UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 0-29375
SAVVIS COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1809960
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
12851 WORLDGATE DRIVE
HERNDON, VA 20170
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(703) 234-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements
for the past 90 days. Yes /X/ No /_/
COMMON STOCK, $.01 PAR VALUE - 93,742,687 SHARES
OUTSTANDING AS OF NOVEMBER 6, 2000
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE)
The Index of Exhibits appears on page 19.
<PAGE>
SAVVIS Communications Corporation
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and September 30, 2000... 3
Consolidated Statements of Operations for the three and nine months
ended September 30, 2000, the period January 1, 1999 to April 6,
1999 and the period April 7 1999 to September 30, 1999.................... 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000, the period January 1, 1999 to April 6, 1999 and
the period April 7, 1999 to September 30, 1999............................ 5
Consolidated Statement of Changes in Stockholders Equity
for the nine months ended September 30, 2000 ............................. 6
Notes to Consolidated Financial Statements.................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................. 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 20
Item 2. Changes in Securities and Use of Proceeds................................... 20
Item 6. Exhibits and Reports on Form 8-K............................................ 21
Signatures.............................................................................. 22
Exhibits
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SAVVIS Communications Corporation
CONSOLIDATED BALANCE SHEETS
(U.S. Dollars in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ ----------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ............................................................... $ 2,867 $ 73,003
Restricted cash ......................................................................... -- 5,137
Accounts receivable from an affiliate ................................................... -- 32,064
Trade accounts receivable, less allowance for doubtful accounts
of $375 in 1999 and $500 in 2000 ...................................................... 2,271 6,423
Prepaid expenses ........................................................................ 503 1,136
Other current assets .................................................................... 88 1,031
--------- ---------
Total current assets .................................................................. 5,729 118,794
PROPERTY PLANT AND EQUIPMENT -- Net ...................................................... 5,560 281,586
GOODWILL AND INTANGIBLE ASSETS -- Net of accumulated amortization
of $12,217 in 1999 and $21,833 in 2000 .................................................. 26,250 16,754
OTHER NON-CURRENT ASSETS ................................................................. 1,757 25,556
--------- ---------
TOTAL .................................................................................... $ 39,296 $ 442,690
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................................................ $ 5,093 $ 86,170
Accrued compensation payable ............................................................ 1,928 4,008
Due to an affiliate...................................................................... 24,065 22,492
Current portion of capital lease obligations ............................................ 2,462 24,355
Other accrued liabilities ............................................................... 5,083 22,057
--------- ---------
Total current liabilities ............................................................. 38,631 159,082
--------- ---------
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION .......................................... 3,431 45,254
NOTES PAYABLE, LESS CURRENT PORTION ...................................................... -- 71,129
OTHER ACCRUED LIABILITIES ............................................................... -- 128
--------- ---------
Total Liabilities ........................................................................ 42,062 275,593
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' (DEFICIT) EQUITY:
Preferred stock; 50,000,000 authorized, none issued and outstanding..................... -- --
Common stock; $.01 par value, 250,000,000 authorized,
77,210,286 issued and outstanding in 1999 and
93,770,367 issued and 93,738,429 outstanding in 2000 .................................. 772 938
Additional paid-in capital .............................................................. 84,973 373,537
Accumulated deficit ..................................................................... (38,617) (151,736)
Deferred compensation ................................................................... (49,894) (55,569)
Accumulated other comprehensive income:
Cumulative foreign currency translation adjustment .................................... -- (57)
Treasury stock at cost; 0 shares in 1999 and 31,938 shares in 2000 ..................... -- (16)
--------- ---------
Total stockholders' (deficit) equity ..................................................... (2,766) 167,097
--------- ---------
TOTAL .................................................................................... $ 39,296 $ 442,690
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
SAVVIS Communications Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Period from Period from Nine Months
Three Months Ended January 1 to April 7 to Ended
September 30, April 6, September 30 September 30,
--------------------------- -------------- ------------- ------------
1999 2000 1999 1999 2000
------------- ------------- -------------- ------------- ------------
(Successor) (Successor) (Predecessor) (Successor) (Successor)
<S> <C> <C> <C> <C> <C>
REVENUES:
Managed data networks (including $43,649
for the three months ended September 30, 2000
and $103,439 for the nine months ended September
30, 2000 from an affiliate) .................. $ -- $ 44,151 $ -- $ -- $ 104,096
Internet access (including $501 for the three
months ended September 30, 2000 and $758 for
the nine months ended September 30, 2000,
respectively, from an affiliate).............. 5,993 8,794 5,303 11,492 23,456
Installation & other ........................... 286 699 137 700 1,894
------------- ------------- -------------- ------------- ------------
Total revenue ............................. 6,279 53,644 5,440 12,192 129,446
------------- ------------- -------------- ------------- ------------
DIRECT COSTS AND OPERATING EXPENSES:
Data communications and operations
(excluding $.5 million and $1.4 million
of equity-based compensation for the
three and nine month periods in
2000, respectively) .......................... 6,739 62,723 6,371 12,979 147,459
Sales and marketing (excluding $1.6
million and $4.5 million of equity-based
compensation for the three and nine month
periods in 2000, respectively) ............... 3,250 8,610 2,618 6,267 23,749
General and administrative (excluding
$2.2 million and $6.6 million in
equity-based compensation for the
three and nine month periods in 2000,
respectively) ................................ 2,440 7,047 2,191 4,991 17,054
Depreciation and amortization ................... 5,007 17,341 817 9,747 41,767
Impairment of assets ............................ -- -- 1,383 -- --
Non-cash compensation ........................... -- 4,275 -- -- 12,450
------------- ------------- -------------- ------------- ------------
Total direct costs and operating expenses.. 17,436 99,996 13,380 33,984 242,479
------------- ------------- -------------- ------------- ------------
LOSS FROM OPERATIONS .............................. (11,157) (46,352) (7,940) (21,792) (113,033)
NONOPERATING INCOME (EXPENSE):
Interest income .............................. 12 1,730 23 27 5,449
Interest expense ............................. (491) (2,825) (158) (809) (5,535)
------------- ------------- -------------- ------------- ------------
Total nonoperating income (expense) ....... (479) (1,095) (135) (782) (86)
LOSS BEFORE INCOME TAXES .......................... (11,636) (47,447) (8,075) (22,574) (113,119)
INCOME TAXES ...................................... -- -- -- -- --
------------ ----------- ------------- ------------- -----------
NET LOSS .......................................... $ (11,636) $ (47,447) $ (8,075) $ (22,574) $ (113,119)
============ ============ ============= ============= ============
PREFERRED STOCK DIVIDENDS ......................... -- -- (706) -- --
AMORTIZATION OF DEFERRED FINANCING COSTS
AND DISCOUNT ON PREFERRED STOCK .............. -- -- (244) -- --
------------- ------------- -------------- ------------- ------------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS ................................. $ (11,636) $ (47,447) $ (9,025) $ (22,574) $ (113,119)
============= ============= ============== ============= ============
BASIC AND DILUTED LOSS PER COMMON SHARE ........... $ (0.16) $ (0.53) $ (0.14) $ (0.31) $ (1.31)
============= ============= ============== ============= ============
WEIGHTED AVERAGE SHARES OUTSTANDING ............... 72,000,000 89,301,053 66,018,388 72,000,000 86,316,703
============= ============= ============== ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
SAVVIS Communications Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Period from Period from Nine Months
January 1 to April 7 to Ended
April 6, September 30, September 30,
1999 1999 2000
---------------- --------------- -------------
(Predecessor) (Successor) (Successor)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss .................................................. $ (8,075) $ (22,574) $(113,119)
Reconciliation of net loss to net cash used in operating
activities:
Depreciation and amortization ..................... 817 9,747 41,767
Impairment of fixed assets ........................ 1,383 -- --
Compensation expense relating to the
issuance of options and restricted stock ........ 78 -- 12,450
Net changes in operating assets and liabilities:
Accounts receivable (including from an affiliate).. (17) 560 (55,656)
Other current assets .............................. (18) 4 (943)
Other assets ...................................... (156) (152) (18,153)
Prepaid expenses .................................. (51) (307) (634)
Accounts payable .................................. (127) 718 21,972
Deferred revenue .................................. 52 (119) --
Other accrued liabilities (including amounts
due to an affiliate)............................. (71) 2,898 41,333
---------------- --------------- ------------
Net cash used in operating activities ..................... (6,185) (9,225) (70,983)
---------------- --------------- ------------
INVESTING ACTIVITIES:
Capital expenditures ...................................... (275) (855) (131,304)
---------------- --------------- ------------
Net cash used in investing activities ..................... (275) (855) (131,304)
---------------- --------------- ------------
FINANCING ACTIVITIES:
Purchase of treasury stock ................................ -- -- (16)
Exercise of stock options ................................. 28 -- 466
Issuance of common stock .................................. -- -- 333,364
Principal payments under capital lease obligations ........ (182) (381) (11,766)
Proceeds from borrowings from an affiliate ................ 4,700 11,850 1,300
Proceeds from vendor financing ............................ -- -- 28,924
Repayment of borrowings from an affiliate ................. -- -- (5,585)
Preferential distribution to an affiliate ................. -- -- (68,991)
Funding of letter of credit facilities (restricted) ....... -- -- (5,137)
Principal payments on borrowings from bank ................ (13) -- --
---------------- --------------- ------------
Net cash provided by financing activities ............... 4,533 11,469 272,559
---------------- --------------- ------------
Net effect of changes in exchange rates on cash and equivalents -- -- (136)
---------------- --------------- ------------
NET INCREASE(DECREASE)IN CASH
AND CASH EQUIVALENTS ...................................... (1,927) 1,389 70,136
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................ 2,521 594 2,867
---------------- --------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................... $ 594 $ 1,983 $ 73,003
================ =============== =============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Debt incurred under capital lease obligations ............. $ 2,634 $ 1,153 $ 76,501
Debt incurred in equipment acquisition .................... -- -- 71,129
Capital expenditures accrued and unpaid ................... -- -- 59,106
Netting of amounts due to/from an affiliate ............... -- -- 19,439
Stock issued in payment of obligations .................... -- -- 5,766
Preferred stock dividends ................................. 706 -- --
Amortization of deferred financing costs................... 76 -- --
Accretion of preferred stock discount ..................... 168 -- --
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest .................................... $ 99 $ 267 $ 3,942
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
SAVVIS Communications Corporation
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
(U.S. Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Number of Shares
----------------------
Common Treasury
Stock Stock
----------- ---------
<S> <C> <C>
BALANCE, JANUARY 1, 2000 77,210,286 --
Issuance of common stock in
initial public offering 14,875,000 --
Issuance of common stock upon
exercise of stock options 935,081 --
Issuance of common stock in
payment of obligations 750,000 --
Issuance of stock options and
restricted stock -- --
Recognition of deferred
compensation cost -- --
Purchase of shares for treasury -- (31,938)
Foreign currency translation
adjustment -- --
Preferential distribution to
an affiliate -- --
Net loss -- --
---------- --------
BALANCE, SEPTEMBER 30, 2000 93,770,367 (31,938)
---------- --------
</TABLE>
<TABLE>
<CAPTION>
Amounts
----------------------------------------------------------------------------------------
Additional
Common Paid-In Foreign Deferred Accumulated Treasury
Stock Capital Currency Compensation Deficit Stock Total
------ ----------- --------- ------------ ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 2000 $772 $ 84,973 -- $(49,894) $(38,617) $ -- $ (2,766)
Issuance of common stock in
initial public offering 149 333,216 -- -- -- -- 333,365
Issuance of common stock upon
exercise of stock options 9 457 -- -- -- -- 466
Issuance of common stock in
payment of obligations 8 5,758 -- -- -- -- 5,766
Issuance of stock options
and restricted stock -- 18,125 -- (18,125) -- -- --
Recognition of deferred
compensation cost -- -- -- 12,450 -- -- 12,450
Purchase of shares for treasury -- -- -- -- -- (16) (16)
Foreign currency translation
adjustment -- -- (57) -- -- -- (57)
Preferential distribution to
affiliate -- (68,992) -- -- -- -- (68,992)
Net loss -- -- -- -- (113,119) -- (113,119)
---- -------- ------- -------- -------- ---- -------
BALANCE, SEPTEMBER 30, 2000 $938 $373,537 $ (57) $(55,569) $(151,736) $(16) $167,097
---- -------- ------- -------- -------- ---- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
SAVVIS Communications Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. Dollars in thousands)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The acquisition by Bridge Information Systems, Inc. ("Bridge") of SAVVIS
Communications Corporation on April 7, 1999 resulted in the Company reporting in
its 1999 Annual Report on Form 10-K (the "Annual Report") and in its
Registration Statement on Form S-1 (File No. 333-90881), as amended (the "Form
S-1"), results of operations for the period January 1, 1999 through April 6,
1999 as the "Predecessor" period, due to a change in the basis of accounting
upon the acquisition by Bridge. The Statements of Operations for this period
included in the nine-month reporting period in 1999 were identical to the
results of operations for the period January 1, 1999 through March 31, 1999 and
April 1, 1999 to September 30, 1999.
These consolidated financial statements for the three- and nine-month periods
ended September 30, 2000 and 1999 and the related footnote information are
unaudited and have been prepared under the rules and regulations of the
Securities and Exchange Commission and on a basis substantially consistent with
the audited consolidated financial statements of SAVVIS Communications
Corporation and its subsidiaries (collectively, "SAVVIS" or the "Company") as of
and for the period ended December 31, 1999 included in the Company's Annual
Report as filed with the Securities and Exchange Commission. These financial
statements should be read in conjunction with the audited consolidated financial
statements and the related notes to the consolidated financial statements of the
Company included in the Annual Report. In the opinion of management, the
accompanying consolidated financial statements contain all adjustments
(consisting of normal recurring adjustments) which management considers
necessary to present fairly the consolidated financial position of the Company
at September 30, 2000 and the results of its operations for the three- and
nine-month periods ended September 30, 2000 and 1999 and cash flows for the
nine-month periods ended September 30, 2000 and 1999. The results of operations
for the three-month period ended September 30, 2000 may not be indicative of the
results expected for any succeeding quarter or for the entire year ending
December 31, 2000.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results may differ from those estimates.
RESTRICTED CASH - Restricted cash consists of amounts supporting outstanding
letters of credit, principally related to office space and data center
construction.
RECLASSIFICATIONS - Certain amounts from prior periods have been reclassified to
conform to current period presentation.
OFFSETTING - From time to time, the Company, as a result of the application of
rights of offset, will net certain trade liabilities to Bridge with the Accounts
Receivable for network services from Bridge.
NEW 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, as amended by SFAS
No. 138 in June 2000, establishes accounting and reporting standards for
derivative instruments, including some derivatives embedded in other contracts,
and for hedging activities by requiring that all derivatives be recognized on
the balance sheet and measured at fair value. In June 1999, the FASB issued SFAS
No. 137, "Deferral of the Effective Date of FASB Statement No. 133 - an
Amendment of FASB Statement No. 133," which deferred the effective date for us
until January 1, 2001. We do not expect that the adoption of this interpretation
will have a material impact on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. The guidelines in SAB No. 101 must be adopted
by the fourth quarter of 2000. We are in the process of evaluating the potential
impact of this statement on our financial position and results of operations.
7
<PAGE>
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation, an Interpretation of APB
Opinion No. 25," which clarifies the application of APB Opinion No. 25 for
certain issues including: (1) the defining of an employee for purposes of
applying APB Opinion No. 25, (2) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (3) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award and (4)
the accounting for an exchange of stock compensation awards in a business
combination. Interpretation No. 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur either after December 15, 1998 or
January 12, 2000. The adoption of this interpretation has not had a material
impact on our financial position or results of operations.
NOTE 2 - ORGANIZATION
On April 7, 1999 (the "acquisition date"), the Company was acquired by a
wholly-owned subsidiary of Bridge in an all stock transaction that was accounted
for as a "purchase transaction" under Accounting Principles Board Opinion No.
16.
The value of the Bridge shares and options issued and the costs incurred by
Bridge in connection with the acquisition aggregated $32 million. In accordance
with the accounting requirements of the Securities and Exchange Commission,
purchase transactions that result in one entity becoming substantially
wholly-owned by the acquirer establish a new basis of accounting in the acquired
entity's records for the purchased assets and liabilities. Thus, the purchase
price has been allocated to the underlying assets purchased and liabilities
assumed based on their estimated fair values at the acquisition date.
NOTE 3 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), defined as net income (loss) plus all other changes
(cumulative foreign currency translation adjustment) in equity from nonowner
sources, was $(47.4) million and $(113.1) million for the three- and nine-months
months ended September 30, 2000. During 1999 there were no items of other
comprehensive income (loss).
NOTE 4 - CASH AND CASH EQUIVALANTS
Cash and cash equivalents include cash on hand and money market investments.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
---- ----
<S> <C> <C>
Computer equipment ............................. $ 801 $ 1,931
Communications equipment ....................... 1,057 207,244
Purchased software ............................. 107 338
Furniture and fixtures ......................... 322 2,485
Leasehold improvements ......................... 382 1,655
Construction in progress ....................... -- 45,261
Equipment under capital lease
obligations .................................. 5,089 56,940
----- ------
7,758 315,854
Less accumulated depreciation and
amortization ............................. (2,198) (34,268)
------- --------
$ 5,560 $ 281,586
========= =========
</TABLE>
8
<PAGE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company is subject to various legal proceedings and other actions arising in
the normal course of its business. While the results of such proceedings and
actions cannot be predicted, management believes, based on the advice of legal
counsel, that the ultimate outcome of such proceedings and actions will not have
a material adverse effect on the Company's financial position, results of
operations or cash flows.
On September 26, 2000, SAVVIS entered into two thirty-nine month lease
agreements to finance a total of approximately $14 million in equipment
necessary for the network expansion. Payments under the leases are zero for
months one to three, and will be approximately $.1 million in months three to
six, and $.5 million in months seven to thirty-nine.
In August 2000, the Company entered into a 20-year agreement with Kiel Center
Partners, L.P. ("KCP") pursuant to which it acquired the naming rights to an
arena in St. Louis, Missouri. Total consideration for these rights amounts to
$72 million, including 750,000 shares of its common stock issued by the Company
to KCP. A charge to earnings will be taken quarterly over the term of the
agreement.
On June 30, 2000, the Company entered into a Global Purchase Agreement (the
"Global Purchase Agreement") with Nortel Networks, Inc. ("Nortel"). This
agreement calls for the Company to purchase and take delivery of products and
services from Nortel in the amount of $155 million from the date of the
agreement through December 31, 2003. These products and services are to be
financed by Nortel pursuant to a credit agreement.
Concurrent with the execution of the Global Purchase Agreement, on June 30,
2000, the Company entered into a credit agreement with Nortel Networks Inc.
("Nortel") for the financing of approximately $38 million of network equipment
and services. On September 5, 2000, this credit agreement was amended and
restated, resulting in an increase to a $235 million advancing term loan
facility (the "Term Loan") for the purpose of financing a portion of the
Company's costs to purchase network equipment and installation services from
Nortel and to pay certain third-party expenses. As of September 30, 2000, the
Company has drawn approximately $45 million under this financing arrangement for
the purchase of equipment and services and other third-party costs. Amounts
drawn under this term loan facility have been recorded in notes payable, due in
twenty equal quarterly installments commencing on September 30, 2003, bearing
interest at a variable market-based rate.
On August 2, 2000, the Company entered into two agreements with Level 3
Communications, LLC ("Level 3"). These agreements grant to SAVVIS exclusive
indefeasible rights of use ("IRU") in certain segments of a multi-conduit fiber
optic communications system being constructed by Level 3. The term of each
agreement is for a 20-year period beginning with the acceptance of a segment and
payment by SAVVIS of the segment IRU fee. The agreements stipulate payments to
Level 3 totaling approximately $36.2 million. As of September 30, the Company
has paid to Level 3 approximately $9.7 million pursuant to these agreements,
which amounts were funded by drawings on the Term Loan.
On June 30, 2000, SAVVIS executed an agreement to acquire approximately $30
million of telecommunications equipment and related services with Winstar
Wireless, Inc. ("Winstar"). Upon execution, the Company took delivery of certain
equipment and paid approximately $5 million to Winstar. Of the remaining $25
million, approximately $16.5 million has been financed by Winstar over six years
at 11% interest, with payments commencing in the third quarter of 2000. The
remaining balance of $8.2 million has been recorded in other accrued
liabilities, due over the next twelve months. On September 29, 2000, the Company
executed an additional agreement with Winstar to acquire $10 million in
telecommunications equipment. The agreement calls for a down payment of $1.5
million, which was paid by SAVVIS in early October. The remaining $8.5 million
has also been financed by Winstar over six years at 11% interest, with payments
commencing in the fourth quarter of 2000.
On March 31, 2000, the Company entered into a three-year software licensing
agreement with a vendor for the acquisition of unlimited software licenses for
certain customer applications over the global network. The agreement called for
payments totaling $9 million through September 30, 2000 with the balance of $1.3
million due in December 2000. In addition, the Company will pay $1 million
annually in years two and three of the agreement for a maintenance contract in
support of the software licenses.
On March 23, 2000, SAVVIS entered into a $30 million, thirty-nine month lease
facility relating to equipment necessary for the network expansion. Payments
under the lease were zero for months one to three, and will be $.3 million in
months three to six, and $1.1 million in months seven to thirty-nine.
On January 24, 2000, SAVVIS entered into a 10-year lease for its new, 80,582
square foot, headquarters office building located in Herndon, VA. Monthly lease
payments begin at $.2 million per month and escalate to $.3 million per month by
year ten.
9
<PAGE>
NOTE 7 - CAPITAL STOCK
An initial public offering of the Company's common stock was completed on
February 18, 2000. A total of 14.875 million shares were sold by the Company in
the offering at $24 per share. The Company received net proceeds from this
transaction of approximately $333 million, of which approximately $127 million
was paid to Bridge.
Simultaneous with the completion of the public offering, the Company purchased
or subleased Bridge's global Internet protocol network assets. The final
purchase price of the assets (at Bridge's carrying value), after the
determination for and reconciliations of the specific assets purchased, was
approximately $77 million, of which approximately $52 million was paid from the
offering proceeds. SAVVIS also paid a $69 million preferential distribution, as
adjusted, to Bridge. Additionally, the Company assumed capital lease obligations
of approximately $25 million related to these network assets.
NOTE 8 - RELATED PARTY TRANSACTIONS
In connection with Bridge's acquisition of the Company and through the date of
our initial public offering as discussed in Note 2, Bridge funded the Company's
operations. At December 31, 1999 and September 30, 2000, the Company had amounts
payable to Bridge of $24.1 million and $22.5 million, respectively, including
accrued interest at 8%.
Concurrent with the asset purchase, the Company also entered into a 10-year
network services agreement with Bridge under which the Company will provide
managed data networking services to Bridge. The Company's fees are based upon
the cash cost to Bridge of operating the network as configured on the date the
Company acquired it, and fees for additional services provided following the
closing of the transfer are set for a three-year term based on an agreed pricing
schedule which is revised annually. Bridge has agreed to pay a minimum of
approximately $105 million, $132 million and $145 million for network services
in 2000, 2001 and 2002, respectively.
In connection with the principal agreements entered into effective February 18,
2000, between the Company and Bridge, related to the network acquisition by the
Company, SAVVIS generated revenues for network services rendered to Bridge
amounting to $103.4 million for the period February 18 to September 30, 2000. As
of September 30, 2000, SAVVIS' accounts receivable from Bridge approximated
$32.1 million under the Network Services Agreement. This amount is net of
approximately $19.4 million in liabilities through September 30, 2000 SAVVIS
owed to Bridge under the Technical Services Agreement, Administrative Services
Agreement, for certain employee benefit payments paid by Bridge, and for
telecommunication charges relating to the global IP network that were paid by
Bridge. These amounts due from SAVVIS to Bridge were all subject to the right of
offset against amounts due to Bridge from SAVVIS.
10
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NOTE 9 -INDUSTRY SEGMENT AND GEOGRAPHIC REPORTING
The Company's operations are organized into three geographic operating segments
- Americas, Europe and Asia. The Company evaluates the performance of its
segments and allocates resources to them based on revenue and adjusted EBITDA,
which is defined as the respective consolidated loss before interest, taxes,
depreciation, amortization and non-cash compensation charges. Financial
information for the Company's geographic segments for the three- and nine-month
periods ended September 30, 2000 is presented below. In 1999, the Company had
one operating segment - the Americas.
<TABLE>
<CAPTION>
Americas Europe Asia Eliminations Total
-------- ------ ----- ------------ -----
<S> <C> <C> <C> <C> <C>
Three months ended September 30, 2000:
Revenue ............ $ 42,171 $ 6,947 $ 4,526 $ -- $ 53,644
Adjusted EBITDA .... (23,863) (836) (37) -- (24,736)
Assets ............. 441,018 7,672 1,894 (7,894) 442,690
Capital Expenditures 64,319 -- -- -- 64,319
Americas Europe Asia Eliminations Total
-------- ------ ----- ------------ -----
Nine months ended September 30, 2000:
Revenue ............ $ 102,477 $ 16,447 $ 10,522 $ -- $ 129,446
Adjusted EBITDA .... (57,279) (1,501) (36) -- (58,816)
Assets ............. 441,018 7,672 1,894 (7,894) 442,690
Capital Expenditures 293,695 7,896 6,505 -- 308,096
</TABLE>
Adjusted EBITDA for all reportable segments differs from the consolidated loss
before income taxes reported in the consolidated statement of operations as
follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 2000 September 30, 2000
------------- -------------
<S> <C> <C>
Adjusted EBITDA $ (24,736) $ (58,816)
Plus adjustments as follows:
Depreciation and amortization (17,341) (41,767)
Interest, net (1,095) (86)
Non-cash compensation (4,275) (12,450)
------- -------
Consolidated loss before income taxes $ (47,447) $(113,119)
=========== =========
</TABLE>
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH (1) OUR
ACCOMPANYING UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, AND
(2) OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS, NOTES THERETO AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999 INCLUDED IN OUR ANNUAL
REPORT FOR SUCH PERIOD AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THE
RESULTS SHOWN HEREIN ARE NOT NECESSARILY INDICATIVE OF THE RESULTS TO BE
EXPECTED IN ANY FUTURE PERIODS. THIS DISCUSSION CONTAINS FORWARD-LOOKING
STATEMENTS (AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995) BASED ON CURRENT EXPECTATIONS WHICH INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS AND THE TIMING OF EVENTS COULD DIFFER MATERIALLY
FROM THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS. FOR A
DISCUSSION OF THE MATERIAL FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS, YOU SHOULD READ "RISK FACTORS"
INCLUDED IN PART I, ITEM 1 OF OUR 1999 ANNUAL REPORT ON FORM 10-K.
GENERAL
We are a rapidly growing provider of high quality, high performance global data
networking and Internet-related services to medium and large businesses,
multinational corporations and Internet service providers. To provide our
Internet access services, we use the SAVVIS ProActiveSM Network, a data
communications network that uses our nine PrivateNAPsSM and our proprietary
routing policies to reduce data loss and enhance performance by avoiding the
congested public access points on the Internet.
We began commercial operations in 1996, offering Internet access services to
local and regional Internet service providers. Our customer base has grown from
15 customers at the end of 1996 to 1,896 at September 30, 2000.
On April 7, 1999, we were acquired by Bridge in a stock-for-stock transaction
that was accounted for as a "purchase transaction" under Accounting Principles
Board Opinion No. 16. Since the purchase transaction resulted in our Company
becoming a wholly owned subsidiary of Bridge, SEC rules required us to establish
a new basis of accounting for the assets purchased and liabilities assumed. As a
result, the purchase price has been allocated to the underlying assets purchased
and liabilities assumed based on estimated fair market value of these assets and
liabilities on the acquisition date, and the difference between the purchase
price and the fair market value was recorded as goodwill. The accounting for the
purchase transaction has been "pushed down" to our financial statements. The
impact of the acquisition on our balance sheet, as a result of the application
of fair value accounting, was to increase intangibles, goodwill, other
liabilities and stockholders' equity. As a result of the acquisition and the
"push down" accounting, our results of operations following the acquisition,
particularly our depreciation and amortization, are not comparable to our
results of operations prior to the acquisition.
On September 10, 1999, Bridge sold in a private placement approximately 25% of
its equity ownership in SAVVIS to the existing stockholders of Bridge, at which
time Welsh Carson purchased from Bridge a 12% interest in SAVVIS. On February
28, 2000, Bridge completed the sale of an additional 6,250,000 shares of SAVVIS
common stock to Welsh Carson Anderson & Stowe ("Welsh Carson"). Bridge and Welsh
Carson now own approximately 48% and 16% of SAVVIS' common stock, respectively.
Simultaneously with the completion of the initial public offering of our common
stock in February 2000, we acquired Bridge's global Internet protocol network
for total consideration of approximately $77 million plus a payment representing
a preferential distribution to Bridge of approximately $69 million. See Note 7
to the unaudited consolidated financial statements. The purchase substantially
increased our depreciation and amortization. At that time, we entered into a
10-year network services agreement with Bridge under which we provide managed
data networking services to Bridge. Our initial network service fees are based
upon the cash cost to Bridge of operating the network as configured on October
31, 1999, as adjusted for changes to the network and associated personnel
related to Bridge's network requirements through February 17, 2000. Our fees for
additional services provided following February 17, 2000 were set for a
three-year term based on an agreed price schedule. Bridge has agreed to pay us a
minimum of $105 million, $132 million and $145 million for network services in
2000, 2001 and 2002, respectively.
12
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Because the amounts paid to us under the network services agreement for the
services provided over the original network acquired from Bridge are based upon
the cash cost to operate the original network, the provision of such services
did not and will not have an impact on our cash flows from operations. However,
due to amortization and depreciation relating to the network, the provision of
services under the network services agreement resulted in our incurring losses
from operations, and these losses will continue until we can sell additional
services over the network to Bridge or to other customers. The effects of such
operating losses will include continued increases in our accumulated deficit and
reductions in stockholders' equity.
Bridge has agreed to provide to us various services, including technical
support, customer support and project management in the areas of installation,
provisioning, help desk, and repair and maintenance. In addition, Bridge has
agreed to provide to us additional administrative and operational services, such
as payroll and accounting functions, benefit management and office space, until
we develop the capabilities to perform these services ourselves. We expect to
develop many of these capabilities by the end of 2000 and in the first quarter
of 2001.
Our revenue is derived primarily from the sale of data networking (principally
to Bridge), Internet access and hosting services. Assuming we had received the
minimum revenues under the network services agreement for the first year of the
agreement in 1999, Bridge would have represented approximately 83% of our 1999
revenues. Bridge has informed us that it expects to convert its remaining
customers to the Internet protocol network over the next three years. We expect
that, to the extent these customers are converted, Bridge will order additional
services from us under the network services agreement. We cannot assure you that
any of these customers will be converted or as to when any conversions will be
completed.
RESULTS OF OPERATIONS
The historical financial information included in this Form 10-Q does not reflect
our future results of operations, financial position and cash flows. Our results
of operations, financial position and cash flows subsequent to the purchase of
Bridge's network and the execution of the related agreements is not comparable
to prior periods. The acquisition by Bridge of SAVVIS on April 7, 1999 resulted
in the Company reporting in its 1999 Annual Report and in its Form S-1 results
of operations for the period January 1, 1999 through April 6, 1999 as the
"Predecessor" period, due to a change in the basis of accounting upon the
acquisition by Bridge. The Statements of Operations included in the nine-month
reporting period in 1999 were identical to the reported results of operations
for the period January 1, 1999 through March 31, 1999 and the period April 1,
1999 through September 30 1999.
THREE MONTHS ENDED SEPTEMBER 30, 2000 AS COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue.
Revenue was $53.6 million for the three months ended September 30, 2000, an
increase of $47.4 million or 754%, from $6.3 million for the three months ended
September 30, 1999. The revenue growth resulting from the initiation of managed
data network services, under the Bridge network services agreement entered into
on February 18, 2000, accounted for $43.6 million of the increase. Internet
access revenues increased 47% to $8.8 million in the third quarter of 2000,
compared to $6.0 million for the comparable period in 1999. These increases were
driven by an increase in active customer circuits of 204% to approximately 2,500
as of September 30, 2000 from approximately 800 as of the end of the third
quarter in 1999. Other revenues, consisting of installation and equipment sales,
increased from $.3 million in 1999 to $.7 million for the third quarter of 2000.
Data Communications and Operations.
Data communications and operations expenses consist primarily of leased routers
and switches, leased long distance and local circuit costs, leased colocation
space, installed local access lines at customer sites, as well as related
operating expenses such as repairs and maintenance associated with network
operations, customer support and field service, and engineering personnel costs.
Data communications and operations expenses were $62.7 million for the quarter
ended September 30, 2000; an increase of $56.0 million from $6.7 million for the
three months ended September 30, 1999. The increase in expenses related
principally to the costs incurred by SAVVIS to operate the newly-acquired
Internet protocol network (from Bridge) since February 18, 2000 and other
increases in the number of leased long distance, dedicated customer and dial-up
circuits to support the increased customer circuits in operation.
13
<PAGE>
Sales and Marketing.
Sales and Marketing expenses consist of personnel and related sales commission
costs, advertising and direct marketing, and travel. Sales and marketing
expenses were $8.6 million for the three months ended September 30, 2000, up
165% or $5.4 million as compared to the third quarter of 1999. This increase is
principally attributed to personnel related costs and sales commissions of $3.2
million associated with the growth in sales and marketing staff and a $1.5
million increase in expenditures on advertising and marketing initiatives.
General and Administrative.
General and administrative expenses consist primarily of compensation and
occupancy costs for executive, financial, legal, tax and support personnel,
travel, and bad debt costs. General and administrative expenses amounted to $7.0
million for the three months ended September 30, 2000 and $2.4 million for the
three months ended September 30, 1999, an increase of $4.6 million or 189%. This
increase resulted from increased occupancy costs of $1.0 million related to the
Company's move to its new headquarters during the second quarter of 2000,
increased personnel costs of $1.4 million to support the expansion of the
customer base and the overall growth of the business, an increase of $.4 million
in services provided by Bridge under the Administrative Services agreement, an
increase of $.3 million for professional audit, tax, legal and consulting
services, and an increase of $.3 million in insurance expense. Bad debt expense
amounted to $.5 million in 2000 versus $.2 million for the three months ended
September 30, 1999.
Non-cash Compensation.
Non-cash compensation amounting to $4.3 million represents the amortization
charge to earnings in the quarter ended September 30, 2000 for the difference
between the imputed fair market value of our common stock and the exercise price
for options granted on various dates in early 2000 and late 1999.
Depreciation and Amortization.
Depreciation and amortization expense was $17.3 million for the three months
ended September 30, 2000, an increase of $12.3 million from the three months
ended September 30, 1999. This increase resulted primarily from $13.4 million of
depreciation on the network acquired from Bridge on February 18, 2000 and
subsequent network equipment acquisitions.
Interest.
Interest income from the investment of the initial public offering proceeds
amounted to $1.7 million in the quarter ended September 30, 2000, an increase of
$1.7 million from the three months ended September 30, 1999. Interest expense
for the quarter ended September 30, 2000 amounted to $2.8 million, an increase
of $2.3 million from the comparable period in 1999. This increase is
attributable to interest expense on capital equipment financing incurred since
the acquisition of the Internet protocol network in February 2000.
14
<PAGE>
Net Loss.
The net loss for the three months ended September 30, 2000 was $47.4 million, or
$0.53 basic and diluted loss per share, an increase of $35.8 million from the
net loss for the three months ended September 30, 1999 of $11.6 million, or
$0.16 per share. The primary reasons for the increase in net loss are:
o The $13.4 million increase in depreciation and amortization expense due
primarily to the acquisition of the Internet protocol network from Bridge
and other network equipment.
o A decrease in gross profit (revenues less data communications and
operations expenses) of $8.6 million related to expansion of our Internet
protocol network.
o Increased sales and marketing expenses of $5.4 million related to growth in
staff and advertising and marketing initiatives.
o Increased general and administrative expenses of $4.6 million related to
growth in staff, increased occupancy, and increased professional services.
o An increase in non-cash compensation expense of $4.3 million related to the
imputed fair value of stock option grants.
15
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 AS COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
Revenue.
Revenue was $129.4 million for the nine months ended September 30, 2000, an
increase of $111.8 million or 634%, from $17.6 million for the nine months ended
September 30, 1999. The revenue growth resulting from the initiation of managed
data network services, under the Bridge network services agreement entered into
on February 18, 2000, accounted for $103.4 million of the increase. Internet
access revenues increased 40% to $23.5 million in the first nine months of 2000,
compared to $16.8 million for the comparable period in 1999. These increases
were driven by an increase in active customer circuits of 204% to approximately
2,500 as of September 30, 2000 from 800 as of September 30, 1999. Other
revenues, consisting of installation and equipment sales, increased from $.8
million in 1999 to $1.9 million in 2000.
Data Communications and Operations.
Data communications and operations expenses consist primarily of leased routers
and switches, leased long distance and local circuit costs, leased colocation
space, installed local access lines at customer sites, as well as related
operating expenses such as repairs and maintenance associated with network
operations, customer support and field service, and engineering personnel costs.
Data communications and operations expenses were $147.5 million for the nine
months ended September 30, 2000; an increase of $128.1 million from $19.3
million for the nine months ended September 30, 1999. The increase in expenses
related principally to the costs incurred by SAVVIS to operate the Internet
protocol network acquired from Bridge since February 18, 2000 and other
increases in the number of leased long distance, dedicated customer and dial-up
circuits to support the increased customer circuits in operation.
Sales and Marketing.
Sales and Marketing expenses consist of personnel and related sales commission
costs, advertising and direct marketing, and travel. Sales and marketing
expenses were $23.7 million for the nine months ended September 30, 2000, up
167% or $14.9 million as compared to the first nine months of 1999. This
increase is principally attributed to personnel related costs and sales
commissions of $8.5 million associated with the growth in sales and marketing
staff, and a $4.5 million increase in expenditures on advertising and marketing
initiatives.
General and Administrative.
General and administrative expenses consist primarily of compensation and
occupancy costs for executive, financial, legal, tax and support personnel,
travel, and bad debt costs. General and administrative expenses amounted to
$17.1 million for the nine months ended September 30, 2000 and $7.2 million for
the nine months ended September 30, 1999, an increase of $9.9 million or 137%.
This increase resulted from increased personnel costs of $2.2 million to support
the expansion of the customer base and the overall growth of the business,
increased occupancy costs of $2.2 million related to the move to the Company's
new headquarters during the second quarter, an increase of $1.9 million for
professional audit, tax, legal and consulting services, an increase of $.8
million in insurance expense, an increase of $.8 million in services provided by
Bridge under the Administrative Services agreement, and an increase of $.9
million in travel expense associated with the overall growth of the business.
Bad debt expense amounted to $.7 million in 2000 versus $.6 million for the nine
months ended September 30, 1999.
Non-cash Compensation.
Non-cash compensation amounting to $12.5 million represents the amortization
charge to earnings in the nine months ended September 30, 2000 for the
difference between the imputed fair market value of our common stock and the
exercise price for options granted on various dates in 2000 and late 1999.
16
<PAGE>
BECAUSE THE "PREDECESSOR" STATEMENT OF OPERATIONS IN 1999 IS PRESENTED ON A
DIFFERENT BASIS OF ACCOUNTING, THE FOLLOWING AREAS IN THE STATEMENT OF
OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 ARE NOT COMPARED:
Depreciation and Amortization.
Depreciation and amortization expense was $41.8 million for the nine months
ended September 30, 2000. $32.2 million of this amount is attributed to
depreciation on the network acquired on February 18, 2000 and subsequent network
equipment acquisitions, and $9.6 million relates to the amortization of the
goodwill associated with the mandated "push down accounting" ascribed to the
Bridge acquisition of SAVVIS in April, 1999. Goodwill is being amortized over
three years.
Impairment of Assets.
The asset impairment amount reported in the 1999 nine-month statement of
operations related to an adjustment to the recorded value of fixed assets in the
amount of $1.4 million.
Interest.
Interest income from the investment of the initial public offering proceeds
amounted to $5.4 million in the nine months ended September 30, 2000. Interest
expense during the same period, primarily attributable to interest expense on
capital equipment financing incurred since the acquisition of the Internet
protocol network in February 2000 and amounts payable to affiliates, amounted to
$5.5 million.
Net Loss.
The net loss for the nine months ended September 30, 2000 was $113.1 million, or
$1.31 basic and diluted loss per share.
LIQUIDITY AND CAPITAL RESOURCES
We generated negative cash flows from operations of $71.0 million for the nine
months ended September 30, 2000. For the nine months ended September 30, 1999,
we generated negative operating cash flows of $15.4 million.
Net cash used in investing activities for the nine months ended September 30,
2000 was approximately $131.3 million, which primarily reflects the purchase of
the Bridge Internet protocol network and other property and equipment not
financed. We obtained funds through issuances of equity securities and customer
receipts, including receipts from Bridge. During the nine month period, we
increased our outstanding advances from Bridge by $1.3 million. Additionally,
for the period February 18, 2000 to September 30, 2000, the Company also
incurred obligations to Bridge amounting to approximately $19.4 million, related
to the payment by Bridge of certain network costs and other miscellaneous
expenses on behalf of SAVVIS, as well as the provision of services under the
Technical and Administrative Services agreements. These amounts owed to Bridge
have been applied, pursuant to existing rights of offset, against the
outstanding receivable from Bridge as of September 30, 2000.
Our capital expenditures, including the purchase of the Bridge IP network,
totaled approximately $308 million in the nine month period, including
approximately $206 million that has been financed under existing or pending
financing arrangements. We expect to incur capital expenditures of approximately
$25 million for the remainder of 2000 as we build out colocation facilities,
deploy ATM devices and expand our network to new cities. On February 18, 2000,
we acquired Bridge's Internet protocol network assets for total consideration of
approximately $77 million. Of this amount, $25 million was paid by entering into
a capital lease obligation with Bridge. At the request of a lender,
approximately $2.5 million of the capitalized principal obligation was paid in
March 2000. The remaining purchase price of $52 million was paid with a portion
of the net proceeds from the initial public offering of our common stock. We
also paid to Bridge, out of the offering proceeds, approximately $69 million as
a preferential distribution.
17
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In connection with our purchase of the network assets, we also entered into a
network services agreement with Bridge under which we provide Bridge with
managed data networking services. Because the amounts paid to us under the
network services agreement for the services provided over the original network
acquired from Bridge are based upon the cash cost to operate the original
network, the provision of such services did not and will not have an impact on
our cash flows from operations. However, due to amortization and depreciation
relating to the network, the provision of services under the network services
agreement resulted in our incurring losses from operations, and these losses
will continue until we can sell additional services over the network to Bridge
or to other customers. The effects of such operating losses will include
continued increases in our accumulated deficit and reductions in stockholders'
equity.
In addition to acquiring the Internet protocol Network, we have acquired
approximately $176 million in network equipment through a combination of
financing and cash purchases during the first nine months of 2000. We have also
incurred approximately $51 million in costs in 2000 related to the construction
of data centers.
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 minimum spending requirements 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.
On September 26, 2000, SAVVIS entered into two thirty-nine month lease
agreements to finance a total of approximately $14 million in equipment
necessary for the network expansion. Payments under the leases are zero for
months one to three, and will be approximately $.1 million in months three to
six, and $.5 million in months seven to thirty-nine.
In August 2000, the Company entered into a 20-year agreement with Kiel Center
Partners, L.P. ("KCP") pursuant to which it acquired the naming rights to an
arena in St. Louis, Missouri. Total consideration for these rights amounts to
$72 million, including 750,000 shares of its common stock issued by the Company
to KCP. A charge to earnings will be taken
quarterly over the term of the agreement.
On June 30, 2000, the Company entered into a Global Purchase Agreement (the
"Global Purchase Agreement") with Nortel Networks, Inc. ("Nortel"). This
agreement calls for the Company to purchase and take delivery of products and
services from Nortel in the amount of $155 million from the date of the
agreement through December 31, 2003. These products and services are to be
financed by Nortel pursuant to a credit agreement.
Concurrent with the execution of the Global Purchase Agreement, on June 30,
2000, the Company entered into a credit agreement with Nortel Networks Inc.
("Nortel") for the financing of approximately $38 million of network equipment
and services. On September 5, 2000, this agreement was amended and restated,
resulting in an increase to a $235 million advancing term loan facility (the
"Term Loan") for the purpose of financing a portion of the Company's costs to
purchase network equipment and installation services from Nortel and to pay
certain third-party expenses. As of September 30, 2000, the Company has drawn
approximately $45 million under this financing arrangement for the purchase of
equipment and services and other third-party costs. Amounts drawn under this
term loan facility have been recorded in notes payable, due in twenty equal
quarterly installments commencing on September 30, 2003, bearing interest at a
variable market-based rate.
On August 2, 2000, the Company entered into two agreements with Level 3
Communications, LLC ("Level 3"). These agreements grant to SAVVIS exclusive
indefeasible rights of use ("IRU") in certain segments of a multi-conduit fiber
optic communications system being constructed by Level 3. The term of each
agreement is for a 20-year period beginning with the acceptance of a segment and
payment by SAVVIS of the segment IRU fee. The agreements stipulate payments to
Level 3 totaling approximately $36.2 million. As of September 30, the Company
has paid to Level 3 approximately $9.7 million pursuant to these agreements,
which amounts were funded by drawings on the Term Loan.
On June 30, 2000, SAVVIS executed an agreement to acquire approximately $30
million of telecommunications equipment and related services with Winstar
Wireless, Inc. ("Winstar"). Upon execution, the Company took delivery of certain
equipment and paid approximately $5 million to Winstar. Of the remaining $25
million, approximately $16.5 million has been financed by Winstar over six years
at 11% interest, with payments commencing in the third quarter of 2000. The
remaining balance of $8.2 million has been recorded in other accrued
liabilities, due over the next twelve months. On September 29, 2000, the Company
executed an additional agreement with Winstar to acquire $10 million in
telecommunications equipment. The agreement calls for a down payment of $1.5
million, which was paid by SAVVIS in early October. The remaining $8.5 million
has also been financed by Wnstar over six years at 11% interest, with payments
commencing in the fourth quarter of 2000.
Although we plan to invest significantly in equipment and in network expansion,
except as described in the preceding paragraphs, 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.
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We believe that the net proceeds of the initial public offering will allow us to
continue in business as a going concern and will be sufficient to fund our
operating and capital needs through early 2001. We are currently in discussions
with a number of vendors, strategic investors, financial institutions and
existing shareholders regarding debt and equity financing to meet the Company's
financing requirements for 2001 and 2002. We cannot assure you that such
additional funding will be available on terms satisfactory to us or at all.
On October 25, 2000, Bridge advised the Company that it had notified its lenders
that it had failed to satisfy the minimum EBITDA requirement of its bank credit
agreement for the third quarter of 2000. Bridge reported that this failure is
the result of lower operating results since the consolidation and conversion of
Dow Jones Telerate customers acquired in 1998, a write-off of aged receivables
as a result of the major on-going re-engineering of their back office, and an
accounting reclassification of income from sub-leases of equipment to SAVVIS
entered into at the time of SAVVIS' acquisition of Bridge's global Internet
protocol network assets in February 2000.
Bridge has also notified its lenders that it is in discussions with major
shareholders regarding an equity investment in Bridge and would hope to
negotiate a concurrent revision of their credit agreement designed to restore
the company to contract compliance.
As of September 30, 2000, SAVVIS' accounts receivable from Bridge approximated
$32.1 million under the Network Services Agreement. This amount is net of
approximately $19.4 million in liabilities through September 30, 2000 SAVVIS
owed to Bridge under the Technical Services Agreement, Administrative Services
Agreement, for certain employee benefit payments paid by Bridge, and for
telecommunication charges relating to the global IP network that were paid by
Bridge. These amounts due from SAVVIS to Bridge were all subject to the right of
offset against amounts due to Bridge from SAVVIS. Subsequent to September 30,
Bridge paid an additional $20 million to SAVVIS as a further reduction in their
accounts receivable balance. SAVVIS currently bills Bridge approximately $14.8
million per month under the Network Services Agreement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposures relate to changes in interest rates. Following
the purchase of Bridge's global Internet protocol network assets in February
2000, we have begun to expand our business internationally, and as a result, we
are also exposed to changes in foreign currency exchange rates.
Our financial instruments that are sensitive to changes in interest rates are
our borrowings from Bridge, all of which were entered into for other than
trading purposes, are denominated in U.S. Dollars, and bear interest at a fixed
rate of 8%. Because the interest rate on these advances is fixed, changes in
interest rates will not directly impact our cash flows. As of September 30,
2000, the aggregate fair value of our borrowings approximated their carrying
value.
Prior to our purchase of the network assets from Bridge, changes in foreign
exchange rates did not impact our results of operations. For the quarter ended
September 30, 2000, 39% of our service revenue from Bridge was derived from
operations outside the United States, and approximately 29% of our total direct
costs were incurred outside the United States. We expect these percentages to
remain relatively constant in the periods ahead. Because our foreign revenue
closely matched our foreign costs, changes in foreign exchange rates did not
have a material impact on our results of operations in this quarter. In the
future, we may engage in hedging transactions to mitigate foreign exchange risk.
19
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims arising
out of our ordinary course of business. We are not currently involved in any
material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Between July 1, 2000 and September 30, 2000, we granted options to purchase
216,000 shares of our common stock to a total of 34 of our employees, each at an
exercise price of $13.0625 per share, options to purchase 152,000 shares to 30
employees, each at an exercise price of $11.75 per share, and options to
purchase 398,500 shares to 42 employees, each at an exercise price of $8.9375
per share. All of these options were granted pursuant to our 1999 Incentive
Stock Option Plan. These issuances were effected in transactions not subject to,
or exempt from, the registration requirements of the Securities Act of 1933, and
these transactions were effected without the use of an underwriter.
In August 2000, the Company entered into a 20-year agreement with Kiel Center
Partners, L.P. ("KCP") pursuant to which it acquired the naming rights to an
arena in St. Louis, Missouri. Total consideration for these rights amounts to
$72 million, including 750,000 shares of its common stock issued by the Companmy
to KCP.
During the quarter ended September 30, 2000, proceeds of approximately $42,000
were generated from the exercise of options for 85,270 shares of our common
stock. There were no significant expenses, underwriting discounts or commissions
attributable to these proceeds. We used the proceeds for general working capital
expenses incurred in the ordinary course of business. These options had been
granted under our 1999 Incentive Stock Option Plan. We issued the shares in
reliance on the exemption from registration provided by Rule 701 under the
Securities Act of 1933.
The Form S-1 relating to the initial public offering of 14,875,000 shares of our
common stock was declared effective by the SEC on February 14, 2000. We have
used approximately $127 million from the net proceeds of $333 million of our
initial public offering for payment to Bridge for the purchase of the network
and the preferential distribution and to reduce indebtedness to Bridge.
Additionally, approximately $25 million has been used for non-financed capital
expenditures, and approximately $108 million was used for general working
capital purposes and network expansion.
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<PAGE>
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are either provided with this Form 10-Q or
are incorporated herein by reference.
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER EXHIBIT DESCRIPTION
<S> <C>
3.1* Amended and Restated Certificate of Incorporation of the Registrant
3.2* Certificate of Amendment to Amended and Restated Certificate of
Incorporation of the Registrant
3.3* Amended and Restated Bylaws of the Registrant
4.1* Form of Common Stock Certificate
10.1+ Amended and Restated Credit Agreement, dated as of September 5, 2000,
by and among the Registrant, as guarantor, SAVVIS Communications
Corporation, a Missouri corporation, as borrower, and Nortel Networks
Inc., as administrative agent, and the lenders named therein.
10.2 Pledge Agreement, dated as of September 5, 2000, by and between the
Registrant and Nortel Networks Inc., as administrative agent for the
lenders.
10.3 Amended and Restated Pledge and Security Agreement, dated as of
September 5, 2000, by and between SAVVIS Communications Corporation, a
Missouri corporation and Nortel Networks Inc., as administrative agent
for the lenders.
10.4 Pledge and Security Agreement, dated as of September 5, 2000, by and
between Global Network Assets, LLC and Nortel Networks Inc., as
administrative agent for the lenders.
10.5 Amended and Restated Guaranty Agreement, dated as of September 5, 2000,
delivered by the Registrant to and in favor of Nortel Networks Inc., as
administrative agent for itself and the other lenders.
10.6 Amended and Restated Guaranty Agreement, dated as of September 5, 2000,
delivered by Global Network Assets, LLC to and in favor of Nortel
Networks Inc., as administrative agent for itself and the other
lenders.
10.7+ Long Haul IRU Agreement, dated as of August 2, 2000, between SAVVIS
Communications Corporation, a Missouri corporation and Level 3
Communications, LLC.
10.8+ Metro IRU Agreement, dated as of August 2, 2000, between SAVVIS
Communications Corporation, a Missouri corporation and Level 3
Communications, LLC.
10.9+ Arena Naming Rights Agreement, dated as of August 17, 2000, among the
Registrant, Kiel Center Partners, L.P. and Bridge Information Systems,
Inc.
10.10+ Master Agreement, dated as of June 30, 2000, between SAVVIS
Communications Corporation, a Missouri corporation and Winstar
Wireless, Inc., as amended by that certain Letter Agreement dated
September 29, 2000.
11.1 Calculation of Basic and Diluted per share and weighted average shares
used in EPS calculation for the three months ended September 30, 2000
11.2 Calculation of Basic and Diluted per share and weighted average shares
used in EPS calculation for the nine months ended September 30, 2000
27.1 Financial Data Schedule for the three- and nine-months ended September
30, 2000.
</TABLE>
* Incorporated by reference to the same numbered exhibit to SAVVIS' Registration
Statement on Form S-1, as amended (File No. 333-90881).
+ Request for Confidential Treatment
(b) Reports on Form 8-K.
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 14, 2000 SAVVIS Communications Corporation
-----------------
Date
By: /s/ Robert McCormick
---------------------
Robert McCormick
Chief Executive Officer
November 14, 2000 By: /s/ David J. Frear
----------------- -------------------
Date David J. Frear
EVP & Chief Financial Officer
22