UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-29375
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SAVVIS Communications Corporation
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Delaware 43-1809960
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
12007 SUNRISE VALLEY DRIVE
RESTON, VA 20191
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
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(703) 453-7500
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No /_/
COMMON STOCK, $.01 PAR VALUE - 92,890,247 SHARES AS OF MAY 9, 2000
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE)
The Index of Exhibits appears on page 18.
<PAGE>
SAVVIS Communications Corporation
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 1999
and March 31, 2000........................................................ 3
Consolidated Statements of Operations for
the three months ended March 31, 1999 and March 31,
2000 ..................................................................... 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and March 31, 2000...................... 5
Consolidated Statements of Changes in Stockholders Equity
for the three months ended March 31, 2000................................. 6
Notes to Consolidated Financial Statements.................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of operations....................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................. 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 17
Item 2. Changes in Securities and Use of Proceeds................................... 17
Item 6. Exhibits and Reports on Form 8-K............................................ 18
Signatures.............................................................................. 19
Exhibits
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SAVVIS Communications Corporation
CONSOLIDATED BALANCE SHEETS
(U.S. Dollars in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31, March 31,
1999 2000
------------ ----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................................... $ 2,867 $ 185,316
Accounts receivable from an affiliate ................................................... -- 12,505
Trade accounts receivable, less allowance for doubtful accounts
of $375 in 1999 and in 2000 .................................................. 2,271 2,893
Prepaid expenses ........................................................................ 503 2,588
Other current assets .................................................................... 88 294
--------- ---------
Total current assets .................................................................. 5,729 203,596
PROPERTY AND EQUIPMENT -- Net ............................................................ 5,560 125,940
GOODWILL AND INTANGIBLE ASSETS -- Net of accumulated amortization
of $12,217 in 1999 and $16,289 in 2000 .................................................. 26,250 22,296
OTHER LONG-TERM ASSETS ................................................................... 1,757 14,360
--------- ---------
TOTAL .................................................................................... $ 39,296 $ 366,192
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................................................ $ 5,093 $ 33,338
Accrued compensation payable ............................................................ 1,928 3,524
Due to an affiliate...................................................................... 24,065 21,981
Current portion of capital lease obligations ............................................ 2,462 19,575
Other accrued liabilities ............................................................... 5,083 11,412
--------- ---------
Total current liabilities ............................................................. 38,631 89,830
--------- ---------
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION .......................................... 3,431 37,131
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT) EQUITY:
Preference stock; 50,000,000 authorized ................................................. -- --
Common stock; $.01 par value, 250,000,000 authorized,
77,210,286 issued and outstanding in 1999 and
92,893,878 issued and 92,888,878 outstanding in 2000 ........................... 772 929
Additional paid-in capital .............................................................. 84,973 367,718
Accumulated deficit ..................................................................... (38,617) (65,295)
Deferred compensation ................................................................... (49,894) (64,119)
Cumulative foreign currency translation adjustment ...................................... -- 1
Treasury stock at cost; 0 shares in 1999 and 5,000 shares in 2000 ...................... -- (3)
--------- ---------
Total stockholders' (deficit) equity ..................................................... (2,766) 239,231
--------- ---------
TOTAL .................................................................................... $ 39,296 $ 366,192
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
SAVVIS Communications Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
------------------
March 31, March 31,
1999 2000
--------- ---------
(Predecessor) (Successor)
<S> <C> <C>
REVENUES:
Managed data networks (including $17,346 from an affiliate) ...................... $ -- $ 17,407
Internet access .................................................................. 5,303 6,616
Installation and other ........................................................... 137 653
------------ ------------
Total revenue ..................................................................... 5,440 24,676
------------ ------------
DIRECT COSTS AND OPERATING EXPENSES:
Data communications and operations (excluding $.5 million of equity-based
compensation in 2000)......................................................... 6,429 27,374
Sales and marketing (excluding $1.4 million of equity-based compensation in 2000). 3,043 7,598
General and administratives (excluding $2.0 million of equity-based compensation
in 2000)...................................................................... 1,708 3,338
Depreciation and amortization .................................................... 817 9,610
Impairment of assets ............................................................. 1,383 --
Non-cash compensation ............................................................ -- 3,900
------------ ------------
Total direct costs and operating expenses ......................................... 13,380 51,820
------------ ------------
LOSS FROM OPERATIONS ............................................................... (7,940) (27,144)
NONOPERATING INCOME (EXPENSE):
Interest income .................................................................... 23 1,344
Interest expense ................................................................... (158) (878)
------------ ------------
Total nonoperating income (expense) ............................................... (135) 466
------------ ------------
LOSS BEFORE INCOME TAXES ........................................................... (8,075) (26,678)
INCOME TAXES ....................................................................... -- --
------------ ------------
NET LOSS ........................................................... (8,075) (26,678)
PREFERRED STOCK DIVIDENDS .......................................................... (706) --
AMORTIZATION OF DEFERRED FINANCING COSTS AND DISCOUNT ON
PREFERRED STOCK .................................................................. (244) --
------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS ....................................... $ (9,025) $ (26,678)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE ............................................ $ (.14) $ (.33)
------------ ------------
BASIC AND DILUTED LOSS PER COMMON SHARE ............................................ $ (.14) $ (.33)
------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING ................................................ 66,018,388 79,849,105
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
SAVVIS Communications Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------------------
MARCH 31, MARCH 31,
1999 2000
------------------ --------------------
(Predecessor) (Successor)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ............................................................ $ (8,075) $ (26,678)
Reconciliation of net loss to net cash
used in operating activities:
Depreciation and amortization ............................... 817 9,610
Impairment of fixed assets .................................. 1,383 --
Compensation expense relating to the
issuance of options and restricted stock .................. 78 3,900
Net changes in operating assets and liabilities:
Accounts receivable ......................................... (17) (13,127)
Other current assets ........................................ (18) (206)
Other assets ................................................ (156) (12,734)
Prepaid expenses ............................................ (51) (2,085)
Accounts payable ............................................ (127) 28,245
Deferred revenue ............................................ 52 --
Other accrued liabilities ................................... (71) 7,926
--------- ---------
Net cash used in operating activities .......................... (6,185) (5,149)
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures ................................................ (275) (70,779)
--------- ---------
Net cash used in investing activities .............................. (275) (70,779)
--------- ---------
FINANCING ACTIVITIES:
Purchase of treasury stock .......................................... -- (3)
Exercise of stock options ........................................... 28 404
Issuance of common stock ............................................ -- 333,365
Principal payments under capital lease obligations .................. (182) (4,314)
Proceeds from borrowings from an affiliate .......................... 4,700 3,501
Repayment of borrowings from an affiliate ........................... -- (5,585)
Preferential distribution to an affiliate ........................... -- (68,991)
Principal payments on borrowings from bank .......................... (13) --
--------- ---------
Net cash provided by financing activities ......................... 4,533 258,377
--------- ---------
NET INCREASE(DECREASE)IN CASH
AND CASH EQUIVALENTS ................................................ (1,927) 182,449
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD ................................................. 2,521 2,867
--------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD ....................................................... $ 594 $ 185,316
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Debt incurred under capital lease obligations ....................... $ 2,634 $ 55,126
Preferred stock dividends ........................................... 706 --
Amortization of deferred financing costs ............................ 76 --
Accretion of preferred stock discount ............................... 168 --
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest .............................................. $ 99 $ 281
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
SAVVIS Communications Corporation
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
(U.S. Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Number of Shares
Common Treasury Common
Stock Stock Stock
---------------------- ------
<S> <C> <C> <C>
BALANCE, DECEMBER 31 1999 77,210,286 -- $772
Issuance of common stock in
initial
Public offering ............... 14,875,000 -- 149
Issuance of common stock upon
exercise
of stock options .............. 808,592 -- 8
Issuance of stock options and
restricted stock .............. -- -- --
Recognition of deferred
compensation cost ............. -- -- --
Purchase of shares for treasury -- (5,000) --
Foreign currency translation
adjustment -- -- --
Preferential distribution to
an affiliate .................. -- -- --
Net loss ...................... -- -- --
---------- ----- ----
BALANCE, MARCH 31, 2000 ....... 92,893,828 (5,000) $929
---------- ----- ----
</TABLE>
<TABLE>
<CAPTION>
Amounts
-------------------------------------------------------------------------
Additional
Paid-In Foreign Deferred Accumulated Treasury
Capital Currency Compensation Deficit Stock Total
----------- --------- ------------ ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31 1999 $ 84,973 -- $(49,894) $(38,617) $ -- $ (2,766)
Issuance of common stock in
Initial Public offering ....... 333,216 -- -- -- -- 333,365
Issuance of common stock upon
exercise
of stock options .............. 396 -- -- -- -- 404
Issuance of stock options and
restricted stock .............. 18,125 -- (18,125) -- -- --
Recognition of deferred
compensation cost ............. -- -- 3,900 -- -- 3,900
Purchase of shares for treasury -- -- -- -- (3) (3)
Foreign currency translation
adjustment .................... -- 1 -- -- -- 1
Preferential distribution to
affilate ...................... (68,992) -- -- -- -- (68,992)
Net loss ...................... -- -- -- (26,678) -- (26,678)
-------- ------- -------- -------- ---- -------
BALANCE, MARCH 31, 2000 ....... $367,718 $ 1 $(64,119) $(65,295) $ (3) $239,231
-------- ------- -------- -------- ---- -------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE>
SAVVIS Communications Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. Dollars in thousands)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The acquisition by Bridge of SAVVIS on April 7, 1999 resulted in the Company
reporting in its 1999 Form 10-K and in its Form S-1 Registration Statement dated
February 14, 2000, results of operations for the period January 1, 1999 through
April 6, 1999 as being the "Predecessor" period, due to a change in the basis of
accounting upon the acquisition by Bridge. The Statement of Operations used for
this reporting period was identical to the results of operations for the period
January 1, 1999 through March 31, 1999.
These consolidated financial statements for the three-month periods ended March
31, 2000 and 1999 and the related footnote information are unaudited and have
been prepared under the rules and regulations of the Securities and Exchange
Commission and on a basis substantially consistent with the audited consolidated
financial statements of SAVVIS Communications Corporation and its subsidiaries
(collectively, "SAVVIS" or the "Company") as of and for the period ended
December 31, 1999 included in the Company's Annual Report on Form 10-K as filed
with the Securities and Exchange Commission (the "Annual Report"). These
financial statements should be read in conjunction with the audited consolidated
financial statements and the related notes to consolidated financial statements
of the Company included in the Annual Report. In the opinion of management, the
accompanying unaudited financial statements contain all adjustments (consisting
of normal recurring adjustments) which management considers necessary to present
fairly the consolidated financial position of the Company at March 31, 2000 and
the results of its operations and cash flows for the three-month periods ended
March 31, 2000 and 1999. The results of operations for the three-month period
ended March 31, 2000 may not be indicative of the results expected for any
succeeding quarter or for the entire year ending December 31, 2000.
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. Actual results may
differ from those estimates.
NOTE 2 - ORGANIZATION
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.
The value of the Bridge shares and options issued and the costs incurred by
Bridge in connection with the acquisition aggregated $32 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
7
<PAGE>
accounting, intangibles, goodwill, other liabilities and additional paid-in
capital were increased in the Company's consolidated financial statements.
NOTE 3 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), defined as net income (loss) plus all other changes
(cumulative foreign currency translation adjustment) in equity from nonowner
sources, was $(26.7) million for the three months ended March 31, 2000. For the
quarter ended March 31, 1999, there were no items of other comprehensive income
(loss).
NOTE 4 - CASH AND CASH EQUIVALANTS
Cash and cash equivalents include cash on hand, money market investments and
government agency securities. The agency securities have maturities ranging from
overnight to seven days and are stated at cost, which approximates market.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property and equipment consisted of the following:
December 31, March 31,
1999 2000
--------- ----------
Computer equipment ............................. $ 801 $ 824
Communications equipment ....................... 1,057 67,278
Purchased software ............................. 107 150
Furniture and fixtures ......................... 322 539
Leasehold improvements ......................... 382 1,359
Construction in progress ....................... -- 3,298
Equipment under capital lease
obligations .................................. 5,089 60,215
--------- ---------
7,758 133,663
Less accumulated depreciation and
amortization ............................. (2,198) (7,723)
--------- ---------
$ 5,560 $ 125,940
========= =========
NOTE 6 - COMMITMENTS AND CONTINGENCIES
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.
On March 31, 2000, the Company entered into a three-year software licensing
agreement with a vendor for the acquisition of unlimited software licenses for
certain customer applications on the newly-acquired global network. The
agreement called for an initial payment on March 31 of $5.0 million with the
8
<PAGE>
balance of $8 million due in installments on June 1, September 1, and December 1
of 2000. In addition, the Company will pay $1 million annually for three years
relating to a maintenance contract in support of the software licenses.
On March 23, 2000, SAVVIS entered into a $30 million, thirty-nine month lease
facility relating to equipment necessary for the network expansion. Payments
under the lease will begin as equipment is received and will amount to zero for
months one to three, $.3 million in months three to six, and $1.1 million in
months seven to thirty-nine.
On January 24, 2000, SAVVIS entered into a 10-year lease for its new, 80,582
square foot, headquarters office building located in Herndon, VA. Monthly lease
payments begin at $.2 million per month and escalate to $.3 million per month by
year ten.
NOTE 7 - CAPITAL STOCK
An initial public offering of the Company's common stock was completed on
February 18, 2000. A total of 14.875 million shares were sold by the Company in
the offering at $24 per share. The Company received net proceeds from this
transaction of approximately $333 million, of which approximately $127 million
was paid to Bridge.
Simultaneous with the completion of the public offering, the Company 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. SAVVIS also paid a $69 million preferential distribution, as
adjusted, to Bridge. The Company had originally estimated the net book value of
the assets to be transferred to be $88 million and the preferential distribution
to be paid to Bridge to be $58 million. Additionally, the Company assumed
capital lease obligations of approximately $25 million related to these network
assets.
NOTE 8 - RELATED PARTY TRANSACTIONS
In connection with Bridge's acquisition of the Company and through the date of
our initial public offering as discussed in Note 2, Bridge funded the Company's
operations during 1999. At December 31, 1999 and March 31, 2000, the Company had
amounts payable to Bridge of $24.1 million and $22.0 million, respectively.
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 are based upon the cash cost to Bridge of operating the
network as configured on the date the Company acquired it, and fees for
additional services provided following the closing of the transfer were set for
a three-year term based on an agreed pricing schedule. 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.
9
<PAGE>
In connection with the principal agreements entered into effective February 18,
2000, between the Company and Bridge, related to the network acquisition by the
Company, SAVVIS received network services revenues from Bridge amounting to
$17.3 million for the period February 18 to March 31, 2000. SAVVIS incurred
obligations to Bridge amounting to $.3 million for the same period relating to
obligations under the Technical Services and Administrative Services Agreements.
NOTE 9 - 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 charges. Financial
information for the Company's geographic segments for the three months ended
March 31, 2000 is presented below. In 1999, the Company had one operating
segment - the Americas.
<TABLE>
<CAPTION>
Americas Europe Asia Eliminations Total
-------- ------ ---- ------------ -----
<S> <C> <C> <C> <C> <C>
Three months ended
March 31, 2000:
Revenue ............ $ 20,037 $ 2,857 $ 1,782 $ -- $ 24,676
Adjusted EBITDA .... (13,625) (9) -- -- (13,634)
Assets ............. 360,892 5,792 2,581 (3,073) 366,192
Capital Expenditures 110,631 8,796 6,478 -- 125,905
</TABLE>
Adjusted EBITDA for all reportable segments differs from the consolidated loss
before income taxes reported in the consolidated statement of operations as
follows:
Three months ended
March 31, 2000
------------------
Adjusted EBITDA $ (13,634)
Plus adjustments as follows:
Depreciation and amortization (9,610)
Interest, net 466
Non-cash compensation (3,900)
----------
Consolidated loss before income taxes $ (26,678)
==========
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH (1) OUR
ACCOMPANYING UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, AND
(2) OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS, NOTES THERETO AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999 INCLUDED IN OUR ANNUAL
REPORT ON FORM 10-K FOR SUCH PERIOD AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. THE RESULTS SHOWN HEREIN ARE NOT NECESSARILY INDICATIVE OF THE
RESULTS TO BE EXPECTED IN ANY FUTURE PERIODS. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS BASED ON CURRENT EXPECTATIONS WHICH INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS AND THE TIMING OF EVENTS COULD DIFFER MATERIALLY
FROM THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS. FOR A
DISCUSSION OF THE RISK FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS, YOU SHOULD READ "RISK FACTORS"
INCLUDED IN PART I, ITEM 1 OF OUR 1999 ANNUAL REPORT ON FORM 10-K.
GENERAL
We are a rapidly 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 ProActiveSM Network, a data
communications network that uses our nine PrivateNAPsSM 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 approximately 1,200 at March 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.
11
<PAGE>
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. Bridge and Welsh Carson now own approximately 49%
and 16% of SAVVIS common stock, respectively.
Simultaneously with the completion of the initial public offering of our common
stock in February 2000, 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. See Note 7
to the unaudited consolidated financial statements. The purchase substantially
increased our depreciation and amortization. At that time, we entered into a
10-year network services agreement with Bridge under which we will 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. Bridge has agreed to
pay us a minimum of $105 million, $132 million and $145 million for network
services in 2000, 2001 and 2002, respectively.
Because under the network services agreement the amounts paid to us for the
services provided over the original network acquired from Bridge are based upon
the cash cost to operate the original network, the purchase of the network and
provision of services under the network services agreement did not and will not
result in losses and negative cash flow from operations. As Bridge purchases
additional services on the network from us, and as we sell services to other
customers, we expect to generate incremental operating margins.
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 services, such
as payroll and accounting functions, benefit management and office space, until
we develop the capabilities to perform these services ourselves. We expect to
generally develop many of these capabilities by the end of 2000.
Our revenue will be derived primarily from the sale of data networking
(principally to Bridge), Internet access and colocation services. Assuming we
had received the minimum revenues under the network services agreement for the
first year of the agreement in 1999, Bridge would have represented approximately
83% of our 1999 revenues. Bridge has informed us that it expects to convert its
remaining customers to the Internet protocol network over the next three years.
We expect that, to the extent these customers are converted, Bridge will order
additional services from us under the network services agreement. We cannot
assure you that any of these customers will be converted or as to what schedule
any conversions will be completed.
12
<PAGE>
RESULTS OF OPERATIONS
The historical financial information included in this Form 10-Q 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 will not be
comparable to prior periods.
THREE MONTHS ENDED MARCH 31, 2000 AS COMPARED TO THE THREE MONTHS ENDED MARCH
31, 1999
The acquisition by Bridge of SAVVIS on April 7, 1999 resulted in the Company
reporting in its 1999 Form 10-K and in its Form S-1 Registration Statement dated
February 14, 2000, results of operations for the period January 1, 1999 through
April 6, 1999 as being the "Predecessor" period, due to a change in the basis of
accounting upon the acquisition by Bridge. The Statement of Operations used for
this reporting period was identical to the results of operations for the period
January 1, 1999 through March 31, 1999.
Revenue.
Revenue was $24.7 million for the three months ended March 31, 2000, an increase
of $19.3 million or 354%, from $5.4 million for the three months ended March 31,
1999. The revenue growth resulting from the initiation of managed data network
service, under the Bridge Network Services agreement entered into on February
18, 2000, accounted for $17.3 million of the increase. Internet access revenues
increased 25% to $6.6 million in the first quarter of 2000, compared to $5.3
million for the comparable period in 1999. These increases were driven by an
increase in active customer circuits of 137% to approximately 1,400 as of March
31, 2000 from 600 as of the end of the first quarter in 1999. Other revenues,
consisting of installation and equipment sales, increased from $.1 million in
1999 to $.7 million for the first quarter of 2000.
Data Communications and Operations.
Data communications and operations expenses consist primarily of leased routers
and switches, leased long distance and local circuit costs, leased colocation
space, installed local access lines at customer sites, as well as related
operating expenses such as repairs and maintenance associated with network
operations, customer support and field service, and engineering personnel costs.
Data communications and operations expenses were $27.4 million for the quarter
ended March 31, 2000; an increase of $21 million from $6.4 million for the three
months ended March 31, 1999. The increase in expenses related principally to the
costs incurred by SAVVIS to operate the newly-acquired Internet protocol network
(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.
13
<PAGE>
Sales and Marketing.
Sales and Marketing expenses consist of personnel and related sales commission
costs, advertising and direct marketing, and travel. Sales and marketing
expenses were $7.6 million for the three months ended March 31, 2000, up 150% or
$4.6 million as compared to the first quarter of 1999. This increase is
principally attributed to personnel related costs and sales commissions of $2.4
million associated with the growth in sales and marketing staff and a $1.3
million increase in spending on advertising and marketing initiatives.
General and Administrative.
General and administrative expenses consist primarily of compensation and
occupancy costs for executive, financial, legal, tax and support personnel,
travel, and bad debt costs. General and administrative expenses amounted to $3.3
million for the three months ended March 31, 2000 and $1.7 million for the three
months ended March 31, 1999, an increase of $1.6 million or 94%. This increase
resulted from increased personnel costs of $.6 million to support the expansion
of the customer base and the overall growth of the business, and an increase of
$.6 million for professional audit, tax and legal services. Bad debt expense
amounted to $.2 million in 2000 versus $.1 million for the three months ended
March 31, 1999.
Non-cash Compensation.
Non-cash compensation amounting to $3.9 million represents the amortization
charge to earnings in the quarter ended March 31, 2000 for the difference
between the imputed fair market value of our common stock and the exercise price
for options granted on various dates in 2000 and 1999.
------------------
Because of the "predecessor" Statement of Operations in 1999 being on a
different basis of accounting, the following areas in the Statement of
Operations for the three months ended March 31, 2000 are not compared:
Depreciation and Amortization.
Depreciation and amortization expense was $9.6 million for the three months
ended March 31, 2000. $4.8 million of this amount is attributed to depreciation
on the network acquired on February 18, 2000 and $4.1 million relates to the
amortization of the goodwill associated with the mandated "push down accounting"
ascribed to the Bridge acquisition of SAVVIS in April, 1999. Goodwill is being
amortized over three years.
Impairment of Assets.
The asset impairment amount reported in the 1999 first quarter statement of
operations related to an adjustment to the recorded value of fixed assets in the
amount of $1.4 million.
Interest.
Interest income from the investment of the IPO proceeds amounted to $1.3 million
in the quarter ended March 31, 2000. Interest expense in the same period
amounted to $.9 million.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We generated negative cash flows from operations of $15.4 million and $6.2
million, for the three months ended March 31, 2000 and for the three months
ended March 31, 1999, respectively.
Net cash used in investing activities was approximately $70.8 million, which
primarily reflects the purchase of the Bridge Internet protocol network and
other property and equipment not financed with capital leases. We obtained funds
through issuances of equity securities and advances from Bridge. During the
quarter, we decreased our net outstanding advances from Bridge by approximately
$2.1 million.
Our capital expenditures, including the purchase of the Bridge IP network,
totaled approximately $126 million in the quarter. We expect to incur capital
expenditures of approximately $110 million for the remainder of 2000 as we build
out colocation facilities, deploy ATM devices and expand our network to 40 new
cities. On February 18, 2000, we acquired Bridge's Internet protocol network
assets for total consideration of approximately $77 million. Of this amount, $25
million was paid by entering into a capital lease obligation with Bridge. The
remaining purchase price of $52 million was paid with a portion of the net
proceeds from the initial public offering of common stock. We also paid to
Bridge, out of the offering proceeds, an approximate $69 million preferential
distribution. At the request of a lender, approximately $2.5 million of the
capitalized principal obligation was paid in March 2000.
In connection with our purchase of the network assets, we also entered into a
network services agreement with Bridge 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 and will 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 until 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.
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 $28 million in 2000.
In specific instances, we are able to choose among a variety of communications
services offered to meet these spending minimums. We are currently exceeding all
of our spending minimums and expect to continue to do so as our network
requirements expand. However, if our network requirements were to decrease, we
could be obligated to make payments to these suppliers for services we do not
need.
15
<PAGE>
Although we plan to invest significantly in equipment and in network expansion,
except as described in the preceding paragraph, we have no material commitments
for such items at this time. As we expand our network, increase our employee
base to support our expanded operations and invest in our marketing and sales
organizations, we expect to have significant cash requirements for the
foreseeable future.
We believe that the net proceeds of the initial public offering will allow us to
continue in business as a going concern and will be sufficient to fund our
operating and capital needs through 2000. We are currently in discussions with
one vendor to obtain vendor financing for network equipment purchases, and a
number of institutions for the financing of two data centers currently under
construction. We will need to raise a significant amount of capital to fund our
capital expenditures, operating deficits, working capital needs and debt service
requirements after 2000. We intend to seek equity or debt financing from
external sources to meet our cash needs after 2000. We cannot assure you that
such additional funding will be available on terms satisfactory to us or at all.
ITEM 3. 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.
Our financial instruments that are sensitive to changes in interest rates are
our borrowings from Bridge, all of which were entered into for other than
trading purposes, are denominated in U.S. Dollars, and bear interest at a fixed
rate of 8%. Because the interest rate on these advances is fixed, changes in
interest rates will not directly impact our cash flows. As of March 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 quarter ended
March 31, 2000, 27% of our service revenue from Bridge was derived from
operations outside the United States, and approximately 17% of our total direct
costs incurred were outside the United States. We expect these percentages to
remain relatively constant in the periods ahead. Because our foreign revenue
closely matched our foreign costs, changes in foreign exchange rates did not
have a material impact on our results of operations in the quarter. In the
future, we may engage in hedging transactions to mitigate foreign exchange risk.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Between January 1, 2000 and March 31, 2000, we granted options to purchase
159,500 shares of our common stock to a total of 7 of our employees, each at an
exercise price of $.50 per share, options to purchase 858,500 shares to 33
employees each at an exercise price of $10.00 per share, and options to purchase
15,000 shares to 1 employee at an exercise price of $19.6875 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 3 non-employee directors of our Board of Directors, each at an
exercise price of $.50 per share. All of these options were granted pursuant to
our 1999 Incentive Stock Option Plan. These issuances were effected either in
transactions exempt from registration pursuant to Rule 701 promulgated under
Section 3(b) of the Securities Act of 1933 or in transactions not subject to the
registration requirements of the Securities Act of 1933, and these transactions
were effected without the use of an underwriter.
During the quarter ended March 31, 2000, proceeds of approximately $404,000 were
generated from the exercise of options for 808,592 shares of our common stock.
There were no significant expenses, underwriting discounts or commissions
attributable to these proceeds. We used the proceeds for general working capital
expenses incurred in the ordinary course of business. These options had been
granted under our 1999 Incentive Stock Option Plan. We issued the shares in
reliance on the exemption from registration provided by Rule 701 under the
Securities Act of 1933.
The registration statement on Form S-1 (Registration No. 333-90881) relating to
the initial public offering of 14,875,000 shares of our common stock 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. $5 million was
used for the purchase of the unlimited software licenses (see Note 6 to the
unaudited Consolidated Financial Statements), and approximately $16 million was
used for general working capital purposes and network expansion.
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are either provided with this Form 10-Q or
are incorporated herein by reference.
EXHIBIT INDEX
NUMBER EXHIBIT DESCRIPTION
- ------ ----------------------------------------------------------------------
3.1* Amended and Restated Certificate of Incorporation of the Registrant
3.2* Certificate of Amendment to Amended and Restated Certificate of
Incorporation of the Registrant
3.3* Amended and Restated Bylaws of the Registrant
4.1* Form of Common Stock Certificate
11.1 Calculation of Basic and Diluted per share and weighted average shares
used in EPS calculation
27.1 Financial Data Schedule for the quarter ended March 31, 2000.
- ------
* Incorporated by reference to the same numbered exhibit to SAVVIS' Registration
Statement on Form S-1, as amended (File No. 333-90881).
(b) Reports on Form 8-K.
None.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 15, 2000 SAVVIS Communications Corporation
- ------------
Date By: /s/ Robert McCormick
-----------------------
Robert McCormick
Chief Executive Officer
May 15, 2000 By: /s/ David J. Frear
- ------------ -----------------------
Date David J. Frear
EVP & Chief Financial Officer
19
EXHIBIT 11.1
SAVVIS Communications Corporation
CALCULATION OF BASIC AND DILUTED LOSS PER SHARE AND WEIGHTED AVERAGE SHARES
USED IN EPS CALCULATION
(UNAUDITED)
Weighted average shares outstanding:
Common stock:
Shares outstanding at beginning of period, net of 4,476,792
shares subject to forfeiture .............................. 72,733,494
Weighted average shares issued during the three months
ended March 31, 2000 (19,678,592 shares) .................. 7,115,611
------------
79,849,105
============
Net loss attributable to common shareholders ................. $(26,678,000)
============
Basic and diluted loss per share ............................. $ (0.33)
============
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND THE CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2000 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> SAVVIS Communications Corporation
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 185,316
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<RECEIVABLES> 15,773
<ALLOWANCES> 375
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<CURRENT-ASSETS> 203,596
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0
<COMMON> 929
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