FILED PURSUANT TO RULE 424b(4)
FILE NUMBER 333-90881
P R O S P E C T U S
- -------------------
17,000,000 SHARES
[GRAPHIC OMITTED]
SAVVIS COMMUNICATIONS CORPORATION
COMMON STOCK
---------------
This is SAVVIS Communications Corporation's initial public offering of
common stock. SAVVIS Communications Corporation is selling 14,875,000 shares
and Bridge Information Systems, Inc., currently a 69% stockholder of SAVVIS, is
selling 2,125,000 shares. Approximately $129 million of the net proceeds to
SAVVIS will be paid by SAVVIS to Bridge.
Prior to the offering, there has been no public market for the shares. The
shares have been approved for quotation on the Nasdaq National Market under the
symbol "SVVS."
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 10 OF THIS PROSPECTUS.
---------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- ---------------
<S> <C> <C>
Public offering price ......................................... $ 24.00 $408,000,000
Underwriting discount ......................................... $ 1.44 $ 24,480,000
Proceeds, before expenses, to SAVVIS .......................... $ 22.56 $335,580,000
Proceeds, before expenses, to the selling stockholder ......... $ 22.56 $ 47,940,000
</TABLE>
The underwriters may also purchase up to an additional 2,550,000 shares
from the selling stockholder at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares will be ready for delivery on or about February 18, 2000.
---------------
MERRILL LYNCH & CO. MORGAN STANLEY DEAN WITTER
---------------
BEAR, STEARNS & CO. INC.
---------------
BANC OF AMERICA SECURITIES LLC
CIBC WORLD MARKETS
---------------
The date of this prospectus is February 14, 2000.
<PAGE>
(MAP OF THE WORLD SHOWS LOCATIONS OF SAVVIS' PRIVATENAPSSM, PLANNED
PRIVATENAPSSM,
ATM SWITCHES, FRAME RELAY SWITCHES AND TRANSMISSION CAPACITY)
[GRAPHIC OMITTED]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary ....................................................................... 3
Risk Factors ............................................................................. 10
Forward-Looking Statements ............................................................... 22
Use of Proceeds .......................................................................... 24
Dividend Policy .......................................................................... 24
Capitalization ........................................................................... 25
Dilution ................................................................................. 26
Unaudited Pro Forma Consolidated Financial Statements .................................... 27
Selected Historical Consolidated Financial Data .......................................... 32
Management's Discussion and Analysis of Financial Condition and Results of Operations .... 34
Business ................................................................................. 42
Relationship with Bridge ................................................................. 61
Management ............................................................................... 65
Transactions with Affiliates ............................................................. 75
Principal Stockholders and Selling Stockholder ........................................... 76
Description of Capital Stock ............................................................. 79
Shares Available for Future Sale ......................................................... 82
United States Tax Consequences to Non-U.S. Holders of Common Stock ....................... 83
Underwriting ............................................................................. 86
Validity of the Shares ................................................................... 91
Experts .................................................................................. 91
Change in Certifying Accountants ......................................................... 91
Where You May Find Additional Information ................................................ 91
Index to Consolidated Financial Statements ............................................... F-1
</TABLE>
---------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT, AND THE UNDERWRITERS HAVE NOT, AUTHORIZED ANY OTHER PERSON TO PROVIDE
YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT
INFORMATION, YOU SHOULD NOT RELY ON IT. WE ARE NOT, AND THE UNDERWRITERS ARE
NOT, MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE
OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION
APPEARING IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE ON THE FRONT COVER
OF THIS PROSPECTUS. OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS
AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE.
MARKET DATA AND SEVERAL INDUSTRY FORECASTS USED THROUGHOUT THIS PROSPECTUS
WERE OBTAINED FROM MARKET RESEARCH, PUBLICLY AVAILABLE INFORMATION AND INDUSTRY
PUBLICATIONS.
<PAGE>
PROSPECTUS SUMMARY
The information below is only a summary of more detailed information
included in other sections of this prospectus. This summary may not contain all
the information that is important to you or that you should consider before
buying shares in the offering. The other information is important, so please
read this entire prospectus carefully.
The terms "SAVVIS," "we," "us" and "our" as used in this prospectus 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.
Unless otherwise indicated, all information in this prospectus assumes the
underwriters do not exercise their over-allotment option and reflects the
72,000-for-1 stock split of our outstanding common stock on July 22, 1999.
SAVVIS is a subsidiary of Bridge Information Systems, Inc., or Bridge, which
owns approximately 69% of SAVVIS' outstanding common stock.
SAVVIS
OUR BUSINESS
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. 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.
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 COLOCATION SERVICES that allow our customers to locate their
mission-critical content and networking hardware in our data centers
which provide a highly secure, fault tolerant environment.
Simultaneously with the closing of this offering, we will acquire the
Internet protocol network assets of Bridge and the employees of Bridge who have
operated that network. This transfer will significantly expand our managed data
networking services, which we began offering in September 1999. Upon the
transfer of the Bridge network to us and pursuant to a network services
agreement between Bridge and us, Bridge will pay us for the use of the SAVVIS
ProActiveSM Network to deliver Bridge's content and applications to over 4,500
financial institutions, including 75 of the top 100 banks in the world and 45
of the top 50 brokerage firms in the United States. Following the network
transfer, these entities will remain customers of Bridge. We currently provide
Internet access services directly to approximately 850 customers.
THE SAVVIS PROACTIVESM NETWORK
The SAVVIS ProActiveSM Network was created through the combination, in
September 1999, of the Bridge network, 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 ProActiveSM Network."
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The SAVVIS ProActiveSM Network interconnects over 6,000 buildings in 83 of
the world's major commercial cities in 43 countries. Our network architecture
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 currently reliably
deliver real-time data, unless operated over an ATM network, such as the
SAVVIS ProActiveSM Network.
Additionally, our 83 city global system connects to eight private Internet
access points, which we call PrivateNAPsSM, where our network connects to a
number of Internet service providers, including Sprint Corporation, Cable &
Wireless plc and UUNET, an MCI Worldcom company.
These PrivateNAPsSM, which will be expanded to 12 by March 2000, use our
proprietary routing policies to reduce data loss and enhance performance by
avoiding the congested public access points on the Internet. We measure the
performance of our access services using data loss and transmission delay,
commonly known as latency, measurements. The high performance of our Internet
access services has been verified by our analysis of data collected by Keynote
Systems, Inc., an independent research firm, which showed that we had the
second best mean download time in 1999.
RELATIONSHIP WITH BRIDGE
In April 1999, we were acquired by Bridge. Bridge is a global provider of
high quality, real-time and historical financial information, including
coverage of equities, fixed income, foreign exchange and commodities, which it
delivered to an estimated 235,000 trading terminals around the globe as of
December 31, 1999. On September 10, 1999, Bridge sold in a private placement
approximately 25% of its equity ownership in SAVVIS to existing stockholders of
Bridge. Bridge currently owns approximately 69% of our outstanding common stock
and, after completion of this offering, will own approximately 56% of our
outstanding common stock. Investment partnerships sponsored by Welsh, Carson,
Anderson & Stowe, or Welsh Carson, a sponsor of private equity funds with
extensive experience in the communications and information services industries,
currently owns approximately 38% of Bridge's outstanding voting stock and
approximately 11% of our outstanding common stock and, after completion of this
offering, will own approximately 10% of our outstanding common stock.
Over the last four years, Bridge constructed a sophisticated network based
on Internet protocol and ATM technologies to service some of the largest
financial institutions and institutional investors in the world. These
financial market participants rely on information received continuously from
Bridge to make trading and investment decisions throughout the business day.
Bridge must deliver this information instantaneously and reliably. Accordingly,
Bridge built a highly redundant, fault tolerant network to deliver high volume,
real-time financial data and news around the globe.
Since January 1996, Bridge has converted a substantial portion of its
customers from less technologically advanced protocols to its Internet protocol
network. As of December 31, 1999, of Bridge's estimated 235,000 terminals, an
estimated 135,000 terminals were connected to the SAVVIS ProActiveSM Network.
Bridge has advised us that it intends to convert the remaining 100,000
terminals on its other networks to the SAVVIS ProActiveSM Network over the next
three years. As Bridge converts terminals, we expect it to order additional
connections from us under the network services agreement. As of December 31,
1999, Bridge's proprietary network
4
<PAGE>
monitoring and customer support systems managed over 10,000 routers and over
11,000 servers. Additionally, Bridge has a highly experienced group of network
engineers, technical support representatives and customer call center personnel
to support its services and has agreed to make their services available to us.
Acquisition of Bridge's Network Assets and Ongoing Relationship with
Bridge. Simultaneously with the closing of this offering, we will acquire
Bridge's Internet protocol network assets and the employees of Bridge who
operate them, and we will enter into a network services agreement with Bridge
that commits Bridge to purchase a minimum of approximately $105 million, $132
million and $145 million of network services from us in 2000, 2001 and 2002,
respectively. Thereafter, Bridge will be required to purchase at least 80% of
their network requirements from us, declining to 60% in 2006 through the end of
the agreement in 2010. We will incur losses from the operation of the network
under the network services agreement, and had the network services agreement
been in effect in 1999, Bridge would have represented approximately 83% of our
1999 revenues. We have instituted a lead referral program for Bridge's
approximately 500 sales representatives worldwide to generate sales leads for
us. We will also enter into a number of other agreements with Bridge under
which Bridge will transfer a number of highly skilled people to us and we will
purchase various support services from it.
Preferential Distribution. We will also pay to Bridge a $58 million
preferential distribution with a portion of the proceeds of this offering.
BUSINESS STRATEGY
Our objective is to tap the rapidly growing market for reliable, high
speed data communications and Internet services. Key elements of our strategy
to achieve this objective include:
o providing a single source for managed data network services and high
quality Internet services;
o capitalizing on Bridge's relationships to penetrate its customer base;
o targeting potential customers in buildings already connected to our
network;
o expanding our network and PrivateNAPSM infrastructure;
o growing domestic and international distribution channels;
o providing enabling infrastructure for e-commerce services; and
o developing and marketing new services.
COMPETITIVE STRENGTHS
Our target customers are businesses that are intensive users of data
communications and require high quality service for their global data
networking and Internet needs. We believe our competitive strengths in
servicing these customers include:
o large number of sophisticated users already connected to our network;
o network engineered for real-time performance;
o global network presence;
o single source service offering; and
o world-class service through proprietary systems.
5
<PAGE>
WE HAVE INCURRED SIGNIFICANT LOSSES AND NEGATIVE CASH FLOW IN THE PAST AND
EXPECT TO INCUR SIGNIFICANT LOSSES AND NEGATIVE CASH FLOW AT LEAST THROUGH
2002.
We incurred losses of approximately $2.2 million, $14.0 million and $20.0
million in 1996, 1997 and 1998 and had negative cash flow from operating
activities of $1.3 million, $10.5 million and $20.6 million in these years. We
also had losses of $8.1 million and negative cash flow from operating
activities of $6.2 million for the period from January 1, 1999 to April 6, 1999
and losses of approximately $22.6 million, and negative cash flows from
operating activities of approximately $9.9 million, from April 7, 1999 to
September 30, 1999. We expect to incur significant net losses and negative cash
flow from operating activities at least through 2002. As of September 30, 1999,
our accumulated deficit was approximately $22.6 million, which reflects our
losses only since Bridge acquired our company on April 7, 1999.
OTHER RISK FACTORS
You should consider carefully the following risk factors, the information
contained in "Risk Factors" and the other information in this prospectus before
deciding to invest in our common stock:
o a significant portion of our revenues is expected to come from Bridge, and
the loss of Bridge as a customer or reduced demand from Bridge would
materially affect our business;
o if Bridge is unable to meet its financial commitments to us, we will be
materially adversely affected;
o our limited operating history, and the fact that we only recently began
offering data networking and colocation services, makes it difficult for
you to evaluate our performance; and
o our historical financial information will not be comparable to our future
financial performance.
Our principal executive office is located at 12007 Sunrise Valley Drive,
Reston, Virginia 20191, and our telephone number is (703) 453-7500.
6
<PAGE>
THE OFFERING
Common stock offered by us........ 14,875,000 shares
Common stock offered by the
selling stockholder.............. 2,125,000 shares
Total.......................... 17,000,000 shares
Shares outstanding after
this offering.................... 92,883,340 shares
Over-allotment option............. 2,550,000 shares
Use of proceeds.................. We will receive net proceeds from this
offering of approximately $333 million. We
intend to use these net proceeds to pay the
$66 million cash portion of the purchase
price for the Bridge network assets, for
capital expenditures relating to our network
expansion, and for other general corporate
purposes. In addition, a portion of the net
proceeds of this offering will be used to pay
a $58 million preferential distribution to
Bridge and repay approximately $5 million of
indebtedness owed to Bridge.
We will not receive any proceeds from the
sale of shares by the selling stockholder.
Dividend policy................. We do not intend to pay dividends on our
common stock for the foreseeable future. We
plan to retain any earnings for use in the
operation of our business and to fund future
growth.
Nasdaq National Market
Symbol........................... "SVVS"
This information is based on our shares outstanding on February 14, 2000.
This information excludes 3,479,168 shares of common stock underlying options
granted under our stock option plan outstanding as of February 14, 2000 at a
weighted average exercise price of $2.55 per share.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
We derived the summary historical consolidated financial data presented
below as of and for each of the three years ended December 31, 1996, 1997 and
1998 from our audited consolidated financial statements. We derived the summary
historical consolidated financial data presented below for the nine months
ended September 30, 1998, the period from January 1, 1999 to April 6, 1999 and
the period from April 7, 1999 to September 30, 1999 and as of September 30,
1999 from our unaudited consolidated financial statements. We prepared the
unaudited financial statements on substantially the same basis as our audited
financial statements and, in our opinion, the unaudited financial statements
include all adjustments necessary for a fair presentation of the results of
operations for those periods. Historical results are not necessarily indicative
of the results to be expected in the future, and results of interim periods are
not necessarily indicative of results for the entire year. You should read the
information set forth below together with the discussion under "Unaudited Pro
Forma Consolidated Financial Statements," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our financial statements
and the notes to those financial statements that are in the back of this
prospectus.
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 on 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 unaudited consolidated balance sheet. The SAVVIS
unaudited historical consolidated balance sheet data as of September 30, 1999
and unaudited consolidated statement of operations data for the period from
April 7, 1999 through September 30, 1999 give effect to our acquisition by
Bridge and are labeled "Successor." The SAVVIS unaudited historical 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 stockholders of Bridge,
including Welsh Carson which purchased from Bridge a 12% interest in SAVVIS at
that time.
Pro forma data for the year ended December 31, 1998 and the nine months
ended September 30, 1999 give effect to, as if they had occurred at the
beginning of 1998 for the statement of operations data and at September 30,
1999 for the balance sheet data, the acquisition of our company by Bridge, our
purchase of the network assets from Bridge for $88 million, including the
incurrence of capital lease obligations to Bridge of $22 million, the payment
of a $58 million preferential distribution to Bridge and the sale in this
offering of the shares required to generate the $129 million of cash to be paid
to Bridge in respect of these items. For more detailed information on the pro
forma financial data, see "Unaudited Pro Forma Consolidated Financial
Statements."
We calculate EBITDA as earnings (loss) before depreciation and
amortization, interest income and expense and income tax expense (benefit). We
have included information concerning EBITDA because our management believes
that in our industry such information is a relevant measurement of a company's
financial performance and liquidity. EBITDA is not determined in accordance
with generally accepted accounting principles, 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 generally accepted accounting principles.
Additionally, EBITDA as used in this prospectus may not be comparable to
similarly titled measures of other companies, as other companies may not
calculate it in a similar manner.
8
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<TABLE>
<CAPTION>
PREDECESSOR
--------------------------------------------
HISTORICAL PRO FORMA
-------------------------------------------- --------------
YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
-------------------------------------------- --------------
1996 1997* 1998* 1998*
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues ..................... $ 290 $ 2,758 $ 13,674 $ 13,674
Direct costs and
operating expenses:
Data communications
and operations ............. 1,044 11,072 20,889 20,889
Selling, general and
administrative ............. 1,204 5,130 12,245 12,245
Depreciation and
amortization ............... 153 631 2,288 45,876
Impairment of assets ........ -- -- -- --
------------ ------------ ------------ ------------
Total direct costs and
operating expenses.......... 2,401 16,833 35,422 79,010
------------ ------------ ------------ ------------
Loss from operations ......... (2,111) (14,075) (21,748) (65,336)
Interest expense, net ........ (60) (482) (100) (1,449)
------------ ------------ ------------ ------------
Net loss before minority
interest and
extraordinary item .......... (2,171) (14,557) (21,848) $ (66,785)
============
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)
============ ============ ============
Basic and diluted net loss
per common share ............ $ (.06) $ (.38) $ (.39) $ (.86)
============ ============ ============ ============
Weighted average shares
outstanding ................. 35,396,287 36,904,108 58,567,482 77,354,167
============ ============ ============ ============
OTHER FINANCIAL DATA:
EBITDA ....................... $ (1,958) $ (12,897) $ (17,653)
Capital expenditures ......... 884 697 1,688
Cash used in operating
activities .................. (1,293) (10,502) (20,560)
Cash used in investing
activities .................. (884) (697) (2,438)
Cash provided by
financing activities ........ 2,740 12,024 24,121
<PAGE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------------ ---------------
HISTORICAL
------------------------------ HISTORICAL PRO FORMA
NINE MONTHS PERIOD FROM PERIOD FROM NINE MONTHS
ENDED JANUARY 1 TO APRIL 7 TO ENDED
SEPTEMBER 30, APRIL 6, SEPTEMBER 30, SEPTEMBER 30,
--------------- -------------- --------------- --------------
1998* 1999* 1999 1999
--------------- -------------- --------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues ..................... $ 8,914 $ 5,440 $ 12,192 $ 17,632
Direct costs and
operating expenses:
Data communications
and operations ............. 14,609 6,429 13,095 19,524
Selling, general and
administrative ............. 7,353 4,751 11,142 15,893
Depreciation and
amortization ............... 1,556 817 9,747 30,185
Impairment of assets ........ -- 1,383 -- 1,383
------------ ------------ ------------ ------------
Total direct costs and
operating expenses.......... 23,518 13,380 33,984 66,985
------------ ------------ ------------ ------------
Loss from operations ......... (14,604) (7,940) (21,792) (49,353)
Interest expense, net ........ (138) (135) (782) (1,520)
------------ ------------ ------------ ------------
Net loss before minority
interest and
extraordinary item .......... (14,742) (8,075) (22,574) $ (50,873)
============
Minority interest in losses,
net of accretion ............ (147) -- --
Extraordinary gain on
debt extinguishment,
net of tax .................. 1,954 -- --
------------ ------------ ------------
Net loss ..................... $ (12,935) $ (8,075) $ (22,574)
============ ============ ============
Basic and diluted net loss
per common share ............ $ (.26) $ (.14) $ (.31) $ (.66)
============ ============ ============ ============
Weighted average shares
outstanding ................. 56,735,597 66,018,388 72,000,000 77,354,167
============ ============ ============ ============
OTHER FINANCIAL DATA:
EBITDA ....................... $ (11,241) $ (7,123) $ (12,045)
Capital expenditures ......... 1,308 275 855
Cash used in operating
activities .................. (15,530) (6,185) (9,945)
Cash used in investing
activities .................. (2,058) (275) (855)
Cash provided by
financing activities ........ 24,445 4,533 12,189
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR PRO FORMA
---------------------------------- --------------------- --------------
HISTORICAL HISTORICAL
---------------------------------- ---------------------
AS OF DECEMBER 31, AS OF
---------------------------------- AS OF SEPTEMBER 30, SEPTEMBER 30,
1996 1997* 1998* 1999 1999
-------- ------------ ------------ --------------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .................... $573 $ 1,398 $ 2,521 $ 1,983 $206,813
Goodwill and intangibles, net ................ -- -- 1,406 30,322 30,322
Total assets ................................. 1,888 4,313 11,663 41,422 334,252
Debt and capital lease obligations ........... 1,126 8,814 2,759 23,237 40,737
Redeemable stock, net of discount and deferred
financing costs ............................. 500 5,261 36,186 -- --
Stockholders' equity (deficit) ............... (693) (14,903) (33,197) 9,172 284,502
</TABLE>
* As discussed in Note 14 to our Consolidated Financial Statements, 1997, 1998
and predecessor 1999 amounts have been restated.
9
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RISK FACTORS
You should consider carefully the following risks and the other
information in this prospectus before deciding to invest in our common stock.
We have separated the risks into three groups:
o risks related to our business;
o risks related to our industry; and
o risks related to this offering.
If any of the following risks actually occurs, our business, prospects,
financial condition and results of operations could be materially adversely
affected. In any such case, the market price of our common stock could decline
and you could lose all or most of your investment in our company.
RISKS RELATED TO OUR BUSINESS
A SIGNIFICANT PORTION OF OUR REVENUES IS EXPECTED TO COME FROM BRIDGE, AND THE
LOSS OF BRIDGE AS A CUSTOMER OR REDUCED DEMAND FROM BRIDGE WOULD MATERIALLY
ADVERSELY AFFECT OUR BUSINESS.
Upon the closing of this offering, we will enter into a network services
agreement with Bridge whereby Bridge will become our largest customer. Under
the network services agreement, Bridge will commit to purchase at least of $105
million of network services from us in 2000. Assuming we had received these
minimum revenues for the first year of the agreement in 1999, Bridge would have
represented approximately 83% of our 1999 revenues. The network services
agreement with Bridge could be terminated prior to its term if we default in
our performance under this agreement, including if we fail to meet our service
level commitments, or Bridge is unable to perform its obligations under the
agreement. The loss of Bridge as a customer, or reduced demand from Bridge,
would materially reduce our expected revenues and, consequently, would have a
material adverse effect on our business.
BRIDGE IS HIGHLY LEVERAGED, HAS HAD SIGNIFICANT NET LOSSES AND NEGATIVE CASH
FLOW TO DATE AND IS REQUIRED TO MAKE A SIGNIFICANT DEBT REPAYMENT BY JUNE 30,
2000. IF BRIDGE IS UNABLE TO MEET ITS FINANCIAL COMMITMENTS TO US, WE MAY BE
ADVERSELY AFFECTED.
We will rely on Bridge to meet its financial commitments to us. For the
fiscal years ended December 31, 1996, 1997 and 1998, Bridge has informed us
that it had net losses of approximately $61 million, $69 million and $143
million. For the nine months ended September 30, 1999, Bridge had net losses of
approximately $134 million and had negative cash flows from operating
activities of approximately $76 million. Bridge has also informed us it
continued to use cash in its operating activities and generate losses for the
three months ended December 31, 1999.
As of September 30, 1999, Bridge had $1,240 million of indebtedness, $470
million of redeemable preferred stock and a stockholders' deficit of $414
million. In the three months ended December 31, 1999, Bridge incurred an
additional $100 million of indebtedness under a bridge loan agreement. In
February 2000, Bridge incurred an additional $25 million of indebtedness.
Under the terms of its indebtedness, following the completion of this
offering, Bridge is required to repay approximately $350 million of its
indebtedness on or before June 30, 2000. Bridge will receive aggregate proceeds
from this offering of approximately $177 million from its sale of our shares,
our purchase of the network assets, the payment of the preferential
distribution and the repayment of a portion of our indebtedness to Bridge. In
addition, pursuant to a stock purchase agreement dated February 7, 2000, Bridge
has agreed to sell for $150 million in cash to Welsh Carson 6,250,000 shares of
our common stock held by Bridge. The purchase price per share is equal to the
initial public offering price per share. The consummation of the sale to Welsh
Carson is expected to occur after the closing of this offering and is subject
to limited conditions, including termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. We cannot assure you that
this sale will be consummated.
10
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We cannot assure you that Bridge will have sufficient sources of capital
to:
o meet its capital expenditure, debt service and working capital
requirements, including its obligations to us under the network services
agreement; or
o satisfy its remaining requirement to repay $173 million of its
indebtedness by June 30, 2000.
The failure by Bridge to meet these requirements could have a material
adverse effect on our operations and the price of our common stock.
THE AUDIT REPORT ACCOMPANYING BRIDGE'S 1998 FINANCIAL STATEMENTS WILL CONTAIN
AN EXPLANATORY PARAGRAPH REGARDING BRIDGE'S ABILITY TO CONTINUE AS A GOING
CONCERN.
As a result of losses, working capital deficiencies and other liquidity
issues, including the fact that this offering has not yet occurred, Bridge's
independent auditors' report on its 1998 financial statements will include an
explanatory paragraph regarding its ability to continue as a going concern.
IF THE AMORTIZATION PERIODS FOR BRIDGE'S INTANGIBLES WOULD HAVE BEEN SHORTER,
BRIDGE'S LOSSES WOULD HAVE INCREASED.
At September 30, 1999, Bridge's unamortized goodwill and intangibles
resulting from acquisitions was approximately $863.9 million, or approximately
54% of total assets. Goodwill is the excess of cost over the fair value of the
net assets of businesses acquired. We cannot assure you that Bridge will ever
realize the value of such goodwill. This goodwill is being amortized on a
straight-line basis over 3 to 40 years. Bridge will continue to evaluate on a
regular basis whether events or circumstances have occurred that indicate all
or a portion of the carrying amount of goodwill may no longer be recoverable,
in which case an additional charge to earnings would become necessary. Any such
future determination requiring the write-off of a significant portion of
unamortized goodwill could have a material adverse effect on Bridge's financial
condition or results of operations. If Bridge had used amortization periods of
no longer than ten years, the net loss would have been $68.7 million, $86
million, $180.7 million and $180 million for the periods ended December 31,
1996, 1997, 1998 and September 30, 1999, respectively.
OUR PRIOR OPERATIONS WERE FUNDED BY BRIDGE. HOWEVER, BRIDGE IS NOT PERMITTED TO
FUND OUR OPERATIONS IN THE FUTURE.
We have experienced recurring losses from operations and cash flow
deficiencies which, since April of 1999, have been funded by Bridge. While
Bridge has funded our operations through 1999, Bridge is not permitted under
the terms of its indebtedness to fund our operations in the future.
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 12 months from the date we acquire the network. In the event
we do not 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 36-month period.
OUR LIMITED HISTORY, AND THE FACT THAT WE ONLY RECENTLY BEGAN OFFERING DATA
NETWORKING AND COLOCATION SERVICES, MAKES IT DIFFICULT FOR YOU TO EVALUATE OUR
PERFORMANCE.
Although we began commercial operations in 1996, we only recently began
offering data networking and colocation services. 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
recently, and we have adopted our business strategies recently. Because of our
limited
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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 colocation markets.
OUR HISTORICAL FINANCIAL INFORMATION WILL NOT BE COMPARABLE TO OUR FUTURE
FINANCIAL PERFORMANCE.
Upon completion of this offering, we will acquire Bridge's Internet
protocol network assets and enter into an agreement to provide data networking
services to Bridge. As a result, the historical financial information included
in this prospectus will not necessarily be comparable to our results of
operations, financial position and cash flows in the future once we have
acquired Bridge's network assets and entered into the network services and
related agreements.
WE EXPECT TO CONTINUE TO INCUR SUBSTANTIAL LOSSES AND HAVE NEGATIVE OPERATING
CASH FLOW.
We incurred losses of approximately $2.2 million, $14.0 million and $20.0
million in 1996, 1997 and 1998 and had negative cash flows from operating
activities of $1.3 million, $10.5 million and $20.6 million in these years. We
expect to incur significant net losses, negative cash flow from operating
activities and negative EBITDA at least through 2002.
THE AUDIT REPORTS ACCOMPANYING OUR 1996, 1997 AND 1998 FINANCIAL STATEMENTS
CONTAINED AN EXPLANATORY PARAGRAPH REGARDING OUR ABILITY TO CONTINUE AS A GOING
CONCERN.
As a result of losses and working capital deficiencies, our independent
auditors' report on our 1996, 1997 and 1998 financial statements included an
explanatory paragraph regarding our ability to continue as a going concern. The
independent auditors' report on our 1998 financial statements when originally
issued did not contain such an explanatory paragraph due to Bridge's commitment
and ability to finance our operations. Because of current limitations in
Bridge's financing arrangements, such financial support cannot be relied upon
in the future. As a result, such explanatory paragraph was added to the
independent auditors' report upon its reissuance in January 2000.
WE EXPECT OUR OPERATING EXPENSES TO INCREASE SIGNIFICANTLY.
From the acquisition by Bridge of our company on April 7, 1999 through
September 30, 1999, we had a loss of approximately $22.6 million and net cash
used in operating activities of approximately $9.9 million. As of September 30,
1999, our accumulated deficit was approximately $22.6 million, which reflects
only our 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, as a result of the acquisition of Bridge's
network assets, 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 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 NEW CUSTOMERS.
Under the network services agreement that we will enter into with Bridge,
the amount we charge Bridge for the use of the network as configured on the
date of the transfer is based on the cash costs of operating that network. As a
result, we will incur losses from the operation of the network to provide
services to Bridge until we use the network either to provide additional
services to Bridge not currently covered by the network services agreement,
such as connecting new customers of Bridge or adding additional connections to
existing customers or to provide services to new customers. We cannot guarantee
that we will sell enough additional services to become profitable.
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WE ARE OBLIGATED TO PROVIDE NETWORK SERVICES TO BRIDGE FOR A PERIOD OF 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. If the price to be paid by Bridge is less than the cost incurred
by us to provide the service, such services will be provided at a loss to us.
THE PURCHASE OF THE NETWORK ASSETS FROM BRIDGE WILL RESULT IN A PREFERENTIAL
DISTRIBUTION TO BRIDGE.
Because we will record the network assets to be purchased from Bridge at
Bridge's historical net book value, the excess of the payments to Bridge over
the net book value, currently estimated at $58 million, will be treated for
accounting purposes as a preferential distribution to Bridge. As a result our
stockholders' equity will be reduced and you will experience a dilution in
tangible book value per share.
IF WE ARE NOT ABLE TO RAISE ADDITIONAL CAPITAL, WE MAY HAVE TO DELAY SOME OR
ALL OF OUR EXPANSION PLANS.
As we develop and expand our business, we will require significant capital
to fund our capital expenditures, operating deficits and working capital needs,
as well as our debt service requirements. We believe that our existing cash,
cash equivalents, short-term investments and anticipated vendor financing,
together with the net proceeds from this offering, will be sufficient to meet
our capital requirements only through the end of 2000. We currently estimate
that we will make approximately $149 million of capital expenditures in 2000,
exclusive of our purchase of the network assets from Bridge, and we expect to
make significant capital expenditures in the following years. In addition, we
expect to incur significant net losses, negative cash flow from operating
activities and negative EBITDA at least through 2002. The actual amounts and
timing of our future capital requirements may vary significantly from our
estimates. Our capital needs may exceed our current expectations because of
factors such as acquisitions that we may make, changes in the demand for our
services, regulatory developments, the competitive environment in our markets
or failure to expand our business as expected. In that case, we may need to
seek additional capital sooner than we expect, and such additional financing
may not be available on acceptable terms or at all. If we are unable to raise
additional capital when needed, we may have to delay or abandon some or all of
our expansion plans or otherwise forego market opportunities. We do not
currently have a credit facility from which we could access additional capital.
IF WE ARE NOT RELEASED FROM REGULATION UNDER THE BANK HOLDING COMPANY ACT, WE
WOULD NOT BE ABLE TO EXPAND OUR BUSINESS AS WE EXPECT.
State Street Corporation, a bank holding company, currently owns
approximately 7.7% of the outstanding voting capital stock of Bridge on a fully
diluted basis and approximately 2% of our outstanding common stock. State
Street also has the right to elect one member of Bridge's board of directors.
At the time State Street made its investment in Bridge in 1996, State Street
agreed with the Federal Reserve Board to regard Bridge as a subsidiary of State
Street for purposes of the Bank Holding Company Act, and Bridge agreed to
restrict its activities and its investments to those permitted for bank holding
company subsidiaries under Regulation Y of the Federal Reserve Board. At the
time Bridge acquired us in April 1999, State Street and Bridge agreed that we
also would be regarded as a bank holding company subsidiary and subject to the
applicable restrictions on our activities. Permitted activities for a bank
holding company subsidiary include the transmission of data, provided that no
more than 30% of the revenue generated by a bank holding company subsidiary
from that activity is derived from the transmission of data that is not
financial, banking or economic in nature. Accordingly, in connection with
Bridge's acquisition of our company in April 1999, Bridge undertook to ensure
that at least 70% of our revenue would be derived from the transmission of
qualifying data. We believe that the services we will provide to Bridge under
the network services agreement will satisfy this requirement initially.
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In the event State Street does not comply with its agreement to cooperate
with us to ensure that, by the close of business on April 30, 2000, we will no
longer be subject to the activity and investment restrictions of Regulation Y,
our revenues from Bridge and/or revenues from the transmission of other
qualifying data will need to represent at least 70% of our total revenue. As a
result, we may not be able to expand our business as currently contemplated.
OUR FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD IMPAIR OUR BUSINESS.
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 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.
OUR SUBSTANTIAL ONGOING RELATIONSHIPS WITH BRIDGE WILL BE CRITICAL TO OUR
SUCCESS. IF BRIDGE TERMINATES ANY OF THESE RELATIONSHIPS, OUR BUSINESS
PROSPECTS WILL BE IMPAIRED.
Bridge will provide 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. Bridge will also provide to us additional administrative and
operational services, such as payroll and accounting functions, benefit
management and office space. If Bridge unexpectedly stops providing these
services for any reason, 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 will sublease from Bridge some of the network assets that
Bridge currently leases from General Electric Capital Corporation, or GECC. The
aggregate amount of our capitalized lease obligations to Bridge will be
approximately $22 million. We will not have a direct relationship with GECC. If
Bridge fails to perform its obligations under its agreement with GECC, our
rights to such network assets may be impaired.
WE ARE CONTROLLED BY PARTIES WHOSE INTERESTS MAY NOT BE ALIGNED WITH YOURS.
Bridge and investment partnerships sponsored by Welsh Carson owned
approximately 69% and 11% of our outstanding common stock, respectively, prior
to this offering. In addition, Welsh Carson partnerships own approximately 38%
of Bridge's outstanding voting stock. Consequently, Bridge controls us and is
in a position to elect our entire board of directors and control all matters
affecting us. In addition, Welsh Carson may be deemed to be a controlling
person of Bridge. Pursuant to a stock purchase agreement dated February 7,
2000, Bridge has agreed to sell to Welsh Carson for $150 million in cash
6,250,000 shares of our common stock held by Bridge. The purchase price per
share is equal to the initial public offering price per share. The consummation
of the sale is expected to occur after the closing of this offering and is
subject to limited conditions, including termination of the waiting period
under the Hart-Scott-Rodino Act. Upon consummation of such sale Bridge and
Welsh Carson would own approximately 49% and 16% of our outstanding common
stock, respectively.
Some decisions concerning our operations or financial structure may
present conflicts of interest between Bridge and Welsh Carson and our other
stockholders. For example, Bridge or Welsh Carson may make investments in other
entities engaged in the telecommunications business, some of which may compete
with us. Also, Bridge and Welsh Carson are under no obligation to bring to us
any investment or business opportunities of which they are aware, even if these
opportunities are within our scope and objectives.
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Upon the completion of this offering, we will enter 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 and Bridge will provide various support services to us. Because we are
controlled by Bridge, 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 sales and marketing 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.
FAILURES IN OUR NETWORK OR WITH THE NETWORK OPERATIONS CENTER COULD DISRUPT OUR
ABILITY TO PROVIDE OUR DATA NETWORKING, INTERNET ACCESS AND COLOCATION
SERVICES, WHICH COULD EXPOSE US TO LIABILITY 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 colocation 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 colocation 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 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 our network
on a timely, cost-effective basis. A number of factors could hinder the
expansion 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.
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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 data transmission capacity before we have secured customers
and our leased 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 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. 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
colocation 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 colocation
services. We cannot assure you that we will be able to maintain or achieve
these levels of quality.
ANY BREACH OF SECURITY OF OUR NETWORK COULD NEGATIVELY IMPACT OUR BUSINESS.
Our network may be vulnerable to unauthorized access, computer viruses and
other disruptive problems caused by customers, employees or others. Computer
viruses, unauthorized access or other disruptive problems could lead to
interruptions, delays or cessation of service to our customers and these
customers' end users. Unauthorized access also could potentially jeopardize the
security of confidential information stored in the computer systems of our
customers, which might result in our liability to our customers, and also might
deter potential customers. We may be unable to implement security measures in a
timely manner or, if and when implemented, these measures could be circumvented
as a result of accidental or intentional actions. In the past, security
measures employed by others have been circumvented by third parties.
Eliminating computer viruses and alleviating other security problems may
require interruptions, delays or cessation of service to our customers and
these customers' end users. Any breach of security on our network may result in
a loss of customers and damage to our reputation.
WE MAY NOT BE ABLE TO MEET THE OBLIGATIONS UNDER OUR SERVICE LEVEL AGREEMENTS.
We have service level agreements with many of our Internet access
customers in which we provide various guarantees regarding our levels of
service. In addition, the network services agreement with Bridge will have
required 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
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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 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.
Regulatory restrictions in the following 16 countries are expected to
prevent us from acquiring, as part of the Bridge network asset transfer which
will occur simultaneously with the completion of the offering, the Bridge
network assets located in these countries. These assets represent approximately
4% of the net book value of the assets to be acquired from Bridge. These
countries include:
o Europe--Greece, Ireland, Hungary and Poland;
o Africa--South Africa;
o Middle East--Bahrain, Kuwait, Saudi Arabia and the United Arab Emirates;
o Asia Pacific--China, Macau, Malaysia, Taiwan and Thailand; and
o The Americas/Caribbean--Mexico and Venezuela.
We will be obligated to acquire these assets from Bridge in these
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. In all
countries where we have received regulatory approval to acquire and operate the
Bridge assets, we will be permitted to deliver network services to Bridge, but
not necessarily data networking services to third parties.
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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 colocation services;
o the fixed nature of approximately 75% of our costs;
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 colocation
services industries, as well as general economic factors;
o the announcement or introduction of new or enhanced services by our
competitors;
o our ability to obtain, and the pricing for, local access connections; and
o changes in the prices we pay Internet backbone providers.
Accordingly, we believe that period-to-period comparisons of our results of
operations are not meaningful and should not be relied upon as indications of
future performance. In addition, these factors may impact our long-term
viability.
It is possible that in some future periods our results of operations may
fall below the expectations of investors. In this event, the price of our
common stock may fall. You should not rely on quarter-to-quarter comparisons of
our results of operations as an indication of future performance.
WE MAY BE LIABLE FOR THE MATERIAL THAT CONTENT PROVIDERS DISTRIBUTE OVER OUR
NETWORK.
The law relating to the liability of private network operators for
information carried on or disseminated through their networks is currently
unsettled. We may become subject to legal claims relating to the content
disseminated on our network. For example, lawsuits may be brought against us
claiming that material on our network on which one of our customers relied was
inaccurate. Claims could also involve matters such as defamation, invasion of
privacy and copyright infringement. Content providers operating private
networks have been sued in the past, sometimes successfully, based on the
content of material. If we need to take costly measures to reduce our exposure
to these risks, or are required to defend ourselves against such claims, our
business could be adversely affected.
RISKS RELATED TO OUR INDUSTRY
DATA NETWORKING, INTERNET ACCESS AND COLOCATION SERVICES ARE NEW AND RAPIDLY
GROWING MARKETS, BUT THIS GROWTH MAY NOT CONTINUE.
According to International Data Corporation, an independent research firm,
the market for data networking services has been growing rapidly. If the data
networking services market does not grow as expected, or our anticipated share
of that market does not grow as expected, our revenues could be less than
expected.
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In addition, the market for Internet access and related services, such as
colocation services, is 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 high performance Internet access and related services 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.
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.
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 colocation services.
OUR ABILITY TO COMPETE FOR INTERNET ACCESS BUSINESS MAY BE WEAKENED IF THE
PROBLEMS OF INTERNET CONGESTION, TRANSMISSION DELAYS AND DATA LOSS ARE
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 COLOCATION ARE HIGHLY
COMPETITIVE, AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
The markets for data networking, Internet access and colocation 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 colocation 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;
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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, ICG Communications, Inc.,
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 colocation markets. Such new competitors could include computer
hardware, software, media and other technology and telecommunications
companies, as well as satellite and cable companies. A number of
telecommunications companies and online service providers currently offer, or
have announced plans to offer or expand, their data networking services.
Further, the ability of some of these potential competitors to bundle other
services and products with their data networking services could place us at a
competitive disadvantage. For example, Reuters Group plc, a news and financial
information distributor, and Equant N.V., an international telecommunications
provider, recently announced that they intend to form a joint venture for the
purposes of offering Internet access 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, 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 and will serve after the Bridge asset
transfer. Prices for data networking, Internet access and colocation 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 colocation 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,
Internet access and colocation industries are likely to continue to encounter
consolidation in the future. Increased price competition or consolidation in
these markets could result in an 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 and the data
networking and colocation services that we will provide after the Bridge asset
transfer. The adoption of such new technologies or industry
20
<PAGE>
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.
Following the Bridge asset transfer, we will be subject to varying degrees
of regulation in each of the jurisdictions in which we provide services. Local
laws and regulations, and their interpretation, 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 outside the U.S. and several
European countries. These nations are 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.
Following the Bridge asset transfer, our operations will be dependent on
licenses and authorizations from governmental authorities in each foreign
jurisdiction in which we 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. In addition, in connection with the transfer of
the Bridge assets, we need to obtain licenses from a number of non-U.S.
jurisdictions in order to provide our services in those jurisdictions.
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 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.
21
<PAGE>
RISKS RELATED TO THIS OFFERING
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.
Immediately after the completion of this offering, we will have 92,883,340
shares of common stock outstanding and 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 after this offering, 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 MANAGEMENT WILL HAVE BROAD DISCRETION OVER ALLOCATION OF PROCEEDS FROM THIS
OFFERING.
We expect that the net proceeds to us from the sale of the common stock in
this offering will be approximately $205 million, after deducting the payments
to Bridge, the underwriting discounts and commissions and estimated offering
expenses. Our management will have broad discretion to allocate these proceeds
to uses they deem appropriate. We may be unable to yield a significant return
on any investment of the proceeds.
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.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
The price you will pay for our common stock in this offering will be
substantially higher than the negative $.29 pro forma tangible book value per
share of our outstanding common stock as of September 30, 1999. As a result,
you will experience immediate dilution of $21.07 in tangible book value per
share, and our current stockholders will experience an immediate increase in
the tangible book value per share of their shares of common stock of $3.22.
WE HAVE GRANTED STOCK OPTIONS AT A PRICE SIGNIFICANTLY LOWER THAN THE PUBLIC
OFFERING PRICE.
Since July 1999, we have granted options to purchase approximately 9.5
million shares of our common stock at a weighted average exercise price of
$2.55 per share. As of the date of this prospectus, options to purchase
approximately 3.5 million shares of our common stock remained outstanding. The
holders of these options have the right to acquire shares of our common stock
at a price significantly lower than the initial public offering price.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements based on our current
beliefs and assumptions. These beliefs and assumptions are based on information
currently available to us. These forward-looking statements are subject to
risks and uncertainties. Forward-looking statements include the information
concerning our possible or assumed future results of operations.
22
<PAGE>
Forward-looking statements are not guarantees of performance. Our future
results and requirements may differ materially from those described in the
forward-looking statements. Many of the factors that will determine these
results and requirements are beyond our control. In addition to the risks and
uncertainties discussed in "Prospectus Summary," "Business," "Relationship with
Bridge" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," you should consider those discussed under "Risk
Factors."
These forward-looking statements speak only as of the date of this
prospectus. Except as required by law, we do not intend to update or revise any
forward-looking statements to reflect events or circumstances after the date of
this prospectus, including changes in our business strategy or planned capital
expenditures, or to reflect the occurrence of unanticipated events.
23
<PAGE>
USE OF PROCEEDS
The net proceeds from this offering will be approximately $333 million.
This is based on the initial public offering price of $24.00 per share, after
deducting estimated underwriting discounts and commissions and offering
expenses payable by us.
Of the net proceeds of this offering we expect to pay an aggregate of
approximately $129 million to Bridge. Of this amount, approximately $66 million
will represent the portion of the purchase price of Bridge's Internet protocol
network assets not subject to capital leases, approximately $5 million will be
used to reduce existing outstanding debt to Bridge and approximately $58
million will be paid to Bridge as a preferential distribution. As of December
31, 1999, we had approximately $25 million of outstanding debt to Bridge
consisting of term notes maturing one year after the completion of this
offering, bearing interest at 8% per annum, the proceeds of which were used for
working capital purposes. The remaining net proceeds will be used for operating
expenses, capital expenditures and for general corporate purposes. We also may
use a portion of the net proceeds of this offering for acquisitions or
investments. We have no present commitments or agreements with respect to any
material capital expenditures, acquisitions or investments. Pending the
application of the proceeds towards one of the uses described above, we intend
to invest the net proceeds in short-term, interest-bearing, investment-grade
securities.
We will purchase Bridge's Internet protocol network assets simultaneously
with the closing of this offering. The closing of this offering is conditioned
on the acquisition of those assets and our and Bridge's entering into the
network services agreement.
We will not receive any proceeds from the sale of shares by the selling
stockholder.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock, and
we do not intend to pay any cash dividends on our common stock in the
foreseeable future. We intend to retain any earnings to finance the expansion
of our business and for general corporate purposes.
24
<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of September 30, 1999:
o on an actual basis, after adjusting for the "push down" accounting in
connection with the acquisition of our company by Bridge, see footnote 1
to our unaudited financial statements that are in the back of this
prospectus; and
o on a pro forma, as adjusted basis to give effect to our receipt of
proceeds of $333 million in this offering, net of discounts, commissions
and expenses payable by us, and the use of an aggregate of $129 million of
the proceeds to pay to Bridge a portion of the purchase price for the
acquisition of network assets, to reduce existing outstanding debt to
Bridge, and to pay a $58 million preferential distribution to Bridge.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-------------------------
PRO FORMA
AS
ACTUAL ADJUSTED
------------ ------------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Cash and cash equivalents .................................. $ 1,983 $ 206,813
========= =========
Capitalized lease obligations, including current maturities $ 5,967 $ 27,967
Due to Bridge under notes .................................. 17,270 12,770
--------- ---------
Subtotal ............................................... 23,237 40,737
--------- ---------
Stockholders' equity:
Common stock $.01 par value per share; 125,000,000 shares
authorized, 72,000,000 issued and outstanding (actual),
and 86,875,000 issued and oustanding (pro forma as
adjusted) .............................................. 720 869
Additional paid-in capital .............................. 31,026 364,207
Preferential distribution ............................... -- (58,000)
--------- ---------
Total additional paid-in capital ....................... 31,026 306,207
Accumulated deficit ..................................... (22,574) (22,574)
--------- ---------
Total stockholders' equity ............................. 9,172 284,502
--------- ---------
Total capitalization .................................... $ 32,409 $ 325,239
========= =========
</TABLE>
25
<PAGE>
DILUTION
Our net tangible book value as of September 30, 1999 was approximately
negative $21 million or approximately negative $.29 per share of common stock.
Net tangible book value per share represents total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding on
that date. Dilution per share is the difference between the amount per share
paid by purchasers of shares of common stock in this offering and the pro
forma, as adjusted net tangible book value per share reflecting this offering,
the purchase of the network assets from Bridge and the preferential
distribution to Bridge. After giving effect to our sale of the 14,875,000
shares of common stock offered in this offering at the initial public offering
price of $24.00 per share, our pro forma, as adjusted, net tangible book value
as of September 30, 1999 would have been $254 million, or $2.93 per share. This
represents an immediate increase in pro forma net tangible book value to
existing stockholders of $3.22 per share and an immediate dilution to new
investors of $21.07 per share. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share .......... $ 24.00
Net tangible book value per share as of September 30,
1999 ................................................. $ (.29)
Increase attributable to new investors ................ 3.22
------
Pro forma, as adjusted, net tangible book value per share
after this offering ..................................... 2.93
--------
Dilution in pro forma net tangible book value per share to
new investors ........................................... $ 21.07
========
</TABLE>
The following table summarizes, as of September 30, 1999, the number of
shares of common stock purchased from us, the total consideration paid to us
and the average price per share paid by the existing stockholders and by the
new investors, before deducting the estimated underwriting discounts and
commissions and other expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED CASH CONSIDERATION(1) AVERAGE CASH PRICE
------------------------ -------------------------- -------------------
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------- -------------- --------- -------------------
<S> <C> <C> <C> <C> <C>
Bridge (2) ................................ 53,870,279 62% $ -- 0% $ --
Other stockholders ........................ 18,129,721 21% 9,064,861 2% 0.50
---------- -- ------------ - ------
Existing stockholders ..................... 72,000,000 9,064,861
New investors in this offering(3) ......... 14,875,000 17% 357,000,000 98% $ 24.00
---------- -- ------------ -- -------
Total .................................... 86,875,000 100% $366,064,861 100%
========== === ============ ===
</TABLE>
- ----------------
(1) Cash consideration does not include the value of Bridge stock exchanged in
Bridge's acquisition of us on April 7, 1999, and the cash consideration of
$9,064,861 represents the gross amount received by Bridge in its private
placement of our stock to Bridge's stockholders.
(2) Includes 2,125,000 shares to be sold in this offering by Bridge, at the
offering price of $24.00.
(3) Represents only the shares sold in this offering by SAVVIS.
The discussion and table above assumes that none of the options
outstanding under our stock option plans as of September 30, 1999 are
exercised. As of September 30, 1999, there were options outstanding to purchase
a total of 6,063,840 shares of common stock at an exercise price of $.50 per
share. To the extent that any of these options are exercised, you will be
diluted further.
26
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated statement of operations for the nine
months ended September 30, 1999 and for the year ended December 31, 1998 give
effect to the following, as if each had occurred on January 1, 1998:
o the acquisition of our company by Bridge in April 1999;
o our sale in the offering of the shares required to generate the $129
million to be paid to Bridge for the $66 million cash component of the
purchase price for Bridge's network assets, the $58 million preferential
distribution and to reduce approximately $5 million of existing outstanding
debt to Bridge, estimated at 5,354,167 shares; and
o our purchase and sublease of the network assets from Bridge.
The unaudited pro forma consolidated balance sheet as of September 30,
1999 gives effect to the following, as if each had occurred on September 30,
1999:
o our receipt of proceeds of $333 million in this offering, net of estimated
discounts, commissions and expenses payable by us;
o our purchase and sublease of the network assets from Bridge;
o our use of proceeds of this offering to pay a portion of the purchase price
of the network assets; and
o the payment of $58 million as a preferential distribution and to repay
approximately $5 million of indebtedness to Bridge.
As a result of SEC rules and as discussed in note 1 to our unaudited
consolidated financial statements in the back of this prospectus, we have
applied "push down" accounting to our historical financial statements. In these
unaudited pro forma consolidated financial statements, "Predecessor" represents
the historical results of our operations prior to the purchase of our company
by Bridge on April 7, 1999. "Successor" represents the historical consolidated
balance sheet and results of our operations for the period subsequent to that
purchase and the effects of the "push down" from April 7, 1999 through
September 30, 1999.
The network assets to be purchased from Bridge are recorded in the
unaudited pro forma consolidated financial statements at Bridge's historical
net book value of those assets. As a result of regulatory restrictions, we will
not be able to acquire, as part of the initial network transfer, network assets
in approximately 16 countries. We have the right to purchase the assets in
these countries at their net book value, once we have received the regulatory
approvals. Only the assets in jurisdictions where all requisite consents and
approvals from third parties to transfer the assets from Bridge have been
obtained are included in these unaudited pro forma consolidated financial
statements. Additionally, we will pay to Bridge a preferential distribution of
$58 million, which will be treated as a reduction in stockholders' equity.
The pro forma adjustments and the assumptions on which they are based are
further described in the accompanying notes to the unaudited pro forma
consolidated financial statements. You should read the unaudited pro forma
consolidated financial statements together with our historical financial
statements and the notes to those financial statements that are in the back of
this prospectus.
The pro forma consolidated financial statements are for illustrative
purposes only. You should not rely on the unaudited pro forma consolidated
financial statements as being indicative of the results that actually would
have occurred if the transactions had occurred on the dates indicated or that
may be obtained in the future.
27
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------------------------
HISTORICAL BRIDGE
--------------------------- ACQUISITION OF PURCHASE OF
PREDECESSOR SUCCESSOR SAVVIS NETWORK ASSETS PRO FORMA
------------- ------------- ------------------ -------------------- ----------------------
<S> <C> <C> <C> <C> <C>
Revenues ....................... $ 5,440 $ 12,192 $ 17,632
---------- ---------- -------------
Direct costs and operating
expenses:
Data communications and
operations .................. 6,429 13,095 19,524
Selling, general and
administrative .............. 4,751 11,142 15,893
Depreciation and
amortization ................ 817 9,747 $ (879) (1) $ 20,500 (3) 30,185
Impairment of assets .......... 1,383 -- -- -- 1,383
---------- ---------- -------- ---------- -------------
Total direct costs and operating
expenses ...................... 13,380 33,984 (879) 20,500 66,985
---------- ---------- -------- ---------- -------------
Loss from operations ........... (7,940) (21,792) 879 (20,500) (49,353)
Interest expense, net .......... (135) (782) (603) (4) (1,520)
---------- ---------- ---------- -------------
Net loss ....................... $ (8,075) $ (22,574) $ 879 $ (21,103) $ (50,873)
========== ========== ======== ========== =============
Basic and diluted net loss per
common share .................. $ (0.12) $ (0.31) $ (0.66) (7)
========== ========== =============
Weighted average shares
outstanding ................... 66,018,388 72,000,000 77,354,167 (7)
========== ========== =============
</TABLE>
See notes to the unaudited pro forma consolidated financial statements.
28
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------------------------
BRIDGE
HISTORICAL ACQUISITION OF PURCHASE OF
PREDECESSOR SAVVIS NETWORK ASSETS PRO FORMA
------------- ------------------ -------------------- ---------------------
<S> <C> <C> <C> <C>
Revenues .......................................... $ 13,674 $ 13,674
Direct costs and operating expenses:
Data communications and operations ............... 20,889 20,889
Selling, general and administrative .............. 12,245 12,245
Depreciation and amortization .................... 2,288 $ 16,255 (2) $ 27,333 (3) 45,876
----------- --------- -------- -------------
Total direct costs and operating expenses ......... 35,422 16,255 27,333 79,010
----------- ----------- ---------- -------------
Loss from operations .............................. (21,748) (16,255) (27,333) (65,336)
Interest expense, net ............................. (100) (1,349) (4) (1,449)
----------- ---------- -------------
Net loss .......................................... $ (21,848) $ (16,255) $ (28,862) $ (66,785)
=========== =========== ========== =============
Basic and diluted loss per common share ........... $ (.37) $ (.86)
=========== =============
Weighted average shares outstanding ............... 58,567,482 77,354,167 (7)
=========== =============
</TABLE>
See notes to the unaudited pro forma consolidated financial statements.
29
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
----------------------------------------
PURCHASE OF
NETWORK ASSETS,
PREFERENTIAL
DISTRIBUTION
SALE OF COMMON AND REPAYMENT PRO FORMA
HISTORICAL STOCK OF DEBT AS ADJUSTED
------------ ------------------- -------------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 1,983 $ 333,330 (6) $ (128,500)(5) $ 206,813
Accounts receivable, net ............................. 2,106 2,106
Other current assets ................................. 489 489
--------- ---------
Total current assets ............................. 4,578 333,330 (128,500) 209,408
Property, plant and equipment ........................ 5,995 88,000 (5) 93,995
Goodwill and intangible assets ....................... 30,322 30,322
Other long-term assets ............................... 527 527
--------- ---------
Total ......................................... $ 41,422 $ 333,330 $ (40,500) $ 334,252
========= =========== ============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable ..................................... $ 5,089 $ 5,089
Accrued expenses ..................................... 1,095 1,095
Current portion of capital lease obligations ......... 1,986 $ 7,000 (5) 8,986
Due to Bridge ........................................ 17,270 (4,500)(5) 12,770
Other accrued liabilities ............................ 2,385 2,385
--------- ---------
Total current liabilities ........................ 27,825 2,500 30,325
Long-term portion of capital lease obligations 3,981 15,000 (5) 18,981
Other liabilities .................................... 444 444
--------- ---------
Total liabilities ................................ 32,250 17,500 49,750
STOCKHOLDERS' EQUITY:
Common Stock ......................................... 720 $ 149 (6) 869
Additional paid-in capital ........................... 31,026 333,181 (6) (58,000)(5) 306,207
Accumulated deficit .................................. (22,574) (22,574)
--------- ---------
Total stockholders' equity ....................... 9,172 333,330 (58,000) 284,502
--------- ----------- ------------ ---------
Total ......................................... $ 41,422 $ 333,330 $ (40,500) $ 334,252
========= =========== ============ =========
</TABLE>
See notes to the unaudited pro forma consolidated financial statements.
30
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1) To record depreciation and amortization expense of $9,685 associated with
fixed assets, intangible assets and excess of purchase price over fair value
of net assets acquired when Bridge acquired our company. These expenses were
offset by the reversal of historical amortization and depreciation expense
of $10,564. Since a significant portion of these assets acquired had an
estimated useful life of one year, the pro forma entry to give effect to the
acquisition of SAVVIS by Bridge as of January 1, 1998 resulted in a net
reduction of pro forma depreciation and amortization in the nine months
ended September 30, 1999.
2) To record depreciation and amortization expense of $18,543 associated with
fixed assets, intangible assets and excess of purchase price over fair value
of net assets acquired when Bridge acquired our company. These expenses were
offset by the reversal of historical depreciation and amortization expense
of $2,288.
3) To reflect depreciation and amortization on the additional $88,000 net book
value of the network assets acquired and subleased from Bridge. Depreciation
on such assets, excluding approximately $6,000 of uninstalled equipment, has
been computed using the straight line method with an estimated remaining
life of assets of three years.
4) To reflect interest expense on capitalized leases assuming that network
assets with an $82,000 net book value, plus $6,000 in equipment awaiting
installation, are purchased or leased from Bridge at net book value.
5) To reflect the purchase of network assets together with the capitalized
leases from Bridge, assuming a purchase price of approximately $88,000 with
the payment of $66,000 of the purchase price in cash from the proceeds of
this offering, and $22,000 in the form of capital lease obligations. These
amounts exclude the net book value of assets outside the United States that
may be purchased in the future, once we obtain regulatory approvals.
Additionally, to reflect payment of $58,000 as a preferential distribution
to Bridge, which has been reflected as a reduction of stockholders' equity,
and the payment of $4,500 to Bridge to reduce existing outstanding debt.
6) To reflect the proceeds, net of issuance costs, from the sale of 14,875,000
shares of common stock in this offering, at the initial public offering
price of $24.00 per share.
7) Pro forma loss per share is calculated assuming the sale of the number of
shares of common stock that will generate an amount of proceeds to pay a
total of $128,500 to Bridge, consisting of $66,000 for the network assets
not subject to capital leases, $58,000 as a preferential distribution and
$4,500 to reduce existing outstanding debt.
31
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
We derived the selected historical consolidated financial data presented
below as of and for each of the three years ended December 31, 1996, 1997 and
1998 from our audited consolidated financial statements. Our consolidated
financial statements as of and for the years ended December 31, 1996, and 1997
have been audited by Ernst & Young LLP, independent auditors. Our consolidated
financial statements as of and for the year ended December 31, 1998 have been
audited by Deloitte & Touche LLP, independent auditors. We began commercial
operations in 1996.
We derived the selected consolidated financial data presented below for
the nine months ended September 30, 1998, the period from January 1 to April 6,
1999, and the period from April 7 to September 30, 1999 and as of September 30,
1999 from our unaudited consolidated financial statements. We prepared the
unaudited financial statements on substantially the same basis as our audited
financial statements and, in our opinion, the unaudited financial statements
include all adjustments necessary for a fair presentation of the results of
operations for those periods. Historical results are not necessarily indicative
of the results to be expected in the future, and results of interim periods are
not necessarily indicative of results for the entire year. You should read the
information set forth below together with the discussion under the "Unaudited
Pro Forma Consolidated Financial Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and the notes to those financial statements that are in the back of
this prospectus.
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 unaudited consolidated balance sheet. The SAVVIS
unaudited historical consolidated balance sheet data as of September 30, 1999
and unaudited consolidated statement of operations data for the period from
April 7, 1999 through September 30, 1999 reflect our acquisition by Bridge and
are labeled "Successor." The SAVVIS historical 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 at that
time.
We calculate EBITDA as earnings (loss) before depreciation and
amortization, interest income and expense and income tax expense (benefit). We
have included information concerning EBITDA because our management believes
that in our industry such information is a relevant measurement of a company's
financial performance and liquidity. EBITDA is not determined in accordance
with generally accepted accounting principles, 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 generally accepted accounting principles.
Additionally, EBITDA as used in this prospectus may not be comparable to
similarly titled measures of other companies, as other companies may not
calculate it in a similar manner.
32
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR
-------------------------------------------------------------------------------
PERIOD FROM
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED JANUARY 1 TO
-------------------------------------------- SEPTEMBER 30, APRIL 6,
1996 1997* 1998* 1998* 1999*
-------------- -------------- -------------- ------------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ...................................... $ 290 $ 2,758 $ 13,674 $ 8,914 $ 5,440
Direct costs and operating expenses:
Data communications and operations 1,044 11,072 20,889 14,609 6,429
Selling, general and administrative .......... 1,204 5,130 12,245 7,353 4,751
Depreciation and amortization ................ 153 631 2,288 1,556 817
Impairment of assets ......................... -- -- -- -- 1,383
------------ ----------- ----------- ----------- ------------
Total direct costs and operating
expenses .................................. 2,401 16,833 35,422 23,518 13,380
------------ ----------- ----------- ----------- ------------
Loss from operations .......................... (2,111) (14,075) (21,748) (14,604) (7,940)
Interest expense, net ......................... (60) (482) (100) (138) (135)
------------ ----------- ----------- ----------- ------------
Net loss before minority interest and
extraordinary item ........................... (2,171) (14,557) (21,848) (14,742) (8,075)
Minority interest in losses, net of
accretion .................................... -- 547 (147) (147) --
Extraordinary gain on debt
extinguishment, net of tax ................... -- -- 1,954 1,954 --
------------ ----------- ----------- ----------- ------------
Net loss ...................................... $ (2,171) $ (14,010) $ (20,041) $ (12,935) $ (8,075)
============ =========== =========== =========== ============
Net loss attributable to common
stockholders ................................. $ (2,171) $ (14,161) $ (22,666) $ (14,674) $ (9,025)
============ =========== =========== =========== ============
Basic and diluted net loss per share
before extraordinary item .................... $ (.06) $ (.38) $ (.42) $ (.29) $ (.14)
Extraordinary gain on debt
extinguishment, net of tax ................... -- -- .03 .03 --
------------ ----------- ----------- ----------- ------------
Basic and diluted loss per common
share ........................................ $ (.06) $ (.38) $ (.39) $ (.26) $ (.14)
============ =========== =========== =========== ============
Weighted average shares outstanding ........... 35,396,287 36,904,108 58,567,482 56,735,597 66,018,388
============ =========== =========== =========== ============
OTHER FINANCIAL DATA:
EBITDA ........................................ $ (1,958) $ (12,897) $ (17,653) $ (11,241) $ (7,123)
Capital expenditures .......................... 884 697 1,688 1,308 275
Cash used in operating activities ............. (1,293) (10,502) (20,560) (15,530) (6,185)
Cash used in investing activities ............. (884) (697) (2,438) (2,058) (275)
Cash provided by financing activities ......... 2,740 12,024 24,121 24,445 4,533
<PAGE>
<CAPTION>
SUCCESSOR
--------------
PERIOD FROM
APRIL 7 TO
SEPTEMBER 30,
1999
--------------
(DOLLARS IN
THOUSANDS,
EXCEPT
SHARE AMOUNTS)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ...................................... $ 12,192
Direct costs and operating expenses:
Data communications and operations 13,095
Selling, general and administrative .......... 11,142
Depreciation and amortization ................ 9,747
Impairment of assets ......................... --
-----------
Total direct costs and operating
expenses .................................. 33,984
-----------
Loss from operations .......................... (21,792)
Interest expense, net ......................... (782)
-----------
Net loss before minority interest and
extraordinary item ........................... (22,574)
Minority interest in losses, net of
accretion .................................... --
Extraordinary gain on debt
extinguishment, net of tax ................... --
-----------
Net loss ...................................... $ (22,574)
===========
Net loss attributable to common
stockholders ................................. $ (22,574)
===========
Basic and diluted net loss per share
before extraordinary item .................... $ (.31)
Extraordinary gain on debt
extinguishment, net of tax ................... --
-----------
Basic and diluted loss per common
share ........................................ $ (.31)
===========
Weighted average shares outstanding ........... 72,000,000
===========
OTHER FINANCIAL DATA:
EBITDA ........................................ $ (12,045)
Capital expenditures .......................... 855
Cash used in operating activities ............. (9,945)
Cash used in investing activities ............. (855)
Cash provided by financing activities ......... 12,189
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
-------------------------------------- --------------
AS OF DECEMBER 31,
-------------------------------------- AS OF
SEPTEMBER 30,
1996 1997* 1998* 1999
-------- ------------ ------------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .................. $ 573 $ 1,398 $ 2,521 $ 1,983
Goodwill and intangibles, net .............. -- -- 1,406 30,322
Total assets ............................... 1,888 4,313 11,663 41,422
Debt and capital lease obligations ......... 1,126 8,814 2,759 23,237
Redeemable stock, net of discount and
deferred financing costs .................. 500 5,261 36,186 --
Stockholders' equity (deficit) ............. (693) (14,903) (33,197) 9,172
</TABLE>
* As discussed in Note 14 to our Consolidated Financial Statements, information
regarding 1997, 1998 and predecessor 1999 have been restated.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our financial
statements and the notes to those financial statements that are in the back of
this prospectus.
OVERVIEW
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 eight 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 850.
On March 4, 1998, we acquired Interconnected Associates, Inc., a regional
Internet service provider serving approximately 170 customers in Seattle,
Washington and Portland, Oregon, for $750,000 in cash and shares of our common
stock with an estimated fair value of $583,000. We accounted for the
acquisition using the purchase method of accounting.
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. Under the terms of the transaction, Bridge
issued approximately 3,011,000 shares of its common stock together with
approximately 239,000 options and warrants on its common stock in exchange for
all of our outstanding equity securities. 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 at
that time.
Simultaneously with the completion of this offering, we will acquire
Bridge's global Internet protocol network, which has been integrated with our
network since September 1999, for total consideration of approximately $88
million and we will pay a preferential distribution to Bridge of $58 million.
At that time, we will enter into a 10-year network services agreement with
Bridge under which we will provide managed data networking services to Bridge.
The purchase will substantially increase our depreciation and amortization. Our
fees will be 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 the date
of transfer. Our fees for additional services provided following the date of
transfer will be set for a three-year term based on an agreed price schedule
reflecting the estimated cost to provide the services. The price schedule for
additional services will be subject to annual review and negotiation between
Bridge and SAVVIS and will be mutually agreed upon by Bridge and SAVVIS or
determined by binding arbitration. Bridge has agreed to pay us a minimum of
approximately $105 million, $132 million and $145 million for network services
in 2000, 2001 and 2002, respectively.
34
<PAGE>
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 the fourth, fifth and sixth 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 under the network services agreement the amounts paid to us for
the services to be 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 will
result in losses and negative cash flow from operations until we can sell
additional services over that network to Bridge or other customers. However,
because Bridge is paying us the cash cost to operate the original network and
the estimated total cost for additional network facilities, we expect any
additional revenues generated from the use of the network to generate higher
incremental operating margins.
Bridge will also agree to provide to us various services, including
technical support, customer support and project management in the procurement
and installation of equipment. In addition, Bridge will agree 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 these capabilities by the end of 2000.
Revenue. Our revenue will be derived primarily from the sale of data
networking, Internet access and colocation services. 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 colocation services
to corporate customers. Beginning in September 1999, we began to offer managed
data networking services.
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. As of December 31,
1999, approximately 6% of our customer agreements, representing approximately
6% of our revenues for the month of December 1999, were month-to-month and were
able to be terminated on 30 days' notice. We expect the proportion of customers
on month-to-month agreements will continue to decrease as we add new customers
and our sales force continues to pursue longer renewals.
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.
We expect that a substantial portion of our revenues will be generated by
our network services agreement with Bridge. 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. As of December 31, 1999, Bridge had an estimated 135,000 trading
terminals connected to the SAVVIS ProActiveSM Network and an estimated 100,000
trading terminals connected over networks using older protocols. 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.
While we expect our revenues from Bridge to increase, we expect them to
decrease as a percentage of our total revenues as we expand our data
networking, Internet access and colocation customer base. We believe data
networking and colocation services will increase as a percentage of our
non-Bridge recurring revenues as we expand these service offerings.
35
<PAGE>
DIRECT COSTS AND EXPENSES. Direct costs and expenses are comprised of the
following items:
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 engineering salaries and related benefits;
o other related repairs and maintenance items;
o leasing routers and switches;
o leasing colocation space; and
o installing local access lines at customer sites.
These costs will also include the cost of the network operations center,
as well as the customer help desk and other services that will be provided by
Bridge under the technical services agreement. Data communications and
operations expenses will increase significantly with the inclusion of the
Bridge network. In addition, we expect that these costs will increase in total
dollars as we expand our network and increase our customer base, but we expect
that they will decrease as a percentage of revenues.
Selling, general and administrative. Selling, general and administrative
expenses include the cost of:
o sales and marketing salaries and related benefits;
o advertising and direct marketing;
o sales commissions and referral payments;
o office rental;
o administrative support personnel;
o bad debt expense; and
o travel.
We anticipate that these expenses will increase significantly in total
dollars as we add more sales personnel and administrative support personnel and
increase our marketing initiatives to support the acquisition of the Bridge
network and for the expansion of our customer base. Annual facility expenses
are expected to increase significantly beginning in the year 2000 as a result
of newly leased headquarters facility in Herndon, Virginia. Our incremental
cost will approximate $2 million per year. We expect noncash compensation
expense will materially increase as a result of stock options granted to
employees of SAVVIS and Bridge. During the period from October through December
1999, we granted 2,843,258 stock options with an exercise price of $.50 per
share. Noncash compensation cost based upon the difference between the exercise
price and the imputed fair value of our common stock as of the respective
option grant dates totalling approximately $53 million will be recorded over
the vesting periods of such options, which periods range from immediate up to
four years. Approximately $2 million of noncash compensation expense will be
recorded in the fourth quarter of 1999.
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 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 being amortized over one to three
years.
36
<PAGE>
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
will enter into capitalized leases with Bridge relating to their capitalized
leases for network equipment that Bridge could not directly assign to us. As a
result, our interest expense will increase.
Income tax expense. We incurred operating losses from inception through
September 30, 1999 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 we believe
that the future realization of the tax benefit is uncertain. As of December 31,
1998, we had net operating loss carry forwards of approximately $30 million.
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 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 carryforward periods ranging from 15 to 20 years.
As we 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 EBITDA to
increase substantially for the foreseeable future.
RESULTS OF OPERATIONS
The historical financial information included in this prospectus 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.
Subsequent to the issuance of our financial statements for the years ended
December 31, 1997 and 1998, we determined that the Class A shares of our
subsidiary represented a minority interest to which losses should be allocated
and for which accretion on the Class A shares and related convertible notes
should be recorded at an effective rate of 20%. We also concluded that the
exchange of these instruments for Class B preferred stock in March of 1998
should be treated as a debt extinguishment, with recognition of an
extraordinary item, and as the purchase of minority interest .
Period from January 1, 1999 to April 6, 1999 (Predecessor)
For the period from January 1, 1999 to April 6, 1999, which is the day
before the acquisition by Bridge of our company, revenue was approximately $5.4
million. Data communications and operations expenses for the period were
approximately $6.4 million, and selling, general and administrative expenses
were approximately $4.8 million. Depreciation and amortization expenses for the
period January 1, 1999 to April 6, 1999 were approximately $.8 million. An
asset impairment charge of approximately $1.4 million was also recorded during
this period. Interest expense, net, was $.1 million and the net loss for the
period was approximately $8.1 million.
Period from April 7, 1999 to September 30, 1999 (Successor)
For the period from April 7, 1999, which is the date of the acquisition by
Bridge of our company, to September 30, 1999, revenue increased to
approximately $12.2 million. Data communications and operations expenses for
the period were approximately $13.1 million, and selling, general and
administrative expenses increased to approximately $11.1 million. Depreciation
and amortization expenses for the period January 1, 1999 to April 6, 1999,
increased to approximately $9.7 million, due to the amortization of goodwill
and other intangible assets associated with the acquisition by Bridge. Interest
expense, net, was $.8 million and the net loss for the period was approximately
$22.6 million.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
The following discussion compares combined information of SAVVIS and our
predecessor for the nine months ended September 30, 1999, with those of our
predecessor for the nine months ended September 30, 1998. The combined
information consists of the sum of the financial data from
37
<PAGE>
January 1, 1999 through April 6, 1999 for the predecessor and from April 7,
1999 through September 30, 1999 for SAVVIS. The acquisition by Bridge resulted
in a new basis of accounting, which impacted depreciation and amortization in
the period subsequent to April 7, 1999.
Revenue. Revenue was approximately $17.6 million for the first nine months
of 1999, compared to approximately $8.9 million for the first nine months of
1998, an increase of 98%. This $8.7 million increase was primarily due to
increased marketing and sales efforts and the resulting increase in the number
of customers to 705 from 422, as well as a nominal increase in services to
existing customers.
Data Communications and Operations. Data communications and operations
expenses were approximately $19.5 million for the first nine months of 1999
compared to approximately $14.6 million for the first nine months of 1998, a
34% increase. This approximately $4.9 million increase was due to costs
associated with the expansion of our network and the increase in our customer
base, and the hiring of additional engineering personnel.
Selling, General and Administrative. Selling, general and administrative
expenses were approximately $15.9 million for the first nine months of 1999,
compared to approximately $7.4 million for the first nine months of 1998, an
increase of 115%. This approximately $8.5 million increase was due to the
increase in the size of our sales force in connection with our increased
marketing efforts. As a result, our personnel expenses and the related
recruiting and travel costs, sales, marketing and administrative departmental
costs and professional service expenses increased accordingly.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue. Revenue was $13.7 million in 1998 compared to $2.8 million in
1997, an increase of 389%. This $10.9 million increase was primarily due to
increased marketing and sales efforts and the resulting increase in the number
of customers from 102 to 476.
Data Communications and Operations. Data communications and operations
expenses were $20.9 million in 1998, compared to $11.1 million in 1997, an
increase of 88%. This $9.8 million increase was due to costs associated with
the expansion of our network and the increase in the customer base.
Selling, General and Administrative. Selling, general and administrative
expenses were $12.2 million in 1998, compared to $5.1 million in 1997, an
increase of 139%. The principal increase in these expenses resulted from the
increased size of our sales force in the second half of 1998. Marketing and
administrative costs also increased in 1998 to support the increased number of
customers.
Depreciation and Amortization. Depreciation and amortization expenses were
$2.3 million in 1998, compared to $.6 million in 1997, an increase of 283%.
Depreciation and amortization expense increased due to the purchase of
communications equipment for the expansion of our network and the acquisition
of Interconnected Associates.
Interest Expense, Net. Interest expense, net was $.1 million in 1998,
compared to $.5 million in 1997, a decrease of 80%. This $.4 million decrease
was directly attributed to the conversion of a portion of our convertible notes
into equity securities in connection with our corporate reorganization in March
1998 and interest income earned on proceeds received in the transaction.
Net Loss. Net loss was $20.0 million in 1998, which included a $1.9
million extraordinary gain on debt extinguishment, compared to $14.0 million in
1997, a 43% increase.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Revenue. Revenue was $2.8 million in 1997 compared to $.3 million in 1996,
our first year of operations. This $2.5 million increase was primarily due to
increased marketing and sales efforts and the resulting increase in the number
of customers from 15 to 102.
Data Communications and Operations. Data communications and operations
expenses were $11.1 million in 1997, compared to $1.0 million in 1996. This
$10.1 million increase was due to costs associated with the expansion of our
network and the increase in our customer base.
38
<PAGE>
Selling, General and Administrative. Selling, general and administrative
expenses were $5.1 million in 1997, compared to $1.2 million in 1996. This $3.9
million increase was primarily attributable to the expansion of our business,
including personnel expenses, sales and marketing costs and professional
services expenses.
Depreciation and Amortization. Depreciation and amortization expenses were
$.6 million in 1997, compared to $.2 million in 1996. This $.4 million increase
is attributable to the purchase of communications equipment for the expansion
of our network.
Interest Expense, Net. Interest expense, net was $.5 million in 1997,
compared to $.1 million in 1996. This $.4 million increase is attributable to
interest on capitalized lease obligations that we entered into in 1997 and the
interest on convertible notes and bank debt.
Net Loss. Net loss was $14.0 million in 1997, compared to $2.2 million in
1996. In 1997, $.5 million of our losses were allocated to our minority
interest, net of accretion.
LIQUIDITY AND CAPITAL RESOURCES
We have historically generated negative cash flows from operations. We
generated negative cash flows from operations of $15.5 million and $16.1
million for the first nine months of 1998 and 1999, respectively, and $1.3
million, $10.5 million and $20.6 million for 1996, 1997 and 1998, respectively.
From January 1, 1996 through September 30, 1999, we expended approximately
$90 million for operating purposes and for the construction, maintenance and
expansion of our network. Net cash used in investing activities was
approximately $1.1 million for the first nine months of 1999, and $.9 million,
$.7 million and $2.4 million for 1996, 1997 and 1998, respectively. Net cash
used in investing activities in each period primarily reflects purchases of
property and equipment not financed with capital leases. In March 1998, we used
approximately $.8 million in cash and stock with a fair value of approximately
$.6 million to acquire Interconnected Associates. See note 5 to our audited
financial statements that are in the back of this prospectus. Net cash provided
by financing activities was $16.7 million for the first nine months of 1999,
and $2.7 million, $12.0 million and $24.1 million for 1996, 1997 and 1998,
respectively. We obtained funds through issuances of equity securities and
convertible notes, bank financing, capital lease obligations and advances from
Bridge. As of September 30, 1999, we had outstanding loans from Bridge of
approximately $17.3 million.
We expect our capital expenditures will total approximately $1.2 million
for 1999. We expect to have capital expenditures, excluding the purchase of the
Bridge network assets, of approximately $149 million in 2000 as we build out
colocation facilities, deploy ATM devices and expand our network to 24 new
cities.
Upon completion of this offering, we will acquire Bridge's Internet
protocol network assets for total consideration of approximately $88 million.
Of this amount, $22 million will be paid by entering into a capital lease
obligation with Bridge. The remaining purchase price of $66 million will be
paid with a portion of the net proceeds of this offering. We will also pay to
Bridge, out of the offering proceeds, a $58 million preferential distribution.
In connection with our purchase of the network assets, we will also enter
into a network services agreement with Bridge under which we will provide
Bridge with managed data networking services. Because the amounts paid to us
under the network services agreement for the services to be provided over the
original network acquired from Bridge are based upon the cash cost to operate
the original network, the provision of such services 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 will result in our incurring losses from operations 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.
In connection with our acquisition of Bridge's network assets, Bridge will
assign to us numerous agreements for the purchase of communications services.
We are currently discussing with several of these suppliers the placement of
deposits or stand-by letters of credit by us. We estimate that we may be
required to deposit approximately $5 million for such purposes.
39
<PAGE>
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.
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 this offering, together with our
existing cash and cash equivalents, will allow us to continue in business as a
going concern and will be sufficient to fund our operating and capital needs
for a year following this offering. We are currently in discussions with two
separate vendors to obtain vendor financing for network equipment purchases. In
the absence of proceeds from this offering, our cash and cash equivalents would
not be sufficient and we would be required to seek capital from external
sources and curtail expansion plans. 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.
IMPACT OF THE YEAR 2000
Many computers, software, and other equipment include computer code in
which calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to produce
correct results if "00" is interpreted to mean 1900, rather than 2000. These
problems are commonly referred to as the "Year 2000 problem."
We believe that we have identified and resolved all Year 2000 problems
that could significantly harm our business operations. However, we believe that
it is not possible to determine with complete certainty that all Year 2000
problems affecting us have been identified or corrected. The number of devices
and systems that could be affected and the interactions among these devices and
systems are numerous.
The costs of upgrading the various hardware or software that were found
not to be compliant, as well as the cost of assessing and addressing Year 2000
compliance issues, were approximately $100,000. These costs were absorbed into
normal operating expense and salary structures.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments and hedging activities. As amended by Statement of
Financial Accounting Standards No. 137, this standard will be effective for us
for the fiscal years and quarters beginning after June 15, 2000, and requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. We
are currently evaluating the impact of this standard.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." This standard requires companies to expense the costs of start-up
activities and organization costs as incurred and is effective for fiscal years
beginning after December 15, 1998. We do not expect that adoption of this
standard will have a material impact on our results of operations.
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In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
Our adoption of this standard did not affect our financial position, results of
operations or cash flows for any period presented.
QUALITATIVE AND QUANTITATIVE MARKET RISKS
Our primary market risk exposures relate to changes in interest rates.
Following the purchase of Bridge's global Internet protocol network assets, we
expect to expand our business internationally, and as a result, we will be
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. These term notes mature one year after the completion of this
offering and bear interest at a fixed rate of 8%. In addition, in connection
with our purchase of Bridge's network assets, we expect to issue a three-year
promissory note that will bear interest at an annual rate of 10%. Because the
interest rate on these notes is fixed, changes in interest rates will not
directly impact our cash flows. As of December 31, 1998, the aggregate fair
value of our borrowings approximated their carrying value.
Changes in foreign exchange rates do not currently impact our results of
operations. Upon our purchase of Bridge's Internet protocol network assets and
our entry into the network service agreement at the completion of this
offering, we expect approximately 18% of our revenue from Bridge to be derived
from operations outside the United States, and approximately 17% of our direct
costs to be incurred outside the United States. Because our foreign revenue
will closely match our foreign costs, we do not anticipate that changes in
foreign exchange rates will have a material impact on our results of
operations. We may engage in hedging transactions to mitigate foreign exchange
risk.
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BUSINESS
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. Upon transfer of the
Bridge network to us and pursuant to a network services agreement between
Bridge and us, Bridge, one of the leading content providers to the financial
services industry, will pay us for the use of the SAVVIS ProActiveSM Network to
deliver Bridge's content and applications to over 4,500 financial institutions,
including 75 of the top 100 banks in the world and 45 of the top 50 brokerage
firms in the United States. Following the network transfer, these entities will
remain customers of Bridge. We currently offer a wide range of managed data
network services, high bandwidth Internet access services and colocation
services.
The SAVVIS ProActiveSM Network was constructed to meet the real-time data
delivery requirements of the demanding customers of the financial services
industry. Our network has been operational since 1996 and has over 6,000
buildings on-net in 83 of the world's major commercial centers in 43 countries.
Our network architecture is based on ATM, frame relay and Internet protocol
technologies. Additionally, our 83-city global system connects to eight
PrivateNAPsSM, which will be expanded to 12 by March 2000, 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. The network also allows us to tailor our service offerings to our
customers' needs and to offer a range of quality of service levels.
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. As of December 31, 1999 Bridge had an
estimated 235,000 network terminals installed worldwide of which an estimated
135,000 terminals were connected to the SAVVIS ProActiveSM Network. Bridge
expects to connect the remaining 100,000 terminals to our network over the next
three years. Bridge is a privately held company whose principal shareholder is
Welsh Carson, a sponsor of private equity funds with extensive experience in
the communication and information services industries. The high performance of
our Internet access services has been verified by our analysis of data
collected by Keynote Systems, Inc., which showed that we had the second best
mean download time in 1999. We currently provide Internet access services
directly to approximately 850 customers.
Following the Bridge asset transfer, our revenue will be derived primarily
from the sale of data networking, Internet access and colocation services.
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 expanded our service offering to
corporate customers as well.
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. As of December 31,
1999, approximately 6% of our customer agreements, representing approximately
6% of our revenues for the month of December 1999, were month-to-month and were
able to be terminated on 30 days' notice. We expect the proportion of customers
on month-to-month agreements will continue to decrease as we add new customers
and our sales force continues to pursue longer renewals.
RELATIONSHIP WITH BRIDGE
In April 1999, we were acquired by Bridge, a leading provider of content
to financial services companies. Upon the completion of this offering, we will
purchase Bridge's global Internet protocol network, which has been integrated
with our network since September 1999, for total consideration of approximately
$88 million. As a result, the SAVVIS ProActiveSM Network will interconnect over
6,000 buildings in 83 of the world's major commercial cities in 43 countries.
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In addition, upon completion of this offering, we will enter into a
10-year network services agreement with Bridge that commits Bridge to purchase
a minimum of approximately $105 million, $132 million and $145 million of
network services from us in 2000, 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 will
also enter into a number of other agreements with Bridge that contemplate,
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.
Following the completion of this offering and the purchase of Bridge's
network assets, we will become a provider of managed data networking services
to Bridge. At that time, we will connect Bridge to over 4,500 of its financial
services company customers, including 75 of the top 100 banks in the world and
45 of the top 50 brokerage firms in the United States, to allow Bridge to
deliver its content and applications. While the over 4,500 financial services
companies will remain customers of Bridge and we will only derive revenue from
Bridge for delivering Bridge content and applications to these companies, we
intend to aggressively market our services to occupants of the 6,000 buildings
connected to the SAVVIS ProActiveSM Network, in particular to Bridge's customer
base.
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. Internet and e-commerce services was $2.9 billion in 1997 and
is expected to grow to $22 billion by 2002, a 50% 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 38 million in
1996 and is forecasted to grow to over 170 million by the year 2000. 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
International Data Corporation, the market for data network services in the
United States grew from approximately $3.0 billion in 1997 to approximately
$5.5 billion in 1998. International Data Corporation expects that the market
for data network services in the United States will continue to grow rapidly to
reach approximately $12.8 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
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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 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.
Industry analysts expect the market for both Internet protocol-based data
networking services and Internet access to grow rapidly as companies increase
their use of the Internet, intranets extranets and privately managed Internet
protocol networks. According to industry analyst Forrester Research, Inc., an
independent research firm, the total market for Internet services is projected
to grow from $6.2 billion in 1997 to approximately $49.7 billion in 2002.
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 less than $1
billion in 1998 to almost $15 billion by 2003. 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 remarkable,
rapid success of Internet protocol, the Internet faces limitations that may
serve as a bottleneck between the full
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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.
COMPETITIVE STRENGTHS
Our target customers are those businesses that are intensive users of data
communications that require a high quality of service for their global data
networking and Internet needs. Our competitive strengths in servicing these
customers include:
Large number of sophisticated users connected to our network. Bridge uses
the SAVVIS ProActiveSM Network to deliver its content and applications to over
4,500 financial services firms, including 75 of the top 100 banks in the world
and 45 of the top 50 brokerage firms in the U.S. Because these financial
services firms depend on up-to-the-minute information and cutting edge
technology to successfully compete in their businesses, they are demanding
users of corporate data services. The SAVVIS ProActiveSM Network was designed
and is operated to high standards of speed and redundancy to satisfy their
requirements, with multiple backbone connections, local access lines and ATM
switches. With the SAVVIS ProActiveSM Network in place, the marginal cost of
providing additional services to existing Bridge customers is low.
Additionally, the marginal cost of making our high quality services available
to new customers, including medium and small businesses and new vertical
markets, is also low. We believe providing service to Bridge to enable them to
deliver content to the world's major financial institutions will significantly
advance our brand building efforts and enhance our prospects for winning new
business.
Network engineered for real-time performance. Our network architecture
allows us to deliver data services to the demanding customers that require
real-time delivery of large volumes of data, such as financial services
participants that rely on data sent on our network to make trading and
investment decisions throughout the day. The high performance of our Internet
access services has been verified by our analysis of data collected by Keynote
Systems, Inc., which showed that we had the second best mean download time in
1999. In order to achieve this, we designed our network to be highly redundant,
including multiple backbone connections, local access lines and Internet
connections. In addition, our system of PrivateNAPsSM allows our Internet
traffic to bypass the heavily congested public access points of the Internet,
thereby reducing data loss and latency, and improving reliability and
performance. We also use proprietary routing and network management policies to
enhance our network efficiency and to maintain a high quality of service. The
reliability and functionality of our network allows us to provide our customers
with a range of services and quality of service levels.
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Global network presence. Our network will reach 43 countries, with
facilities in 83 major cities, including 58 international cities and 25 U.S.
cities. We intend to continue to extend the scope of our network by connecting
an additional 24 cities in 2000. We have over 6,000 buildings connected to our
network. Because our network is already connected to these buildings as a
result of our relationship with Bridge, we can deliver our services to Bridge's
customers and the other tenants with low marginal cost and a time-to-market
advantage.
Single source service offering. We provide our customers with a single
source for a wide range of global data networking, Internet access and
colocation services. Our global data networking services include managed data,
virtual private network and dial-up access services. Our Internet-related
services include dedicated access, DSL and Internet security services. All of
our services are offered on a service-only basis and a fully managed basis,
with service and equipment included, depending on customer requirements and the
capabilities of their internal information technology staff.
World-class service through proprietary systems. The global data network
operations center in St. Louis and regional network operations centers in
London and Singapore are equipped with sophisticated network monitoring,
management, reporting and diagnostic tools for network troubleshooting. These
systems enable real-time remote monitoring and management of our network
equipment and customer service. Our customers can contact us 24 hours a day,
365 days a year, with support inquiries, and receive prompt notification of
events that might impact service quality, such as network congestion, equipment
failures and network or power outages. Our global data network, based on the
combination of ATM technology and our PrivateNAPsSM, also enables us to provide
our customers with an extremely high level of service. We commit this level of
service to our customers in writing in service level agreements. Our service
level agreements are guarantees to our customers of high quality service
measured in terms of network availability, latency and data loss.
BUSINESS STRATEGY
Our objective is to tap the rapidly growing market for reliable, high
speed data communications and Internet services. In pursuit of this objective,
we intend to:
Provide a single source for managed data network services and high quality
Internet services. 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
both Internet 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. Since the
requirements and internal capabilities of customers vary significantly, we
offer our services on a service-only basis and a fully managed basis, with
service and equipment included.
Capitalize on Bridge relationships to penetrate its customer base. We
intend to aggressively market our services to the over 4,500 Bridge customers
already connected to our network through both our sales force and the over 500
Bridge sales representatives around the world. We provide incentives to Bridge
employees to refer Bridge customers to us. Since Bridge customers are already
connected to our network, we believe we enjoy significant time-to-market, cost
and quality advantages and enhanced customer retention when delivering our
services to these customers.
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.
Expand our network and PrivateNAPsSM infrastructure. We intend to leverage
the substantial investments made in our network infrastructure and service and
support capabilities to service new customer segments, including large
corporations in other targeted vertical markets, medium and small
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businesses and Internet service providers. We intend to continue to expand our
data network infrastructure to connect new cities and new buildings to our
network. Over the next two years, we expect to establish facilities in 48
additional cities worldwide. We believe that this expansion will allow us to
continue to expand our customer base, improve our service offerings and improve
our economies of scale. We also intend to continue the expansion of our
PrivateNAPsSM with the addition of four PrivateNAPsSM in early 2000. Given the
high volume of traffic that is carried on our network, we are also evaluating
the purchase of local and long haul fiber to further reduce network operating
costs.
Grow domestic and international distribution channels. We intend to
aggressively grow our distribution channels. We expect to significantly
increase the size of our sales force for both global data networking services
and Internet access services in 2000 and enter into distribution arrangements
with companies licensed to provide our services in markets where we do not
directly hold such licenses. We will also attempt to establish relationships
with our Internet service provider customers who are interested in
cross-selling our global data networking services to their existing customer
base.
Provide enabling infrastructure for e-commerce services. We believe that
many of our target customers, particularly the financial services companies
that receive Bridge content and applications, are aggressively pursuing
e-commerce strategies. We believe that our network architecture of ATM
technology and PrivateNAPsSM, highly available domestic and international dial
access platforms and security services will enable businesses to communicate
with customers and suppliers over the Internet and secure websites. As a
result, we believe that we are well positioned 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 and intend to 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, onto our network at a reduced cost. We are also in the
process of upgrading and expanding our colocation data center facilities to
over 250,000 square feet of space, and expect to offer complex web hosting
services at these facilities. We intend to further expand our relationship with
Bridge to develop tailored product offerings which bundle news, financial
content and trading applications with our data networking services. We also
intend to develop bundled content or applications and network services with
other trading partners targeted at new vertical markets.
SAVVIS SERVICES
We believe that we are well positioned to solve the major problems
currently facing Internet and data networking customers. We designed the SAVVIS
ProActiveSM Network to offer a guaranteed, superior 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, colocation 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 on a service-only basis and 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.
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Global Data Networking Services
The SAVVIS ProActiveSM Network provides a reliable, high quality
environment to transfer private corporate data among offices, employees,
customers and suppliers because our network uses multiple backbones, switches
and local connections to attain a high level of redundancy and is monitored 24
hours a day, 365 days a year. Because all of our global data networking
services are carried over a single network, we are able to offer these services
on a cost-effective basis relative to less technologically advanced private
line networks, while providing comparable quality and security and significant
improvements in redundancy, flexibility and scalability.
Managed Data Networking. Managed data networking services provide data
communication links over a shared network environment. Because we operate,
manage and monitor our global network end-to-end, we are able to provide our
customers with higher performance and greater reliability than networks that
utilize the public Internet. Customers can connect to our data network using
ATM, frame relay or Internet protocol technologies. Customers contract for
connectivity to our global network and configure software-based permanent
virtual circuits that emulate much of the functionality of private lines, but
with improved scalability and redundancy and the ability to "burst" beyond the
stated capacity of the permanent virtual circuits. Our managed data networking
services are designed for those customers that require a very high level of
quality and security for their networking services.
Virtual Private Network Services. For customers who want to realize the
cost benefits of a shared network but do not require the level of performance
and security of our managed data networking services, we offer our
Internet-based virtual private network services. Virtual private networks
utilize the near-ubiquity of the Internet to provide cost-effective
connectivity for businesses with large numbers of sites, mobile workers or
sites that do not have high bandwidth requirements or that are in remote
locations. A typical Internet-based virtual private network supports dial-up
access, resulting in extensive geographic coverage and, together with the
implementation of tunneling, encryption, authentication and access control
technologies, can establish a secure link between the mobile worker and the
corporate network environment. One of our primary competitive advantages is
that our Internet-based virtual private network customers are served by our
high performance network.
Packet Transport Services. We offer point-to-point data connection
services, which are implemented as ATM or frame relay permanent virtual
circuits, for customers requiring high bandwidth point-to-point network
communications.
Dial Access. By the end of 2000, we plan to offer local dial access in
over 20 U.S. markets, toll- free dial access for all other U.S. markets as well
as international dial access. By the middle of 2001, we expect to provide local
dial access in approximately 100 U.S. cities, increasing to approximately 300
U.S. cities by the end of 2001. Our dial access service will enable mobile
workers, telecommuters and small-office and home-office users to connect to our
high quality global data network. This service is targeted at those businesses
with extensive extranets designed for e-commerce services and companies with a
significant number of mobile workers who demand reliable, high-quality dial-up
services.
Internet Access Services
We offer our customers in the U.S. a broad range of Internet access
services designed to meet the varied needs of corporate customers and regional
Internet service providers. Our Internet access services range from high-speed
continuous access provided by dedicated telephone circuits to lower-cost
dial-up services. The principal features of our Internet access services are
the high performance, reliability and flexibility provided by the SAVVIS
ProActiveSM Network that is connected to our system of PrivateNAPsSM allowing
our customers to bypass the congested public Internet access points. We plan to
make these services available outside the U.S. beginning in the third quarter
of 2000. The high performance of our Internet access services has been verified
by our analysis of data collected by Keynote Systems, Inc., which showed that
we had the second best mean download time in 1999.
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Dedicated Access. We offer customers a range of bandwidth options, from
128 kilobits per second to 155 Mbps on a fully dedicated or burstable basis. We
also provide all required Internet protocol addresses, primary and secondary
domain name service, newsfeed service and network time protocol.
Ethernet Service. For customers that seek a cost-effective 100% fiber
optic network technology for high-speed Internet access, we offer our 10 Mbps
Ethernet service. Our Ethernet service transmits information through a
customer's existing local area network router. This service is an intermediate
upgrade between our 1.5 Mbps service and our fractional 45 Mbps service.
DSL Service. For commercial customers that seek cost-effective continuous
connectivity for high-speed Internet access, we offer symmetric DSL services at
speeds up to 1.5 Mbps. DSL services transmit information through a customer's
existing copper telephone lines by encoding the information in a digital
format. We currently offer DSL services in 16 U.S. cities, and we expect to add
service to approximately 12 additional cities by the end of 2000.
Wholesale Internet Access. We provide wholesale Internet access to local
and regional Internet service providers who use our network to connect their
customers to the Internet.
Internet Security Services. For companies using the Internet, protection
from internal and external threats to their corporate network is extremely
important. We offer a broad range of security services designed to provide a
customer with the ability to:
o authenticate users attempting to gain access to its network;
o prevent intruders from accessing its network;
o protect the integrity of the content on its network; and
o encrypt secured transmissions of company data through the Internet.
We evaluate and assess a customer's security needs, recommend appropriate
security services, and implement, manage, monitor and maintain these services.
We also perform security audits to find deficiencies in a customer network and
in host computers attached to that network and recommend appropriate services.
Our security services utilize the products and services of Netrex, Inc., a
well-known Internet security provider.
Colocation Services
We offer customers a secure, fault-tolerant environment in which to locate
their mission-critical content and networking hardware. We provide these
services in colocation data center facilities that are currently being upgraded
and expanded to over 250,000 square feet of space. These state-of-the-art
facilities are located directly on our network to provide high quality,
cost-effective Internet access and hosting to the web sites of our colocation
customers. We expect to complete upgrades and expansions during 2000 in Boston,
London, New York, St. Louis, Los Angeles, San Francisco, Dallas, Chicago and
Washington, D.C. By using our colocation facilities, customers enjoy a highly
secure, fault-tolerant environment and direct access to our global data network
and avoid significant capital outlays required to construct such facilities on
their own. Customers have physical and remote access to our colocation
facilities 24 hours a day, 365 days a year, to manage, monitor and maintain
their equipment, or they may engage us to provide support services. Our
colocation services are targeted at content providers, Internet-centric
businesses and application service providers.
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.
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Direct Sales. Our direct sales force consisted of approximately 100 sales
representatives and sales engineers in the U.S. as of December 31, 1999. Our
direct sales force is specialized along product lines, which enables our sales
representatives to develop an expertise in a specific product area, including
customer applications and requirements. This specialization also allows us to
customize our sales compensation arrangements to the sales cycle, revenue and
margin characteristics of each product. 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.
Our sales force is divided between our Global Networking Sales Division
and our Internet Access Sales Division. We employ a distributed sales model for
global networking sales to facilitate a consultative sales approach. Because we
only recently began marketing our global data networking services, our global
data networking sales force currently consists of eight people based in six
major cities in the U.S. We intend to rapidly expand our sales force and
establish a sales presence in 14 additional cities worldwide by the end of the
first quarter of 2000. In contrast, we have a centralized sales model for our
Internet Access Sales Division. Our Internet access sales force consists of
approximately 100 representatives based in Reston, Virginia. We intend to
locate additional centralized sales teams in Europe, Asia and Latin America by
the end of 2001.
Bridge Lead Referrals. We expect to capitalize on our relationship with
Bridge, a major content provider to financial services companies, to generate
sales leads in the financial services market. As of December 31, 1999, Bridge
had approximately 500 sales representatives worldwide, located in the world's
key financial centers. These sales representatives support a customer base of
over 4,500 financial services companies already connected to our network. We
expect to be able to provide these businesses with additional services in a
rapid, cost-effective and scaleable manner. In addition to Bridge, 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 intend to develop new distribution arrangements with Internet-related and
communications companies. Many of these companies lack our network
infrastructure or sales and technical support expertise for high value-added
data services. By entering into relationships with us, these companies will be
able to generate additional revenues, provide a more complete service bundle
and reduce customer churn. We intend to pursue distribution opportunities with
Internet service providers, competitive local exchange carriers, DSL companies
and other communications and Internet-related companies in the U.S., Europe,
Asia and Latin America.
Client Solutions Team. 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 a managed data networking client on Internet and
e-commerce 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 corporate data networking services and Internet
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, IT Expo and Internet World. At
the 1999 Networld+InterOP show, our virtual private network services were named
the "Best of Show" for wide area network services. 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
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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.
CUSTOMERS
We currently provide services to approximately 850 customers. Upon
completion of the Bridge asset transfer, Bridge will enter into a network
services agreement with us and will be our largest customer. 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. We expect that Bridge will account for
a significant percentage of our revenues during 2000. No individual customer
accounted for more than 5% of our revenues during the nine months ended
September 30, 1999. 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 will be for ten years. 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 requirements 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 services on a service only basis and a fully managed basis, with
service and equipment included, that are tailored to meet customer needs;
and
o providing effective 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 voice, 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.
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Customer Call Centers. Customer support personnel located in call centers
in St. Louis, Missouri, London, England and Singapore handle service inquiries
from our customers 24 hours a day, 365 days a year, 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 September
1999 its call centers answered an average of 6,000 calls per week, maintained
an average hold time 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 scalable 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 or Bridge 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 ProActiveSM Network enables us to provide effective service level
agreements to our customers. We believe that companies unable to support a
commensurate level of predictable network performance will not be able to
provide service level agreements with value to the customer or will do so at
substantial risk to their own business.
SAVVIS PROACTIVESM NETWORK INFRASTRUCTURE
Overview
The following description of the SAVVIS ProActiveSM Network gives effect
to the acquisition of Bridge's Internet protocol network which will be
completed simultaneously with the completion of this offering.
The SAVVIS ProActiveSM Network reaches 43 countries, with facilities in 83
major cities, including 58 international cities and 25 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 eight
PrivateNAPsSM, which will be expanded to 12 in early 2000 and which allow 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,
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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. As we deploy ATM devices at the customer premises in the first
quarter of 2000, customers will be able 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 175 Lucent ATM and frame relay
switches, providing a highly redundant switch backbone deployed throughout the
SAVVIS ProActiveSM Network. We have over 300 backbone routers installed and
there are approximately 10,000 Nortel routers located in office buildings and
on Bridge's customers' premises. 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 155 Mbps in the U.S. and 45 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.
PrivateNAPsSM. For our customers' Internet traffic, we have built private
network access points, or PrivateNAPsSM, where we connect to the Internet
backbones operated by Sprint Corporation, Cable & Wireless plc and UUNET, an
MCI Worldcom company. At each of our PrivateNAPsSM, 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 eight PrivateNAPsSM in the U.S. and plan to
add four additional PrivateNAPsSM in early 2000. In addition, to enhance our
carrier redundancy, at each of our PrivateNAPsSM, 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., DIGEX, Incorporated,
Exodus Communications, Inc., Frontier GlobalCenter, Level 3 Communications,
LLC, PSINet Inc. and Williams Communications Group, Inc. These peering
arrangements allow for settlement-free, direct connections between networks,
where local access charges are generally split evenly between the applicable
parties. Smaller Internet service providers typically connect to our network
through transit agreements that allow them to connect to our network for a fee.
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Our PrivateNAPSM 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 PrivateNAPSM get one-hop
access, meaning their data pass through only one router, when communicating
with each other, and two customers connected to different PrivateNAPsSM 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.
Dial Access Platforms. We are currently deploying 25 Nortel dial access
platforms in over 20 cities in the U.S., which we expect to have completed by
the end of 2000. By mid-2001, we expect to have deployed dial access in
approximately 100 U.S. cities, increasing to approximately 300 U.S. cities by
the end of 2001. Our dial coverage will be supplemented by toll free dial
access where we do not have local dial access, and by the end of 2001 the
platforms are expected to contain over 20,000 ports.
Colocation. We are in the process of upgrading and expanding our Internet
colocation data center facilities to over 250,000 square feet of space. We
expect to complete the upgrade and expansion during 2000 in Boston, London, New
York, St. Louis, Los Angeles, San Francisco, Dallas, Chicago and Washington,
D.C. All of these facilities will be served by multiple 2.5 gigabits per second
connections for local access. Development is underway to elevate these
facilities 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. These facilities
include two fully redundant colocation facilities in St. Louis, Missouri, each
of which will contain approximately 90,000 square feet, approximately 60,000 of
which will be subleased to Bridge.
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
ProActiveSM Network, including our PrivateNAPsSM, 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 scalable 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.
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X.25 was an early open shared network protocol that was designed to
support mission-critical communications over analog networks. X.25 has been
extremely popular outside of the U.S., where until recently private line
networks have remained expensive, and in developing markets where the
telecommunications infrastructure is sometimes unreliable. X.25 contemplates
extensive error detection and data recovery processes, which slows the
effective rate of transmission.
Today, ATM, frame relay and Internet protocol are driving the migration of
traffic from private line networks to shared networks and from older open
protocols such as X.25 to newer architectures.
Frame Relay. Frame relay evolved from X.25 networks and today is widely
used for applications such as local area network-to-local area network
communications. Unlike X.25, frame relay does not perform any complex error
detection or error recovery of data. As a result, it is a simpler and faster
technology. Frame relay circuits are effective to create a network of
interconnected sites because each site needs only one link into the frame relay
network to communicate with all other sites. Frame relay is less costly than
point-to-point private networks, and its software-defined "virtual circuits"
make it easier to alter network topology as connectivity requirements change.
One limitation of the frame relay protocol is its application for real-time
services. Frame relay packets are variable in length, and as large data files
transit the network they can cause delays at key aggregation and switching
points, often causing other traffic to be delayed. These delays can materially
degrade the quality of real-time services such as voice and video.
ATM. The ATM protocol was specifically designed to support the
transmission of all types of content, including data, video and voice, over a
single network. ATM is unique in its 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 switching 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 scalable 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 ProActiveSM Network 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:
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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. These companies have significant experience in offering
tailored services and market their expertise in providing these services and
related technology. For example, Reuters Group plc and Equant N.V. recently
announced that they intend to form a joint venture for the purposes of offering
Internet access to the financial services industry. There are also a number of
new entrants, such as Digital Island Inc., that are targeting specific niches
to deliver customers' data traffic worldwide.
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 Apex Global
Information Services, Inc., AT&T Corp., Cable & Wireless plc, GTE
Internetworking, ICG Communications, Inc., Intermedia Communications Inc.,
PSINet Inc., Sprint Corporation, UUNET, an MCI Worldcom company, Concentric
Network Corporation and Verio Inc. Many of these companies are developing
Internet-based virtual private network services that attempt to replicate some
or all of the functionality of our managed data networking services.
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.
Other Competitors. Because we offer a broad range of services, we
encounter competition from numerous businesses which provide one or more
similar services. For example, we compete with companies such as Exodus
Communications, Inc., Qwest Communications International Inc., Global Crossing
Ltd., DIGEX, Incorporated and Level 3 Communications, Inc. in the colocation
facilities market.
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 six
major markets consist of the United States, the United Kingdom, Germany,
France, Italy and Japan. Data networking and Internet access services are now
open to competition in all of these foreign markets, but a license is required,
except for France where no license is required. We believe that we are licensed
to provide data networking and Internet access services as an independent
operator under the applicable telecommunications regulations in the United
Kingdom, that in France we are authorized to provide such services without any
license and that in Germany we have notified the necessary authorities to allow
us to provide such services. In Italy, the provision of such services to only
Bridge does not require any license, and we have filed the application for the
appropriate licenses to offer such services to the general public as well. In
Japan, we are currently authorized to provide data networking services only to
Bridge and are in the process of making application for the appropriate license
to offer services to third parties.
In most other countries that we believe represent significant revenue
potential, our data networking and Internet access services are now open to
competition, although in most cases a license is required. In some of these
countries, including Australia, Denmark, Finland, Hong Kong, The Netherlands
and Norway, we are authorized to provide data networking and Internet access
services to Bridge and third parties. However, in the remainder of these
countries, including Brazil, Canada, Chile, India, Indonesia and the
Philippines, we are authorized to offer data networking services only to
Bridge, or to offer only data networking services, but not Internet access
services, to Bridge and third parties. Our business plan does not contemplate
selling significant services outside of the U.S., except 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.
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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. These Bridge network assets generally will not be
transferred to us as part of the Bridge asset transfer because of
telecommunications licensing or other regulatory requirements.
We are in the process of seeking regulatory approvals in some countries to
offer services to Bridge and third parties, including Greece, Ireland, Hungary,
Malaysia, Taiwan, Thailand, Mexico and Venezuela. Although we expect the asset
transfer to occur in Greece, Ireland, Hungary, Poland, Taiwan, Mexico, and
Venezuela within one year after the completion of this offering we cannot
assure you that we will obtain any of these approvals. We do not believe that
the failure to obtain these licenses will have a material impact on our
revenues as we do not expect revenues from non-U.S. customers to be substantial
in the near term.
World Trade Organization Agreement and its Implications
On February 15, 1997, 69 countries at the World Trade Organization reached
an agreement to liberalize market access and introduce national treatment in
basic telecommunications services. Since then, two of the 69 participants have
submitted improved basic telecommunications schedules and three World Trade
Organization members who did not participate in the negotiations have submitted
commitments, bringing the total number of governments with basic
telecommunications schedules to 72. In February 1998, the results of the World
Trade Organization negotiations on market access for basic telecommunications
services formally entered into force and became binding on the signatory
countries.
Despite the World Trade Organization agreement, 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 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.
Corporate Presence. In a number of jurisdictions, we are permitted to
provide data networking or Internet access 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.
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 the foreign countries in
which we expect to generate significant revenue from data networking services.
In the European Union member countries, such services may be provided upon the
satisfaction of a simple registration, notification or authorization procedure,
in some cases, without the need for any formality.
Internet Access Services. The Internet access services that we provide in
the U.S. do not require any authorization. The Internet access services that we
offer outside of the U.S. generally do not require any authorization beyond
those required for managed data networking services and value added services.
However, because the regulation of Internet access is ill-defined or in flux in
some countries, there is a risk that customers are using our network to access
the Internet in countries that may prohibit, or wish to prohibit, such access.
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
Internet access.
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Substantive Regulation in Key Markets
The regulatory regimes applicable to the United States, the United
Kingdom, Germany, France, Italy and Japan, which will be our six major markets
following the Bridge asset transfer, as well as that of the European Union, are
summarized below.
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 data networking services without significant legal
constraints. We provide these services on a resale basis or a facilities basis.
To the extent that any of these planned or future services require prior
authorization, either by the Federal Communications Commission, or 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, as is also the case in the
European Union. The regulatory classification and treatment of some of these
services has not been resolved authoritatively in the United States, 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 provision of basic telecommunications services on a common carrier
basis is subject to regulation in the United States. An entity that provides
such services on a common carrier basis is classified as a telecommunications
carrier. Interstate and international common carrier services provided by a
telecommunications carrier are subject to the FCC's jurisdiction under Title II
of the Communications Act. Intrastate telecommunications services are subject
to regulation by the relevant state Public Utility Commission.
We believe that the products and services we offer are not subject to
regulation, but there is some risk that the FCC or a state commission could
determine that our products and services should require specific authorization
or be subject to other regulations. If that were to be the case, these
regulatory requirements could include prior authorization requirements,
tariffing requirements and the payment of contributions to federal and
state-created subsidy mechanisms applicable to providers of telecommunications
services. Some of these contributions would be required whether or not we would
be subject to authorization or tariff requirements.
There also is some uncertainty about the regulatory status of voice
services provided on 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.
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 are
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
allowing them to delay the full liberalization of their telecommunications
regime until a later date. As a result, Luxembourg liberalized its
telecommunications regime on July 1, 1998; Spain and Ireland liberalized on
December 1, 1998; and Portugal liberalized on January 1, 2000. Currently, only
Greece is not required to have a fully liberalized telecommunications regime.
Greece is required to liberalize on December 31, 2000.
The process of opening up the telecommunications markets in the European
Union 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
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European Council aimed at ensuring that a minimum set of harmonized rules, to
ensure fair competition, 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
late or inadequate implementation, as well as the irregular enforcement by the
domestic regulatory authorities of some European Union member states.
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" are licensed, with licenses for
the provision of specific services being the exception. This authorization
regime also is based on licenses, rather than regulations or other generally
applicable instruments. There are two broad types of licenses, individual and
class. Finally, with minor exceptions, regulatory treatment under this act does
not hinge on whether the license applies to data or voice.
We provide our managed data networking services and value added services
on an international basis under the Telecommunications Services License, which
is a class license. This license authorizes the provision of fixed
telecommunications services of any description, other than international voice
services, broadcasting and conditional access services. This license allows the
connection of the licensee's telecommunications system to essentially any other
licensed system, and allows the commercial supply of services to third parties
from up to 20 premises. Internet access services are not subject to additional
service-specific regulation.
Germany. The legal framework for the deregulation in the
telecommunications sector in Germany was transformed by the Telecommunications
Act of 1996, which became effective on August 1, 1996, and its implementing
ordinances adopted since then. This act has liberalized most telecommunications
services, subject to a licensing regime that is in conformity with European
Community law in all material respects. However, some telecommunications
services, such as asynchronous DSL, are not liberalized. Nevertheless, the
managed data networking services and value added services that we offer can be
provided in Germany upon notifying the regulatory authorities, which we have
done.
France. The legal framework for regulation in the telecommunications
sector in France was transformed by 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, subject to a licensing regime
that is in conformity with European Community law. The data networking services
we provide, whether managed data networking services or Internet access
services, currently do not require any form of authorization.
Italy. Pursuant to law No. 103/1995 and subsequent decrees, the provision
of telecommunications services in Italy to the general public is subject to the
granting of two specific authorizations from the Ministry of Communications.
One authorization relates to provision of telecommunications services through
direct access to the public network, including Internet access services, and
one authorization relates to provision of packet- and circuit-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. Voice
telephony and telecommunications infrastructures are subject to an individual
license. We are in the process of filing the two requests for authorization.
Japan. The legal framework for regulation in the telecommunications sector
in Japan is the Telecommunications Business Law. This law requires a special
type 2 license if a company makes its international communication facility,
including privately leased international lines, available to any third party
for the purpose of telecommunication by that third party. In this context, the
term "telecommunication" encompasses the act of data transmission. Accordingly,
if a company provides its customers access to an overseas database through its
leased lines, it will be required to obtain a special type 2 license. However,
if a company were to replicate the database in Japan and permit access to the
database from within the country, the Telecommunications Business Law would not
apply, even if all the information were transmitted directly to the database
from an overseas parent company or subsidiary.
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Under the Telecommunications Business Law, information transfers exclusively
between a parent company and its subsidiary are exempt from licensing.
Moreover, if a company provides Internet access services directly or indirectly
through the local Internet access providers that hold a type 1 license or a
special type 2 license, it will only be required to obtain a general type 2
license, in general. We are in the process of applying for a special type 2
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
European Union member countries. As a matter of practice, Switzerland and
Norway conform their regulatory frameworks to the European Union model. By
contrast, in Hungary, upon filing the necessary notification, a foreign owned
subsidiary may provide limited data networking services to a defined group and,
upon receipt of necessary licenses, may provide Internet access services. In
Poland, however, minimum local ownership requirements limit greatly the extent
to which data networking or Internet access services may be provided.
Asia, excluding Japan. Regulatory regimes vary greatly in character
throughout Asia. At the liberalized end of the range, countries such as
Australia and New Zealand have liberalized policies that require no licenses to
provide data networking and Internet access services. Other countries, such as
Taiwan, are open to competition, but require service providers to comply with
extensive licensing procedures. At the more restrictive end, countries such as
Indonesia and India require some minimum level of domestic ownership in order
to provide data networking and Internet access services to persons other than
Bridge.
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. Despite our efforts to protect our proprietary rights,
departing employees and other unauthorized parties may attempt to copy or
otherwise obtain and use our products and technology. Monitoring unauthorized
use of our products and technology is difficult, and we cannot be certain that
the steps we have taken will prevent misappropriation of our technology,
particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States.
EMPLOYEES
As of December 31, 1999, we employed 212 full-time persons, 67 of whom
were engaged in engineering, operations and customer service, 117 in sales and
marketing, and 28 in finance and administration. 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.
FACILITIES
Our executive offices are located in Reston, Virginia and consist of
approximately 10,500 square feet that are leased under an agreement that
expires in 2004. We lease facilities for our sales offices and network
equipment in a number of metropolitan areas and specific cities. We also lease
approximately 10,000 square feet from Bridge in St. Louis, Missouri. We are
negotiating a ten and a half year lease for an 80,000 square foot facility in
Herndon, Virginia to house our executive management, sales and marketing
personnel and our Washington, D.C. colocation data center facility. 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.
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.
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RELATIONSHIP WITH BRIDGE
This is an offering of shares of common stock of SAVVIS and not Bridge.
The following information has been provided because a significant portion of
revenues of SAVVIS is expected to come from Bridge. Purchasers of our common
stock will not acquire an interest in Bridge.
You should read Bridge's financial statements and the notes thereto, as
well as the Management's Discussion and Analysis of Financial Condition and
Results of Operations of Bridge that are included in the back of this
prospectus.
The following selected financial information for the years ended December
31, 1996, 1997 and 1998 was derived from Bridge's audited financial statements.
The financial information for the nine months ended September 30, 1999 was
provided by Bridge and is unaudited.
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEARS ENDED DECEMBER 31, ENDED
------------------------------------------- SEPTEMBER 30,
1996 1997 1998 1999
------------- ----------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
- -----------------------------
Revenues ...................................... $ 269,312 $ 409,926 $ 892,141 $ 958,435
Loss from operations (1) ...................... (40,543) (33,647) (69,046) (66,140)
Net loss (1) .................................. (60,796) (68,610) (142,861) (134,377)
OTHER FINANCIAL DATA:
- ---------------------
EBITDA before acquisition related
writeoffs .................................... 25,113 50,902 160,260 153,712
Acquisition related write-offs ................ 6,500 5,396 28,709 --
Cash (used in) provided by operating
activities ................................... (19,484) 10,404 46,304 (76,025)
Cash used in investing activities ............. (292,449) (56,948) (498,936) (123,847)
Cash provided by financing activities ......... 322,679 43,384 473,812 203,542
</TABLE>
- ----------
(1) Bridge has used amortization periods ranging from three years to 40 years
for goodwill and other intangibles. If they had used amortization periods
of no longer than ten years, the loss from operations would have been
$48.6 million, $51.0 million, $106.9 million and $111.8 million and the
net loss would have been $68.7 million, $86 million, $180.7 million and
$180 million for the periods ended December 31, 1996, 1997, 1998 and
September 30, 1999, respectively.
Bridge has informed us it continued to use cash in its operating
activities for the fiscal quarter ended December 31, 1999 and that the cash
used in operating activities in 1999 was primarily due to temporary working
capital pressures experienced in the course of integrating its recent
acquisitions, as well as declines in revenues primarily resulting from higher
than expected cancellations of subscriptions of products of acquired companies
due to non-Year 2000 compliant products, client rationalization of market data
services costs and reductions in users due to mergers among Bridge clients.
The increases in working capital are attributable to
o Accounts receivable increases of $75.8 million resulting from (1) billing
delays resulting from conversions from the non-Year 2000 compliant billing
systems of acquired companies to the Bridge billing system and (2) billing
issues resulting from the migration of customers from the less
technologically advanced protocol products of acquired companies to
Bridge's new technology products; and
o Accounts payable decreases of $46.6 million resulting from the payment of
one-time accruals related to companies acquired in 1998.
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BRIDGE RELATIONSHIP
Upon completion of this offering, we will acquire Bridge's Internet
protocol network and enter into a number of agreements with Bridge.
Master Establishment and Transition Agreement. The master establishment
and transition agreement transfers Bridge's global Internet protocol network to
us for $150 million. Under this agreement, a Bridge subsidiary that owns all of
Bridge's U.S. network assets will transfer them to one of our subsidiaries. The
transfers of non-U.S. assets will be effected under local transfer agreements
to be entered into by the appropriate Bridge and SAVVIS subsidiaries.
The transfer of several portions of the Bridge network requires
contractual consents from some of Bridge's counterparties or regulatory
approvals in several jurisdictions which, as of the closing date, may not yet
be 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. In jurisdictions where
we expect the purchase to occur within one year of the closing date of the
Bridge asset transfer, Bridge will operate the facilities on our behalf and we
will reimburse Bridge for all costs directly associated with the use,
maintenance and operation of those assets and we will be paid for the use of
those assets by Bridge under the network services agreement. We expect the
asset transfer to occur in Greece, Ireland, Hungary, Poland, Taiwan, Mexico and
Venezuela within one year from the closing date of the Bridge transfer. Our
obligation to acquire these assets expires upon the later of ten years from the
closing date or expiration of the network services agreement.
Under the master establishment and transition agreement, Bridge will be
responsible for all liabilities associated with its Internet protocol network
prior to the transfer to us, and we will be responsible for liabilities after
the transfer. Bridge will make several limited representations in the agreement
relating to corporate authority, title and existence of the assets being
transferred, as well as that the transfer is of the entire network, other than
the assets that could not be transferred. The agreement will further provide
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 will
agree 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 the closing date. 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.
The purchase will substantially increase our depreciation and
amortization, and as a result we will incur significant losses. For the first
year of the agreement, our fees will be based upon the cash cost to Bridge of
operating the network as configured on the date we acquired the orginal
network. Our fees for additional services, following the closing of the
transfer, will be set for a three-year term based on an agreed payment schedule
reflecting the estimated cost to provide the services. The price schedule for
additional services will be subject to annual review and will be mutually
agreed upon or determined by binding arbitration. Bridge has agreed to pay us 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 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; 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 will 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
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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 twelve months after the date of the
transfer of the network, 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 Bridge network services
agreement will contain quality of service levels and will provide for credits
if the levels are not maintained. In addition, a material breach of the service
levels would allow Bridge to terminate the agreement and/or collect up to $50
million as liquidated damages not more than once in any 36-month period.
The agreement will provide for the creation of a strategic advisory
committee comprised of three of our senior executives and three from Bridge,
with an additional outside consultant to be appointed by both parties. The
mission of the committee will be to review the performance of the network, to
serve as a forum for the consideration and discussion of issues related to the
network, and to discuss issues related to the future development of the SAVVIS
ProActiveSM Network in the context of the relationship of SAVVIS and Bridge. We
will agree to use our commercially reasonable best efforts to comply with the
recommendations of the committee.
Bridge will agree 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.
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 will be charged
back to Bridge at a rate intended to recover our costs.
Equipment Colocation Permits. Some network assets to be purchased 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 will 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 will 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 will provide 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 will agree to manage 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 also will manage 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 are fixed for the first year. We expect the aggregate amount of
payments to Bridge under the technical services, agreement in 2000 will be
approximately $1.1 million. After the first year, we will negotiate new rates,
and if we and Bridge cannot agree on new rates, then we
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will submit prices to an independent arbitrator who will assign the price
quoted by the party that in the arbitrator's opinion comes closest to quoting a
fair market price. Bridge is required to meet quality of service standards set
forth in the agreement, and, if Bridge fails to meet the standards, we will be
entitled 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. For a period of three years, 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 will charge us for these services in a
manner that is intended to permit Bridge to recover the costs of providing the
services.
Promissory Note. To the extent we do not pay for the purchase price for
the Bridge network assets in cash we will issue to Bridge a three-year
promissory note. The promissory note will bear interest, payable semi-annually,
at an annual rate of 10%. Principal will be payable at maturity.
GECC Sublease. In connection with the acquisition of the network assets,
we will sublease from Bridge some of the network assets that Bridge leases from
GECC. The aggregate amount of these capital leases is estimated to be $22
million. The terms of the GECC sublease are meant to mirror the GECC master
lease. At the end of the lease term, Bridge will have the right to acquire
these assets from GECC for $1, and we will have the right to acquire these
assets from Bridge for $1.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table shows the names and ages of our directors, executive
officers and significant employees and the positions they hold with our
company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- ----- ------------------------------------------
<S> <C> <C>
Robert A. McCormick ........... 34 Chief Executive Officer and
Chairman of the Board
Jack M. Finlayson ............. 45 President, Chief Operating Officer and
Director
Richard Bubenik ............... 38 Executive Vice President and Chief
Technical Officer
David J. Frear ................ 43 Executive Vice President, Chief Financial
Officer and Director
James D. Mori ................. 44 Executive Vice President and General
Manager -- Americas
Clyde A. Heintzelman .......... 61 Director
Thomas E. McInerney ........... 58 Director
Patrick J. Welsh .............. 56 Director
Thomas M. Wendel .............. 63 Director
Steven M. Gallant ............. 40 Vice President, General Counsel and
Secretary
</TABLE>
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 from January 1997 to December 1999, and held various engineering, design
and development positions at Bridge from 1988 to January 1997. Mr. McCormick
attended the University of Colorado at Boulder.
JACK 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.
RICHARD 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.
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
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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.
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 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 1996. From January 1995 to April 1995,
he was an independent consultant and provided services primarily to Hekimian
Laboratories, Inc., a developer of data network testing capabilities. In
January 1992, he participated in founding CSI, a company focused on building
hardware and software products for switched wide area networks using ISDN
technology, and from January 1992 to December 1994, he served as Vice President
- -- Sales & Marketing of CSI. 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, and Tata
Consultancy Services, a software and services company. Mr. Heintzelman received
a B.A. in Marketing from the University of Delaware.
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. Prior to joining Welsh Carson, 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
Mede America Corporation, The BISYS Group, Inc., Centennial Cellular 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.
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.
THOMAS M. WENDEL has served as a director of our company since April 1999.
He has been Chairman of the Board of Bridge since January 1996, and President
and Chief Executive Officer of Bridge since September 1995. From 1986 to
September 1995, Mr. Wendel served as founding
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President and Chief Executive Officer of Liberty Brokerage, Inc., a United
States government securities brokerage firm. From 1982 to 1986, Mr. Wendel was
with Paine Webber Inc., where he held several senior management positions,
including Chief Financial Officer and head of Operations and Systems. Mr.
Wendel also served as Executive Vice President and Managing Director of Paine
Webber, where he was responsible for investment banking involving thrifts and
commercial banks, mortgage sales and trading, and mortgage banking. Prior to
1982, Mr. Wendel was Senior Vice President and Chief Financial Officer of Pan
American World Airways. While at Pan American, he also held several senior
management positions including overall responsibility for Data Systems and
Communications, Airline Planning, Property and Facilities, Corporate Budgets,
Treasury, Accounting, Aircraft Sales, and Office Services. Mr. Wendel holds a
B.S. in Mathematics, an M.A. in Economics, an M.B.A., and several academic
honors including Phi Kappa Phi and a National Defense Graduate Fellowship in
Mathematics. He was the co-author of Introduction to Data Processing and COBOL
published by McGraw-Hill in 1969.
STEVEN M. GALLANT has served as our Vice President, General Counsel and
Secretary since December 1996. From July 1991 to December 1996, Mr. Gallant was
a partner with The Stolar Partnership where he specialized in the areas of
corporate finance, mergers and acquisitions and general corporate law. Mr.
Gallant received a B.A. from the University of Denver, a J.D. from Washington
University and an L.L.M. in Taxation from New York University.
Members of our board of directors are elected each year at our annual
meeting of stockholders, and serve until the next annual meeting of
stockholders and until their respective successors have been elected and
qualified. Following the completion of this offering, we intend to comply with
the requirements of the Nasdaq National Market regarding independent directors.
Our officers are elected annually by our board of directors and serve at the
board's discretion.
In November 1999, we entered into an agreement with Mr. Heintzelman in
connection with his resignation as our President and Chief Executive Officer.
Pursuant to the agreement, Mr. Heintzelman has agreed to serve on our board of
directors for a one-year term that will expire in November 2000.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has established an audit committee and a
compensation committee. The audit committee and the compensation committee
consist of Thomas E. McInerney, Patrick J. Welsh and Thomas M. Wendel. 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 compensation committee is responsible for determining the salaries and
incentive compensation of our management and key employees and administering
our stock option plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Wendel, a director of our company, is also President, Chief Executive
Officer and Chairman of the Board of Bridge. 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, two of which are among our principal
stockholders and are also principal stockholders of Bridge.
In 1999, 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.
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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 will receive an annual retainer of $15,000, 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. 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. 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.
EXECUTIVE COMPENSATION
The following table provides you with information about compensation
earned during fiscal 1999 by our Chief Executive Officers and the other two
most highly compensated executive officers employed by us, whose salaries and
bonuses for such year were in excess of $100,000. We use the term "named
executive officers" to refer to these officers in this prospectus.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-----------------
ANNUAL COMPENSATION SECURITIES ALL
-------------------- UNDERLYING STOCK OTHER
NAME AND PRINCIPAL POSITION SALARY OPTIONS COMPENSATION
- ------------------------------------ -------------------- ----------------- -----------------
<S> <C> <C> <C>
Robert A. McCormick(2) ............. $ 45,139 750,000 --
Chief Executive Officer and
Chairman of the Board
Clyde A. Heintzelman(3) ............ 218,146 218,224 $ 330,400(6)
David J. Frear(4) .................. 122,276 400,000 2,400(7)
Executive Vice President and
Chief Financial Officer
Richard Bubenik(5) ................. 159,258 306,732 2,400(7)
Executive Vice President and
Chief Technical Officer .........
</TABLE>
- ---------------------
(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 named executive officers that are available generally to
all salaried employees and various perquisites and other personal benefits
received by the named 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) 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 by Bridge.
(3) Mr. Heintzelman became our President and Chief Executive Officer in
December 1998 and resigned from these positions in November 1999.
(4) Mr. Frear became our Executive Vice President and Chief Financial Officer
in July 1999.
(5) Mr. Bubenik joined us in December 1996 and became our Executive Vice
President and Chief Technical Officer in July 1999.
(6) Consists of $328,000 payable to Mr. Heintzelman in connection with his
resignation and $2,400 of matching contributions made under our 401(k)
plan.
(7) Consists of matching contributions made under our 401(k) plan.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table shows grants of stock options to each of the named
executive officers during 1999. The percentages in the table below are based on
options to purchase a total of 5,159,508 shares of our common stock granted to
our employees and directors in 1999. The exercise price per share of each
option was equal to the fair market value of the common stock on the date of
grant as determined by the compensation committee of our board of directors.
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.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL
NUMBER OF RATES OF STOCK
SECURITIES PRICE APPRECIATION FOR
UNDERLYING PERCENT OF TOTAL EXERCISE OPTION TERM
OPTIONS OPTIONS GRANTED TO PRICE PER EXPIRATION -------------------------
NAME GRANTED EMPLOYEES IN 1999 SHARE DATE 5% 10%
- ---------------------------------- ------------ -------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert A. McCormick (1) .......... 750,000 14.5% $ 0.50 7/22/09 $610,836 $972,653
Clyde A. Heintzelman (2) ......... 218,224 4.2% 0.50 7/22/09 177,732 283,008
David J. Frear (3) ............... 400,000 7.8% 0.50 7/22/09 325,779 518,749
Richard Bubenik (4) .............. 306,732 5.9% 0.50 7/22/09 249,817 397,792
</TABLE>
- ---------------------
(1) All these options vested on the date of grant. If Mr. McCormick were to
resign, we would have the right to repurchase up to 454,500 of the shares
that have been purchased by Mr. McCormick upon exercise of these options
at the lower of $0.50 per share or the fair market value of the shares.
This right will be terminated with respect to 79,500 shares on the first
anniversary of the date of the option grant and with respect to the
balance of the shares at the rate of 125,000 shares on each of the second,
third and fourth anniversaries of the date of grant.
(2) All these options vested on the date of Mr. Heintzelman's resignation.
(3) All these options vested on the date of grant. If Mr. Frear were to resign,
we would have the right to repurchase the shares that have been purchased
by Mr. Frear upon exercise of these options at the lower of $.50 per share
or the fair market value of the shares. This right will be terminated with
respect to 100,000 shares upon completion of this offering 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.
(4) Currently, these options are exercisable at the rate of 4,167 each month.
On June 30, 2000, a total of 12,500 options will become exercisable, and
beginning on June 30, 2000, 6,250 options will become exercisable each
month.
AGGREGATE OPTION EXERCISES IN 1999 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth as of December 31, 1999, for each of the
named executive officers listed:
o the total number of shares received upon exercise of options during 1999;
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, 1999.
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There was no public trading market for our common stock as of December 31,
1999. Accordingly, in order to present the values realized upon exercise of
options and the values of unexercised in-the-money options shown below we
subtracted the applicable exercise price from a price of $24.00 per share.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY
DECEMBER 31, 1999 OPTIONS AT DECEMBER 31, 1999
----------------------------- ----------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ----------------- -------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. McCormick .......... 750,000 $17,625,000 -- -- -- --
Clyde A. Heintzelman ......... 218,224 5,128,264 -- -- -- --
David J. Frear ............... 400,000 9,400,000 -- -- -- --
Richard Bubenik .............. 40,065 941,528 0 266,667 0 $6,266,675
</TABLE>
STOCK OPTION PLAN
Background. On July 22, 1999, our board of directors approved the adoption
of our 1999 SAVVIS stock option plan, and our stockholders approved the stock
option plan on the same date. On December 7, 1999, the board adopted an
amendment to the stock option plan approving an increase in the number of
shares of common stock available for issuance under the plan, and our
stockholders approved the amendment on that same date. The purpose of our 1999
stock option plan is to enhance our ability to attract, retain and compensate
highly qualified employees and other individuals providing us with services.
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 of 1986, or 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
the date of this prospectus, options to purchase 3,479,168 shares of common
stock were outstanding under the stock option plan. No options may be granted
under the stock option plan after July 22, 2009.
The number of shares of common stock available for issuance under the
option plan is 12,000,000 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.
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 or less
than par value in the case of incentive stock options and less than par value
only in the case of non-qualified stock options. 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
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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 option, 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 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.
Amendments 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.
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.
FEDERAL INCOME TAX CONSEQUENCES
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
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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, 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 generally 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 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
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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.
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 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.
ARRANGEMENTS WITH EXECUTIVE OFFICERS
Arrangement with Mr. Heintzelman. Mr. Heintzelman became our President and
Chief Executive Officer under an employment agreement dated December 4, 1998.
On November 12, 1999, we entered into an additional agreement with Mr.
Heintzelman in connection with his resignation, entitling him to continue to
receive his base salary of approximately $20,800 per month through December 3,
2000. In addition, under these agreements, Mr. Heintzelman is entitled to a
prorated portion of his bonus for 1999 in an amount to be established by our
board of directors, but in no event less than 25% of his annual base salary.
Under the agreement dated November 12, 1999, Mr. Heintzelman agreed to serve on
our board of directors for a one-year term that will expire in November of
2000. While Mr. Heintzelman will not separately be compensated for his services
on the board of directors during this one-year term, he will continue to be
eligible to participate in benefit plans as though he had remained employed by
us. All of Mr. Heintzelman's stock options vested fully on the date of his
resignation and Mr. Heintzelman has exercised all of his options since that
date.
In his employment agreement of December 4, 1998, Mr. Heintzelman agreed to
preserve the confidentiality and the proprietary nature of all information
relating to us and our business for three years after the term of his
agreements ends. In addition, Mr. Heintzelman is obligated under this agreement
not
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to compete with us and not to solicit the business of our customers for one
year following the term of his employment agreement. He will assist in the
transition of his position and help to ensure our ability to retain our key
employees. Mr. Heintzelman has also released our company, Bridge and our and
Bridge's employees and directors from all claims arising from his employment.
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. Mr.
Finlayson will be 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. Mr. Finlayson has the
right to sell 50,000 shares underlying these options immediately, and the
remaining 150,000 shares on a monthly pro rata basis over the calendar year
2000. The remaining 450,000 shares will vest on January 3, 2000, and 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 vested 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.
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, Mr. Frear received 400,000 options to
purchase shares of our common stock at an exercise price of $.50 per share. All
of Mr. Frear's options have vested. 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 will be terminated with respect to a
total of 100,000 shares at the completion of this offering 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,
upon completion of this offering, Mr. Frear will receive a number of options
equal to .25% of our then outstanding shares of common stock on a fully diluted
basis at an exercise price per share equal to the public offering price. 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.
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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. We also granted Mr. Mori options to
purchase 225,000 shares of our common stock 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
4,687 shares per month and will terminate on the fourth anniversary of the date
of grant. Under his agreement, Mr. Mori is entitled to benefits commensurate
with those available to Bridge 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.
TRANSACTIONS WITH AFFILIATES
Mr. Wendel, a director of our company, is also President, Chief Executive
Officer and Chairman of the Board of Bridge. Mr. McCormick, our Chief Executive
Officer and the Chairman of our Board, served as the Executive Vice President
and Chief Technical Officer of Bridge through December 1999. 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, two of which are among our principal
stockholders and are also principal stockholders of Bridge.
As of December 31, 1999, we had outstanding term notes to Bridge of
approximately $25 million. These loans mature one year after the completion of
this offering and bear interest at a rate of 8% per year. We used the proceeds
of these loans to fund our working capital requirements.
We will enter 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.
In connection with these agreements, we will execute a promissory note in favor
of Bridge. The terms of these agreements and the note are described under the
heading "Relationship with Bridge."
We have agreed to grant to Welsh Carson customary registration rights with
respect to the shares of our common stock to be purchased by Welsh Carson from
Bridge following this offering, including demand registration rights and
piggy-back registration rights.
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PRINCIPAL STOCKHOLDERS AND SELLING STOCKHOLDER
OWNERSHIP OF OUR COMMON STOCK
The following table provides you with information about the beneficial
ownership of shares of our common stock as of the date of this prospectus, and
as adjusted to reflect the sale of shares in this offering, by:
o each person who, to our knowledge, beneficially owns more than 5% of our
common stock;
o each of our directors and named executive officers;
o all our directors and executive officers as a group; and
o the selling stockholder.
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
officer is SAVVIS Communications Corporation, 12007 Sunrise Valley Drive,
Reston, Virginia 20191. 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 held by that person that are
exercisable within 60 days of the date of this prospectus, but excludes shares
of common stock underlying options held by all other persons. Percentage of
beneficial ownership is based on 78,008,340 shares of common stock outstanding
as of the date of this prospectus, and 92,883,340 shares of common stock
outstanding after completion of this offering.
<TABLE>
<CAPTION>
SHARE BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OFFERING OWNED AFTER OFFERING
-------------------------- -----------------------------
SHARES
NAME NUMBER PERCENTAGE BEING SOLD NUMBER PERCENTAGE
- --------------------------------------------- ------------ ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Bridge Information Systems, Inc. (1) ........ 53,858,702 69.0% 2,125,000 51,733,702 55.7%(6)
Welsh, Carson, Anderson & Stowe (2) ......... 8,844,642 11.3% -- 8,844,642 9.5%(6)
Clyde A. Heintzelman ........................ 218,224 * -- 218,224 *
Robert A. McCormick ......................... 750,000 * -- 750,000 *
David J. Frear .............................. 400,000 * -- 400,000 *
Richard Bubenik (3) ......................... 56,732 * -- 52,566 *
Thomas M. Wendel ............................ 500,000 * -- 500,000 *
Patrick J. Welsh (4) ........................ 8,843,413 11.3% -- 8,843,413 9.5%
Thomas E. McInerney (5) ..................... 8,883,118 11.4% -- 8,883,118 9.6%
All executive officers and directors as a
group (9 persons) .......................... 11,822,202 15.2% 11,822,202 12.7%
</TABLE>
- ---------------------
* 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 3 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 and 667,761 shares held by WCAS
Capital Partners II, L.P., or WCAS CP II. The respective sole general
partners of WCAS VI, WCAS VII, WCAS IP and WCAS CP II are WCAS VI
Partners, L.P., WCAS VII Partners, L.P., WCAS INFO Partners and WCAS CP II
Partners. The individual general partners of each of these partnerships
include some or all of Bruce K. Anderson, Russell L. Carson, Anthony J. de
Nicola,
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James B. Hoover, Thomas E. McInerney, Robert A. Minicucci, Charles G.
Moore, III, Andrew M. Paul, Paul B. Queally, Rudolph E. Rupert, 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 foreging 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. The
address of Welsh, Carson, Anderson & Stowe is 320 Park Avenue, New York, NY
10022.
(3) Includes 8,333 shares of common stock subject to options that are
exercisable within 60 days of the date of this prospectus.
(4) Includes 8,779,285 shares held by Welsh, Carson, Anderson & Stowe, as
described in note 2 above.
(5) Includes 8,844,642 shares held by Welsh, Carson, Anderson & Stowe, as
described in note 2 above.
(6) Pursuant to a stock purchase agreement dated February 7, 2000, Bridge has
agreed to sell to Welsh Carson for $150 million in cash 6,250,000 shares
of our common stock held by Bridge. The purchase price per share is equal
to the initial public offering price per share. Upon consummation of such
sale Bridge and Welsh Carson would own approximately 49% and 16% of our
outstanding common stock, respectively.
For a description of material relationships between us and the selling
stockholder, see "Transactions with Affiliates."
OWNERSHIP OF BRIDGE CLASS A COMMON STOCK AND BRIDGE SERIES D PREFERRED STOCK
The following table provides you with information about the beneficial
ownership of shares of Bridge's Class A common stock and Bridge's Series D
preferred stock as of the date of this prospectus, by:
o each of our directors and named executive officers; and
o all of 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 Class A common stock and the
Series D preferred stock. 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 Class A common stock outstanding used in calculating
the percentage for each person named in the table includes the shares of Class
A common stock underlying options held by that person that are exercisable
within 60 days of the date of this prospectus, but excludes shares of Class A
common stock underlying options held by all other persons. Percentage of
beneficial ownership is based on 37,018,168 shares of Bridge Class A common
stock and 1,950,000 shares of Bridge Series D preferred stock outstanding as of
the date of this prospectus. As of the date of this prospectus, none of our
executive officers or directors owned any shares of Bridge's Series E preferred
stock or Series F preferred stock.
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<TABLE>
<CAPTION>
NUMBER OF SHARES OF NUMBER OF SHARES OF PERCENT OF
CLASS A COMMON PERCENT OF SERIES D PREFERRED SERIES D PREFERRED
STOCK BENEFICIALLY CLASS A COMMON STOCK STOCK BENEFICIALLY STOCK BENEFICIALLY
NAME AND ADDRESS OWNED BENEFICIALLY OWNED OWNED OWNED
- --------------------------------- -------------------- ---------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
Robert A. McCormick (1) ......... 125,000 * -- --
Clyde A. Heintzelman ............ -- -- -- --
David J. Frear .................. -- -- -- --
Richard Bubenik ................. -- -- -- --
Thomas M. Wendel (2) ............ 798,664 2.2 % -- --
Patrick J. Welsh ................ 21,449,846(3) 57.9% (5) 438,400(6) 22% (5)
Thomas E. McInerney ............. 21,543,540(4) 58.2% (5) 440,598(7) 23% (5)
All named executive officers and
directors as a group (9 persons) 22,622,280 61.1% (5) 443,848 23% (5)
</TABLE>
- ----------------
(1) Includes 125,000 shares of Class A common stock subject to options that are
exercisable within 60 days of the date of this prospectus.
(2) Includes 798,664 shares of Class A common stock subject to options that are
exercisable within 60 days of the date of this prospectus.
(3) Includes 12,989,080 shares of Bridge's Class A common stock held by WCAS
VI, 6,324,767 shares of Class A common stock held by WCAS VII, and
1,980,923 shares of Class A common stock held by WCAS CP II.
(4) Includes 12,989,080 shares of Bridge's Class A common stock held by WCAS
VI, 6,324,767 shares of Class A common stock held by WCAS VII, 155,728
shares of Class A common stock held by WCAS IP and 1,980,923 shares held
by WCAS CP II.
(5) Bridge's 1,950,000 shares of Series D preferred stock and 1,500,000 shares
of Series E preferred stock are presently convertible into 24,750,000
shares and 7,146,260 shares, respectively, of Bridge's Class A common
stock. Both series of preferred stock are presently entitled to vote with
the Class A common stock on all matters and have voting power equal to the
number of shares of Class A common stock into which they are convertible.
None of the persons or Welsh Carson entities referred to in the table or
any notes thereto own any shares of Bridge Series E preferred stock or
Series F preferred stock. Accordingly, the percentage of total ordinary
voting power represented by the combined ownership of Class A common stock
and Series D preferred stock shown for Messrs. Welsh and McInerney and all
named executive officers and directors as a group would be 38%, 38% and
39%, respectively.
(6) Includes 92,679 shares of Bridge's Series D preferred stock held by WCAS VI
and 342,471 shares of Series D preferred stock held by WCAS VII.
(7) Includes 92,679 shares of Bridge's Series D preferred stock held by WCAS
VI, 342,471 shares of Series D preferred stock held by WCAS VII and 3,498
shares of Series D preferred stock held by WCAS IP.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 250,000,000 shares of common
stock, par value $.01 per share, and 50,000,000 shares of preferred stock, par
value $.01 per share, the rights, preferences and privileges of which may be
established from time to time by our board of directors. As of the date of this
prospectus, 78,008,340 shares of our common stock were outstanding and no
shares of our preferred stock were outstanding. As of the date of this
prospectus, we had 389 stockholders.
COMMON STOCK
Each holder of record of common stock is entitled to one vote for each
share on all matters properly submitted to the stockholders for their vote. Our
certificate of incorporation does not allow cumulative voting for the election
of directors, which means that the holders of a majority of the shares voted
can elect all the directors then standing for election. Subject to preferences
that may be applicable to any preferred stock outstanding at the time, holders
of our common stock are entitled to receive ratable dividends, if any, as may
be declared from time to time by our board of directors out of funds legally
available for that purpose. In the event of our liquidation, dissolution or
winding up, holders of common stock would be entitled to share in our assets
remaining after the payment of liabilities and liquidation preferences on any
outstanding preferred stock. Holders of our common stock have no preemptive or
conversion rights or other subscription rights and there are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are, and the shares of common stock offered by us in this
offering will be, when issued and paid for, fully paid and non-assessable. The
rights, preferences and privileges of holders of common stock may be adversely
affected by the rights of the holders of shares of any series of preferred
stock that we may authorize and issue in the future.
PREFERRED STOCK
The board of directors is authorized, subject to Delaware law, without
stockholder approval, from time to time to issue up to an aggregate of
50,000,000 shares of preferred stock in one or more series. The board of
directors may fix the rights, preferences and privileges of the shares of each
series and any qualifications, limitations or restrictions. Issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, a majority of our outstanding voting
stock. We have no present plans to issue any shares of preferred stock.
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law, our certificate of
incorporation provides that our directors will not be personally liable to us
or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
o for any breach of the director's duty of loyalty to us or our stockholders;
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o under Section 174 of the Delaware General Corporation Law, relating to
unlawful dividends or unlawful stock purchases or redemptions; or
o for any transaction from which the director derives an improper personal
benefit.
As a result of this provision, we and our stockholders may be unable to
obtain monetary damages from a director for breach of his or her duty of care.
Our certificate of incorporation and bylaws provide for the
indemnification of our directors and officers to the fullest extent authorized
by the Delaware General Corporation Law. In addition, our certificate of
incorporation provides that if the Delaware General Corporation Law is amended
to authorize the further elimination or limitation of the liability of a
director, then the liability of our directors will be eliminated or limited to
the fullest extent permitted by the amended Delaware Law. The
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indemnification provided under our certificate of incorporation and bylaws
includes the right to be paid expenses in advance of any proceeding for which
indemnification may be had, provided that the payment of these expenses
incurred by a director or officer in advance of the final disposition of a
proceeding may be made only upon delivery to us of an undertaking by or on
behalf of the director or officer to repay all amounts paid in advance if it is
ultimately determined that the director or officer is not entitled to be
indemnified.
We believe that the provisions in our certificate of incorporation and
bylaws are necessary to attract and retain qualified persons as directors and
officers.
ANTI-TAKEOVER PROVISIONS
Provisions of Delaware law and our certificate of incorporation and bylaws
summarized below could hinder or delay an attempted takeover of us. These
provisions could have the effect of discouraging attempts to acquire us or
remove incumbent management even if some or a majority of our stockholders
believe this action to be in their best interest, including attempts that might
result in the stockholders receiving a premium over the market price for their
shares of common stock.
CERTIFICATE OF INCORPORATION AND BY-LAW PROVISION
Under our bylaws, only the board of directors, the Chairman or Vice
Chairman of the board and the President may call special meetings of
stockholders. The stockholders may not call a special meeting.
The foregoing provisions could have the effect of delaying until the next
stockholders' meeting stockholder actions which are favored by the holders of a
majority of our outstanding voting securities. These provisions may also
discourage another person or entity from making a tender offer for our common
stock because such person or entity, even if it acquired a majority of our
outstanding voting securities, would be able to take action as a stockholder,
such as electing new directors or approving a merger, only at a duly called
stockholders meeting.
DELAWARE ANTI-TAKEOVER LAW
We will be subject to the provisions of Section 203 of the Delaware
General Corporation Law regulating corporate takeovers. Section 203 prevents a
Delaware corporation, including those that are listed on the Nasdaq National
Market, from engaging, in several circumstances, in a "business combination,"
which includes a merger or sale of more than 10% of the corporation's assets,
with any "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder. An
interested stockholder is a stockholder who owns 15% or more of the
corporation's outstanding voting stock, as well as affiliates and associates of
that person. This is the case unless:
o the transaction that resulted in the stockholder's becoming an interested
stockholder was approved by the board of directors prior to the date the
interested stockholder attained that status;
o upon completion of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction began, excluding those shares owned by (1) persons who are
directors and also officers and (2) employee stock compensation plans in
which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in
a tender or exchange offer, or
o on or after the date the interested stockholder attained that status, the
business combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders by the affirmative vote of
at least two-thirds of the outstanding voting stock that is not owned by
the interested stockholder.
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A Delaware corporation may "opt out" of Section 203 with an express
provision in its original certificate of incorporation or an express
stockholder's amendment approved by at least a majority of the outstanding
voting shares. We have not "opted out" of the provisions of Section 203. This
statutory provision could prohibit or delay mergers or other takeover or
change-in-control attempts with respect to SAVVIS and, accordingly, may
discourage attempts to acquire us.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services.
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SHARES AVAILABLE FOR FUTURE SALE
Following this offering, we will have 92,883,340 shares of our common
stock outstanding. All of the shares we sell in this offering will be freely
tradable without restriction or further registration under the Securities Act,
except that any shares purchased by our affiliates, as that term is defined in
Rule 144 under the Securities Act, may generally only be sold in compliance
with the limitations of Rule 144 below.
The remaining 78,008,340 shares of common stock outstanding following this
offering are restricted securities under the terms of the Securities Act. Sales
of a large portion of the restricted shares to be outstanding upon completion
of this offering will be limited by lock-up agreements.
RULE 144
In general, under Rule 144, a stockholder who owns restricted shares that
have been outstanding for at least one year is entitled to sell, within any
three-month period, a number of these restricted shares that does not exceed
the greater of:
o 1% of the then outstanding shares of common stock, or approximately 928,833
shares immediately after this offering, or
o the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding filing of a notice
on Form 144 with respect to the sale.
In addition, our affiliates must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement,
to sell shares of common stock that are not restricted securities. Sales under
Rule 144 are also governed by manner of sale provisions and notice
requirements, and current public information about us must be available.
Under Rule 144(k), a stockholder who is not currently, and who has not
been for at least three months before the sale, an affiliate of ours and who
owns restricted shares that have been outstanding for at least two years may
resell these restricted shares without compliance with the above requirements.
The one- and two-year holding periods described above do not begin to run until
the full purchase price is paid by the person acquiring the restricted shares
from us or an affiliate of ours.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchases shares of our
common stock from us in connection with a compensatory stock or option plan or
other written agreement is eligible to resell those shares 90 days after the
effective date of this offering in reliance on Rule 144, but without compliance
with some of the restrictions, including the holding period, contained in Rule
144.
STOCK OPTIONS
Following 180 days after this offering, we intend to file a registration
statement under the Securities Act covering 12,000,000 shares of common stock
reserved for issuance under our 1999 Stock Option Plan, and we expect the
registration statement to become effective upon filing. As of the date of this
prospectus, options to purchase approximately 3.5 million shares of common
stock were outstanding. Accordingly, shares registered under this registration
statement will, provided options have vested and Rule 144 volume limitations
applicable to our affiliates are complied with, be available for sale in the
open market shortly after this offering closes, and in the case of our
officers, directors and stockholders who have entered into lock-up agreements,
after the 180-day lock-up agreements expire.
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UNITED STATES TAX CONSEQUENCES TO
NON-U.S. HOLDERS OF COMMON STOCK
GENERAL
The following is a general discussion of the principal U.S. federal income
and estate tax consequences of the ownership and disposition of our common
stock that may be relevant to you if you are a non-U.S. Holder. For purposes of
this discussion, you are a non-U.S. holder if you are a beneficial owner of
common stock that is any of the following for U.S. federal income tax purposes:
o a nonresident alien individual;
o a foreign corporation;
o a foreign estate or trust; or
o a foreign partnership.
This discussion does not address all aspects of U.S. federal income and
estate taxation that may be relevant to you in light of your particular
circumstances, and does not address any foreign, state or local tax
consequences. Furthermore, this discussion is based on provisions of the
Internal Revenue Code, Treasury regulations and administrative and judicial
interpretations as of the date of this prospectus. All of these are subject to
change, possibly with retroactive effect, or different interpretations. If you
are considering buying our common stock you should consult your own tax advisor
about current and possible future tax consequences of holding and disposing of
our common stock in your particular situation.
DISTRIBUTIONS
We have not paid any dividends on our common stock and do not intend to
pay dividends in the foreseeable future. See "Dividend Policy." However, if
dividends are paid on the shares of our common stock, these distributions
generally will constitute dividends for U.S. federal income tax purposes to the
extent paid from our current or accumulated earnings and profits, as determined
under U.S. federal income tax principles. To the extent these distributions
exceed those earnings and profits, the distributions will constitute a return
of capital that is applied against, and will reduce, your basis in the common
stock, but not below zero, and then will be treated as gain from the sale of
stock. Dividends paid to a non-U.S. holder that are not effectively connected
with a U.S. trade or business of the non-U.S. holder will be subject to United
States withholding tax at a 30% rate or, if a tax treaty applies, a lower rate
specified by the treaty. To receive a reduced treaty rate, a non-U.S. holder
must furnish to us or our paying agent a duly completed Form 1001 or Form
W-8BEN or substitute form certifying to its qualification for the reduced rate.
Currently, withholding is generally imposed on the gross amount of a
distribution, regardless of whether we have sufficient earnings and profits to
cause the distribution to be a dividend for U.S. federal income tax purposes.
However, withholding on distributions made after December 31, 2000 may be on
less than the gross amount of the distribution if the distribution exceeds a
reasonable estimate made by us of our accumulated and current earnings and
profits.
Dividends that are effectively connected with the conduct of a trade or
business within the U.S. and, if a tax treaty applies, are attributable to a
U.S. permanent establishment of the non-U.S. holder, are exempt from U.S.
federal withholding tax, provided that the non-U.S. holder furnishes to us or
our paying agent a duly completed Form 4224 or Form W-8BCI or substitute form
certifying the exemption. However, dividends exempt from U.S. withholding
because they are effectively connected or they are attributable to a U.S.
permanent establishment are subject to U.S. federal income tax on a net income
basis at the regular graduated U.S. federal income tax rates. Any such
effectively connected dividends received by a foreign corporation may be
subject to an additional "branch profits tax" at a 30% rate or a lower rate
specified by an applicable income tax treaty.
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Under current U.S. Treasury regulations, dividends paid before January 1,
2001 to an address outside the United States are presumed to be paid to a
resident of the country of address for purposes of the withholding discussed
above and for purposes of determining the applicability of a tax treaty rate.
However, U.S. Treasury regulations applicable to dividends paid after December
31, 2000 eliminate this presumption, subject to transition rules, and a
non-U.S. holder who wishes to claim the benefit of an applicable treaty rate,
and avoid back-up withholding, as discussed below, would be required to satisfy
applicable certification and other requirements.
For dividends paid after December 31, 2000, a non-U.S. holder generally
will be subject to U.S. backup withholding tax at a 31% rate under the backup
withholding rules described below, rather than at a 30% rate or a reduced rate
under an income tax treaty, as described above, unless the non-U.S. holder
complies with Internal Revenue Service certification procedures or, in the case
of payments made outside the U.S. with respect to an offshore account,
documentary evidence procedures. Further, to claim the benefit of a reduced
rate of withholding under a tax treaty for dividends paid after December 31,
2000, a non-U.S. holder must comply with modified IRS certification
requirements. Special rules also apply to dividend payments made after December
31, 2000 to foreign intermediaries, U.S. or foreign wholly owned entities that
are disregarded for U.S. federal income tax purposes and entities that are
treated as fiscally transparent in the U.S., the applicable income tax treaty
jurisdiction, or both. You should consult your own tax advisor concerning the
effect, if any, of the rules affecting post-December 31, 2000 dividends on your
possible investment in our common stock.
A non-U.S. holder eligible for a reduced rate of U.S. withholding tax
under an income tax treaty may obtain a refund of any excess amounts withheld
by filing an appropriate claim for refund along with the required information
with the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax
with respect to gain recognized on a sale or other disposition of our common
stock unless one of the following applies:
o If the gain is effectively connected with a trade or business of the
non-U.S. holder in the United States and, if a tax treaty applies, the gain
is attributable to a U.S. permanent establishment maintained by the
non-U.S. holder, the non-U.S. holder will, unless an applicable treaty
provides otherwise, be taxed on its net gain derived from the sale under
regular graduated U.S. federal income tax rates. If the non-U.S. holder is
a foreign corporation, it may be subject to an additional branch profits
tax equal to 30% of its effectively connected earnings and profits within
the meaning of the Internal Revenue Code for the taxable year, as adjusted
for specified items, unless it qualifies for a lower rate under an
applicable income tax treaty and duly demonstrates that it qualifies.
o If a non-U.S. holder who is an individual and holds our common stock as a
capital asset is present in the United States for 183 or more days in the
taxable year of the sale or other disposition, and other conditions are
met, the non-U.S. holder will be subject to a flat 30% tax on the gain
derived from the sale, which may be offset by U.S. capital losses.
o If we are or have been a "U.S. real property holding corporation" for U.S.
federal income tax purposes at any time during the shorter of the five-year
period ending on the date of the disposition or the period during which the
non-U.S. holder held the common stock, the non-U.S. holder may be taxable
in the U.S. on gain from the sale of common stock pursuant to the
effectively connected rules above. We believe that we never have been and
are not currently a U.S. real property holding corporation for U.S. federal
income tax purposes. Although we consider it unlikely based on our current
business plans and operations, we may become a U.S. real property holding
corporation in the future. Even if we were to become a U.S. real property
holding corporation, any gain recognized by a non-U.S. holder still would
not be subject to U.S. tax if the shares of our common stock are considered
to be "regularly
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<PAGE>
traded on an established securities market" and the non-U.S. holder did
not own, actually or constructively, at any time during the shorter of
the periods described above, more than five percent of our common stock.
FEDERAL ESTATE TAX
Common stock owned by an individual who is not a citizen or resident, as
defined for U.S. estate tax purposes, of the United States at the time of death
will be included in that individual's gross estate for U.S. federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Under U.S. Treasury regulations, we must report annually to the IRS and to
each non-U.S. holder the amount of dividends paid to that holder and the tax
withheld with respect to those dividends. These information reporting
requirements apply even if withholding was not required because the dividends
were effectively connected dividends or withholding was reduced or eliminated
by an applicable income tax treaty. Pursuant to an applicable tax treaty, that
information may also be made available to the tax authorities in the country in
which the non-U.S. holder resides.
United States federal backup withholding generally is a withholding tax
imposed at the rate of 31% on specified payments to persons that fail to
furnish required information under the U.S. information reporting requirements.
See the discussion under "--Distributions" above for rules regarding backup
withholding on dividends paid to non-U.S. holders, after December 31, 2000.
As a general matter, information reporting and backup withholding will not
apply to a payment by or through a foreign office of a foreign broker of the
proceeds of a sale of our common stock effected outside the U.S. However,
information reporting requirements, but not backup withholding, will apply to a
payment by or through a foreign office of a broker of the proceeds of a sale of
our common stock effected outside the U.S. if that broker:
o is a U.S. person;
o is a foreign person that derives 50% or more of its gross income for
specified periods from the conduct of a trade or business in the U.S.;
o is a "controlled foreign corporation" as defined in the Internal Revenue
Code; or
o is a foreign partnership with specified U.S. connections, for payments made
after December 31, 2000.
Information reporting requirements will not apply in the above cases if
the broker has documentary evidence in its records that the beneficial owner is
a non-U.S. holder and specified conditions are met or the beneficial owner
otherwise establishes an exemption.
Payment by or through a U.S. office of a broker of the proceeds of a sale
of our common stock is subject to both backup withholding and information
reporting unless the holder certifies to the payor in the manner required as to
its non-U.S. status under penalties of perjury or otherwise establishes an
exemption.
Amounts withheld under the backup withholding rules do not constitute a
separate U.S. federal income tax. Rather, any amounts withheld under the backup
withholding rules will be refunded or allowed as a credit against the holder's
U.S. federal income tax liability, if any, provided the required information or
appropriate claim for refund is filed with the IRS.
THE FOREGOING DISCUSSION IS A SUMMARY OF THE PRINCIPAL TAX CONSEQUENCES OF
THE OWNERSHIP, SALE OR OTHER DISPOSITION OF OUR COMMON STOCK BY NON-U.S.
HOLDERS FOR U.S. FEDERAL INCOME AND ESTATE TAX PURPOSES. YOU ARE URGED TO
CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO
YOU OF OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK, INCLUDING THE EFFECT OF
ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS.
85
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated, Bear, Stearns & Co. Inc., Banc of America Securities LLC and CIBC
World Markets Corp. are acting as representatives of the underwriters named
below. Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley &
Co. Incorporated are acting as Joint Book-Running Managers. Subject to the
terms and conditions set forth in a purchase agreement among us, the selling
stockholder and the underwriters, we and the selling stockholder have agreed to
sell to the underwriters, and the underwriters severally have agreed to
purchase from us and the selling stockholder, the number of shares listed
opposite their names below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ------------------------------------------------------------------ ------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ................................ .......... 4,900,000
Morgan Stanley & Co. Incorporated ........................... 4,900,000
Bear, Stearns & Co. Inc. .................................... 2,800,000
Banc of America Securities LLC .............................. 700,000
CIBC World Markets Corp. .................................... 700,000
Chase Securities, Inc. ...................................... 300,000
Donaldson, Lufkin & Jenrette Securities Corporation ......... 300,000
ING Barings LLC ............................................. 300,000
Edward D. Jones & Co., L.P. ................................. 300,000
Lazard Freres & Co. LLC ..................................... 300,000
Wasserstein Perella Securities, Inc. ........................ 300,000
Robert W. Baird & Co......................................... 150,000
Ferris, Baker Watts, Incorporated ........................... 150,000
Janney Montgomery Scott LLC ................................. 150,000
Josephthal & Co., L.P. ...................................... 150,000
Legg Mason Wood Walker, Incorporated ........................ 150,000
Brad Peery Inc. ............................................. 150,000
SunTrust Equitable Securities Corporation ................... 150,000
Utendahl Capital Partners, L.P. ............................. 150,000
---------
Total ........................................ .......... 17,000,000
==========
</TABLE>
The underwriters have agreed to purchase all of the shares sold under the
purchase agreement if any of the shares are purchased. If an underwriter
defaults, the purchase agreement provides the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated.
We and the selling stockholder have agreed to indemnify the underwriters
against liabilities specified in the purchase agreement, including liabilities
under the Securities Act, or to contribute to payments the underwriters may be
required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreement, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right
to withdraw, cancel or modify offers to the public and to reject orders in
whole or in part.
COMMISSIONS AND DISCOUNTS
The representatives have advised us and the selling stockholder that the
underwriters propose initially to offer the shares to the public at the initial
public offering price on the cover page of this prospectus and to dealers at
that price less a concession not in excess of $.86 per share. The underwriters
may allow, and the dealers may reallow, a discount not in excess of $.10 per
share to other dealers. After this offering, the public offering price,
concession and discount may be changed.
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<PAGE>
The following table shows the public offering price, underwriting
discount, proceeds before expenses to SAVVIS and the selling stockholder and
other compensation. The information assumes either no exercise or full exercise
by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
-------------- ---------------- ---------------
<S> <C> <C> <C>
Public offering price ......................... $ 24.00 $408,000,000 $469,200,000
Underwriting discount ......................... $ 1.44 $ 24,480,000 $ 28,152,000
Proceeds, before expenses, to SAVVIS .......... $ 22.56 $335,580,000 $335,580,000
Proceeds, before expenses, to the selling
stockholder .................................. $ 22.56 $ 47,940,000 $105,468,000
Other compensation(1) ......................... N/A N/A N/A
</TABLE>
- ------------------
(1) An affiliate of Morgan Stanley & Co. Incorporated has received 457,507
shares of our common stock which is deemed compensation in this offering
under the National Association of Securities Dealers' Rules of Fair
Practice. In addition, NASD Rule 2710(c)(7) requires those shares be
locked up for a period of one year following the effective date of the
registration statement of which this prospectus is a part. For additional
information, see " -- Other Relationships."
The underwriting discount is 6% of the public offering price. The expenses
of the offering, not including the underwriting discount, are estimated at
$2,250,000 and are payable pro rata by us and the selling stockholder based
upon the number of shares offered in this offering. The underwriters have
agreed to reimburse us for a portion of our expenses incurred in connection
with this offering. These expenses consist of the following:
o a registration fee of $130,081;
o an NASD filing fee of $30,500;
o Nasdaq National Market listing fee of $95,000;
o estimated blue sky fees and expenses of $10,000;
o estimated printing and engraving expenses of $500,000;
o estimated legal fees and expenses of $600,000;
o estimated accounting fees and expenses of $575,000;
o estimated transfer agent fees and expenses of $3,500; and
o estimated miscellaneous fees and expenses of $305,919.
OVER-ALLOTMENT OPTION
The selling stockholder has granted an option to the underwriters to
purchase up to 2,550,000 additional shares at the public offering price less
the underwriting discount. The underwriters may exercise this option for 30
days from the date of this prospectus solely to cover any over-allotments. If
the underwriters exercise this option, each will be obligated, subject to
conditions contained in the purchase agreements, to purchase a number of
additional shares proportionate to that underwriter's initial amount reflected
in the above table.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 7.5% of the shares offered by this prospectus for
sale to some of our and Bridge's directors, officers, employees and their
immediate family and business associates. Our senior management will determine
whether or not a business associate will be included in this program. If these
persons purchase reserved shares, this will reduce the number of shares
available for sale to the general public. Any reserved shares which are not
orally confirmed for purchase within one day of the pricing of this offering
may be offered by the underwriters to the general public on the same terms as
the other shares offered by this prospectus.
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<PAGE>
NO SALES OF SIMILAR SECURITIES
We, the selling stockholder, our executive officers and directors and
other stockholders have agreed, with exceptions, not to sell or transfer any
common stock for 180 days after the date of this prospectus without first
obtaining the written consent of Merrill Lynch and Morgan Stanley.
Specifically, we and these other individuals have agreed not to directly or
indirectly:
o offer, pledge, sell or contract to sell any common stock,
o sell any option or contract to purchase any common stock,
o purchase any option or contract to sell any common stock,
o grant any option, right or warrant for the sale of any common stock,
o lend or otherwise dispose of or transfer any common stock,
o request or demand that we file a registration statement related to the
common stock, or
o enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired later by the
person executing the agreement or for which the person executing the agreement
later acquires the power of disposition. The shares of our common stock held by
the selling stockholder, other than the shares to be sold in the offering, have
been pledged to secure indebtedness of the selling stockholder. The lenders of
such indebtedness have not agreed to the provisions mentioned above.
QUOTATION ON THE NASDAQ NATIONAL MARKET
The shares have been approved for quotation on the Nasdaq National Market,
subject to notice of issuance, under the symbol "SVVS."
Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through
negotiations among us, the selling stockholder and the representatives. In
addition to prevailing market conditions, the factors to be considered in
determining the initial public offering price are:
o the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us,
o our financial information,
o the history of, and the prospects for, our company and the industry in
which we compete,
o an assessment of our management, its past and present operations, and the
prospects for, and timing of, our future revenues,
o the present state of our development, and
o the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares in the
aggregate to accounts over which they exercise discretionary authority.
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<PAGE>
NASD REGULATIONS
The representatives and their affiliates may, from time to time, engage in
transactions with, and perform services for, us and our affiliates in the
ordinary course of their business. In particular, affiliates of Merrill Lynch,
Morgan Stanley and CIBC World Markets Corp. are lenders under Bridge's senior
secured credit facility and an affiliate of Merrill Lynch is a lender under
Bridge's bridge loan, and they will receive in excess of ten percent of the net
proceeds of this offering. Because more than ten percent of the net proceeds of
the offering may be paid to members or affiliates of members of the National
Association of Securities Dealers, Inc. participating in the offering, the
offering will be conducted in accordance with NASD Conduct Rule 2710(c)(8).
This rule requires that the public offering price of an equity security be no
higher than the price recommended by a qualified independent underwriter which
has participated in the preparation of the registration statement and performed
its usual standard of due diligence with respect to that registration
statement. Bear, Stearns & Co. Inc. has agreed to act as qualified independent
underwriter for the offering. The price of the shares will be no higher than
that recommended by Bear, Stearns & Co. Inc.
UK SELLING RESTRICTIONS
Each underwriter has agreed that
o it has not offered or sold and, prior to the expiration of the period six
months from the closing of the offering, will not offer or sell any shares
of common stock of SAVVIS to persons in the United Kingdom, except to
persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments, as principal or agent, for the
purposes of their businesses or otherwise in circumstances which do not
constitute an offer to the public in the United Kingdom within the meaning
of the Public Offers of Securities Regulations 1995;
o it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in relation
to the common stock in, from or otherwise involving the United Kingdom; and
o it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issuance
of common stock to a person who is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1996 as amended or is a person to whom such document may otherwise
lawfully be issued or passed on.
NO PUBLIC OFFERING OUTSIDE THE UNITED STATES
No action has been or will be taken in any jurisdiction except in the
United States that would permit a public offering of the shares of common
stock, or the possession, circulation or distribution of this prospectus or any
other material relating to our company or shares of our common stock in any
jurisdiction where action for that purpose is required. Accordingly, the shares
of our common stock may not be offered or sold, directly or indirectly, and
neither this prospectus nor any other offering material or advertisements in
connection with the shares of common stock may be distributed or published, in
or from any country or jurisdiction except in compliance with any applicable
rules and regulations of any such country or jurisdiction.
Purchasers of the shares offered by this prospectus may be required to pay
stamp taxes and other charges in accordance with the laws and practices of the
country of purchase in addition to the offering price on the cover page of this
prospectus.
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<PAGE>
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, SEC rules may limit the
underwriters and selling group members from bidding for and purchasing our
common stock. However, the representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover page of this prospectus, the representatives may reduce that short
position by purchasing common stock in the open market. The representatives may
also elect to reduce any short position by exercising all or part of the
over-allotment option described above. Purchases of the common stock to
stabilize its price or to reduce a short position may cause the price of the
common stock to be higher than it might be in the absence of such purchases.
The representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares
in the open market to reduce the underwriters' short position or to stabilize
the price of such shares, they may reclaim the amount of the selling concession
from the underwriters and selling group members who sold those shares. The
imposition of a penalty bid may also affect the price of the shares in that it
discourages resales of those shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the
representatives will engage in such transactions or that these transactions,
once commenced, will not be discontinued without notice.
OTHER RELATIONSHIPS
The underwriters and their respective affiliates provide and have provided
banking, advisory and other financial services to SAVVIS and Bridge and some of
their affiliates in the ordinary course of the underwriters' businesses and may
do so from time to time in the future. The underwriters have received customary
compensation in connection with these transactions.
An affiliate of Morgan Stanley & Co. Incorporated owns 1,396,177 shares of
Bridge's class A common stock. Pursuant to an offer made by Bridge to all of
its accredited investor shareholders, on September 10, 1999 an affiliate of
Morgan Stanley & Co. Incorporated purchased 457,507 units from Bridge for an
aggregate purchase price of $915,014. Each unit consists of one share of common
stock of SAVVIS and $1.50 principal amount of Bridge subordinated notes.
On October 12, 1999, Goldman Sachs Credit Partners L.P. and Merrill Lynch
Capital Corporation, an affiliate of Merrill Lynch, committed to make available
to Bridge up to $100 million in aggregate principal amount of senior
subordinated bridge loans, subject to terms and conditions set forth in the
commitment letter. On November 24, 1999, Goldman, Sachs and Merrill Lynch
Capital loaned $50 million to Bridge pursuant to a bridge loan agreement. On
December 31, 1999, the bridge loan agreement was amended to add two additional
lenders and Bridge borrowed another $50 million under the amended bridge loan
agreement, $15 million of which came from Merrill Lynch Capital. If the bridge
loan is not repaid 12 months after closing date, Bridge is required to deliver
warrants to purchase Bridge common stock to Goldman, Sachs and Merrill Lynch
Capital. Each of Goldman, Sachs and Merrill Lynch Capital received customary
compensation in connection with this transaction.
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VALIDITY OF THE SHARES
The validity of the shares of common stock offered through this prospectus
will be passed upon for us by Hogan & Hartson L.L.P., New York, New York and
Steven M. Gallant, General Counsel of SAVVIS. Several legal matters relating to
the securities will be passed upon for the underwriters by Shearman & Sterling,
New York, New York.
EXPERTS
The consolidated financial statements of SAVVIS Communications
Corporation, as of December 31, 1998, and for the year then ended, as restated,
included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing in this prospectus,
which report contains an explanatory paragraph describing conditions that raise
substantial doubt as to our company's ability to continue as a going concern
and an explanatory paragraph relating to the restatement, and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of SAVVIS Communications
Corporation, as of December 31, 1997, as restated, and for the years ended
December 31, 1997, as restated, and 1996, included in this prospectus, have
been audited by Ernst & Young, LLP, independent auditors, as set forth in their
report dated April 23, 1998, except for Note 14 as to which the date is January
25, 2000, which contains an explanatory paragraph describing conditions that
raise substantial doubt about the company's ability to continue as a going
concern. This report appears in this prospectus, and is included in reliance on
such report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of Bridge Information Systems, Inc.
and Subsidiaries, as of December 31, 1997 and 1998, and for each of the three
years in the period ended December 31, 1998 included in this prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing in this prospectus, which report contains an explanatory
paragraph describing conditions that raise substantial doubt as to Bridge's
ability to continue as a going concern, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
CHANGE IN CERTIFYING ACCOUNTANTS
Upon our acquisition by Bridge on April 7, 1999, Deloitte & Touche LLP,
Bridge's independent accountants, replaced Ernst & Young LLP who had been our
independent accountants for the years ended December 31, 1996 and 1997. Ernst &
Young LLP's reports on our financial statements for each of those years were
unqualified, but included an explanatory paragraph surrounding uncertainties
regarding our ability to continue as a going concern. The decision to change
auditors was precipitated by the acquisition and was approved by the board of
directors.
During the two years in the period ended December 31, 1997, and subsequent
thereto, there were no disagreements with Ernst & Young LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to their satisfaction,
would have caused them to make reference to the subject matter of the
disagreements in connection with their reports.
WHERE YOU MAY FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules to the registration
statement. For further information with respect to us and the common stock to
be sold in this offering, we refer you to the registration statement and the
exhibits and schedules filed as part of the registration statement. Statements
contained in this prospectus concerning the contents of any contract or any
other document are not necessarily complete. If a contract or document has been
filed as an exhibit to the registration statement, we refer you to the copy of
the contract or document
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<PAGE>
that has been filed. Each statement in this prospectus relating to a contract
or document filed as an exhibit is qualified in all respects by the filed
exhibit. The registration statement, including exhibits and schedules filed
with it, may be inspected without charge at the SEC's public reference rooms
at:
o Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549;
o Seven World Trade Center, 13th Floor, New York, New York 10048; or
o Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661.
Copies of all or any part of the registration statement may be obtained
from such office after payment of fees prescribed by the SEC. Please call the
SEC at 1-800-SEC-0330 for further information on the operation of the public
reference rooms. The SEC also maintains a Web site that contains registration
statements, reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC at
http://www.sec.gov.
We intend to provide our stockholders with annual reports containing
consolidated financial statements audited by an independent public accounting
firm.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SAVVIS COMMUNICATIONS CORPORATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Balance Sheet as of September 30, 1999 (unaudited) .......................... F-2
Consolidated Statements of Operations for the nine month period ended September 30, 1998
(As
Restated), the period January 1 to April 6, 1999 (As Restated) and the period April 7 to
September 30, 1999 (unaudited) .......................................................... F-3
Consolidated Statement of Changes in Stockholders' Equity for the period January 1, 1999
to
September 30, 1999 (As Restated) (unaudited) ............................................ F-4
Consolidated Statements of Cash Flows for the nine month period ended September 30, 1998
(As
Restated), the period January 1 to April 6, 1999 (As Restated) and the period April 7 to
September 30, 1999 (unaudited) .......................................................... F-5
Notes to Consolidated Financial Statements (unaudited) ................................... F-6
Independent Auditors' Report - Deloitte & Touche LLP ..................................... F-11
Independent Auditors' Report - Ernst & Young LLP ......................................... F-12
Consolidated Balance Sheets as of December 31, 1997 (As Restated) and 1998 (As Restated) . F-13
Consolidated Statements of Operations for the years ended December 31, 1996, 1997 (As
Restated)
and 1998 (As Restated) .................................................................. F-14
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended
December
31, 1996, 1997 (As Restated) and 1998 (As Restated) ..................................... F-15
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 (As
Restated)
and 1998 (As Restated) .................................................................. F-16
Notes to Consolidated Financial Statements ............................................... F-17
</TABLE>
BRIDGE INFORMATION SYSTEMS, INC.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of Operations .... F-31
Independent Auditors' Report ............................................................. F-41
Consolidated Balance Sheets as of December 31, 1997 and 1998 ............................. F-42
Consolidated Statements of Operations and Comprehensive Loss for the years ended
December 31, 1996, 1997 and 1998 ........................................................ F-43
Consolidated Statements of Deficiency in Net Assets for the years ended December 31, 1996,
1997 and 1998 ........................................................................... F-44
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and F-45
1998.
Notes to Consolidated Financial Statements ............................................... F-46
Condensed Consolidated Balance Sheet as of September 30, 1999 (unaudited) ................ F-63
Condensed Consolidated Statements of Operations and Comprehensive Loss for the nine-month
period ended September 30, 1998 and 1999 (unaudited) .................................... F-64
Condensed Consolidated Statements of Cash Flows for the nine month period ended
September 30, 1998 and 1999 (unaudited) ................................................. F-65
Notes to Unaudited Condensed Consolidated Financial Statements ........................... F-66
</TABLE>
F-1
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEET - UNAUDITED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
--------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................................. $ 1,983
Accounts receivable, less allowance for doubtful accounts of $355...................... 2,106
Prepaid expenses ...................................................................... 479
Other current assets .................................................................. 10
---------
Total current assets ............................................................... 4,578
PROPERTY AND EQUIPMENT -- Net (Note 3) ................................................... 5,995
GOODWILL AND INTANGIBLE ASSETS -- Net of accumulated amortization of $8,144............... 30,322
OTHER LONG-TERM ASSETS ................................................................... 527
---------
TOTAL .............................................................................. $ 41,422
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ...................................................................... $ 5,089
Accrued expenses ...................................................................... 1,095
Due to Bridge Information Systems ..................................................... 17,270
Current portion of capital lease obligations (Note 4) ................................. 1,986
Other accrued liabilities ............................................................. 2,385
---------
Total current liabilities .......................................................... 27,825
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION (NOTE 4) ................................. 3,981
OTHER ACCRUED LIABILITIES ................................................................ 444
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 125,000,000 shares authorized, 72,000,000 shares issued
and outstanding ...................................................................... 720
Additional paid-in capital ............................................................ 31,026
Accumulated deficit ................................................................... (22,574)
---------
Total stockholders' equity ......................................................... 9,172
---------
TOTAL .............................................................................. $ 41,422
=========
</TABLE>
See notes to unaudited consolidated financial statements.
F-2
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------------------------- --------------
NINE MONTHS PERIOD FROM
ENDED PERIOD FROM APRIL 7 TO
SEPTEMBER 30, JANUARY 1 TO SEPTEMBER 30,
1998 APRIL 6, 1999 1999
--------------- --------------- --------------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
REVENUES ...................................................... $ 8,914 $ 5,440 $ 12,192
DIRECT COSTS AND OPERATING EXPENSES:
Data communications and operations ........................... 14,609 6,429 13,095
Selling, general and administrative .......................... 7,353 4,751 11,142
Depreciation and amortization ................................ 1,556 817 9,747
Impairment of assets ......................................... -- 1,383 --
----------- ----------- -----------
Total direct costs and operating expenses .................. 23,518 13,380 33,984
----------- ----------- -----------
LOSS FROM OPERATIONS .......................................... (14,604) (7,940) (21,792)
INTEREST EXPENSE, NET ......................................... (138) (135) (782)
----------- ----------- -----------
LOSS BEFORE INCOME TAXES, MINORITY INTEREST, AND
EXTRAORDINARY ITEM ........................................... (14,742) (8,075) (22,574)
Income Taxes .................................................. -- -- --
Minority Interest in Losses, net of accretion ................. (147)
-----------
LOSS BEFORE EXTRAORDINARY ITEM ................................ (14,889) (8,075) (22,574)
Extraordinary gain on debt extinguishment, net of tax ......... 1,954 -- --
----------- ----------- -----------
NET LOSS ...................................................... (12,935) (8,075) (22,574)
PREFERRED STOCK DIVIDENDS ..................................... (1,370) (706) --
AMORTIZATION OF DEFERRED FINANCING COSTS AND DISCOUNT
ON SERIES B AND C PREFERRED STOCK ............................ (369) (244) --
----------- ----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS .................. $ (14,674) $ (9,025) $ (22,574)
=========== =========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE BEFORE
EXTRAORDINARY ITEM ........................................... $ (.29) $ (.14) $ (0.31)
EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENT ..................... .03 -- --
----------- ----------- -----------
BASIC AND DILUTED LOSS PER COMMON SHARE ....................... $ (.26) $ (.14) $ (.31)
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING ........................... 56,735,597 66,018,388 72,000,000
=========== =========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
F-3
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF SHARES AMOUNTS
---------------------------- ----------------------------------------------------------
ADDITIONAL DEFERRED ACCUMULATED
COMMON TREASURY COMMON PAID-IN COMPEN- DEFICIT TREASURY
STOCK STOCK STOCK CAPITAL SATION (AS RESTATED) STOCK
------------ --------------- -------- ------------ ---------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1999 .............. 69,299,809 5,051,543 $693 $ 5,263 $ (78) $ (39,011) $ (64)
Issuance of common stock upon
exercise of stock options ........... 2,700,191 -- 27 1 -- -- --
Recognition of deferred
compensation ........................ -- -- -- -- 78 -- --
Net loss for the period prior to
acquisition ......................... -- -- -- -- -- (9,025) --
Acquisition of the Company by
Bridge Information Systems .......... -- (5,051,543) -- 25,762 -- 48,036 64
Net loss for the period subsequent
to acquisition ...................... -- -- -- -- -- (22,574) --
---------- ---------- ---- ------- ----- --------- -----
BALANCE, SEPTEMBER 30, 1999 ........... 72,000,000 -- $720 $31,026 $ -- $ (22,574) $ --
========== ========== ==== ======= ===== ========= =====
<CAPTION>
TOTAL
-------------
<S> <C>
BALANCE, JANUARY 1, 1999 .............. $ (33,197)
Issuance of common stock upon
exercise of stock options ........... 28
Recognition of deferred
compensation ........................ 78
Net loss for the period prior to
acquisition ......................... (9,025)
Acquisition of the Company by
Bridge Information Systems .......... 73,862
Net loss for the period subsequent
to acquisition ...................... (22,574)
---------
BALANCE, SEPTEMBER 30, 1999 ........... $ 9,172
=========
</TABLE>
See notes to unaudited consolidated financial statements.
F-4
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------------------------------- -------------------
NINE MONTHS PERIOD FROM
ENDED SEPTEMBER PERIOD FROM JANUARY APRIL 7 TO
30, 1998 1 TO APRIL 6, 1999 SEPTEMBER 30, 1999
----------------- --------------------- -------------------
(AS RESTATED) (AS RESTATED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net cash used in operating activities ................. $ (15,530) $ (6,185) $ (9,945)
INVESTING ACTIVITIES:
Capital expenditures -- net ........................... (1,308) (275) (855)
Acquisition of IXA, net of cash acquired .............. (750) -- --
--------- -------- --------
Net cash used in investing activities ............... (2,058) (275) (855)
--------- -------- --------
FINANCING ACTIVITIES:
Purchase of treasury stock ............................ (15) -- --
Proceeds from common stock issuance ................... 5 -- --
Exercise of stock options ............................. -- 28 --
Proceeds from Series C preferred stock issuance........ 22,500 -- --
Proceeds from issuance of Series C warrants ........... 3,700 -- --
Payment of Series C deferred financing costs .......... (1,747) -- --
Principal payments under capital lease obligations..... (503) (182) (381)
Proceeds from issuance of senior convertible
bridge notes ........................................ 1,800 -- --
Principal payments on borrowings from senior
bridge notes ........................................ (1,053) -- --
Proceeds from borrowings from Bridge
Information Systems Notes ........................... -- 4,700 12,570
Principal payments on borrowings from bank
notes payable ....................................... (242) (13) --
--------- -------- --------
Net cash provided by financing activities ............. 24,445 4,533 12,189
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ........................................... 6,857 (1,927) 1,389
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ......... 1,398 2,521 594
--------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............... $ 8,255 $ 594 $ 1,983
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Non-cash investing and financing activities:
Debt incurred under capital lease obligations ......... $ 1,059 $ 2,634 $ 1,153
Preferred stock dividends accrued ..................... 1,370 706 --
Amortization of deferred financing costs and
accretion of preferred stock discount ............... 369 244 --
Senior convertible notes exchanged for preferred
stock ............................................... 7,617 -- --
Issuance of common stock in acquisition of IXA ........ 583 -- --
Cash paid during the year for interest ................ 165 99 267
</TABLE>
See notes to unaudited consolidated financial statements.
F-5
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
1. PRESENTATION
The accompanying unaudited consolidated financial statements of Savvis
Communications Corporation, a Delaware corporation, formerly Savvis Holdings
Corporation (the "Company" or "Savvis"), have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions of Article 10 of Regulation S-X. Accordingly, the interim
financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for annual financial
statements.
On April 7, 1999 (the "acquisition date"), Savvis was acquired by a
wholly-owned subsidiary of Bridge Information Systems ("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. This transaction
was valued at approximately $31,746 based on the fair value of the securities
exchanged, as determined by independent valuation specialists, and the direct
costs of the acquisition. 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 market
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 Savvis unaudited consolidated financial
satements.
On September 10, 1999, Bridge sold in a private placement approximately
25% of its equity ownership in Savvis to existing shareholders of Bridge.
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments, which are of a
normal recurring nature, necessary to present fairly the Company's financial
position as of September 30, 1999 and the results of operations and cash flows
for the period subsequent to the Company's purchase by Bridge through September
30 (successor) and from January 1, 1999 through April 6, 1999 (predecessor) and
the nine months ended September 30, 1998 (predecessor). The results of
operations are not necessarily indicative of results that may be expected for
any other interim period or for the full year.
The financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the three years in the
period ended December 31, 1998 included elsewhere in this prospectus. Except as
described above, the accounting policies used in preparing these consolidated
financial statements are the same as those described in the consolidated
financial statements for the three years in the period ended December 31, 1998.
The unaudited financial statements for the predecessor periods have been
restated to reflect the recording of minority interest related to redeemable
Class A shares of the Company's subsidiary and to record accretion on Class A
shares and related convertible notes at an effective rate of 20%. The exchange
of these instruments for Class B preferred stock in March of 1998 has been
restated to be treated as a debt extinguishment and the purchase of a minority
interest.
F-6
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS) - (CONTINUED )
2. BUSINESS COMBINATIONS
As discussed in Note 1, Bridge issued approximately 3,011,000 shares of
its common stock, together with 239,000 options and warrants to purchase its
common stock, for all the outstanding equity interests of Savvis. The total
cost of the acquisition exceeded the fair value of Savvis' net assets by
$23,767 which is being amortized over 3 years. In addition, a portion of the
purchase price was allocated to the following tangible and intangible assets:
<TABLE>
<CAPTION>
ALLOCATED LIFE
ASSETS PURCHASE PRICE (IN MONTHS)
- -------------------------------- ---------------- ------------
<S> <C> <C>
Property and equipment ......... $5,600 36-60
Trademark ...................... 9,500 36
Non-compete agreement .......... 2,700 12
Other intangibles .............. 2,500 12
</TABLE>
Also, in connection with the acquisition, Bridge assumed liabilities of
Savvis in the amount of $12,321.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 1999:
<TABLE>
<S> <C>
Computer equipment ................................ $ 641
Communications equipment .......................... 1,025
Purchased software ................................ 104
Furniture and fixtures ............................ 334
Leasehold improvements ............................ 372
Equipment under capital lease obligations ......... 5,079
--------
7,555
Less: accumulated depreciation .................... (1,560)
--------
Property and equipment, net ....................... $ 5,995
========
</TABLE>
4. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable consisted of borrowings by Savvis from Bridge. The
outstanding balance on the notes was $17,270 at September 30, 1999 and interest
accrues at a rate of 8% per annum. The carrying value of the notes approximates
fair value at September 30, 1999.
F-7
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS) - (CONTINUED )
4. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS--(CONTINUED)
Savvis leases various equipment under capital leases. Future minimum lease
payments under capital leases at September 30, 1999 are as follows:
<TABLE>
<S> <C>
1999 (Three months) ............................ $ 370
2000 ........................................... 2,948
2001 ........................................... 2,940
2002 ........................................... 634
--------
Total capital lease obligations ............. 6,892
Less amount representing interest .............. (925)
Less current portion ........................... (1,986)
--------
Long-term capital lease obligations ......... $ 3,981
========
</TABLE>
5. STOCK SPLIT
On July 22, 1999, the Board of Directors of the Company declared a
72,000-for-1 stock split on 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 outstanding have been adjusted retroactively for the stock
split.
6. STOCK OPTION ACTIVITY
As discussed in Note 1, upon Bridge's acquisition of the Company on April
7, 1999, all outstanding Savvis stock options were exchanged for Bridge stock
options and included as part of the purchase consideration based upon the fair
value of Bridge options issued. Subsequently, on July 22 1999, the Company's
Board of Directors adopted a new stock option plan and authorized 8 million
stock options to be granted under the plan. Between July and September 1999,
the Company granted options to purchase 3,639,000 shares of its common stock to
certain employees of Bridge. In that same period, the Company granted options
to purchase up to 2,300,008 shares of its common stock to certain of its
employees.
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 option plan. Under the provisions of APB 25, no compensation
expense was recorded as the $.50 exercise price approximated the estimated fair
value of the stock at the date of the grant, as determined by an independent
valuation specialist. Pro forma information regarding net income is required by
SFAS No. 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS No. 123. The fair
value of these options was estimated at the date of grant using the minimum
value method. Under this method, the expected volatility of the Company's
common stock is not estimated, as there is no market for the Company's common
stock in which to monitor stock price volatility. The calculation of the fair
value of the options granted assumed a risk-free interest rate of approximately
5.0%, an assumed dividend yield of zero, and an expected life of the options of
three years. The weighted average fair value of options granted was $.07. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' estimated vesting period.
Had compensation cost for the Company's stock option plan 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 not have been significantly
different than the net loss reported.
F-8
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS) - (CONTINUED )
7. RELATED PARTY TRANSACTIONS
In connection with Bridge's acquisition of the Company, as discussed in
Note 1, Bridge has funded the Company's operations during 1999. At September
30, 1999, the Company had amounts payable to Bridge of $17,270. See Note 8 for
a discussion of other relationships between the Company and Bridge arising from
the execution of the Master Establishment and Transition Agreement and other
related agreements.
8. SUBSEQUENT EVENTS
Public Offering -- The Board of Directors of SAVVIS has authorized
management of the Company to file a registration statement with the Securities
and Exchange Commission for the initial public offering of the Company's common
stock. The Company contemplates using a portion of the proceeds from the
proposed public offering to finance a portion its purchase of Bridge's Internet
protocol network assets and to pay Bridge a preferential distribution of $58
million as discussed below. The remaining proceeds will be used to finance
growth.
Asset Purchase and Preferential Distribution -- Simultaneous with the
completion of the public offering, the Company will purchase or sublease
Bridge's global Internet protocol network assets for approximately $92,000 less
the book value of all the assets not transferred because of regulatory
restrictions (the "Call Assets") (approximately $4,000). The purchase price of
the assets will be paid with offering proceeds. For accounting purposes, the
assets are to be transferred from Bridge to Savvis at their historical net book
value of approximately $88,000. The Company will also pay a $58 million
preferential distribution to Bridge. In addition, this agreement establishes a
right for Savvis to purchase the Call Assets at their net book values. At the
time any call right is exercised, such assets will be recorded at their net
book value.
At the time of the asset purchase, the Company will also enter 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 will be based upon the cash cost to Bridge of
operating the network as configured on the date the Company acquire it, fees
for additional services provided following the closing of the transfer will be
set for a three-year term based on an agreed payment schedule reflecting the
estimated cost to provide the services. Bridge has agreed to pay us 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% 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% of the total amount paid
by Bridge and its subsidiaries for Internet protocol data transport services.
Upon transfer of the assets, Bridge is also to provide various services,
including technical support, customer support and project management in the
procurement and installation of equipment. In addition, Bridge is to provide
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. The permits provide the Company, subject to the receipt of
required landlord consents, with licenses 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 less than $75 per year.
F-9
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS) - (CONTINUED )
Stock Options -- During the period from October through December 1999, the
Company granted 2,843,258 stock options to employees of SAVVIS and Bridge with
an exercise price of $.50 per share. Noncash 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 totalling approximately
$53,000 will be recorded over the vesting periods of such options, which
periods range from immediate up to four years. Approximately $2,000 of noncash
compensation expense will be recorded in the fourth quarter.
Severance -- In November 1999, in connection with the resignation of its
President, the Company agreed to provide severance benefits, to include
approximately one year's base salary, a 1999 performance bonus of not less than
25% of base salary, and other miscellaneous benefits. Approximately $360 will
be accrued in the fourth quarter related to this severance arrangement.
* * * * * *
F-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Savvis Communications Corporation:
We have audited the accompanying consolidated balance sheet of Savvis
Communications Corporation and subsidiaries, formerly SAVVIS Holdings
Corporation (the "Company") as of December 31, 1998, and the related
consolidated statements of operations, changes in stockholders' deficit, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Savvis Communications
Corporation and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
We have not audited any financial statements of the Company for any period
subsequent to December 31, 1998. However, as discussed in Note 13 to the
financial statements, the Company has experienced recurring losses from
operations and cash flow deficiencies which have been funded by Bridge
Information Systems, Inc. ("Bridge"), of which the Company is a majority-owned
subsidiary. As further discussed in Note 13, Bridge has not committed to fund
the Company's operations in the future. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 13. The 1998 financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 14, the consolidated financial statements for the
year ended December 31, 1998 have been restated.
/s/ DELOITTE & TOUCHE LLP
St. Louis, Missouri
August 12, 1999, except for Note 13 as to which the date is January 14, 2000,
and Note 14 as to which the date in January 25, 2000.
F-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of Savvis Communications Corporation:
We have audited the accompanying consolidated balance sheet of Savvis
Communications Corporation and subsidiaries (the "Company"), as of December 31,
1997 and the related consolidated statements of operations, changes in
stockholders' equity (deficit), and cash flows for each of the two years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Savvis Communications
Corporation and subsidiaries as of December 31, 1997 and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has incurred operating
losses and has a working capital deficiency. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
As discussed in Note 14, the consolidated financial statements for the
year ended December 31, 1997 have been restated.
/s/ ERNST & YOUNG, LLP
St. Louis, Missouri
April 23, 1998, except for Note 14 as to which the date is January 25, 2000
F-12
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1998
------------ ------------
(AS RESTATED, SEE NOTE 14)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 1,398 $ 2,521
Accounts receivable, less allowance for doubtful accounts of $128 in
1997 and $149 in 1998..................................................... 623 2,649
Prepaid expenses ........................................................... 304 120
Other current assets ....................................................... 29 21
--------- ---------
Total current assets .................................................... 2,354 5,311
PROPERTY AND EQUIPMENT -- Net (Note 6) ...................................... 1,906 4,753
GOODWILL AND INTANGIBLE ASSETS -- Net of accumulated amortization of
$503........................................................................ -- 1,406
OTHER LONG-TERM ASSETS ...................................................... 53 193
--------- ---------
TOTAL ....................................................................... $ 4,313 $ 11,663
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ........................................................... $ 3,812 $ 4,498
Accrued compensation payable ............................................... 326 1,140
Deferred revenue ........................................................... 359 71
Notes payable to bank -- current portion (Note 7) .......................... 220 13
Current portion of capital lease obligations (Note 7) ...................... 318 1,097
Other accrued liabilities .................................................. 274 206
--------- ---------
Total current liabilities ............................................... 5,309 7,025
--------- ---------
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION (NOTE 7) .................... 491 1,649
NOTES PAYABLE TO BANK (NOTE 7) .............................................. 13 --
SENIOR CONVERTIBLE NOTES (NOTE 7) ........................................... 4,719 --
SENIOR CONVERTIBLE BRIDGE NOTES (NOTE 7) .................................... 3,053 --
COMMITMENTS AND CONTINGENCIES (NOTE 11) .....................................
MINORITY INTEREST ........................................................... 370 --
REDEEMABLE STOCKS (NOTES 1 AND 4):
Series A, $.01 par value, 1,000,000 shares authorized, 480,228 issued
and outstanding in 1997 .................................................. 5,261 --
Series A, $.001 par value, 517,410 shares authorized, 502,410 Issued
and outstanding, liquidation preference of $5,345 ........................ -- 5,345
Series B, $.001 par value, 5,649,241 shares authorized, 5,649,241 issued
and outstanding, liquidation preference of $5,649......................... -- 3,898
Series C, $.001 par value, 30,000,000 shares authorized, 30,000,000 issued
and outstanding, liquidation preference of $30,000 -- net of
unamortized discount ..................................................... -- 26,943
STOCKHOLDERS' DEFICIT:
Common stock; $.01 par value, 125,000,000 authorized, 39,550,519 issued
and outstanding in 1997, 69,299,809 issued and outstanding in 1998 ....... 396 693
Additional paid-in capital ................................................. 1,095 5,263
Accumulated deficit ........................................................ (16,345) (39,011)
Deferred compensation ...................................................... -- (78)
Treasury stock ............................................................. (49) (64)
--------- ---------
Total stockholders' deficit ................................................ (14,903) (33,197)
--------- ---------
TOTAL ....................................................................... $ 4,313 $ 11,663
========= =========
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- --------------
(AS RESTATED, SEE NOTE 14)
<S> <C> <C> <C>
REVENUES:
Service ...................................................... $ 194 $ 2,395 $ 12,827
Installation ................................................. 82 317 538
Other ........................................................ 14 46 309
----------- ----------- -----------
Total revenue ............................................. 290 2,758 13,674
----------- ----------- -----------
DIRECT COSTS AND OPERATING EXPENSES:
Data communications and operations ........................... 1,044 11,072 20,889
Selling, general and administrative .......................... 1,204 5,130 12,245
Depreciation and amortization ................................ 153 631 2,288
----------- ----------- -----------
Total direct costs and operating expenses ................. 2,401 16,833 35,422
----------- ----------- -----------
LOSS FROM OPERATIONS .......................................... (2,111) (14,075) (21,748)
NONOPERATING INCOME (EXPENSE):
Interest income .............................................. -- -- 383
Interest expense ............................................. (60) (482) (483)
----------- ----------- -----------
Total nonoperating income (expense) ....................... (60) (482) (100)
----------- ----------- -----------
LOSS BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY
ITEM ......................................................... (2,171) (14,557) (21,848)
INCOME TAXES (NOTE 10) ........................................ -- -- --
Minority Interest in Losses, net of accretion ................. -- 547 (147)
----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM ................................ (2,171) (14,010) (21,995)
Extraordinary gain on debt extinguishment, net of tax ......... -- -- 1,954
----------- ----------- -----------
NET LOSS ...................................................... (2,171) (14,010) (20,041)
PREFERRED STOCK DIVIDENDS ..................................... -- (151) (2,054)
AMORTIZATION OF DEFERRED FINANCING COSTS AND DISCOUNT ON
SERIES B AND C PREFERRED STOCK ............................... -- -- (571)
----------- ----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS .................. $ (2,171) $ (14,161) $ (22,666)
=========== =========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE BEFORE EXTRAORDINARY
ITEM ......................................................... $ (.06) $ (.38) $ (.42)
EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENT ..................... -- -- .03
----------- ----------- -----------
BASIC AND DILUTED LOSS PER COMMON SHARE ....................... $ (.06) $ (.38) $ (.39)
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING ........................... 35,396,287 36,904,108 58,567,482
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NUMBER OF SHARES
-------------------------
COMMON TREASURY
STOCK STOCK
------------ ------------
<S> <C> <C>
BALANCE, JANUARY 1, 1996 ............. 30,665,765 --
Issuance of common stock ............ 8,884,754 --
Issuance of common stock upon
Exercise of stock options .......... -- --
Net loss ............................ -- --
---------- --
BALANCE, DECEMBER 31, 1996 ........... 39,550,519 --
Purchase of shares for treasury ..... -- 4,853,967
Dividends declared on Series A
Preferred Stock .................... -- --
Net loss ............................ -- --
---------- ---------
BALANCE, DECEMBER 31, 1997 ........... 39,550,519 4,853,967
Issuance of common stock ............. 1,976 --
Issuance of in-the-money 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
Preferred Stock ..................... -- --
Amortization of deferred financing
costs and discount on Series C
Preferred Stock ..................... -- --
Purchase of shares for treasury ...... -- 197,576
Issuance of Series C warrants
(Note 3) ............................ -- --
Net loss ............................. -- --
---------- ---------
BALANCE, DECEMBER 31, 1998 ........... 69,299,809 5,051,543
========== =========
<PAGE>
<CAPTION>
AMOUNTS
---------------------------------------------------------------------------
(AS RESTATED,
ADDITIONAL SEE NOTE 14)
COMMON PAID-IN DEFERRED ACCUMULATED TREASURY
STOCK CAPITAL COMPENSATION DEFICIT STOCK TOTAL
-------- ------------ -------------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 ............. $ 307 $ (206) $ -- $ (13) $ -- $ 88
Issuance of common stock ............ 89 1,279 -- -- -- 1,368
Issuance of common stock upon
Exercise of stock options .......... -- 22 -- -- -- 22
Net loss ............................ -- -- -- (2,171) -- (2,171)
----- ------ ----- --------- ----- ---------
BALANCE, DECEMBER 31, 1996 ........... 396 1,095 -- (2,184) -- (693)
Purchase of shares for treasury ..... -- -- -- -- (49) (49)
Dividends declared on Series A
Preferred Stock .................... -- -- -- (151) -- (151)
Net loss ............................ -- -- -- (14,010) -- (14,010)
----- ------ ----- --------- ----- ---------
BALANCE, DECEMBER 31, 1997 ........... 396 1,095 -- (16,345) (49) (14,903)
Issuance of common stock ............. -- 1 -- -- -- 1
Issuance of in-the-money 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
Preferred Stock ..................... -- -- -- (2,054) -- (2,054)
Amortization of deferred financing
costs and discount on Series C
Preferred Stock ..................... -- -- -- (571) -- (571)
Purchase of shares for treasury ...... -- -- -- -- (15) (15)
Issuance of Series C warrants
(Note 3) ............................ -- 3,700 -- -- -- 3,700
Net loss ............................. -- -- -- (20,041) -- (20,041)
----- ------ ----- --------- ----- ---------
BALANCE, DECEMBER 31, 1998 ........... $ 693 $5,263 $ (78) $ (39,011) $ (64) $ (33,197)
===== ====== ===== ========= ===== =========
</TABLE>
See notes to consolidated financial statements
F-15
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------- -------------
(AS RESTATED, SEE NOTE 14)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss ........................................................... $ (2,171) $ (14,010) $ (20,041)
Reconciliation of net loss to net cash used in Operating ..........
Depreciation and amortization ................................... 153 631 2,288
Extraordinary gain on early extinguishment of debt .............. -- -- (1,954)
Minority interest in losses, net of accretion ................... -- (547) 147
Discount Accretion .............................................. 55 25
Compensation expense relating to the issuance of options . -- -- 93
Net changes in operating assets and liabilities - net of effect
of acquisition:
Accounts receivable ............................................ (96) (527) (1,885)
Other current assets ........................................... (33) 4 63
Other assets ................................................... -- (53) (141)
Prepaid expenses ............................................... (53) (250) 183
Accounts payable ............................................... 676 3,316 61
Deferred revenue ............................................... 65 294 (288)
Other accrued liabilities ...................................... 166 585 889
-------- --------- ---------
Net cash used in operating activities ......................... (1,293) (10,502) (20,560)
-------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures - net ........................................ (884) (697) (1,688)
Acquisition of IXA ................................................ -- -- (750)
-------- --------- ---------
Net cash used in investing activities ......................... (884) (697) (2,438)
-------- --------- ---------
FINANCING ACTIVITIES:
Purchase of treasury stock ........................................ -- (49) (15)
Proceeds from common stock issuance ............................... 1,369 -- 1
Exercise of stock options ......................................... 22 -- 10
Proceeds from Series A preferred stock issuance ................... 500 250 --
Proceeds from Series C preferred stock issuance ................... -- -- 22,500
Proceeds from issuance of Series C warrants ....................... -- -- 3,700
Payment of Series C deferred financing costs ...................... -- -- (1,747)
Principal payments under capital lease obligations ................ (20) (218) (793)
Proceeds from issuance of senior convertible notes ................ -- 4,483 --
Proceeds from issuance of Class A shares of subsidiary ............ 917
Proceeds from issuance of senior convertible bridge notes ......... -- 3,053 1,800
Principal payments on borrowings from senior convertible
bridge notes .................................................... -- -- (1,053)
Proceeds from borrowings from notes payable ....................... 950 3,725 --
Principal payments on borrowings from bank notes payable . (81) (137) (282)
-------- --------- ---------
Net cash provided by financing activities ..................... 2,740 12,024 24,121
-------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS .......................... $ 563 $ 825 $ 1,123
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ....................... 10 573 1,398
-------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR ............................. $ 573 $ 1,398 $ 2,521
======== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Non-cash investing and financing activities:
Debt incurred under capital lease obligations ................... $ 277 $ 718 $ 2,835
Forgiveness of capital lease obligations in exchange for
property ....................................................... -- -- 279
Preferred stock dividends ....................................... -- 151 2,054
Amortization of financing costs ................................. -- -- 234
Accretion of preferred stock discount ........................... -- -- 569
Senior convertible notes exchanged for preferred stock .......... -- -- 7,617
Issuance of common stock in acquisition of IXA .................. -- -- 583
Cash paid for interest .......................................... 24 227 262
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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". The Company was
formed in November 1995 with $101 of capital and commenced commercial
operations in 1996. The Company provides high-speed Internet access and
high-end private Intranet services to corporations throughout the United
States. The Company also offers colocation services, network operations, and
related engineering services.
The Company's operations are subject to risks and uncertainties,
including, among others, actual and prospective competition by entities with
greater financial and other resources, risks associated with the development of
the Internet market, risks associated with growth and domestic expansion, risks
associated with limited experience in the market, technology and regulatory
risks, and dependence upon sole and limited source suppliers.
PRINCIPLES OF CONSOLIDATION -- The Company's consolidated financial
statements include the accounts of Holdings, SCC and LLC. On March 4, 1998 the
Company entered into a transaction, which is discussed below, that modified the
corporate structure so that Holdings became the holding company of SCC.
On July 31, 1997, SCC formed the LLC as a prerequisite to obtaining $5,400
in financing through the issuance of senior convertible promissory notes. The
LLC functioned as SCC's primary operating entity, owning all customer contracts
entered into in connection with the business, from July 30, 1997 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 noteholders owned all 5,400,000 shares. Both classes of stock had
equal voting rights and liquidation preferences.
A portion of the 1997 net loss of the LLC was allocated to the Class A
minority interest in the LLC. The minority shareholders' interest in the LLC,
along with the $5,400 in senior convertible promissory notes, was converted
into Series B convertible preferred stock of Holdings on March 4, 1998. The LLC
was subsequently merged into SCC on April 30, 1998 and SCC's Class B shares in
the LLC and the senior noteholders' Class A interest in the LLC were
terminated. The exchange of the senior notes and Class A stock for the Series B
convertible preferred has been accounted for as the extinguishment of debt and
the purchase of minority interest. At the date of issuance the Series B
convertible preferred was deemed to have a fair value of $3,700 which resulted
in the recognition of an extraordinary gain on extinguishment of the notes of
approximately $1,954 and the establishment of $290 of goodwill.
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.
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 term of the
related lease.
OTHER ASSETS -- Other assets consist primarily of deposits for network
services.
F-17
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
(CONTINUED)
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 generally three years.
GOODWILL AND INTANGIBLE ASSETS -- Goodwill is being amortized over ten
years and intangible assets over one to two years, all using the straight-line
method. The goodwill life was determined at the acquisition date based on
market and industry factors.
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 nonfinancial
data such as market trends, product and development cycles, and changes in
management's market emphasis. There has been no impairment recognized during
the years ended 1996, 1997 and 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The fair value of borrowings is
estimated by discounting the future cash flows using borrowing rates for
similar arrangements with similar maturities.
STOCK SPLIT -- On July 22, 1999, the Board of Directors of the Company
declared a 72,000-for-1 stock split on the Company's shares of common stock. As
a result, the Company had 125 million shares authorized and 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 the stock split.
REVENUE RECOGNITION AND DEFERRED REVENUE -- Service revenues consist
primarily of monthly Internet access service fees, which are fixed monthly
amounts. Services were billed one month in advance in both 1996 and 1997. For
all years, any services billed and payments received in advance of providing
services are deferred until the period such services are earned. Equipment
sales and installation charges are recognized when equipment is delivered and
installation is completed.
ADVERTISING COSTS -- Advertising costs are expensed as incurred.
INCOME TAXES -- SCC was originally incorporated as an S Corporation under
the provisions of the Internal Revenue Code. Under S Corporation provisions,
SCC generally did not pay any federal or state corporate income tax on its
taxable income. Instead, SCC's taxable loss was reported by the stockholders on
their individual income tax returns. Effective November 12, 1996, SCC changed
its tax status from an S Corporation to a C Corporation. Accordingly, income
taxes for the Company for fiscal 1998 and 1997 are accounted for under the
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 cost based on the intrinsic value of the equity instrument awarded
as determined at grant 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).
F-18
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
(CONTINUED)
NEW ACCOUNTING STANDARDS -- In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 131, Disclosures about Segments of an Enterprise and Related
Information, which establishes standards for the way that public enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued. SFAS No. 131 is effective for
years beginning after December 15, 1997. The statement has not had an impact on
the Company's financial statement disclosures as its financial statements
reflect how the "chief operating decision maker" manages the business, i.e., as
a single segment.
In June 1997, FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for the reporting and display of comprehensive
income and its components in the financial statements. SFAS No. 130 is
effective for years beginning after December 15, 1997. The statement has not
had an impact on the Company's financial statements as the Company has no other
comprehensive income to report.
In February 1997, FASB issued SFAS No. 128, Earnings Per Share, which
replaced primary and fully diluted earnings per share with basic and diluted
earnings per share. SFAS No. 128 is effective for years ending after December
31, 1997. All loss per share amounts for all periods have been presented to
conform to SFAS No. 128. All stock options and warrants outstanding have been
excluded from the computation of diluted loss per share, as their effect would
be antidilutive, and accordingly, there is no reconciliation between basic and
diluted loss per share for each of the years presented.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up
Activities. This standard requires companies to expense the costs of start-up
activities and organization costs as incurred. In general, SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. The adoption of
SOP 98-5 is not expected to have a material impact on the Company's results of
operations.
In June 1998, FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133 was
amended by SFAS No. 137, which delays the effective date of SFAS No. 133 to
fiscal years and quarters beginning after June 15, 2000. SFAS No. 133 requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
The Company is assessing the requirements of SFAS No. 133 and the effects, if
any, on the Company's financial position, results of operations and cash flows.
CONCENTRATIONS OF CREDIT RISK -- Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of
accounts receivable. This risk is limited due to the large number of customers
comprising the Company's customer base. 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.
RECLASSIFICATIONS -- Certain 1996 and 1997 information has been
reclassified to conform to the 1998 presentation.
2. SUBSEQUENT EVENTS
PURCHASE BY BRIDGE INFORMATION SYSTEMS, INC. -- On April 7, 1999, the
Company was purchased by Bridge Information Systems, Inc. ("Bridge"). Pursuant
to the terms of the transaction, Bridge
F-19
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUBSEQUENT EVENTS - (CONTINUED)
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
outstanding equity interests of the Company. To effect the transaction, the
Series A, B and C Preferred Shareholders received their respective liquidation
preferences (see Note 4) 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. Subsequent to the purchase, Bridge has
the intent to support and fund operations of Savvis throughout fiscal year
1999.
STOCK OPTION ACTIVITY (UNAUDITED) -- Also on July 22, 1999, the Company's
Board of Directors adopted a new stock option plan and authorized 8 million
stock options to be granted under plan. Between July and October 1999, the
Company granted options to purchase 3,639,000 shares of its common stock to
selected employees of Bridge Information Systems, Inc. In that same period, the
Company granted options to purchase up to 2,300,008 shares of its common stock
to selected employees. All of these options were granted pursuant to the 1999
Stock Option Plan.
PRIVATE PLACEMENT (UNAUDITED) -- On September 10, 1999, Bridge, 100%
parent of SAVVIS, sold in a private placement 18,129,721 shares of SAVVIS
common stock to Bridge shareholders.
PROPOSED PUBLIC OFFERING OF COMMON STOCK (UNAUDITED) -- The Board of
Directors of SAVVIS has authorized management of the Company to file a
registration statement with the Securities and Exchange Commission for the
initial public offering of the Company's common stock. The Company contemplates
using the proceeds from the proposed public offering to finance a portion of
its purchase of Bridge's Internet protocol network assets, for payment of a
preferential distribution to Bridge, for capital expenditures and general
corporate purposes, and to finance its growth.
3. CORPORATE REORGANIZATION AND FINANCIAL TRANSACTIONS
The Company was originally organized in November 1995 and operated as SCC.
Subsequently, the Company entered into the following transactions:
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 entered into the following
transactions:
o Issuance of convertible notes to investors totaling $3,700. These notes,
along with a $500 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.
On July 31, 1997, SCC formed the LLC, which functioned as SCC's primary
operating entity, as a prerequisite for the following transactions:
o Issuance of senior convertible notes (senior notes) for $5,400. In return
for lending the LLC $5,400, the senior noteholders received 5.4 million
Class A shares of the LLC for an aggregate nominal fee of $1,000. The
senior notes were unsecured, accrued interest at a rate of 8% per annum,
and had a term of five years.
F-20
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. CORPORATE REORGANIZATION AND FINANCIAL TRANSACTIONS - (CONTINUED)
Between October 31 and December 31, 1997, LLC entered into the following
transactions:
o Issuance of $3,100 in senior convertible bridge notes ("senior bridge
notes").
o Issuance of 13,799,812 five-year detachable warrants in conjunction with
the issuance of the senior bridge notes. (See discussion below regarding
subsequent exchange.)
o Issuance of 23,496 shares of Series A convertible preferred stock at a
price of $10.64 per share.
During 1998 an additional $1,800 of LLC senior bridge notes were issued.
On March 3, 1998, the Company's owners formed Holdings. At this time,
Holdings entered into the following transactions:
o Issuance of 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 Issuance of 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. The exercise
period for these warrants expires on May 29, 2002.
o Conversion of $5,400 in senior notes and accrued interest of $249 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 Issuance of 63,488,349 shares of $.001 par common stock of Holdings in
exchange for all of the $.01 par common stock of SCC.
o Issuance of 22,000,000 shares of Class C Preferred Stock and 299,466,125
detachable Series C common stock warrants of Holdings for $18,200 in cash
and exchange of $3,800 of LLC senior bridge notes. The remaining senior
bridge notes were repaid from the proceeds of the financing.
o Issuance of 13,799,812 warrants to purchase common stock at a strike price
of $.10 were exchanged for an equal amount of warrants to purchase common
stock of SCC with the same strike price. The warrants expire on the earlier
of ten years from the date of issuance and five years from the date of an
initial public offering.
On July 1, 1998, Holdings issued an additional 8,000,000 shares of Series
C Preferred Stock and 108,896,798 detachable common stock warrants for $8,000
in cash.
The Company, based on an independent valuation, assigned $3,700 to the
value of the detachable Series C common stock warrants issued in the March 1998
and July 1998 transactions. The $3,700 was recorded as a discount on the
preferred stock and an increase in additional paid in capital. Financing costs
of $1,800 were recorded as a discount against the preferred stock. This
resulted in $24,600 of value assigned to the Series C Preferred Stock, with the
difference between such value and the $30,000 redemption value being amortized
through the mandatory redemption date. Amortization is being charged to
accumulated deficit.
4. REDEEMABLE PREFERRED STOCK AND STOCK WARRANTS
HOLDINGS SERIES A PREFERRED STOCK -- The Series A Preferred ranks junior
to the Series C Preferred and the Series B Preferred, but senior to all other
classes of stock as to liquidation, dividends, redemptions, and any other
payment or distribution with respect to capital stock. The Series A Preferred
shall be redeemed on December 31, 2003, after (i) all shares of Series C
Preferred have been redeemed by payment in full of the aggregate Series C
liquidation preference and (ii) all
F-21
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. REDEEMABLE PREFERRED STOCK AND STOCK WARRANTS - (CONTINUED)
shares of Series B Preferred have 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 shall be equal to the greater of the Series A
liquidation preference or the fair market value per share of the Series A
Preferred, as determined in accordance with the Certificate of Incorporation.
Holders of the Series A Preferred shall be entitled to convert each share of
Series A Preferred into 142.0413 shares of common stock. The Series A
conversion ratio is subject to adjustment in connection with certain issuances
of capital stock of the holders and as otherwise set forth in the Certificate
of Incorporation. Each holder of Series A Preferred shall be 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 the public offering and sale of shares of capital stock of
the Company resulting in gross proceeds of at least $10,000. Holders of Series
A Preferred shall be entitled to vote on all matters on which the common
stockholders may vote. Each share of Series A Preferred shall be entitled to
142.0413 votes. The Series A Preferred holders are not entitled to dividends.
HOLDINGS SERIES B PREFERRED STOCK -- The Series B Preferred ranks junior
to the Series C Preferred, but senior to all other classes of the Company's
stock as to liquidation, dividends, redemptions, and any other payment or
distribution with respect to capital stock. The Series B Preferred shall be
redeemed on December 31, 2003 after all shares of Series C Preferred have 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 shall
be equal to the greater of the Series B liquidation preference or the then -
applicable fair market value per share of the Series B Preferred, as determined
in accordance with the Certificate of Incorporation. At any time, holders of
the Series B Preferred shall be entitled to convert each share of Series B
Preferred into 13.3497 share of common stock. The Series B conversion ratio is
subject to adjustment in connection with certain issuances of capital stock of
the Company and as otherwise set forth in the Certificate of Incorporation.
Each holder of Series B Preferred shall be 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 the public offering and
sale of shares of capital stock of the Company resulting in gross proceeds of
at least $10,000. Holders of Series B Preferred shall be entitled to vote on
all matters on which the common stockholders may vote. Each share of Series B
Preferred shall be entitled to approximately 13.3497 vote. The Series B
Preferred holders are not entitled to dividends.
HOLDINGS SERIES C PREFERRED STOCK -- The Series C Preferred ranks senior
to all other classes of stock of the Company as to liquidation, dividends,
redemptions, and any other payments and has a liquidation preference equal to
the Series C price per share of $1 plus accrued and unpaid dividends
("liquidation preference"). Dividends accrue quarterly at 8 percent and may be
paid in cash, and to the extent not paid in cash, such dividends will be added
to the liquidation preference of the Series C Preferred for the first five
years at the option of the Company; thereafter dividends are payable in cash.
The Series C Preferred shall be redeemed on December 31, 2003 at a mandatory
price equal to the liquidation preference. The Company is 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, and certain other conditions as defined in
the agreement. The Company has 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 shall be entitled to vote
on all matters on which the common stockholders may vote and are entitled to
13.6122 vote per share. In addition, the Certificate of Incorporation provides
that for so long as at least 1 million shares of Series C Preferred are
outstanding, the holders of 66 2/3 percent of the Series C Preferred shall be
entitled to elect four of the Company's seven directors.
F-22
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. REDEEMABLE PREFERRED STOCK AND STOCK WARRANTS - (CONTINUED)
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, redemptions, and any other payment or distribution with
respect to capital stock. The Series A Preferred was 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, as determined in accordance with the
Certificate of Incorporation, 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 nonassessable
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
adjustment provisions of the Agreement. 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 the public offering and sale of shares of
capital stock of the Company resulting in gross proceeds of at least $10,000.
Holders of Series A Preferred were entitled to vote on all matters on which the
common stockholders could 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.
See Note 2 for discussion of the redemption of all of the Holdings
Preferred Stock subsequent to December 31, 1998.
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. These warrants were subsequently
exchanged for an equal amount of warrants to purchase common stock of Holdings
with the same strike price and remained outstanding as of December 31, 1998.
The warrants expire on the earlier of 10 years from the date of issuance or
five years from the date of an initial public offering. Management believes the
value of the warrants is insignificant.
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 $3,700. The warrants are
exercisable at any time except that no more than 75 percent of the warrants are
exercisable prior to March 3, 2000. The warrants expire 10 years from date of
issuance. The warrants provide, 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. All Series
C warrants were outstanding as of December 31, 1998.
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 $160 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 and remained outstanding as of December 31, 1998.
5. BUSINESS COMBINATION
On March 4, 1998, the Company acquired all of the outstanding shares of
Interconnected Associates, Inc. ("IXA") for $750 in cash and 28,789,781 shares
of the Company's common stock.
F-23
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. BUSINESS COMBINATION - (CONTINUED)
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.
<TABLE>
<S> <C>
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
======
</TABLE>
The following summarized pro forma (unaudited) information assumes that
the acquisition consummated in 1998 had occurred at the beginning of each
period:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Revenues .......... $ 4,474 $ 13,903
Net loss .......... (14,002) (20,318)
</TABLE>
In management's opinion, the pro forma combined results of operations are
not indicative of the actual results that would have occurred had the
acquisition been consummated as of that time or of future operations of the
combined companies under the ownership and operation of the Company.
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Computer equipment ...................................... $ 259 $ 837
Communications equipment ................................ 1,000 1,771
Purchased software ...................................... 104 182
Furniture and fixtures .................................. 58 383
Leasehold improvements .................................. 88 217
Equipment under capital lease obligations ............... 995 3,553
------ --------
2,504 6,943
Less accumulated depreciation and amortization .......... (598) (2,190)
------ --------
$1,906 $ 4,753
====== ========
</TABLE>
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 $486 for the year ended December 31,
1998.
Accumulated amortization for equipment under capital leases for 1997 and 1998
was $209 and $831, respectively. Amortization expense for 1996, 1997 and 1998
was $23, $186 and $814, respectively.
F-24
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
7. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable and convertible notes payable consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1998
----------- --------
<S> <C> <C>
Senior convertible notes, interest at 8%, converted to Series B
preferred stock of Holdings on March 4, 1998 ...................... $ 4,538 $ --
Senior convertible bridge notes, interest at 8%, converted to Series
C preferred stock of Holdings on March 4, 1998 .................... 3,053 --
Note payable to bank, interest at 9.375%, monthly principal and
interest payments of $6, matured February 14, 1999................. 85 13
Note payable to bank, interest at 9.25%, monthly principal and
interest payments of $8, matured August 1, 1998.................... 148 --
------- -----
7,824 13
Less current portion ............................................... (220) (13)
------- -----
Long-term portion .................................................. $ 7,604 $ --
======= =====
</TABLE>
The carrying value of the notes approximated fair value at December 31,
1997 and 1998. The senior notes and senior bridge notes were unsecured, accrued
interest at a rate of 8% per annum, and had a term of five years. See Note 3
for discussion of the conversion of senior convertible and senior bridge notes.
The notes payable to the bank are secured by property and equipment purchased
with the proceeds and a general lien on the assets of the Company. The note
bearing the 9.25% rate was paid off during 1998.
The Company leases various equipment under capital leases.
Future minimum lease payments under capital leases are as follows:
<TABLE>
<S> <C>
1999 ............................................ $ 1,343
2000 ............................................ 1,187
2001 ............................................ 614
--------
Total capital lease obligations ............. 3,144
Less amount representing interest ............... (398)
Less current portion ............................ (1,097)
--------
Long-term capital lease obligations ......... $ 1,649
========
</TABLE>
8. EMPLOYEE STOCK OPTIONS
Prior to 1997, the Company granted non--qualified stock options to its
employees as directed by the Company's Board of Directors. In January 1997, the
Company established the 1997 stock option plan, under which it is 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 become exercisable over a
three-year vesting period from the date of grant and 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 have 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
F-25
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. EMPLOYEE STOCK OPTIONS - (CONTINUED)
their options for incentive stock options priced at $.01 per share, with a
vesting period of four years from the employee's start date. The incentive
options vest 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 cancelled, and new options with respect to the
same number of shares were granted with an exercise price of $.01 per share,
the existing 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 vest 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
expire 10 years from the grant date.
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 option 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 at the date of grant. During 1998, the Company
recognized $93 of compensation expense for option grants in 1998 with strike
prices that were below the value of the Company's stock.
Pro forma information regarding net income is required by SFAS No. 123 and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of SFAS No. 123. The fair value of these
options was estimated at the date of grant using the minimum value method.
Under this method, the expected volatility of the Company's common stock is not
estimated, as there is no market for the Company's common stock in which to
monitor stock price volatility. The calculation of the fair value of the
options granted in 1996, 1997 and 1998 assumes a risk-free interest rate of 6.7
percent, 6.2 percent and 5.0 percent, respectively, an assumed dividend yield
of zero, and an expected life of the options of three years. The weighted
average fair value of options granted was below $.01 per share in 1996, 1997
and 1998, respectively. 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 plan 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:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------- -------------
<S> <C> <C> <C>
Net loss attributable to common
stockholders:
As reported ........................ $ (2,171) $ (14,161) $ (22,666)
Pro forma .......................... (2,171) (14,175) (22,696)
Basic and diluted net loss per share:
As reported ........................ $ (.06) $ (.38) $ (.39)
Pro forma .......................... (.06) (.38) (.39)
</TABLE>
F-26
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. EMPLOYEE STOCK OPTIONS - (CONTINUED)
The following table summarizes stock option activity for the three years
ended December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF
SHARES WEIGHTED
OF COMMON PRICE AVERAGE
STOCK OPTIONS PER EXERCISE
(IN THOUSANDS) SHARE PRICE
---------------- ---------------- ---------
<S> <C> <C> <C>
Balance, December 31, 1995 ....................... -- $ -- $ --
Granted ......................................... 1,625 .01 0.01
-----
Balance, December 31, 1996 ....................... 1,625 .01 0.01
Granted ......................................... 39,496 .01 - .07 0.02
Forfeited ....................................... (245) .03 0.03
Cancelled ....................................... (9,229) .01 - .04 0.03
------
Balance, December 31, 1997 ....................... 31,647 .01 - .07 0.01
Granted ......................................... 91,927 .01 - .02 0.02
Exercised ....................................... (958) .01 0.01
Forfeited ....................................... (7,416) .01 - .02 0.01
------
Balance, December 31, 1998 ....................... 115,200 $.01 - $.07 $ 0.02
=======
Options exercisable at December 31, 1996 ......... --
=======
Options exercisable at December 31, 1997 ......... 7,271 $.01 - $ .07 $ 0.02
=======
Options exercisable at December 31, 1998 ......... 28,051 $.01 - $ .07 $ 0.01
=======
</TABLE>
The following table summarizes information about the options outstanding
and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES REMAINING EXERCISE SHARES EXERCISE
(IN THOUSANDS) LIFE PRICE (IN THOUSANDS) PRICE
- ---------------- ----------- ---------- ---------------- ---------
<S> <C> <C> <C> <C>
13,542 9.93 $ .01 12,267 $ .01
25,995 8.81 .01 10,325 .01
74,849 9.59 .02 4,658 .02
24 8.08 .04 10 .04
790 8.50 .07 790 .07
---------- ------
115,200 9.51 $ .02 28,051 $ .02
========== ======
</TABLE>
9. EMPLOYEE SAVINGS PROGRAM
The Company sponsors an employee savings plan that qualifies as a defined
contribution arrangement under Section 401(k) of the Internal Revenue Code. All
employees may contribute a percentage of their base salary, subject to
limitations. The plan was put into place during 1998. All employer
contributions are discretionary under plan provisions. The Company made no
contributions to the plan during 1998.
10. INCOME TAXES
No provision for income taxes was provided for the years ended December
31, 1996, 1997, and 1998 as the potential deferred tax benefit of $208, $3,044,
and $6,853, respectively, resulting primarily from the net operating losses,
was fully offset by a provision to provide a valuation allowance against such
deferred tax benefit.
F-27
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. INCOME TAXES - (CONTINUED)
The components of deferred income tax assets and liabilities are as
follows at December 31:
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ......... $ 3,234 $ 10,215
Other .................................... 44 87
-------- ---------
Gross deferred tax assets ............. 3,278 10,302
Deferred tax liabilities:
Intangible assets ........................ -- (109)
Other .................................... (26) (88)
-------- ---------
Net deferred tax assets ............... 3,252 10,105
Valuation allowances ...................... (3,252) (10,105)
-------- ---------
$ -- $ --
======== =========
</TABLE>
At December 31, 1997 and 1998, the Company recorded a valuation allowance
of $3,252 and $10,105, respectively, against the net deferred tax asset due to
the uncertainty of its ultimate realization. The valuation allowance increased
by $3,044 from December 31, 1996 to December 31, 1997 and by $6,853 from
December 31, 1997 to December 31, 1998.
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 an ownership change occurred during 1998 as
a result of the corporate reorganization and financing transactions (see Note
3). Management believes such limitation may affect the Company's ability to
utilize the net operating losses over the 20-year carryforward period.
At December 31, 1998, the Company had approximately $30,000 in U.S.
Federal net operating loss carryforwards expiring between 2011 and 2018.
The effective income tax rate differed from the statutory federal income
tax rate as follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Pretax loss ...................................... 34% 34% 34%
Federal income tax portion of changes in
valuation allowance ............................. (10) (16) (32)
Minority interest in net operating loss .......... -- (18) (1)
S Corporation loss ............................... (24) -- --
Other - net ...................................... -- -- (1)
--- --- ------
Effective income tax rate ........................ 0% 0% 0%
=== === ======
</TABLE>
F-28
<PAGE>
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, 1998 are as
follows:
<TABLE>
<CAPTION>
NETWORK OTHER OFFICE
EQUIPMENT EQUIPMENT SPACE TOTAL
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
1999 ............... $ 378 $158 $1,106 $1,642
2000 ............... 1,115 126 1,086 2,327
2001 ............... -- 101 906 1,007
2002 ............... -- 38 918 956
2003 ............... -- 13 932 945
Thereafter ......... -- -- 901 901
------ ---- ------ ------
Total .......... $1,493 $436 $5,849 $7,778
====== ==== ====== ======
</TABLE>
Rental expense under operating leases for the years ended December 31,
1996, 1997 and 1998, was $110, $1,924, and $1,905, respectively.
EMPLOYMENT AGREEMENT -- On December 4, 1998 the Company entered into an
employment agreement with the Company's new President and Chief Executive
Officer. In connection with his employment, the executive received an option to
purchase the number of shares of the Company's common stock, which constituted
5% of the current fully diluted number of all shares of common stock. One-third
of the options vested immediately with the balance to vest over 42 months. All
unvested options vested immediately upon the purchase of the Company by Bridge.
See Note 2 for discussion of the purchase.
LITIGATION -- The Company is subject to various legal proceedings and
other actions arising out of the normal course of 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:
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES DEDUCTIONS END OF YEAR
-------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
December 31, 1996 ......... $ -- $ 16 $ -- $ 16
December 31, 1997 ......... 16 254 (142) 128
December 31, 1998 ......... 128 278 (257) 149
</TABLE>
13. GOING CONCERN MATTERS
The Company has experienced recurring losses from operations and cash flow
deficiencies which, since April of 1999, have been funded by Bridge, of which
the Company is a majority-owned consolidated subsidiary. While Bridge has
funded the Company's operations through 1999, Bridge has not committed to fund
the Company's operations in the future. These matters raise substantial doubt
as to the Company's ability to continue as a going concern. Management intends
to fund operations and other cash flow needs with the proceeds of an initial
public offering in the first quarter of 2000. There can be no assurances that
such an offering will be consummated. If an offering is not consummated,
management intends to seek other financing and otherwise alter its business
plans.
F-29
<PAGE>
SAVVIS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
14. RESTATEMENT
Subsequent to the issuance of its financial statements for the years ended
December 31, 1997 and 1998, the Company determined that the Class A shares of
its subsidiary represented a minority interest to which losses should be
allocated and for which accretion on the Class A shares and related convertible
notes should be recorded at an effective rate of 20%. The Company also
concluded that the exchange of these instruments for Class B preferred stock in
March of 1998 should be treated as a debt extinguishment, with recognition of
an extraordinary gain, and as the purchase of a minority interest. The
Company's financial statements have been restated to correct the accounting for
the above. A summary of the significant effects of the restatement are as
follows.
<TABLE>
<CAPTION>
1997 1998
---------------------------- --------------------------
AS AS
PREVIOUSLY PREVIOUSLY
FOR THE YEAR ENDED DECEMBER 31: REPORTED AS RESTATED REPORTED AS RESTATED
- ------------------------------------------ ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Depreciation and amortization ............ $ 631 $ 631 $ 2,208 $ 2,288
Interest expense ......................... 427 482 458 483
Loss before income taxes, minority
interest and extraordinary item ......... (14,502) (14,557) (21,743) (21,848)
Minority interest in losses, net of
accretion ............................... -- 547 -- (147)
Extraordinary item, net of tax ........... -- -- -- (1,954)
Net loss ................................. (14,502) (14,010) (21,743) (20,041)
Preferred stock accretion ................ 151 151 1,821 2,054
Net Loss attributable to common
stockholders ............................ (14,653) (14,161) (24,134) (22,666)
Basic and diluted loss per common share
before extraordinary item ............... (.40) (.38) (.41) (.42)
Extraordinary gain on debt
extinguishment .......................... -- -- -- .03
Basic and diluted loss per common share. (.40) (.38) (.41) (.39)
At December 31:
Goodwill and intangibles, net ........... -- -- 1,197 1,406
Accounts payable ........................ 3,993 3,812 4,498 4,498
Minority interest ....................... -- 370 -- --
Accumulated deficit ..................... (16,837) (16,345) (40,971) (39,011)
Senior convertible notes ................ 5,400 4,719 -- --
Stockholders' deficit ................... (15,395) (14,903) (35,157) (33,197)
</TABLE>
******
F-30
<PAGE>
BRIDGE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF BRIDGE
The following discussion should be read together with the more detailed
information in Bridge's historical consolidated financial statements, including
the related notes thereto, appearing elsewhere in this prospectus. 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.
OVERVIEW
Bridge is a global provider of high-quality, real time and historical
financial information, including market data, news and analytical tools.
Bridge's customers are investment and commercial banks, money managers,
investment advisors, broker/dealers, traders, exchanges, corporations and
governmental agencies. Bridge's products include a wide range of computer
workstations, market data feeds and web-browser-based applications that provide
comprehensive market data, in-depth news, powerful analytical tools and trading
room integration systems.
During the period 1996 through September 30, 1999, Bridge made several
acquisitions as outlined below which resulted in significant increases in
Bridge's revenues, expenses, intangible assets, debt and redeemable preferred
stock.
On July 26, 1996, Bridge acquired all of the outstanding shares of
Knight-Ridder Financial, Inc. ("KRF") for approximately $272.8 million in a
business combination accounted for as a purchase. The purchase was financed
through the sale of approximately $155.5 million of Series D redeemable
preferred stock of Bridge and through a portion of the proceeds obtained from a
$160 million term loan. The total cost of the acquisition was approximately
$273.5 million, which exceeded the fair value of the net assets of KRF by
$203.2 million. This excess is being amortized over 40 years. In addition,
approximately $6.5 million of the purchase price was allocated to purchased
research and development, which was expensed to acquisition related expense in
1996. In 1997, Bridge recognized non-recurring costs of approximately $5.4
million comprised of customer credits for downtime and other conversion costs
related to the closure of KRF's data center which are included in restructuring
and acquisition related expense.
On July 15, 1997, Bridge acquired all of the outstanding shares of
Telesphere Corporation ("Telesphere") for approximately $34.5 million in a
business combination accounted for as a purchase. Bridge acquired Telesphere
for 450,000 shares of Series A common stock of Bridge (valued at approximately
$3.3 million), approximately $3 million in an 11% senior subordinated note of
Bridge and approximately $28.6 million in cash. The total cost of the
acquisition was approximately $34.8 million, which exceeded the fair market
value of the net assets of Telesphere by approximately $27.5 million. This
excess is being amortized over 20 years.
On May 29, 1998, Bridge acquired all the outstanding shares of Dow Jones
Markets Holdings, Inc., ("Telerate") for approximately $510 million in a
business combination accounted for as a purchase. Bridge acquired Telerate for
1,500,000 shares of Series E preferred stock of Bridge (valued at approximately
$150 million) and approximately $360 million in cash, which was financed
through the proceeds obtained from a loan under Bridge's senior secured credit
agreement. The total cost of the acquisition was approximately $511.6 million,
which exceeded the fair market value of the net assets of Telerate by
approximately $184.1 million. This excess is being amortized over 30 years. In
addition approximately $22 million of the purchase price was allocated to
purchased research and development, which was expensed to acquisition related
expenses in 1998. In 1998, Bridge also recognized non-recurring costs of
approximately $6.7 million, comprised of other conversion costs related to the
closure of redundant offices, which are included in acquisition related
expenses.
On November 10, 1998, Bridge acquired the financial information business
assets of ADP Financial Information Services ("ADP") for approximately $154.2
million in a business combination accounted for as a purchase. Bridge acquired
the assets in exchange for 900,000 shares of Series F preferred stock of Bridge
(valued at approximately $90 million) and approximately $64.2 million in cash
which was financed
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through proceeds obtained from a loan under Bridge's senior secured credit
agreement. The total cost of the acquisition was approximately $154.5 million,
which exceeded the fair market value of the net assets of ADP Financial
Information Services by approximately $99.8 million. This excess is being
amortized over 20 years.
On April 7, 1999, Bridge acquired SAVVIS Communications Corporation, f/k/a
SAVVIS Holdings Corporation, ("SAVVIS"), in an all stock transaction that was
accounted for as a purchase. Pursuant to the terms of the transaction, Bridge
issued approximately 3,011,000 shares of common stock, together with
approximately 239,000 options and warrants to purchase common stock in exchange
for all the outstanding equity interest of SAVVIS. This transaction was valued
at approximately $31.7 million based on the fair value of the securities
exchanged, as determined by an independent valuation specialist, and the direct
cost of the acquisition. The purchase price has been allocated to the
underlying assets purchased and liabilities assumed based on their estimated
fair market values at the acquisition date. The total cost of the acquisition
exceeded the fair value of SAVVIS' net assets by approximately $23.8 million,
which is being amortized over 3 years. In addition, approximately $20.3 million
of the purchase price was allocated to property and equipment, trademarks,
non-compete agreements and other intangibles, which are being amortized over 1
to 5 years. Also, in connection with the acquisition, Bridge assumed net
liabilities of SAVVIS in the amount of approximately $12.3 million. Subsequent
to the acquisition, on September 10, 1999, Bridge sold in a private placement
approximately 25% of its ownership to Bridge shareholders for approximately
$9.0 million.
The net value of goodwill and other intangible assets arising from past
acquisitions was $863.9 million on September 30, 1999. Bridge's determination
of the amortization period for these assets was based on management's estimates
of their useful lives which they believe were consistent with accounting
precedent and practice on the dates of the acquisitions. Had management assumed
shorter useful lives, amortization charges would have been higher, increasing
Bridge's operating losses. Since the completion of these acquisitions, there
has been considerable debate, both within the accounting profession and among
government agencies, about the appropriateness of useful life assumptions
beyond 5 to 10 years. Were Bridge to amortize all goodwill over 10 years and
other intangibles over no more than 5 years, net losses would have been $68.7
million, $86.0 million and $180.7 million for 1996, 1997 and 1998,
respectively, and $115.3 million and $180.0 million for the nine months ended
September 30, 1998 and 1999, respectively.
Revenues.
Bridge's revenues include fees for information services, transaction
services, equipment sales, customer data fees and other revenues.
Information services. Information services revenues are derived from
subscription charges to clients for the use of Bridge's real time and
historical information and news on equities, fixed income, foreign exchange,
derivatives and commodities. Information services revenues are billed 1 to 12
months in advance and are recognized in the period the related services are
provided.
Transaction services. Bridge's wholly owned subsidiaries, Bridge Trading
Company ("Bridge Trading"), Bridge International Broking Ltd.-Hong Kong
("Bridge Broking-Hong Kong") and Bridge International Broking (U.K.) Limited
("Bridge Broking-U.K.") provide securities order routing and execution services
, or transaction services, to many of Bridge's institutional clients. Bridge
Trading, Bridge Broking-Hong Kong and Bridge Broking-U.K. are registered
broker-dealers under securities laws of the United States, Hong Kong and the
United Kingdom, respectively. Transaction services revenues represent the net
commissions and fees earned from providing the transactions services in excess
of the value of the subscription charges recorded as information services
revenues. Transaction services are recorded on the trade date of the relevant
security transaction.
Equipment sales. Bridge is a value added reseller for Sun Microsystems,
Inc. Equipment sales revenues are derived from the sale of computer equipment
to clients. Equipment sales are recorded upon delivery of the equipment.
Customer data fees. Customer data fees revenues represent fees and
royalties charged by Bridge to clients for the right for clients to use the
data of third party data suppliers subscribed for through Bridge's
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information system. Pursuant to contracts with the third party data suppliers,
Bridge remits a portion of such fees and royalties to the data suppliers.
Other revenues. Other revenues primarily consist of sales of computer
software and printed information products and charges for systems installation
and maintenance.
Operating Expenses.
Operating expenses include employee related expenses, depreciation and
amortization, technology related expenses, equipment cost of sales, customer
data fees, transaction services related expenses, data acquisition related
expenses, facilities related expenses and general and administrative expenses.
Employee related. Employee related expenses include, in addition to
employee salaries and bonuses, payroll taxes, Bridge's 401(k) and pension
contributions, health insurance costs, travel and entertainment and other
miscellaneous employee costs.
Depreciation and amortization. Depreciation and amortization expenses
consist of (1) depreciation of buildings, leasehold improvements, furniture and
fixtures and equipment used in Bridge's data centers, sales and administrative
offices, the global data network and client's offices; and (2) amortization of
goodwill and other intangible assets principally resulting from Bridge's
acquisitions. Generally, depreciation is calculated using the straight-line
method over the useful life of the associated asset, which ranges from 3 to 5
years for equipment and software and 5 to 32 years for buildings, improvements,
furniture and fixtures. Goodwill is being amortized over 3 to 40 years and
other intangible assets over 1 to 20 years, all using the straight-line method.
Technology related. Technology related expenses consist of communication
and equipment charges incurred to operate Bridge's global data network. The
network serves to both collect data from Bridge's data suppliers and to
distribute data to Bridge's clients. Following SAVVIS' initial public offering
and the transfer of Bridge Internet Protocol network to SAVVIS, Bridge's
payments under the Network Services Agreement will be reflected here.
Equipment cost of sales. Equipment cost of sales is directly related to
equipment sales revenues and represents the cost of equipment acquired for
resale to clients.
Customer data fees. Customer data fees expenses represent fees and
royalties paid by Bridge to data suppliers for the right for clients to use the
suppliers' data obtained through Bridge's information system.
Transaction services related. Transaction services related expenses,
primarily clearing, floor brokerage and specialist fees, are directly related
to transaction services revenue. All fees for executed transactions are
recorded on the trade date of the relevant securities transaction.
Data acquisition related. Data acquisition related expenses consist of
fees and royalties paid by Bridge to data suppliers for Bridge's right to
obtain and redistribute the suppliers' data.
Facilities related. Facilities related expenses include costs related to
Bridge's leased facilities in approximately 90 cities throughout the world.
General and administrative. General and administrative expenses include
voice communications costs, professional services fees, insurance, property and
other general taxes, marketing and advertising expenses, shipping and freight
expenses and other miscellaneous expenses.
Acquisition related. Acquisition related expenses, primarily purchased
research and development expenses, are one-time costs directly related to
acquisitions made in the respective years.
Interest expense. Interest expense is related to debt to banks,
subordinated debt and capital leases.
Income taxes. Income tax expense primarily consists of taxes paid in the
local jurisdictions of Bridge's foreign subsidiaries. Bridge incurred operating
losses in the United States and, therefore, has not recorded a provision for
income taxes in its historical financial statements. Bridge has recorded a
valuation allowance for the full amount of its net deferred tax assets because
it believes that the future realization of the tax benefit is uncertain.
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Loss on early extinguishment of debt. Losses on early extinguishment of
debt represent the write-off of deferred financing costs upon prepayment of
debt.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
Telerate was acquired on May 29, 1998; therefore, only four months of
Telerate's results are included in the results of operations for the nine
months ended September 30, 1998. ADP was acquired on November 10, 1998;
therefore, none of its results are included in the results of operations for
the nine months ended September 30, 1998. The results of operations for the
nine months ended September 30, 1999 include the results of Telerate and ADP
for the full nine months. SAVVIS was acquired on April 7, 1999; therefore, its
results of operations are included from the date of acquisition through
September 30, 1999.
Revenues.
Information services. Information services revenues were $651.2 million
for the first nine months of 1999 compared to $398.8 million for the first nine
months of 1998, an increase of 63%. This $252.4 million increase primarily
resulted from the acquisitions of Telerate and ADP. The net revenue increase
resulting from the acquisitions was $251.6 million. The remaining growth in
revenue was due to increased marketing and sales efforts for the new technology
products, offset by losses of old technology products due to some products not
being Year 2000 compliant, client rationalization of market data services costs
and reductions in users due to mergers among clients. The affect of these
pressures on Bridge's revenues increased in the fourth quarter of 1999
primarily as a result of Year 2000 issues.
Transaction services. Transaction services revenues were $55.6 million for
the first nine months of 1999 compared to $40.0 million for the first nine
months of 1998, an increase of 39%. This $15.6 million increase was primarily
due to increased marketing and sales efforts and the resulting increase in
transaction volume.
Equipment sales. Equipment sales revenues were $73.9 million for the first
nine months of 1999 compared to $52.1 million for the first nine months of
1998, an increase of 42%. This $21.8 million increase was primarily due to
increased marketing and sales efforts and the resulting increase in sales
volume.
Customer data fees. Customer data fees were $149.6 million for the first
nine months of 1999 compared to $74.5 million for the first nine months of
1998, an increase of 101%. This $75.1 million increase primarily resulted from
the acquisitions of Telerate and ADP. The net revenue increase resulting from
the acquisitions was $69.6 million. The balance of the increase is directly
related to the growth in the installed subscription base of information
services revenues excluding acquisitions.
Other revenues. Other revenues were $16.0 million for the first nine
months of 1999 compared to $12.5 million for the first nine months of 1998, an
increase of 28%. This increase primarily resulted from the acquisitions of
Telerate and ADP.
Operating Costs and Expenses.
Employee related. Employee related expenses were $297.9 million for the
first nine months of 1999 compared to $182.4 million for the first nine months
of 1998, an increase of 63%. This $115.5 million increase primarily resulted
from the acquisitions of Telerate, ADP and SAVVIS. The net expense increase
resulting from the acquisitions was $97.6 million. The balance of the increase
primarily related to the increases in employees in the news and customer
services functions and annual wage increases.
Depreciation and amortization. Depreciation and amortization was $211.9
million for the first nine months of 1999 compared to $133.4 million for the
first nine months of 1998, an increase of 59%. This $78.5 million increase
primarily resulted from the acquisitions of Telerate and ADP. The net expense
increase resulting from the acquisitions was $72.6 million. The balance of the
increase primarily resulted from increased equipment purchases related
expansion of the global data network and client conversion to new technology
products.
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Technology related. Technology related expenses were $142.5 million for
the first nine months of 1999 compared to $58.8 million for the first nine
months of 1998, an increase of 142%. Of this $83.7 million increase, the net
expense increase resulting from the acquisitions of Telerate, ADP and SAVVIS
was $55.3 million, and the remainder primarily resulted from overlapping
network costs incurred as Bridge converted clients from the legacy networks of
KRF and Telerate to the Bridge Internet Protocol network.
Equipment cost of sales. Equipment cost of sales was $68.0 million for the
first nine months of 1999 compared to $48.1 million for the first nine months
of 1998, an increase of 41%. This $19.9 million increase is directly related to
the increase in equipment sales revenues.
Customer data fees. Customer data fees were $122.2 million for the first
nine months of 1999 compared to $69.2 million for the first nine months of
1998, an increase of 77%. This $53.0 million increase is directly related to
the increase in customer data fees revenues, and primarily resulted from the
acquisitions of Telerate and ADP. The net expense increase resulting from the
acquisitions was $56.7 million. The balance of the increase is directly related
to the growth in the installed subscription base of information services
revenues excluding acquisitions.
Transaction services related. Transaction services related expenses were
$21.5 million for the first nine months of 1999 compared to $18.5 million for
the first nine months of 1998, an increase of 16%. This $3.0 million increase
is directly related to the increase in transaction services revenues.
Data acquisition related. Data acquisition related expenses were $62.3
million for the first nine months of 1999 compared to $27.4 million for the
first nine months of 1998, an increase of 127%. This $34.9 million increase
primarily resulted from the acquisitions of Telerate and ADP. The net expense
increase resulting from the acquisitions was $28.0 million. The balance
primarily resulted from purchases of additional fixed income and foreign
exchange data suppliers.
Facilities related. Facilities related expenses were $45.2 million for the
first nine months of 1999 compared to $20.8 million for the first nine months
of 1998, an increase of 117%. This $24.4 million increase primarily resulted
from the acquisitions of Telerate and ADP. The expense increase resulting from
the acquisitions was $21.3 million.
General and administrative. General and administrative expenses were $53.1
million for the first nine months of 1999 compared to $36.4 million for the
first nine months of 1998, an increase of 46%. This $16.7 million increase
primarily resulted from the acquisitions of Telerate, ADP and SAVVIS. The net
expense increase resulting from the acquisitions was $12.5 million. The balance
of the increase primarily resulted from increased expenditures for marketing
and advertising.
Acquisition related. Acquisition related expenses, primarily purchased
research and development expenses, were $28.7 million for the first nine months
of 1998 resulting from the Telerate acquisition.
Other Income and Expense.
Interest income. Interest income was $2.2 million for the first nine
months of 1999 compared to $1.3 million for the first nine months of 1998, an
increase of 69%. This $.9 million increase was primarily due to larger cash
balances available for short-term investment subsequent to the Telerate
acquisition.
Interest expense. Interest expense was $68.1 million for the first nine
months of 1999 compared to $41.3 million for the first nine months of 1998, an
increase of 65%. This $26.8 million increase is attributable to the bank debt
incurred to finance portions of the Telerate and ADP acquisitions and to
provide additional working capital.
Provision for income taxes. The provision for income taxes was $10.3
million for the first nine months of 1999 compared to $6.7 million for the
first nine months of 1998, an increase of 54%. This $3.6 million net expense
increase resulted from the acquisition of Telerate.
Loss on extinguishment of debt. The loss on extinguishment of debt was
$3.0 million for the first nine months of 1998 and resulted from the
refinancing of bank debt in connection with the acquisition of Telerate.
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Net loss. Net loss was $134.4 million for the first nine months of 1999
compared to $90.8 million for the first nine months of 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues.
Information services. Information services revenues were $621.6 million in
1998 compared to $280.4 million in 1997, an increase of 122%. This $341.2
million increase primarily resulted from the acquisition of Telerate whose
revenues for 1998 were $307.8 million. The remaining growth in revenues was due
to increased marketing and sales efforts for the new technology products.
Transaction services. Transaction services revenues were $55.7 million in
1998 compared to $41.5 million in 1997, an increase of 34%. This $14.2 million
increase was primarily due to increased marketing and sales efforts and the
resulting increase in transaction volume.
Equipment sales. Equipment sales revenues were $68.1 million in 1998
compared to $43.3 million in 1997, an increase of 57%. This $24.8 million
increase was primarily due to increased marketing and sales efforts and the
resulting increase in sales volume.
Customer data fees. Customer data fees were $127.2 million in 1998
compared to $36.4 million in 1997, an increase of 249%. This $90.8 million
increase primarily resulted from the acquisition of Telerate whose revenues for
1998 were $73.0 million. The remaining growth in revenues primarily resulted
from Bridge becoming responsible for invoicing Nasdaq fees to clients and from
the increase in information services revenues.
Other revenues. Other revenues were $19.5 million in 1998 compared to $8.4
million in 1997, an increase of 132%. This $11.1 million increase primarily
resulted from the acquisition of Telerate whose revenues for 1998 were $10.0
million.
Operating Costs and Expenses.
Employee related. Employee related expenses were $285.7 million in 1998
compared to $143.0 million in 1997, an increase of 100%. This $142.7 million
increase primarily resulted from the acquisition of Telerate whose expenses for
1998 were $115.1 million. The balance of the increase primarily resulted from
the increases in employees in the news, customer service and accounting
functions and from annual wage increases.
Depreciation and amortization. Depreciation and amortization was $203.9
million in 1998 compared to $83.7 million in 1997, an increase of 144%. This
$120.2 million increase primarily resulted from the acquisition of Telerate
whose expenses for 1998 were $93.9 million. The balance of the increase
primarily resulted from increased equipment purchases related expansion of the
global data network and increases in data center computer capacity for the
development of new Telerate products.
Technology related. Technology related expenses were $98.3 million in 1998
compared to $44.0 million in 1997, an increase of 123%. This $54.3 million
increase primarily resulted from the acquisition of Telerate whose expenses for
1998 were $37.0 million. The balance of the increase primarily resulted from
expansion of the Internet Protocol network and increases in the number of
information services clients.
Equipment cost of sales. Equipment cost of sales was $62.5 million in 1998
compared to $39.2 million in 1997, an increase of 59%. This $23.3 million
increase is directly related to the increase in equipment sales revenues.
Customer data fees. Customer data fees were $109.7 million in 1998
compared to $31.5 million in 1997, an increase of 248%. This $78.2 million
increase is directly related to the increase in customer data fees revenues,
and primarily resulted from the acquisition of Telerate whose expenses for 1998
were $57.6 million. The remaining growth in revenues primarily resulted from
Bridge becoming responsible for invoicing Nasdaq fees to clients and from the
increase in information services revenues.
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Transaction services related. Transaction services related expenses were
$26.2 million in 1998 compared to $20.7 million in 1997, an increase of 27%.
This $5.5 million increase is directly related to the increase in transaction
services revenues.
Data acquisition related. Data acquisition related expenses were $40.9
million in 1998 compared to $21.0 million in 1997, an increase of 95%. This
$19.9 million increase primarily resulted from the acquisition of Telerate
whose revenues for 1998 were $24.1 million, offset by reductions in costs due
to termination of redundant feeds from third party data suppliers.
Facilities related. Facilities related expenses were $45.6 million in 1998
compared to $18.9 million in 1997, an increase of 141%. This $26.7 million
increase primarily resulted from the acquisition of Telerate whose expenses for
1998 were $34.8 million, offset by the closure of redundant office facilities.
General and administrative. General and administrative expenses were $59.7
million in 1998 compared to $36.1 million in 1997, an increase of 65%. This
$23.6 million increase primarily resulted from the acquisition of Telerate
whose expenses for 1998 were $22.9 million.
Acquisition related. Acquisition related expenses, primarily purchased
research and development expenses, were $28.7 million in 1998 compared to $5.4
million in 1997, an increase of 431%. The 1998 and 1997 expenses were directly
related to the acquisitions of Telerate and Telesphere, respectively.
Other Income and Expense.
Interest income. Interest income was $2.8 million in 1998 compared to $.7
million in 1997, an increase of 300%. This $2.1 million increase is primarily
due to larger cash balances available for short-term investment subsequent to
the Telerate acquisition.
Interest expense. Interest expense was $62.9 million in 1998 compared to
$30.5 million in 1997, an increase of 106%. This $32.4 million increase is
attributable to the bank debt incurred to finance portions of the Telerate and
ADP acquisitions.
Provision for income taxes. The provision for income taxes was $10.4
million in 1998 compared to $.6 million in 1997, an increase of 1,633%. This
$9.8 million increase resulted from the acquisition of Telerate.
Loss on early extinguishment of debt. The loss on early extinquishment of
debt was $3.0 million in 1998 compared to $4.2 million in 1997, a decrease of
$1.2 million. The loss in 1998 resulted from the refinancing of bank debt in
connection with the acquisition of Telerate. The loss in 1997 also resulted
from the refinancing of bank debt, the purpose of which was to provide
additional working capital.
Net loss. Net loss was $142.9 million in 1998 compared to $68.6 million in
1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
KRF was acquired on July 26, 1996, therefore, only five months of KRF's
results are included in the results of operations for the year ended December
31, 1996. A full year of KRF's results is included in the results of operations
for the year ended December 31, 1997.
Revenues.
Information services. Information services revenues were $280.4 million in
1997 compared to $173.4 million in 1996, an increase of 62%. This $107.0
million increase primarily resulted from the acquisition of KRF and from growth
in revenue due to increased marketing and sales efforts for the new technology
products.
Transaction services. Transaction services revenues were $41.5 million in
1997 compared to $38.0 million in 1996, an increase of 9%. This $3.5 million
increase was primarily due to increased marketing and sales efforts and the
resulting increase in transaction volume.
Equipment sales. Equipment sales revenues were $43.3 million in 1997
compared to $29.1 million in 1996, an increase of 49%. This $14.2 million
increase was primarily due to increased marketing and sales efforts and the
resulting increase in sales volume.
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Customer data fees. Customer data fees were $36.4 million in 1997 compared
to $24.2 million in 1996, an increase of 50%. This $12.2 million increase
primarily resulted from the acquisition of KRF and from growth in other
information services revenues.
Other revenues. Other revenues were $8.4 million in 1997 compared to $4.5
million in 1996, an increase of 87%. This $3.9 million increase primarily
resulted from the acquisition of KRF.
Operating Costs and Expenses.
Employee related. Employee related expenses were $143.0 million in 1997
compared to $107.7 million in 1996, an increase of 33%. This $35.3 million
increase primarily resulted from the acquisition of KRF and annual wage
increases, offset by reductions in KRF personnel as functions were integrated
during the course of 1997.
Depreciation and amortization. Depreciation and amortization were $83.7
million in 1997 compared to $59.1 million in 1996, an increase of 42%. This
$24.6 million increase primarily resulted from the acquisition of KRF.
Technology related. Technology related expenses were $44.0 million in 1997
compared to $29.5 million in 1997, an increase of 49%. This $14.5 million
increase primarily resulted from the acquisition of KRF and expansion of the
Internet Protocol network, offset by elimination of redundant backbone
networks.
Equipment cost of sales. Equipment cost of sales was $39.2 million in 1997
compared to $26.1 million in 1996, an increase of 50%. This $13.1 million
increase is directly related to the increase in equipment sales revenues.
Customer data fees. Customer data fees were $31.5 million in 1997 compared
to $22.1 million in 1996, an increase of 43%. This $9.4 million increase is
directly related to the increase in customer data fees revenues, and primarily
resulted from the acquisition of KRF and from growth in other information
services revenues.
Transaction services related. Transaction services related expenses were
$20.7 million in 1997 compared to $17.0 million in 1996, an increase of 22%.
This $3.7 million increase is directly related to the increase in transaction
services revenues.
Data acquisition related. Data acquisition related expenses were $21.0
million in 1997 compared to $14.1 million in 1996, an increase of 49%. This
$6.9 million increase primarily resulted from the acquisition of KRF.
Facilities related. Facilities related expenses were $18.9 million in 1997
compared to $13.4 million in 1996, an increase of 41%. This $5.5 million
increase primarily resulted from the acquisition of KRF and the addition of the
world headquarters office in New York, offset by the closure of redundant
office facilities in New York and other cities in the United States.
General and administrative. General and administrative expenses were $36.1
million in 1997 compared to $14.3 million in 1996, an increase of 152%. This
$21.8 million increase primarily resulted from the acquisition of KRF.
Acquisition related. Acquisition related expenses, primarily purchased
research and development expenses, were $5.4 million in 1997 compared to $6.5
million in 1996, a decrease of 17%. The 1997 and 1996 expenses were directly
related to the acquisitions of KRF and Telesphere, respectively.
Other Income and Expense.
Interest income. Interest income was $.7 million in 1997 compared to $.7
million in 1996. The average cash balances available for short-term investment
during 1997 and 1996 were approximately the same.
Interest expense. Interest expense was $30.5 million in 1997 compared to
$20.9 million in 1996, an increase of 46%. This $9.6 million increase is
attributable to the bank debt incurred to finance a portion of the KRF
acquisition.
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Provision for income taxes. The provision for income taxes was $.6 million
in 1997 compared to $.2 million in 1996, an increase of 200%. This $.4 million
increase resulted from the acquisition of KRF.
Loss on early extinguishment of debt. The loss on early extinquishment of
debt was $4.2 million in 1997 resulting from the refinancing of bank debt to
provide additional working capital.
Net loss. Net loss was $68.6 million in 1997 compared to $61.0 million in
1996.
LIQUIDITY AND CAPITAL RESOURCES
Bridge's business has required significant cash to fund acquisitions,
capital expenditures, debt service costs and ongoing operations. Bridge has
historically funded and expects to fund future operating and capital
requirements through cash flows from operations, borrowings under its credit
facilities, debt financings, equity financings and sales of assets, including
future sales of SAVVIS stock.
Bridge's net cash provided by (used in) operating activities was $(19.5)
million, $10.4 million and $46.3 million in fiscal 1996, 1997 and 1998,
respectively. The positive net cash generated from operations in fiscal 1997
and 1998 was due to increasing cash flows from operations as costs were reduced
through the integration of acquired companies. For the nine months ended
September 30, 1999, net cash provided by (used in) operating activities was
$(76.0) million compared to $(6.3) million for the comparable period in 1998.
Bridge continued to use cash in its operating activities for the fourth quarter
of 1999. The increase in use in 1999 was primarily due to working capital
pressures experienced in the course of integrating Bridge's recent
acquisitions, as well as declines in revenues primarily resulting from higher
than expected cancellations of subscriptions for products of acquired companies
due to (1) non-Year 2000 compliant products, (2) client rationalization of
market data services cost and (3) reduction in users due to mergers among
clients. The increases in working capital are attributable to:
o Accounts receivable increases of $75.8 million resulting from (1) billing
delays resulting from conversions from the non-Year 2000 compliant billing
systems of acquired companies to the Bridge billing system and (2) billing
issues resulting from the migration of customers from the less
technologically advanced protocol products of acquired companies to
Bridge's new technology products;
o Accounts payable decreases of $46.6 million resulting from the payment of
one-time accruals related to companies acquired in 1998.
Bridge's net cash used in investing activities was $292.4 million, $56.9
million and $498.9 million in fiscal 1996, 1997 and 1998, respectively, and
$386.8 million and $123.8 million for the nine months ended September 30, 1999
and 1998, respectively. The principal uses have been for acquisitions and
capital expenditures, primarily computer and communications network equipment
and general working capital.
Bridge's cash provided by financing activities was $322.7 million, $43.4
million and $473.8 million in fiscal 1996, 1997 and 1998, respectively, and
$411.7 million and $203.5 million for the nine months ended September 30, 1998
and 1999, respectively. The funds raised through financing activities have
primarily been from sales of redeemable preferred stock and issuances of
long-term debt.
As of September 30, 1999, Bridge had $1,240 million of indebtedness, $470
million of redeemable preferred stock and a stockholders' deficit of $414
million. In the three months ended December 31, 1999, Bridge incurred an
additional $100 million of indebtedness under a bridge loan agreement. In
February 2000, Bridge incurred an additional $25 million of indebtedness.
Under the terms of Bridge's indebtedness, following the completion of this
offering, Bridge is required to repay approximately $350 million of its
indebtedness on or before June 30, 2000. Bridge will receive aggregate proceeds
of approximately $177 million from the sale of a portion of its SAVVIS shares
held by Bridge, the sale of the network assets to SAVVIS, the payment by SAVVIS
of a $58 million preferential distribution and the repayment of a portion of
SAVVIS' indebtedness to Bridge. In addition, pursuant to a stock purchase
agreement dated February 7, 2000, Bridge has agreed to sell to Welsh Carson for
$150 million in cash shares of our common stock held by Bridge. The purchase
price per share is equal to the initial public offering price per share. The
consummation of the sale is expected to occur
F-39
<PAGE>
after the closing of this offering and is subject to limited conditions,
including termination of the waiting period under the Hart-Scott-Rodino Act. We
cannot assure you that this sale will be consummated. Bridge plans to pay the
remaining indebtedness due on or before June 30, 2000, through proceeds from
the sale of shares of our common stock held by Bridge to cover the
underwriters' over-allotment option as part of this offering or cash provided
from operations.
There can be no assurances that Bridge will have sufficient sources of
capital to:
o meet its capital expenditure, debt service and working capital
requirements, and
o satisfy its remaining requirement to repay approximately $173 million of
its indebtedness by June 30, 2000.
Bridge's capital expenditures in 1999 were approximately $164 million.
Bridge expects to have capital expenditures of $70 million in 2000 for the
expansion and upgrade of its data center and customer site equipment for new
customers and client conversions to new technology products.
Under the network services agreement, Bridge is required to purchase from
SAVVIS 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 paid to SAVVIS 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; 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. This statement establishes accounting and
reporting standards for derivative instruments, and for hedging activities.
SFAS No. 133 was amended by SFAS No. 137 that delays the effective date of SFAS
No. 133 to fiscal years and quarters beginning after June 15, 2000. SFAS No.
133 will require Bridge to record all derivatives on the balance sheet at fair
value. Changes in derivative fair value will either be recognized in earnings
as offsets to the changes in fair value of related hedged assets, liabilities
and firm commitments or, for forecasted transactions, deferred and recorded as
a component of other stockholders' equity until the hedged transactions occur
and are recognized in earnings. Bridge is currently evaluating the impact of
the standard on Bridge. The impact of SFAS No. 133 will depend on a variety of
factors, including future interpretive guidance, the future level of hedging
activity, the types of hedging instruments used and the effectiveness of such
instruments.
QUALITATIVE AND QUANTITATIVE MARKET RISKS
Bridge's primary market risk exposures relate to changes in interest rates
and foreign currency Exchange rates.
Bridge's financial instruments that are sensitive to changes in interest
rates are Bridge's borrowings under senior secured credit facilities,
subordinated debt and capital leases, all of which were entered into for other
than trading purposes. The senior secured credit loans and capital leases have
floating interest rates, thus changes in rates will directly impact Bridge's
cash flows. Approximately one-half of the outstanding senior secured credit
loan balances are hedged through interest rate swaps to lessen the impact of
changes in interest rates. The subordinated debt has a fixed interest rate,
thus changes in interest rates will not directly impact Bridge's cash flows.
Approximately 36% of Bridge's revenue is derived from operations outside
the United States, and approximately 34% of Bridge's costs are incurred outside
the United States. Currently, the only material foreign currency exchange risk
relates to monthly fees received from Bridge's Japanese distributor, which are
denominated in Japanese yen. Bridge has hedged that exposure for 2000 through
the purchase of forward exchange contracts.
F-40
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Bridge Information Systems, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Bridge
Information Systems, Inc. and Subsidiaries ("Bridge") as of December 31, 1997
and 1998, and the related consolidated statements of operations and
comprehensive loss, deficiency in net assets, and cash flows for each of the
three years in the period ended December 31, 1998. These consolidated financial
statements are the responsibility of Bridge's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Bridge Information Systems, Inc.
and Subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
We have not audited any financial statements of Bridge for any period
subsequent to December 31, 1998. However, as discussed in Note 21 to the
consolidated financial statements, at December 31, 1999, Bridge did not comply
with certain of the restrictive covenants contained in its Secured Credit
Agreement (the "Agreement"). As a result, Bridge agreed, among other things, to
modify the principal payments due under the Agreement and to cause one of its
subsidiaries, SAVVIS, to complete a public offering of its equity securities by
February 29, 2000. These matters raise substantial doubt about Bridge's ability
to continue as a going concern. Bridge's plans in regard to these matters are
also described in Note 21. The financial statements do not include any
adjustments that might result from any outcome of this uncertainty.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
April 30, 1999, except for Note 21 as to which the date is February 9, 2000
F-41
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PAR VALUE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1997 1998
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................................. $ 12,949 $ 33,318
Restricted cash equivalents ............................................ -- 3,387
Accounts receivable, net of allowance for doubtful accounts of $12,090
(1997) and $32,671 (1998) ............................................ 53,494 157,443
Inventory .............................................................. 1,195 8,405
Other current assets (Note 5) .......................................... 10,548 60,292
---------- ----------
Total current assets ................................................ 78,186 262,845
PROPERTY AND EQUIPMENT, Net ............................................. 103,243 238,690
GOODWILL AND INTANGIBLE ASSETS, Net ..................................... 274,552 935,445
OTHER LONG-TERM ASSETS (Note 5) ......................................... 21,037 83,822
---------- ----------
TOTAL .................................................................. $ 477,018 $1,520,802
========== ==========
LIABILITIES AND DEFICIENCY IN NET ASSETS
CURRENT LIABILITIES:
Accounts payable ....................................................... $ 17,809 $ 38,572
Accrued employee compensation and benefits ............................. 9,546 42,170
Accrued exchange fees .................................................. 4,799 19,067
Other liabilities and accrued expenses ................................. 26,787 137,579
Deferred revenue ....................................................... 8,714 16,060
Current portion of loss contract accruals (Note 8) ..................... -- 21,918
Current maturities of loss lease accruals (Note 9) ..................... 6,067 14,007
Current maturities of long-term debt and capital lease obligations
(Note 10) ............................................................ 17,820 51,022
---------- ----------
Total current liabilities ........................................... 91,542 340,395
LOSS CONTRACT ACCRUALS, Net (Note 8) .................................... -- 104,967
LOSS LEASE ACCRUALS EXCLUDING CURRENT MATURITIES (Note 9) ............... 17,718 24,381
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS EXCLUDING CURRENT
MATURITIES (Note 10) ................................................... 306,166 833,271
OTHER LONG-TERM LIABILITIES ............................................. 2,923 56,569
---------- ----------
Total liabilities ................................................... 418,349 1,359,583
---------- ----------
MINORITY INTEREST (Note 3) .............................................. 1,297 1,494
---------- ----------
REDEEMABLE PREFERRED STOCK (Note 14) .................................... 204,811 456,785
---------- ----------
COMMITMENT AND CONTINGENCIES (Note 19)
DEFICIENCY IN NET ASSETS:
Class A common stock, $.01 par value, 85 million shares authorized,
33,403,631 (1997) and 33,934,475 (1998) shares issued (Notes 3 and 13) 334 339
Class B common stock, $.01 par value, 15 million shares authorized, none
issued (Note 13) .....................................................
Additional paid-in capital (common) .................................... 181,512 187,934
Accumulated deficit .................................................... (326,076) (480,910)
Cumulative translation adjustments ..................................... (2,959) (4,173)
Treasury stock at cost, 20,000 shares .................................. (250) (250)
---------- ----------
Total deficiency in net assets ...................................... (147,439) (297,060)
---------- ----------
TOTAL .................................................................. $ 477,018 $1,520,802
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F- 42
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
--------------------------------------------
1996 1997 1998
<S> <C> <C> <C>
REVENUES:
Information services ............................. $ 173,420 $ 280,384 $ 621,602
Transaction services ............................. 37,982 41,533 55,683
Equipment sales .................................. 29,134 43,262 68,146
Customer data fees ............................... 24,247 36,379 127,175
Other revenues ................................... 4,529 8,368 19,535
--------- --------- ----------
269,312 409,926 892,141
OPERATING COSTS AND EXPENSES:
Employee related ................................. 107,749 142,975 285,664
Depreciation and amortization .................... 59,115 83,719 203,885
Technology related ............................... 29,505 43,954 98,335
Equipment cost of sales .......................... 26,102 39,243 62,485
Customer data fees ............................... 22,147 31,547 109,709
Transaction services related ..................... 16,978 20,670 26,208
Data acquisition related ......................... 14,051 21,046 40,869
Facilities related ............................... 13,402 18,937 45,616
General and administrative ....................... 14,306 36,086 59,707
Acquisition related (Note 3) ..................... 6,500 5,396 28,709
--------- --------- ----------
309,855 443,573 961,187
--------- --------- ----------
OPERATING LOSS .................................... (40,543) (33,647) (69,046)
OTHER INCOME (EXPENSE):
Interest income .................................. 747 739 2,818
Interest expense ................................. (20,864) (30,502) (62,865)
Minority interest in net income of consolidated
subsidiary ..................................... -- (78) (381)
Other, net ....................................... 41 (312) 119
--------- --------- ----------
(20,076) (30,153) (60,309)
--------- --------- ----------
LOSS BEFORE INCOME TAXES .......................... (60,619) (63,800) (129,355)
PROVISION FOR INCOME TAXES (Note 11) .............. (177) (634) (10,480)
LOSS BEFORE EXTRAORDINARY ITEM .................... (60,796) (64,434) (139,835)
Extraordinary Item-loss on early extinguishment of
debt, net (Note 10) ............................ -- (4,176) (3,026)
--------- --------- ----------
NET LOSS .......................................... (60,796) (68,610) (142,861)
OTHER COMPREHENSIVE LOSS:
Foreign currency translation adjustment .......... 598 (2,361) (1,214)
--------- --------- ----------
COMPREHENSIVE LOSS ................................ $ (61,394) $ (70,971) $ (144,075)
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F- 43
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF DEFICIENCY IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PAR VALUE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
CLASS A COMMON STOCK
----------------------------------------
$.01 PAR VALUE,
85,000,000 SHARES
AUTHORIZED
----------------------------------------
ADDITIONAL
SHARES AMOUNT PAID-IN CAPITAL
------------- -------- -----------------
<S> <C> <C> <C>
BALANCE -- JANUARY 1, 1996 ..... 24,398,232 $ 244 $ 123,196
Equity offering ................ 8,347,263 83 53,914
Employee stock transactions 5,000 83
Accrued dividends on
redeemable preferred
stock .........................
Foreign currency translation
adjustments ...................
Net Loss .......................
BALANCE -- DECEMBER 31,
1996 .......................... 32,750,495 $ 327 $ 177,193
Issuance of common stock ....... 500,000 5 3,620
Employee stock transactions
(Note 15) ..................... 153,136 2 699
Accrued dividends on
redeemable preferred
stock (Note 14) ...............
Accretion of redeemable
preferred stock to
redemption value
(Note 14) .....................
Foreign currency
translation adjustments .......
Net loss .......................
BALANCE -- DECEMBER 31,
1997 .......................... 33,403,631 $ 334 $ 181,512
Common stock issued as
part of the acquisition of
Wall Street on Demand
(Note 3) ...................... 388,644 4 6,020
Employee stock
transactions (Note 15) ........ 142,200 1 402
Accrued dividends on
redeemable preferred
stock (Note 14) ...............
Accretion of redeemable
preferred stock to
redemption value (Note
14) ...........................
Foreign currency
translation adjustments .......
Net loss .......................
BALANCE -- DECEMBER 31,
1998 .......................... 33,934,475 $ 339 $ 187,934
========== ===== =========
<PAGE>
<CAPTION>
TREASURY STOCK
--------------------
AT COST
--------------------
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE
DEFICIT LOSS SHARES AMOUNT TOTAL
--------------- -------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE -- JANUARY 1, 1996 ..... $ (186,003) 20,000 $ (250) $ (62,813)
Equity offering ................ 53,997
Employee stock transactions 83
Accrued dividends on
redeemable preferred
stock ......................... (3,031) (3,031)
Foreign currency translation
adjustments ................... (598) (598)
Net Loss ....................... (60,796) (60,796)
----------- -----------
BALANCE -- DECEMBER 31,
1996 .......................... $ (249,830) $ (598) 20,000 $ (250) $ (73,158)
Issuance of common stock ....... 3,625
Employee stock transactions
(Note 15) ..................... 701
Accrued dividends on
redeemable preferred
stock (Note 14) ............... (7,496) (7,496)
Accretion of redeemable
preferred stock to
redemption value
(Note 14) ..................... (140) (140)
Foreign currency
translation adjustments ....... (2,361) (2,361)
Net loss ....................... (68,610) (68,610)
----------- -----------
BALANCE -- DECEMBER 31,
1997 .......................... $ (326,076) $ (2,959) 20,000 $ (250) $ (147,439)
Common stock issued as
part of the acquisition of
Wall Street on Demand
(Note 3) ...................... 6,024
Employee stock
transactions (Note 15) ........ 403
Accrued dividends on
redeemable preferred
stock (Note 14) ............... (11,880) (11,880)
Accretion of redeemable
preferred stock to
redemption value (Note
14) ........................... (93) (93)
Foreign currency
translation adjustments ....... (1,214) (1,214)
Net loss ....................... (142,861) (142,861)
----------- -----------
BALANCE -- DECEMBER 31,
1998 .......................... $ (480,910) $ (4,173) 20,000 $ (250) $ (297,060)
=========== ========= ====== ======= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-44
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER
31
--------------
1996
--------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................................. $ (60,796)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization .......................................................... 59,115
Purchased research and development ..................................................... 6,500
Amortization of discount on subordinated debt and deferred financing costs ............. 2,056
Extraordinary loss on early extinguishment of debt ..................................... --
Gain on sale of investments in companies ............................................... (154)
Deferred revenue ....................................................................... (870)
Minority interest in loss of consolidated subsidiary ................................... --
Changes in assets and liabilities net of effects of acquisitions:
Restricted cash ........................................................................ (20,000)
Accounts receivable, net ............................................................... (5,876)
Inventory .............................................................................. --
Other assets ........................................................................... (1,680)
Loss contracts accrual, net ............................................................ --
Loss lease accruals, net ............................................................... (1,212)
Accounts payable and other accrued expenses ............................................ 3,433
Other long-term liabilities ............................................................ --
----------
Net cash provided by (used in) operating activities ................................... (19,484)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (Note 3) ............................................ (264,663)
Investment in unconsolidated subsidiaries .............................................. --
Capital expenditures, net .............................................................. (27,381)
Software development costs ............................................................. (2,218)
Sale of investments in companies ....................................................... 1,813
----------
Net cash used in investing activities ................................................. (292,449)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of redeemable preferred stock ....................................... 184,355
Proceeds from sale of common stock ..................................................... 13,900
Proceeds from issuance of long-term debt ............................................... 183,500
Redemption of redeemable preferred stock ............................................... (1,973)
Payments on long-term debt ............................................................. (41,055)
Payments on capital lease obligations .................................................. (11,596)
Fees incurred in financing activities .................................................. (4,535)
Dividends paid by subsidiary ........................................................... --
Employee stock transactions ............................................................ 83
----------
Net cash provided by financing activities ............................................. 322,679
----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS .......................... (56)
----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................................... 10,690
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............................................. 7,023
----------
CASH AND CASH EQUIVALENTS, END OF YEAR ................................................... $ 17,713
==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during year for:
Interest ............................................................................... $ 19,762
Income taxes ........................................................................... 109
Debt incurred under capital lease obligations ........................................... 5,799
Accrued dividends on redeemable preferred stock ......................................... 3,031
Accretion of redeemable preferred stock to redemption value ............................. --
Conversion of redeemable preferred stock and accrued dividends to common stock .......... 9,056
Conversion of subordinated debt and accrued interest to common stock .................... 31,301
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FOR THE ENDED D FOR THE YEARS ENDED DECEMBER 31
---------------------------------------------
1997 1998
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................................. $ (68,610) $ (142,861)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization .......................................................... 83,719 203,885
Purchased research and development ..................................................... -- 22,000
Amortization of discount on subordinated debt and deferred financing costs ............. 2,161 3,421
Extraordinary loss on early extinguishment of debt ..................................... 4,176 3,026
Gain on sale of investments in companies ............................................... -- --
Deferred revenue ....................................................................... (1,423) (45,699)
Minority interest in loss of consolidated subsidiary ................................... 78 381
Changes in assets and liabilities net of effects of acquisitions:
Restricted cash ........................................................................ 20,000 (3,387)
Accounts receivable, net ............................................................... (13,480) 25,469
Inventory .............................................................................. -- (2,179)
Other assets ........................................................................... 623 (4,850)
Loss contracts accrual, net ............................................................ -- (13,350)
Loss lease accruals, net ............................................................... (4,574) (1,347)
Accounts payable and other accrued expenses ............................................ (12,266) (7,313)
Other long-term liabilities ............................................................ -- 9,108
---------- -----------
Net cash provided by (used in) operating activities ................................... 10,404 46,304
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (Note 3) ............................................ (32,767) (426,620)
Investment in unconsolidated subsidiaries .............................................. -- (1,700)
Capital expenditures, net .............................................................. (11,004) (58,428)
Software development costs ............................................................. (13,177) (12,188)
Sale of investments in companies ....................................................... -- --
---------- -----------
Net cash used in investing activities ................................................. (56,948) (498,936)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of redeemable preferred stock ....................................... 10,000 --
Proceeds from sale of common stock ..................................................... 362 --
Proceeds from issuance of long-term debt ............................................... 267,000 803,000
Redemption of redeemable preferred stock ............................................... -- --
Payments on long-term debt ............................................................. (218,197) (288,532)
Payments on capital lease obligations .................................................. (11,950) (23,028)
Fees incurred in financing activities .................................................. (4,532) (17,847)
Dividends paid by subsidiary ........................................................... -- (184)
Employee stock transactions ............................................................ 701 403
---------- -----------
Net cash provided by financing activities ............................................. 43,384 473,812
---------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS .......................... (1,604) (811)
---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................................... (4,764) 20,369
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............................................. 17,713 12,949
---------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR ................................................... $ 12,949 $ 33,318
========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during year for:
Interest ............................................................................... $ 28,323 $ 46,567
Income taxes ........................................................................... 306 10,303
Debt incurred under capital lease obligations ........................................... 39,556 46,341
Accrued dividends on redeemable preferred stock ......................................... 7,496 11,880
Accretion of redeemable preferred stock to redemption value ............................. 140 93
Conversion of redeemable preferred stock and accrued dividends to common stock .......... -- --
Conversion of subordinated debt and accrued interest to common stock .................... -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-45
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. DESCRIPTION OF BRIDGE
Bridge Information Systems, Inc., together with its wholly-owned
subsidiaries ("Bridge"), is an international financial information company that
provides a comprehensive resource of financial data and interpretive
applications for investment professionals around the world. Bridge offers
real-time and historical information and news on equities, fixed income,
foreign exchange, derivatives and commodities and provides a wide array of
flexible analytic applications to aid in the interpretation of such data.
Bridge also provides transaction services, through its wholly-owned
subsidiaries, Bridge Trading Company ("Trading"), Bridge International Broking
Ltd. - Hong Kong ("BBH") and Bridge International Broking (U.K.) Limited
("BBU"), comprehensive valuations on fixed income securities, computer
equipment sales and systems integration and information delivery technology,
including private network services, for the financial community.
Bridge's clients include institutional investors, brokerage firms,
research analysts, exchanges and other enterprises throughout the world. No
individual customer comprises a significant portion of Bridge's revenues.
Bridge receives data from more than 1,000 exchanges and contributing sources in
100 countries with no single supplier comprising a significant percentage.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION-- The consolidated financial statements of
Bridge include the accounts of Bridge Information Systems, Inc. and its
subsidiaries after elimination of intercompany accounts and transactions.
REVENUE RECOGNITION-- Information services and other revenues are billed
one to twelve months in advance in certain markets and are recognized in the
period the related services are provided. Prepayments are included in deferred
revenue. Equipment sales are recognized upon delivery of the equipment.
CASH AND CASH EQUIVALENTS-- Bridge considers highly liquid investment
instruments with remaining terms of three months or less at time of acquisition
to be cash equivalents.
RESTRICTED CASH EQUIVALENTS-- Regulations require the Japanese trading
branch and India subsidiary to maintain restricted cash.
NEW ACCOUNTING STANDARDS-- In 1998, Bridge adopted Statement of Financial
Accounting Standards ("SFAS") 130, "Reporting Comprehensive Income."
Comprehensive income is defined as net income (loss) plus certain items that
are recorded directly to shareholders' equity. Bridge's only component of
comprehensive income (loss) in addition to net loss is the cumulative foreign
translation adjustments which are $176, $(2,361) and $(1,214), net of tax
effects for the years ended December 31, 1996, 1997, and 1998, respectively.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. This statement establishes accounting and
reporting standards for derivative instruments, and for hedging activities.
SFAS No. 133 was amended by SFAS No. 137 which delays the effective date of
SFAS No. 133 to fiscal years and quarters beginning after June 15, 2000. SFAS
No. 133 will require Bridge to record all derivatives on the balance sheet at
fair value. Changes in derivative fair value will either be recognized in
earnings as offsets to the changes in fair value of related hedged assets,
liabilities, and firm commitments or, for forecasted transactions, deferred and
recorded as a component of other stockholders' equity until the hedged
transactions occur and are recognized in earnings. Bridge is currently
evaluating the impact of the standard on Bridge. The impact of SFAS No. 133
will depend on a variety of factors, including future interpretive guidance,
the future level of hedging activity, the types of hedging instruments used,
and the effectiveness of such instruments.
F-46
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: - (CONTINUED)
SECURITIES TRANSACTIONS-- Securities transactions and the related
commission revenue and expense are recorded on a trade date basis. In the
normal course of business, the trading companies' activities involve the
execution, settlement and financing of various securities transactions through
their clearing brokers. The resulting receivables from the clearing brokers are
available to the trading companies on a settlement date basis. These activities
may expose the trading companies to off-balance-sheet risk in the event the
customer or other party is unable to fulfill its contractual obligations. The
trading companies, through their clearing brokers, continually monitor their
customers' activities. At December 31, 1997 and 1998, receivables from clearing
brokers totaled $2,034 and $3,398, respectively, and are included in accounts
receivable.
Securities owned and securities sold, but not yet purchased, are carried
at market value and unrealized gains and losses are reflected in transaction
services revenue. Securities owned totaled $520 and $43 at December 31, 1997
and 1998, respectively, and are included in other current assets (see Note 5).
Securities sold, but not yet purchased ("short positions"), totaled $186 and $9
at December 31, 1997 and 1998, respectively, and are included in other
liabilities and accrued expenses. In the normal course of business, the trading
companies assume short positions in their inventory. The establishment of short
positions exposes the trading companies to off-balance sheet risk in the event
of price increases. The trading companies attempt to control such risk by
monitoring the market value on a daily basis.
INVENTORIES-- Inventories which consist of computer equipment to be
installed at customer sites are stated at the lower of cost (generally on an
average cost basis) or market.
PROPERTY AND EQUIPMENT-- Property and equipment is recorded at cost less
accumulated depreciation and amortization. Property additions and improvements
are capitalized while maintenance and repairs are expensed as incurred. Upon
retirement or disposition, the cost and related accumulated depreciation and
amortization are removed from the accounts and any gain or loss is included in
the results of operations. Depreciation and amortization is computed using the
straight-line method based on estimated useful lives as follows:
<TABLE>
<S> <C>
Building, improvements and furniture and fixtures ......... 5 - 32 years
Computer, communications equipment and software ........... 3 - 5 years
</TABLE>
GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS-- Goodwill is being
amortized over 20 to 40 years and other intangible assets are being amortized
over 1 to 20 years, all using the straight-line method. Bridge periodically
assesses the recoverability of the cost of its goodwill and identifiable
intangible assets based on a review of projected undiscounted cash flows. As of
December 31, 1997 and 1998, no impairment had been identified.
DEFERRED FINANCING COSTS-- Deferred financing costs are amortized to
interest expense over the life of the related debt based on a method that
approximates the effective interest method.
SOFTWARE DEVELOPMENT COSTS-- In April 1998, the Accounting Standards
Executive Committee of AICPA issued Statement of Position 98-1 (SOP),
"Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use." The SOP is effective for financial statements for fiscal years
beginning after December 15, 1998. As permitted by the SOP, Bridge adopted the
provisions of the SOP effective January 1, 1997.
All costs, primarily employee compensation and benefits related to
conceptual formulation, design and testing of possible software projects
(preliminary project stage), are expensed as incurred. Upon completion of
preliminary project stage, costs incurred in the development of software are
capitalized until the software is released to production. Software development
costs of $12,015 and
F-47
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: - (CONTINUED)
$16,896 (net of accumulated amortization of $5,488 and $10,604) are included in
other assets at December 31, 1997 and 1998, respectively, and research and
development expense totaled $8,443, $2,620, and $6,575 for the years ended
December 31, 1996, 1997, and 1998, respectively. Unamortized capitalized costs
determined to be in excess of the net realizable value of the products are
expensed to depreciation and amortization expense at the date of such
determination. As of December 31, 1997 and 1998, no impairment had been
identified.
Amortization is provided over an estimated economic life of the software
(generally 1 to 3 years) using the straight-line method and commences when the
software is released into production. Amortization expense totaled $1,767,
$3,673, and $7,307 for the years ended December 31, 1996, 1997, and 1998,
respectively. The accumulated amortization and related software development
costs are removed from their respective accounts effective in the year
following full amortization.
PREPAID COMMISSION EXPENSE-- Commissions paid at the beginning of the
subscription to sales representatives and managers for successful customer
referrals and renewals are deferred and expensed over the length of the
subscription. This policy is consistent with others in the financial
information business and matches commissions more closely with the revenue
earned from the related subscriptions.
INCOME TAXES-- Bridge files consolidated federal and state income tax
returns and its foreign subsidiaries file various income tax returns in the
respective foreign jurisdictions. Deferred tax assets and liabilities are
determined based on the differences between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. In addition, the amount of
any future tax benefits is reduced by a valuation allowance to the extent such
benefits are not expected to be realized.
Except for selective dividends, Bridge intends to reinvest the unremitted
earnings of its non-U.S. subsidiaries and postpone their remittance
indefinitely. Accordingly, no provision for U.S. income taxes was required on
such earnings during the three years ended December 31, 1996, 1997, and 1998.
FOREIGN CURRENCY TRANSLATION-- The financial position and results of
operations of Bridge's foreign subsidiaries are measured using local currency
as the functional currency. Revenues and expenses of such subsidiaries have
been translated into U.S. dollars at average exchange rates prevailing during
the period. Assets and liabilities have been translated at the rates of
exchange at the balance sheet date. Translation adjustments are recorded as a
component of other comprehensive income.
STOCK-BASED COMPENSATION ARRANGEMENTS-- Bridge accounts for employee stock
options in accordance with Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations. Under
APB No. 25, Bridge recognizes compensation cost based on the intrinsic value of
the equity instrument awarded as determined at grant date.
Bridge is also subject to disclosure requirements under Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 prescribes the recognition of compensation expense
based on the fair value of options as determined on the grant date. However,
SFAS No. 123 allows companies to continue applying APB No. 25 if certain pro
forma disclosures are made assuming hypothetical fair value method application
(see Note 15).
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS-- The
preparation of financial statements in conformity with generally accepted
accounting principles requires Bridge management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-48
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: - (CONTINUED)
RECLASSIFICATIONS-- Certain reclassifications have been made in the 1996
and 1997 financial statements to conform to the 1998 presentation.
3. BUSINESS COMBINATIONS
On July 26, 1996, Bridge acquired all of the outstanding shares of
Knight-Ridder Financial, Inc. ("KRF") for $272,827 in a business combination
accounted for as a purchase. The purchase was financed through the sale of
$155,500 of Series D redeemable preferred stock (see Note 14) and through a
portion of the proceeds obtained from a $160,000 term loan from a bank. The
total cost of the acquisition was $273,461, which exceeded the fair value of
the net assets of KRF by $203,162 which is being amortized over 40 years (see
Notes 2 and 7). In addition, $6,500 of the purchase price was allocated to
purchased research and development, which was expensed to acquisition related
expense in 1996. In 1997, Bridge recognized non-recurring costs of $5,396
comprised of customer credits for downtime and other conversion costs related
to the closure of KRF's data center which are included in acquisition related
expense.
On January 1, 1997, Bridge acquired an 80% common stock interest in Dunai
Financial Systems Pty Limited ("DFS") in exchange for $1,491 in cash and a 100%
interest in one of Bridge's subsidiaries, Equinet Pty Limited, with a carrying
value of $2,621 plus additional acquisition costs of $264. Bridge also
deposited $500 into an escrow account under the terms of a Shareholders
Agreement which will be released to the minority shareholders upon its
termination and the sale of the remainder interest to Bridge. The total cost of
the acquisition exceeded the fair value of the net assets acquired by $3,433
which is amortized over 20 years. The minimum purchase price for the minority
interest shares is $1,650 and may be greater if DFS exceeds targeted revenues
and earnings. If certain annual performance targets are met over a four-year
period, the minority shareholders can increase their profit share by 1.875%
annually or receive a bonus. The minority shareholders can also obtain an
additional profit share of 2.5% if the performance targets are achieved in the
fourth year of the management agreement. Bridge is obligated to purchase the
shares owned by the minority shareholders upon termination of the Shareholders
Agreement. The agreement may be terminated by Bridge or the minority
shareholders at the end of the initial four-year term or by Bridge prior to the
end of the initial term if certain financial performance targets are not met.
On January 7, 1997, Bridge entered into an Asset Purchase Agreement to
purchase all of the assets, primarily software, of Ease Technologies, Inc. for
$1,415 in cash.
On July 15, 1997, Bridge acquired all of the outstanding shares of
Telesphere Corporation for $34,486 in a business combination accounted for as a
purchase. Bridge received 100% of Telesphere for 450,000 shares of Series A
common stock (valued at $3,263), a $2,975 11% Senior Subordinated Note and
$28,550 in cash. The total cost of the acquisition was $34,788, which exceeded
the fair value of the net assets of Telesphere by $27,540 which is being
amortized over 20 years (see Notes 2 and 7).
On May 29, 1998, Bridge acquired all the outstanding shares of Dow Jones
Markets Holdings, Inc., (DJM) for $510,000 in a business combination accounted
for as a purchase. Bridge received 100% of DJM for 1,500,000 shares of Series E
preferred stock (valued at $150,000) and $360,000 in cash which was financed
through the proceeds obtained from a loan under Bridge's Secured Credit
Agreement (see Note 10). The total cost of the acquisition was $511,648, which
exceeded the fair market value of the net assets of DJM by $184,116, which is
being amortized over 30 years (see Notes 2 and 7). In addition $22,000 of the
purchase price was allocated to purchased research and development, which was
expensed to acquisition related expenses in 1998. In 1998, Bridge also
recognized non-recurring costs of $6,709, comprised of other conversion costs
related to the closure of redundant offices, which are included in acquisition
related expenses.
F-49
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. BUSINESS COMBINATIONS - (CONTINUED)
On October 20, 1998, Bridge acquired all the outstanding shares of Wall
Street on Demand (WSOD) for $21,000 in a business combination accounted for as
a purchase. Bridge received 100% of WSOD for 388,644 shares of Series A common
stock (valued at $6,024) and $14,976 in cash which was financed through the
proceeds obtained from a loan under Bridge's Secured Credit Agreement (see Note
10). The total cost of the acquisition was $21,090, which exceeded the fair
market value of the net assets of WSOD by $19,683, which is being amortized
over 20 years (see Notes 2 and 7).
On November 10, 1998, Bridge acquired the financial information business
assets of ADP Financial Information Services (ADP) for $154,177 in a business
combination accounted for as a purchase. Bridge received the assets for 900,000
shares of Series F preferred stock (valued at $90,000) and $64,177 in cash
which was financed through the proceeds obtained from a loan under Bridge's
Secured Credit Agreement (see Note 10). The total cost of the acquisition was
$154,496, which exceeded the fair market value of the net assets of ADP by
$99,783, which is being amortized over 20 years (see Notes 2 and 7).
Goodwill lives are determined at the acquisition date based on such
factors as market penetration, name recognition, geographic coverage and
infrastructure of the acquired entities. Market, industry and other factors at
the date of acquisition are also considered.
A summary of the cash and non-cash components of the acquisitions is as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -------------
<S> <C> <C> <C>
Fair value of assets acquired, including goodwill .......... $333,958 $ 48,247 $1,138,412
Liabilities assumed ........................................ 61,131 8,589 453,235
Minority interest .......................................... -- 1,219 --
-------- -------- ----------
Total purchase price ....................................... 272,827 38,439 685,177
Acquisition fees ........................................... 634 566 2,057
-------- -------- ----------
Total cost of the acquisitions ............................. 273,461 39,005 687,234
Common stock issued ........................................ -- 3,263 6,024
Preferred stock issued ..................................... -- -- 240,000
Subordinated debt issued ................................... -- 2,975 --
-------- -------- ----------
Total cash paid ............................................ 273,461 32,767 441,210
Acquired cash .............................................. 8,798 -- 14,590
-------- -------- ----------
Total cash paid, net of acquired cash ...................... $264,663 $ 32,767 $ 426,620
======== ======== ==========
</TABLE>
The results of operations of all acquired companies are included in the
accompanying financial statements since their respective dates of acquisition.
The following summarized unaudited pro forma financial information
presents a summary of consolidated results of operations as if the above
transactions had occurred as of the beginning of the period in which the
acquisitions were completed and the beginning of the immediately preceeding
period:
<TABLE>
<CAPTION>
1997 AND 1998
ACQUISITIONS
---------------------------
1997 1998
------------- -------------
<S> <C> <C>
Net revenue $1,371,652 $1,341,113
========== ==========
Net loss before extraordinary item $ (259,871) $ (224,817)
========== ==========
Net loss $ (257,847) $ (227,643)
========== ==========
</TABLE>
Pro forma results of operations for 1997 exclude a restructuring charge of
$296,739 that was recorded by one of the acquired entities prior to the
acquisition.
F-50
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. BUSINESS COMBINATIONS - (CONTINUED)
In Bridge's management's opinion, the pro forma combined results of
operations may not be indicative of the actual results that would have occurred
had the acquisitions been consummated as of that time or of future operations
of the combined companies under the ownership and operation of Bridge.
4. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
On September 1, 1998 Bridge entered into a joint venture (I-NET Bridge)
with 3 partners, of which Bridge owns 25%. I-NET Bridge is engaged in the
business of producing and delivering an electronic on-line business information
service within South Africa. Bridge contributed $200 in cash and a Bridge
licensing agreement in return for 200 shares of the joint venture and a note
receivable of $6,045 which is to be repaid over the next 5 years. The licensing
agreement is being recognized as revenue over a five-year period and the
remaining balance at December 31, 1998 is $6,583. The investment in the joint
venture is accounted for using the equity method and was valued at $1,900 as of
December 31, 1998.
During 1998, Bridge made a $1,500 capital contribution for a 10% ownership
interest in Strike Technologies, LLC, which operates an Electronic
Communications Network, as defined in the Securities and Exchange Commission's
Order Handling Rules.
5. OTHER CURRENT AND NONCURRENT ASSETS
Other current and noncurrent assets consisted of the following at December
31:
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Other Current Assets:
Prepaid expenses ...................................................... $ 4,428 $15,916
Prepaid commissions (see Note 2) ...................................... 2,391 4,574
Current portion of prepaid data acquisition costs ..................... 355 340
Securities owned (see Note 2) ......................................... 520 43
Current portion of deferred financing costs (see Notes 2 and 10) ...... 684 3,101
Property held for sale, net ........................................... -- 7,967
Receivable due from transitional service agreement .................... -- 14,544
Other receivables ..................................................... -- 7,948
Other current assets .................................................. 2,170 5,859
------- -------
$10,548 $60,292
======= =======
Other Noncurrent Assets:
Deferred financing costs (see Notes 2 and 10) ......................... $ 3,731 $13,884
Software development costs, net (see Note 2) .......................... 12,015 16,896
Long-term investments ................................................. -- 31,036
Prepaid data acquisition costs ........................................ 2,840 2,489
Other noncurrent assets ............................................... 2,451 19,517
------- -------
$21,037 $83,822
======= =======
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Land, building, improvements and furniture and fixtures .......... $ 49,349 $ 111,885
Computer and communications equipment ............................ 157,417 312,845
---------- ----------
206,766 424,730
Less: accumulated depreciation ................................... (103,523) (186,040)
---------- ----------
Property and equipment, net ...................................... $ 103,243 $ 238,690
========== ==========
</TABLE>
F-51
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Components of intangible assets, which primarily relate to business
acquisitions, were as follows at December 31:
<TABLE>
<CAPTION>
1997 1998
----------- -------------
<S> <C> <C>
Goodwill ......................................... $ 259,909 $ 561,000
Software/technology .............................. 30,215 28,415
Noncompete agreements ............................ 20,000 126,000
Trademarks ....................................... 10,647 148,943
Customer base .................................... 4,000 177,786
Product distribution and service rights .......... 4,400 4,400
--------- ----------
329,171 1,046,544
Less: accumulated amortization ................... (54,619) (111,099)
--------- ----------
$ 274,552 $ 935,445
========= ==========
</TABLE>
8. LOSS CONTRACT ACCRUALS
Bridge, in connection with acquisitions, assumes various equipment,
software and data contracts. If Bridge determines that such contracts are above
market, or are redundant and will not be utilized in the ordinary course of
business, a loss is accrued. The loss accrual represents the above market
portion of the contract or the total payments remaining in those cases where
the contract is effectively abandoned. Such accruals are generally recorded on
a gross basis except for those with lengthy remaining terms which are
discounted. Loss contract accruals of acquired entities are accrued as part of
the purchase price allocation. Other loss contract accruals are charged to
expenses at the time they are identified.
The loss portion of the contractual payments consisted of the following at
December 31, 1998:
<TABLE>
<CAPTION>
CONTRACTUAL
PAYMENTS
------------
<S> <C>
1999 ............................ $ 21,918
2000 ............................ 17,808
2001 ............................ 15,701
2002 ............................ 15,444
2003 ............................ 15,344
Thereafter ...................... 40,670
--------
Future minimum payments ......... $126,885
========
</TABLE>
9. LOSS LEASE ACCRUALS
Bridge enters into or assumes, in connection with acquisitions, various
operating lease agreements for office space. Bridge may determine that it will
no longer utilize certain office space under a lease because it is redundant or
due to a change in Bridge's objectives. At the date of acquisition or other
time of such determination, Bridge fully reserves the gross amount of remaining
lease payments, net of expected future sublease rentals. The net reserve
includes both noncancellable future sublease income and Bridge management's
best estimate of future sublease rentals based on analyses of the facilities
involved and the local sublease markets. Loss lease accruals of acquired
entities are accrued as part of the purchase price allocation. Other loss lease
accruals are charged to expense.
Required lease payments (net of estimated future sublease rentals) and
noncancellable future sublease income consisted of the following at December
31, 1998:
F-52
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. LOSS LEASE ACCRUALS - (CONTINUED)
<TABLE>
<CAPTION>
REQUIRED EXPECTED
PAYMENTS, SUBLEASE NET
NET INCOME ACCRUAL
----------- ---------- -----------
<S> <C> <C> <C>
1999 ............................ $ 17,235 $ 3,228 $ 14,007
2000 ............................ 9,486 4,614 4,872
2001 ............................ 5,824 3,441 2,383
2002 ............................ 7,776 2,468 5,308
2003 ............................ 5,687 2,582 3,105
Thereafter ...................... 27,507 18,794 8,713
-------- -------- --------
Future minimum payments ......... $ 73,515 $ 35,127 $ 38,388
======== ======== ========
</TABLE>
10. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
12% subordinated debt ....................................... $ 59,926 $ 61,090
11% subordinated debt ....................................... 2,975 2,975
Secured credit agreement with bank .......................... 215,000 735,000
7.75% note payable .......................................... -- 15,954
Mortgage note ............................................... 3,826 3,612
Capitalized equipment lease obligations, payments
extend through 2003, at various rates of interest
averaging 9.4% ............................................ 42,259 65,662
--------- ---------
Total long-term debt and capital lease obligations .......... 323,986 884,293
Less: current maturities .................................... (17,820) (51,022)
--------- ---------
$ 306,166 $ 833,271
========= =========
</TABLE>
At December 31, 1998, the 12% subordinated debt consisted of the original
issue of senior subordinated notes payable to Welsh, Carson, Anderson & Stowe.
This issue, as amended, ($65,500 less unamortized discount of $4,410 and $5,574
at December 31, 1997 and 1998, respectively -- effective rate of 16%) is due on
August 15, 2002, and bears interest at 12% per annum, payable quarterly in
arrears.
As part of the Telesphere acquisition (see Note 3), Bridge issued $2,975
of subordinated notes payable to the former owners. The notes bear interest of
11% payable monthly in arrears. The principal is due on August 15, 2002.
Bridge has a Secured Credit Agreement (the "Agreement") originally dated
May 29, 1998 and amended and restated on July 7, 1998 with a bank syndicate the
proceeds from which were used to finance the DJM acquisition (see Note 3) and
to repay the amounts outstanding under the then existing Credit Agreement dated
November 17, 1997. The Agreement contains four tranches with a total credit
facility of $800,000. The first tranche consists of a $125,000 revolving credit
line of which $60,000 was outstanding at December 31, 1998. The second tranche
consists of a multi-draw term loan of $75,000 all of which is outstanding at
December 31, 1998. The revolving credit line and the multi-draw term loan
mature May 29, 2003. Bridge pays letter of credit fees and a commitment fee on
the unused portion of the revolving credit line and multi-draw term loan which
are both tied to Bridge's Leverage Ratio. The third tranche consists of a
$100,000 term loan payable in quarterly installments of $3,750 beginning
September 30, 1999 and through June 30, 2001 and $8,750 through the maturity
date of May 29, 2003. The fourth tranche consists of a $500,000 term loan
payable in quarterly installments of $1,250 beginning September 30, 1999 and
through June 30, 2004, quarterly installments of $118,750 through March 31,
2005 with a final payment of $118,750 due at maturity on May 29, 2005. Interest
accrues on all borrowings at the Eurodollar rate (5.25% at December 31, 1998)
plus a defined margin tied to Bridge's Leverage Ratio. The Agreement is
collateralized by a pledge of
F-53
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS - (CONTINUED)
capital stock of the Bridge's U.S. entities, excluding Trading. The Agreement
contains various restrictive covenants including the maintenance of a minimum
rolling four-quarter earnings before interest, taxes, depreciation and
amortization (EBITDA), a minimum interest coverage ratio, a maximum leverage
ratio, a maximum amount of capital leases incurred and a maximum amount of
total capital expenditures. Bridge incurred transaction costs of $17,375 which
were capitalized to deferred financing costs related to obtaining the credit
facility. Due to the repayment of the previous credit agreement, $3,026 of
deferred financing costs were recognized in 1998 as an extraordinary loss, net
of related income taxes of $0. (See Note 21 regarding subsequent amendment to
the Agreement.)
In connection with the Agreement, Bridge has also entered into three swap
transactions pursuant to which it has exchanged its floating rate interest
obligations for a fixed rate payment obligation. These swap agreements hedge
the third and fourth tranches of the credit agreement. The first swap has a
notional principal amount of $137,375 at December 31, 1998 and a fixed rate of
6.035% per annum for the period ending December 31, 2002. The second swap has a
notional principal amount of $100,000 at December 31, 1998 and a fixed rate of
5.8125% per annum ending June 29, 2001. The third swap has a notional principal
amount of $100,000 at December 31, 1998 and a fixed rate of 5.94% per annum
ending June 29, 2002. The fixing of the interest rates for this period
minimizes in part Bridge's exposure to the uncertainty of floating interest
rates.
The weighted average interest rate on Bridge's debt with a bank was 8.5%
and 8.6% for the years ended December 31, 1997 and 1998, respectively. Letters
of credit outstanding at December 31, 1997 and 1998 totaled $19,910 and $8,641,
respectively.
Bridge's mortgage note is collateralized by the technology center
building, bears interest at 8.5% and is payable in equal monthly installments
of $44 through February 1, 2009.
As part of the acquisition of DJM, Bridge assumed a 7.75% note payable to
a third party. The note is payable over three years. Bridge also obtained a
guaranteed investment contract in the same amount and earning a similar rate
which was designated by DJM to fund this note. This investment is included in
other assets.
Required debt payments (net of discount), future minimum lease payments
(including interest under capital leases) and noncancellable operating leases,
consist of the following at December 31, 1998:
<TABLE>
<CAPTION>
OPERATING LEASES
-----------------------
CAPITALIZED
EQUIPMENT OFFICE
DEBT LEASES EQUIPMENT FACILITIES
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
1999 ........................................... $ 14,366 $ 41,168 $ 514 $ 28,909
2000 ........................................... 24,363 28,815 205 24,250
2001 ........................................... 34,362 1,009 48 20,535
2002 ........................................... 107,994 486 10 17,859
2003 ........................................... 157,828 121 3 27,570
Thereafter ..................................... 479,718 -- 3 70,426
--------- -------- ----- ---------
Future minimum payments ........................ $ 818,631 71,599 $ 783 $ 189,549
========= ===== =========
Amount representing interest ................... (5,937)
--------
Present value of net minimum lease payments .... $ 65,662
========
</TABLE>
Total rent expense for all operating leases was $10,313, $14,448, and
$32,002 for the years ended December 31, 1996, 1997, and 1998, respectively.
Bridge is the lessee of certain computer, communications equipment and
software under capital leases. The assets and liabilities under capital leases
are recorded at the lower of the present value of the minimum lease payments or
the fair value of the assets. The assets are depreciated and amortized over the
lower of
F-54
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS - (CONTINUED)
their related lease terms or their estimated useful lives. Assets recorded
under capital leases are included in property and equipment at a cost of
$32,703 and $47,561, net of accumulated depreciation and amortization of
$40,613 and $59,881 at December 31, 1997 and 1998, respectively.
11. INCOME TAXES
The income tax provision consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- -----------
<S> <C> <C> <C>
Current tax provision:
United States .......................... $ -- $ -- $ --
Foreign ................................ 177 634 7,480
State and local ........................ -- -- --
----- ----- --------
177 634 7,480
Deferred tax provision - foreign ......... -- -- 3,000
----- ----- --------
Total provision for income taxes ......... $ 177 $ 634 $ 10,480
===== ===== ========
</TABLE>
The total income tax provision differed from that which would be computed
by applying the statutory federal income tax rate to income before income
taxes. The reasons for this difference are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Federal income tax benefit computed at statutory
federal income tax rate ................................. $ (21,217) $ (23,791) $ (46,333)
Federal income tax portion of change in valuation
allowance ............................................... 19,972 22,686 52,912
Foreign income without federal income tax expense ......... 1,112 (162) (9,585)
Nondeductible expenses .................................... 635 1,267 3,006
Foreign taxes ............................................. 177 634 10,480
Other ..................................................... (502) -- --
--------- --------- ---------
$ 177 $ 634 $ 10,480
========= ========= =========
</TABLE>
The components of deferred income tax assets and liabilities are as
follows at December 31:
<PAGE>
<TABLE>
<CAPTION>
1997 1998
----------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ......... $ 56,460 $ 79,370
Tax credit carryforwards ................. 1,059 1,059
Accounts receivable ...................... 4,051 7,103
Property and equipment ................... -- 77,042
Intangible assets ........................ 5,292 --
Accrual for loss lease ................... 8,395 11,278
Accrual for loss contracts ............... -- 51,872
Other accrued liabilities ................ -- 19,316
Other .................................... 886 667
--------- ----------
76,143 247,707
--------- ----------
Deferred tax liabilities:
Software capitalization .................. 4,792 6,682
Property and equipment ................... 1,215 --
Intangible assets ........................ -- 84,693
Prepaid commissions ...................... -- 1,784
Limited partnerships' losses ............. 420 420
--------- ----------
6,427 93,579
--------- ----------
Net deferred tax asset ..................... 69,716 154,128
Valuation allowance ........................ (69,716) (153,535)
--------- ----------
$ 0 $ 593
========= ==========
</TABLE>
At December 31, 1997 and 1998, Bridge recorded a valuation allowance of
$69,716 and $153,535, respectively, against the net deferred tax asset due to
the uncertainty of its ultimate realization. The valuation allowance increased
by $32,090 from December 31, 1996 to December 31, 1997 and by
F-55
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. INCOME TAXES - (CONTINUED)
$83,819 from December 31, 1997 to December 31, 1998. Amounts fully reserved
include $26,491 in deferred tax assets acquired by Bridge in a purchase
business combination. If it is determined in the future that such deferred tax
assets are recoverable, the valuation allowances will be reversed and credited
against the original purchase price allocated to goodwill.
Certain states do not allow for the filing of a consolidated state income
tax return; therefore, the taxable income of certain of Bridge's subsidiaries
cannot be offset with losses sustained by other of Bridge's subsidiaries in
those states. At December 31, 1998, Bridge has the following approximate income
tax carryforwards available:
<TABLE>
<CAPTION>
TAX EXPIRATION
PURPOSES DATES
------------ -----------
<S> <C> <C>
U.S. federal regular tax carryforwards other than from
purchase business combinations:
Net operating loss carryforwards ................... $ 199,512 2004-2018
Business tax credit carryforwards .................. $ 599 1999-2002
U.S. federal minimum tax credit carryforwards against
regular tax ........................................ $ 298 --
Foreign regular tax carryforwards other than from
purchase business combinations:
Net operating loss carryforwards ..................... $ 4,132 2002-2009
</TABLE>
12. REGULATORY REQUIREMENT
Trading is subject to the Uniform Net Capital Rule under the Securities
Exchange Act of 1934, which requires the maintenance of minimum net capital of
$1,000 and requires that the ratio of aggregate indebtedness to net capital,
both as currently defined, shall not exceed 15 to 1. At December 31, 1998,
Trading had net capital of $3,490, which was $2,490 in excess of the minimum
required, and the ratio of aggregate indebtedness to net capital was 1.69 to 1.
Substantially all customer transactions are cleared through third parties on a
fully disclosed basis and, therefore, Trading does not hold securities or funds
for the accounts of its customers. Accordingly, Trading is exempt from the
requirements of Rule 15c3-3 under the Securities Exchange Act of 1934.
BBH is subject to regulatory requirements of the Securities and Futures
Commission and BBU is subject to the regulatory requirements of The Securities
and Futures Authority Resource Requirement. At December 31, 1998, management is
not aware of any matters which would have a materially adverse effect on BBH or
BBU.
13. CAPITAL STOCK
During 1996, Bridge increased its number of authorized shares of capital
stock to 102 million shares, consisting of 85 million shares of Class A common
stock, 15 million shares of Class B common stock, and 2 million shares of
preferred stock ($1 par value). In addition, Bridge increased the total number
of shares of common stock for which options may be granted from 2,360,250
shares to 4 million shares. In October 1997, Bridge increased the total number
of shares for which options may be granted from 4 million to 6 million shares.
Class A common shareholders are entitled to one vote per share while Class B
common shareholders have no voting rights. Both Class A and Class B common
shareholders have the same dividend and liquidation rights. In addition, both
classes of common stock contain provisions which allow certain shareholders of
both classes to convert their shares into shares of the other class on a
one-for-one basis.
In May 1996, Bridge completed an equity offering totaling $53,997, net of
transaction costs of $260 which were charged to additional paid-in capital
(common) as costs incurred to raise capital. The offering was accomplished in
three pieces. First, subordinated debt issues two through five totaling
F-56
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. CAPITAL STOCK - (CONTINUED)
$29,500, plus accrued interest of $1,801, were converted into 4,815,543 shares
of Class A common stock. Secondly, all shares of Series A and C redeemable
preferred stock totaling $8,700, plus accrued dividends of $356, were converted
into 1,393,305 shares of Class A common stock. The third piece consisted of the
sale of 2,138,415 shares of Class A common stock for $13,900 to existing
shareholders and a strategic investor. In addition, as part of the offering,
all shares of Series B redeemable preferred stock totaling $1,900, plus accrued
dividends of $73, were redeemed from the proceeds of the offering.
14. REDEEMABLE PREFERRED STOCK
In connection with the acquisition of KRF (see Note 3) in 1996, Bridge
designated 1,950,000 shares of Series D redeemable preferred stock. At the time
of the KRF acquisition, 1,550,000 shares were issued for $154,355, with a
redemption value of $155,000. The carrying value of the redeemable preferred
stock is accreted to the redemption value through its mandatory redemption
dates. In connection with the DJM acquisition (see Note 3) Bridge designated
and issued 1,500,000 shares of Series E redeemable preferred stock at a
redemption value of $150,000. Bridge also designated and issued 900,000 shares
of Series F redeemable preferred stock at a redemption value of $90,000 in
connection with the ADP acquisition (see Note 3). The following shares have
been issued and are outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
PREFERRED STOCK
-----------------------
ADDITIONAL ACCRETION
SHARES $1 PAR PAID-IN TO TOTAL
ISSUED AND VALUE CAPITAL ACCRUED REDEMPTION CARRYING
SERIES DESIGNATED AMOUNT (PREFERRED) DIVIDENDS VALUE VALUE
- -------------- ------------ ---------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
D .......... 1,950,000 $ 1,950 $ 192,405 $ 18,116 $ 234 $ 212,705
E .......... 1,500,000 1,500 148,500 3,567 -- 153,567
F .......... 900,000 900 89,100 513 -- 90,513
------- --------- -------- ----- ---------
$ 4,350 $ 430,005 $ 22,196 $ 234 $ 456,785
======= ========= ======== ===== =========
</TABLE>
Series D and E preferred shareholders are entitled to one common vote for
each share of Class A common stock that would be issuable upon conversion of
preferred stock. Series F preferred shareholders do not have any voting rights.
At December 31, 1998, one share of Series D preferred stock was convertible
into 12.5 shares of common stock and one share of Series E or F preferred stock
was convertible into 4.62 shares of common stock. All preferred shareholders
rank senior to common shareholders in the event of any voluntary or involuntary
liquidation, dissolution or winding up of Bridge. All preferred stocks pay
dividends at the rate of $4.00 per share per annum. All preferred dividends are
cumulative and non-participating.
On June 30 in each of 2002, 2003, 2004, Bridge is required to redeem the
lesser of 1) 33-1/3% of the aggregate number of shares of Series D preferred
stock thereto issued or 2) the number of shares of Series D preferred stock
then outstanding. Preferred stock has a redemption price of $100 per share plus
all accrued but unpaid dividends, which is equivalent to the carrying value.
Bridge may elect to redeem preferred shares, in whole or in part, at any time
subsequent to January 1, 2001, but prior to the mandatory redemption dates as
well.
On May 29, 2003 and November 10, 2003, Bridge is required to redeem all
shares of Series E and Series F preferred stock, respectively, then issued and
outstanding at the redemption price of $100 per share plus all accrued but
unpaid dividends, which is equivalent to the carrying value.
F-57
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
15. STOCK OPTIONS
Bridge has a Stock Option and Restricted Stock Purchase Plan, which
provides for stock option and other awards to selected employees and officers
of Bridge. Bridge's Board of Directors determines the option price (not to be
less than 100% of fair market value for incentive stock options) at the date of
grant. Options granted during 1997 and 1998 vest ratably over five years and
expire ten years from the date of grant.
Bridge applies APB Opinion No. 25 and related interpretations in
accounting for its plan. Accordingly, compensation cost has been recognized for
its stock option plan only to the extent the fair market value of Bridge's
common stock exceeded the exercise price of nonqualified stock option grants at
the grant date. Had compensation cost for Bridge's stock option plan been
determined based on the fair value at the grant dates for awards under the plan
consistent with the method of SFAS No. 123, Bridge's net loss would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- --------------
<S> <C> <C> <C>
Net loss
As reported ......... $ (60,796) $ (68,610) $ (142,861)
Pro Forma ........... $ (61,339) $ (69,755) $ (144,452)
</TABLE>
Changes in outstanding options are as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE SHARES
------------- ---------------- -------------
<S> <C> <C> <C>
Outstanding, beginning of year .......... 2,363,250 $ 4.73 2,209,117
Granted ................................. 567,112 6.50 2,738,000
Exercised ............................... (5,000) 4.73 (153,136)
Forfeited ............................... (713,245) 6.05 (345,800)
Expired ................................. (3,000) 250.00 --
--------- ------- ---------
Outstanding, end of year ................ 2,209,117 $ 4.80 4,448,181
========= ======= =========
Options exercisable at year-end ......... 444,050 660,350
========= =========
Weighted-average fair value of options
granted during the year ................ $ 2.04 $ 2.04
=========== ===========
<CAPTION>
1997 1998
------------------------------ ----------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE PRICE SHARES EXERCISE PRICE
---------------- ------------- ---------------
<S> <C> <C> <C>
Outstanding, beginning of year .......... $ 4.80 4,448,181 $ 6.22
Granted ................................. 7.25 1,474,319 10.21
Exercised ............................... 4.67 (142,200) 2.83
Forfeited ............................... 6.05 (243,300) 6.77
Expired ................................. -- -- --
-------- --------- -------
Outstanding, end of year ................ $ 6.22 5,537,000 $ 7.36
======== ========= =======
Options exercisable at year-end ......... $ 4.57 1,396,886 $ 5.67
======== ========= =======
Weighted-average fair value of options
granted during the year ................ $ 2.73
===========
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the minimum value option-pricing model with the following
weighted-average assumptions used for grants in 1996, 1997, and 1998,
respectively: dividend yield of 0 percent for all three years; risk-free
interest rates of 5.4, 6.7, and 5.5 percent; and expected lives of 6 years for
all three years.
The following table summarizes the characteristics of stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
EXERCISE PRICE SHARES LIFE PRICE SHARES PRICE
- ---------------- ------------ -------------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
$ 1.00 80,000 6.71 years $ 1.00 48,000 $ 1.00
$ 4.73 1,176,569 7.36 4.73 705,941 4.73
$ 6.50 429,612 7.42 6.50 171,845 6.50
$ 7.25 2,355,500 8.50 7.25 471,100 7.25
$ 8.00 317,819 9.00 8.00 -- --
$ 10.80 1,177,500 9.42 10.80 -- --
--------- ---- -------- ------- --------
5,537,000 7.16 years $ 7.36 1,396,886 $ 5.67
========= ==== ======== ========= ========
</TABLE>
F-58
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
16. EMPLOYEE SAVINGS PROGRAMS
DOMESTIC SAVINGS PLANS -- In the United States, Bridge sponsors an
employee savings plan that qualifies as a defined salary arrangement under
Section 401(k) of the Internal Revenue Code. Participating U.S. employees may
contribute a percentage of their base salary, subject to certain limitations,
and Bridge matches a portion of the employees' contributions. Bridge
contributed $723, $1,388, and $2,463 to these plans during the years ended
December 31, 1996, 1997, and 1998, respectively. Also under Bridge's plan,
profit sharing contributions may be made at the discretion of Bridge. No such
contributions were made during the years ended December 31, 1996, 1997, and
1998. No post-retirement benefits are provided.
FOREIGN SAVINGS PLANS -- Bridge maintains certain retirement plans for
employees outside of the United States that provide retirement benefits based
on service and salary. The funding policy for these plans is to contribute the
amounts required by the plan provisions or applicable regulations, although
additional amounts may be made at the discretion of Bridge. Bridge contributed
$987, $1,923, and $5,430, to these plans during the years ended December 31,
1996, 1997, and 1998 respectively.
Bridge has a defined benefit plan covering certain employees of Bridge in
Japan. The benefits for this plan are based on years of service and current
salaries. Payments are made on a monthly basis and the net pension expense for
1996, 1997 and 1998 was immaterial.
17. RELATED PARTY TRANSACTIONS
Bridge provides services to certain shareholders at terms and prices
approximating market. Sales to existing shareholders totaled $34,549, $28,260,
and $56,205 for the years ended December 31, 1996, 1997, and 1998,
respectively. Accounts receivable from existing shareholders totaled $6,795 and
$30,957 at December 31, 1997 and 1998, respectively.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments". The estimated fair
value amounts have been determined by Bridge using available market information
and appropriate valuation methodologies. However, considerable judgment is
necessarily required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that Bridge could realize in a current market
exchange.
The use of different market assumptions and/or estimation methodologies
may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
1997 1998
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Treasury bills ..................... $ 1,314 $ 1,331 $ -- $ --
Securities owned ................... 520 520 43 43
Guaranteed investment contract ..... -- -- 15,955 15,955
Financial liabilities:
Term loan with Bank ................ 200,000 200,000 600,000 600,000
Mulit-draw loan .................... -- -- 75,000 75,000
Revolving credit agreement ......... 15,000 15,000 60,000 60,000
Mortgage note ...................... 3,826 4,063 3,612 3,861
11% subordinated debt .............. 2,975 2,975 2,975 2,975
</TABLE>
F-59
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
18. FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
<TABLE>
<CAPTION>
1997 1998
------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
12% subordinated debt ..................... 59,926 59,926 61,090 61,090
7.75% note payable ........................ -- -- 15,955 15,955
Loss lease accruals ....................... 23,785 14,633 38,388 27,256
Loss contract accruals .................... -- -- 126,885 125,401
Securities sold but not yet purchased ..... 186 186 9 9
Unrecognized financial instruments:
Swap Agreements ............................. -- 1,446 -- 8,790
Standby letters of credit ................... -- 164 -- 319
</TABLE>
SECURITIES OWNED AND SECURITIES SOLD BUT NOT YET PURCHASED -- For those
instruments held for trading purposes, fair values are based on quoted market
prices or dealer quotes.
LONG-TERM DEBT -- Term loan with Bank, multi-draw loan and revolving
credit agreement, are variable rate in nature and reprice quarterly. Bridge
believes the carrying value of this debt approximates fair value. The fair
value of the subordinated debt, notes payable and other fixed rate debt is
estimated by discounting cash flows based on the rates Bridge could obtain
today for similar borrowings.
LOSS LEASE ACCRUALS -- The fair value of Bridge's loss lease accruals is
estimated based on the remaining required lease payments (net of estimated
future sublease rentals) and noncancellable future sublease income discounted
at current rates offered to Bridge for debt of similar remaining maturities.
LOSS CONTRACT ACCRUALS -- The fair value of Bridge's loss contract
accruals is estimated based on the contractual payments discounted at current
rates offered to Bridge for debt of similar maturities.
SWAP AGREEMENT -- The fair value of Bridge's swap agreement represents the
estimated amount Bridge would receive to terminate the agreement, considering
current interest and currency rates.
STANDBY LETTERS OF CREDIT -- The fair value of letters of credit is based
on fees currently charged for similar agreements.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1997 and 1998,
respectively. Although Bridge's management is not aware of any factors that
would significantly affect the estimated fair value amounts, such amounts have
not been comprehensively revalued for purposes of these financial statements
since that date, and current estimates of fair value may differ significantly
from the amounts presented herein.
19. OTHER COMMITMENTS AND CONTINGENCIES
At the time of the DJM acquistion, DJM was party to certain agreements
between DJM and Cantor Fitzgerald Securities Corp. ("Cantor"), a primary
supplier of market data to DJM, and Market Data Corporation ("MDC"). As of the
date of the acquisition, certain provisions of these agreements were in dispute
between DJM and Cantor. In addition, Cantor has taken the position that as a
result of the acquisition, by virtue of certain provisions in the agreements
with Cantor and MDC, Bridge has incurred certain obligations separate from
DJM's obligations under those agreements to make payments to MDC and Cantor
with respect to terminals other than those to which DJM was providing
information prior to the acquisition.
F-60
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
19. OTHER COMMITMENTS AND CONTINGENCIES - (CONTINUED)
Bridge has been in discussions with Cantor regarding settlement of this
dispute. Any such settlement would also require approval of Dow Jones. It is
uncertain at this time whether Bridge will be able to settle this matter. If
settlement is not feasible, and litigation were to ensue, Bridge believes that
it has meritorious defense to Cantor claims.
Bridge, in the normal course of business, enters into service agreements
with telecommunication companies, whereby Bridge has guaranteed annual usage
levels of data communications. Remaining minimum commitments are $10,000 for
the year ending December 31, 1999.
Bridge also enters into agreements for the licensing of software and
information databases to be used in connection with Bridge's products. Certain
of these agreements provide for royalty payments based on Bridge's revenues or
the number of workstations installed, as defined. Bridge has no material
commitments with respect to these licenses.
Bridge is subject to various other legal proceedings and claims which
arise in the ordinary course of its business.
Loss accruals for matters that have not been indemnified by the sellers
and relate directly to acquisitions have been established as part of the
purchase price (goodwill). When and if it is determined that such accruals are
unnecessary, they will be reversed and credited back to the purchase price
(goodwill). The ultimate resolution of these matters cannot be predicted with
certainty. However, based on the information currently available, Bridge's
management does not believe they will have a material adverse effect on
Bridge's financial condition.
20. SUBSEQUENT EVENTS
ACQUISITION AND INVESTMENTS -- On February 8, 1999, Bridge entered into a
Formation Agreement with FutureSource Information Systems, Inc. (FSIS) and its
shareholders to form a new business enterprise named FutureSource/Bridge L.L.C.
(FS/B). The transaction closed on March 5, 1999. The purpose of FS/B is to
better develop and market financial information products in the commodities
field. Bridge contributed $4,500 of cash and customer contracts totaling
approximately $16,500 of annualized revenue to FS/B for a 45% ownership
interest. FSIS contributed all of its assets, subject to assumed liabilities,
to FS/B for a 55% ownership interest. Bridge also made a $2,000 subordinated
loan to FS/B.
On February 17, 1999, Bridge entered into a Merger Agreement with SAVVIS
Holdings Corporation (SAVVIS) to acquire all of the equity of SAVVIS in
exchange for 3,250,000 shares of Bridge's common stock. The transaction closed
on April 7, 1999.
DEBT EXTENSION -- On March 5, 1999, Bridge increased the fourth tranche of
the term loan under its Secured Credit Agreement (see Note 10) by $50,000 to a
total of $550,000. The proceeds were used to reduce the outstanding balances
under the revolving credit facility, to provide funds for working capital and
for other corporate purposes. The covenants relating to the maximum leverage
ratio and the minimum interest coverage were adjusted accordingly.
PUBLIC OFFERING (UNAUDITED) -- The Board of Directors of Bridge has
authorized management of SAVVIS to file a registration statement with the
Securities and Exchange Commission for the initial public offering of SAVVIS'
common stock. SAVVIS intends to use a portion of the proceeds to finance a
portion of its purchase of Bridge's Internet protocol network assets and to pay
a preferential dividend to Bridge.
STOCK OPTIONS (UNAUDITED) -- During the period from October through
December 1999, SAVVIS granted 2,843,758 stock options to employees of SAVVIS
and Bridge with an exercise price of $.50 per share. Noncash compensation cost
based upon the difference between the exercise price and the
F-61
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
20. SUBSEQUENT EVENTS - (CONTINUED)
imputed fair value of SAVVIS' stock as of the respective option grant dates
totaling approximately $53 million will be recorded over the vesting periods of
such options, which periods range from immediate up to four years.
Approximately $2,000 of noncash compensation expense will be recorded in the
fourth quarter of 1999.
21. GOING CONCERN
The consolidated 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
Bridge be unable to continue as a going concern. Bridge has experienced
recurring losses from operations and operating cash flow deficiencies, which
have been funded by additional borrowings. At December 31, 1999, Bridge did not
comply with certain of the restrictive covenants contained in its Secured
Credit Agreement (the "Agreement") (see Note 11).
The Agreeement was amended on January 7, 2000 (the "Amendment") to 1)
permit the sale of Bridge's network assets to SAVVIS, 2) allow for the
subsequent public offering of SAVVIS shares, and 3) waive and modify certain
covenants in the Agreement related to EBITDA, interest coverage ratio, leverage
ratio and capital expenditure limitations. The Agreement was also modified to
require Bridge to repay approximately $250,000 of its indebtedness under the
Agreement on or before June 30, 2000. However, Bridge must repay a separate
loan in the amount of $100,000 before it can repay the full amounts required
under the amended Agreement.
In addition, the Amendment requires the public offering of SAVVIS shares
to be completed by February 29, 2000. Failure to comply with this provision
could result in acceleration of the maturity of the outstanding balance due
under the Agreement.
The Amendment also requires that all of the proceeds from the sale of
assets to SAVVIS and the preferential distribution be applied to the
indebtedness under the Agreement.
In 2000, Bridge expects to complete the integration of past acquisitions,
to the extent possible, and plans to reduce both employee and technology
related expenses. Further, with the sale of its network assets to SAVVIS,
Bridge expects its capital spending requirements to be reduced significantly.
Therefore, Bridge expects operating results and cash flow to improve in 2000 as
compared to 1999.
Also as part of Bridge's ongoing strategy, management has for some time
been pursuing plans to expand the pool of capital available to fund business
growth. These plans include, but are not limited to, the sale or spin-off or
assets, including the sale of additional SAVVIS shares, and other public and
private debt financing alternatives. Management believes these plans will be
sufficient to satisfy its fiscal 2000 financing requirements. However, there
can be no assurance that sufficient proceeds through these activities will be
available to meet Bridge's debt obligations.
* * * * * *
F-62
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
--------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................................... $ 34,577
Restricted cash equivalents ....................................................... 1,935
Accounts receivable, net of allowance for doubtful accounts of $55,573 ............ 235,409
Inventory ......................................................................... 22,058
Other current assets .............................................................. 55,999
----------
Total current assets .............................................................. 349,978
PROPERTY AND EQUIPMENT, net of depreciation of $237,534 ............................ 269,078
GOODWILL AND INTANGIBLE ASSETS, net of amortization of $202,873 .................... 863,864
OTHER LONG-TERM ASSETS ............................................................. 112,479
----------
TOTAL ............................................................................. $1,595,399
==========
LIABILITIES AND DEFICIENCY IN NET ASSETS
CURRENT LIABILITIES:
Accounts payable .................................................................. $ 75,242
Accrued employee compensation and benefits ........................................ 33,270
Accrued exchange fees ............................................................. 16,118
Other liabilities and accrued expenses ............................................ 107,167
Deferred revenue .................................................................. 23,742
Current portion of loss contract accruals ......................................... 20,731
Current maturities of loss lease accruals ......................................... 8,918
Current maturities of long-term debt and capital lease obligation ................. 60,999
----------
Total current liabilities ......................................................... 346,187
LOSS CONTRACT ACCRUALS, NET ........................................................ 90,915
LOSS LEASE ACCRUALS EXCLUDING CURRENT MATURITIES ................................... 28,340
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS EXCLUDING CURRENT MATURITIES .......... 1,030,130
OTHER LONG-TERM LIABILITIES ........................................................ 35,076
----------
Total liabilities ................................................................. 1,530,648
----------
MINORITY INTEREST .................................................................. 11,288
----------
REDEEMABLE PREFERRED STOCK ......................................................... 469,869
----------
COMMITMENT AND CONTINGENCIES .......................................................
DEFICIENCY IN NET ASSETS:
Class A common stock, $.01 par value, 85 million shares authorized,
36,984,524 shares issued ........................................................ 370
Class B common stock, $.01 par value, 15 million shares authorized, none issued
Additional paid-in capital (common) ............................................... 219,180
Accumulated deficit ............................................................... (628,371)
Cumulative translation adjustments ................................................ (7,335)
Treasury stock at cost, 20,000 shares ............................................. (250)
----------
Total deficiency in net assets .................................................... (414,406)
----------
TOTAL ............................................................................. $1,595,399
==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-63
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE-MONTH PERIOD
ENDED SEPTEMBER 30
-----------------------------
1998 1999
------------- -------------
<S> <C> <C>
REVENUES:
Information services .................................................... $ 398,773 $ 651,150
Transaction services .................................................... 40,015 55,639
Network services ........................................................ -- 12,193
Equipment sales ......................................................... 52,114 73,937
Customer data fees ...................................................... 74,456 149,551
Other revenues .......................................................... 12,533 15,965
--------- ----------
577,891 958,435
OPERATING COSTS AND EXPENSES:
Employee related ........................................................ 182,403 297,922
Depreciation and amortization ........................................... 133,447 211,893
Technology related ...................................................... 58,818 142,472
Equipment cost of sales ................................................. 48,093 67,997
Customer data fees ...................................................... 69,151 122,222
Transaction services related ............................................ 18,545 21,487
Data acquisition related ................................................ 27,431 62,281
Facilities related ...................................................... 20,817 45,194
General and administrative .............................................. 36,353 53,107
Acquisition related ..................................................... 28,709 --
--------- ----------
623,767 1,024,575
--------- ----------
OPERATING LOSS ........................................................... (45,876) (66,140)
OTHER INCOME (EXPENSE):
Interest income ......................................................... 1,289 2,246
Interest expense ........................................................ (41,279) (68,126)
Minority interest in net income of consolidated subsidiary .............. (482) (804)
Other, net .............................................................. 5,282 8,763
--------- ----------
(35,190) (57,921)
--------- ----------
LOSS BEFORE INCOME TAXES ................................................. (81,066) (124,061)
PROVISION FOR INCOME TAXES ............................................... (6,688) (10,316)
--------- ----------
LOSS BEFORE EXTRAORDINARY ITEM ........................................... (87,754) (134,377)
Extraordinary item -- loss on early extinguishment of debt, net ......... (3,026) --
--------- ----------
NET LOSS ................................................................. (90,780) (134,377)
OTHER COMPREHENSIVE LOSS:
Foreign currency translation adjustment ................................. (1,056) (3,162)
--------- ----------
COMPREHENSIVE LOSS ....................................................... $ (91,837) $ (137,539)
========= ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-64
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE-MONTH PERIOD
ENDED SEPTEMBER 30
----------------------------
1998 1999
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS ...................................................................... $ (90,780) $ (134,377)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................................ 133,447 211,892
Acquisition related costs .................................................... 22,000 --
Amortization of discount on subordinated debt and deferred financing costs ... 2,207 4,392
Gain on joint venture investment ............................................. -- (10,000)
Extraordinary loss on early extinguishment of debt ........................... 3,026 --
Deferred revenue ............................................................. (30,460) 7,682
Minority interest in loss of consolidated subsidiary ......................... 481 804
Changes in assets and liabilities net of effects of acquisitions:
Restricted cash .............................................................. (2,225) 1,452
Accounts receivable, net ..................................................... 6,031 (75,836)
Inventory .................................................................... (2,687) (13,653)
Other assets ................................................................. (17,225) (1,287)
Loss contracts accrual, net .................................................. (7,312) (17,936)
Loss lease accruals, net ..................................................... (5,130) (10,441)
Accounts payable and other accrued expenses .................................. (14,319) (20,292)
Other long-term liabilities .................................................. (3,324) (18,425)
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES ...................................... (6,270) (76,025)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired ........................................... (348,112) (106)
Equity investment in minority subsidiary ..................................... (1,673) (6,650)
Capital expenditures, net .................................................... (27,779) (99,150)
Software development costs ................................................... (9,239) (17,941)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES ...................................... (386,803) (123,847)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ..................................... 680,000 377,051
Payments on long-term debt ................................................... (240,159) (149,576)
Principal payments on capital lease obligations .............................. (11,236) (28,129)
Fees incurred in financing activities ........................................ (16,863) (5,025)
Proceeds from partial sale of subsidiary ..................................... -- 8,990
Dividends paid by subsidiary ................................................. (187) --
Employee stock transactions .................................................. 178 231
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................................. 411,733 203,542
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS .................. (776) (2,411)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................................... 17,884 1,259
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................ 12,949 33,318
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................................... $ 30,833 $ 34,577
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during period year for:
Interest ................................................................... $ 25,760 $ 61,154
Income taxes ............................................................... 6,688 6,794
Debt incurred under capital lease obligations .............................. 14,294 1,405
Accrued dividends on redeemable preferred stock ............................ 7,889 13,014
Accretion of redeemable preferred stock to redemption value ................ 70 70
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-65
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. DESCRIPTION OF BRIDGE
Bridge Information Systems, Inc., together with its wholly-owned
subsidiaries ("Bridge"), is an international financial information company that
provides a comprehensive resource of financial data and interpretive
applications for investment professionals around the world. Bridge offers
real-time and historical information and news on equities, fixed income,
foreign exchange, derivatives and commodities and provides a wide array of
flexible analytic applications to aid in the interpretation of such data.
Bridge also provides transaction services, through its wholly-owned
subsidiaries, Bridge Trading Company ("Trading"), Bridge International Broking
Ltd. - Hong Kong and Bridge International Broking (U.K.) Limited, comprehensive
valuations on fixed income securities, computer equipment sales and systems
integration and information delivery technology, including private network
services, for the financial community.
Bridge's clients include institutional investors, brokerage firms,
research analysts, exchanges and other enterprises throughout the world. No
individual customer composed a significant portion of Bridge's revenues. Bridge
receives data from more than 1,000 exchanges and contributing sources in 100
countries with no single supplier composing a significant percentage.
2. UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles.
In the opinion of Bridge's management, all adjustments, consisting only of
normal recurring adjustments considered necessary for a fair presentation, have
been included. Operating results for any period are not necessarily indicative
of the results for any other period or for the full year. These statements
should be read in conjunction with Bridge's financial statements and notes
thereto for the year ended December 31, 1998.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements of
Bridge's include the accounts of Bridge Information Systems, Inc. and its
subsidiaries after elimination of intercompany accounts and transactions.
REVENUE RECOGNITION -- Information services and other revenues are billed
one to twelve months in advance in certain markets and are recognized in the
period the related services are provided. Prepayments are included in deferred
revenue. Equipment sales are recognized upon delivery of the equipment.
CASH AND CASH EQUIVALENTS -- Bridge considers highly liquid investment
instruments with remaining terms of three months or less at time of acquisition
to be cash equivalents.
RESTRICTED CASH EQUIVALENTS -- Regulations require the Japanese trading
branch and India subsidiary to maintain restricted cash.
NEW ACCOUNTING STANDARDS -- In June 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued. This statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. SFAS No. 133 was amended by SFAS 137, which delays the
effective date of SFAS 133 to fiscal years and quarters beginning after June
15, 2000. SFAS No. 133 will require Bridge to record all derivatives on the
balance sheet at fair value. Changes in derivative fair value will either be
recognized in earnings as offsets to the changes in fair value of related
hedged assets, liabilities, and firm commitments or, for forecasted
transactions, deferred and recorded as a component of other stockholders'
equity until the hedged transactions occur and are recognized in earnings.
Bridge is
F-66
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
currently evaluating the impact of the standard on Bridge. The impact of SFAS
No. 133 will depend on a variety of factors, including future interpretive
guidance, the future level of hedging activity, the types of hedging
instruments used, and the effectiveness of such instruments.
SECURITIES TRANSACTIONS -- Securities transactions and the related
commission revenue and expense are recorded on a trade date basis. In the
normal course of business, the trading companies' activities involve the
execution, settlement and financing of various securities transactions through
its clearing brokers. The resulting receivables from the clearing brokers are
available to the trading companies on a settlement date basis. These activities
may expose the trading companies to off-balance-sheet risk in the event the
customer or other party is unable to fulfill their contractual obligations. The
trading companies, through their clearing brokers, continually monitor its
customers' activities. At September 30, 1999 receivables from clearing brokers
totaled $2,236 and are included in accounts receivable.
Securities owned and securities sold, but not yet purchased, are carried
at market value and unrealized gains and losses are reflected in transaction
services revenue. Securities owned totaled $108 at September 30, 1999, and are
included in other current assets. Securities sold, but not yet purchased
("short positions"), totaled $191 at September 30, 1999 and are included in
other liabilities and accrued expenses. In the normal course of business, the
trading companies assume short positions in their inventory. The establishment
of short positions exposes the trading companies to off-balance sheet risk in
the event of price increases. The trading companies attempt to control such
risk by monitoring the market value on a daily basis.
INVENTORIES -- Inventories which consist of computer equipment are stated
at the lower of cost (generally on an average cost basis) or market.
PROPERTY AND EQUIPMENT -- Property and equipment is recorded at cost less
accumulated depreciation and amortization. Property additions and improvements
are capitalized while maintenance and repairs are expensed as incurred. Upon
retirement or disposition, the cost and related accumulated depreciation and
amortization are removed from the accounts and any gain or loss is included in
the results of operations. As of September 30, 1999, no impairment had been
identified.
Depreciation and amortization is computed using the straight-line method
based on estimated useful lives as follows:
<TABLE>
<S> <C>
Building, improvements and furniture and fixtures ......... 5-32 years
Computer, communications equipment and software ........... 3-5 years
</TABLE>
GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS -- Goodwill is being
amortized over 3 to 40 years and other intangible assets over 1 to 20 years,
all using the straight-line method. Bridge periodically assesses the
recoverability of the cost of its goodwill and identifiable intangible assets
based on a review of projected undiscounted cash flows. As of September 30,
1999 no impairment had been identified.
DEFERRED FINANCING COSTS -- Deferred financing costs are amortized to
interest expense over the life of the related debt based on a method that
approximates the interest method.
SOFTWARE DEVELOPMENT COSTS -- In April 1998, the Accounting Standards
Executive Committee issued Statement of Position 98-1 (SOP), "Accounting for
the Cost of Computer Software Developed or Obtained for Internal Use." The SOP
is effective for financial statements for fiscal years beginning after December
15, 1998. As permitted by the SOP, Bridge adopted the provisions of the SOP
effective January 1, 1997.
F-67
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
All costs, primarily employee compensation and benefits related to
conceptual formulation, design and testing of possible software projects
(preliminary project stage), are expensed as incurred. Upon completion of
preliminary project stage, costs incurred in the development of software are
capitalized until the software is released to production. Software development
costs of $26,017 (net of accumulated amortization of $19,182) are included in
other assets at September 30, 1999. Unamortized capitalized costs determined to
be in excess of the net realizable value of the products are expensed to
depreciation and amortization expense at the date of such determination. As of
September 30, 1999, no impairment had been identified.
Amortization is provided over an estimated economic life of the software
(generally 1 to 3 years) using the straight-line method and commences when the
software is released into production. Amortization expense totaled $5,294 and
$8,820 for the nine-month periods ended September 30, 1998 and 1999,
respectively. The accumulated amortization and related software development
costs are removed from their respective accounts effective in the year
following full amortization.
PREPAID COMMISSION EXPENSE -- Commissions paid at the beginning of the
subscription to sales representatives and managers for successful customer
referrals and renewals are deferred and expensed over the length of the
subscription. This policy is consistent with others in the financial
information business and matches commissions more closely with the revenue
earned from the related subscriptions.
INCOME TAXES -- Bridge files consolidated federal and state income tax
returns and its foreign subsidiaries file various income tax returns in the
respective foreign jurisdictions. Deferred tax assets and liabilities are
determined based on the differences between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to be reversed. In addition, the amount
of any future tax benefits is reduced by a valuation allowance to the extent
such benefits are not expected to be realized.
Except for selective dividends, Bridge intends to reinvest the unremitted
earnings of its non-U.S. subsidiaries and postpone their remittance
indefinitely. Accordingly, no provision for U.S. income taxes was required on
such earnings during the nine-month periods ended September 30, 1998 and 1999.
FOREIGN CURRENCY TRANSLATION -- The financial position and results of
operations of Bridge's foreign subsidiaries are measured using local currency
as the functional currency. Revenues and expenses of such subsidiaries have
been translated into U.S. dollars at average exchange rates prevailing during
the period. Assets and liabilities have been translated at the rates of
exchange at the balance sheet date. Translation adjustments are recorded as a
component of other comprehensive income.
STOCK-BASED COMPENSATION ARRANGEMENTS -- Bridge 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 cost based on the intrinsic value of the equity
instrument awarded as determined at grant date.
The Company is also subject to disclosure requirements under Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 prescribes the recognition of compensation expense
based on the fair value of options as determined on the grant date. However,
SFAS No. 123 allows companies to continue applying APB No. 25 if certain pro
forma disclosures are made assuming hypothetical fair value method application.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -- The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-68
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
4. BUSINESS COMBINATIONS:
On April 7, 1999, Bridge acquired SAVVIS Holdings Corporation ("SAVVIS")
in an all stock transaction that was accounted for as a "purchase transaction"
under Accounting Principles Board No. 16. Pursuant to the terms of the
transaction, Bridge issued 3,011,000 shares of common stock, together with
239,000 options and warrants to purchase common stock in exchange for all of
the outstanding equity interest of SAVVIS. The purchase price has been
allocated to the underlying assets purchased and liabilities assumed based on
their estimated fair market values at the acquisition date. The total cost of
the acquisition exceeded the fair value of SAVVIS' net assets by $23,767, which
is being amortized over three years. In addition, $20,300 of the purchase price
was allocated to property and equipment, trademarks, noncompete agreements and
other intangibles, which are being amortized over one to five years. Also, in
connection with the acquisition, Bridge assumed net liabilities of SAVVIS in
the amount of $12,321. Subsequent to the acquisition, on September 10, 1999,
Bridge sold in a private placement (Note 5) approximately 25% of its ownership
to Bridge shareholders for $9,000.
The following summarized pro forma (unaudited) information assumes the
SAVVIS acquisition had occurred at the beginning of each period:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Net revenues ......... $ 586,805 $ 963,875
========== ==========
Net loss ............. $ (103,246) $ (142,428)
========== ==========
</TABLE>
In Bridge management's opinion, the pro forma combined results of
operations may not be indicative of the actual results that would have occurred
had the acquisitions been consummated as of that time or of future operations
of the combined companies under the ownership and operation of Bridge.
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following at
September 30:
<TABLE>
<CAPTION>
1999
------------
<S> <C>
12% subordinated debt ................................................... $ 61,977
11% subordinated debt ................................................... 2,975
Secured credit agreement with bank ...................................... 934,624
Junior subordinated variable rate notes ................................. 26,970
7.75% note payable ...................................................... 15,954
Mortgage notes .......................................................... 4,492
Capitalized equipment lease obligations, payments extend through 2003, at
various rates of interest averaging 9.4% ............................... 44,137
----------
Total long-term debt and capital lease obligations ...................... 1,091,129
Less: current maturities ................................................ 60,999
----------
$1,030,130
==========
</TABLE>
At September 30, 1999, the 12% subordinated debt consisted of the original
issue of senior subordinated notes payable to Welsh, Carson, Anderson & Stowe.
This issue, as amended, ($65,500 less unamortized discount of $3,523 at
September 30, 1999 -- effective rate of 16%) is due on August 15, 2002, and
bears interest at 12% per annum, payable quarterly in arrears.
F-69
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS - (CONTINUED)
As part of the Telesphere acquisition in 1997, Bridge issued $2,975 of
subordinated notes payable to the former owners. The notes bear interest of 11%
payable monthly in arrears. The principal is due on August 15, 2002.
Bridge has a Secured Credit Agreement (the "Agreement") originally dated
May 29, 1998 and amended and restated on July 7, 1998 with a bank syndicate
from which the proceeds were used to finance the Dow Jones Markets, Inc.
("DJM") acquisition and to repay the amounts outstanding from the existing
Credit Agreement dated November 17, 1997. The Agreement contains four tranches
with a total credit facility of $944,625 as of September 30, 1999. The first
tranche consists of a $125,000 revolving credit line of which $115,000 was
outstanding at September 30, 1999. The second tranche consists of a multi-draw
term loan of $75,000 all of which is outstanding at September 30, 1999. The
revolving credit line and the multi-draw term loan mature May 29, 2003. Bridge
pays letter of credit fees and a commitment fee on the unused portion of the
revolving credit line and multi-draw term loan which are both tied to Bridge's
Leverage Ratio. The third tranche consists of a $96,250 term loan payable in
quarterly installments of $3,750 through June 30, 2001 and $8,750 through the
maturity date of May 29, 2003. The fourth tranche consists of a $648,375 term
loan payable in quarterly installments of $1,625 through June 30, 2004,
quarterly installments of $154,375 through March 31, 2005 with a final payment
of $154,375 due at maturity on May 29, 2005. Interest accrues on all borrowings
at the Eurodollar rate (5.4375% at September 30, 1999) plus a defined margin
tied to Bridge's Leverage Ratio. The Agreement is collateralized by a pledge of
capital stock of the company's U.S. entities, excluding Trading. The Agreement
contains various restrictive covenants including the maintenance of a minimum
rolling four-quarter earnings before interest, taxes, depreciation and
amortization (EBITDA), a minimum interest coverage ratio, a maximum leverage
ratio, a maximum amount of capital leases incurred and a maximum amount of
total capital expenditures. Bridge incurred transaction costs of $19,952 which
were capitalized to deferred financing costs related to obtaining the credit
facility. (See Note 8 regarding subsequent amendment to the Agreement)
In connection with the Agreement, Bridge has also entered into three swap
transactions pursuant to which it has exchanged its floating rate interest
obligations for a fixed rate payment obligation. These swap agreements hedge
the third and fourth tranches of the credit agreement. The first swap has a
notional principal amount of $136,625 at September 30, 1999 and a fixed rate of
6.035% per annum for the period ending December 31, 2002. The second swap has a
notional principal amount of $100,000 at September 30, 1999 and a fixed rate of
5.8125% per annum ending June 29, 2001. The third swap has a notional principal
amount of $100,000 at September 30, 1999 and a fixed rate of 5.94% per annum
ending June 29, 2002. The fixing of the interest rates for this period
minimizes in part Bridge's exposure to the uncertainty of floating interest
rates during this period.
In connection with the private placement of SAVVIS' stock (Note 4), Bridge
received proceeds and issued junior subordinated variable rate notes. The notes
bear interest of 2% plus the otherwise applicable variable rate on any overdue
principal amount. The principal is due December 31, 2005.
6. STOCK OPTIONS
BRIDGE INFORMATION SYSTEMS -- Bridge has a Stock Option and Restricted
Stock Purchase Plan, which provides for stock option and other awards to
selected employees and officers of Bridge. The Board of Directors determines
the option price (not to be less than 100% of fair market value for incentive
stock options) at the date of grant. During the nine-month period ended
September 30, 1999, 2,236,500 options to purchase common stock were granted
with ratable vesting over five years and expiring ten years from the date of
grant.
F-70
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. STOCK OPTIONS - (CONTINUED)
Bridge applies APB Opinion No. 25, Accounting for Stock Issue to Employees
("APB 25") and related interpretations in accounting for its plan. Accordingly,
compensation cost has been recognized for its stock option plan only to the
extent the fair market value of Bridge's common stock exceeded the exercise
price of nonqualified stock option grants at the grant date. Had compensation
cost for Bridge's stock option plan been determined based on the fair value at
the grant dates for awards under the plan consistent with the method of SFAS
No. 123, Bridge's net loss would not have been significantly different than the
net loss reported.
SAVVIS COMMUNICATION CORPORATION -- Upon Bridge's acquisition of SAVVIS on
April 7, 1999, all outstanding SAVVIS stock options were exchanged for Bridge's
stock options and included as part of the purchase consideration based upon the
fair value of Bridge's options issued. Subsequently, on July 22, 1999, SAVVIS'
Board of Directors adopted a new stock option plan and authorized 8 million
stock options to be granted under the plan. Between July and September 1999,
SAVVIS granted options to purchase 3,639,000 shares of its common stock to
certain employees of Bridge. In that same period, SAVVIS granted options to
purchase up to 2,300,008 shares of its common stock to certain of its
employees.
SAVVIS has elected to follow APB 25, and related interpretations in
accounting for its employee stock option plan. Had compensation cost for
SAVVIS' stock option plan been determined consistent with the provisions of
SFAS No. 123 based on the fair value at the grant date, SAVVIS' pro forma net
loss would not have been significantly different than the net loss reported.
7. OTHER COMMITMENTS AND CONTINGENCIES
At the time of the DJM acquisition in 1998, DJM was party to certain
agreements between DJM and Cantor Fitzgerald Securities Corp. ("Cantor"), a
primary supplier of market data to DJM, and Market Data Corporation ("MDC"). As
of the date of the acquisition, certain provisions of these agreements were in
dispute between DJM and Cantor. In addition, Cantor has taken the position that
as a result of the acquisition, by virtue of certain provisions in the
agreements with Cantor and MDC, Bridge has incurred certain obligations
separate from DJM's obligations under those agreements to make payments to MDC
and Cantor with respect to terminals other than those to which DJM was
providing information prior to the acquisition.
Bridge has been in discussions with Cantor regarding settlement of this
dispute. Any such settlement would also require approval of Dow Jones. It is
uncertain at this time whether the Company will be able to settle this matter.
If settlement is not feasible, and litigation were to ensue, Bridge believes
that it has meritorious defense to Cantor claims.
Bridge also enters into agreements for the licensing of software and
information data bases to be used in connection with the Bridge's products.
Certain of these agreements provide for royalty payments based on the Company's
revenues or the number of workstations installed, as defined. Bridge has no
material commitments with respect to these licenses.
Bridge is subject to various other legal proceedings and claims which
arise in the ordinary course of its business.
Loss accruals for matters that have not been indemnified by the sellers
and relate directly to acquisitions have been established as part of the
purchase price (goodwill). When and if it is determined that such accruals are
unnecessary, they will be reversed and credited back to the purchase price
(goodwill). The ultimate resolution of these matters cannot be predicted with
certainty. However, based on the information currently available, management
does not believe they will have a material adverse effect on Bridge's financial
condition.
F-71
<PAGE>
BRIDGE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
8. SUBSEQUENT EVENTS:
PUBLIC OFFERING: The Board of Directors of the Company has authorized
management of SAVVIS to file a registration statement with the Securities and
Exchange Commission for the initial public offering of SAVVIS' common stock.
SAVVIS intends to use a portion of the proceeds to finance a portion of its
purchase of the Company's Internet protocol network assets and to pay a
preferential dividend to the Company.
STOCK OPTIONS: During the period from October through December 1999,
SAVVIS granted 2,543,258 stock options to employees of SAVVIS and the Company
with an exercise price of $.50 per share. Noncash compensation cost based upon
the difference between the exercise price and the imputed fair value of SAVVIS'
stock as if the respective option grant dates totaling approximately $53
million will be recorded over the vesting periods of such options, which
periods range from immediate up to four years. Approximately $2,000 of noncash
compensation expense will be recorded in the fourth quarter of 1999.
DEBT RESTRUCTURING: At December 31, 1999, Bridge did not comply with
certain of the restrictive covenants contained in its Secured Credit Agreement
(the "Agreement"). The Agreement was amended on January 7, 2000 (the
"Amendment") to 1) permit the sale of Bridge's network assets to SAVVIS, 2)
allow for the subsequent public offering of SAVVIS shares, and 3) waive and
modify certain covenants in the Agreement related to EBITDA, interest coverage
ratio, leverage ratio and capital expenditure limitations. The Amendment was
also modified to require Bridge to repay approximately $250,000 of its
indebtedness under the Agreement on or before June 30, 2000. However, Bridge
must repay a separate loan in the amount of $100,000 before it can repay the
full amounts required under the amended Agreement. In addition, the Amendment
requires the public offering of SAVVIS shares to be completed by February 29,
2000. Failure to comply with this provision could result in acceleration of the
maturity of the outstanding balance due under the Agreement. The Amendment also
requires that all of the proceeds from the sale of assets to SAVVIS and the
preferential dividend, be applied to the indebtedness under the Agreement.
* * * * * *
F-72
<PAGE>
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Through and including March 10, 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
17,000,000 SHARES
[GRAPHIC OMITTED]
SAVVIS COMMUNICATIONS CORPORATION
COMMON STOCK
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P R O S P E C T U S
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MERRILL LYNCH & CO. MORGAN STANLEY DEAN WITTER
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BEAR, STEARNS & CO. INC.
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BANC OF AMERICA SECURITIES LLC
CIBC WORLD MARKETS
FEBRUARY 14, 2000
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