services, the
majority of business data communications today take place over private or
managed corporate data and electronic data interchange networks. According to
Infonetics, the market for IP-VPN's in the United States will grow from
approximately $800 million in 2000 to approximately $10 billion in 2003.
Today, organizations employ local data networks, or local area networks, to
interconnect personal computers and workstations. The highly successful use of
local area networks for information-sharing, messaging and other applications
has led organizations to aggressively deploy wide area networks, which
effectively interconnect local area networks and replicate their functionality
across a much broader geographic area. The demand for wide area networks has
grown as a result of today's competitive business environment. Factors
stimulating higher demand include the need to provide broader and more
responsive customer service and to operate faster and more effectively between
operating units, suppliers and other business partners. In addition, as
businesses become more global in nature, the ability to access business
information across the enterprise has become a competitive necessity.
Convergence between the Internet and corporate data networking. Today, many
businesses are utilizing Internet-related services as lower-cost alternatives to
several traditional telecommunications services. The near ubiquity and
relatively low cost of the Internet have resulted in its widespread use for
specific applications, most notably web access and e-mail. Internet protocol has
become the communications protocol of choice for the desktop and for local area
networks. As a result, Internet protocol wide area network implementation
requires no protocol conversion, reducing overhead and improving performance.
Many corporations are connecting
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their remote locations using intranets to enable more efficient communications
with employees, providing remote access for mobile workers and reducing
telecommunications costs by using value-added services such as Internet
protocol-based fax and video-conferencing.
Rapid growth in e-commerce. While most corporations' early use of the
Internet was to establish an Internet marketing presence, businesses today are
using the Internet much more aggressively: to generate new revenues, to increase
efficiency through improved communications with suppliers and other third
parties, and to improve internal communications. The rapid growth of e-commerce
encompasses both business-to-business and business-to-consumer communications
and transactions, and the projected growth of these markets over the next five
years is dramatic. Forrester Research, Inc. projects that the market for
business-to-business e-commerce will grow from $43 billion in 1998 to $1.3
trillion in 2003. In addition, Forrester Research, Inc. projects that the market
for business-to-consumer e-commerce will grow from $8 billion to $108 billion
over the same period.
Outsourcing of Internet related services. In order to capitalize fully on
the new opportunities presented by the Internet and e-commerce, businesses will
require high quality, reliable and flexible data communications and
infrastructure services capable of supporting mission-critical applications. We
believe that an increasing number of businesses will seek to outsource these
services to third-party providers for several reasons. First, the rapid growth
of Internet-related businesses has created a shortage of information technology
personnel skilled in Internet protocol and e-commerce development. Second, many
companies believe that establishing leadership in their industry with respect to
Internet-related services is important to the future of their business. Given
this posture, time to market is critical and turning to a specialized,
third-party provider can often shorten time to market. Finally, many
infrastructure services require significant up-front investment. Many companies
will choose to preserve their capital to invest in activities that are integral
to their business strategy and seek to develop their infrastructure by
purchasing services rather than investing in networks, systems and equipment.
Rapid growth in colocation and web site hosting. While in the past only the
largest companies provisioned their own data networking services, until recently
businesses of all sizes typically housed, maintained and monitored their own web
and content servers. As Internet-enabled applications become mission-critical,
larger and more difficult to develop and maintain and require increasing amounts
of investment, we believe a substantial number of businesses will outsource
their colocation and web site hosting requirements to third parties. Forrester
Research, Inc. projects that the web site hosting business, including
colocation, dedicated and shared hosting, will grow from approximately $2.5
billion in 2000 to almost $20 billion by 2004. We believe that companies seeking
Internet protocol expertise, high levels of security, fault-tolerant
infrastructure, local and remote support and the cost benefits of a shared
infrastructure will be most likely to outsource these services.
Limitations of Internet protocol and the Internet. Despite the rapid
success of Internet protocol, the Internet faces limitations that may serve as a
bottleneck between the full potential of Internet protocol and its use in
mission-critical applications. First, in Internet protocol routing, packet data
travels through the network without a pre-defined path or guaranteed delivery.
Individual packets may travel separate paths and arrive at the network
destination at different times. Second, Internet protocol packets cannot be
identified as belonging to one class of traffic or another. For example, in a
given flow of Internet protocol packets it is not possible to separate
"real-time" traffic, such as voice over Internet protocol, from lower priority
traffic, such as e-mail. Each of these issues limits the utility of Internet
protocol for mission-critical, real-time enterprise networks. While we believe
that an improved version of Internet protocol will be implemented, the timing
and efficiency of these improvements remain uncertain.
Bottlenecks at network access points. The Internet is a network of
networks. Communication among these networks takes place at access points where
they interconnect. Despite the near ubiquity of the Internet, there are only a
few major public network access points. However, since the introduction of
network access points, the volume of Internet traffic has increased
dramatically, often overwhelming network access points' capacity to handle the
smooth exchange of traffic. The public network access points are now space
constrained, have inadequate power and air conditioning, have poor security,
often employ older, less technologically advanced switching technologies, have
limited or no available maintenance or support staff, and are not centrally
managed. No single entity has the economic incentive or ability to facilitate
problem resolution, to optimize peering of data networks, or to bring about
centralized routing administration. As a consequence of the lack of
coordination, and in order to avoid the increasing congestion at the public
network access points, selected backbone providers have established connections
at private network access points, connecting to other backbone providers for the
exchange of traffic and bypassing public network access points.
BUSINESS STRATEGY
Our objective is to tap the rapidly growing market for reliable, high-speed
data communications, Internet, and managed hosting services. Specifically, we
intend to:
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Establish SAVVIS as a leading provider of public and private Internet
Protocol (IP) transport solutions for business-to-business communications. We
intend to market a combination of our Intelligent IP VPN services and Private
NAP(SM) Internet access services to meet the demand in the market. We see
customers demanding a combination of Internet, extranet and intranet networking
services and believe our Intelligent IP(SM) platform and Private NAP(SM)
architecture sets us apart from the competition in meeting the demand.
Provide the Application Infrastructure Platform (AIP) support utilizing the
SAVVIS Intelligent Hosting services to meet customers e-commerce requirements,
and to compliment our IP transport solutions. Many customers are establishing
new or more robust Internet, extranet and intranet sites and want their service
provider to provide the application infrastructure platform for their servers,
operating system and application software. SAVVIS is focused on providing full
management of the customers' application platform, hosted in our
state-of-the-art data centers in St. Louis, San Francisco, Toronto and London.
In addition, we intend to provide both private and public IP transport to the
customers hosted site.
Capitalize on the demand for outsourced services in the VPN (Virtual Private
Network), Internet, and managed hosting markets. Data communications and the
Internet are mission-critical to thousands of businesses worldwide and,
according to industry studies, the market for these services continues to grow
rapidly. Corporations are continually expanding and enhancing existing networks
and deploying new services in response to this growth. By providing a wide range
of services for Internet, hosting and managed data networking services, we offer
a single source solution to the key challenges faced by corporate information
technology managers implementing Internet, intranet and extranet applications.
We are focused on the demand for simple, flexible solutions, and our
market-leading IP-VPN products and managed hosting services to allow us to
address heretofore untapped segments of the business market.
Capitalize on our connectivity to financial institutions worldwide. We are
aggressively marketing our services to the traditional and emerging financial
services companies, based on our connectivity to over 4,700 companies, including
75 of the top 100 global banks and 45 of the top 50 brokerages. In today's
rapidly deregulating financial market, financial institutions must be
fast-to-market with innovative delivery methodologies that speed transactions or
they risk obsolescence. We believe we are well positioned to meet the need,
because our community-of interest network, Financial Xchange(SM), provides the
performance and security of a private network with the reach and rapid
deployment of the Internet.
Target potential customers in buildings connected to our network. We intend
to actively market our services to the businesses in the over 6,000 buildings
worldwide that are connected to our network. These buildings are generally
located in central business districts of major cities and are typically occupied
by multiple businesses. Because our network is already in place, we expect to
enjoy time-to-market, cost and quality advantages when delivering services to
current and new customers located in these buildings. We are deploying broadband
wireless access to 500 of these buildings, reducing our cost of service delivery
and enhancing our ability to sell high-speed connectivity.
Expand our network and PrivateNAPs(SM) infrastructure and add
industry-leading "intelligence" to our platform. We have completed a major build
out of our global network, now reaching 121 cities in 46 countries. The number
of POPs on the SAVVIS Intelligent IP Network(SM) increased by nearly 57%,
totaling 130 at the end of 2000 versus 83 at the end of 1999. Four new
PrivateNAPs(SM) were added to the network, including the industry's first
European PrivateNAP(SM) in London, for a total of 12 currently in operation.
Since the launch of our Intelligent IP Network(SM) architecture last May, which
puts the "smarts" on the network instead of in customer premises equipment, we
have deployed 58 Nortel Networks Shasta 5000 BSNs. The network also is powered
by 324 Lucent ATM backbone switches; 1,747 Lucent ATM edge devices; and 13,254
Nortel, Cisco and DSL edge routers. In addition, we have entered into agreements
with Nortel Networks and Level 3 Communications through which we intend to
establish our own fiber-optic backbone by the fourth quarter of 2001, replacing
our leased-line network. The initial 20,000 route-mile redundant backbone will
be comprised of 8 rings, connecting 50 of our markets in the U.S. and Canada. We
believe that by implementing and managing our own fiber backbone, we will
achieve greater control over our network.
Grow domestic and international distribution channels. We intend to
aggressively grow our distribution channels, by expanding our direct channel as
well as utilizing alternate channels. We intend to continue to increase the size
of our direct sales force for VPN, Internet and managed hosting services. We
have entered into agreements with multiple partners, including Science
Applications International Corporation (SAIC), PRIMUS Telecommunications Group,
QuantumShift and Viatel, Inc., to resell our services and will continue to sign
up additional partners in 2001.
Provide enabling infrastructure for e-commerce services. We believe that
many of our target customers, particularly financial services companies, are
aggressively pursuing e-commerce strategies. We believe that our network
architecture of ATM technology and PrivateNAPs(SM), highly available domestic
and international managed data networking, and managed hosting offering uniquely
position SAVVIS to help our customers capitalize on the substantial anticipated
growth in e-commerce.
Develop and market new services. We intend to continue to develop new
services, such as voice and video that will enable us to further leverage our
network infrastructure and our customer base. For example, we have deployed ATM
to the edge of our network
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and will aggressively deploy ATM devices at customer premises allowing for the
provision of multiple network applications with different quality of service
levels over the same local access lines and customer equipment. The deployment
of these devices will allow our customers to combine services that they may
currently buy from multiple vendors, each on a different network. We have also
launched the industry's first network-based IP VPN offering, and intend to
continue to develop new tools, such as a web-based Network Creation System, to
enable our customers to outsource the management of their intranets, extranets
and Internet services to us, while maintaining control themselves.
SAVVIS SERVICES
We designed the SAVVIS Intelligent IP Network(SM) to offer a guaranteed,
high level of performance for both Internet and data networking services. We
deliver a comprehensive range of high performance, quality of
service-differentiated products, including data networking, Internet access,
intranets, extranets, e-business hosting and other services.
A common feature among all of the services that we provide to our customers
is the substantial flexibility to choose among a range of offerings, including
from a service-only basis to a fully managed basis. On a service-only basis, the
customer is responsible for the design and integration of its network and the
purchase of network hardware, relying on us only for network services. On a
fully managed basis, we are responsible for the design, implementation,
integration and ongoing support of the customer's network.
INTEGRATED NETWORK SOLUTIONS
SAVVIS put IP Intelligence into our network and extended the benefits all
the way to the customer premises. This enables us to deliver functionality,
security and performance to our customers, and enables our customers to
customize our products according to their needs. Our customers need only to tell
us who they want to talk to, which of four Quality of Service (QoS) levels is
appropriate for each application, and how much bandwidth they require. SAVVIS
then provides them with a bundled solution that delivers the security,
flexibility and affordability they need.
Until now, companies had to work with various service providers, forcing
them to spend lots of time and money patching together different network
configurations to address each of their multifaceted needs. But now that SAVVIS
has put IP Intelligence into our network, we are able to integrate numerous
networking strategies -- Internet, intranet, extranet and e-business hosting --
into one simplified and affordable solution over one local loop. Customers can
take advantage of a full continuum of solutions, without having to manage
customer premises equipment for routing or firewalling. Our customers can
prioritize their applications and select the QoS level, from e-mail to video
streaming. And, they can hook up to the Internet or roll out complex extranet
applications, with a fully integrated networking solution from SAVVIS.
Extranet Solutions. Much of business success depends on being able to
exchange information and communicate with suppliers, partners and customers.
That's why SAVVIS developed its Intelligent IP Network(SM) platform to enable
our customers to choose between having their own private extranet or combining a
private extranet with Internet access to off-net locations. Our customers can
communicate and conduct transactions with multiple partners in a secure and
managed environment, without having to spend lots of time and money deploying
expensive premises-based security. With a SAVVIS extranet, they can take
advantage of our networking capabilities, define who gets access to their
community of users, and determine their own set of rules. We offer a broad range
of ATM-based QoS levels and advanced network-based IP features, with security
policies defined by the customer. The customer is in control, secure in the
knowledge that their extranet application is running on the SAVVIS Intelligent
IP Network(SM).
Intranet Solutions. Intranet communications are confidential, highly
proprietary information that need to be protected from competitors. Businesses
need to maintain tightly controlled user rights and privileges. But up until
now, businesses only had one choice: spend money on expensive, inflexible
traditional private networks, based on either frame relay or private lines.
Today they have new choices. Now they can get intranet solutions that combine
the security and performance of private networking with the flexibility and
economy of the Internet. And once again, SAVVIS makes everything easy for them.
Customers just need to define whom they want to connect to, choose one of four
different QoS levels, and determine their bandwidth requirements. They won't
have to waste money or resources deploying routers and firewall devices at each
office location. SAVVIS will package everything into one simple, flexible
bundled solution. In addition, customers can use the excess bandwidth of their
local loop for extranet or Internet access.
Internet Solutions. SAVVIS built its global Intelligent IP Network(SM) for
high performance and reliability. Customer data speeds through a controlled,
performance-guaranteed environment that completely bypasses the congested public
Internet exchange points. Through our PrivateNAPs(SM) , their data is directly
connected, giving them the most direct route on the Internet and instantaneous
access to the world. SAVVIS offers a wide range of Internet access options,
including 56K, DSL, DS1, OC3 and Ethernet. Our
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customers are able to add new services easily or change existing applications by
using the excess bandwidth of their existing access circuit to add or change
applications virtually instantaneously.
Managed Hosting Services
Whether businesses are deploying an e-business Web site, extranet or
intranet, SAVVIS can help create hosting and networking solutions that will grow
with them. If they want to establish a Web presence on the Internet quickly,
ensure a high level of system availability and assure that their customers and
users have a positive experience, SAVVIS Intelligent Hosting(SM) is the answer.
Intelligent Hosting(SM) includes fully managing their hardware, operating
systems and Web servers within our secure, reliable data center environment and
distributing traffic over our highly rated Internet backbone or over their
intranet or extranet.
Based on their business needs, they can choose other value-added options
including database management, load balancing, security services, back-up and
recovery solutions, WebTrends(TM) reporting and managed storage services
(including business continuance and managed testing environment). Our fully
managed Intelligent Hosting(SM) solutions eliminate the need for our customers
to monitor and manage hardware and operations, stay abreast of the latest
software upgrades and patches, and hire and train the personnel necessary to do
the job. Additional services can then be added as needed for a customized
solution.
By selecting our hosting services, our customers are able to reduce capital
expenditures for expensive networking equipment, eliminate the expense of
supporting their Internet servers and avoid having to spend time and money on
building a secure data center facility. Our customers get direct connectivity to
the SAVVIS network -- giving them unsurpassed reliability, availability and
security -- with no local loop charges, no routers or hubs charges and reduced
staffing expenses. Also, we allow our customers to lease the equipment necessary
to build their site, which helps to further reduce capital costs and scale the
site for future business growth.
ACCESS ALTERNATIVES
How a business connects to the Internet - speed, performance and security -
can be crucial to its success. SAVVIS offers a wide range of scalable Internet
access methods ranging from fractional DS-1 through OC-3, and SAVVIS also
supports Ethernet access. Whether a customer is using the Internet to conduct
business communications or e-commerce, they'll get Internet access that is of
"mission critical" caliber with SAVVIS. And down the road if they decide they
also need an intranet or extranet, they will not need to design a whole new
network. SAVVIS enables its customers to use the excess bandwidth of their
existing access circuit to add or change applications virtually instantaneously.
SAVVIS Internet access solutions include: dedicated Internet connections
(fractional DS1 through OC3) Our dedicated fractional DS1 access gives customers
Internet connection speeds from 128Kbps up to 1.544Mbps. DS3 gives them speeds
up to 45Mbps. And SAVVIS will support OC3 connectivity providing 155Mbps of
bandwidth - for high-volume businesses that need optimum connectivity 24 hours a
days, seven days a week.
Set Usage At A Fixed Monthly Cost. SAVVIS Internet access options give
customers complete control over their usage and monthly cost. DS1 service is
available in fractional increments from 128Kbps up to 1.54Mbps. DS3 service is
available in fractional increments from 3Mbps up to 45Mbps. OC3 and OC12
services are sold on a case by case basis, until we install our fiber rings;
then OC3, OC12 and OC48s will be available as standard products.
Manage The Peaks And Flows Of Data Usage. If a customer's bandwidth needs
fluctuate throughout the month, our burstable access option may be an attractive
choice for them because full bandwidth is available as they need it but they are
billed based on their actual usage. With SAVVIS' burstable Internet access
service, our customers are not required to pay for excess bandwidth that they
don't need.
Digital Subscriber Line (DSL). For businesses that have outgrown dial-up or
ISDN access, are connecting to the Internet for the first time or are adding
remote access locations, DSL offers high-speed Internet service that is "always
on."
Ethernet. For customers who feel comfortable operating in the 10/100 Mbps
Ethernet environment, SAVVIS Ethernet access serves as a cost-effective solution
to support high volume Internet traffic from a multiple user LAN or heavy data
exchange from a Web server.
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SALES AND MARKETING
We contact potential new customers through our direct sales force and our
recently implemented lead referral program. Our direct salespeople together with
our sales engineers develop sales proposals for potential new customers. After a
sale is completed and the services are implemented, the client solutions team
assumes the management of the customer relationship, handling support issues and
selling additional services and connectivity as the customer's business grows.
Direct Sales. Our direct sales force utilizes a "solution selling"
approach, qualifying the customer's IP networking and hosting requirements. We
then bring in product and engineering experts to design the final solution for
the customer. Under this approach, we are able to effectively manage the
relationship with the customer while utilizing more specialized resources to
ensure that the right solution is proposed and implemented. All sales
representatives take part in an extensive training program designed to develop
in-depth technical expertise so they can better understand customers' complex
networking needs and develop customized solutions. In addition, they participate
in "solution selling" training to teach them the best techniques to qualify and
sell the SAVVIS product line. We employ approximately fifty people in ten major
cities in the U.S. and approximately 150 representatives based in Herndon, VA
and St. Louis, MO. We also have small sales teams in Europe, Asia and Latin
America, who are focused on direct sales and engaging alternate distribution
channels by the end of 2001.
Lead Referrals. We believe that additional content providers will be
interested in establishing lead referral programs. A relationship with SAVVIS
will enable a content provider to deliver its service in a real-time, high
quality manner and provide an incremental revenue opportunity through a lead
referral commission.
Alternate Channels. In addition to relationships with content providers, we
are developing new distribution arrangements with small to large partners,
including SAIC, Primus, QuantumShift and Viatel. To help these companies compete
in today's changing market, our alternate channels strategy brings companies
network infrastructure, sales and technical support and value added data
services. Through our Web based access our partners have access to our lead
referral program, free marketing materials and collateral and an exclusive
incentive promotion. Our channel partners will benefit by generating additional
revenues, providing a more complete service bundle and reduce customer churn. We
have identified distribution opportunities with Internet service providers,
competitive local exchange carriers, DSL companies and other communications and
Internet-related companies in the United States, Europe, Asia and Latin America.
Client Solutions. Our client solutions team is responsible for customer
relationship management. The team alerts customers when their bandwidth
utilization approaches capacity and advises customers on methods to improve the
performance and security of their network using additional SAVVIS services. This
team is also able to cross-sell to existing customers additional services, such
as advising on VPN services and managed hosting services.
Marketing. Our marketing programs are designed to build national and global
awareness of the SAVVIS brand name and its association with high performance,
high quality VPN services, Internet services and managed hosting services. We
use brand awareness and direct marketing programs to generate leads, accelerate
the sales process, retain existing customers and promote new products to
existing customers. Our print advertisements are placed in trade journals,
newspapers and special-interest publications. We participate in industry trade
shows, such as Networld+InterOP, Internet World, and the Securities Industry
Association (SIA). We also use direct mail, e-newsletters, widespread fax
distributions, surveys, telemarketing, Internet marketing, on-line and on-site
seminars, collateral materials, advertising, welcome kits and direct response
programs to communicate with existing customers and to reach potential new
customers. Many of these marketing programs are co-funded by our suppliers. Our
marketing programs are targeted at information technology executives, as well as
senior marketing and finance managers. We closely track the impact and
effectiveness of our primary marketing programs.
Sales Force Automation. We use our proprietary sales force automation
system to manage all pre-sales communications with our prospective customers.
All distribution and tracking of sales leads occur through this system. Sales
leads are imported from data sources such as corporate web sites, telemarketing,
direct mail and national advertising campaigns, and assigned regionally to the
desktops of the appropriate sales representatives. All contact with these
prospects is documented in the sales force automation system through every step
of the sales cycle, from initial contact to contract receipt. In addition, this
system allows sales management to monitor the sales activity of their specific
sales representatives and generate sales forecasts based on that activity.
Further, our sales force automation system tracks all marketing communications
with the prospective customers, allowing us to measure the effectiveness of
various collateral materials and marketing campaigns in an effort to maximize
our marketing dollars. Lastly, our sales people use our sales force automation
system to track and manage their personal sales prospects and to send customized
packages of sales literature, brochures and faxes directly from their computer
desktops, thereby improving sales efficiency.
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CUSTOMERS
We currently provide services to approximately 2,550 customers. On February
18, 2000, Bridge entered into a network services agreement with us and became
our largest customer. Bridge represented approximately 81% of our 2000 revenues.
On February 15, 2001, Bridge's U.S. operating subsidiaries filed for bankruptcy
protection. Other than Bridge, no individual customer accounted for more than 5%
of our revenues during the year ended December 31, 2000. We also provide
services to many Internet service providers and Internet-centric businesses.
Our contracts with our customers are typically for one to three years in
length. The Bridge network services agreement is a ten-year contract. Many of
our customer contracts contain service level agreements that provide for service
credits should we fail to maintain specified levels of quality.
CUSTOMER SERVICE
Our goal is to provide the highest level of customer service in the
industry. We believe that high quality customer service is critical to
attracting and retaining customers and to satisfying the rapidly growing data
networking, hosting and Internet services needs of these customers. Our
comprehensive approach to customer service and satisfaction includes a focus on:
o providing written guarantees of service quality;
o providing a choice of services, either standard or fully managed (i.e.
outsourced management and equipment included), and
o providing effective network management, monitoring and support for our
customers' data networks.
We believe our network architecture, proprietary routing policies and
industry leading service level agreements provide our customers with very high
service quality. We are able to offer our customers different levels of service
priority for their different data transmission needs over one high-quality
network. For example, e-commerce and real-time applications, such as market data
delivery, can be assigned the highest level of quality of service, while other
applications, such as e-mail, can be assigned a lower priority of service. By
assigning the highest level of service only to mission-critical or real-time
applications, customers can lower their overall data services costs without
compromising their data networking requirements.
Customer Call Centers. Customer support personnel located in call centers
in St. Louis, Missouri (24 hours a day, 365 days a year), London, England and
Singapore handle service inquiries from our customers and for Bridge customers,
and provide this service in eight languages. These personnel are organized in
client teams and are highly trained to identify and resolve customer issues
rapidly and completely. Our customer call center support services are supplied
to us by Bridge under a ten-year technical services agreement. Bridge reported
to us that in December 2000 its call centers answered an average of 6,000 calls
per week, maintained an average speed of answer of under 15 seconds and resolved
98% of customer issues with front-line support personnel. To track trouble
tickets and customer information, Bridge uses a proprietary management platform
based on Vantive enterprise software, a highly scaleable platform for problem
tracking and customer record access and maintenance that is easily accessible by
personnel at all of our network operations centers. We use an integrated
client/circuit information database that allows our customer support personnel
to quickly access a customer's profile from any of our support centers. In our
local markets, we have available to us over 270 field technicians who are
experts in Internet protocol, Unix, NT and ISDN technology and who are generally
able to respond to customer requests within two hours.
Management, Monitoring and Maintenance. We provide our customers with
detailed monitoring, reporting and management tools that allow them to review
their usage patterns, network availability, outage events, latency and data
loss. These tools allow our customers to evaluate the performance of our service
against our service level guarantee as well as review utilization and
performance data to facilitate their network planning and design activities.
Service Level Agreements. The consistent, reliable performance of the
SAVVIS Intelligent IP Network(SM) enables us to provide effective service level
agreements to our customers. We believe that companies unable to support a
commensurate level of predictable network performance will not be able to
provide service level agreements with value to the customer or will do so at
substantial risk to their own business.
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SAVVIS INTELLIGENT IP NETWORK(SM) INFRASTRUCTURE
OVERVIEW
The SAVVIS Intelligent IP Network(SM) reaches 46 countries, with facilities
in 121 major cities, including 64 international cities and 57 U.S. cities. Our
network interconnects over 6,000 buildings worldwide and is based on ATM, frame
relay and Internet protocol technologies. In addition, our network incorporates
12 PrivateNAPs(SM), which allows our Internet traffic to bypass the congested
public Internet access points.
We have designed our network to enable us to offer our customers high
speed, high quality services, as well as a range of quality of service levels
and multiple levels of redundancy. Our network is designed with:
Open System Architectures. Our network is based on ATM, frame relay and
Internet protocol technologies. These are open systems networking protocols that
are in widespread use in data communications. Internet protocol is the most
commonly used and fastest growing networking protocol in the world. By carrying
Internet protocol on our network, we generally allow our customers to connect to
their customers, suppliers and remote offices using equipment already installed
in their networks and the networks to which they connect. Additionally, by using
ATM and frame relay in our network, we enhance network utilization and quality
of service, and we are able to easily communicate with third party networks for
the delivery of traffic on and off our network without procuring special
interface technologies or devices.
Quality of Service Differentiation. Our network architecture allows us to
offer and guarantee different levels of service priority for customers'
different data transmission needs. For example, e-commerce and real-time
applications, such as voice, can be assigned the highest level of priority,
while other applications, such as e-mail, can be assigned a lower priority of
service. By offering a quality of service differentiated product, we enable
customers to select a price/performance combination that is appropriate for
their needs. Customer sites where we have deployed ATM devices at the customer
premises enable the customers to run multiple applications, such as Internet
access, intranet and private voice, over the same equipment and local access,
thereby saving on local network transport and equipment costs.
High Reliability. We utilize multiple, redundant circuits, switches and
physical locations to substantially reduce the effects of a single point of
failure within our network. This redundancy, combined with our switching and
routing equipment, generally enables us to automatically reroute traffic when a
failure occurs, resulting in higher overall network performance and integrity.
Our backbone switches also incorporate high levels of equipment-specific
redundancies, resulting in higher levels of availability than those found in
basic routing platforms. We also employ uninterruptable power supplies and/or
electric generator back-ups at each switching facility, designed to limit the
impact of local power outages on our network.
Global Network Components
The components of our network include the following:
Switching Facilities. There are over 300 Lucent ATM and frame relay
switches, providing a highly redundant switch backbone deployed throughout the
SAVVIS Intelligent IP Network(SM). We have over 300 backbone routers installed
and there are approximately 14,700 customer premise routers located in office
buildings and customer sites. Our switches are located in secure facilities,
which provide highly reliable, direct access to high-speed telecommunications
infrastructure. In each switching facility, we rent space, install networking
equipment, including ATM or frame relay switches, routers and high-speed analog
and digital modems.
Backbone Capacity. Our network is designed with a highly redundant backbone
infrastructure, including diversely routed long haul and local access
connections from multiple carriers. We interconnect our switching facilities
through high speed lines leased from a variety of carriers, including Qwest
Communications International, Inc., MCI WorldCom, Inc. and Broadwing, Inc.,
formerly known as IXC Communications, Inc. Our leased line connections range in
capacity from 45 Mbps through 620 Mbps in the U.S. and up to 155 Mbps
internationally. To enhance our redundancy, we lease ATM service from Sprint
Corporation. This service is delivered using the highest quality of service mode
available and our service connections range in capacity from 45 Mbps through 620
Mbps. The combination of our leased lines and Sprint ATM service makes our
transmission backbone highly redundant so that at least two diverse paths exist
between all of our switching facilities. The "fault tolerant" configuration of
our network allows data packets to travel on many alternate paths to connect
points on our network.
In addition to our leased line backbone, we are in the process of lighting
our own dark fiber network in the United States. This network consists of
approximately 20,000 route miles of fiber covering the vast majority of
high-density cities within the U.S. The
12
fiber is being purchased from Level 3 and lit with Nortel optronics gear. The
initial development will light one bi-directional, protected OC192 (10 Gbps)
circuit on each fiber span, with OC48 (2.5 Gbps) handoffs in each U.S. city
where we connect to the fiber backbone. This initiative is presently on hold
pending waiver discussions due to the fact that we are in default under the
Nortel agreement. (See Note 7 to the Company's 2000 financial statements
beginning on F-1 included herein).
PrivateNAPs(SM). For our customers' Internet traffic, we have built private
network access points, or PrivateNAPs(SM), where we connect to the Internet
backbones operated by Sprint Corporation, Cable & Wireless plc and UUNET, an MCI
WorldCom company. At each of our PrivateNAPs(SM), we are connected to these
carriers through transit agreements that allow us to connect to their Internet
networks for a monthly fee. Since we are a paying customer of each of these
Internet backbone providers, we believe we realize better response times,
installation intervals, service levels and routing flexibility than Internet
service providers that rely solely on free public or private peering
arrangements. We currently operate 11 PrivateNAPs(SM) in the U.S. and one in
London. In addition, to enhance our carrier redundancy, at each of our
PrivateNAPs(SM), we connect to other Internet backbones through peering
arrangements where each party to the peering arrangement agrees to carry the
other party's traffic for free. We have peering arrangements in place with
AboveNet Communications, Inc., America Online, Inc., DIGEX, Incorporated, Exodus
Communications, Inc., Frontier GlobalCenter, Level 3 Communications, LLC, Inc.,
PSINet Inc., Williams Communications Group, Inc. and Winstar Wireless, Inc.
These peering arrangements allow for settlement-free, direct connections between
networks, where local access charges are generally split evenly between the
applicable parties. Smaller Internet service providers typically connect to our
network through transit agreements that allow them to connect to our network for
a fee.
Our PrivateNAP(SM) architecture combined with our proprietary routing
policies enables us to route customer traffic directly onto the Internet
backbone of its destination for a substantial portion of global Internet
addresses. This network architecture allows our customers' Internet traffic to
generally bypass congested public Internet network access points, thereby
reducing data loss and latency and improving reliability and performance. In
addition, customers directly connected to the same PrivateNAP(SM) typically get
one-hop access, meaning their data pass through only one router, when
communicating with each other, and two customers connected to different
PrivateNAPs(SM) typically enjoy two-hop access, meaning their data pass through
only two routers, when communicating with each other, in both cases completely
bypassing the public Internet.
Managed Hosting. We have approximately 150,000 square feet of data center
facilities located in St. Louis, San Francisco, London and Toronto. All of these
facilities are served by high speed connections for local access. These
facilities are built to state-of-the-art levels with high availability,
mission-critical environments, including uninterruptable power supplies, back-up
generators, fire suppression, separate cooling zones and seismically braced
racks. These facilities will be accessible 24 hours a day, 365 days a year, both
locally and remotely, and will have high levels of physical security.
Network Operations Centers
Our global network operations center, which is owned and managed by Bridge
and located in St. Louis, Missouri, operates 24 hours a day, 365 days a year,
and is staffed by over 20 of our skilled technicians. We also have regional
network operations centers in London and Singapore. These regional centers
operate for ensuring backup for the St. Louis facility. From these network
operations centers, we remotely monitor the components of the SAVVIS Intelligent
IP Network(SM), including our PrivateNAPs(SM), and perform network diagnostics
and equipment surveillance. The network operations centers use sophisticated,
proprietary network management platforms based on the Lucent NavisCore, HP
OpenView, and Nortel Optivity programs to monitor and manage our switching
facilities and our routers.
TECHNOLOGY OVERVIEW
Private networks. Private networks typically comprise a number of private,
leased lines that interconnect multiple corporate locations. The advantages of
private lines include quality, since capacity is reserved for the exclusive use
of the network owner, and security, since the owner's data transmissions are not
commingled with those of other customers. Private line networks have been most
popular in the U.S., where capacity prices are lowest. While private lines are
typically secure and reliable, they do not use network capacity efficiently and
are not flexible or scaleable as changes in network topology are implemented.
Shared networks. Until recently, prices for long-haul telecommunications
capacity outside of the U.S., particularly international capacity, were
relatively expensive. Since the advent of data networking, only users with
extremely high capacity requirements invested in private networks in these
locations. Most other users employed shared networking technologies, whereby
multiple corporate locations would be interconnected with the data network of a
major telecommunications carrier or value-added network service provider for
carriage to the appropriate destination. X.25 was an early open shared network
protocol that was designed to support mission-critical communications over
analog networks. X.25 has been extremely popular outside of the U.S., where
until recently private line networks have remained expensive, and in developing
markets where the telecommunications infrastructure is sometimes unreliable.
X.25 contemplates extensive error detection and data recovery processes, which
slows the effective rate of transmission.
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Today, ATM, frame relay and Internet protocol are driving the migration of
traffic from private line networks to shared networks and from older open
protocols such as X.25 to newer architectures.
Frame Relay. Frame relay evolved from X.25 networks and today is widely
used for applications such as local area network-to-local area network
communications. Unlike X.25, frame relay does not perform any complex error
detection or error recovery of data. As a result, it is a simpler and faster
technology. Frame relay circuits are effective to create a network of
interconnected sites because each site needs only one link into the frame relay
network to communicate with all other sites. Frame relay is less costly than
point-to-point private networks, and its software-defined "virtual circuits"
make it easier to alter network topology as connectivity requirements change.
One limitation of the frame relay protocol is its application for real-time
services. Frame relay packets are variable in length, and as large data files
transit the network they can cause delays at key aggregation and switching
points, often causing other traffic to be delayed. These delays can materially
degrade the quality of real-time services such as voice and video.
ATM. The ATM protocol was specifically designed to support the transmission
of all types of content, including data, video and voice, over a single network.
ATM generally has the ability to prioritize cells to ensure that real-time data
takes priority over less time-sensitive material when transiting the network.
This enables service providers to offer service guarantees with a greater degree
of confidence and facilitates the introduction of real-time services that are
difficult under other protocols.
Additionally, ATM data cells are small and fixed in size, facilitating
high-speed line transport at speeds up to 2.5 billion bits per second. One
limitation of ATM is that the benefits created by the small, fixed nature of ATM
cells also create incremental traffic on the network. Each cell requires its own
identification and addressing information, which is repeated in each of many
individual ATM cells that comprise a given data transmission. The replication of
this "header" information generates additional overhead for the network,
requiring the network operator to provision additional transmission capacity.
Internet Protocol. Internet protocol is a simple, highly scaleable protocol
that is a core element of the architecture of the Internet and can be used
across most network technologies in use today. Internet protocol has also become
the communications protocol of choice for the desktop and the local area
network, thus data networking over Internet protocol requires no protocol
conversion, reducing overhead and improving performance. The protocol does not
distinguish among classes of traffic, which limits its ability to deliver
real-time services.
Our Network. We have built the SAVVIS Intelligent IP Network(SM) to take
advantage of the rapid growth of Internet protocol in corporate networks, to
offer customers the ability to run multiple applications on a single network and
to allow customers to choose the quality of service level which best meets their
needs. By building our network to run Internet protocol over ATM, we allow our
customers to overcome the limitations of Internet protocol and designate the
level of priority to be accorded to their traffic.
COMPETITION
The markets that we serve are intensely competitive. In addition, we expect
to face significant additional competition in the future from existing
competitors and new market entrants. Many of our competitors have greater
financial, technical and marketing resources, larger customer bases, greater
name recognition and more established relationships in the industries that we
operate in than we do.
We believe that a highly reliable network infrastructure, a broad range of
quality products and services, a knowledgeable sales force and the quality of
customer support are the primary competitive factors in our targeted markets and
that price is generally secondary to these factors. We believe that we presently
are well positioned to compete favorably with respect to most of these factors.
Our current and potential competitors in our targeted markets include:
VPN and Data Networking Companies. Several data networking companies such
as Equant N.V., Infonet Services Corporation, Concert Management Services Inc.
and Global One offer data networking services to business customers worldwide.
These services include ATM and frame relay, private line, Internet access and
network outsourcing. In addition, many competitors in the U.S. offer traditional
data communications services, such as AT&T, Sprint and WorldCom. These companies
have significant experience in offering tailored services and market their
expertise in providing these services and related technology.
Internet Service Providers. Our current and potential competitors in the
market include Internet service providers with a significant regional, national
or global presence targeting business customers, such as AT&T Corp., Cable &
Wireless plc, Genuity, PSINet Inc., Sprint Corporation, and UUNET, an MCI
WorldCom company. Many of these companies are developing Internet-based virtual
private network services that attempt to replicate some or all of the
functionality of our VPN services.
14
Telecommunications Carriers. Many large carriers, including AT&T Corp.,
British Telecommunications plc, Cable & Wireless plc, MCI WorldCom, Inc.,
Deutsche Telekom AG and Sprint Corporation, offer data networking and Internet
access services. They compete with us by bundling various services such as local
and long distance voice, data transmission and video services to their business
customers. We believe that there is a move toward horizontal integration by
telecommunications companies through acquisitions of or joint ventures with
Internet service providers to meet the Internet access and data networking
requirements of business customers. Accordingly, we expect to experience
increased competition from these telecommunications carriers.
Managed Hosting Competitors. There are more limited competitors in the
managed hosting market, including Digex and Exodus as the two primary players.
Other carriers and Internet service providers are also entering the managed
hosting market, including AT&T, Sprint, UUNET and Qwest. Many of these
competitors have struggled in providing managed hosting services, and have been
more focused on colocation services until this year.
REGULATORY MATTERS
As with any provider of global data networking and Internet access
services, we face regulatory and market access barriers in various countries
resulting from restrictive laws, policies and licensing requirements. Our major
regional markets consist of North America (United States and Canada), the
European Union and the Asia Pacific Rim. The market for our data networking and
Internet access services in each of the major economies within these regions are
now open to foreign competition, including the United States, Canada, France,
Germany, Italy, the United Kingdom, Australia, Hong Kong, Japan, and Singapore.
We believe that we are authorized to provide data networking and Internet access
services as an independent operator under the applicable telecommunications
regulations in all of these countries.
In the United States, Australia, France, and the United Kingdom, no
specific license or authorization is required to provide our services. In
Canada, we hold a Class A License for the Provision of Basic International
Telecommunications Services; no specific license is required to provide domestic
services. In Hong Kong, we hold a Public Non-Exclusive Telecommunications
License. In Japan, we hold a Special Type II Telecommunications Business
License. In Singapore, we hold a Services-Based Operator (Individual) License.
In the countries of Germany and Italy we have complied with notification
requirements.
Most other countries that we believe represent significant revenue
potential have opened their markets to our data networking and Internet access
services, although authorization is required in many of them. In some of these
countries, including Austria, Belgium, Denmark, Finland, Ireland, Luxembourg,
Netherlands, New Zealand, Norway, Poland, Puerto Rico, Spain, Sweden,
Switzerland, and Taiwan, we are authorized to provide data networking and
Internet access services to Bridge and third party customers. Of these
countries, in Belgium, Denmark, Finland, New Zealand, Norway, Puerto Rico, and
Switzerland, no individual license is required. In Ireland we hold a Basic
Telecommunications License. In Spain, we hold a General Type C Authorization. In
Taiwan, we hold a Type II Telecommunications License. In the countries of
Austria, Luxembourg, Netherlands, Poland and Sweden we have complied with
notification requirements.
In other countries, including Argentina, Brazil, Chile, Columbia, Panama,
Peru, and South Korea, we are currently authorized to offer data networking and
Internet access services only to Bridge. However, we have already filed license
applications in Argentina, Brazil and Chile that will enable us to provide
services to third party customers and are in the process of preparing
authorization requests for the remainder. Although we expect to obtain the
necessary approvals to provide services in these countries to both Bridge and
third party customers, we cannot assure you that we will obtain any of these
approvals. In addition, while we are authorized to provide services to Bridge in
the Bahamas, Bermuda, India, Indonesia, Mexico, Philippines, and Turkey, these
countries' regulations do not yet permit us to provide services to third party
customers. Our business plan does not contemplate selling significant services
in these markets other than to Bridge in the near term. Therefore, we do not
believe that our inability to offer services to third parties in these countries
is significant.
In addition, we face regulatory and market access barriers in countries in
which we do not operate but in which we have an obligation to purchase the
Bridge Internet protocol network assets that we have not already acquired in the
Bridge asset transfer. In some of these countries, we are currently unable to
purchase these assets due to regulatory restrictions prohibiting foreign
competition. These countries include Bahrain, China, Kuwait, Macau, Saudi
Arabia, Thailand, and the United Arab Emirates. As these countries liberalize
their telecommunications markets, we will seek the authorizations necessary to
acquire and operate the network assets in order to provide services to Bridge
and, if permissible, other third party customers. Our business plan does not
contemplate selling services in these closed markets to either Bridge or other
customers in the near term. Therefore, we do not believe that our inability to
access these markets is significant.
In the remaining countries where we have an obligation to purchase the
Bridge assets, regulatory conditions now permit us to acquire these assets and
provide services to both Bridge and other customers. Consequently, we are in the
process of seeking regulatory approvals to offer services to Bridge and third
parties in Greece, Hungary, Malaysia, South Africa, and Venezuela. We are
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in the process of preparing authorization requests for the each country in this
group. Although we expect to obtain the necessary approvals to acquire the
Bridge assets and provide services to both Bridge and third party customers in
these countries, we cannot assure you that we will obtain any of these
approvals. As our business plan does not contemplate selling significant amounts
of services in these markets in the near term, we do not believe that the
failure to obtain the authorizations in these countries will have a material
impact on our revenues. At present, we do not know the extent to which Bridge,
its international affiliates or any future purchaser of all or a substantial
part of its international operations will continue to operate in these countries
due to the uncertainties surrounding the overall resolution of Bridge's
bankruptcy proceedings, which may impact our ability to acquire the assets not
already transferred by Bridge to SAVVIS.
World Trade Organization Agreement and its Implications
In December 1993, 54 countries during the Uruguay Round of World Trade
Organization ("WTO") negotiations made commitments to permit market access for
Value-Added Services. On February 15, 1997, 69 countries at the WTO reached an
agreement to liberalize basic telecommunications services. This Agreement on
Basic Telecommunications Services (the "ABT") formally entered into force,
binding the signatory countries, on February 5,1998. Since then, the number of
signatories has increased to 80. Before the agreement came into force, only 17
percent of the world's top 20 global markets were open to U.S. firms; now,
measured by annual sales, U.S. companies have gained access to over 95% of
global telecommunications markets, according to the International
Telecommunications Union. The current round of WTO negotiations on Trade in
Services commenced in 2000. With respect to the telecommunications, the United
States has proposed a negotiating framework which calls on all WTO members to
implement fully their basic telecommunications commitments, adhere to the ABT's
Reference Paper on Regulatory Principles, establish the goal of full
privatization of telecommunications operators and networks, ensure full
value-added services commitments, and maximize commitments in all services that
can be delivered electronically.
Despite the enactment of the ABT, regulatory obstacles continue to exist in
a number of signatory countries. First, some signatory countries made only
limited commitments in terms of the services that they were willing to
liberalize and the timeframe in which they were willing to do so. Second, some
less developed signatory countries are not well prepared for competition or for
effectively regulating a liberalized market; gaining the requisite experience
and expertise is likely to be a long and difficult process. Finally, even in the
more liberalized countries, there remains considerable "post-liberalization red
tape," such as complicated licensing rules, foreign ownership limits, high fees
and undeveloped competition and interconnection safeguards. Finally, some
countries with potentially large markets for telecommunications services, such
as China and Russia, are not yet WTO members and thus are not bound by the ABT's
framework on market access.
Corporate Presence
In a number of jurisdictions, we are permitted to provide services to local
customers only after first establishing a corporate presence, by way of either
the incorporation of a subsidiary or the registration of a branch or
representative office. We have established or will establish such a local
presence in each of the jurisdictions where such a presence is legally required.
Regulatory Analysis by Service Type
Data Networking Services. The core of our data networking services business
is providing managed data networking services to corporate customers, which we
market under various trade names. The managed data networking services that we
provide are generally characterized as data transmission services or value added
services for licensing purposes. We are authorized by law or by individual
license or a general authorization obtainable by simple notification or
declaration by an automatic "class" license to provide these services in all
countries in which we expect to generate significant revenue from data
networking services, including the United States, Canada, France, Germany,
Italy, the United Kingdom, Australia, Hong Kong, Japan, and Singapore.
Internet Access Services. The Internet access services that we offer
generally do not require any authorization beyond those required for managed
data networking services and value added services. In many countries, Internet
services are less heavily regulated than other enhanced data services. In the
United States, for instance, no individual authorization is required. However,
because Internet and IP technology is so new, regulations concerning Internet
access remain ill-defined or in flux in many countries. Moreover, certain
countries which today impose few restrictions on the provision of Internet
services may, in the future, adopt rules treating such services similarly to
basic voice telecommunications services. In addition, there is a risk that
customers may attempt to use our network to access the Internet in countries
that may prohibit or restrict such access or, after accessing the Internet, may
create or view content or engage in other activities that certain countries may
wish to prohibit or restrict. We may limit this risk by discontinuing such
access if measures are taken or threatened by the pertinent authorities to
restrict the use of our network for these purposes.
Hosting Services. The hosting services that SAVVIS currently provides in
the United States and other foreign countries are not considered
telecommunications service. Our four data center facilities are designed to
ensure a secure environment in which
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customers locate mission critical networking hardware, which enables us to
provide value-added hosting management and service options including server
management, operating system management, co-location, hardware management and
space and environmental provisioning. In most countries, hosting is a relatively
new product offering and therefore regulations do not specifically address it.
We do not foresee, however, the emergence of any regulatory issues that will
prevent us from selling our hosting services in accordance with our business
plan. However, we cannot guarantee that governments will not institute laws and
regulations that may impact the provision of these services.
Substantive Regulation in Key Markets
The regulatory regimes applicable to countries in North America (United
States and Canada), the European Union and the Asia Pacific Rim, our three major
regional markets, are summarized below.
North America
United States. We believe that the regulatory framework governing the
provision of telecommunications services in the United States permits us to
offer all of our planned services without significant legal constraints. We
provide these services on a resale basis today, however, we have entered into
certain agreements that will enable us to provide these services on a facilities
basis, as well. To the extent that any of these planned or future services
require prior authorization, either by the Federal Communications Commission
("FCC"), or by a state public utility commission, we believe there is no
significant risk that such an application would be denied or would face
processing delays that would have a material adverse effect on us.
Nevertheless, services offered over the Internet or using Internet protocol
may present distinct regulatory issues. Advancements in technology, moreover,
are increasingly narrowing the distinctions, from a customer's perspective,
between traditional or basic telecommunications services and Internet protocal
or Internet based services, and thus may lead regulators to reassess their
treatment of such services. The regulatory classification and treatment of some
of these services has not been resolved authoritatively in the United States, at
either the federal or state levels, and it is possible that various
Internet-related services will be subject to prior authorization and to as yet
undefined terms and conditions under which such authorizations may be granted.
The Telecommunications Act of 1996 distinguishes between telecommunications
services, which are regulated at the federal level by the FCC, and information
services, which are not. This Act defines "telecommunications services" as
"transmission, between or among points specified by the user, of information of
the user's choosing, without change in the form or content of the information as
sent and received." This Act defines "information services" as "the offering of
a capability for generating, acquiring, storing, transforming, processing,
retrieving, utilizing, or making available information via telecommunications."
The provisioning of telecommunications services on a common carrier basis
requires authorization and is subject to tariff requirements, as well as
contributions to a universal service fund ("USF") based on interstate and
international revenues. Providers of telecommunications services on a private
carrier basis are not required to obtain a specific authorization or files
tariffs, but are required to make USF contributions based on international and
interstate revenues. Intrastate telecommunications services are subject to
regulation by the relevant state public utility commission and may be subject to
licensing requirements, tariffs, and/or subsidy mechanisms.
Certain services may have components of both "telecommunications" and
"information." In its 1998 Report to Congress on Universal Service, the FCC
identified such services as "hybrids," defined as "services in which a provider
offers a capability for generating, acquiring, storing, transforming,
processing, retrieving, utilizing or making available information via
telecommunications, and as an inseparable part of that service transmits
information supplied or requested by the user." The FCC has determined that
certain hybrid services are exempt from federal regulation.
We believe that the products and services we offer, whether on a facilities
or resale basis, qualify as information services as defined by the
Telecommunications Act or exempt hybrid services as classified by the FCC and
thus are not subject to federal regulation. Nor do we believe that our services
are subject to regulation by the various states in which we provide intrastate
services. There is some risk that the FCC or a state commission could determine
that our products and services require specific authorization or are subject to
tariff filing or USF obligations or other regulations. In such case, we may be
required to obtain such authorizations and/or comply with other regulatory
obligations. We have no reason to believe, however, that any applications for
federal or state authorizations would be denied or would face processing delays
that would have a material adverse effect on us.
There also is some uncertainty about the regulatory status of voice
services provided over data networks. If we were to offer voice services in the
future, there is some risk that those services could be subject to regulation
and that those services could be treated similarly to voice services provided
over conventional circuit-switched network facilities for purposes of making
payments to local telephone companies for origination and termination of calls
and for other purposes.
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Canada. Communications services in Canada are governed by the
Telecommunications Act of 1993 and administered by the Canadian Radio-Television
and Telecommunications Commission ("CRTC"). This Act requires that providers of
international telecommunications services obtain a license; however, no specific
license is required to provide domestic telecommunications services. SAVVIS has
obtained a Class A License for the Provision of Basic International
Telecommunications. With respect to facilities, an entity that wishes to own or
operate a transmission facility to provide telecommunications services to the
public for a fee must qualify as a Common Carrier. Because Canada has not fully
liberalized its telecommunications market, Common Carriers may not be owned and
controlled by foreign persons. Currently, we provide our services in Canada over
lines leased from authorized providers. Although SAVVIS is pursuing the
acquisition of transmissions facilities in Canada on an Indefeasible Right of
Use ("IRU) basis, we do not believe that we will either "own or operate" the
facility as defined by the Canadian Telecommunications Act and interpreted by
the CRTC. Therefore, we do not believe we will be required to qualify as a
Common Carrier in order to use these facilities to provide our services in
Canada.
European Union. In the last ten years, the European Union has established a
comprehensive and flexible regulatory system, culminating in the full
liberalization of telecommunication networks and services effective on January
1, 1998. By that date, ten European Union member countries were required to
adopt a fully liberalized telecommunications regime. These countries were
Austria, Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands,
Sweden and the United Kingdom. The five remaining European Union countries,
Luxembourg, Ireland, Spain, Portugal and Greece, were allowed a derogation
permitting them to delay the full liberalization of their telecommunications
regime. As a result, Luxembourg liberalized its telecommunications regime on
July 1, 1998; Spain and Ireland on December 1, 1998; Portugal on January 1,
2000; and Greece on December 31, 2000.
The process of opening up the region's telecommunications markets was
achieved through European Union legislation called directives. Directives are
addressed to and binding on European Union member countries and require
implementation into national law. There are two types of European Union
directives relating to telecommunications: first, directives adopted by the
European Commission aimed at liberalizing European Union markets and, second,
directives adopted by the European Council aimed at ensuring that a minimum set
of harmonized rules applies throughout the European Union. All 15 European Union
member countries were obligated to incorporate the principles contained in these
directives into their respective domestic legal frameworks. However, the impact
of the European Union directives has been affected in some cases by delayed or
inadequate implementation, as well as the irregular enforcement by the domestic
regulatory authorities of some European Union member states. In addition, new
market entrants may encounter cumbersome licensing and reporting requirements,
difficulty negotiating interconnection agreements and obtaining local loops, and
burdensome requirements concerning data protection and privacy.
United Kingdom. The Telecommunications Act of 1984 provides the regulatory
framework for the provision of telecommunications services in the United
Kingdom. The authorization regime established by this Act is largely
infrastructure based, meaning that systems or facilities are licensed; services
are generally exempted from individual license requirements. Accordingly, with
minor exceptions, regulatory treatment under this Act does not hinge on whether
the license applies to data or voice.
SAVVIS provides its services over international private leased circuits
("IPLCs") and leased local loops which are not connected to the public switch
and, as such, is not required to obtain an individual license. Our services are
provided under the Telecommunications Services Class License. This Class License
authorizes the provision of fixed telecommunications services of any
description, other than international voice services, broadcasting and
conditional access services. The class license allows us to connect our network
to essentially any other licensed system and to provide commercial services to
third parties from up to twenty premises. Internet access services are not
subject to additional service-specific regulation.
Germany. The legal framework for the deregulation of the telecommunications
sector in Germany is contained in the Telecommunications Act of 1996, which
became effective on August 1, 1996, and its implementing ordinances adopted
since then. Under this Act, only two services require individual licenses:
transmission, which requires a Class 4 license, and voice, which requires a
Class 3. Non-voice services are not subject to individual licensing, however,
notification to the regulator describing the services to be provided is
required. We lease our IPLCs and local loops from authorized providers and do
not provide voice services. Therefore, we are only subject to the notification
procedure, which we have completed. Should we wish to own and operate facilities
or provide voice services in the future, we might be required to obtain a Class
4 or Class 3 license. These licenses remain expensive, because Germany has yet
to implement the EU directive requiring that license fees only reflect
administrative costs.
France. The legal framework for regulation in the telecommunications sector
in France is set forth in the Telecommunications Act of 1996, which became
effective on July 28, 1996, and subsequent decrees on interconnection, universal
service, numbering, licensing and rights-of-way. This Act has liberalized most
telecommunications services. The services that SAVVIS provides in France,
whether over IPLCs are on an IRU basis, are governed by section L34.2, which
provides that such telecommunications services may be provided without
restriction, and as such do not require any form of authorization or
notification. Were SAVVIS in the future to acquire dark fiber and light it, then
it may be required to obtain a L33.1 license to establish and operate a public
telecommunications network.
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Italy. Pursuant to Law No. 103 on Telecommunications of 1995 and subsequent
decrees, the provision of telecommunications services in Italy to general public
is subject to the granting of authorizations from the Ministry of
Communications. Two of the authorizations are applicable to SAVVIS' services.
The first covers the provision of telecommunications services through direct
access to the public network, including Internet access services, and the second
covers the provision of packet-switched data services or simple resale of
capacity, including data transmission. For the provision of telecommunications
services through switched access to the public network, a notice must be filed
with the Ministry of Communication. SAVVIS has received both of the above
referenced authorizations and provided the requisite notice.
Asia-Pacific Rim. The last decade has witnessed dramatic changes across the
Asia-Pacific Rim as emerging markets have begun to open their economies to trade
and competition. The Asia-Pacific Economic Cooperation ("APEC"), established in
1989 in response to the growing interdependence among Asia-Pacific economies,
has become the primary vehicle for promoting open trade and economic cooperation
in the region. APEC includes 21 member countries, including the United States.
With respect to telecommunications, degrees of liberalization vary significantly
among the APEC members. Australia and New Zealand have fully liberalized the
sectors. Japan, Singapore, and Taiwan have opened their markets to foreign
competition, however, one or more factors, such as complicated and
time-consuming regulatory procedures, lack of complete independence of
regulators, and continued governmental ownership of incumbent operators, impose
costs on new market entrants, restricting competition. China and the Philippines
continue to restrict direct foreign investment in the telecommunications sector
to minority ownership or prohibit it all together.
Australia. The Australian telecommunications market is largely based on
principles of self-regulation and open competition, introduced by the
Telecommunications Act of 1997. Under this Act, the services SAVVIS provides
have been deregulated and are not subject to licensing. Furthermore, SAVVIS
leases the local loops and IPLCs in Australia and thus is not required to obtain
a Carrier License. However, there are no regulatory impediments preventing
SAVVIS from obtaining a Carrier License should we acquire our facilities in the
future. We have, however, registered with the Telecommunications Industry
Ombudsman, which provides a mechanism for addressing consumer complaints.
Hong Kong. Telecommunications in Hong Kong is governed by the
Telecommunications Ordinance which provides that no one shall operate a public
telecommunications network or provide services without a license from the Office
of the Telecommunications Authority ("OFTA"). Authorization to provide managed
data network services and Internet access over public switched networks or IPLCs
is covered by the Public Non-Exclusive Telecommunications ("PNETS") License,
which SAVVIS has obtained.
Japan. The legal framework for regulation in the telecommunications sector
in Japan is governed by the Telecommunications Business Law of 1985. The Law
distinguishes between Type I and Type II carriers, with the former installing
and operating its own telecommunications circuit facilities, and the latter
providing services with the use of circuit facilities leased from Type I
carriers. Type II carriers are further divided into two sub-groups: Special Type
II licensees are defined as carriers with large network capacity who provide
service to many unspecified users or who provide international communications
services; all other Type II carriers are classified as General Type IIs.
Specific authorization is required to provide Type I or Special Type II
services, while only prior notification is required to provide General Type II
services. SAVVIS leases its facilities from Type I carriers and provides
services covered under the Special Type II Telecommunications Business License,
which it has received. If SAVVIS were to obtain its own facilities in the
future, it would be required to obtain a Type I License. Under its WTO
commitments, Japan has lifted foreign ownership restrictions on Type I carriers,
however, the application procedures remain cumbersome and subject to substantial
regulatory discretion.
Singapore. Singapore introduced open competition and removed foreign
ownership restrictions on April 1, 2000. Facilities-based operators are required
to obtain individual licenses; service-based operators are authorized either by
class license or individual license. There are no restrictions on the number of
entrants in the sector. Both our managed data network and Internet access
services fall under the Services-Based Operators (Individual) License category,
which we have obtained. We are also authorized under the Class License for Store
& Retrieve Value Added Network Services. As we currently lease transmission
capacity from Facilities Based Operators ("FBO"), we are not required to obtain
an FBO license; however, if we elect to operate our own facilities in the
future, we would not anticipate any significant barriers to obtaining that
license.
Regulatory Assessment of Other Markets
Europe, excluding European Union member countries. Telecommunications
services are liberalized in varying degrees in European countries that are not
EU members. As a matter of practice, Switzerland and Norway conform their
regulatory frameworks to the European Union model and we are authorized to
provide services to Bridge and third parties in both countries. In Poland, the
new Telecommunication Law of 2000 lifted foreign ownership restrictions,
permitting the provisioning of data networking and Internet access services upon
notification to the regulator, which we have done. By contrast, in Hungary, upon
filing the necessary notification, a foreign owned subsidiary may provide
certain data networking services only to a defined closed user group and, upon
receipt of necessary authorizations, may provide Internet access services. We
anticipate filing application materials in the near future in Hungary, however,
we cannot guarantee that we will obtain the requisite authorizations to provide
services.
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Asia, excluding Australia, Hong Kong, Japan and Singapore. Regulatory
regimes vary greatly in character throughout Asia. At the liberalized end of the
spectrum, countries such as New Zealand have adopted policies that require no
licenses to provide data networking and Internet access services and we are
authorized to provide services in New Zealand both to individual Bridge and
third parties. Other countries, such as Taiwan, are open to competition, but
require service providers to comply with extensive licensing procedures; we have
completed that process in Taiwan and hold a Type II Telecommunications License.
At the more restrictive end, countries such as, Indonesia and Philippines
require some minimum level of domestic ownership in order to provide data
networking and Internet access services to persons other than Bridge;
regulations in countries such as China and Thailand restrict our ability to
provide services to any customer.
Central and South America/Caribbean
Use of the Internet is growing rapidly throughout Latin America, due in
large part to the introduction of competition and the lifting of foreign
ownership constraints in the major markets of Argentina, Brazil and Chile.
Individual licenses are generally required throughout the region in order to
provide data networking and Internet access services. In Argentina, we have
filed a license application for the Provision of Data Transmission and Value
Added Services. In Brazil we have filed a license application for Specialized
Network Services and Specialized Circuit Services. In Chile, we have filed for
an Intermediate Concession for Value Added Services. Although we expect to
obtain all of these approvals, we cannot assure you that we will obtain any of
them. In Mexico, we are registered to provide Value Added Services for Bridge.
However, foreign ownership restrictions prevent us from obtaining a license to
provide services directly to other customers. In addition, the regulator Cofetel
still lacks true independence and the incumbent operator continues to exercise
monopoly-like powers. In December 2000, the United States requested that the WTO
convene a panel to investigate Mexico's compliance with its obligations to
provide foreign access to its telecommunications market under its WTO
commitments.
Middle East/Africa
The telecommunications market in much of the Middle East and Africa remains
largely closed to foreign competition in a wide range of services. In addition,
some governments impose strict content restrictions and hold the network service
providers liable for content that runs over the network. The market in South
Africa, by contrast, is now open for SAVVIS to provide its services by obtaining
a Value Added Network Services License. The incumbent operator, however, remains
the only provider of local loops and has been reluctant to provision lines to
unaffiliated companies. SAVVIS is in the process of preparing the license
application materials, however, we cannot guarantee that we will obtain the
authorization to provide our services in South Africa.
INTELLECTUAL PROPERTY
We do not own any patents or registered trademarks, except for our business
name and several product names for which we are in the process of applying, nor
do we hold any material licenses, franchises or concessions. We enter into
confidentiality and invention assignment agreements with our employees and
consultants and control access to and distribution of our proprietary
information.
EMPLOYEES
As of December 31, 2000, we employed 589 full-time persons, 275 of whom
were engaged in engineering, operations and customer service, 264 in sales and
marketing, and 50 in finance and administration. Approximately 100 personnel
were transferred from Bridge to SAVVIS upon the transfer of the Bridge network
on February 18, 2000, and approximately 30 additional personnel were transferred
from Bridge to SAVVIS into various departments subsequent to the network
transfer. None of our employees is represented by a labor union, and we have not
experienced any work stoppages to date. We consider our employee relations to be
good.
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RISK FACTORS
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, set forth below are cautionary statements
identifying important factors that could cause our actual results to differ
materially from those projected in any forward-looking statements made by or on
behalf of us, whether oral or written. We wish to ensure that any
forward-looking statements are accompanied by meaningful cautionary statements
in order to maximize to the fullest extent possible the projections of the safe
harbor established in the Private Securities Litigation Reform Act of 1995.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the following important factors that could cause our
actual results to differ materially from those projected in our forward-looking
statements.
RISKS RELATED TO OUR BUSINESS
OUR LARGEST CUSTOMER HAS FILED FOR PROTECTION UNDER THE BANKRUPTCY LAWS, WHICH
MAY HAVE A MATERIAL ADVERSE EFFECT ON US.
Effect of Bridge Bankruptcy on Our Revenues. Bridge is our largest customer,
accounting for approximately 81% of our revenues in 2000. On February 15, 2001,
Bridge's U.S. operating subsidiaries filed for protection under Chapter 11 of
the Bankruptcy Code. Bridge's financial condition, ability and willingness to
meet its payment obligations under the network services agreement will affect
our revenues and our ability to run our business. There can be no assurance that
we will receive timely payments owed to us under the network services agreement
from Bridge. The Bankruptcy Code may restrict the amount and recoverability of
our claims against Bridge. In addition, under the automatic stay provisions of
the Bankruptcy Code, we are currently prevented from exercising certain rights
and remedies under our network services agreement with Bridge and from taking
certain enforcement actions against Bridge. Under section 362 of the Bankruptcy
Code, during a Chapter 11 case, creditors and other parties in interest may not
do the following without bankruptcy court approval:
o commence or continue judicial, administrative or other cases against
the debtor that were or could have been commenced prior to
commencement of the Chapter 11 case, or recover a claim that arose
prior to commencement of the case;
o enforce any pre-petition judgments against the debtor;
o take any action to obtain possession of or exercise control over the
debtor's property or estates;
o create, perfect or enforce any lien against the debtor's property;
o collect, assess or recover claims against the debtor that arose before
the commencement of the case; or
o set off any debt owing to the debtor that arose prior to the
commencement of the case against a claim of such creditor or
party-in-interest against the debtor that arose before the
commencement of the case.
As of March 31, 2001, Bridge owed us approximately $33 million (before
offsetting our note due to Bridge), of which approximately $17 million
represented claims that arose before Bridge filed for bankruptcy, approximately
$2 million represented claims that arose after the commencement of the
bankruptcy, and approximately $14 million represented claims with respect to
Bridge's international operations which are not part of the bankruptcy
proceedings.
In addition, Bridge has the right, subject to bankruptcy court approval and
certain other limitations, to assume and assign or reject executory,
pre-petition contracts and unexpired leases. In this context, "assumption"
requires Bridge to perform its obligations and cure all existing defaults under
the assumed contract or lease and "rejection" means that Bridge is relieved from
its obligations to perform further under the rejected contract or lease, but is
subject to a claim for damages for the breach thereof subject to certain
limitations contained in the Bankruptcy Code. Generally, any damages resulting
from rejection are treated as general unsecured claims in the reorganization
cases. Pre-petition claims that were contingent or unliquidated at the
commencement of the Chapter 11 cases are generally allowable against the debtor
in amounts to be fixed by the bankruptcy court or otherwise agreed upon. In the
event that Bridge rejects the network services agreement, our expected revenues
would be materially reduced and such reduction could have a material adverse
effect on our business. It is unlikely that we would be able to replace the
expected revenues from the Bridge network services contract with new customers
or increased demand from existing customers on such a timetable that would allow
us to meet our obligations to our suppliers under existing contracts. The data
center we have constructed in St. Louis, Missouri is located on land owned by
Bridge. Bridge has given its banks a mortgage on the land. We do not have a
written agreement with Bridge and, because Bridge is in bankruptcy, we are not
able to obtain one. If we are unable to come to an agreement with Bridge
regarding the land on which the data center is located, such dispute between us
and Bridge would have to be resolved by the bankruptcy court.
Effect of Bridge Bankruptcy on Our Operations. Bridge provides to us many
technical, administrative and operational services and related support
functions, including technical and customer support service and project
management in the procurement and installation of equipment. Our network
equipment, including our PrivateNAPs,(SM) is located in spaces subleased from
Bridge. Bridge also provides to us additional administrative and operational
services, such as payroll and accounting functions, benefit management
21
and office space. If Bridge were to cease operations, liquidate its assets or
reject all of these contracts or otherwise stop providing these services, our
operations would be disrupted and we could face significant challenges and costs
in assuming these services or finding an alternative to Bridge. This could
impair our operations, adversely affect our reputation and harm our financial
results.
In addition, we sublease from Bridge some network assets that Bridge
currently leases from General Electric Capital Corporation, or GECC. As of March
31, 2001, the aggregate amount of our capitalized lease obligations to Bridge
was approximately $9.3 million. We do not have a direct relationship with GECC.
Bridge has failed to perform its obligations under its agreements with GECC and
with Savvis, including forwarding to GECC payments we made to Bridge, and as a
result our rights to such network assets may be impaired. Furthermore, SAVVIS
has deposited the the March and April 2001 payments, amounting to $ 1.2 million,
into a separate account instead of making payment to Bridge, thus causing a
default with Bridge under this lease.
Sale of Our Shares by Bridge. Bridge has announced that it is seeking ways
to sell its assets in bankruptcy, including the shares in our company that it
owns. The sale of Bridge or the sale of all or substantially all of our shares
owned by Bridge could result in a change of control in our company as Bridge
currently owns approximately 48% of our outstanding common shares.
Effect of Bridge Bankruptcy on Our Credit Facility. The Bridge bankruptcy
constituted an event of default under our credit facility with Nortel Networks,
Inc. Pursuant to the terms of the credit facility, the Bridge bankruptcy event
of default resulted in the automatic acceleration of all amounts outstanding
under the credit facility and the termination of the remaining commitments under
the credit facility. As a result, we are not currently able to borrow under the
credit facility and are therefore unable to perform our obligations under our
equipment purchase agreements with Nortel and Level 3. While Nortel has not
demanded that we repay amounts owed under the credit facility, all amounts
incurred thereunder are due and payable and they have the right to demand
payment at any time. We have requested from Nortel a waiver of defaults under
the credit facility, however, there can be no assurance that a waiver will be
granted. On February 20, 2001, we received a $20 million investment from
affiliates of Welsh Carson in the form of a five year senior secured convertible
note. Under the terms of that note, Welsh Carson has the right to declare the
note due and payable upon the acceleration of any of our other indebtedness. As
a result of the Nortel acceleration, Welsh Carson may have the right to declare
the $20 million due and payable. We do not have the funds to repay amounts
incurred under the credit facility or the Welsh Carson notes.
Effect of Bridge Bankruptcy on Our Relationship with Our Vendors. On March
23, 2001 and on April 9, 2001 the bankruptcy court approved the following
negotiated stipulations which directly involve us, Bridge and our vendors: (i) a
stipulation among Bridge, SAVVIS and Sprint relating to interim post-petition
payouts which have been/will be made to Sprint, (ii) a stipulation among Bridge,
SAVVIS and MCI WorldCom relating to certain post-petition payments to be made to
MCI WorldCom; (iii) a stipulation among Bridge, SAVVIS and AT&T relating to
certain post-petition payments to be made to AT&T (iv) a stipulation between
Bridge and SAVVIS relating to certain post-petition payments to be made by
Bridge to us. If either us or Bridge were to default in the obligations under
the stipulations, MCI/WorldCom, Sprint or AT&T would have the right to terminate
the related services to us.
WE MAY BE REQUIRED TO CEASE OPERATIONS OR DECLARE BANKRUPTCY IF WE ARE UNABLE TO
OBTAIN NEEDED FUNDING.
As of March 31, 2001 we had approximately $10 million of unrestricted cash
on hand. Assuming Bridge continues to make payments to us under the network
services agreement, we currently have enough cash to run our business into May,
2001. We have retained Merrill Lynch & Co. to assist us in obtaining additional
funding or to find a buyer for our company. Should we be unsuccessful in our
efforts to raise additional capital, we may be required to cease operations or
declare bankruptcy. It will be difficult to obtain funding so long as Bridge 's
future remains uncertain.
In addition, because of our low cash position, we are not current in our
payments to many of our suppliers. As a result, any of these suppliers may
decide to discontinue doing business with us in the future or may demand
deposits or other security in order the ensure payment.
Assuming that Bridge continues to make current payments under the network
services agreement, we currently estimate that we will need approximately $300
million to have sufficient working capital to run our business, fund preexisting
liabilities and debt service obligations, purchase capital equipment and
continue to fund certain anticipated operating deficits through December 31,
2001. In addition, we expect to incur significant net losses, negative cash flow
from operating activities and negative adjusted EBITDA at least through 2002. If
we are unable to fund our business plan we may have to delay or abandon some or
all of our expansion plans or otherwise forego market opportunities or may be
forced to cease operations, any of which may have a material adverse effect on
our business and prospects.
22
On March 30, 2001, the closing bid of our common stock on the Nasdaq
National Market was $.44 per share. The offering price of our common stock in
our initial public offering in February 2000 was $24.00 per share. In the event
we are able to raise additional funding through the issuance of our common stock
or securities convertible into our common stock, our existing stockholders will
likely suffer significant dilution.
THE AUDIT REPORT ACCOMPANYING OUR 2000 FINANCIAL STATEMENTS CONTAINS AN
EXPLANATORY PARAGRAPH REGARDING OUR ABILITY TO CONTINUE AS A GOING CONCERN.
Our losses from operations, our inability to raise additional financing and
Bridge's voluntary filing for bankruptcy raise substantial doubt about our
ability to continue as a going concern. As a result of these factors, among
others, our independent auditors' report on our 2000 financial statements
includes an explanatory paragraph regarding our ability to continue as a going
concern. The appropriateness of reporting on a going concern basis is dependent
upon, among other things, future profitable operations and the ability to
generate sufficient cash from operations and financing sources to meet our
obligations. As a result of the going concern qualification, potential investors
or other financing sources may be averse to investing in us or loaning money to
us because of the threat that we may forfeit on our obligations to repay any
loan, we may file for bankruptcy in the future and/or the negative perception
which may exist about a company with a going concern qualification.
BRIDGE MAY BE ENTITLED TO TERMINATE THE NETWORK SERVICES AGREEMENT OR COLLECT
LIQUIDATED DAMAGES IF WE ARE NOT ABLE TO MEET QUALITY OF SERVICE LEVELS.
Pursuant to the network services agreement with Bridge, we have agreed that
the network will perform in accordance with specific quality of service
standards within twelve months from the date we acquired the network, which was
February 18, 2001. In the event we did not meet or do not continue to meet the
required quality of service levels, Bridge will be entitled to credits and, in
the event of a material breach of such quality of services levels, Bridge will
be entitled to terminate the network services agreement and, whether or not the
network service agreement is terminated, collect up to $50 million as liquidated
damages once during any thirty-six-month period. At present, neither SAVVIS, nor
to the best of our knowledge, Bridge has developed the software and or the
monitoring tools necessary to determine whether or not SAVVIS is in compliance
with the SLAs.
OUR LIMITED HISTORY, AND THE FACT THAT WE ONLY RECENTLY BEGAN OFFERING DATA
NETWORKING AND HOSTING SERVICES, MAKES IT DIFFICULT FOR YOU TO EVALUATE OUR
PERFORMANCE.
Although we began commercial operations in 1996, we only began offering
data networking and hosting services in 2000. We expect to generate a
substantial portion of our revenues from these services in the future. In
addition, many of our executive officers and key technical employees joined us
in late 1999 and in 2000, and we have adopted our business strategies recently.
Because of our short operating history, you have very limited operating and
financial data about us upon which to base an evaluation of our performance and
prospects and an investment in our common stock. Therefore, you should consider
and evaluate our prospects in light of the risks and difficulties frequently
encountered by rapidly growing companies, particularly companies in the rapidly
evolving data networking, Internet access and hosting markets.
OUR HISTORICAL FINANCIAL INFORMATION WILL NOT BE COMPARABLE TO OUR FUTURE
FINANCIAL PERFORMANCE.
In February 2000, we acquired Bridge's Internet protocol network assets and
entered into an agreement to provide data networking services to Bridge. As a
result, our historical financial information included in this report will not
necessarily be comparable to our results of operations, financial position and
cash flows in the future.
BRIDGE IS A PRIVATE COMPANY AND ACCORDINGLY ITS FINANCIAL INFORMATION IS NOT
PUBLICLY AVAILABLE.
As a private company, Bridge does not make its financial statements
publicly available. Unless and until it becomes or is acquired by a public
company, you should expect that it will not do so in the future. Bridge is
currently undergoing reorganization under Chapter 11 of the Bankruptcy Code, and
has offered all the assets of the company for sale under Section 363 of that
Code. As a result, in the event we continue to provide services to Bridge under
the network services agreement and Bridge continues to account for a
23
significant portion of our revenues, you will not have access to financial
information on Bridge in order to assess their ability to meet their obligations
to us.
WE EXPECT TO CONTINUE TO INCUR SUBSTANTIAL LOSSES AND HAVE NEGATIVE OPERATING
CASH FLOW.
We incurred losses of approximately $20.0 million, $46.7 million and $164.9
million in 1998, 1999 and 2000 and had negative cash flows from operating
activities of $20.6 million, $24.5 million and $73.6 million in these years. We
expect to incur significant net losses, negative cash flow from operating
activities and negative adjusted EBITDA at least through 2002.
WE EXPECT OUR OPERATING EXPENSES TO INCREASE SIGNIFICANTLY.
From the date of the acquisition of SAVVIS by Bridge on April 7, 1999
through December 31, 2000, we had net losses aggregating approximately $203.5
million and net cash used in operating activities of approximately $91.9
million. As of December 31, 2000, our accumulated operating deficit was
approximately $203.5 million, which reflects only our net losses since Bridge
acquired our company on April 7, 1999. We expect our operating expenses to
increase significantly, especially in the areas of data communications and
operations expenses, and sales and marketing, as we continue to develop and
expand our business. As a result, we will need to increase our revenues
significantly to generate cash flow from our operations.
WE WILL CONTINUE TO INCUR LOSSES FROM THE OPERATION OF THE NETWORK TO PROVIDE
SERVICES TO BRIDGE UNDER THE NETWORK SERVICES AGREEMENT UNTIL WE USE THE NETWORK
EITHER TO PROVIDE ADDITIONAL SERVICES TO BRIDGE OR TO NEW SAVVIS CUSTOMERS.
Under the network services agreement with Bridge, the amount we charge
Bridge for the use of the network as configured on the date of the asset
transfer was based on Bridge's then current cash costs of operating that
network. As a result, we will continue to incur losses from the operation of the
network to provide services to Bridge until we either provide additional
services to Bridge, such as connecting new customers of Bridge, add additional
connections to existing SAVVIS customers, or provide services to new customers
of SAVVIS. We cannot guarantee that we will continue to sell enough new
additional services to become cash flow positive or profitable.
WE ARE OBLIGATED TO PROVIDE NETWORK SERVICES TO BRIDGE FOR A PERIOD OF UP TO
FIVE YEARS AFTER THE TERMINATION OF THE NETWORK SERVICES AGREEMENT AT THE RATES
IN EFFECT AT THE DATE OF THE AGREEMENT'S TERMINATION.
We are required to provide network services to Bridge under the network
services agreement for a period of up to five years subsequent to the
termination of the agreement. These services must be provided to Bridge at the
rates in effect for our third party customers at the date of the agreement's
termination. Should our communications costs rise within that five-year period
and the price to be paid by Bridge is less than the cost incurred by us to
provide the service, such services will be priced at a loss to us.
THE PURCHASE OF THE NETWORK ASSETS FROM BRIDGE RESULTED IN A PREFERENTIAL
DISTRIBUTION TO BRIDGE.
Because we recorded the network assets purchased from Bridge at Bridge's
historical net book value, the excess of the payments to Bridge over the net
book value, approximately $69 million, was treated for accounting purposes as a
preferential distribution to Bridge. As a result our stockholders' equity has
been reduced and purchasers of our common stock in our initial public offering
experienced a dilution in tangible book value per share.
OUR FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD IMPAIR OUR BUSINESS.
If we are able to obtain funding, we expect our business to continue to
grow rapidly, which may significantly strain our management, financial, customer
support, sales, marketing and administrative resources, as well as our network
operations and our management and billing systems. Such a strain on our
managerial, operational and administrative capabilities could adversely affect
the quality of our services and our ability to generate revenues. To manage our
growth effectively, we will have to further enhance the
24
efficiency of our operational support and other back office systems, and of our
financial systems and controls. We will also have to expand, train and manage
our employees and third-party providers to handle the increased volume and
complexities of our business. In addition, if we fail to project traffic volume
and routing preferences correctly, or fail to determine the appropriate means of
expanding our network, we could lose customers, make inefficient use of our
network, and have higher costs and lower profit margins.
WE ARE CONTROLLED BY PARTIES WHOSE INTERESTS MAY NOT BE ALIGNED WITH YOURS.
Bridge and investment partnerships sponsored by Welsh Carson currently own
approximately 48% and 16% of our outstanding common stock, respectively. In
addition, Welsh Carson partnerships own approximately 38% of Bridge's
outstanding voting stock. On February 20, 2001, in order to obtain additional
funding for our operations, we issued $20 million in the aggregate of our 10%
convertible secured notes due 2006 to investment partnerships sponsored by, and
individuals affiliated with, Welsh Carson. These notes are convertible into our
common stock at $1.31 per share, which was the closing bid of our common stock
the day prior to the execution of the securities purchase agreement, and are
secured by our data center in Hazelwood, MO. After giving effect to the
conversion of $20 million in the aggregate of our senior secured convertible
notes held by Welsh Carson affiliates, Welsh Carson affiliates would own
approximately 34% of our outstanding common stock and Bridge would own 38%.
Decisions concerning our operations or financial structure may present
conflicts of interest between Bridge and Welsh Carson affiliates and our other
stockholders.
We entered into a number of agreements with Bridge relating to the
acquisition of Bridge's global Internet protocol network and to our provision of
global data networking services to Bridge. In addition, Bridge provides various
support services to us. Because we were controlled by Bridge during the
negotiation of the agreements, we cannot assure you that these agreements are
comparable to those that would have been reached had the terms been negotiated
on an arm's-length basis.
WE DEPEND ON KEY PERSONNEL. IF WE ARE UNABLE TO HIRE AND RETAIN QUALIFIED
PERSONNEL, WE MAY BE UNABLE TO IMPLEMENT OUR BUSINESS STRATEGY EFFECTIVELY.
Our future performance depends to a significant degree on the continued
contributions of our management team, sales force and key technical personnel.
In particular, we depend on Robert McCormick, our Chairman of the Board and
Chief Executive Officer. Mr. McCormick was appointed Chief Executive Officer in
November 1999. In addition, our business plan contemplates the significant
expansion of our field sales organization and the retention of our established
inside sales, marketing and product management staff. The industries in which we
compete are characterized by a high level of employee mobility and aggressive
recruiting of skilled personnel. As a result, we may have difficulty in hiring
and retaining highly skilled employees. Our future performance depends on our
ability to attract, retain and motivate highly skilled employees. In the event
of a change of control at our company, which could occur as result of the Bridge
bankruptcy or our need for additional financing, the outstanding and unvested
options held by some of our officers and other key employees will vest, which
may make retaining such officers and key employees more difficult.
FAILURES IN OUR NETWORK OR WITH THE NETWORK OPERATIONS CENTER COULD DISRUPT OUR
ABILITY TO PROVIDE OUR DATA NETWORKING, INTERNET ACCESS AND HOSTING SERVICES,
WHICH COULD HARM OUR BUSINESS AND INCREASE OUR CAPITAL COSTS.
Our ability to successfully implement our business plan depends upon our
ability to provide high quality, reliable services. Interruptions in our ability
to provide our data networking, Internet access and hosting services to our
customers could adversely affect our business and reputation. Our operations
depend upon our ability to protect our equipment and network infrastructure,
including connections to our communications transmission, or backbone,
providers, and our customers' data and equipment, against damage from natural
disasters, as well as power loss, telecommunications failure and similar events.
The occurrence of a natural disaster or other unanticipated problem could result
in interruptions in the services we provide to our customers and could seriously
harm our business and business prospects.
WE ARE HIGHLY DEPENDENT ON OUR SUPPLIERS, AND ANY INTERRUPTIONS COULD IMPAIR OUR
SERVICE TO OUR CUSTOMERS.
If we are unable to obtain required products or services from third-party
suppliers on a timely basis and at an acceptable cost, we may be unable to
provide our data networking, Internet access and hosting services on a
competitive and timely basis. We are dependent on other companies to supply
various key components of our infrastructure, including network equipment,
backbone
25
connectivity, the connections from our customers to our network, which we call
local access, and connection to other Internet network providers. If our
suppliers fail to provide products or services on a timely basis and at an
acceptable cost, we may be unable to meet our customer service commitments and,
as a result, we may experience increased costs or loss of revenue.
IF WE ARE UNABLE TO EXPAND OUR NETWORK AS EXPECTED, OUR RESULTS OF OPERATIONS
WOULD BE ADVERSELY AFFECTED.
Our success will depend on our ability to continue to expand and upgrade
our network on a timely, cost-effective basis. A number of factors could hinder
the expansion and upgrade of our network. These factors include cost overruns,
the unavailability of appropriate facilities, communications capacity or
additional capital, strikes, shortages, delays in obtaining governmental or
other third-party approvals, natural disasters and other casualties, and other
events that we cannot foresee. In addition, expanding or enhancing our network,
including through hardware or software upgrades, could result in unexpected
interruptions of services to our customers.
IF OUR ESTIMATES REGARDING OUR TRAFFIC LEVELS ARE NOT CORRECT, WE MAY HAVE TOO
MUCH OR TOO LITTLE CAPACITY.
We rely on other carriers to provide several data transmission services. We
generally lease or purchase data transmission capacity before we have secured
customers. Our leased or purchased capacity costs are typically fixed monthly
payments based on the capacity made available to us. Our failure to correctly
estimate transmission capacity could increase the cost or reduce the quality of
our services. Underestimation of traffic levels could lead to a shortage of
capacity, requiring us to lease or purchase more capacity, which may be at
unfavorable rates, or could lead to a lower quality of service because of
increased data loss and latency. Overestimation of traffic levels, because our
traffic volumes decrease or do not grow as expected, would result in idle
capacity, thereby increasing our per-unit costs.
WE HAVE EXPERIENCED CUSTOMER TURNOVER IN THE PAST AND MAY CONTINUE TO DO SO IN
THE FUTURE. IF WE CONTINUE TO EXPERIENCE CUSTOMER TURNOVER WITHOUT A
CORRESPONDING GROWTH IN NEW CUSTOMERS, OUR BUSINESS MAY BE ADVERSELY AFFECTED.
Customer turnover in the Internet access business is high. Customer loss
results in loss of future revenue from subscribers who discontinue or reduce
their services. Customer loss occurs for several reasons, such as voluntary
disconnection by subscribers who choose to switch to a competing service and
termination by Internet access providers for nonpayment of bills or abuse of the
network. We have experienced customer turnover in the past and as our subscriber
base grows and the industry matures, our customer loss may continue or even
increase. In addition, due to the downturn in the technology and Internet sector
of the economy, we may see increased customer turnover as these customers reduce
their operations or cease to do business. If, in the future, we were to lose a
large number of customers without signing contracts with new customers, there
could be an adverse impact on our business.
OUR BRAND IS NOT AS WELL KNOWN AS SOME OF OUR COMPETITORS'. FAILURE TO DEVELOP
BRAND RECOGNITION COULD HURT OUR ABILITY TO COMPETE EFFECTIVELY.
We need to strengthen our brand awareness to realize our strategic and
financial objectives. Many of our competitors have well-established brands
associated with the provision of data networking, Internet access and hosting
services. The promotion and enhancement of our brand also will depend in part on
our success in continuing to provide high quality Internet access services and
in providing high quality data networking and hosting services. We cannot assure
you that we will be able to maintain or achieve these levels of quality.
ANY BREACH OF SECURITY OF OUR NETWORK COULD NEGATIVELY IMPACT OUR BUSINESS.
Our network may be vulnerable to unauthorized access, computer viruses and
other disruptive problems caused by customers, employees or others. Computer
viruses, unauthorized access or other disruptive problems could lead to
interruptions, delays or cessation of service to our customers and these
customers' end users. Unauthorized access also could potentially jeopardize the
security of confidential information stored in the computer systems of our
customers, which might result in our liability to our customers, and also might
deter potential customers. We may be unable to implement security measures in a
timely manner or, if and when implemented, these measures could be circumvented
as a result of accidental or intentional actions. In the past, security measures
employed by others have been circumvented by third parties. Eliminating computer
viruses and alleviating other security
26
problems may require interruptions, delays or cessation of service to our
customers and these customers' end users. Any breach of security on our network
may result in a loss of customers and damage to our reputation.
WE MAY NOT BE ABLE TO MEET THE OBLIGATIONS UNDER OUR SERVICE LEVEL AGREEMENTS.
We have service level agreements with all of our Internet access and
collocation customers in which we provide various guarantees regarding our
levels of service. In addition, the network services agreement with Bridge
requires levels of service and we offer service level agreements to other data
networking customers. If we fail to provide the levels of service required by
these agreements, our customers may be entitled to terminate their relationship
with us or receive service credits for their accounts. If Bridge or a
significant number of other customers become entitled to exercise, and do
exercise, these rights, our revenues could be materially reduced.
WE MAY MAKE ACQUISITIONS OR ENTER INTO JOINT VENTURES OR STRATEGIC ALLIANCES,
EACH OF WHICH IS ACCOMPANIED BY INHERENT RISKS.
If appropriate opportunities present themselves, we may make acquisitions
or investments or enter into joint ventures or strategic alliances with other
companies. Risks commonly encountered in such transactions include:
o the difficulty of assimilating the operations and personnel of
the combined companies;
o the risk that we may not be able to integrate the acquired
services, products or technologies with our current services,
products and technologies;
o the potential disruption of our ongoing business;
o the inability to retain key technical and managerial personnel;
o the inability of management to maximize our financial and
strategic position through the successful integration of acquired
businesses;
o increases in reported losses as a result of charges for
in-process research and development and amortization of goodwill
and other intangible assets;
o the adverse impact on our annual effective tax rate;
o difficulty in maintaining controls, procedures and policies; and
o the impairment of relationships with employees, suppliers and
customers as a result of any integration.
WE FACE REGULATORY RESTRICTIONS IN A SIGNIFICANT NUMBER OF COUNTRIES THAT HAVE
DELAYED AND MAY PREVENT US FROM ACQUIRING OR OPERATING BRIDGE ASSETS LOCATED IN
THESE COUNTRIES. WE ALSO FACE REGULATORY RESTRICTIONS IN A SIGNIFICANT NUMBER OF
COUNTRIES THAT MAY PREVENT US FROM PROVIDING SERVICES TO CUSTOMERS OTHER THAN
BRIDGE.
At the time of the asset transfer on February 18, 2000 between SAVVIS and
Bridge, regulatory restrictions prevented SAVVIS from acquiring and operating
Bridge assets in ten countries. Due to policy liberalizations, regulations no
longer prevent us from obtaining the proper authorizations in South Africa and
Poland. However, regulatory restrictions remain in place in the eight countries
concentrated in the Middle East and Asia that prevent us from acquiring the
Bridge network assets located in these countries. The net book value of these
assets at December 31, 2000, was approximately $1.2 million. These countries
are:
o Middle East--Bahrain, Kuwait, Saudi Arabia and the United Arab
Emirates; and
o Asia -- China, India, Macau and Thailand.
27
Regulations in the following seven countries permit us to acquire and operate
the Bridge network assets located in these countries upon obtaining proper
regulatory authorization, which we are in the process of pursuing. The net book
value of these assets as of December 31, 2000, was approximately $.6 million.
These countries are:
o Europe -- Greece, Hungary and Poland;
o Africa -- South Africa;
o Asia -- Malaysia; and
o Americas -- Bahamas and Venezuela.
We are obligated to acquire the network assets from Bridge in each of these
fifteen countries at book value once we have received the required approvals. We
cannot assure you, however, that we will be able to comply with the regulatory
and other requirements necessary to allow us to acquire these assets. At
present, we do not know the extent to which Bridge, its international affiliates
or any future purchaser of all or a substantial part of its international
operations will continue to operate in these countries due to the uncertainties
surrounding the overall resolution of Bridge's bankruptcy proceedings, which may
impact our ability to acquire the assets not already transferred by Bridge to
SAVVIS.
To date, we have acquired the Bridge assets in over thirty-five countries;
in each one of these countries, we are authorized to deliver network services to
Bridge, but not necessarily to third parties. Providing services to third
parties in some of these countries requires a separate authorization or may not
be permitted under current regulations. We are currently authorized to provide
networking services to third parties in twenty-four countries. We are in the
process of pursuing authorizations to provide services to third parties in an
additional ten to fifteen countries. We cannot assure you, however, that we will
be able to comply with the regulatory and other requirements necessary to allow
us to provide services in these countries to third parties.
NUMEROUS FACTORS MAY CAUSE FLUCTUATIONS IN OUR QUARTERLY REVENUES AND OPERATING
RESULTS, AS WELL AS IMPACT OUR LONG-TERM VIABILITY.
Our quarterly revenues and operating results have fluctuated in the past
and are likely to fluctuate significantly from quarter to quarter in the future
due to a number of factors. These factors include the following:
o demand for and market acceptance of our data networking, Internet
access and hosting services;
o the timing and magnitude of capital expenditures, including costs
relating to the expansion of operations;
o increasing sales, marketing and other operating expenses;
o the compensation of our sales personnel based on achievement of
periodic sales quotas;
o our ability to generate revenues for our services;
o changes in our revenue mix between usage-based and fixed rate
pricing plans; and
o fluctuations in the duration of the sales cycle for our services.
Other factors, which are beyond our control, may also affect us, including:
o conditions specific to the data networking, Internet access and
hosting services industries, as well as general economic factors;
o the announcement or introduction of new or enhanced services by
our competitors;
o our ability to obtain, and the pricing for, local access
connections; and,
o changes in the prices we pay Internet backbone providers.
Accordingly, we believe that period-to-period comparisons of our results of
operations are not meaningful and should not be relied upon as indications of
future performance. In addition, these factors may impact our long-term
viability.
28
It is possible that in some future periods our results of operations may
fall below the expectations of investors. In this event, the price of our common
stock may fall. You should not rely on quarter-to-quarter comparisons of our
results of operations as an indication of future performance.
WE MAY BE LIABLE FOR THE MATERIAL THAT CONTENT PROVIDERS DISTRIBUTE OVER OUR
NETWORK.
The law relating to the liability of private network operators for
information carried on or disseminated through their networks is currently
unsettled. We may become subject to legal claims relating to the content
disseminated on our network. For example, lawsuits may be brought against us
claiming that material on our network on which one of our customers relied was
inaccurate. Claims could also involve matters such as defamation, invasion of
privacy and copyright infringement. Content providers operating private networks
have been sued in the past, sometimes successfully, based on the content of
material. If we need to take costly measures to reduce our exposure to these
risks, or are required to defend ourselves against such claims, our business
could be adversely affected.
RISKS RELATED TO OUR INDUSTRY
DATA AND VPN NETWORKING, DEDICATED ACCESS AND HOSTING SERVICES ARE NEW AND
RAPIDLY GROWING MARKETS, BUT THIS GROWTH MAY NOT CONTINUE.
According to International Data Corporation, Forrester Research, Meta
Group, and Infonetics, leading independent research firms, the market for data
networking and VPN's, Internet access, and hosting services has been growing
rapidly. If these markets do not grow as expected, or our anticipated share of
that market does not grow as expected, our revenues could be less than expected.
In addition the market for VPN's and hosting are in an early stage of
growth. As a consequence, current and future competitors are likely to introduce
competing services, and it is difficult to predict the rate at which the market
will grow or at which new or increased competition will result in market
saturation. We face the risk that the market for VPN networking and hosting may
fail to develop or may develop more slowly than we expect, or that our services
may not achieve widespread market acceptance. Furthermore, we may be unable to
market and sell our services successfully and cost-effectively to a sufficiently
large number of customers.
THE CURRENT GENERAL ECONOMIC DOWNTURN IS ADVERSELY AFFECTING OUR INDUSTRY.
In the last 12 months, the U.S. economy has suffered a sharp decline. The
telecommunications industry has been particularly hard hit by this downturn. We,
like many telecommunications companies, have seen our stock price fall
dramatically, and our ability to raise additional funding in the public and
private markets has been severely limited. Many of our customers have reduced
their expenditures for telecommunications services, including our services, and
in some cases delayed decisions to roll out our services or decisions to make
initial evaluations of our services. Some of our customers, which are startup or
emerging businesses themselves, have experienced a sharp decline in their
businesses. We may experience difficulty in the future with respect to the
collections of receivables. Some of our vendors are also telecommunications
companies and are also experiencing difficulties. One of our vendors has filed
for protection under the federal bankruptcy laws and is going out of business,
which has caused disruption of service for our customers. A continuation of this
economic downturn, and the results thereof, could have a material and adverse
effect on our business.
WIDESPREAD COMMERCIAL USE OF THE INTERNET MAY BE HAMPERED BY POOR PERFORMANCE.
Despite growing interest in the varied commercial uses of the Internet,
many businesses have been deterred from purchasing Internet access services for
a number of reasons, including inconsistent or unreliable quality of service,
lack of availability of cost-effective, high-speed options, a limited number of
local access points for corporate users, inability to integrate business
applications on the Internet, the need to deal with multiple and frequently
incompatible vendors and a lack of tools to simplify Internet access and use.
Capacity constraints caused by growth in the use of the Internet may, if left
unresolved, impede further development of the Internet to the extent that users
experience delays, transmission errors and other difficulties.
GROWTH IN INTERNET ACCESS BUSINESS MAY BE HAMPERED BY SOME COMPANIES' RELUCTANCE
TO ADOPT INTERNET STRATEGIES FOR COMMERCE AND COMMUNICATION.
29
The adoption of Internet strategies for commerce and communications,
particularly by those individuals and enterprises that have historically relied
upon alternative means of commerce and communication, generally requires an
understanding and acceptance of a new way of conducting business and exchanging
information. In particular, enterprises that have already invested substantial
resources in other means of conducting commerce and exchanging information may
be particularly reluctant or slow to adopt a new strategy that may make their
existing personnel and infrastructure obsolete. The failure of the market for
business-related Internet services to further develop could cause our revenues
to grow more slowly than anticipated and reduce the demand for our Internet
access and hosting services.
OUR ABILITY TO COMPETE FOR INTERNET ACCESS BUSINESS MAY BE WEAKENED IF THE
PROBLEMS OF INTERNET CONGESTION, TRANSMISSION DELAYS AND DATA LOSS IS RESOLVED.
If the Internet becomes subject to a form of central management, or if
Internet backbone providers establish an economic settlement arrangement
regarding the exchange of traffic between data networks, the problems of
congestion, latency and data loss addressed by our Internet access services
could be largely resolved and our ability to compete for business in this market
could be adversely affected.
THE MARKETS FOR DATA NETWORKING, INTERNET ACCESS AND HOSTING ARE HIGHLY
COMPETITIVE, AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
The markets for data networking, Internet access and hosting services are
extremely competitive, and there are few significant barriers to entry. We
expect that competition will intensify in the future, and we may not have the
financial resources, technical expertise, sales and marketing abilities or
support capabilities to compete successfully in these markets. Many of our
existing Internet access data networking and hosting competitors have greater
market presence, engineering and marketing capabilities and financial,
technological and personnel resources than we do. As a result, as compared to
us, our competitors may:
o develop and expand their networking infrastructures and service
offerings more efficiently or more quickly;
o adapt more rapidly to new or emerging technologies and changes in
customer requirements;
o take advantage of acquisitions and other opportunities more
effectively;
o develop products and services that are superior to ours or have
greater market acceptance;
o adopt more aggressive pricing policies and devote greater
resources to the promotion, marketing, sale, research and
development of their products and services;
o make more attractive offers to our existing and potential
employees;
o establish cooperative relationships with each other or with third
parties; and
o more effectively take advantage of existing relationships with
customers or exploit a more widely recognized brand name to
market and sell their services.
Our competitors include:
o backbone providers that may provide us connectivity services,
including AT&T, Cable & Wireless plc, GTE Internetworking, Sprint
Corporation and UUNET, an MCI WorldCom company;
o global, national and regional telecommunications companies,
including regional Bell operating companies and providers of
satellite bandwidth capacity; and
o global, national and regional Internet service providers.
We expect that new competitors will enter the data networking, Internet
access and hosting markets. Such new competitors could include computer
hardware, software, media and other technology and telecommunications companies,
as well as satellite and cable companies. A number of telecommunications
companies and online service providers currently offer, or have announced plans
to offer or expand, their data networking services. Further, the ability of some
of these potential competitors to bundle other services and
30
products with their data networking services could place us at a competitive
disadvantage. For example, Reuters Group plc, a news and financial information
distributor, and Equant N.V., an international telecommunications provider,
formed a joint venture for the purposes of offering Internet protocol network
services to the financial services industry. Various companies are also
exploring the possibility of providing, or are currently providing, high-speed
data services using alternative delivery methods, including the cable television
infrastructure, direct broadcast satellites, all optical networks, gigabit
ethernet, wireless cable and wireless local access. In addition, Internet
backbone providers may benefit from technological developments, such as improved
router technology, that will enhance the quality of their services.
OUR FAILURE TO ACHIEVE DESIRED PRICE LEVELS COULD IMPACT OUR ABILITY TO ACHIEVE
PROFITABILITY OR POSITIVE CASH FLOW.
We expect competition and other factors to continue to cause pricing
pressure in the markets we serve. Prices for data and VPN networking and
Internet access and services have decreased significantly in recent years, and
we expect significant price declines in the future. In addition, by bundling
their services and reducing the overall cost of their services,
telecommunications companies that compete with us may be able to provide
customers with reduced communications costs in connection with their data
networking, Internet access or hosting services, thereby significantly
increasing pricing pressure on us. We may not be able to offset the effects of
any such price reductions even with an increase in the number of our customers,
higher revenues from enhanced services, cost reductions or otherwise. In
addition, we believe that the data networking and VPN's and Internet access and
hosting industries are likely to continue to encounter consolidation in the
future. Increased price competition or consolidation in these markets could
result in erosion of our revenues and operating margins and could prevent us
from becoming profitable.
NEW TECHNOLOGIES COULD DISPLACE OUR SERVICES OR RENDER THEM OBSOLETE.
New technologies or industry standards have the potential to replace or
provide lower cost alternatives to our Internet access services, data networking
and hosting services. The adoption of such new technologies or industry
standards could render these services obsolete or unmarketable. For example,
these services rely on the continued widespread commercial use of the set of
protocols, services and applications for linking computers known as Internet
protocol. Alternative sets of protocols, services and applications for linking
computers could emerge and become widely adopted. Improvements in Internet
protocol could emerge that would allow for the assignment of priorities to data
packets in order to ensure their delivery in the manner customers prefer, as
well as other improvements, which could eliminate one advantage of the ATM
architecture of our network. We cannot guarantee that we will be able to
identify new service opportunities successfully and develop and bring new
products and services to market in a timely and cost-effective manner, or that
products, software and services or technologies developed by others will not
render our current and future services non-competitive or obsolete. In addition,
we cannot assure you that our current and future services will achieve or
sustain market acceptance or be able to address effectively the compatibility
and interoperability issues raised by technological changes or new industry
standards. If we fail to anticipate the emergence of, or obtain access to, a new
technology or industry standard, we may incur increased costs if we seek to use
those technologies and standards or our competitors that use such technologies
and standards may use them more cost-effectively than we do.
THE DATA NETWORKING AND INTERNET ACCESS INDUSTRIES ARE HIGHLY REGULATED IN MANY
OF THE COUNTRIES IN WHICH WE PLAN TO PROVIDE SERVICES, WHICH COULD RESTRICT OUR
ABILITY TO CONDUCT BUSINESS INTERNATIONALLY.
We are subject to varying degrees of regulation in each of the
jurisdictions in which we provide services. Local laws and regulations, and
their interpretation and enforcement, differ significantly among those
jurisdictions. Future regulatory, judicial and legislative changes may have a
material adverse effect on our ability to deliver services within various
jurisdictions.
National regulatory frameworks that are consistent with the policies and
requirements of the World Trade Organization have only recently been, or are
still being, put in place in many countries. Many countries are still in the
early stages of providing for and adapting to a liberalized telecommunications
market. As a result, in these markets, we may encounter more protracted and
difficult procedures to obtain licenses and negotiate interconnection
agreements.
Our operations are dependent on licenses and authorizations from
governmental authorities in most of the foreign jurisdictions in which we
operate or plan to operate. These licenses and authorizations generally will
contain clauses pursuant to which we may be fined or our license may be revoked.
Such revocation may be on short notice, at times as short as 30 days' written
notice to us. We may not be able to obtain or retain the licenses necessary for
our operations.
31
ADOPTION OR MODIFICATION OF GOVERNMENT REGULATIONS RELATING TO THE INTERNET
COULD HARM OUR BUSINESS.
There is currently only a small body of laws and regulations directly
applicable to access to or commerce on the Internet. However, existing laws have
been applied to Internet transactions in a number of cases. Moreover, due to the
increasing popularity and use of the Internet, international, national, federal,
state and local governments may adopt laws and regulations that affect the
Internet. The nature of any new laws and regulations and the manner in which
existing and new laws and regulations may be interpreted and enforced cannot be
predicted accurately. The adoption of any future laws or regulations might
decrease the growth of the Internet, decrease demand for our services, impose
taxes or other costly technical requirements or otherwise increase the cost of
doing business on the Internet or in some other manner have a significantly
harmful effect on us or our customers. The U.S. government and/or state
governments also may seek to regulate some segments of our activities as it has
with basic telecommunications services. Moreover, the applicability to the
Internet of existing laws governing intellectual property ownership and
infringement, copyright, trademark, trade secret, obscenity, libel, employment,
personal privacy and other issues is uncertain and developing. We cannot predict
accurately the impact, if any, that future laws and regulations or changes in
laws and regulations may have on our business.
RISKS RELATED TO OUR COMMON STOCK
OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET IF WE ARE
UNABLE TO MAINTAIN A STOCK PRICE ABOVE $1.00 PER SHARE.
In order to continue being listed on the Nasdaq National Market, our common
stock must maintain a closing bid price of $1.00 per share. March 9, 2001 was
the last day on which the closing bid price of our common stock was $1.00. If
our closing bid price remains below a $1.00 for 30 consecutive trading days, and
if the closing bid price is not at least $1.00 for ten consecutive days within
the next 90 calendar days, Nasdaq may delist our common stock from the Nasdaq
National Market. If our common stock were delisted, there would be a reduction
in the market liquidity for our common stock. Such a reduction in liquidity
would likely reduce our ability to raise capital and would have a significant
negative impact on our business plans and operations, including our ability to
acquire new businesses and develop new products. If our common stock were not
listed or quoted on another market or exchange an investor would find it more
difficult to dispose of, or to obtain accurate quotations for the price of our
common stock. Additionally, if our common stock is delisted from the Nasdaq
National Market and we fail to obtain listing or quotation on another market or
exchange, broker-dealers may be less willing or able to sell and/or make a
market in our common stock.
A SIGNIFICANT NUMBER OF OUR SHARES ARE ELIGIBLE FOR RESALE AND BRIDGE INTENDS TO
SELL ADDITIONAL SHARES OF OUR COMMON STOCK IN THE FUTURE. THIS COULD REDUCE OUR
STOCK PRICE AND IMPAIR OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS.
We have 93,842,498 shares of common stock outstanding as of March 31, 2001,
almost all of which are available for resale beginning at various points of time
in the future. Sales of substantial amounts of shares of our common stock in the
public market, or the perception that those sales will occur, could cause the
market price of our common stock to decline. Those sales also might make it more
difficult for us to sell equity and equity-related securities in the future at a
time and at a price that we consider appropriate. In particular, Bridge has
indicated to us that it intends in the future to sell a portion of its shares of
our common stock which may include sales in the open market or in private
placements or sales to strategic investors.
OUR CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS
THAT COULD DISCOURAGE A TAKEOVER.
Our certificate of incorporation and Delaware law contain provisions which
may make it more difficult for a third party to acquire us, including provisions
that give the board of directors the power to issue shares of preferred stock.
We have also chosen to be subject to Section 203 of the Delaware General
Corporation Law, which prevents a stockholder of more than 15% of a company's
voting stock from entering into business combinations set forth under Section
203 with that company.
32
ITEM 2. PROPERTIES.
Our executive offices are located in Herndon, Virginia and consist of an
80,000 square foot facility with a ten year lease that is set to expire in 2010.
We lease facilities for our sales offices and network equipment in a number of
metropolitan areas. We also lease approximately 10,000 square feet for office
facilities from Bridge in St. Louis, Missouri. We have constructed a 35,000
square foot data center in Hazelwood, Missouri, on land owned by Bridge for
which no written agreement exists with Bridge. We have leased 34,000 square feet
in San Francisco for our new data center (opened in December, 2000), for which
the lease expires in 2010, and, 35,000 square feet in both Boston and New York
that may be used for future data centers.
We believe that our existing facilities, including the additional space,
are adequate for our current needs and that suitable additional or alternative
space will be available in the future on commercially reasonable terms as
needed.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may be involved in litigation relating to claims
arising out of our ordinary course of business. We are not currently involved in
any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the shareholders during calendar
year 2000.
33
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(A)(1) MARKET PRICE OF COMMON STOCK.
Our common stock, $.01 par value per share, has been quoted on the Nasdaq
National Market under the symbol "SVVS" since our initial public offering on
February 15, 2000. Prior to February 15, 2000, there was no established trading
market for our shares of common stock. As of March 31, 2001, there were
approximately 514 holders of record of our common stock. The following table
lists, on a per share basis for the periods indicated, the high and low closing
sale prices for the common stock as reported by the Nasdaq National Market:
Quarter Ended High Low
------------- --------- ---------
March 31, 2000 $ 24.625 $ 15.9375
June 30, 2000 17.125 10.8750
September 30, 2000 14.750 7.6875
December 31, 2000 8.000 .8125
We have not declared or paid any cash dividends on our common stock since
our inception. We do not intend to pay cash dividends on our common stock in the
foreseeable future. We anticipate we will retain any earnings for use in our
operations and the expansion of our business. In addition, we are restricted
from paying dividends by the terms of our credit agreement.
(A)(2) RECENT SALES OF UNREGISTERED SECURITIES
Between January 1, 2000 and December 31, 2000, we granted options to
purchase 2,924,500 shares of our common stock to a total of 402 of our employees
(159,500 options at $.50 per share; 858,500 at $10.00 per share; 15,000 at
$19.6875 per share; 169,000 at $13.875 per share; 132,000 at $14.9375 per share;
206,000 at $13.0625 per share; 152,000 at $11.75 per share; 398,500 at $8.9375
per share; 170,000 at $8.00 per share; 282,375 at $3.6875 per share and; 381,625
options at $2.00 per share). In that same period, we granted options to purchase
60,000 shares of our common stock to a total of 64 employees of Bridge and
options to purchase 45,000 shares of our common stock to three non-employee
members of our Board of Directors, each at an exercise price of $.50 per share.
All of these options were granted pursuant to our stock option plan. These
option grants were effected in transactions not subject to, or exempt from, the
registration requirements of the Securities Act of 1933, and these transactions
were effected without the use of an underwriter.
During the fiscal year ended December 31, 2000, proceeds of approximately
$.5 million were generated from the exercise of options for 995,780 shares of
our common stock. There were no underwriting discounts, commissions or
significant expenses attributable to these proceeds. We used the proceeds for
general working capital expenses incurred in the ordinary course of business.
All of the options had been granted under our stock option plan. We issued the
shares in reliance on the exemption from registration provided by Rule 701 under
the Securities Act of 1933.
On February 16, 2001, we entered into a securities purchase agreement and
certain related agreements and documents with two investment entities sponsored
by Welsh Carson and several individuals affiliated with Welsh Carson. Pursuant
to the terms of the securities purchase agreement, the Welsh Carson entities and
affiliated individuals agreed to purchase $20 million aggregate principal amount
of our 10% convertible senior secured notes due 2006. Subject to the terms of
the notes, the holders of the notes have the right, at their option at any time,
to convert all or any portion of the unpaid principal amount of the notes
together with accrued interest, into such number of shares of our common stock
as is obtained by dividing the total amount so to be converted by the conversion
price of $1 5/16. The notes were issued without registration under the
Securities Act of 1933 in reliance on the exemption from registration contained
in Section 4(2) of the Securities Act, and the issuances were effected without
the use of an underwriter.
34
(B) USE OF PROCEEDS
The Registration Statement on Form S-1 (the "Registration Statement")
relating to the initial public offering of our common stock (File No. 333-90881)
was declared effective by the SEC on February 14, 2000. We have used
approximately $127 million from the net proceeds of $333 million of our initial
public offering for payment to Bridge for the purchase of the network and the
preferential distribution and to reduce indebtedness to Bridge. Additionally,
approximately $100 million has been used for non-financed capital expenditures,
and approximately $74 million was used for general working capital purposes and
network expansion.
ITEM 6. SELECTED FINANCIAL DATA.
The following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Business", and our consolidated financial statements and related notes included
elsewhere in this report. We derived the selected historical consolidated
financial data presented below from our audited consolidated financial
statements. We began commercial operations in 1996.
On April 7, 1999, Bridge acquired all our equity securities and accounted
for this acquisition as a purchase transaction. Since the purchase transaction
resulted in our company becoming a wholly owned subsidiary of Bridge, SEC rules
required us to establish a new basis of accounting for the purchased assets and
liabilities. The accounting for the purchase transaction has been "pushed down"
to the financial statements of SAVVIS. Therefore, the purchase price has been
allocated to the underlying assets purchased and liabilities assumed based on
the estimated fair market values of these assets and liabilities at the
acquisition date. As a result of the application of fair value accounting,
intangibles, goodwill, other liabilities and stockholders' equity were increased
in the SAVVIS consolidated balance sheet. The consolidated balance sheet data as
of December 31, 2000, December 31, 1999 and consolidated statement of operations
data for the year ended December 31, 2000 and the period from April 7, 1999
through December 31, 1999 reflect our acquisition by Bridge and are labeled
"Successor." The financial data for the periods prior to the acquisition are
labeled "Predecessor."
On September 10, 1999, Bridge sold in a private placement approximately 25%
of its equity ownership in SAVVIS to existing shareholders of Bridge, at which
time Welsh Carson purchased from Bridge a 12% interest in SAVVIS. On February
28, 2000, Bridge completed the sale of an additional 6,250,000 shares of SAVVIS
common stock to Welsh Carson at $24 per share, for a total cash consideration of
$150 million. As of March 31, 2001, Bridge and Welsh Carson owned approximately
48% and 16% of our outstanding common stock, respectively.
The initial public offering of our common stock was completed on February
18, 2000. A total of 14.875 million shares were sold by us in the offering at
$24 per share. We received net proceeds from this transaction of approximately
$333 million, of which approximately $121 million was paid to Bridge for the IP
network, as described below, and $6 million for debt reduction.
Simultaneous with the completion of the public offering, we purchased or
subleased Bridge's global Internet protocol network assets. The final purchase
price of the assets (at Bridge's carrying value), after the determination for
and reconciliations of the specific assets purchased, was approximately $77
million, of which approximately $52 million was paid from the offering proceeds.
We also paid a $69 million preferential distribution to Bridge. Additionally, we
assumed capital lease obligations of approximately $25 million related to these
network assets.
We calculate adjusted EBITDA as consolidated earnings (loss) before
depreciation and amortization, taxes, interest income and expense, non-cash
compensation and asset impairment and write-down charges. We have included
information concerning adjusted EBITDA because our management believes that in
our industry such information is a relevant measurement of a company's financial
performance and liquidity. Adjusted EBITDA is not determined in accordance with
accounting principles generally accepted in the United States of America, is not
indicative of cash used by operating activities and should not be considered in
isolation or as an alternative to, or more meaningful than, measures of
operating performance determined in accordance with accounting principles
generally accepted in the United States of America. Additionally, our
calculation of adjusted EBITDA may not be comparable to similarly titled
measures of other companies, as other companies may not calculate it in a
similar manner.
35
PREDECESSOR SUCCESSOR
-------------------------------------------- ---------------------------------------------
YEARS ENDED DECEMBER 31, PERIOD FROM PERIOD FROM YEAR ENDED
-------------------------------------------- JANUARY 1 TO APRIL 7 TO DECEMBER 31,
1996 1997 1998 APRIL 6, 1999 DECEMBER 31, 1999 2000
------------ ------------ ------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Managed data networks (including
$149,805 from Bridge in 2000) ... $ -- $ -- $ -- $ -- $ -- $ 151,733
Internet access (including $1,844
from Bridge in 2000) ............ 290 2,395 12,827 5,303 17,501 32,542
Other .............................. -- 363 847 137 1,048 2,049
------------ ------------ ------------ ------------ ------------ ------------
Total revenues .................. 290 2,758 13,674 5,440 18,549 186,324
Direct costs and operating expenses:
Data communications and
operations (1) ............... 1,044 11,072 20,889 6,371 21,183 211,750
Sales and marketing (2) ......... 328 1,777 8,155 2,618 9,924 33,892
General and administrative (3) .. 876 3,353 4,090 2,191 8,906 24,361
Depreciation and amortization ... 153 631 2,288 817 14,351 60,511
Asset impairment and other
write-downs of assets ........ -- -- -- 1,383 -- 2,000
Non-cash equity-based
compensation ................. -- -- -- -- 1,500 14,459
------------ ------------ ------------ ------------ ------------ ------------
Total direct costs and
operating expenses ........... 2,401 16,833 35,422 13,380 55,864 346,973
------------ ------------ ------------ ------------ ------------ ------------
Loss from operations ............... (2,111) (14,075) (21,748) (7,940) (37,315) (160,649)
Interest expense, net .............. (60) (482) (100) (135) (1,302) (4,202)
------------ ------------ ------------ ------------ ------------ ------------
Loss before income taxes,
minority interest and
extraordinary item .............. (2,171) (14,557) (21,848) (8,075) (38,617) (164,851)
Minority interest in losses,
net of accretion ................ -- 547 (147) -- -- --
Extraordinary gain on debt
extinguishment, net of tax ...... -- -- 1,954 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net loss ........................... $ (2,171) $ (14,010) $ (20,041) $ (8,075) $ (38,617) $ (164,851)
============ ============ ============ ============ ============ ============
Net loss attributable to
common stockholders ............. $ (2,171) $ (14,161) $ (22,666) $ (9,025) $ (38,617) $ (164,851)
============ ============ ============ ============ ============ ============
Basic and diluted net
loss per share before
extraordinary item .............. $ (.06) $ (.38) $ (.42) $ (.14) $ (.54) $ (1.89)
Extraordinary gain on debt
extinguishment, net of tax ...... -- -- .03 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Basic and diluted loss
per common share ................ $ (.06) $ (.38) $ (.39) $ (.14) $ (.54) $ (1.89)
============ ============ ============ ============ ============ ============
Weighted average shares
outstanding ..................... 35,396,287 36,904,108 58,567,482 66,018,388 72,075,287 87,343,896
============ ============ ============ ============ ============ ============
OTHER FINANCIAL DATA:
Adjusted EBITDA .................... $ (1,958) $ (12,897) $ (17,653) $ (5,740) $ (21,464) $ (83,679)
Capital expenditures ............... 884 697 1,688 275 837 152,193
Cash used in operating
activities ...................... (1,293) (10,502) (20,560) (6,185) (18,273) (73,635)
Cash used in investing
activities ...................... (884) (697) (2,438) (275) (837) (153,193)
Cash provided by financing
activities ...................... 2,740 12,024 24,121 4,533 21,383 256,670
PREDECESSOR SUCCESSOR
---------------------------------------- ------------------------
AS OF DECEMBER 31, AS OF DECEMBER 31
---------------------------------------- ------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents ........................... $ 573 $ 1,398 $ 2,521 $ 2,867 $ 32,262
Goodwill and intangibles, net ....................... -- -- 1,406 26,250 13,974
Total assets ........................................ 1,888 4,313 11,663 39,296 438,622
Debt and capital lease obligations .................. 1,126 8,814 2,759 29,958 199,610
Redeemable preferred stock, net of discount
and deferred financing costs ..................... 500 5,261 36,186 -- --
Stockholders' equity (deficit) ...................... (693) (14,903) (33,197) (2,766) 116,930
<FN>
(1) excluding $.2 million and $1.9 million of equity-based compensation for the 1999 Successor period and 2000, respectively
(2) excluding $.5 million and $5.0 million of equity-based compensation for the 1999 Successor period and 2000, respectively
(3) excluding $.8 million and $7.6 million of equity-based compensation for the 1999 Successor period and 2000, respectively
</FN>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
You should read the following discussion together with our consolidated
financial statements and the related notes to those financial statements that
are included in Part II, Item 8 of this Form 10-K, beginning on page F-1 of this
report. As a result of Bridge filing for bankruptcy on February 15, 2001 and our
inability to raise capital, as further explained in Part I, Item 1 "Risks
Related to our
36
Business" on page 21, in Liquidity and Capital Resources later in this section,
and in Note 1 to the Consolidated Financial Statements in Part IV, Item 14 on
page F-7, our ability to continue as a going concern in the normal course of
business is uncertain.
OVERVIEW
We are a growing provider of high quality, high performance global data
networking and Internet-related services to medium and large businesses,
multinational corporations and Internet service providers. To provide our
Internet access services, we use the SAVVIS Intelligent IP Network(SM), a data
communications network that uses our twelve PrivateNAPs(SM) and our proprietary
routing policies to reduce data loss and enhance performance by avoiding the
congested public access points on the Internet.
We began commercial operations in 1996, offering Internet access services
to local and regional Internet service providers. Our customer base has grown
from 15 customers at the end of 1996 to 2,310 at December 31, 2000.
On April 7, 1999, we were acquired by Bridge in a stock-for-stock
transaction that was accounted for as a "purchase transaction" under Accounting
Principles Board Opinion No. 16. Since the purchase transaction resulted in our
Company becoming a wholly owned subsidiary of Bridge, SEC rules required us to
establish a new basis of accounting for the assets purchased and liabilities
assumed. As a result, the purchase price has been allocated to the underlying
assets purchased and liabilities assumed based on estimated fair market value of
these assets and liabilities on the acquisition date, and the difference between
the purchase price and the fair market value was recorded as goodwill. The
accounting for the purchase transaction has been "pushed down" to our financial
statements. The impact of the acquisition on our balance sheet, as a result of
the application of fair value accounting, was to increase intangibles, goodwill,
other liabilities and stockholders' equity. As a result of the acquisition and
the "push down" accounting, our results of operations following the acquisition,
particularly our depreciation and amortization, are not comparable to our
results of operations prior to the acquisition.
On September 10, 1999, Bridge sold in a private placement approximately 25%
of its equity ownership in SAVVIS to the existing stockholders of Bridge, at
which time Welsh Carson purchased from Bridge a 12% interest in SAVVIS. On
February 28, 2000, Bridge completed the sale of an additional 6,250,000 shares
of SAVVIS common stock to Welsh Carson Anderson & Stowe ("Welsh Carson"). As of
March 25, 2001, Bridge and Welsh Carson owned approximately 48% and 16% of our
outstanding common stock, respectively.
The initial public offering of our common stock was completed in February
2000. A total of 17 million shares were sold in the offering, 14,875,000 shares
sold by us and 2,125,000 shares sold by Bridge, all at $24 per share. We
received net proceeds from this offering of approximately $333 million.
Simultaneously with the completion of the initial public offering, we acquired
Bridge's global Internet protocol network for total consideration of
approximately $77 million plus a payment representing a preferential
distribution to Bridge of approximately $69 million. The purchase has
substantially increased our depreciation and amortization. At that time, we
entered into a 10-year network services agreement with Bridge under which we
provide managed data networking services to Bridge. Our initial network service
fees are based upon the cash cost to Bridge of operating the network as
configured on October 31, 1999, as adjusted for changes to the network and
associated personnel related to Bridge's network requirements through February
17, 2000. Our fees for additional services provided following February 17, 2000
were set for a three-year term based on an agreed price schedule. Our revenues
from Bridge exceeded this minimum price guarantee for the year ended December
31, 2000. The minimum cost to Bridge per the network services agreement is $132
million and $145 million for SAVVIS to provide the network services in 2001 and
2002, respectively.
In addition, Bridge has agreed that the amount paid to us under the
agreement for the fourth, fifth and sixth years will not be less than 80% of the
total amount paid by Bridge and its subsidiaries for Internet protocol data
transport services in each of those years; and the amount paid to us under the
agreement for the seventh through tenth years will not be less than 60% of the
total amount paid by Bridge and its subsidiaries for Internet protocol data
transport services in each of those years.
Because the amounts paid to us under the network services agreement for the
services provided over the original network acquired from Bridge are based upon
the cash cost to operate the original network, the provision of such services
did not have an impact on our cash flows from operations. However, due to
amortization and depreciation relating to the network, the provision of services
under the network services agreement resulted in our incurring losses from
operations, and these losses will continue unless we can sell additional
services over the network to Bridge or to other customers. The effects of such
operating losses will include continued increases in our accumulated deficit and
reductions in stockholders' equity.
Bridge has agreed to provide to us various services, including technical
support, customer support and project management in the areas of installation,
provisioning, help desk, and repair and maintenance. In addition, Bridge has
agreed to provide to us additional administrative and operational support
services until we develop the capabilities to perform these services ourselves.
Due to the potential sale of Bridge or its assets and the possibility of the
rejection of these agreements, we may be forced to perform these services
ourselves in the near future.
37
Revenue. Our revenue is derived primarily from the sale of data networking
(principally to Bridge), and Internet access services. For the year 2000, Bridge
represented 81% of our total revenue. Through December 31, 1998, our revenue was
primarily derived from the sale of Internet access services to local and
regional Internet service providers in the United States. Beginning in late
1998, we also began to offer Internet security and hosting services to corporate
customers. Beginning in September 1999, we began to offer managed data
networking services. We expect our revenues from Bridge to decrease as a
percentage of our total revenues as we expand our data networking, Internet
access and hosting customer base.
We charge each customer an initial installation fee that typically ranges
from $500 to $5,000 and a fixed monthly fee that varies depending on the
services provided, the bandwidth used and the quality of service level chosen.
Our customer agreements are typically for 12 to 36 months in length. These fees
are recognized in income over the average life of the customer contracts.
Prices for telecommunication services, including the services we offer,
have decreased significantly over the past several years and we expect this
trend to continue for the foreseeable future.
DIRECT COSTS AND EXPENSES
Data communications and operations. Data communications and operations
expenses include the cost of:
o connections to other Internet service providers;
o leasing local access lines;
o transmission connections;
o salaries and related benefits for engineering and operations
personnel;
o other related repairs and maintenance items;
o leasing routers and switches;
o leasing hosting space; and
o installing local access lines at customer sites.
These costs also include the cost of the network operations center, as well
as the customer help desk and other services that are provided by Bridge under
the technical services agreement. Data communications and operations expense has
increased significantly with the inclusion of the Bridge network. In addition,
we expect that these costs will continue to increase in total dollars as we
expand our network and increase our customer base, but we expect an eventual
decrease as a percentage of revenues.
Sales and Marketing. These expenses include the cost of:
o sales and marketing salaries and related benefits;
o sales commissions and referral payments;
o advertising and direct marketing; and
o travel.
We anticipate that these expenses will continue to increase in total
dollars as we add more sales personnel and increase our marketing initiatives to
support the expansion of our customer base.
General and administrative. General and administrative expenses include the
cost of:
o occupancy costs;
o executive, financial, legal, tax and administrative support personnel;
38
o professional services, including legal, accounting, tax and consulting
o bad debt expense; and
o travel.
These expenses are expected to continue to increase as we continue to add
to our support personnel, infrastructure and back office systems as the business
continues to ramp up and the network is expanded.
Depreciation and amortization. Depreciation and amortization expense
consists primarily of the depreciation and amortization of communications
equipment, capital leases, goodwill and intangibles. We expect these expenses to
continue to increase as we make significant investments in the network as we
expand our business. Generally, depreciation is calculated using the
straight-line method over the useful life of the associated asset, which ranges
from three to five years. Goodwill resulting from our acquisition by Bridge is
being amortized over three years and other intangibles are amortized over one to
three years.
Interest expense. Historical interest expense is related to indebtedness to
banks, convertible notes, loans from Bridge and capitalized leases. In
connection with our purchase of Bridge's Internet protocol network assets, we
entered into capitalized sub-leases with Bridge relating to their capitalized
leases for network equipment that Bridge could not directly assign to us.
Additional capitalized leases were entered into in 2000 relating to the network
expansion. Also, during 2000 the Company executed credit agreements with vendors
to acquire network equipment and related services. Accordingly, we expect our
interest expense to continue to increase as further expansion to the network
occurs.
Income tax expense. We incurred operating losses from inception through
December 31, 2000 and, therefore, have not recorded a provision for income taxes
in our historical financial statements. We have recorded a valuation allowance
for the full amount of our net deferred tax assets because the future
realization of the tax benefit is uncertain. As of December 31, 2000, we had
U.S. net operating loss carry forwards of approximately $169 million and foreign
net operating losses of approximately $9 million. Section 382 of the Internal
Revenue Code restricts the utilization of U.S. net operating losses and other
U.S. carryover tax attributes upon the occurrence of an ownership change, as
defined. Such an ownership change occurred during 1999 as a result of the
acquisition of our company by Bridge. Management believes that this limitation
may restrict our ability to utilize the net operating losses over the U.S.
Statutory carry-forward periods ranging from 15 to 20 years.
As we continue to expand our network, increase our employee base to support
our expanded operations and invest in our marketing and sales operations, we
expect our losses, net cash used in operating activities and negative adjusted
EBITDA to continue to increase for the foreseeable future.
RESULTS OF OPERATIONS
The historical financial information included in this Form 10-K will not reflect
our future results of operations, financial position and cash flows. Our results
of operations, financial position and cash flows subsequent to the purchase of
Bridge's network and the commencement of the related agreements is not
comparable to prior periods.
THE YEAR ENDED DECEMBER 31, 2000 AS COMPARED TO THE YEAR ENDED DECEMBER 31,1999
(1999 AMOUNTS REPRESENTS COMBINED PREDECESSOR AND SUCCESSOR INFORMATION)
Revenue. Revenue was $186.3 million for the year ended December 31, 2000, an
increase of $162.3 million or 677%, from $24.0 million for the year ended
December 31, 1999. The revenue growth resulting from the initiation of managed
data network services, including services provided under the Bridge network
services agreement entered into on February 18, 2000, accounted for $151.7
million of the increase. Internet access revenues increased 43% to $32.5 million
in the twelve months of 2000, compared to $22.8 million for 1999. These
increases were driven by an increase in active customer circuits of 161% to
approximately 3,000 as of December 31, 2000 from 1,150 as of December 31, 1999.
Other revenues, consisting of installation and equipment sales, increased from
$1.2 million in 1999 to $2.0 million in 2000.
Data Communications and Operations. (exclusive of non-cash compensation) Data
communications and operations expenses were $211.8 million for the year ended
December 31, 2000; an increase of $184.2 million from $27.6 million for the year
ended December 31, 1999. The increase in expenses related principally to the
costs incurred by SAVVIS to operate the Internet protocol network acquired from
Bridge since February 18, 2000 and other increases in the number of leased long
distance, dedicated customer and dial-up circuits to support the increased
customer circuits in operation.
39
Sales and Marketing. (exclusive of non-cash compensation) Sales and marketing
expenses were $33.9 million for the year ended December 31, 2000, up 170% or
$21.4 million as compared to 1999. This increase is principally attributed to
personnel related costs and sales commissions of $13.6 million associated with
the growth in sales and marketing staff, a $5.0 million increase in expenditures
on advertising and marketing initiatives, and a $2.4 million increase in travel
and training-related items.
General and Administrative. (exclusive of non-cash compensation) General and
administrative expenses amounted to $24.4 million for the year ended December
31, 2000 and $11.1 million for the same period in 1999, an increase of $13.3
million or 120%. This increase resulted from increased personnel costs of $2.8
million to support the expansion of the customer base and the overall growth of
the business, increased occupancy costs of $3.8 million related to the move to
the Company's new headquarters during the second quarter and increased costs for
the growing employee base, an increase of $1.8 million for professional audit,
tax, legal and consulting services, an increase of $1.6 million in services
provided by Bridge under the Administrative Services agreement, and an increase
of $1.3 million in travel expense associated with the overall growth of the
business. Bad debt expense amounted to $1.8 million in 2000 versus $.8 million
for the year ended December 31, 1999.
Non-cash Equity-based Compensation. Non-cash equity-based compensation amounted
to $14.5 million for the year ended December 31, 2000 versus a $1.5 million
expense in 1999. These expenses represent amortization charges to earnings for
the years ended December 31, 2000 and 1999, respectively, for the difference
between the estimated fair market value of our common stock and the exercise
price for options granted to employees and non-employee members of our Board of
Directors on various dates in early 2000 and late 1999, as well as options
granted to employees of Bridge in 1999 and early 2000.
BECAUSE THE "PREDECESSOR" STATEMENT OF OPERATIONS IN 1999 IS PRESENTED ON A
DIFFERENT BASIS OF ACCOUNTING, THE FOLLOWING AREAS IN THE STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 ARE NOT COMPARED:
Depreciation and Amortization. Depreciation and amortization expense was $60.5
million for the year ended December 31, 2000. Of this total, $43.7 million is
attributed to depreciation on the network acquired on February 18, 2000 and
subsequent network equipment acquisitions, and $12.4 million relates to the
amortization of goodwill and intangibles associated with the mandated "push-down
accounting" ascribed to the Bridge acquisition of SAVVIS in April 1999.
Asset Impairment & Other Write-downs of Assets. During 2000, an asset write down
in the amount of $2 million was required to adjust our investment in specialized
customer application software to its estimated net realizable value.
Interest. Interest income from the investment of the initial public offering
proceeds amounted to $6.4 million for the year ended December 31, 2000. Interest
expense during the same period, primarily attributable to interest expense on
capital equipment financing incurred since the acquisition of the Internet
protocol network in February 2000 and amounts payable to Bridge, amounted to
$10.6 million.
Net Loss. The net loss for the year ended December 31, 2000 was $164.9 million,
or $1.89 basic and diluted loss per share.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
The following discussion compares combined information of SAVVIS and our
predecessor for the year ended December 31, 1999, with those of our predecessor
for the year ended December 31, 1998. The combined information consists of the
sum of the financial data from January 1, 1999 through April 6, 1999 for the
predecessor and from April 7, 1999 through December 31, 1999 for SAVVIS. The
acquisition by Bridge resulted in a new basis of accounting, which impacted
depreciation and amortization, impairment of assets and interest expense in the
period subsequent to April 7, 1999.
Revenue. Revenue was $24.0 million in 1999 compared to $13.7 million in
1998, an increase of 75%. This $10.3 million increase was primarily due to
increased marketing and sales efforts and the resulting increase in the number
of customers from 476 to 872.
Data Communications and Operations. Data communications and operations
expenses were $27.6 million in 1999, compared to $20.9 million in 1998, an
increase of 32%. This $6.7 million increase was due to costs associated with the
expansion of our network and the increase in the customer base.
Sales and Marketing and General and Administrative. Selling, general and
administrative expenses were $23.6 million in 1999, compared to $12.2 million in
1998, an increase of 93%. The principal increase in these expenses resulted from
the increased size of our sales force in 1999. Marketing and administrative
costs also increased in 1999 to support the increased number of customers.
40
LIQUIDITY AND CAPITAL RESOURCES
Negative cash flow from operations increased to $73.6 million for the year ended
December 31, 2000 from $24.5 million in 1999 due to our business growth and the
expansion of the IP network. This increase in negative cash flow primarily
resulted from our costs for sales and marketing efforts, general and
administrative enhancements, and interest costs necessary to support the
increase in our customer base, internal infrastructure support and growth, and
financing costs for network equipment purchases.
Net cash used in investing activities for the year ended December 31, 2000 was
approximately $153.2 million, which primarily reflects the purchase of the
Bridge Internet protocol network and other property and equipment not financed.
We obtained funds for the year 2000 through issuances of equity securities and
customer receipts, including receipts from Bridge. During the year, we increased
our outstanding advances from Bridge by $1.3 million. Additionally, for the
period February 18, 2000 to December 31, 2000, we also incurred obligations to
Bridge amounting to approximately $19.3 million, for services provided by Bridge
under the technical services and administrative services agreements, for certain
employee-related expenses paid directly by Bridge, and for telecommunication
charges relating to our network that were paid by Bridge. These amounts owed to
Bridge have been applied, pursuant to existing rights of offset, against the
outstanding receivable from Bridge as of December 31, 2000.
Our capital expenditures, including the purchase of the Bridge Internet protocol
network on February 18, 2000 for total consideration of approximately $77
million, totaled approximately $361 million in the year, including $237 million
that has been financed under existing or pending financing arrangements. In
addition to acquiring the Bridge Internet protocol network, we have acquired
approximately $206 million in network equipment through a combination of
financing and cash purchases during 2000. In addition, we incurred approximately
$66 million in costs related to the construction of data centers in St. Louis
and San Francisco.
In connection with our purchase of the global Internet protocol network assets
from Bridge, we also entered into a network services agreement under which we
provide Bridge with managed data networking services. Because the amounts paid
to us under the network services agreement for the services provided over the
original network acquired from Bridge are based upon the cash cost to operate
the original network, the provision of such services did not have an impact on
our cash flows from operations. However, due to amortization and depreciation
relating to the network, the provision of services under the network services
agreement resulted in our incurring losses from operations, and these losses
will continue unless we can sell additional services over the network to Bridge
or to other customers. The effects of such operating losses will continue to
increase our accumulated deficit and reduce our stockholders' equity.
On March 31, 2000, the Company entered into a three-year software licensing
agreement with a vendor for the acquisition of unlimited software licenses in
the amount of $9 million for customer applications over our global network. The
agreement called for the total balance to be paid via installment payments
through out the year. As of December 31, 2000, an asset write down in the amount
of $2 million was required to adjust our investment in this specialized customer
application software to its estimated net realizable value.
The following financing transactions occurred during the year (see Notes 7 and
11 to the consolidated financial statements):
o As part of the acquisition of the Internet protocol network from
Bridge, we entered into a capital lease obligation with Bridge for $25
million. As of March 31, 2001, the amount of our obligation under this
lease was approximately $9 million.
o On March 23, 2000, we entered into a $30 million, thirty-nine month
capital lease facility relating to equipment necessary for the network
expansion.
o On June 30, 2000, we entered into a Global Purchase Agreement (the
"Global Purchase Agreement") with Nortel Networks, Inc. ("Nortel").
This agreement calls for us to purchase and take delivery of products
and services from Nortel in the amount of $155 million from the date
of the agreement through December 31, 2003. These products and
services are to be financed by Nortel pursuant to a credit agreement.
o On August 2, 2000, the Company entered into two agreements with Level
3 Communications, LLC ("Level 3"). These agreements grant to SAVVIS
exclusive indefeasible rights of use ("IRU") in certain segments of a
multi-conduit fiber optic communications system being constructed by
Level 3. The term of each agreement is for a 20-year period beginning
with the acceptance of a segment and payment by SAVVIS of the segment
IRU fee. The agreements stipulate payments to Level 3 totaling
approximately $36.2 million. As of December 31, we have paid to Level
3 approximately $9.8 million pursuant to these agreements, which
amounts were funded by drawings under the Nortel term loan facility.
o On June 30, 2000, SAVVIS executed an agreement to acquire
approximately $30 million of telecommunications equipment and related
services with Winstar Wireless, Inc. ("Winstar"). Upon execution, we
took delivery of certain equipment and paid approximately $5 million
to Winstar. Of the remaining $25 million, approximately $16.5
41
million has been financed by Winstar over six years at 11% interest.
The unpaid balance of $6.3 million has been recorded in other accrued
liabilities. On September 29, 2000, we executed an additional
agreement with Winstar to acquire approximately $10 million in
telecommunications equipment. Winstar has financed the unpaid balance
of $8.6 million over six years at 11% interest.
o On September 5, 2000, we entered into a term loan facility agreement
with Nortel for the financing of approximately $235 million of network
equipment, installation services and third party expenses. As of
December 31, 2000 we have drawn approximately $75.1 million under this
financing arrangement for the purchase of equipment and services and
other third-party costs amounts drawn have been recorded in notes
payable-current portion.
o On September 26, 2000 and November 18, 2000, respectively, SAVVIS
entered into four, thirty-nine month capital lease agreements to
finance a total of approximately $25.6 million in equipment necessary
for the network expansion.
As a result of the Bridge bankruptcy Nortel's lending commitments under the
Nortel term loan facility have terminated. We are currently discussing with
Nortel the reinstatement of those commitments. If the commitments are not
reinstated, we will be unable to fund approximately $105 million of our cash
requirements. As a result we would be unable to proceed with the U.S. fiber
deployment and would be unable to meet our purchase commitments with Nortel and
Level 3.
On March 31, 2001, we did not pay approximately $1.2 million of interest and
commitment fees due to Nortel under the term loan facility and in April 2001, we
did not pay approximately $1.7 million, due to GECC under capital lease
obligations. We are currently discussing waivers of these defaults with both
Nortel and GECC. Furthermore, Savvis deposited the March and April 2001
payments, amounting to $1.2 million, into a separate bank account instead of
making the payments to Bridge, thus causing a default with Bridge under this
lease.
Other financing-type transactions during 2000 include:
o On January 24, 2000, we entered into a 10-year lease for our new,
80,582 square foot, headquarters office building located in Herndon,
VA. Monthly lease payments began at $.2 million per month and escalate
to $.3 million per month by year ten.
o In August 2000, we entered into a 20-year agreement with Kiel Center
Partners, L.P. ("KCP") pursuant to which we acquired the naming rights
to an arena in St. Louis, Missouri. Total consideration for these
rights was measured as $72 million and included 750,000 shares of our
common stock issued to KCP which provides for all payments under this
agreement for the first six years. The related expense will be
recognized over the term of the agreement.
We have arrangements with various suppliers of communications services that
require us to maintain minimum spending levels some of which increase over time.
Our aggregate minimum spending level is approximately $46 million, $47 million,
$48 million, $29 million and $5 million in years 2001 to 2005, respectively.
SAVVIS' current spending levels under these agreements are substantially in
excess of the spending commitments. The majority of these minimum spending
commitments have already been exceeded for the year 2001. Should SAVVIS not meet
the minimum spending level in any given year, decreasing termination liabilities
representing a percentage of the remaining contracted amount may immediately
become due and payable. Furthermore, certain of these termination liabilities
are subject to reduction should SAVVIS experience the loss of a major customer
or suffer a loss of revenues from a downturn in general economic activity.
Before considering the effects of any reductions for the business downturn
provisions, if SAVVIS were to terminate all of these agreements as of April 30,
2001, the maximum termination liability would amount to approximately $86
million.
As of December 31, 2000, SAVVIS' accounts receivable from Bridge approximated
$32.9 million under the network services agreement. This amount is net of
approximately $19.3 million in amounts due to Bridge through December 31, 2000
under the technical services and administrative services agreements, for certain
employee-related expenses paid directly by Bridge, and for telecommunication
charges relating to the global Internet protocol network that were paid by
Bridge. These amounts due from SAVVIS to Bridge were all subject to contractual
rights of offset against amounts due to Bridge from SAVVIS. SAVVIS currently
bills
42
Bridge approximately $15 million per month under the network services agreement.
In addition, SAVVIS owes Bridge approximately $23 million, in the form of a note
payable and accrued interest, relating to advances from Bridge necessary to fund
SAVVIS' operations from the date of the acquisition of Savvis by Bridge through
February 18, 2000, the effective date of SAVVIS' initial public offering. This
note matured on February 18, 2001. On February 16, 2001, we advised Bridge that,
if permitted by applicable law, we intend to set-off the note to Bridge against
Bridge's indebtedness to us as of February 15, 2001, the date of Bridge's
bankruptcy filing. Accordingly, as of March 31, 2001, we have not remitted the
total balance due of approximately $23 million of principal and interest to
Bridge.
Based upon our current plans for expansion, we will require approximately $300
million to fund our operating losses, working capital needs and capital
expenditure requirements for 2001. We expect to fund these requirements through
cash on hand and vendor financings aggregating $220 million and approximately
$80 million of additional financings, including the $20 million senior secured
convertible notes recently raised from Welsh Carson.
However, Bridge's bankruptcy filing negatively influences our cash position
through delayed or omitted payments by Bridge to us, demands by suppliers for
advance or accelerated payments for continuing services, and restrictions by
current or prospective providers of capital.
We may meet our remaining funding needs through a combination of equity
investments, debt financings, renegotiation of repayment terms on existing debt
and sales of assets and services. We have retained Merrill Lynch & Co. to advise
us in our discussions with potential strategic partners. There can be no
assurance that we will be successful in completing any of these financings or
that if we are the terms of such financings will be favorable to us. If Bridge
were to cease operations, we believe we would require at least an additional $20
million to fund our operations in 2001.
If we are successful in raising funding, Savvis will continue to explore ways to
optimize the management of its working capital. These efforts could involve
renegotiation of existing contractual obligations, workforce reductions and
elimination of nonessential expenditures.
As of March 31, 2001, we had approximately $10 million of unrestricted cash on
hand. Assuming Bridge continues to make payments to us under the network
services agreement, we currently have enough cash to run our business into May,
2001. Should we be unsuccessful in our efforts to raise additional capital by
then, we may be required to cease operations or declare bankruptcy.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which, as amended by SFAS No. 138 in June
2000, establishes accounting and reporting standards for derivative instruments,
including some derivative instruments embedded in other contracts, and for
hedging activities. FASB Statement No. 133 requires that all derivatives be
recognized on the balance sheet as either assets or liabilities, and measured by
fair value. Additionally, it requires that changes in the derivative
instrument's fair value be recognized in the statement of operations unless
specific hedge accounting criteria are met. The adoption of FASB Statement No.
133 will not have a material impact on our financial position, results of
operations, or cash flows.
We adopted SAB 101 effective January 1, 2000. The effect of implementation of
SAB 101 was not material to the consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures relate to changes in interest rates. Following
the purchase of Bridge's global Internet protocol network assets in February
2000, we have begun to expand our business internationally, and as a result, we
are also exposed to changes in foreign currency exchange rates.
We have financial instruments that are sensitive to changes in interest rates,
including our note payable to Bridge and a number of network equipment financing
arrangements. These instruments were entered into for other than trading
purposes, are denominated in U.S. Dollars, and, with the exception of amounts
drawn under the Term Loan facility with Nortel, bear interest at a fixed rate.
Because the interest rate on these instruments is fixed, changes in interest
rates will not directly impact our cash flows. Borrowings under the Nortel Term
Loan facility bear interest at a market-based variable rate. The basis for the
variable rate is selected by the Company, along with the interest rate period,
which may range from overnight to six months. At the end of the interest rate
period, the rate is reset in accordance with the Company's selection and changes
in market rates. Due to the relatively short nature of the interest rate
periods, we do not expect our operating results or cash flow to be materially
affected by changes in market interest rates. As of December 31, 2000, the
aggregate fair value of our borrowings approximated their carrying value.
Prior to our purchase of the network assets from Bridge, changes in foreign
exchange rates did not impact our results of operations. For the year ended
December 31, 2000, 35% of our service revenue from Bridge was derived from
operations outside the United States and approximately 26% of our total data
communications and operations costs were incurred outside the United States. We
expect these percentages to remain relatively constant in the periods ahead.
Because our foreign revenue closely matched our foreign
43
costs, changes in foreign exchange rates did not have a material impact on our
results of operations in this quarter. In the future, we may engage in hedging
transactions to mitigate foreign exchange risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The 2000 consolidated financial statements and related notes thereto are
included in Part II, Item 8 of this Form 10-K, beginning on page F-1 of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides a brief description of each director's and
executive officer's name, age, principal occupation and business experience and
all positions and offices with SAVVIS currently held by the directors and
executive officers.
Name Age Position and Office
- ---- --- -------------------
Robert A. McCormick 35 Chief Executive Officer and Chairman of the Board
John M. Finlayson 46 President, Chief Operating Officer and Director
David J. Frear 44 Executive Vice President, Chief Financial Officer and Director
James D. Mori 44 Executive Vice President and General Manager - Americas
Richard G. Bubenik 40 Executive Vice President and Chief Technical Officer
Clyde A. Heintzelman 62 Director
Thomas E. McInerney 59 Director
Patrick J. Welsh 57 Director
David L. Roscoe III 57 Director
Robert A. McCormick has served as the Chairman of our board of directors
since April 1999 and as our Chief Executive Officer since November 1999. Mr.
McCormick served as Executive Vice President and Chief Technical Officer of
Bridge, a principal stockholder of our company, from January 1997 to December
1999, and held various engineering, design and development positions at Bridge
from 1988 to January 1997. On February 15, 2001, Bridge filed a voluntary
petition for relief under Chapter 11 of Title 11 of the United States Bankruptcy
Code. Mr. McCormick attended the University of Colorado at Boulder.
John M. Finlayson has served as our President and Chief Operating Officer
since December 1999 and as a director of our company since January 2000. From
June 1998 to December 1999, Mr. Finlayson served as Senior Vice President of
Global Crossing Holdings, Ltd. and President of Global Crossing International,
Ltd., a provider of Internet and long distance communications facilities and
services. Prior to joining Global Crossing, Mr. Finlayson was employed by
Motorola, Inc., a provider of integrated communications solutions and embedded
electronic solutions, as Corporate Vice President and General Manager of the
Americas Cellular Infrastructure Group from March 1994 to February 1998, and as
Corporate Vice President and General Manager of the Asia Pacific Cellular
Infrastructure Group from March 1998 to May 1998. Prior to joining Motorola, Mr.
Finlayson was employed by AT&T as Sales Vice President of Business Network Sales
for the Southeastern United States. Mr. Finlayson received a B.S. degree in
Marketing from LaSalle University, an M.B.A. degree in Marketing from St. Joseph
University and a post M.B.A. certification in Information Management from St.
Joseph's University.
David J. Frear has served as our Executive Vice President and Chief
Financial Officer since July 1999, and as a director of our company since
October 1999. Mr. Frear was an independent consultant in the telecommunications
industry from August 1998 until June 1999. From October 1993 to July 1998, Mr.
Frear was Senior Vice President and Chief Financial Officer of Orion Network
Systems Inc., a Nasdaq listed international satellite communications company
that was acquired by Loral Space & Communications in March 1998. Mr. Frear was
Chief Financial Officer of Millicom Incorporated, a Nasdaq listed international
cellular paging and cable television company, from 1990 to 1993. He previously
was an investment banker at Bear, Stearns & Co., Inc. and Credit Suisse. Mr.
Frear received his C.P.A. in 1979 and received an M.B.A. degree from the
University of Michigan.
James D. Mori has served as our Executive Vice President and General
Manager--Americas since October 1999. Prior to joining us, Mr. Mori was employed
by Sprint Corporation as National Account Manager from April 1987 to December
1989, as Branch Manager from January 1990 to December 1991, as Regional Sales
Director from January 1992 to March 1996, as Vice President -- Sales from March
1996 to February 1997 and as Area Director from February 1997 to October 1999.
From January 1980 to March 1987, Mr. Mori served as National Account Manager of
Digital Equipment Corporation, Southwestern Bell and AT&T Information Systems.
Mr. Mori received a B.S. in Business Administration from the University of
Missouri.
Richard G. Bubenik joined us in December 1996 and has served as our
Executive Vice President and Chief Technical Officer since July 1999. Dr.
Bubenik served as our Assistant Vice President -- Engineering from December 1996
to September 1997, Vice President -- Engineering from October 1997 to April 1999
and Senior Vice President Network Engineering from April 1999 to July 1999. From
May 1993 to December 1996, Dr. Bubenik was a Software Development Manager for
Ascom Nexion, a network switch/router equipment supplier. Dr. Bubenik holds a
Ph.D. in Computer Science from Rice University, M.S. and B.S. degrees in
Computer Science from Washington University and a B.S. degree in Electrical
Engineering from Washington University.
45
Clyde A. Heintzelman has served as a director of our company since December
1998. Mr. Heintzelman has served as the President of Net2000 Communications,
Inc., a provider of broadband business telecommunications services, since
November 1999. From December 1998 to November 1999, Mr. Heintzelman has served
as our President and Chief Executive Officer and from May 1995 to December 1998,
he served as Chief Operating Officer and President of DIGEX Incorporated, a
national internet services provider that was acquired by Intermedia
Communications, Inc. in July 1997. He was retained as Business Consultant by
Intermedia from December 1997 to November 1998. From January 1994, he
participated in the founding of CSI, a company focused on building hardware and
software products for switched wide area networks using ISDN technology. He
served as Vice President - Sales & Marketing of CSI. Mr. Heintzelman spent 28
years with Bell Atlantic and its predecessor companies. Mr. Heintzelman serves
as a director of Optelecom, Inc., a Nasdaq listed company that develops,
manufactures and sells fiber optic communications products and laser systems,
Net2000 Communications, Interland, a web hosting company and TCS, a wireless
software company. Mr. Heintzelman received a B.A. in Marketing from the
University of Delaware and did graduate work at Wharton, University of
Pittsburgh, and University of Michigan.
Thomas E. McInerney has served as a director of our company since October
1999. Mr. McInerney has served as a general partner of Welsh Carson, a principal
stockholder of our company, and other associated partnerships, since 1987. Mr.
McInerney also served as the interim Chief Executive Officer of Bridge from
November 2000 until February 2001. On February 15, 2001, Bridge filed a
voluntary petition for relief under Chapter 11 of Title 11 of the United States
Bankruptcy Code. Prior to joining Welsh, Carson in 1987, Mr. McInerney was
President and Chief Executive Officer of Dama Telecommunications Corporation, a
voice and data communications services company which he co-founded in 1982. Mr.
McInerney has also been President of the Brokerage Services Division and later
Group Vice President -- Financial Services of ADP, with responsibility for the
ADP divisions that serve the securities, commodities, bank, thrift and
electronic funds transfer industries. He has also held positions with the
American Stock Exchange, Citibank and American Airlines. Mr. McInerney serves as
a director of The BISYS Group, Inc., Centennial Communications Corp., The
Cerplex Group, Inc. and Spectra Site Holdings, Inc. He is also a director of
Bridge and several other private companies. Mr. McInerney received a B.A. from
St. Johns University, and attended New York University Graduate School of
Business Administration.
David L. Roscoe III has served as a director of our company since November
2000. Mr. Roscoe has served as the President and Chief Operating Officer of
Bridge since May 2000. Mr. Roscoe has also served as the co-Chief Executive
Officer of Bridge under the guidance of Bridge's executive committee since
February 2001. On February 15, 2001, Bridge filed a voluntary petition for
relief under Chapter 11 of Title 11 of the United States Bankruptcy Code.
Immediately prior to joining Bridge in September 1999, Mr. Roscoe had served as
an advisor to the Bridge board representing J.P.Morgan, with whom he was
employed for over 33 years in various capacities, including as Vice President
(from 1974 to 1980), as Senior Vice President (from 1980 to 1986), as President,
Morgan Securities Services Corporation (from 1986 to 1988) and as Managing
Director (from 1988 to 1999). Mr. Roscoe also served as Executive Director of
CLS Services, Ltd. in London, and has also served as a director or participant
on numerous industry boards and committees, including the National Securities
Clearing Corporation, the New York Clearing House, the American Bankers
Association, and Euroclear Systems, Ltd. Mr. Roscoe received a BA degree with
honors in Economics from Yale University, and an M.B.A from the University of
Oregon.
Patrick J. Welsh has served as a director of our company since October
1999. Mr. Welsh was a co-founder of Welsh Carson, a principal stockholder of our
company, and has served as a general partner of Welsh Carson and affiliated
entities since 1979. Prior to 1979, Mr. Welsh was President and a director of
Citicorp Venture Capital, Ltd., an affiliate of Citicorp engaged in venture
capital investing. Mr. Welsh serves as a director of Accredo Health,
Incorporated. He also serves as a director of Bridge and several other private
companies. Mr. Welsh received a B.A. from Rutgers University and an M.B.A. from
the University of California at Los Angeles.
Members of our board of directors are elected each year at our annual
meeting of stockholders, and serve until their respective successors have been
elected and qualified. Our officers are elected annually by our board of
directors and serve at the board's discretion.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities and Exchange Act of 1934 requires directors
and executive officers and persons who own more than 10% of a registered class
of equity securities to file with the SEC initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
our company. Such reporting persons are required by rules of the SEC to furnish
us with copies of all section 16(a) reports they file. To our knowledge, based
solely upon a review of section 16(a) reports furnished to us for fiscal 2000
and written representations that no reports on Form 5 were required, we believe
that our directors, executive officers and greater than ten percent stockholders
complied with all Section 16(a) filing requirements applicable to them with
respect to transactions during 2000, except that David Roscoe filed a Form 3 in
an untimely manner.
46
ITEM 11. EXECUTIVE COMPENSATION
The following table provides you with information about compensation
earned during fiscal 2000 by our Chief Executive Officer and the other executive
officers employed by us.
SUMMARY COMPENSATION TABLE (1)
Long-Term
Compensation
Awards
Securities
Annual Compensation Underlying Stock All Other
Name and Principal Position Year Salary Bonus(2) Options Compensation(3)
- --------------------------- ---- ------ -------- ------- ---------------
Robert A. McCormick 2000 $393,750 $600,000 -- $2,400
Chief Executive Office and 1999 45,139(4) -- 750,000 --
Chairman of the Board
John M. Finlayson 2000 384,871 500,000 -- 2,400
President and Chief Operating Officer 1999 -- -- 650,000 --
David J. Frear 2000 250,000 125,000 240,000 2,400
Executive Vice President and 1999 122,276 -- 400,000 2,400
Chief Financial Officer
James D. Mori 2000 209,000 200,000 -- 2,400
Executive Vice President and 1999 33,333 -- 300,000 --
General Manager - Americas
Richard G. Bubenik 2000 190,000 200,000 -- 2,400
Executive Vice President and 1999 159,258 180,000 306,732 2,400
Chief Technical Officer
<FN>
- --------------------
(1) In accordance with the rules of the SEC, the compensation described in this table does not include medical, group life insurance
or other benefits received by the executive officers that are available generally to all salaried employees and various perquisites
and other personal benefits received by the executive officers, which do not exceed the lesser of $50,000 or 10% of any officer's
salary and bonus disclosed in this table.
(2) As of March 31, 2001, we had paid fifty percent of each executive officer's bonus for the year 2000. Payment of the remaining
fifty percent is dependent upon the availability of sufficient funds, and the date of such payment, if any, is uncertain.
(3) Consists of matching contributions made under our 401(k) plan.
(4) Mr. McCormick became our Chief Executive Officer in November 1999, but continued serving as the Executive Vice President and
Chief Technology Officer of Bridge through December 1999. He was compensated for all of his services rendered to us in 1999 by
Bridge.
</FN>
47
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows grants of stock options to each of our executive
officers during 2000. The percentages in the table below are based on options to
purchase a total of 2,969,500 shares of our common stock granted to all our
employees and directors in 2000. Potential realizable values are net of exercise
price before taxes and are based on the assumption that our common stock
appreciates at the annual rate shown, compounded annually, from the date of
grant until the expiration of the ten-year term. The numbers are calculated
based on the requirements of the SEC and do not reflect our estimate of future
stock price growth.
OPTIONS GRANTED IN 2000
Individual Grants
-------------------------------------------------------
Percent of
Number of Total
Securities Options
Underlying Granted to Exercise Grant
Options Employees Price per Expiration Date
Name Granted in 2000 Share Date Value (3)
- ---- ------- ------- ----- ---- ---------
Robert A. McCormick -- -- -- -- --
John M. Finlayson -- -- -- -- --
David J. Frear 240,000 (1) 8.1% $24.00 (2) 2/15/2010 $2,678,958
James D. Mori -- -- -- -- --
Richard G. Bubenik -- -- -- -- --
<FN>
- --------------------
(1) Of these options, the initial 30,000 options became exercisable on August
14, 2000. The remaining options become exercisable in equal installments of
5,000 per month.
(2) Options were granted at the fair market value determined as of the date of
grant, based upon the initial public offering price of our common stock.
(3) Options valued under the Black-Scholes option pricing methodology, which
produces a per share option price of $11.16, using the following assumptions and
inputs: expected option life of four years, expected price volatility of 50%,
dividend yield of zero, and an interest rate of 6.7%, which was the average zero
coupon interest rate at the time of grant for three and five year Treasury
bonds. The actual value, if any, the employee may realize from these options
will depend solely on the gain in stock price over the exercise price when the
options are exercised.
</FN>
AGGREGATE OPTION EXERCISES IN 2000 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth as of December 31, 2000, for each of our
executive officers:
o the total number of shares received upon exercise of options during
2000;
o the value realized upon that exercise;
o the total number of unexercised options to purchase our common stock;
and
o the value of such options which were in-the-money at December 31,
2000.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Shares Options at December 31, 2000 December 31, 2000 (1)
Acquired Value ---------------------------- ---------------------------
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
Robert A. McCormick -- -- -- -- -- --
John M. Finlayson 450,000 $10,575,000 (2) -- -- -- --
David J. Frear -- -- 50,000 190,000 -- --
James D. Mori -- -- -- -- -- --
Richard G. Bubenik 41,667 $605,615 (3) 33,333 191,667 $12,500 $71,875
<FN>
(1) These values have been calculated on the basis of the last reported sale price of our common stock on the Nasdaq National Market
as reported on December 29, 2000 of $0.875.
48
(2) Mr. Finlayson exercised these options in January 2000. At that time, there was no public trading market for our common stock.
Accordingly, in order to present the values realized upon exercise of options, we subtracted the applicable exercise price from
a price of $24.00 per share, which was the initial public offering price of our common stock.
(3) Mr. Bubenik exercised some of these options in January and February 2000, at which time there was no public trading market for
our common stock. Accordingly, in order to present the values realized upon exercise of these options, we subtracted the
applicable exercise price from a price of $24.00 per share, which was the initial public offering price of our common stock.
</FN>
ARRANGEMENTS WITH EXECUTIVE OFFICERS
Arrangement with Mr. McCormick. On April 2, 2001, we entered into an
agreement with Mr. McCormick, which agreement ratifies the terms of Mr.
McCormick's employment arrangements. The agreement provides that Mr. McCormick
would serve as our Chairman and Chief Executive Officer effective as of January
3, 2000. Under his agreement, Mr. McCormick is entitled to a base salary of
$400,000 per year. In addition, he will be eligible to receive an annual
incentive bonus of up to $750,000 based on the achievement of mutually agreed to
objectives. Under his employment agreement, Mr. McCormick was entitled to a
minimum annual incentive bonus of $400,000 for the year ended 2000. Mr.
McCormick will be entitled to benefits commensurate with those available to
other senior executives.
In connection with his employment, Mr. McCormick received options to
purchase 750,000 shares of our common stock at an exercise price of $.50 per
share, 500,000 of which were granted in July 22, 1999 and 250,000 of which were
granted on December 30, 1999. All of these options vested on the date of their
grant. If Mr. McCormick were to resign, we would have the right to repurchase
562,500 shares as of December 31, 2001, all at the lower of $.50 per share or
the fair market value thereof. This right will terminate with respect to (i)
125,000 shares on each of July 22, 2001, 2002 and 2003, (ii) 62,500 shares on
each of December 30, 2001, 2002 and 2003 and (iii) with respect to all shares in
the event of a change in control of our company, the sale of substantially all
of our assets, if we terminate his employment without cause, or if he resigns
for good reason. However, if we terminate Mr. McCormick's employment for good
cause, we will have the right to buy all shares not yet saleable at the price he
paid for the shares. Mr. McCormick will have the right to exercise all options
for one year after the termination of his employment unless his employment was
terminated for cause.
In the event we terminate Mr. McCormick's employment without cause or if he
terminates his employment for good reason, he will be entitled to receive a lump
sum severance payment equal to his then current base annual salary, which shall
not be less than his highest annual salary paid by us. In the event of a change
in control of our company, Mr. McCormick has agreed to remain with our company
for a period of up to twelve months if the new management requests him to do so.
We will reimburse Mr. McCormick for any parachute taxes he would incur under the
Internal Revenue Code of 1986, or the Internal Revenue Code, as a result of such
a change in control. We may terminate Mr. McCormick's employment for cause at
any time without notice, in which case he will not be entitled to any severance
benefits.
Arrangement with Mr. Finlayson. On December 28, 1999, we entered into an
agreement with Mr. Finlayson pursuant to which he agreed to serve as our
President and Chief Operating Officer effective December 31, 1999. Under his
agreement, Mr. Finlayson is entitled to a base salary of $400,000 per year. In
addition, he will be eligible to receive an annual incentive bonus of up to
$600,000 based on the achievement of mutually agreed to objectives. Under his
employment agreement, Mr. Finlayson was entitled to a minimum annual incentive
bonus of $400,000 for the year ended 2000. Mr. Finlayson will be entitled to
benefits commensurate with those available to other senior executives.
In connection with his employment, Mr. Finlayson received options to
purchase 650,000 shares of our common stock at an exercise price of $.50 per
share, 200,000 of which vested on December 31, 1999. The remaining 450,000
options vested on January 3, 2000, and the shares underlying these options
become saleable on a monthly pro rata basis over calendar years 2001, 2002 and
2003. Mr. Finlayson may sell all of his shares in the event of a change in
control of our company, the sale of substantially all of our assets, if we
terminate his employment without cause, or if he resigns for good reason.
However, if we terminate Mr. Finlayson's employment for good cause, we will have
the right to buy all shares not yet saleable at the price he paid for the
shares. Mr. Finlayson will have the right to exercise all options for one year
after the termination of his employment unless his employment was terminated for
cause.
In the event we terminate Mr. Finlayson's employment without cause or if he
terminates his employment for good reason, he will be entitled to receive a lump
sum severance payment equal to his then current base annual salary, which shall
not be less than his highest annual salary paid by us. In the event of a change
in control of our company, Mr. Finlayson has agreed to remain with our company
for a period of up to twelve months if the new management requests him to do so.
We will reimburse Mr. Finlayson for any parachute taxes he would incur under the
Internal Revenue Code as a result of such a change in control. We may terminate
Mr. Finlayson's employment for cause at any time without notice, in which case
he will not be entitled to any severance benefits.
49
Arrangement with Mr. Frear. On June 14, 1999, we entered into an
arrangement with Mr. Frear pursuant to which he agreed to serve as our Chief
Financial Officer. As part of this arrangement, Mr. Frear is entitled to an
annual base salary of $250,000, subject to periodic review and adjustment, and a
discretionary annual bonus of approximately 50% of his base salary, based on his
personal and overall corporate performance. Mr. Frear is entitled to medical,
disability, 401(k), life insurance and other benefits in accordance with our
general policies.
In connection with his employment, on July 22, 1999, Mr. Frear received
400,000 options to purchase shares of our common stock at an exercise price of
$.50 per share. All of these options have vested and been exercised. In the
event Mr. Frear were to resign, we would have the right to repurchase the shares
that have been purchased by Mr. Frear upon exercise of the options at fair
market value or $.50 per share, whichever is lower. This repurchase right was
terminated with respect to a total of 100,000 shares on April 14, 2000 and with
respect to the balance of the shares at the rate of 8,333 shares per month
beginning on the first anniversary of the date of the option grant through the
fourth anniversary of the date of grant. Our right to repurchase these shares
will be terminated in the event of a change in control of our company. In
addition, on February 14, 2000, Mr. Frear received 240,000 additional options at
an exercise price of $24.00 per share. Of these options, the initial 30,000
options became exercisable on August 14, 2000. The remaining options become
exercisable in equal installments of 5,000 per month. The options have a term of
ten years.
If we were to terminate Mr. Frear's employment without cause, or if Mr.
Frear were to terminate his employment for good reason, Mr. Frear would be
entitled to salary continuation and continuation of all benefits for one year
following the termination of his employment and a pro rata payment of his bonus
through the date of termination. In addition, our right to repurchase his shares
would be terminated.
Arrangement with Mr. Mori. On September 30, 1999, we entered into an
agreement with Mr. Mori pursuant to which he became our Executive Vice President
and General Manager -- Americas effective October 1, 1999. Under his agreement,
Mr. Mori is entitled to an annual base salary of $200,000, as well as a
discretionary bonus of 50% to 100% of his base salary based on his personal and
overall corporate performance. On October 29, 1999 and December 30, 1999, we
granted Mr. Mori options to purchase 225,000 shares and 75,000 shares of our
common stock, respectively, each at an exercise price of $.50 per share. All of
Mr. Mori's options have vested. In the event Mr. Mori were to resign, we would
have the right to repurchase any shares that have been purchased by Mr. Mori
upon exercise of the options at fair market value or $.50 per share, whichever
is lower. This repurchase right is terminated at a rate of 6,250 shares per
month and will terminate on the fourth anniversary of the date of the grant.
Under his agreement, Mr. Mori is entitled to benefits commensurate with those
available to executives of comparable rank.
If we were to terminate Mr. Mori's employment without cause prior to the
second anniversary of his employment, Mr. Mori would be entitled to receive a
severance payment of $450,000. In the event we terminate Mr. Mori's employment
without cause after the second anniversary of his employment, and either we are
not a public company or we are a public company and our shares on the date of
termination trade at a price less than $15 per share, Mr. Mori would also
receive a payment of $450,000. Mr. Mori will receive a similar payment if he
were to resign as a result of an acquisition of more than 30% of our voting
shares by an entity other than Bridge, if he were to be instructed to relocate
from the St. Louis metropolitan area, or if he were to be reassigned to a
position entailing materially reduced responsibilities or opportunities for
compensation.
DIRECTOR COMPENSATION
Directors who are also employees of our company will not receive additional
compensation for serving as a director. Each director who is not an employee of
our company receives an annual retainer of $10,000, together with a grant of
options to purchase shares of our common stock under our stock option plan at an
exercise price equal to fair market value on the date of grant. The options will
vest immediately on the date of grant, but if a director ceases to serve on our
board of directors, we will have the right to repurchase these shares at the
lower of the exercise price or the fair market value of the shares. Our right to
repurchase these shares will be terminated with respect to one fourth of the
shares on each of the first, second, third and fourth anniversaries of the date
of the option grant. On January 3, 2000, Messrs. Welsh, Wendel and McInerney
each received 15,000 options to purchase shares of our common stock under our
stock option plan at an exercise price of $.50 per share. On April 2, 2001, we
granted Mr. Heintzelman 15,000 options to purchase shares of our common stock
under our 1999 stock option plan at an exercise price of $0.375 per share, the
closing price of our stock on that date.
BOARD OF DIRECTORS AND COMMITTEE MEETINGS
The board of directors met nine times, including by telephone conference,
during fiscal year 2000. All directors attended at least 75% of the meetings of
the board of directors and the meetings of the committees on which they served
held during the period that they served on the board of directors or such
committees.
Our board of directors has established an audit committee and a
compensation committee. The audit committee and the compensation committee
consisted of Thomas E. McInerney, Patrick J. Welsh and Thomas M. Wendel until
the resignation of Mr.
50
Wendel on November 6, 2000 and since such time have consisted solely of Messrs.
McInerney and Welsh. The responsibilities of the audit committee include:
o recommending to our board of directors an independent audit firm to
audit our financial statements and to perform services related to the
audit;
o reviewing the scope and results of the audit with our independent
auditors;
o considering the adequacy of our internal accounting control
procedures; and
o considering auditors' independence.
The board of directors has adopted a written charter for the audit
committee. The audit committee held three meetings during fiscal year 2000.
The compensation committee is responsible for determining the salaries and
incentive compensation of our management and key employees and administering our
stock option plan. The compensation committee did not hold any physical meetings
during fiscal 2000. It took all actions by unanimous written consent.
Our company does not have a nominating committee or a committee serving a
similar function. Nominations are made by and through the full board of
directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Wendel, who served as a director of our company until his resignation
in November 2000, was also President, Chief Executive Officer and Chairman of
the Board of Bridge until January 31, 2001. Messrs. McInerney and Welsh serve as
directors of our company, as well as directors of Bridge. From November 2000
until February 2001, Mr. McInerney served as the interim Chief Executive Officer
of Bridge. In addition, Messrs. McInerney and Welsh are general partners of
Welsh Carson, which sponsors investment partnerships, which are among our
principal stockholders and are also principal stockholders of Bridge.
In 2000, none of our executive officers served as a director or member of
the compensation committee of another entity whose executive officers had served
on our board of directors or on our compensation committee.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Our compensation committee reviews, analyzes and recommends compensation
programs to our board of directors and administers and grants awards under our
1999 stock option plan. During 2000, the compensation committee consisted of
Thomas E. McInerney, Patrick J. Welsh and Thomas M. Wendel, until Mr. Wendel's
resignation in November 2000, and after such time has consisted solely of
Messrs. McInerney and Welsh. None of these directors are current or former
employees of our company.
COMPENSATION POLICIES TOWARD EXECUTIVE OFFICERS
The compensation committee has structured its compensation policies to achieve
the following goals:
o attract, motivate and retain experienced and qualified executives;
o increase the overall performance of SAVVIS;
o increase stockholder value; and
o increase the performance of individual executives.
To achieve these objectives, the compensation program for our executive
officers consists principally of three elements: base salary, cash bonuses and
long-term incentive compensation in the form of participation in our 1999 stock
option plan.
The compensation committee seeks to provide competitive salaries based upon
individual performance together with cash bonuses awarded based on our overall
performance relative to corporate objectives, taking into account individual
contributions, teamwork and performance levels. In addition, it is our policy to
grant stock options to executives upon their commencement of employment and
periodically thereafter in order to strengthen the alliance of interest between
such executives and stockholders and to give executives the opportunity to reach
the top compensation levels of the competitive market depending on our
performance.
51
The following describes in more specific terms the elements of compensation
that implement the compensation committee 's compensation policies, with
specific reference to compensation reported for 2000:
Base Salaries. Base salaries of executives are initially determined by
evaluating the responsibilities of the position, the experience and
knowledge of the individual, and the competitive marketplace for executive
talent, including a comparison to base salaries for comparable positions at
peer public companies in the same geographic region. To ensure retention of
qualified management, we have entered into employment agreements with four
of our executive officers. The terms of such agreements were the results of
arms-length negotiations between us and each executive officer. You can
find further information regarding the employment agreements of the
executive officers under the heading "Arrangements with Executive
Officers," above. The agreements establish the base salary for each officer
during the term of the agreement. We will review the salaries for the
executives annually and, if appropriate, adjust based on individual
performance, increases in general levels of compensation for executives at
comparable firms and our overall financial results.
Bonuses. The compensation committee also considers the payment of cash
bonuses as part of its compensation program. Annual cash bonuses reflect a
policy of requiring a certain level of company financial and operational
performance for the prior fiscal year before any cash bonuses are earned by
executive officers. In general, the compensation committee has tied
potential bonus compensation to performance factors, including the
executive officer's efforts and contributions towards obtaining company
objectives and the company's overall growth. The employment agreements of
each of the executive officers provides that each of these employees will
be entitled to a bonus consisting of cash in an amount determined prior to
the conclusion of each fiscal year.
Stock Options. A third component of executive officers' compensation
is our 1999 stock option plan, pursuant to which we grant executive
officers and other employees options to purchase shares of our common
stock.
The compensation committee grants stock options to executives in order to
align their interests with the interests of our stockholders. Stock options are
considered by the compensation committee to be an effective long-term incentive
because the executives' gains are linked to increases in the stock value which
in turn provides stockholder gains. The compensation committee generally grants
options to new executive officers and other key employees upon their
commencement of employment with us and periodically thereafter. The options
generally are granted at an exercise price equal to the market price of our
common stock at the date of the grant. The full benefit of the options is
realized upon appreciation of the stock price in future periods, thus providing
an incentive to create value for our stockholders through appreciation of stock
price. We believe that stock options have been helpful in attracting and
retaining skilled executive personnel. In 2000, we granted a total of 240,000
stock options to one of our executive officers in connection with his
significant individual contributions relating to our initial public offering.
The per share option exercise price of such options was equal to the initial
offering price of $24.00 per share. We did not grant options to our other
executives.
Other. We have a contributory retirement plan for our employees (including
executive officers) age 21 and over. Employees are eligible to begin
participation on a quarterly basis. This 401(k) plan provides that each
participant may contribute up to 15% of his or her salary (not to exceed the
annual statutory limit). We generally make matching contributions to each
participant's account equal to 50% of the participant's contribution up to 6% of
the participant's annual compensation, but in a total amount not to exceed
$2,400 per year. Thus, the total matching contribution can be up to 3% of the
participant's annual compensation.
CHIEF EXECUTIVE OFFICER COMPENSATION
The executive compensation policy described above has been applied in
setting Mr. McCormick's 2000 compensation. Mr. McCormick generally participates
in the same executive compensation plans and arrangements available to the other
executives. Accordingly, his compensation consists of annual base salary, annual
bonus, and long-term equity-linked compensation. The compensation committee's
general approach in establishing Mr. McCormick's compensation is to be
competitive with peer companies. In addition, the specific 2000 compensation
elements for Mr. McCormick's compensation were determined in light of his level
of responsibility, performance, current salary, the fact that he did not receive
a prior-year bonus from us and other compensation awards.
Mr. McCormick's compensation during the year ended December 31, 2000
included $393,750 in base salary and $600,000 in a cash bonus, fifty percent of
which has been paid. Payment of the remaining fifty percent of Mr. McCormick's
bonus is dependent upon the availability of sufficient funds, and the date of
such payment, if any, is uncertain. Mr. McCormick's salary and bonus payments
for 2000 were consistent with the compensation committee's policy of being
competitive with the compensation of chief executive officers of peer companies.
We did not grant Mr. McCormick any stock options in 2000.
52
COMPENSATION DEDUCTIBILITY POLICY
Section 162(m) of the Internal Revenue Code of 1986 generally disallows a
tax deduction to public corporations for compensation over $1,000,000 paid for
any fiscal year to the corporation's chief executive officer and four other most
highly compensated executive officers as of the end of any fiscal year. However,
the statute exempts qualifying performance-based compensation from the deduction
limit if specified requirements are met.
The board of directors and the compensation committee reserve the authority
to award non-deductible compensation in circumstances as they deem appropriate.
Further, because of ambiguities and uncertainties as to the application and
interpretation of Section 162(m) and the regulations issued thereunder, no
assurance can be given, notwithstanding our efforts, that compensation intended
by SAVVIS to satisfy the requirements for deductibility under Section 162(m)
does in fact do so.
STOCK OPTION PLAN
Background. On July 22, 1999 the board adopted and the stockholders
approved our 1999 stock option plan. On January 23, 2001, the board amended our
stock option plan, subject to stockholder approval, to increase the number of
shares of common stock subject to the plan by 12,000,000 shares from 12,000,000
to 24,000,000 shares. The board has directed that the stock option plan, as
amended, be submitted for approval by our stockholders at our 2001 annual
meeting. The option plan permits the granting of options to purchase shares of
common stock intended to qualify as incentive stock options under the Internal
Revenue Code, and options that do not qualify as incentive stock options, or
non-qualified options. Grants may be made under our stock option plan to
employees and directors of our company or any related company and to any other
individual whose participation in the stock option plan is determined by our
board of directors to be in our best interests. As of March 31, 2001, options to
purchase an aggregate of 8,848,432 shares of our common stock were outstanding
under our stock option plan. No options may be granted under our stock option
plan after July 22, 2009.
Shares Issuable through the Plan. The number of shares of common stock
available for issuance under the option plan, as amended, is 24,000,000 shares
subject to adjustment for stock dividends, splits and other similar events. If
any shares of common stock covered by a grant are not purchased or are
forfeited, or if a grant otherwise terminates without delivery of any shares of
common stock subject to the option, then the number of shares of common stock
counted against the total number of shares available under the stock option plan
with respect to such grant will, to the extent of any such forfeiture or
termination, again be available for making grants under the stock option plan.
Shares of common stock delivered under the option plan in settlement, assumption
or substitution of outstanding awards (or obligations to grant future awards)
under the plans or arrangements of another entity will not reduce the maximum
number of shares of common stock available for delivery under the option, to the
extent that such settlement, assumption or substitution occurs as a result of
our acquisition of another entity (or an interest in another entity). Shares
issued under the option plan may be treasury shares or authorized but previously
unissued shares.
Administration of the Plan. The stock option plan is administered by our
compensation committee. The compensation committee has the full power and
authority to take all actions and to make all determinations required or
provided for under the plan, any option, or option agreement, to the extent such
actions are consistent with the terms of the plan. The board of directors may
take any action the compensation committee is authorized to take. To the extent
permitted by law, the compensation committee or board may delegate its authority
under the plan to a member of the board or one of our executive officers.
Option Terms. The option price of each option will be determined by the
compensation committee. However, the option price may not be less than either
100% of the fair market value of our common stock on the date of grant in the
case of incentive stock options. In no case may the option price be less than
par value. To qualify as incentive stock options, options must meet various
federal tax requirements, including limits on the value of shares subject to
incentive stock options which first become exercisable in any one calendar year,
and a shorter term and higher minimum exercise price in the case of any grants
to 10% stockholders.
The term of each option will be fixed by the compensation committee. The
compensation committee will determine at what time or times each option may be
exercised and the period of time, if any, after retirement, death, disability or
termination of employment during which options may be exercised. However, all
options shall automatically vest upon a termination of employment caused by the
optionee's death, disability, or retirement. Options may be made exercisable in
installments, and the compensation committee may accelerate the exercisability
of options, as well as remove any restrictions on such options. Except to the
extent otherwise expressly set forth in an option agreement relating to a
non-qualified option, options are not transferable other than by will or the
laws of descent and distribution. The compensation committee may include in any
option agreement any provisions relating to forfeitures of options that it deems
appropriate, including prohibitions on competing with our company and other
detrimental conduct.
If an optionee elects to exercise his or her options, he or she must pay
the option exercise price in full either in cash or cash equivalents. To the
extent permitted by the option agreement or the compensation committee, the
optionee may also pay the option
53
exercise price by the delivery of common stock, to the extent that the common
stock is publicly traded, or other property. The compensation committee may also
allow the optionee to defer payment of the option price, or may cause us to loan
the option price to the optionee or to guarantee that any shares to be issued
will be delivered to a broker or lender in order to allow the optionee to borrow
the option price. If the compensation committee so permits, the exercise price
may also be delivered to us by a broker pursuant to irrevocable instructions to
the broker from the participant.
Corporate Transactions. Options granted under the stock option plan will
terminate in connection with corporate transactions involving our company as
listed below, except to the extent the options are continued or substituted for
in connection with the transaction. In the event of a termination of the options
in connection with a corporate transaction and subject to any limitations
imposed in an applicable option agreement, the options will be fully vested and
exercisable for a period to be determined by the board of directors immediately
before the completion of the corporate transaction. A corporate transaction
occurs in the event of:
o a dissolution or liquidation of our company;
o a merger, consolidation or reorganization of our company with one or
more other entities in which our company is not the surviving entity;
o a sale of substantially all of our assets to another person or entity;
or
o any transaction, including, without limitation, a merger or
reorganization in which our company is the surviving entity, approved
by the board that results in any person or entity, other than persons
who are holders of stock of our company at the time the plan was
approved by the stockholders and other than an affiliate, owning 80
percent or more of the combined voting power of all classes of our
stock.
The board of directors may also in its discretion and only to the extent
provided in an option agreement cancel outstanding options in connection with a
corporate transaction. Holders of cancelled options will receive a payment for
each cancelled option.
Amendment and Termination. The board of directors may at any time amend or
discontinue the stock option plan, except that the maximum number of shares
available for grant as incentive stock options and the class of persons eligible
to receive grants under the plan may not be changed without stockholder
approval. No options may be granted under the option plan after July 22, 2009.
Adjustments for Stock Dividends and Similar Events. The compensation
committee will make appropriate adjustments in outstanding awards to reflect
common stock dividends, splits and other similar events.
US FEDERAL INCOME TAX CONSEQUENCES OF THE 1999 STOCK OPTION PLAN
Incentive Stock Options. The grant of an option will not be a taxable event
for the optionee or us. An optionee will not recognize taxable income upon
exercise of an incentive stock option, except that the alternative minimum tax
may apply. Any gain realized upon a disposition of common stock received
pursuant to the exercise of an incentive stock option will be taxed as long-term
capital gain if the optionee holds the shares for at least two years after the
date of grant and for one year after the date of exercise. This is known as the
holding period requirement. We will not be entitled to any business expense
deduction with respect to the exercise of an incentive stock option, except as
discussed below.
For the exercise of an option to qualify for the foregoing tax treatment,
the optionee must be an employee of our company or a subsidiary from the date
the option is granted through a date within three months before the date of
exercise of the option. In the case of an optionee who is disabled, the
three-month period for exercise following termination of employment is extended
to one year. In the case of an employee who dies, both the time for exercising
incentive stock options after termination of employment and the holding period
for common stock received pursuant to the exercise of the option are waived.
If all of the foregoing requirements are met except the holding period
requirement mentioned above, the optionee will recognize ordinary income upon
the disposition of the common stock in an amount generally equal to the excess
of the fair market value of the common stock at the time the option was
exercised over the option exercise price, but not in excess of the gain realized
on the sale. The balance of the realized gain, if any, will be capital gain. We
will be allowed a business expense deduction to the extent the optionee
recognizes ordinary income subject to Section 162(m) of the Internal Revenue
Code, as summarized below.
If an optionee exercises an incentive stock option by tendering common
stock with a fair market value equal to part or all of the option exercise
price, the exchange of shares will be treated as a nontaxable exchange. This
nontaxable treatment would not apply, however, if the optionee had acquired the
shares being transferred pursuant to the exercise of an incentive stock option
and had not
54
satisfied the holding period requirement summarized above. If the exercise is
treated as a nontaxable exchange, the optionee would have no taxable income from
the exchange and exercise, other than minimum taxable income as discussed above,
and the tax basis of the shares exchanged would be treated as the substituted
basis for the shares received. If the optionee used shares received pursuant to
the exercise of an incentive stock option, or another statutory option, as to
which the optionee had not satisfied the applicable holding period requirement,
the exchange would be treated as a taxable disqualifying disposition of the
exchanged shares.
If, pursuant to an option agreement, we withhold shares in payment of the
option price for incentive stock options, the transaction should generally be
treated as if the withheld shares had been sold in a disqualifying disposition
after exercise of the option, so that the optionee will realize ordinary income
with respect to such shares. The shares paid for by the withheld shares should
be treated as having been received upon exercise of an incentive stock option,
with the tax consequences described above. However, the Internal Revenue Service
has not ruled on the tax treatment of shares received on exercise of an
incentive stock option where the option exercise price is paid with withheld
shares.
Non-Qualified Options. The grant of an option will not be a taxable event
for the optionee or us. Upon exercising a non-qualified option, an optionee will
recognize ordinary income in an amount equal to the difference between the
exercise price and the fair market value of the common stock on the date of
exercise. However, if the optionee is subject to restrictions, the measurement
date will be deferred, unless the optionee makes a special tax election within
30 days after exercise. Upon a subsequent sale or exchange of shares acquired
pursuant to the exercise of a non-qualified option, the optionee will have
taxable gain or loss, measured by the difference between the amount realized on
the disposition and the tax basis of the shares. This difference generally is
the amount paid for the shares plus the amount treated as ordinary income at the
time the option was exercised.
If we comply with applicable reporting requirements and with the
restrictions of Section 162(m) of the Internal Revenue Code, we will be entitled
to a business expense deduction in the same amount and generally at the same
time as the optionee recognizes ordinary income. Under Section 162(m) of the
Internal Revenue Code, if the optionee is one of specified executive officers,
then, unless a number of exceptions apply, we are not entitled to deduct
compensation with respect to the optionee, including compensation related to the
exercise of shares options, to the extent such compensation in the aggregate
exceeds $1.0 million for the taxable year. Options issuable under the stock
incentive plan are intended to comply with the exception to Section 162(m) for
"performance-based" compensation.
If the optionee surrenders common stock in payment of part or all of the
exercise price for non-qualified options, the optionee will not recognize gain
or loss with respect to the shares surrendered, regardless of whether the shares
were acquired pursuant to the exercise of an incentive stock option, and the
optionee will be treated as receiving an equivalent number of shares pursuant to
the exercise of the option in a nontaxable exchange. The basis of the shares
surrendered will be treated as the substituted tax basis for an equivalent
number of option shares received and the new shares will be treated as having
been held for the same holding period as had expired with respect to the
transferred shares. The difference between the total option exercise price and
the total fair market value of the shares received pursuant to the exercise of
the option will be taxed as ordinary income. The optionee's basis in the
additional shares will be equal to the amount included in the optionee's income.
If, pursuant to an option agreement, we withhold shares in payment of the
option price for non-qualified options or in payment of tax withholding, the
transaction should generally be treated as if the withheld shares had been sold
for an amount equal to the exercise price after exercise of the option.
An optionee who has transferred a non-qualified stock option to a family
member by gift will realize taxable income at the time the non-qualified stock
option is exercised by the family member. The optionee will be subject to
withholding of income and employment taxes at that time. The family member's tax
basis in the shares will be the fair market value of the shares on the date the
option is exercised. The transfer of vested non-qualified stock options will be
treated as a completed gift for gift and estate tax purposes. Once the gift is
completed, neither the transferred options nor the shares acquired on exercise
of the transferred options will be includible in the optionee's estate for
estate tax purposes.
401(K) PLAN
In January, 1998, we adopted a tax-qualified employee savings and
retirement plan covering all of our employees. Under this 401(k) plan, employees
may elect to reduce their current compensation by a maximum pre-tax amount equal
to the lesser of 15% of eligible compensation or the statutorily prescribed
annual limit, which was $10,000 in 1998, and have the amount of this reduction
contributed to the 401(k) plan. The trustee under the 401(k) plan, at the
direction of each participant, invests the assets of the 401(k) plan in any of
four investment options. The 401(k) plan is intended to qualify under Section
401 of the Internal Revenue Code so that contributions by employees to the
401(k) plan, and income earned on plan contributions, are not taxable to
employees until withdrawn, and so that the contributions by employees will be
deductible by us when made. We may make matching or additional
55
contributions to the 401(k) plan, in amounts to be determined annually by the
board of directors. Employees are immediately 100% vested in their individual
contributions and vest 25% per year in our contributions beginning with their
second year of service, becoming 100% vested in their fifth year of service.
Vesting in our contributions also occurs upon attainment of retirement age,
death or disability. The 401(k) plan provides for hardship withdrawals and
employee loans.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides you with information about the beneficial
ownership of shares of our common stock as of March 31, 2001 by:
o each person who, to our knowledge, beneficially owns more than 5% of
our common stock;
o each of our directors and executive officers; and
o all our directors and executive officers as a group.
Beneficial ownership is determined under the rules of the SEC and includes
voting or investment power with respect to the common stock.
Unless indicated otherwise below, the address for each listed director and
executive officer is SAVVIS Communications Corporation, 12851 Worldgate Drive,
Herndon, Virginia 20170. The persons named in the table have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them, subject to community property laws where applicable,
and the information contained in this table and the notes that follow. The total
number of shares of common stock outstanding used in calculating the percentage
for each person named in the table includes the shares of common stock
underlying options or other convertible securities held by that person that are
exercisable within 60 days of March 31, 2001, but excludes shares of common
stock underlying options or other convertible securities held by all other
persons. Percentage of beneficial ownership is based on 93,842,498 shares of
common stock outstanding as of March 31, 2001.
NUMBER OF SHARES OF PERCENTAGE OF
COMMON STOCK OUTSTANDING SHARES OF
BENEFICIALLY OWNED COMMON STOCK
Bridge Information Systems, Inc. (1)....... 45,483,702 48.5%
Welsh, Carson Anderson & Stowe (2)......... 29,767,209 27.4%
Clyde A. Heintzelman....................... 0 *
Robert A. McCormick........................ 750,000 *
John M. Finlayson.......................... 673,000 *
David J. Frear (3)......................... 475,000 *
Richard Bubenik (4)........................ 141,148 *
James D. Mori.............................. 300,000 *
David L. Roscoe ........................... 251,200 *
Patrick J. Welsh (5)....................... 29,299,723 26.9%
Thomas E. McInerney (6).................... 29,941,832 27.6%
All executive officers and directors as a
group (9 persons).......................... 32,732,455 30.1%
<FN>
- --------------------
* Less than one percent.
(1) Does not include shares held by Welsh, Carson, Anderson & Stowe, as described in note 2 below. The address of Bridge
Information Systems, Inc. is Three World Financial Center, New York, New York 10281.
(2) Includes 4,635,958 shares of common stock held by Welsh, Carson, Anderson & Stowe VI, L.P., or WCAS VI, 3,475,566 shares held
by Welsh, Carson, Anderson & Stowe VII, L.P., or WCAS VII, 65,357 shares held by WCAS Information Partners, L.P., or WCAS IP,
667,761 shares held by WCAS Capital Partners II, L.P., or WCAS CP II, 20,917,947 shares held by Welsh, Carson, Anderson & Stowe
VIII, L.P., or WCAS VIII and 4,620 shares held by WCAS Management Corporation, or WCAS Management. The respective sole general
partners of WCAS VI, WCAS VII, WCAS IP, WCAS CP II and WCAS VIII are WCAS VI Partners, L.P., WCAS VII Partners, L.P., WCAS INFO
Partners, WCAS CP II Partners and WCAS VIII Associates,
56
LLC. 14,667,947 of the shares beneficially held by WCAS VIII and all of the shares beneficially held by WCAS Management are
issuable upon the conversion of the 10% convertible senior secured notes due 2006, including accrued interest thereon through
March 31, 2001, issued to these entities pursuant to the securities purchase agreement dated as of February 16, 2001, as
described in Item 13 of this Form 10-K.
The individual general partners of each of these partnerships include some or all of Bruce K. Anderson, Russell L. Carson,
Anthony J. de Nicola, James B. Hoover, Thomas E. McInerney, Robert A. Minicucci, Charles G. Moore, III, Andrew M. Paul, Paul
B. Queally, Jonathan M. Rather, Lawrence B. Sorrel, Richard H. Stowe, Laura M. VanBuren and Patrick J. Welsh. The individual
general partners who are also directors of SAVVIS are Patrick J. Welsh and Thomas E. McInerney. Each of the foregoing persons
may be deemed to be the beneficial owner of the common stock owned by the limited partnerships of whose general partner he or
she is a general partner. WCAS VI, WCAS VII, WCAS IP and WCAS CP II, in the aggregate, own approximately 38% of the
outstanding equity securities of Bridge on a fully diluted basis. The address of Welsh, Carson, Anderson & Stowe is 320 Park
Avenue, New York, NY 10022.
(3) Includes 75,000 shares of common stock subject to options that are exercisable within 60 days of March 31, 2001.
(4) Includes 64,582 shares of common stock subject to options that are exercisable within 60 days of March 31, 2001.
(5) Includes 29,099,448 shares held by Welsh, Carson, Anderson & Stowe, as described in note 2 above, and also includes 136,147
shares issuable upon the conversion of Mr. Welsh's 10% convertible senior secured notes due 2006, including accrued interest
thereon through March 31, 2001.
(6) Includes 29,767,209 shares held by Welsh, Carson, Anderson & Stowe, as described in note 2 above, and also includes 136,147
shares issuable upon the conversion of Mr. McInerney's 10% convertible senior secured notes due 2006, including
</FN>
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
Mr. Roscoe, a director of our company, is also the President, Chief
Operating Officer and co-Chief Executive Officer of Bridge, one of our principal
stockholders. Mr. McInerney served as the interim Chief Executive Officer of
Bridge from November 2000 until February 2001. Messrs. McInerney and Welsh serve
as directors of our company, as well as directors of Bridge. In addition,
Messrs. McInerney and Welsh are general partners of Welsh, Carson, which
sponsors investment partnerships, which are among our principal stockholders and
are also principal stockholders of Bridge.
Transactions with Welsh Carson. On February 7, 2000, we entered into a
registration rights agreement with Welsh Carson and Bridge, pursuant to which we
granted Welsh Carson customary registration rights, including demand
registration rights and piggy-back registration rights, with respect to the
6,250,000 shares of our common stock that were purchased by Welsh Carson from
Bridge following the initial public offering of our common stock.
On February 16, 2001, we entered into a securities purchase agreement and
certain related agreements and documents with two investment entities sponsored
by Welsh Carson and several individuals affiliated with Welsh Carson. Pursuant
to the terms of the securities purchase agreement, the Welsh Carson entities and
affiliated individuals purchased $20,000,000 aggregate principal amount of our
10% convertible senior secured notes due 2006. Subject to the terms of the
notes, the holders of the notes have the right, at their option at any time, to
convert all or any portion of the unpaid principal amount of the notes, together
with accrued interest, into such number of shares of our common stock as is
obtained by dividing the total amount so to be converted by the conversion price
of $1 5/16. In connection with this transaction, we granted the Welsh Carson
entities and individuals customary registration rights with respect to the
shares of our common stock issuable upon conversion of the notes, including
demand registration rights and piggy-back registration rights.
Transactions with Bridge. In February 2000, we entered into several
agreements with Bridge, including a master establishment and transition
agreement, an equipment colocation permit, a network services agreement, an
administrative services agreement, a technical services agreement, the GECC
Sublease and a local network services agreement. Summaries of these agreements
are set forth below.
57
Master Establishment and Transition Agreement. The master establishment and
transition agreement transferred Bridge's global Internet protocol network to us
for $77 million. Under this agreement, a Bridge subsidiary that owned all of
Bridge's U.S. network assets transferred them to one of our subsidiaries.
The transfers of non-U.S. assets were effected under local transfer
agreements between the appropriate Bridge and SAVVIS subsidiaries. The transfer
of several portions of the Bridge network requires contractual consents from
some of Bridge's counter parties or regulatory approvals in several
jurisdictions which have not yet been obtained. Bridge will continue to own and
operate those portions of the network while we continue to seek the appropriate
consents. Under the master establishment and transition agreement, once the
requisite consents and approvals have been acquired in each jurisdiction, we
will have an obligation to purchase the assets from Bridge in that jurisdiction.
Our obligation to acquire these assets expires upon the later of ten years from
the closing date or expiration of the network services agreement. At present, we
do not know the extent to which Bridge, its international affiliates or any
future purchaser of all or a substantial part of its international operations
will continue to operate in these countries due to the uncertainties surrounding
the overall resolution of Bridge's bankruptcy proceedings, which may impact our
ability to acquire the assets not already transferred by Bridge to SAVVIS.
Under the master establishment and transition agreement, Bridge is
responsible for all liabilities associated with its Internet protocol network
prior to the transfer to us, and we are responsible for liabilities after the
transfer. The agreement provides that we will indemnify Bridge for breaches of
our representations and warranties and with respect to our responsibility for
our assumed liabilities.
Network Services Agreement. Under the network services agreement, we have
agreed to provide Bridge with networks for the collection and distribution of
the financial information provided by Bridge to its customers and for Bridge's
internal managed data network needs for ten years from February 18, 2000. The
agreement may be extended by Bridge for an additional five-year period by giving
us notice one year before the expiration of the initial ten-year term. Upon
termination of the agreement, we will be required to continue to provide network
services to Bridge for an additional five years, at rates in effect for our
third party customers at the termination date.
Bridge has agreed to pay us a minimum of $132 million and $145 million for
network services in 2001 and 2002, respectively. In addition, Bridge has agreed
that the amount paid to us under the agreement for the fourth, fifth and sixth
years of the agreement will not be less than 80% of the total amount paid by
Bridge and its subsidiaries for Internet protocol data transport services; and
the amount paid to us under the agreement for the seventh through tenth years
will not be less than 60% of the total amount paid by Bridge and its
subsidiaries for Internet protocol data transport services.
In addition, we charge Bridge for additional bandwidth and additional
connections at a rate established on an annual basis. In those instances where
the addition is outside of the existing network, we will negotiate the terms of
the expansion with Bridge on a case-by-case basis, including any additional
charges to be paid to us by Bridge to defray the cost of such expansion. If we
cannot reach agreement with Bridge on the annual rate or on the additional
charges, and Bridge still desires for us to provide such service, then we will
submit prices to an independent arbitrator who will assign the price quoted by
the party that in the arbitrator's opinion came closest to quoting a fair market
price.
We have also agreed that, beginning February 18, 2001, the network will
perform in accordance with specific quality of service standards. If those
standards are not met with respect to a customer site in any month, Bridge will
be entitled to receive, upon request, a credit for one month's charges for that
site. The network services agreement contains quality of service levels and
provides for credits if the levels are not maintained. In addition, a material
breach of the service levels allows Bridge to terminate the agreement and/or
collect up to $50 million as liquidated damages not more than once in any
thirty-six month period. At present, neither SAVVIS, nor to the best of our
knowledge, Bridge has developed the software and or the monitoring tools
necessary to determine whether or not SAVVIS is in compliance with the SLAs.
Bridge has agreed that during the term of the network services agreement
and for the next five years after the termination of this agreement, Bridge will
not compete with us anywhere in the world in providing packet-data transport
network services, other than investments in a competitor not to exceed 10% of
the outstanding capital stock of that competitor. So long as Bridge is the
beneficial owner of 20% of our outstanding voting securities, we have agreed not
to provide any of our stockholders with voting or registration rights superior
to the voting or registration rights of Bridge other than as required by law.
It is uncertain if Bridge can meet its continuing obligations under the
network services agreement. Bridge's financial condition and ability and
willingness to meet its payment obligations under the network services agreement
will affect our revenues and our ability to run our business. We may not receive
timely payments owed to us under the network
58
services agreement from Bridge. The Bankruptcy Code may restrict the amount and
recoverability of our claims against Bridge. In addition, under the automatic
stay provisions of the Bankruptcy Code, we are currently prevented from
exercising certain rights and remedies under our network services agreement with
Bridge and from taking certain enforcement actions against Bridge. As of March
31, 2001, Bridge owed us approximately $33 million (before offsetting our note
due to Bridge) under the network services agreement. In addition, Bridge has the
right, subject to bankruptcy court approval and certain other limitations, to
assume and assign or reject executory, pre-petition contracts and unexpired
leases, which would include the network services agreement.
Local Network Services Agreement. In most jurisdictions outside the United
States, the charges that we pay for the local circuit between our distribution
frame, which usually is located in a central office of the local
telecommunications provider, and the Bridge customer premises are charged back
to Bridge at a rate intended to recover our costs.
Equipment Colocation Permits. Some of the purchased network assets are
located in premises currently leased by Bridge. The permits provide us, subject
to the receipt of required landlord consents, with the ability to keep the
equipment that is being purchased from Bridge in the facilities in which they
are currently located. We have no interest in or rights to the real estate other
than the right to enter the facilities for the purpose of maintaining the
equipment and to place a rack with equipment in the premises. According to this
arrangement, we occupy a minimal amount of space, generally less than 100 square
feet, in each of the premises. The permits, approximately thirty in total, are
for a term that is coterminous with the underlying rights which Bridge has to
such facilities, which range from one to ten years. Our costs for these
colocation permits, which are fixed costs, are estimated to be less than $75,000
per year.
Technical Services Agreement. Pursuant to the technical services agreement,
Bridge provides us with services, including help desk support, installation,
maintenance and repair of equipment, customer related services such as
processing service orders and provisioning interconnection. In addition, Bridge
manages the colocation of third-party equipment in our facilities, which
includes facilities management, such as power, heating, air conditioning,
lighting and other utilities and installation, monitoring and maintenance of
equipment. Bridge manages our network operation centers. This agreement will
remain in effect so long as the network services agreement is in effect. Rates
for the services provided under this agreement were fixed for the first year and
have yet to be negotiated for any succeeding period. Bridge is required to meet
quality of service standards set forth in the agreement, and, if Bridge fails to
meet the standards, we will been titled to a refund of all amounts paid for the
non-complying service plus the costs we incurred to have that service provided
by a third party.
Administrative Services Agreement. Until February 2003, and from then on
from year to year until Bridge or we terminate the agreement, Bridge will
provide us with various administrative services, including payroll and
accounting functions, benefit management and the provision of office space. We
have the right to take over one or more of these functions before the
termination of the agreement. Bridge charges us for these services in a manner
that is intended to permit Bridge to recover the costs of providing the
services.
For the period February 18, 2000 to December 31, 2000 we incurred
obligations to Bridge amounting to approximately $19.3 million, for services
provided by Bridge under the technical services agreement and the administrative
services agreement, for certain employee-related expenses paid directly by
Bridge, and for telecommunication charges relating to the network that were paid
by Bridge.
GECC Sublease. We have subleased from Bridge some of the network assets
that Bridge leases from GECC. The terms of the GECC sublease mirror the GECC
master lease. We do not have a direct relationship with GECC with respect to
this sublease. As of March 31, 2001, the aggregate amount of our capitalized
lease obligations to Bridge was approximately $9.3 million. Bridge has failed to
perform its obligations under its agreement with GECC, including forwarding to
GECC payments we made to Bridge, and as a result our rights to such network
assets may be impaired. SAVVIS did not make the March and April 2001 payments,
amounting to $1.2 million, to Bridge under this sublease and deposited these
payments into a separate bank account, thus causing a default with Bridge under
this lease.
Promissory Note. As of December 31, 2000, we had an outstanding term note
in favor of Bridge of approximately $23 million. The loan matured on February
18, 2001 and bears interest at a rate of 8% per year. We used the proceeds of
this loan to fund our working capital requirements from the date of the
acquisition of SAVVIS by Bridge to February 18, 2000, the closing date of our
initial public offering of common stock.
At December 31, 2000, Bridge owed us $32.9 million representing a net
balance of charges to Bridge for network services provided by us under the
network services agreement less amounts netted for technical support, customer
support, project management, and other services provided by Bridge to SAVVIS. On
February 16, 2001, we advised Bridge that, if permitted by applicable law, we
intend to set-off the note to Bridge against Bridge's indebtedness to us as of
February 15, 2001. Accordingly, as of March 31, 2001, we have not remitted the
total balance due of approximately $23 million of principal and interest to
Bridge.
59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) and (2) Financial Statements and Financial Statement Schedules
The following consolidated financial statements are filed pursuant to Item
8 of this report:
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 1999 and 2000.
Consolidated Statements of Operations for the years ended December 31,
1998, 1999 and 2000.
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the years ended December 31, 1998, 1999, and 2000.
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1999 and 2000.
Notes to Consolidated Financial Statements.
All other financial statement schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission
either have been included in the financial statements, or notes thereto, are not
required under the related instructions or are inapplicable and therefore have
been omitted.
14(a)(3) Exhibits. The following exhibits are either provided with this Form
10-K or are incorporated herein by reference.
EXHIBIT INDEX
NUMBER EXHIBIT DESCRIPTION
- ------ -----------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement on Form S-1, as amended (File No.
333-90881) (the "Registration Statement"))
3.2 Certificate of Amendment to Amended and Restated Certificate of
Incorporation of the Registrant (incorporated by reference to the same
numbered exhibit to the Registrant's Registration Statement)
3.3 Amended and Restated Bylaws of the Registrant (incorporated by
reference to the same numbered exhibit to the Registrant's Registration
Statement)
4.1 Form of Common Stock Certificate (incorporated by reference to the same
numbered exhibit to the Registrant's Registration Statement)
10.1 1999 Stock Option Plan, as amended
10.2 Form of Incentive Stock Option Agreement under the 1999 Stock Option
Plan (incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement)
10.3 Form of Incentive Stock Option Agreement under the 1999 Stock Option
Plan (incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement)
10.4 Form of Non-Qualified Stock Option Agreement under the 1999 Stock
Option Plan (incorporated by reference to the same numbered exhibit to
the Registrant's Registration Statement)
60
10.5 Amended and Restated Agreement and Plan of Merger, dated February 19,
1999, among the Registrant, SAVVIS Acquisition Corp. and Bridge
Information Systems, Inc. (incorporated by reference to the same
numbered exhibit to the Registrant's Registration Statement)
10.6 Employment Agreement, dated December 4, 1998, between the Registrant
and Clyde A. Heintzelman (incorporated by reference to the same
numbered exhibit to the Registrant's Registration Statement)
10.7 Letter Agreement, dated November 12, 1999, between the Registrant and
Clyde A. Heintzelman (incorporated by reference to the same numbered
exhibit to the Registrant's Registration Statement)
10.8 Employment Agreement, dated December 20, 1999, between the Registrant
and Jack M. Finlayson (incorporated by reference to the same numbered
exhibit to the Registrant's Registration Statement)
10.9 Letter Agreement, dated June 14, 1999, between the Registrant and David
J. Frear (incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement)
10.10 Letter Agreement, dated September 30, 1999, between the Registrant and
James D. Mori (incorporated by reference to the same numbered exhibit
to the Registrant's Registration Statement)
10.11 Master Establishment and Transition Agreement, dated February 9, 2000,
between the Registrant and Bridge Information Systems, Inc., including
as Exhibit B a Form of Administrative Services Agreement, as Exhibit E
a Form of Local Contract of Assignment and Assumption, as Exhibit F a
Form of Local Asset Transfer Agreement, as Exhibit H a Form of
Equipment Colocation Permit, as Exhibit I a Form of Promissory Note, as
Exhibit J a Form of Call Asset Transfer Agreement and as Exhibit K the
Sublease Agreement (incorporated by reference to the same numbered
exhibit to the Registrant's Registration Statement)
10.12 + Network Services Agreement, dated February 18, 2000, between SAVVIS
Communications Corporation and Bridge Information Systems, Inc.
(incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement)
10.13 + Technical Services Agreement, dated February 18, 2000, between SAVVIS
Communications Corporation and Bridge Information Systems, Inc.
(incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement)
10.14 Managed Network Agreement, dated January 31, 1995, between Sprint
Communications Company L.P. and Bridge Data Company (incorporated by
reference to the same numbered exhibit to the Registrant's Registration
Statement)
10.15 Amendment One to the Managed Network Agreement, dated August 23, 1995,
between Sprint Communications Company L.P. and Bridge Data Company
(incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement)
10.16 Amendment Two to the Managed Network Agreement, dated August 16, 1995,
between Sprint Communications Company L.P. and Bridge Data Company
(incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement)
10.17 + Amendment Three to the Managed Network Agreement, dated March 1, 1996,
between Sprint Communications Company L.P. and Bridge Data Company
(incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement)
10.18 + Amendment Four to the Managed Network Agreement, dated July 29, 1996,
between Sprint Communications Company L.P. and Bridge Data Company
(incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement)
10.19 + Amendment Five to the Managed Network Agreement, dated December 5,
1996, between Sprint Communications Company L.P. and Bridge Data
Company (incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement)
10.20 + Amendment Six to the Managed Network Agreement, dated May 23, 1997,
between Sprint Communications Company L.P. and Bridge Data Company
(incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement)
10.21 + Amendment Seven to the Managed Network Agreement, dated August 28,
1998, between Sprint Communications Company L.P. and Bridge Data
Company (incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement)
10.22 + Service Agreement, dated August 15, 1996, between the Registrant and
IXC Carrier, Inc. (incorporated by reference to the same numbered
exhibit to the Registrant's Registration Statement)
10.23 + Amendment No. 1 to the Service Agreement, dated October 22, 1996,
between the Registrant and IXC Carrier, Inc. (incorporated by reference
to the same numbered exhibit to the Registrant's Registration
Statement)
10.24 + Master Internet Services Agreement, effective June 4, 1999, between the
Registrant and UUNET Technologies, Inc. (incorporated by reference to
the same numbered exhibit to the Registrant's Registration Statement)
10.25 + Internet MCI Dedicated Access Agreement, dated April 16, 1998, between
the Registrant and network MCI, Inc. (incorporated by reference to the
same numbered exhibit to the Registrant's Registration Statement)
10.26 Registration Rights Agreement, dated February 7, 2000, among the
Registrant, Welsh Carson Anderson & Stowe VIII, L.P. and Bridge
Information Systems, Inc. (incorporated by reference to the same
numbered exhibit to the Registrant's Registration Statement)
10.27 Office Lease between WGP Associates, LLC and SAVVIS Communications
(incorporated by reference to the same numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1999)
10.28 Amended and Restated Credit Agreement, dated as of September 5, 2000,
by and among the Registrant, as guarantor, SAVVIS Communications
Corporation, a Missouri corporation, as borrower, and Nortel Networks
Inc., as administrative agent, and the lenders named therein
(incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2000)
10.29 Pledge Agreement, dated as of September 5, 2000, by and between the
Registrant and Nortel Networks Inc., as administrative agent for the
lenders (incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2000)
10.30 Amended and Restated Pledge and Security Agreement, dated as of
September 5, 2000, by and between SAVVIS Communications Corporation, a
Missouri corporation and Nortel Networks Inc., as administrative agent
for the lenders (incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2000)
61
10.31 Pledge and Security Agreement, dated as of September 5, 2000, by and
between Global Network Assets, LLC and Nortel Networks Inc., as
administrative agent for the lenders (incorporated by reference to
Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2000)
10.32 Amended and Restated Guaranty Agreement, dated as of September 5, 2000,
delivered by the Registrant to and in favor of Nortel Networks Inc., as
administrative agent for itself and the other lenders (incorporated by
reference to Exhibit 10.5 to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2000)
10.33 Amended and Restated Guaranty Agreement, dated as of September 5, 2000,
delivered by Global Network Assets, LLC to and in favor of Nortel
Networks Inc., as administrative agent for itself and the other lenders
(incorporated by reference to Exhibit 10.6 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2000)
10.34 + Long Haul IRU Agreement, dated as of August 2, 2000, between SAVVIS
Communications Corporation, a Missouri corporation and Level 3
Communications, LLC (incorporated by reference to Exhibit 10.7 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2000)
10.35 + Metro IRU Agreement, dated as of August 2, 2000, between SAVVIS
Communications Corporation, a Missouri corporation and Level 3
Communications, LLC (incorporated by reference to Exhibit 10.8 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2000)
10.36 + Arena Naming Rights Agreement, dated as of August 17, 2000, among the
Registrant, Kiel Center Partners, L.P. and Bridge Information Systems,
Inc. (incorporated by reference to Exhibit 10.9 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2000)
10.37 + Master Agreement, dated as of June 30, 2000, between SAVVIS
Communications Corporation, a Missouri corporation and Winstar
Wireless, Inc., as amended by that certain Letter Agreement dated
September 29, 2000 (incorporated by reference to Exhibit 10.10 to the
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2000)
10.38 + Nortel Networks Global Purchase Agreement, effective as of June 30,
2000, between SAVVIS Communications Corporation, a Missouri corporation
and Nortel Networks Inc. (incorporated by reference to Exhibit 10.11 to
the Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2000)
10.39 ++ Amendment Eight to the Managed Network Agreement, effective as of
August 1, 2000, between Sprint Communications Company, L.P. and Bridge
Data Company
10.40 Securities Purchase Agreement, dated as of February 16, 2001, among the
registrant, Welsh, Carson, Anderson & Stowe VIII, L.P., WCAS Management
Corporation and the various individuals listed as Purchasers on
schedule I thereto
10.41 Registration Rights Agreement, dated as of February 20, 2001, among the
registrant, Welsh, Carson, Anderson & Stowe VIII, L.P., WCAS Management
Corporation and the various individuals listed on the signature pages
thereto
10.42 Missouri Future Advance Deed of Trust and Security Agreement, dated as
of February 19, 2001, among SAVVIS Communications Corporation, a
Missouri corporation, Steven D. Korenblat and Welsh, Carson, Anderson &
Stowe VII, L.P.
10.43 Stipulation and Order, dated April 9, 2001, by and among the
Registrant, AT&T Corp., Bridge Information Systems, Inc. and its
related debtor entities
10.44 Stipulation and Order, dated March 22, 2001, by and among the
Registrant, Sprint Communications Company L.P., Bridge Information
Systems, Inc. and its related debtor entities
10.45 Stipulation and Order, dated March 23, 2001 by and among the
Registrant, MCI/WorldCom Communications Corporation and certain of its
affiliates, Bridge Information Systems, Inc. and its related debtor
entities
10.46 Employment Agreement, dated April 2, 2001, between the Registrant and
Robert A. McCormick
21.1 Subsidiaries of the Registrant
- ----------
+ Confidential treatment has been granted for this exhibit. The copy filed
as an exhibit omits the information subject to the request for confidential
treatment.
++ A request for confidential treatment has been submitted with respect to
this exhibit. The copy filed as an exhibit omits the information subject to
the request for confidential treatment.
(b) Reports on Form 8-K.
On February 2, 2001 and February 22, 2001, we filed Current Reports on Form
8-K relating to the bankruptcy of Bridge Information Systems, Inc.
(c) Exhibits.
The list of exhibits filed with this report is set forth in response to
Item 14(a)(3). SAVVIS hereby files as part of this report the exhibits listed in
the index to the exhibits.
(d) Financial Statements Schedules.
None.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on April 17, 2001.
SAVVIS COMMUNICATIONS CORPORATION
By: /s/ Robert McCormick
-------------------------
Robert McCormick
CHIEF EXECUTIVE OFFICE AND CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant, in the
capacities indicated below and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------- ------------------------------------------ --------------
/s/ ROBERT MCCORMICK Chief Executive Officer and Chairman April 17, 2001
- ------------------------------- of the Board (principal executive officer)
Robert McCormick
/s/ DAVID J. FREAR Executive Vice President, Chief April 17, 2001
- ------------------------------- Financial Officer and Director
David J. Frear (principal financial officer and
principal accounting officer)
/s/ JACK M. FINLAYSON President, Chief Operating Officer and April 17, 2001
- ------------------------------- Director
Jack M. Finlayson
/s/ CLYDE A. HEINTZELMAN Director April 17, 2001
- -------------------------------
Clyde A. Heintzelman
/s/ THOMAS E. MCINERNEY Director April 17, 2001
- -------------------------------
Thomas E. McInerney
/s/ PATRICK J. WELSH Director April 17, 2001
- -------------------------------
Patrick J. Welsh
/s/ DAVID L. ROSCOE Director April 17, 2001
- -------------------------------
David L. Roscoe
63
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SAVVIS COMMUNICATIONS CORPORATION
PAGE
----
Independent Auditors' Report ................................................................................................. F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000 ................................................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1998, 1999 and 2000 ................................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 1998, 1999 and 2000 .... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000 ................................... F-6
Notes to Consolidated Financial Statements ................................................................................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
SAVVIS Communications Corporation:
We have audited the accompanying consolidated balance sheets of SAVVIS
Communications Corporation and subsidiaries ("SAVVIS"), as of December 31, 2000
and 1999, and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows for the year ended December 31,
2000, the period from April 7, 1999 (the date of SAVVIS' acquisition by Bridge
Information Systems, Inc.) through December 31, 1999, the period from January 1,
1999 through April 6, 1999, and the year ended December 31, 1998. These
financial statements are the responsibility of SAVVIS' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of SAVVIS as of December 31, 2000 and
1999, and the results of its operations and its cash flows for the stated
periods ended December 31, 2000, December 31, 1999, April 6, 1999, and December
31, 1998 in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements for the year ended December 31, 2000 have
been prepared assuming that SAVVIS will continue as a going concern. As
discussed in Note 1, SAVVIS is experiencing difficulty in generating sufficient
cash flow to meet its capital requirements and to sustain its operations. During
the year ended December 31, 2000, SAVVIS incurred a net loss of approximately
$164.9 million and, as of December 31, 2000, SAVVIS has a working capital
deficiency of $153.6 million and an accumulated operating deficit of $203.5
million. These matters, in conjunction with the bankruptcy of Bridge Information
Systems, Inc., discussed in the following paragraph, raise substantial doubt
about SAVVIS' ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
On February 15, 2001, Bridge Information Systems, Inc., from whom the Company
derived about 81% of its revenues during the year ended December 31, 2000, filed
a voluntary petition for relief under Chapter 11 of Title 11 of the United
States Code, 11 U.S.C. Sections 101 et seq. in the United States Bankruptcy
Court for the Eastern District of Missouri.
As discussed in Note 1 to the consolidated financial statements, SAVVIS adopted
a new accounting basis effective April 7, 1999 in connection with a change in
ownership and recorded net assets as of that date at the new owner's acquisition
cost. Accordingly, the consolidated statements of operations for the year ended
December 31, 2000 and for the period from April 7, 1999 through December 31,
1999 are not comparable to those of earlier periods presented.
Deloitte & Touche LLP
McLean, Virginia
April 9, 2001
F-2
SAVVIS COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
1999 2000
--------- ---------
(SUCCESSOR) (SUCCESSOR)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................................... $ 2,867 $ 32,262
Restricted cash ............................................................................. -- 5,565
Accounts receivable from Bridge Information Systems, Inc. ................................... -- 32,897
Trade accounts receivable, less allowance for doubtful accounts of $375 in
1999 and $800 in 2000 ..................................................................... 2,271 11,015
Prepaid expenses ............................................................................ 503 1,087
Other current assets ........................................................................ 88 3,119
--------- ---------
Total current assets ......................................................................... 5,729 85,945
PROPERTY AND EQUIPMENT -- Net ................................................................ 5,560 319,008
GOODWILL AND INTANGIBLE ASSETS -- Net of accumulated amortization of $12,217 in
1999 and $24,606 in 2000 .................................................................... 26,250 13,974
OTHER NON-CURRENT ASSETS ..................................................................... 1,757 19,695
--------- ---------
TOTAL
$ 39,296 $ 438,622
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ............................................................................ $ 5,093 $ 81,901
Accrued compensation payable ................................................................ 1,928 5,407
Due to Bridge Information Systems, Inc. ..................................................... 24,065 23,090
Deferred revenue ............................................................................ -- 3,189
Notes payable -- current portion ........................................................... -- 75,066
Current portion of capital lease obligations ................................................ 2,462 28,465
Other accrued liabilities ................................................................... 5,083 22,439
--------- ---------
Total current liabilities .................................................................... 38,631 239,557
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION .............................................. 3,431 47,971
NOTES PAYABLE - NON CURRENT PORTION .......................................................... -- 25,018
DEFFERRED REVENUE - NON CURRENT .............................................................. -- 8,656
OTHER ACCRUED LIABILITIES .................................................................... -- 490
--------- ---------
Total Liabilities ............................................................................ 42,062 321,692
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock; 50,000,000 shares authorized, none issued and outstanding .................. -- --
Common stock; $.01 par value, 125,000,000 shares authorized, 77,210,286
shares issued and outstanding in 1999, 250,000,000 shares authorized,
93,831,066 shares issued and 93,792,190 shares outstanding in 2000 ......................... 772 938
Additional paid-in capital .................................................................. 84,973 359,586
Accumulated deficit ......................................................................... (38,617) (203,468)
Deferred compensation ....................................................................... (49,894) (39,581)
Treasury stock, at cost, 0 shares in 1999 and 38,876 shares in 2000 ......................... -- (19)
Accumulated other comprehensive income:
Cumulative foreign currency translation adjustment ......................................... -- (526)
--------- ---------
Total stockholders' equity (deficit) ......................................................... (2,766) 116,930
--------- ---------
TOTAL ........................................................................................ $ 39,296 $ 438,622
========= =========
See notes to consolidated financial statements.
F-3
SAVVIS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PERIOD FROM
JANUARY 1 PERIOD FROM
TO APRIL 7 TO
APRIL 6, DECEMBER 31,
1998 1999 1999 2000
------------ ------------ ------------ ------------
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
REVENUES:
Managed data networks (including $149,805 from Bridge
Information Systems, Inc. in 2000) ................................ $ -- $ -- $ -- $ 151,733
Internet access (including $1,844 from Bridge Information
Systems, Inc. in 2000) ............................................ 12,827 5,303 17,501 32,542
Other .............................................................. 847 137 1,048 2,049
------------ ------------ ------------ ------------
Total revenues .................................................... 13,674 5,440 18,549 186,324
------------ ------------ ------------ ------------
DIRECT COSTS AND OPERATING EXPENSES:
Data communications and operations (excluding $.2 million
and $1.9 million of equity-based compensation for the 1999
Successor period and 2000, respectively) .......................... 20,889 6,371 21,183 211,750
Sales and marketing (excluding $.5 million and $5.0 million
of equity-based compensation for the 1999 Successor period
and 2000, respectively) ........................................... 8,155 2,618 9,924 33,892
General and administrative (excluding $.8 million and $7.6
million of equity-based compensation for the 1999
Successor period and 2000, respectively) .......................... 4,090 2,191 8,906 24,361
Depreciation and amortization ...................................... 2,288 817 14,351 60,511
Asset impairment & other write-downs of assets ..................... -- 1,383 -- 2,000
Non-cash equity-based compensation ................................. -- -- 1,500 14,459
------------ ------------ ------------ ------------
Total direct costs and operating expenses ......................... 35,422 13,380 55,864 346,973
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ............................................... (21,748) (7,940) (37,315) (160,649)
NONOPERATING INCOME (EXPENSE):
Interest income .................................................... 383 23 48 6,369
Interest expense ................................................... (483) (158) (1,350) (10,571)
------------ ------------ ------------ ------------
Total non operating expense ....................................... (100) (135) (1,302) (4,202)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES, MINORITY INTEREST AND
EXTRAORDINARY ITEM ................................................ (21,848) (8,075) (38,617) (164,851)
INCOME TAXES ....................................................... -- -- -- --
Minority Interest in Losses, net of accretion ...................... (147) -- -- --
------------ ------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM ..................................... (21,995) (8,075) (38,617) (164,851)
Extraordinary gain on debt extinguishment, net of tax .............. 1,954 -- -- --
------------ ------------ ------------ ------------
NET LOSS ........................................................... (20,041) (8,075) (38,617) (164,851)
PREFERRED STOCK DIVIDENDS .......................................... (2,054) (706) -- --
ACCRETION TO CARRYING VALUES OF SERIES
B AND C REDEEMABLE PREFERRED STOCK ................................ (571) (244) -- --
------------ ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS ....................... $ (22,666) $ (9,025) $ (38,617) $ (164,851)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE BEFORE
EXTRAORDINARY ITEM ................................................ $ (.42) $ (.14) $ (.54) $ (1.89)
EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENT .......................... .03 -- -- --
------------ ------------ ------------ ------------
BASIC AND DILUTED LOSS PER COMMON SHARE ............................ $ (.39) $ (.14) $ (.54) $ (1.89)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING ................................ 58,567,482 66,018,388 72,075,287 87,343,896
============ ============ ============ ============
See notes to consolidated financial statements.
F-4
SAVVIS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 1998 (PREDECESSOR),
PERIOD FROM JANUARY 1, 1999 THROUGH APRIL 6, 1999 (PREDECESSOR),
PERIOD FROM APRIL 7, 1999 THROUGH DECEMBER 31, 1999 (SUCCESSOR)
AND YEAR ENDED DECEMBER 31, 2000 (SUCCESSOR)
(DOLLARS IN THOUSANDS)
NUMBER OF SHARES
---------- ----------
COMMON TREASURY
STOCK STOCK
---------- ----------
BALANCE, JANUARY 1, 1998 (Predecessor) .......................................................... 39,550,519 4,853,967
Issuance of common stock ........................................................................ 1,976 --
Issuance of stock options ....................................................................... -- --
Issuance of common stock for acquisition of IXA ................................................. 28,789,781 --
Issuance of common stock upon exercise of stock options ......................................... 957,533 --
Dividends declared on Series C Redeemable Preferred Stock ....................................... -- --
Accretion to carrying values of Series B and C Redeemable Preferred Stock ....................... -- --
Purchase of shares for treasury ................................................................. -- 197,576
Issuance of Series C warrants
Net loss and comprehensive loss.................................................................. -- --
---------- ----------
BALANCE, DECEMBER 31, 1998 (Predecessor) ........................................................ 69,299,809 5,051,543
Issuance of common stock upon exercise of stock options ......................................... 2,700,191 --
Dividends declared on Series C Redeemable Preferred Stock ....................................... -- --
Accretion to carrying values of Series B and C Redeemable Preferred Stock ....................... -- --
Recognition of deferred compensation cost ....................................................... -- --
Net loss and comprehensive loss ................................................................. -- --
---------- ----------
BALANCE, APRIL 6, 1999 (Predecessor) ............................................................ 72,000,000 5,051,543
Recapitalization related to acquisition of the Company by Bridge Information Systems ............ -- (5,051,543)
Issuance of common stock upon exercise of stock options ......................................... 5,210,286 --
Issuance of stock options and restricted stock .................................................. -- --
Recognition of deferred compensation cost ....................................................... -- --
Net loss and comprehensive loss ................................................................. -- --
---------- ----------
BALANCE, DECEMBER 31, 1999 (Successor) .......................................................... 77,210,286 --
Net loss ........................................................................................ -- --
Foreign currency translation adjustment ......................................................... -- --
Comprehensive loss...............................................................................
Issuance of common stock in initial public offering ............................................. 14,875,000 --
Issuance of common stock upon exercise of stock options ......................................... 995,780 --
Issuance of stock options and restricted stock .................................................. -- --
Issuance of common stock in payment of obligations .............................................. 750,000 --
Recognition of deferred
compensation cost ............................................................................ -- --
Purchase of shares for treasury ................................................................. -- (38,876)
Preferential distribution to Bridge ............................................................. -- --
---------- ----------
BALANCE, DECEMBER 31, 2000 ...................................................................... 93,831,066 (38,876)
========== ==========
AMOUNTS
---------------------------------------------------------------------------------------
OTHER
COMPREHENSIVE
INCOME;
ADDITIONAL CUMULATIVE DEFERRED
COMMON PAID-IN TRANSLATION COMP- ACCUMULATED TREASURY
STOCK CAPITAL ADJUSTMENT ENSATION DEFICIT STOCK TOTAL
--------- --------- ---------- --------- --------- --------- ---------
BALANCE, JANUARY 1, 1998 (Predecessor) .. $ 396 $ 1,095 $-- $ -- $ (16,345) $ (49) $ (14,903)
Issuance of common stock ................ -- 1 -- -- -- -- 1
Issuance of stock options ............... -- 171 -- (78) -- -- 93
Issuance of common stock for
acquisition of IXA ..................... 287 296 -- -- -- -- 583
Issuance of common stock upon
exercise of stock options .............. 10 -- -- -- -- -- 10
Dividends declared on Series C
Redeemable Preferred Stock ............. -- -- -- -- (2,054) -- (2,054)
Accretion to carrying values of
Series B and C Redeemable
Preferred Stock ........................ -- -- -- -- (571) -- (571)
Purchase of shares for treasury ......... -- -- -- -- -- (15) (15)
Issuance of Series C warrants ........... -- 3,700 -- -- -- -- 3,700
Net loss and comprehensive loss ......... -- -- -- -- (20,041) -- (20,041)
--------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1998 (Predecessor) 693 5,263 -- (78) (39,011) (64) (33,197)
Issuance of common stock upon
exercise of stock options .............. 27 1 -- -- -- -- 28
Dividends declared on Series C
Redeemable Preferred Stock ............. -- -- -- -- (706) -- (706)
Accretion to carrying values of
Series B and C Redeemable
Preferred Stock ........................ -- -- -- -- (244) -- (244)
Recognition of deferred
compensation cost ...................... -- -- -- 78 -- -- 78
Net loss and comprehensive loss ......... -- -- -- -- (8,075) -- (8,075)
--------- --------- --------- --------- --------- --------- ---------
BALANCE, APRIL 6, 1999 (Predecessor) .... 720 5,264 -- -- (48,036) (64) (42,116)
Recapitalization related to
acquisition of the Company by
Bridge Information Systems ............. -- 25,762 -- -- 48,036 64 73,862
Issuance of common stock upon
exercise of stock options .............. 52 2,553 -- -- -- -- 2,605
Issuance of stock options and
restricted stock ....................... -- 51,394 -- (51,394) -- -- --
Recognition of deferred
compensation cost ...................... -- -- -- 1,500 -- -- 1,500
Net loss and comprehensive loss ......... -- -- -- -- (38,617) -- (38,617)
--------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1999
(Successor) ............................ 772 84,973 -- (49,894) (38,617) -- (2,766)
---------
Net loss ................................ -- -- -- -- (164,851) -- (164,851)
Foreign currency translation Adjustment . -- -- (526) -- -- -- (526)
---------
Comprehensive loss ...................... (165,377)
Issuance of common stock in
initial public offering ................ 149 333,215 -- -- -- -- 333,364
Issuance of common stock upon
exercise of stock options .............. 9 485 -- -- -- -- 494
Issuance of stock options and
restricted stock ....................... -- 4,146 -- (4,146) -- -- --
Issuance of common stock in
payment of obligations ................. 8 5,758 -- -- -- -- 5,766
Recognition of deferred
compensation cost ...................... -- -- -- 14,459 -- -- 14,459
Purchase of shares for treasury ......... -- -- -- -- -- (19) (19)
Preferential distribution to Bridge ..... -- (68,991) -- -- -- -- (68,991)
--------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 2000 (Successor) .. $ 938 $ 359,586 $ (526) $ (39,581) $(203,468) $ (19) $ 116,930
========= ========= ========= ========= ========= ========= =========
See notes to consolidated financial statements.
F-5
SAVVIS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 1 TO APRIL 7 TO YEAR ENDED
DECEMBER 31 APRIL 6, DECEMBER 31, DECEMBER 31,
1998 1999 1999 2000
--------- --------- --------- ---------
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
OPERATING ACTIVITIES:
Net loss ....................................................................... $ (20,041) $ (8,075) $ (38,617) $(164,851)
Reconciliation of net loss to net cash used in operating activities:
Depreciation and amortization ................................................. 2,288 817 14,351 60,511
Asset impairment & other write-downs of assets ................................ -- 1,383 -- 2,000
Extraordinary gain on early extinguishment of debt, net of tax ................ (1,954) -- -- --
Minority interest in losses, net of accretion ................................. 147 -- -- --
Discount accretion ............................................................ 25 -- -- --
Compensation expense relating to the issuance of options and
restricted stock ............................................................. 93 78 1,500 14,459
Net changes in operating assets and liabilities -- net of
effect of acquisition:
Accounts receivable (including from Bridge Information Systems, Inc.) ........ (1,885) (17) 395 (60,967)
Other current assets ......................................................... 63 (18) (49) (3,031)
Other assets ................................................................. (141) (156) (1,407) (8,146)
Prepaid expenses ............................................................. 183 (51) (331) (584)
Accounts payable (including to Bridge Information Systems, Inc.) ............. 61 (127) 721 53,803
Deferred revenue ............................................................. (288) 52 (123) 11,846
Other accrued liabilities .................................................... 889 (71) 5,287 21,325
--------- --------- --------- ---------
Net cash used in operating activities ....................................... (20,560) (6,185) (18,273) (73,635)
--------- --------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures ........................................................... (1,688) (275) (837) (152,193)
Other investments .............................................................. -- -- -- (1,000)
Acquisition of IXA ............................................................. (750) -- -- --
--------- --------- --------- ---------
Net cash used in investing activities ....................................... (2,438) (275) (837) (153,193)
--------- --------- --------- ---------
FINANCING ACTIVITIES:
Purchase of treasury stock ..................................................... (15) -- -- (19)
Proceeds from common stock issuance ............................................ -- -- -- 333,364
Proceeds from vendor financing ................................................. -- -- -- 28,924
Exercise of stock options ...................................................... 10 28 2,605 494
Issuance of preferred stock and warrants ....................................... 26,200 -- -- --
Payment of deferred financing costs ............................................ (1,747) -- -- (6,165)
Principal payments under capital lease obligations ............................. (792) (182) (587) (19,576)
Issuance of senior convertible notes ........................................... 1,800 -- -- --
Principal payments of senior convertible notes ................................. (1,053) -- -- --
Proceeds from borrowings from Bridge Information Systems, Inc. ................. -- 4,700 19,365 1,300
Repayment of borrowing from Bridge Information Systems, Inc. ................... -- -- -- (5,585)
Repayment of vendor financed debt .............................................. -- -- -- (1,511)
Funding of letters of credit (restricted cash) ................................. -- -- -- (5,565)
Preferential distribution to Bridge Information Systems, Inc. .................. -- -- -- (68,991)
Principal payments on borrowings from bank ..................................... (282) (13) -- --
--------- --------- --------- ---------
Net cash provided by financing activities ................................... 24,121 4,533 21,383 256,670
--------- --------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents ................... -- -- -- (447)
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS ............................ 1,123 (1,927) 2,273 29,395
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................. 1,398 2,521 594 2,867
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................... $ 2,521 $ 594 $ 2,867 $ 32,262
========= ========= ========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Debt incurred under capital lease obligations ................................. $ 2,835 $ 2,634 $ 1,281 $ 90,118
Debt incurred in equipment acquisition ........................................ -- -- -- 72,670
Capital expenditures accrued and unpaid ....................................... -- -- -- 45,641
Forgiveness of capital lease obligations in exchange for property ............. 279 -- -- --
Preferred stock dividends ..................................................... 2,054 706 -- --
Amortization of deferred financing costs ...................................... 234 76 -- --
Accretion to carrying values of Series B and C Redeemable Preferred Stock ..... 569 168 -- --
Senior convertible notes exchanged for preferred stock ........................ 7,617 -- -- --
Issuance of common stock in acquisition of IXA ................................ 583 -- -- --
Recapitalization related to acquisition of the company by Bridge
Information Systems, Inc. .................................................... -- -- 31,746 --
Netting of amounts due to against amounts due from Bridge ..................... -- -- -- 19,326
Stock issued in payment of obligations ........................................ -- -- -- 5,766
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest ......................................................... 262 99 429 9,522
See notes to consolidated financial statements.
F-6
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1998 (PREDECESSOR),
PERIOD FROM JANUARY 1, 1999 THROUGH APRIL 6, 1999 (PREDECESSOR),
PERIOD FROM APRIL 7, 1999 THROUGH DECEMBER 31, 1999 (SUCCESSOR),
AND YEAR ENDED DECEMBER 31, 2000 (SUCCESSOR)
(TABULAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. NATURE OF OPERATIONS, ABILITY TO CONTINUE AS A GOING CONCERN AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- SAVVIS Communications Corporation, a Delaware
corporation, formerly SAVVIS Holdings Corporation ("Holdings"), together with
its wholly-owned subsidiary, SAVVIS Communications Corporation, a Missouri
corporation ("SCC"), and its predecessor company, SAVVIS Communications
Enterprises L.L.C. ("LLC"), are referred to herein collectively as the
"Company," "SAVVIS," "we," "us," and "our". The Company was formed in November
1995, commenced commercial operations in 1996 and provides high-speed Internet
access and high-end private Intranet services to corporations throughout the
United States. The Company also offers hosting services, network operations, and
related engineering services.
On April 7, 1999 (the "acquisition date"), the Company was acquired by a
wholly-owned subsidiary of Bridge Information Systems, Inc. ("Bridge") in an all
stock transaction that was accounted for as a "purchase transaction" under
Accounting Principles Board Opinion No. 16. Pursuant to the terms of the
transaction, Bridge issued approximately 3,011,000 shares of its common stock
together with 239,000 options and warrants to purchase its common stock, in
exchange for all the outstanding equity interests of SAVVIS. To effect the
transaction, the Series A, B and C Preferred Shareholders received their
respective liquidation preferences (see Note 3) in the form of Bridge common
stock. The Company's Series C warrant holders also exercised their warrants and
participated with the other common shareholders and employee option holders in
exchanging their common shares for remaining Bridge common shares. Series A
warrant holders and those holding common warrants with a strike price per
warrant of $4.13 exchanged their warrants for warrants to purchase Bridge common
stock. Company stock options outstanding at the date of the transaction were
converted into options to purchase Bridge common stock.
The value of the Bridge shares and options issued and the costs incurred by
Bridge in connection with the acquisition aggregated $31.7 million. In
accordance with the accounting requirements of the Securities and Exchange
Commission, purchase transactions that result in one entity becoming
substantially wholly-owned by the acquirer establish a new basis of accounting
in the acquired entity's records for the purchased assets and liabilities. Thus,
the purchase price has been allocated to the underlying assets purchased and
liabilities assumed based on their estimated fair values at the acquisition
date. As a result of the application of fair value accounting, intangibles,
goodwill, other liabilities and additional paid-in capital were increased in the
Company's consolidated financial statements.
The following is a summary of unaudited pro forma results of operations assuming
the acquisition had occurred at the beginning of 1998:
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999
-------- --------
Revenues ....................................... $ 13,674 $ 23,989
Net loss before extraordinary item ............. (38,250) (54,872)
Net loss ....................................... (36,296) (54,872)
Net loss per common share ...................... (0.62) (0.76)
On September 10, 1999, Bridge sold 18,129,721 shares of SAVVIS common stock in a
private placement to Bridge shareholders.
F-7
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
ABILITY TO CONTINUE AS A GOING CONCERN & BRIDGE BANKRUPTCY -- The accompanying
consolidated financial statements have been prepared on a going concern basis,
which contemplates the continuity of operations, realization of assets and
satisfaction of liabilities in the normal course of business. The Company is
experiencing difficulty in generating sufficient cash flow to meet its capital
requirements and to sustain its operations. As shown in these financial
statements, during the year ended December 31, 2000, the Company incurred a net
loss of $165 million and, as of December 31, 2000, the Company has a working
capital deficiency of $154 million and an accumulated operating deficit of $203
million.
In addition, on February 15, 2001, Bridge, from whom the Company derived
approximately 81% of its revenues during the year ended December 31, 2000, filed
a voluntary petition ("Bridge's Voluntary Petition") for relief under Chapter 11
of Title 11 of the United States Code, 11 U.S.C. Sections 101 et seq. (the
"Bankruptcy Code") in the United States Bankruptcy Court (the "Bankruptcy
Court") for the Eastern District of Missouri. This filing was made after a
creditor of Bridge filed an involuntary petition against Bridge under Chapter 7
of the Bankruptcy Code in the Bankruptcy Court on February 1, 2001.
The Company has incurred and may continue to incur significant cash requirements
for operations, investments, and debt service. Moreover, the Company believes
Bridge's Voluntary Petition has and may continue to negatively influence the
Company's cash position through delayed or omitted payments by Bridge to the
Company, demands by suppliers for advance or accelerated payments for continuing
services, and restrictions by current or prospective providers of capital. The
Company believes that it will need additional financing to meet its cash
requirements and the availability of such financing on terms acceptable to the
Company is uncertain. These factors indicate that the Company may be unable to
continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis, to obtain additional financing or refinancing
as may be required, and ultimately to attain profitable operations.
If the Company is successful in raising funding, we plan to manage our working
capital requirements by implementing changes intended to improve operating
results in future periods. These changes may include personnel reductions,
elimination of non-essential expenditures, and compensation freezes. The Company
will continue to evaluate its performance to identify additional areas of
working capital savings that may be available. SAVVIS has retained Merrill Lynch
& Co. as a financial advisor to assist in exploring financing alternatives
and/or the sale of the Company. Merrill Lynch & Co. is currently conducting its
review and has not yet formulated any recommendations. No assessment can be made
of the likelihood that the Company's plans to manage its working capital
requirements or the Merrill Lynch review will lead to plans and actions which
management can effectively implement or if implemented, any such plans and
actions will result in the Company continuing as a going concern.
As of March 31, 2001, we had approximately $10 million of unrestricted cash on
hand. Assuming Bridge continues to make payments to us under the network
services agreement, we currently have enough cash to run our business into May,
2001. Should we be unsuccessful in our efforts to raise additional capital by
then, we may be required to cease operations or declare bankruptcy.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS -- All highly liquid investments with a maturity of
three months or less are considered to be cash equivalents.
RESTRICTED CASH -- Restricted cash consists of amounts supporting outstanding
letters of credit, principally related to office space and data center
construction.
PROPERTY AND EQUIPMENT -- Property and equipment are recorded at cost and
depreciated using the straight-line method over estimated useful lives of three
to five years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the term of the related lease.
OTHER NON-CURRENT ASSETS -- Other non-current assets consist primarily of the
unamortized cost of software licenses for certain customer applications,
deferred financing costs associated with a term-loan facility, and the cost of
naming rights to an arena in St. Louis, Missouri.
EQUIPMENT UNDER CAPITAL LEASES -- The Company leases certain of its data
communications equipment and other fixed assets under capital lease agreements.
The assets and liabilities under capital leases are recorded at the lesser of
the present value of aggregate future minimum lease payments, including
estimated bargain purchase options, or the fair value of the assets under lease.
Assets under these capital leases are amortized over the terms of the leases,
which are approximately three years.
F-8
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
GOODWILL AND INTANGIBLE ASSETS -- Goodwill is being amortized over three years
and intangible assets over one to three years, all using the straight-line
method. The goodwill life was determined at the acquisition date based on market
and industry factors. Amortization expense for 1998, the period from January 1,
1999 to April 6, 1999, the period from April 7, 1999 to December 31, 1999 and
2000 was $.5 million, $.1 million , $12.2 million, and $12.4 million,
respectively.
LONG-LIVED ASSETS -- The Company periodically evaluates the net realizable value
of long-lived assets, including intangible assets, goodwill and property and
equipment, relying on a number of factors including operating results, business
plans, economic projections and anticipated future cash flows. An impairment in
the carrying value of an asset is recognized when the expected future operating
cash flows to be derived from the asset are less than its carrying value. In
addition, the Company's evaluation considers non-financial data such as market
trends, product and development cycles, and changes in management's market
emphasis. As a result of such an evaluation of fixed assets, during the period
from January 1, 1999 through April 6, 1999, the Company recognized an impairment
loss related to property and equipment of $1.4 million. During 2000, an asset
write down in the amount of $2 million was required to adjust our investment in
specialized customer application software to its estimated net realizable value.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The fair value of borrowings are
estimated by discounting the future cash flows using borrowing rates for similar
arrangements with similar maturities. As of December 31, 1999 and 2000, the fair
value of all borrowings approximates their carrying value. The carrying values
of cash, accounts receivable and accounts payable approximate their fair values.
STOCK SPLIT & STOCK AUTHORIZATION -- On July 22, 1999, the Board of Directors of
the Company declared a 72,000-for-1 stock split of the Company's shares of
common stock. As a result, the Company had 125 million shares authorized, 72
million shares issued and outstanding with a $.01 par value for each share of
common stock. All references to shares, options and warrants outstanding have
been adjusted retroactively for this stock split. On January 28, 2000, the Board
of Directors increased the number of authorized shares of the $.01 par value
common stock from 125 million shares to 250 million shares.
PUBLIC OFFERING -- An initial public offering of the Company's common stock was
completed in February 2000. A total of 17 million shares were sold in the
offering, 14,875,000 shares sold by the Company and 2,125,000 shares sold by
Bridge, all at $24 per share. The Company received net proceeds from this
offering of approximately $333 million, of which approximately $127 million was
paid to Bridge. In connection with the offering, Bridge also sold certain of its
holdings of the Company's stock to certain of Bridge's stockholders. After the
offering, Bridge owned approximately 49 percent of the Company's outstanding
stock, and shareholders of Bridge owned approximately 26 percent of the
Company's outstanding stock. As of December 31, 2000, Bridge owned approximately
48 percent of the Company's outstanding stock.
REVENUE RECOGNITION -- Service revenues consist primarily of Internet access and
managed data networking service fees, which are fixed monthly amounts, and are
recognized in the financial statements when earned during the life of the
contract. For all periods, any services billed and payments received in advance
of providing services are deferred until the period such services are earned. In
December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, or SAB 101, "Revenue Recognition in Financial Statements,"
which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. The effect of implementation of SAB 101 was not
material to the consolidated financial statements. The current portion of
installation and equipment costs deferred in accordance with SAB 101 is recorded
on the balance sheet in other assets. We now recognize such costs on a
straight-line basis over periods of up to 24 months, the estimated period over
which the related revenues from installation and equipment sales are recognized.
ADVERTISING COSTS -- Advertising costs are expensed as incurred.
INCOME TAXES -- Income taxes are accounted for under the asset and liability
method, which provides for the establishment of deferred tax assets and
liabilities for the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
for income tax purposes.
EMPLOYEE STOCK OPTIONS -- The Company accounts for employee stock options in
accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees." Under APB No. 25, the Company recognizes
compensation
F-9
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
cost based on the intrinsic value of the equity instrument awarded as determined
at the measurement date. The Company is also subject to disclosure requirements
under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation" which requires pro forma information as if the
fair value method prescribed by SFAS No. 123 had been applied (see Note 8).
NON-EMPLOYEE STOCK OPTIONS -- In March 2000, the FASB issued Interpretation No.
44, "Accounting for Certain Transactions involving Stock Compensation, an
Interpretation of APB Opinion No. 25" ("FIN 44"), which clarifies the
application of APB Opinion No. 25 on certain issues, including the definition of
an employee for purposes of applying APB Opinion No. 25. In accordance with FIN
44, the accounting for stock options granted to non-employees (excluding
non-employee members of the Company's Board of Directors) changed effective July
1, 2000. These non-employee stock options are now accounted for under the fair
value method of SFAS No. 123 (see Note 8).
FOREIGN CURRENCY -- Results of operations for foreign subsidiaries are
translated from the functional currency to the U.S. dollar using average
exchange rates during the period, while assets and liabilities are translated at
the exchange rate in effect at the reporting date. Resulting gains and losses
from translating foreign currency financial statements are included in
cumulative translation adjustment in stockholders' equity (deficit).
EARNINGS (LOSS) PER SHARE -- All loss per share amounts for all periods have
been presented to conform to the provisions of SFAS No. 128. All stock options
and warrants outstanding have been excluded from the computations of diluted
loss per share, as their effect would be anti-dilutive, and accordingly, there
is no reconciliation between basic and diluted loss per share for the periods
presented. Also excluded from the computations are shares of restricted stock
subject to repurchase.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally of accounts
receivable including amounts due from Bridge. The Company periodically reviews
the credit quality of its customers and generally does not require collateral.
USE OF ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS -- In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which, as
amended by SFAS No. 138 in June 2000, establishes accounting and reporting
standards for derivative instruments, including some derivative instruments
embedded in other contracts, and for hedging activities. FASB Statement No. 133
requires that all derivatives be recognized on the balance sheet as either
assets or liabilities, and measured by fair value. Additionally, it requires
that changes in the derivative instrument's fair value be recognized in the
statement of operations unless specific hedge accounting criteria are met. The
adoption of FASB Statement No. 133 will not have a material impact on the
Company's financial position, results of operations, or cash flows.
RECLASSIFICATIONS -- Certain amounts from prior periods have been reclassified
to conform to current period presentation.
OFFSETTING -- The Company, as a result of the application of rights of offset,
nets certain trade liabilities to Bridge with the accounts receivable for
network services from Bridge.
2. RELATIONSHIP WITH BRIDGE
In connection with Bridge's acquisition of the Company, as discussed in Note 1,
Bridge funded the Company's operations during 1999 and up through our IPO date.
As of December 31, 1999, the amounts payable to Bridge of approximately $24
million, consisted of advances to fund our operations from the date of the
acquisition by Bridge. At December 31, 2000, the Company had amounts payable to
Bridge of approximately $23 million consisting of a note payable and accrued
interest on the note scheduled to mature on February 18, 2001. In addition, at
December 31, 2000, the Company had amounts receivable from Bridge of $33
million, relating to network services provided by us to Bridge. The Company
earned $152 million in revenues from transactions with Bridge during the year
ended December 31, 2000, primarily for services rendered under the Bridge
Network Services Agreement. This amount represents about 81% of the Company's
revenues for the year.
F-10
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 2000, Bridge owed the Company $33 million representing a net
balance of charges to Bridge for network services provided by the Company under
the Bridge Network Services Agreement less $19 million for technical support,
customer support, project management, and other services provided by Bridge to
SAVVIS. This balance includes approximately $14 million owed by subsidiaries of
Bridge who are not parties to Bridge's Voluntary Petition, which is described in
Note 1. For the period January 1, 2001 to March 31, 2001, Bridge paid SAVVIS
appproximately $23 million in cash in the US. In the event any payments received
from Bridge prior to its declaration of bankruptcy are considered to be
preferential, the trustee of the bankruptcy estate may have the right to seek
return of the payments previously received. In addition and in accordance with
the Bankruptcy Court's order, Bridge paid directly to the telco suppliers, $10.9
million during the month of March, 2001. Accordingly, SAVVIS was relieved of the
obligations it had recorded to the telco suppliers and treated these direct
payments as a further reduction of the post petition accounts receivable balance
from Bridge. As of March 31, 2001, the balance due from Bridge to SAVVIS was
approximately $33 million, of which approximately $18 million was domestic. It
is uncertain if Bridge can meet its continuing obligations under the network
services agreement, both domestically and internationally.
For the period January 1, 2001 to February 15, 2001, the date of Bridge's
Voluntary Petition, Bridge incurred an additional amount due to SAVVIS
approximating $16 million and paid SAVVIS $19 million, thus leaving a
pre-petition balance due to SAVVIS of approximately $17 million. None of this
balance has been remitted to the Company as of March 30, 2001. On February 16,
2001, the Company advised Bridge that, when permitted by applicable law, it
intended to setoff the SAVVIS Promissory Note to Bridge against Bridge's
indebtedness to the Company as of February 15, 2001. Accordingly, as of March
30, 2001, the Company has not remitted the note payable balance due of
approximately $23 million of principal and interest to Bridge. Management, and
its legal counsel, believe the Company acted within its rights in not making the
remittance. In addition, various claims of setoff exist with respect to the note
payable from SAVVIS to Bridge and claims which we have against Bridge and
certain of its affiliates and/or subsidiaries, many of which are determined by
both bankruptcy and non-bankruptcy law. At present we are prevented by the
automatic stay in effect because of the Bridge bankruptcy from actually
effectuating a setoff of the note payable amounts against Bridge's indebtedness,
which the Company asserts exceeds the note payable amount, to the Company.
Subsequent to the date of Bridge's Voluntary Petition, Bridge has incurred and
is expected to continue to incur amounts owed to SAVVIS (the "post-petition
balances"). On March 23, and April 9, 2001 the Bankruptcy Court approved interim
settlement stipulations between the Company and Bridge which provides for
continued payments by Bridge (either to the Company or on behalf of the Company
directly to the Company's service providers) for networking services provided
subsequent to the date of Bridge's Voluntary Petition. Although Bridge has
announced that it has obtained a credit line from its senior lenders to provide
working capital during its reorganization proceedings, there can be no assurance
that Bridge's debtor-in-possession financing will continue.
In the event Bridge is unable or unwilling to meet its future commitments to the
Company under the Administrative and Technical Services Agreements, the Company
believes alternative arrangements could be made to support its infrastructure
needs and to enable services to other customers to continue without significant
interruption. However, the Company's ability to effect such alternative
arrangements is dependent upon its ability to fund the costs associated
therewith.
During 2000, one member of our Board of Directors was also an Officer of Bridge.
ASSET PURCHASE AND PREFERENTIAL DISTRIBUTION -- Simultaneous with the completion
of our public offering, the Company purchased or subleased Bridge's global
Internet protocol network assets. The purchase price of the assets was
approximately $77 million, of which approximately $52 million was paid from the
offering proceeds. The Company also paid a $69 million preferential distribution
to Bridge. Additionally, the Company entered into capital leases totaling
approximately $25 million with Bridge related to these network assets.
Concurrent with the asset purchase, the Company also entered into a 10-year
network services agreement with Bridge under which the Company will provide
managed data networking services to Bridge. For the first year of the agreement,
the Company's fees were based upon the cash cost to Bridge of operating the
network as configured on the date the Company acquired it, and fees for
additional services provided following the closing of the transfer will be set
for a three-year term based on an agreed pricing schedule. Bridge has agreed to
pay a minimum of approximately $105 million, $132 million and $145 million for
network services in 2000, 2001 and 2002, respectively.
In addition, Bridge has agreed that the amount to be paid under the agreement
for the fourth, fifth and sixth years will not be less than 80 percent of the
total amount paid by Bridge and its subsidiaries for Internet protocol data
transport services; and the amount to be paid under the agreement for the
seventh through tenth years will not be less than 60 percent of the total amount
paid by Bridge and its subsidiaries for Internet protocol data transport
services.
F-11
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Pursuant to a ten-year technical services agreement, Bridge is providing various
services, including technical support, customer support and project management
in the areas of installation, provisioning, help desk, and repair and
maintenance. In addition, Bridge is providing, under a three-year agreement
additional administrative and operational services, such as payroll and
accounting functions, benefit management and office space, until the Company
develops the capabilities to perform these services.
Some network assets to be purchased are located in premises currently leased by
Bridge and are subject to an equipment colocation permit between SAVVIS and
Bridge. The permits provide the Company, subject to the receipt of required
landlord consents, with the right to keep the equipment that is being purchased
from Bridge in the facilities in which they are currently located. According to
this arrangement, the Company will occupy a minimal amount of space, generally
less than 100 square feet, in each of the premises. The permits are for a term
that is coterminous with the underlying rights, which Bridge has to such
facilities, which range from one to ten years. Costs for this space are
estimated to be approximately $75,000 per year.
3. CORPORATE REORGANIZATION AND FINANCIAL TRANSACTIONS
The Company was originally organized in November 1995 and operated as SCC. In
1996, SCC issued 46,996 shares of Series A convertible preferred stock at a
price of $10.64 per share. In conjunction with the issuance, 175,047 warrants to
purchase Series A preferred stock were issued. The warrants had an exercise
period of five years from the date of issue at an exercise price of $10.64,
which approximated the market value of the stock at the date of issuance.
Between February 7 and July 31, 1997, SCC issued convertible notes to investors
with principal amounts totaling $3.7 million. These notes, along with a $.5
million convertible note issued in 1996, plus accrued interest, were converted
into 409,736 shares of Series A convertible preferred stock at a price of $10.64
per share on July 31, 1997. The 175,047 warrants to purchase Series A preferred
stock were canceled upon conversion of the notes.
On July 31, 1997, SCC formed the LLC, which then functioned as SCC's primary
operating entity until it was merged back into the Company on April 30, 1998.
Ownership of the LLC was split between Class B shares, of which SCC owned all
8,750,000 shares, and Class A shares, of which the LLC's senior convertible
promissory note holders owned all 5,400,000 shares. Both classes of stock had
equal voting rights and liquidation preferences.
On July 31, 1997, the LLC issued senior convertible notes (senior notes) in an
aggregate principal amount of $5.4 million. The senior note holders also
received 5.4 million Class A shares of the LLC for an aggregate nominal fee of
$1. The senior notes were unsecured, accrued interest at a rate of 8% per annum,
and had a term of five years.
Between October 31 and December 31, 1997, LLC entered into the following
transactions:
o Issued $3.1 million in senior convertible notes.
o Issued 13,799,812 five-year detachable warrants in conjunction with
the issuance of the senior notes. (See discussion below regarding
subsequent exchange.)
o Issued 23,496 shares of Series A convertible preferred stock at a
price of $10.64 per share.
o During 1998 an additional $1.8 million of LLC senior notes were
issued. On March 3, 1998, the Company's owners formed Holdings.
Holdings then entered into the following transactions:
o Issued 502,410 shares of Series A Preferred Stock in Holdings in
exchange for all outstanding Series A Preferred Stock of SCC (480,228
shares) plus accrued dividends.
o Issued 15,000 warrants to purchase Series A Preferred Stock of
Holdings at $10.64 per share in exchange for an equal amount of Series
A Preferred Stock Warrants of SCC with the same strike price.
F-12
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
o Converted $5.4 million in senior notes and accrued interest of $.2
million to 5,649,241 Class B shares of the LLC. These Class B shares
were then immediately exchanged for an equal number of shares of
Series B Preferred Stock in Holdings. In conjunction with the
transaction, the 5.4 million Class A shares of the LLC were cancelled.
o Issued 63,488,349 shares of $.001 par common stock of Holdings in
exchange for all of the $.01 par common stock of SCC.
o Issued 22 million shares of Class C Preferred Stock and 299,466,125
detachable Series C common stock warrants of Holdings in exchange for
$18.2 million in cash and $3.8 million of LLC senior bridge notes. The
remaining senior bridge notes were repaid from the proceeds of the
financing.
o Issued 13,799,812 warrants to purchase common stock at a strike price
of $.10 in exchange for an equal amount of warrants to purchase common
stock of SCC with the same strike price.
On July 1, 1998, Holdings issued additional 8 million shares of Series C
Preferred Stock and 108,896,798 detachable common stock warrants for $8 million
in cash.
The Company, based on an independent valuation, assigned $3.7 million to the
value of the detachable Series C common stock warrants issued in the March 1998
and July 1998 transactions. The $3.7 million was recorded as a discount on the
preferred stock and an increase in additional paid-in capital. Financing costs
of $1.8 million were recorded as a discount against the preferred stock. This
resulted in $24.6 million of value being assigned to the Series C Preferred
Stock, with the difference between such value and the $30 million redemption
value being amortized through the mandatory redemption date. Amortization was
charged to accumulated deficit until the April 7, 1999 acquisition by Bridge.
The conversion of the $5.4 million in senior notes and the related exchange of
Class B shares and cancellation of Class A shares in March 1998 resulted in the
recognition of an extraordinary gain on debt extinguishment and the recording of
the purchase of the minority interest.
4. REDEEMABLE PREFERRED STOCK AND STOCK WARRANTS
HOLDINGS SERIES A PREFERRED STOCK -- The Series A Preferred ranked junior to the
Series C Preferred and the Series B Preferred, but senior to all other classes
of stock as to liquidation, dividends, redemption, and any other payment or
distribution with respect to capital stock. The Series A Preferred was to be
redeemed on December 31, 2003, after (i) all shares of Series C Preferred had
been redeemed by payment in full of the aggregate Series C liquidation
preference and (ii) all shares of Series B Preferred had been redeemed by
payment in full of the aggregate Series B redemption price. The mandatory
redemption price for each share of the Series A Preferred was to be the greater
of the Series A liquidation preference or the fair market value per share of the
Series A Preferred. Holders of the Series A Preferred were entitled to convert
each share of Series A Preferred into 142.0413 shares of common stock, subject
to certain adjustments. Each holder of Series A Preferred was required to
convert all of its shares of Series A Preferred, at the then-effective Series A
conversion ratio, upon (i) the vote of 66 2/3 percent of the then-outstanding
shares of Series A Preferred or (ii) upon the demand of the Company in
connection with a public offering. Holders of Series A Preferred were entitled
to vote on all matters on which the common stockholders were entitled to vote.
Each share of Series A Preferred was entitled to 142.0413 votes. The Series A
Preferred holders were not entitled to dividends.
HOLDINGS SERIES B PREFERRED STOCK -- The Series B Preferred ranked junior to the
Series C Preferred, but senior to all other classes of the Company's stock as to
liquidation, dividends, redemption, and any other payment or distribution with
respect to capital stock. The Series B Preferred was to be redeemed on December
31, 2003 after all shares of Series C Preferred had been redeemed by payment in
full of the aggregate Series C liquidation preference. The mandatory redemption
price for each share of the Series B Preferred was to be the greater of the
Series B liquidation preference or the then-applicable fair market value per
share of the Series B Preferred. At any time, holders of the Series B Preferred
were entitled to convert each share of Series B Preferred into 13.3497 share of
common stock, subject to certain adjustments. Each holder of Series B Preferred
was required to convert all of its shares of Series B Preferred, at the
then--effective Series B conversion ratio, upon (i) the vote of 66 2/3 percent
of the then--outstanding shares of Series B Preferred and the Series A Preferred
(voting together as a class) or (ii) upon the demand of the Company in
connection with a public offering. Holders of Series B Preferred were entitled
to vote on all matters on which the common stockholders were entitled to vote.
Each share of Series B Preferred was entitled to approximately 13.3497 votes.
The Series B Preferred holders were not entitled to dividends.
F-13
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
HOLDINGS SERIES C PREFERRED STOCK -- The Series C Preferred ranked senior to all
other classes of stock of the Company as to liquidation, dividends, redemption,
and any other payments and had a liquidation preference equal to the Series C
price per share of $1 plus accrued and unpaid dividends. Dividends accrued
quarterly at 8 percent , and to the extent not paid in cash, such dividends were
added to the liquidation preference of the Series C Preferred. The Series C
Preferred was to be redeemed on December 31, 2003 at a mandatory price equal to
the liquidation preference. The Company was required, upon the demand of holders
of at least 25 percent of the outstanding Series C Preferred, to redeem all of
the Series C Preferred upon a change of control, failure to make any required
dividend payments, or certain other conditions. The Company had the option to
redeem the Series C Preferred in whole or in part upon ten business days' notice
for an amount equal to the liquidation preference. Holders of Series C Preferred
were entitled to vote on all matters on which the common stockholders were
entitled to vote and were entitled to 13.6122 vote per share. In addition, the
holders of 66 2/3 percent of the Series C Preferred were entitled to elect four
of the Company's seven directors.
See Note 1 for discussion of the redemption of all of the above Preferred Stock
in connection with the acquisition of the Company by Bridge in April 1999.
SCC SERIES A PREFERRED STOCK -- SCC Series A Preferred, which was exchanged on
March 4, 1998 for Holdings Series A Preferred plus accrued dividends, ranked
senior to all other then outstanding classes of stock as to liquidation,
dividends, redemption, and any other payment or distribution with respect to
capital stock. The Series A Preferred was to be redeemable beginning February
2002 and continuing through 2004 at the mandatory redemption price. The
mandatory redemption price for each share of the Series A Preferred was equal to
the greater of the Series A original issuance price or the fair market value per
share of the Series A Preferred, plus accrued and unpaid dividends. Effective
August 1, 1997, the terms of the Series A Preferred were amended to entitle the
holders to a dividend rate of 8 percent per annum on the Original Series A
Issuance Price. Holders of the Series A Preferred were entitled to convert each
share of Series A Preferred into such number of fully paid and non-assessable
shares of common stock as determined by dividing the Original Series A Issuance
Price ($10.64) by the conversion price of such series (Series A Conversion
Price) in effect at the time of conversion. The initial Series A Conversion
Price per share was the Original Series A Issuance Price, subject to certain
adjustments. Each holder of Series A Preferred was required to convert all of
its shares of Series A Preferred, at the then-effective Series A conversion
ratio, upon (i) written consent of 70 percent of the then-outstanding shares of
Series A Preferred or (ii) upon the demand of the Company in connection with a
public offering. Holders of Series A Preferred were entitled to vote on all
matters on which the common stockholders were entitled to vote. Each share of
Series A Preferred was entitled to the number of votes equal to the number of
shares of Common Stock into which such shares of Series A Preferred were
convertible.
COMMON STOCK WARRANTS -- SCC issued 13,799,812 warrants to purchase common stock
at a strike price of $.10 per warrant in October 1997 in conjunction with the
issuance of the senior bridge notes (Note 3). These warrants were subsequently
exchanged for an equal amount of warrants to purchase common stock of Holdings
with the same strike price. The warrants were to expire on the earlier of 10
years from the date of issuance or five years from the date of an initial public
offering. These warrants were cancelled in connection with the acquisition of
the Company by Bridge in April 1999.
SERIES C WARRANTS -- In connection with the issuance of Series C Preferred Stock
in March and July of 1998, the Company issued 408,362,922 of detachable warrants
to purchase common stock of the Company for a price below $.01 per share. The
warrants were assigned a value of $3.7 million. The warrants were exercisable at
any time except that no more than 75 percent of the warrants were exercisable
prior to March 3, 2000. The warrants were to expire 10 years from date of
issuance. The warrants provided, subject to certain clawback provisions in the
event of a qualified public offering, the Series C Preferred holders with 44.88
percent of the common stock of the Company on a fully diluted basis. These
warrants were cancelled in connection with the acquisition of the Company by
Bridge in April 1999.
SERIES A WARRANTS -- SCC issued 15,000 warrants to purchase Series A Preferred
shares of the Company for $10.64 per share to certain investors and consultants
for the performance of services on May 28, 1997. These warrants vested
immediately. Compensation expense recorded with respect to these warrants was
$.2 million in 1997. These warrants were subsequently exchanged for an identical
number of warrants to purchase Series A Preferred shares of Holdings on March 4,
1998. These warrants were then cancelled in connection with the acquisition of
the Company by Bridge in April 1999.
F-14
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. BUSINESS COMBINATION
On March 4, 1998, the Company acquired all of the outstanding shares of
Interconnected Associates, Inc. ("IXA") for $.8 million in cash and 28,789,781
shares of the Company's common stock. IXA, which commenced operations in 1994,
was a regional Internet service provider serving approximately 200 customers
from facilities in Seattle and Portland. The acquisition was accounted for using
the purchase method of accounting.
Fair value of intangible assets acquired,
including goodwill .................................. $ 1,620
Fair value of property acquired ....................... 369
Net liabilities assumed ............................... (656)
-------
Total purchase price ................................ 1,333
Fair value of common stock issued ..................... (583)
-------
Total cash paid ..................................... $ 750
=======
The following is a summary of unaudited pro forma results of operations assuming
that the acquisition had occurred at the beginning of 1998:
1998
--------
Revenues .......................................... $ 13,903
Loss before extraordinary item .................... (22,272)
Net loss .......................................... (20,318)
Net loss per common share ......................... (0.35)
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
1999 2000
--------- ---------
Computer equipment ....................................... $ 801 $ 1,943
Communications equipment ................................. 1,057 166,767
Purchased software ....................................... 107 1,089
Furniture and fixtures ................................... 322 2,854
Leasehold improvements ................................... 382 2,071
Data center .............................................. -- 14,326
Construction in progress ................................. -- 83,884
Equipment under capital leases ........................... 5,089 95,446
--------- ---------
7,758 368,380
Less accumulated depreciation and amortization ........... (2,198) (49,372)
--------- ---------
$ 5,560 $ 319,008
========= =========
Effective January 1, 1998, the Company decreased the estimated remaining useful
lives of its computer equipment, communications equipment and software from five
years to three years to more closely reflect the actual service lives of such
equipment. The effect of the change was to increase depreciation expense and net
loss by approximately $.5 million for the year ended December 31, 1998.
Accumulated amortization for equipment under capital leases for 1999 and 2000
was $1.4 million and $20.6 million, respectively.
F-15
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Amortization expense for 1998, the period from January 1, 1999 to April 6, 1999,
the period from April 7, 1999 to December 31, 1999 and 2000 was $.8 million, $.4
million, $1.4 million, and $19.3 million, respectively.
Interest capitalized in 2000, related to the assets under construction, amounted
to $.3 million.
7. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable as of December 31, 2000 consisted of the following:
Note payable to Nortel Networks, Inc., variable interest rate of 9.70% as of December 31, 2000 .................. $ 44,601
Note payable to Nortel Networks, Inc., variable interest rate of 9.69% as of December 31, 2000 .................. 30,465
Note payable to Winstar Wireless, Inc., interest at 11% ......................................................... 16,458
Note payable to Winstar Wireless, Inc., interest at 11% ......................................................... 8,560
---------
Total notes payable .................................................................................... 100,084
Less current portion ................................................................................ (75,066)
---------
Long-term portion ...................................................................................... $ 25,018
=========
On June 30, 2000, the Company entered into a credit agreement with Nortel
Networks, Inc. ("Nortel") for the financing of approximately $38 million of
network equipment and services. On September 5, 2000, this agreement was amended
and restated, resulting in an increase to a $235 million advancing term loan
facility for the purpose of financing a portion of the Company's costs to
purchase network equipment and installation services from Nortel and to pay
certain third party expenses. As of December 31, 2000, the Company has drawn
approximately $75 million under this financing agreement. Due to the violations
of covenants in this agreement occurring in February 2001, relating to Bridge's
petition in bankruptcy and the lack of formal approval from Nortel regarding the
$20 million of funding received in February 2001 (see Note 15), all amounts due
under this agreement have been classified as current as of December 31, 2000.
The notes bear interest at a variable market-based interest rate, and this
interest is paid at the end of the interest period or three months after the
comencement of the interest period, whichever is earlier. On March 31, 2001, we
did not pay approximately 1.2 million of interest and commitment fees due to
Nortel under the term loan facility, causing a default. We are currently
discussing a waiver of this default.
During 2000, the Company executed two agreements to acquire telecommunications
equipment and related services with Winstar Wireless, Inc. ("Winstar"),
resulting in the financing by Winstar of approximately $25 million of equipment,
over six years at 11% interest. Principal and interest are payable quarterly, in
installments over the term of the notes. Future payments as of December 31,
2000, are as follows: $1.6 million in 2001, $4.4 million in 2002, $7.4 million
in 2003, $9.5 million in 2004, $9.5 million in 2005, and $5.3 million in 2006.
Of these payments, $12.8 million represents interest.
See Note 11 for additional detail on the Nortel and Winstar agreements.
The Company leases various equipment under capital leases. Future minimum lease
payments under capital leases as of December 31, 2000 are as follows:
2001................................................... $ 35,445
2002................................................... 32,234
2003................................................... 20,020
2004................................................... 1,046
--------
Total capital lease obligations........................ 88,745
Less amount representing interest...................... (12,309)
Less current portion................................... (28,465)
--------
Long-term portion of capital lease obligations ........ $ 47,971
========
In April 2001 we did not pay approximately $1.7 million due to GECC under
capital lease obligations, causing a default in our agreement with GECC. We are
currently discussing a waiver of this default with GECC. Furthermore, SAVVIS
deposited $1.2 million, representing the March and April 2001 payments due to
Bridge under capital lease obligations entered into in conjunction with the
purchase of the global Internet protocol network, into a separate bank account
instead of making the payments to Bridge, thus causing a default with Bridge
under this lease.
F-16
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. EMPLOYEE STOCK OPTIONS
In January 1997, the Company established the 1997 stock option plan, under which
it was authorized to grant up to 19,757,596 of either incentive stock options or
non-qualified stock options to it employees. Options under this plan became
exercisable over a three-year vesting period from the date of grant and were to
expire ten years after the date of grant. The Company issued 8,087,100 options
under this plan during 1997.
Additionally, on July 8, 1997, the Company granted an employee 790,304 options
to purchase the Company's common stock at $.07 per share. These options vested
immediately and had a ten-year life.
Effective October 15, 1997, the Company's Board of Directors amended and
restated the 1997 stock option plan and authorized an additional 15,072,319
options to be granted under the plan. As part of this amendment, the Board of
Directors authorized the existing option holders to exchange their options for
incentive stock options priced at $.01 per share. These incentive options vested
6/48 six months from the employee's start date and then 1/48 monthly thereafter.
Accordingly, options with respect to 9,228,655 shares of the Company's common
stock were canceled, and new options with respect to the same number of shares
were granted with an exercise price of $.01 per share, the estimated fair market
value of the Company's common stock at the time. An additional 21,389,890
options were also granted during 1997 under the same terms as the incentive
options. Two option holders, representing 238,356 options, elected not to
exchange, and accordingly, these options remained outstanding under their
original terms at the end of 1997. Of these options, 214,647 were forfeited
during 1998.
In 1998, the Company's Board of Directors established the 1998 stock option
plan, under which it authorized 111,149,677 and granted 91,926,998 options.
These options vested on varying bases over four years beginning at the later
date of six months after the employee's start date or the grant date, and were
to expire 10 years from the grant date.
In connection with the Company's acquisition on April 7, 1999, all outstanding
options under the plans were converted into 239,000 options to purchase common
stock of Bridge.
On July 22, 1999, the Company's Board of Directors adopted a new stock option
plan ("the 1999 Stock Option Plan") and authorized 8 million stock options to be
granted under the plan. On December 7, 1999, an additional 4 million stock
options were authorized by the Board of Directors to be granted under this plan.
During the period from April 7, 1999 through December 31, 1999, the Company
granted options to purchase 4,139,000 shares of its common stock to selected
employees of Bridge. Also during the period, the Company granted options to
purchase up to 4,409,508 shares of its common stock to its employees. Some of
these options contain accelerated or immediate vesting provisions, and shares
issued upon exercise of these options are restricted as to future sale or
subject to repurchase. During the period from April 7, 1999 to December 31,
1999, the Company issued 4,477,287 shares of restricted stock subject to
repurchase in connection with the exercise of these options.
During 2000, the Company granted options to purchase 60,000 shares of its common
stock to selected employees of Bridge. Also during the period, the Company
granted options to purchase up to 2,924,500 shares of its common stock to
employees and 45,000 shares of our common stock to three non-employee members of
our Board of Directors. Some of these options contain accelerated or immediate
vesting provisions, and shares issued upon exercise of these options are
restricted as to future sale or subject to repurchase. During the year, the
Company issued 638,500 shares of restricted stock subject to repurchase in
connection with the exercise of these options.
On January 23, 2001, an additional 12,000,000 stock options were authorized by
the Board of Directors under the plan, subject to stockholder approval.
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") and related interpretations in accounting for
its employee stock compensation plans. Under the provisions of APB 25,
compensation expense is recognized to the extent the value of the Company's
stock exceeds the exercise price of options or restricted stock at the
measurement date. During 1998 and the period from January 1, 1999 to April 6,
1999, the Company recognized $.1 million in each year of compensation expense
for option grants with strike prices that were below the value of the Company's
stock. Similarly, for the period April 7, 1999 to December 31, 1999,
compensation expense in the amount of $1.5 million was recognized related to
option grants within the period, while $14.0 million was recognized in 2000.
F-17
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In accordance with FIN 44, the accounting for stock options granted to
non-employees (excluding non-employee members of the Company's Board of
Directors) changed effective July 1, 2000. These non-employee stock options are
now accounted for under the fair value method of SFAS No. 123. Further, in
accordance with FASB Interpretation No. 28, "Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans" ("FIN 28"), these
non-employee options are accounted for as variable plan awards, and are adjusted
for changes in the quoted market value of the shares of the Company's stock
covered by the grant. The fair value of these options was estimated at December
31, 2000, using the following assumptions: expected volatility of 50 percent, a
risk-free interest rate of 5.1 percent, an assumed dividend yield of zero, and
an expected life of the options of up to four years. The weighted average fair
value of these options was $.50 as of December 31, 2000, and the Company
recognized $.5 million in compensation expense in 2000 related to these
non-employee grants.
Pro forma information regarding net income is required by SFAS No. 123 and has
been determined as if the Company had accounted for its stock options granted to
employees and non-employee members of its Board of Directors under the fair
value method of the statement. The fair value of the options was estimated at
the date of grant. For periods prior to 2000 the minimum value method was used
to estimate the fair value of these options. Under this method, the expected
volatility of the Company's common stock was not estimated, as there was no
market for the Company's common stock in which to monitor such stock price
volatility. Due to the short period of time that the Company's common stock has
been publicly traded, an expected volatility estimate of 50 percent has been
used for 2000. The calculation of the fair value of the options granted in 1998,
1999 and 2000 assumes a weighted average risk-free interest rate of 5.0 percent,
6.3 percent, and 6.2 percent, respectively, an assumed dividend yield of zero,
and an expected life of the options of four years. The weighted average fair
value of options granted was below $.01 per share in 1998 and for the period
January 1 to April 6,1999. For the period April 7, 1999 to December 31, 1999,
the weighted average fair value of options granted was $6.51 per share, while
for 2000 the weighted average fair value of options granted was $7.92 per share.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods.
Had compensation cost for the Company's stock option plans above been determined
consistent with the provisions of SFAS No. 123 based on the fair value at the
grant date, the Company's pro forma net loss would have been as follows:
JANUARY 1 APRIL 7 TO
TO APRIL 6, DECEMBER 31,
1998 1999 1999 2000
------------ ------------ ---------- -----------
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
Net loss:
As reported ........................................... $ (20,041) $ (8,075) $ (38,617) $ (164,851)
Pro forma ............................................. (20,071) (8,104) (38,683) (165,593)
Basic and diluted net loss per share:
As reported ........................................... $ (.42) $ (.14) $ (.54) $ (1.89)
Pro forma ............................................. (.42) (.14) (.54) (1.90)
F-18
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes stock option activity:
NUMBER OF WEIGHTED
SHARES OF AVERAGE
COMMON STOCK PRICE PER EXERCISE
OPTIONS SHARE PRICE
-------------- ------------- ---------
(IN THOUSANDS)
--------
Balance, December 31, 1997 (predecessor) ........................... 31,647 $.01 - $ .07 $ .01
Granted ........................................................... 91,927 .01 - .02 .02
Exercised ......................................................... (958) .01 .01
Forfeited ......................................................... (7,416) .01 - .02 .01
-------- -----
Balance, December 31, 1998 (predecessor) ........................... 115,200 .01 - .07 .02
Granted ........................................................... 7,409 .03 .03
Exercised ......................................................... (2,700) .01 .01
Forfeited ......................................................... (3,789) .01 - .07 .02
-------- -----
Balance, April 6, 1999 (predecessor) ............................... 116,120 .01 - .07 .02
Cancelled upon acquisition by Bridge .............................. (116,120) .01 - .07 .02
Granted ........................................................... 8,549 .50 .50
Exercised ......................................................... (5,210) .50 .50
Forfeited ......................................................... (373) .50 .50
-------- -----
Balance, December 31, 1999 (successor) ............................. 2,966 .50 .50
Granted ........................................................... 3,029 .50 - 24.00 9.22
Exercised ......................................................... (996) .50 .50
Forfeited ......................................................... (582) .50 - 19.69 6.86
-------- -----
Balance, December 31, 2000 (successor) ............................. 4,417 $.50 - $24.00 $7.29
======== =====
Options exercisable at December 31, 1998 ........................... 28,051 $.01 - $ .07 $0.01
======== =====
Options exercisable at December 31, 1999 ........................... 1,094 $.50 $ .50
======== =====
Options exercisable at December 31, 2000 ........................... 1,022 $.50 - $24.00 $2.37
======== =====
The following table summarizes information regarding stock options outstanding
at December 31, 2000:
Period From
-----------
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Number Weighted Average Weighted Average Number Weighted Average
Outstanding Remaining Life Exercise Prices Exercisable Exercise Prices
----------- -------------- --------------- ----------- ---------------
$.50 .......................... 2,041,488 8.73 years $ .50 895,971 $ .50
$2.00 to $3.69 ................ 657,000 9.89 years 2.79 -- N/A
$8.00 to $10.00 ............... 904,000 9.48 years 9.16 72,219 10.00
$11.75 to $14.94 .............. 574,000 9.49 years 13.24 3,696 13.06
$24.00 ........................ 240,000 9.12 years 24.00 50,000 24.00
--------- ---------- ------ --------- ------
$.50 to $14.94 ................ 4,416,488 9.18 years $ 7.29 1,021,886 $ 2.37
========= ========== ====== ========= ======
Included in the option grants discussed above, during the period from October
1999 through February 2000 , the Company granted 3,108,758 stock options at an
exercise price of $.50 per share, and 618,500 stock options at an exercise price
of $10 per share, to employees of SAVVIS and Bridge. Non-cash compensation cost
based upon the difference between the exercise price and the imputed fair value
of the Company's stock as of the respective option grant dates totaling
approximately $61.2 million will be
F-19
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
recorded over the vesting periods of such options, which periods range from
immediate up to four years. Approximately $14.5 million in non-cash compensation
was recorded in 2000, while $1.5 million was recorded in December, 1999.
9. EMPLOYEE SAVINGS PROGRAM
The predecessor Company sponsored an employee savings plan that qualified as a
defined contribution arrangement under Section 401(k) of the Internal Revenue
Code. All employees were allowed to contribute a percentage of their base
salary, subject to limitations. The Company made no contributions to the plan
during 1998 or the 1999 predecessor period. Effective with the acquisition of
the Company by Bridge, the plan administrator and investment options were
changed, and the plan was amended to incorporate an employer matching
contribution The Company matches 50% of employee contributions up to a maximum
of 6% of total compensation or $2,400, whichever is less. Company contributions
under this plan vest ratably over five years, and totaled $.5 million for 2000
and $.2 million for the period from April 7, 1999 to December 31, 1999.
10. INCOME TAXES
U.S. and Foreign Income taxes were not provided for the years ended December 31,
1998 and 2000, and for the periods from January 1, 1999 to April 6, 1999 and
April 7 , 1999 to December 31, 1999 as the potential deferred tax benefit,
resulting primarily from the net operating losses, was fully offset by a
valuation allowance against such deferred tax benefit.
The components of deferred income tax assets and liabilities are as follows at
December 31:
1999 2000
---- ----
Net operating loss carryforwards $18,046 $ 67,643
Depreciation 480 1,541
Accrued payroll - 950
Intangible asset impairment - 759
Non-cash equity based compensation - 529
Other 349 771
------------- --------------
Gross deferred tax assets 18,875 72,193
Deferred tax liabilities:
Intangible assets (2,658) (1,004)
------------- --------------
Gross deferred tax liabilities (2,658) (1,004)
------------- --------------
Net 16,217 71,189
Valuation allowances (16,217) (71,189)
------------- --------------
Net deferred tax assets $0 $0
============= ==============
At December 31, 1999 and 2000, the Company recorded a valuation allowance of
$16.2 million and $71.2 million respectively, against the net deferred tax asset
due to the uncertainty of its ultimate realization. The valuation allowance
increased by $8.0 million from December 31, 1997 to December 31, 1998 by $4.9
million from December 31, 1998 to December 31, 1999 and $55.0 million from
December 31, 1999 to December 31, 2000.
F-20
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The components of income (loss) consist of the following:
1998 1999 2000
---- ---- ----
Domestic $ (20,041) $ (46,692) $ (155,739)
Foreign - - (9,112)
---------------- -------------- ---------------
Total income before income taxes $ (20,041) $ (46,692) $ (164,851)
================ ============== ===============
Section 382 of the Internal Revenue Code restricts the utilization of net
operating losses and other carryover tax attributes upon the occurrence of an
ownership change, as defined. Such and ownership change occurred during 1998 as
a result of the corporate reorganization and financing transactions, and again
in 1999 as a result of the acquisition by Bridge. Management believes such
limitation may restrict the Company's ability to utilize the resulting net
operating losses over the 20 year carry-forward period.
At December 31, 2000, the Company has approximately $169 million in U.S. net
operating loss carryforwards expiring between 2011 and 2020. The net operating
losses generated by the Company during the period between April 7, 1999 and
September 10, 1999 may be utilized by Bridge in its consolidated tax return.
At December 31, 2000, net operating loss carryforwards for our foreign
subsidiaries are about $9 million primarily from the United Kingdom, Singapore,
Switzerland, Germany, Australia and Hong Kong. The aforementioned countries each
have unlimited carry-forward periods except Switzerland which is seven years.
The effective income tax rate differed from the statutory federal income tax
rate as follows:
Period From
-----------
April 7 to
January 1 to December 31,
1998 April 6, 1999 1999 2000
---- ------------- ---- ----
(Predecessor) (Predecessor) (Successor) (Successor)
Federal Statutory Rate 34% 34% 34% 34%
State taxes, net of
federal benefit 4% 4% 4% 4%
Change in valuation
allowance, primarily due to net operating loss carryforwards (36)% (38)% (3)% (34)%
Attribution of net
operating loss to Bridge - - (23)% -
Non-deductible goodwill
amortization - - (12)% (2)%
Minority interest in net
operating losses (1)% - - -
Non-deductible
compensation (1)% - - (2)%
--------------------------------------------------------------
Effective Income Tax Rate 0% 0% 0% 0%
--------------------------------------------------------------
F-21
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
The Company leases communications equipment and office space under various
operating leases. Future minimum lease payments at December 31, 2000 are as
follows:
NETWORK OTHER OFFICE
EQUIPMENT EQUIPMENT SPACE TOTAL
--------- --------- ----- -----
2001 ........................................ $298 $ 65 $ 9,449 $ 9,812
2002 ........................................ -- 38 9,238 9,276
2003 ........................................ -- 35 8,095 8,130
2004 ........................................ -- 22 7,225 7,247
2005 ........................................ -- 4 6,891 6,895
Thereafter .................................. -- -- 31,766 31,766
---- ---- ------- -------
Total ....................................... $298 $164 $72,664 $73,126
==== ==== ======= =======
Rental expense under operating leases for the year ended December 31, 1998, was
$1.9 million, and for the periods from January 1, 1999 through April 6, 1999 and
from April 7, 1999 through December 31, 1999 was $.6 million and $1.9 million,
respectively. Rental expense under operating leases for 2000 was $8.4 million.
Lease payments to GECC amounting to $1.7 million under a number of equipment
leases were not made in April, 2001. Although formal notification has not been
received, nonpayment of the monthly amounts constitute a default.
SAVVIS has employment agreements with several key executive officers. These
agreements contain provisions with regard to base salary, bonus, stock options,
and other employee benefits. These agreements also provide for severance
benefits in the event of employment termination or a change in control of the
Company.
We are required to provide network services to Bridge under the network services
agreement for a period of up to five years subsequent to the termination of the
agreement. These services must be provided to Bridge at the rates in effect for
our third party customers at the date of the agreement's termination. Should our
communications costs rise within that five-year period and the price to be paid
by Bridge is less than the cost incurred by us to provide the service, such
services will be priced at a loss to us. Pursuant to the network services
agreement with Bridge, we have agreed that the network will perform in
accordance with specific quality of service standards within twleve months from
the date we acquire the network, which was February 18, 2001. In the event we
did not meet or do not continue to meet the required quality of service levels,
Bridge would be entitled to credits and, in the event of a material breach of
such quality of services levels, Bridge would be entitled to terminate the
network services agreement and, whether or not the network service agreement is
terminated, collect up to $50 million as liquidated damages once during any
thirty-six month period. At present, neither SAVVIS, nor to the best of our
knowledge, Bridge has developed the software and or the monitoring tools
necessary to determine whether or not SAVVIS is in compliance with the SLAs.
In August 2000, the Company entered into a 20-year agreement with Kiel Center
Partners, L.P. ("KCP") pursuant to which it acquired the naming rights to an
arena in St. Louis, MO. Upon execution of the agreement, total consideration for
these rights amounted to approximately $72 million, including 750,000 shares of
its common stock issued by the Company to KCP. The related expense will be
recognized over the term of the agreement. On March 21, 2001, KCP notified the
Company that it was in default of the agreement relating to possible future
insolvency of SAVVIS. Both parties are in the process of using their reasonable
efforts to resolve this matter within the prescribed time period as defined
within the agreement.
On June 30, 2000, the Company entered into a Global Purchase Agreement (the
"Global Purchase Agreement") with Nortel Networks, Inc. ("Nortel"). This
agreement calls for the Company to purchase and take delivery of products and
services from Nortel in the amount of $155 million from the date of the
agreement through December 31, 2003. These products and services are to be
financed by Nortel pursuant to a credit agreement. Concurrent with the execution
of the Global Purchase Agreement, on June 30, 2000, the Company entered into a
credit agreement with Nortel Networks Inc. ("Nortel") for the financing of
approximately $38 million of network equipment and services. On September 5,
2000, this credit agreement was amended and restated, resulting in an increase
to a $235 million advancing term loan facility (the "Term Loan") for the purpose
of financing a portion of the Company's costs to purchase a network equipment
and installation services from Nortel and to pay certain third party expenses.
As of December 31, 2000,
F-22
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
the Company has drawn approximately $75 million under this financing arrangement
for the purchase of equipment and services and other third-party costs. Amounts
drawn under this term loan facility have been recorded in notes payable -
current portion (see Note 7). Repayments are due in twenty equal quarterly
installments commencing on September 30, 2003 and bearing interest at a variable
market-based rate. On March 31, 2001, we defaulted on the payment of
approximately $1.2 million of interest and commitment fees due to Nortel under
the term loan facility.
Bridge's Voluntary Petition constituted an event of default under the Nortel
Term Loan Facility. As a consequence, the unused portion of the Nortel Term Loan
Facility is terminated and the amounts owed become immediately due and payable.
The Company has requested a waiver from Nortel so that its ability to continue
borrowing to support its network expansion will be reinstated. However, there
can be no assurance that Nortel will comply with the Company's request. The
Company has reported the full balance of the Nortel Term Loan Facility as of
December 31, 2000 as a current liability. The April, 2001 interest payment under
this borrowing facility amounting to $1.2 million was not made for the month of
April, 2001.
As of December 31, 2000, deferred financing costs of $6 million associated with
the Nortel Term Loan Facility are included as Other Non-current Assets on the
Company's balance sheet. It is reasonably possible some or all of these costs
will prove to be unrecoverable in the event Nortel declines to comply with the
Company's request for a waiver or if the Nortel Term Loan Facility is
restructured. No provision for any possible impairment of these deferred
financing costs has been made in the accompanying financial statements.
On August 2, 2000, the Company entered into two agreements with Level 3
Communications, LLC ("Level 3"). These agreements grant to SAVVIS exclusive
indefeasible rights of use ("IRU") in certain segments of a multi-conduit fiber
optic communications system being constructed Level 3. The term of each
agreement is for a 20-year period beginning with the acceptance of a segment and
payment by SAVVIS of the segment IRU fee. The agreements stipulate payments to
Level 3 totaling approximately $36.2 million. As of December 31, 2000, the
Company has paid to Level 3 approximately $9.8 million pursuant to these
agreements, which amounts were funded by drawings on the Nortel Term Loan.
On June 30, 2000, SAVVIS executed an agreement to acquire approximately $30
million of telecommunications equipment and related services with Winstar
Wireless, Inc. ("Winstar"). Upon execution, the Company took delivery of certain
equipment and paid approximately $5 million to Winstar. Of the remaining $25
million, approximately $16.5 million, included in Notes Payable at December 31,
2000, has been financed by Winstar over six years at 11% interest. Payments
commenced in the third quarter of 2000. The remaining balance of $8.2 million
was recorded in the other accrued liabilities, with payments of approximately $2
million due every three months until July 2001. On September 29, 2000, the
Company executed an additional agreement with Winstar to acquire $10.1 million
in telecommunications equipment. This agreement called for a down payment of
$1.5 million, which was paid by SAVVIS in October 2000. The remaining $8.6
million, included in Notes Payable at December 31, 2000, was also financed by
Winstar over six years at 11% interest, with payments being made quarterly
beginning in December 2000. Payments aggregating $2.6 million were not made by
the Company to Winstar as of March 31, 2001; similarly, Winstar has not made
$3.0 million in payments to the Company during the same period.
During the year ended December 31, 2000, the Company invested $45.5 million to
construct and equip a 35,000 square foot data center in Hazelwood, MO. This data
center is built on land owned by Bridge. Bridge has given its banks a mortgage
on the land. We do not have a written agreement with Bridge and, because Bridge
is in bankruptcy, we are not able to obtain one without the permission of the
bankruptcy court. Moreover, the Company's ability to consummate an agreement
with Bridge and or the bankruptcy court will be dependent upon its ability to
fund the costs associated therewith. While there can be no assurances that the
Company will successfully negotiate an acceptable agreement, management
currently believes it is likely to do so. In the event that an agreement cannot
be reached, the Company's rights to the data center could be challenged. (See
Note 15.)
At December 31, 2000, the Company, as lessee, has network assets under capital
leases with Bridge, as sublessor, of $25 million. Bridge leases the underlying
assets from General Electric Capital Corporation ("GECC"). The Company believes
Bridge has defaulted on payments to GECC. Accordingly, a portion of the
Company's network assets may be subject to repossession by GECC, which in turn,
could cause a disruption in our services being provided to Bridge. In addition,
SAVVIS did not make the March and April 2001 payments amounting to $1.2 million
to Bridge, thus causing SAVVIS to be in default under the agreement with Bridge.
SAVVIS faces regulatory and market access barriers in countries in which we do
not operate but in which we have an obligation to purchase the Bridge IP network
assets that were not acquired in the Bridge asset transfer either at February
18, 2000 or subsequently. In some of these countries, we are currently unable to
purchase these assets due to regulatory restrictions prohibiting foreign
competition. As these countries liberalize their telecommunications markets, we
will seek the authorizations necessary to acquire and operate the network
assets, which have an aggregate net book value as of December 31, 2000, of
approximately $1.2 million, in order
F-23
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
to provide services to Bridge and, if permissible, other third party customers.
In the remaining countries where we have an obligation to purchase the Bridge
assets, regulatory conditions now permit us to acquire these assets and provide
services to both Bridge and other customers. Consequently, we are in the process
of seeking regulatory approvals to offer services to Bridge and third parties in
these countries. The aggregate net book value of these network assets totals
approximately $.6 million.
We have arrangements with various suppliers of communications services that
require us to maintain minimum spending levels some of which increase over time.
Our aggregate minimum spending level is approximately $46 million, $47 million,
$48 million, $29 million and $5 million in years 2001 to 2005, respectively.
SAVVIS' current spending levels under these agreements are substantially in
excess of the spending commitments. The majority of these minimum spending
commitments have already been exceeded for the year 2001. Should SAVVIS not meet
the minimum spending level in any given year, decreasing termination liabilities
representing a percentage of the remaining contracted amount may immediately
become due and payable. Furthermore, certain of these termination liabilities
are subject to reduction should SAVVIS experience the loss of a major customer
or suffer a loss of revenues from a downturn in general economic activity.
Before considering the effects of any reductions for the business downturn
provisions, if SAVVIS were to terminate all of these agreements as of April 30,
2001, the maximum termination liability would amount to approximately $86
million.
The Company is subject to various legal proceedings and other actions arising in
the normal course of its business. While the results of such proceedings and
actions cannot be predicted, management believes, based on the advice of legal
counsel, that the ultimate outcome of such proceedings and actions will not have
a material adverse effect on the Company's financial position, results of
operations or cash flows.
12. VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's allowance for doubtful accounts was as follows for the
periods presented:
Additions
Balance at Charged to
Beginning Costs and Balance at
of Period Expenses Deductions End of Period
--------- -------- ---------- -------------
December 31, 1998 (Predecessor) .......................... $128 $ 278 $ (257) $149
April 6, 1999 (Predecessor) .............................. 149 61 (35) 175
December 31, 1999 (Successor) ............................ 175 781 (581) 375
December 31, 2000 (Successor) ............................ 375 2,066 (1,641) 800
13. INDUSTRY SEGMENT AND GEOGRAPHIC REPORTING
The Company's operations are organized into three geographic operating segments
- - Americas, Europe and Asia. The Company evaluates the performance of its
segments and allocates resources to them based on revenue and adjusted EBITDA,
which is defined as the respective consolidated loss before interest, taxes,
depreciation, amortization and non-cash compensation and impairment and
write-down charges. Financial information for the Company's geographic segments
for 2000 is presented below. In the periods prior to 2000, the Company had one
operating segment - the Americas. In 2000, revenues earned in the United States
represented approximately 72% of total revenues. Revenues in no other country
exceeded 10% of total revenues.
Americas Europe Asia Eliminations Total
-------- ------ ---- ------------ -----
Revenue ................................... $ 149,602 $ 21,818 $ 14,904 $ -- $ 186,324
Adjusted EBITDA ........................... (80,382) (3,017) (280) -- (83,679)
Assets .................................... 434,391 4,127 402 (298) 438,622
Capital Expenditures ...................... 339,654 12,020 8,948 -- 360,622
F-24
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Adjusted EBITDA for all reportable segments differs from the consolidated loss
before income taxes reported in the consolidated statement of operations as
follows:
Adjusted EBITDA ............................................. $ (83,679)
Plus adjustments as follows:
Depreciation and amortization ................... (60,511)
Interest, net ................................... (4,202)
Non-cash compensation ........................... (14,459)
Write-downs of asset ...................... (2,000)
---------
Consolidated loss before income taxes ....................... $(164,851)
=========
14. QUARTERLY DATA (UNAUDITED)
Following is summary information for the 2000 and 1999 quarters. The amounts for
the year 2000 are presented based on the guidelines of SAB 101.
First Second Third Fourth
-------- -------- -------- --------
2000
- ----
Revenues .................................. $ 24,463 $ 50,241 $ 52,811 $ 58,809
Operating Loss ............................ (27,330) (39,554) (46,071) (47,694)
Net Loss .................................. (26,864) (39,011) (47,166) (51,810)
Basic and Diluted Loss per
Common Share .................................. $ (.34) $ (.44) $ (.53) $ (.57)
1999
- ----
Revenues ................................... $ 5,440 $ 5,913 $ 6,279 $ 6,357
Operating Loss ............................. (7,940) (10,635) (11,157) (15,523)
Net Loss ................................... (8,075) (10,938) (11,636) (16,043)
Basic and Diluted Loss per
Common Share .................................. $ (.14) $ (.15) $ (.16) $ (.22)
Quarterly and year-to-date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may not
agree with per share amounts for the year.
15. SUBSEQUENT EVENT
On February 19, 2001, Welsh Carson agreed to purchase $20 million of 10%
convertible senior secured notes due 2006, convertible into common stock at $1
5/16 per share. The notes are collateralized by the Company's data center
building located in St. Louis, MO. Interest is payable in kind, compounded on a
semi-annual basis, in the form of additional notes, which are convertible into
common stock at a conversion price of $1 5/16 per share commencing August 31,
2001 through maturity. The transaction closed on February 20, 2001. Under the
terms of the notes, Welsh Carson has the right to declare the notes due and
payable upon the acceleration of any of our other indebtedness. As a result of
the Nortel acceleration, Welsh Carson has the right to declare the $20 million
due and payable. (See Note 11.)
* * * * *
F-25