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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-29375
SAVVIS COMMUNICATIONS CORPORATION
--------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1809960
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12851 WORLDGATE DRIVE
HERNDON, VIRGINIA 20170
(Address of principal executive offices) (Zip Code)
(703-234-8000)
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act: Common stock, par
value $.01 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 30, 2001 was approximately $14,418,149.
The number of shares of the registrant's common stock outstanding as of March
31, 2001 was 93,842,498.
DOCUMENTS INCORPORATED BY REFERENCE
None
SAVVIS COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
PART I
Item 1. Business ..................................................................................................... 3
Item 2. Properties ................................................................................................... 33
Item 3. Legal Proceedings ............................................................................................ 33
Item 4. Submission of Matters to a Vote of Security Holders .......................................................... 33
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ........................................ 34
Item 6. Selected Financial Data ...................................................................................... 35
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations. ............................................................................................ 36
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................................... 43
Item 8. Financial Statements and Supplementary Data .................................................................. 44
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure .............................................................................................. 44
PART III
Item 10. Directors and Executive Officers of the Registrant ........................................................... 45
Item 11. Executive Compensation ....................................................................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................................... 56
Item 13. Certain Relationships and Related Transactions ............................................................... 57
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .............................................. 60
Signatures .............................................................................................. 63
Index to Consolidated Financial Statements .............................................................. F-1
2
PART I
ITEM 1. BUSINESS.
Cautionary Statement
Except for any historical information, the matters we discuss in this
report on Form 10-K concerning our company contain forward-looking statements.
Any statements in this report on Form 10-K that are not statements of historical
fact, are intended to be, and are, "forward-looking statements" under the safe
harbor provided by Section 27(a) of the Securities Act of 1933. Without
limitation, the words "anticipate," "believe," "estimate," "expect," "intend,"
"plan" and similar expressions are intended to identify forward-looking
statements. The important factors we discuss below and under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as other factors identified in our filings with the SEC and
those presented elsewhere by our management from time to time, could cause
actual results to differ materially from those indicated by the forward-looking
statements made in this report. These factors include those set forth in Item I
under the heading "Business -- Risk Factors."
The terms "SAVVIS," "we," "us," "the Company," and "our" as used in this
report refer to SAVVIS Communications Corporation, a Delaware corporation,
formerly SAVVIS Holdings Corporation, and its subsidiaries, except where by the
context it is clear that such terms mean only SAVVIS Communications Corporation.
The term "Bridge" as used in this report refers to Bridge Information Systems,
Inc., a Missouri corporation, which currently owns approximately 48% of our
outstanding common stock.
OVERVIEW
We are a growing provider of high quality, high performance global data
networking, Internet-related and managed hosting services to medium and large
businesses, multinational corporations and Internet service providers. We
currently offer the following services:
o MANAGED DATA NETWORKING SERVICES that provide secure, high quality data
communication links over our network to connect a customer's geographically
dispersed offices, known as intranets, or to connect with its customers and
suppliers, known as extranets. These are also referred to VPN's.
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o HIGH BANDWIDTH INTERNET ACCESS SERVICES including dedicated access and
digital subscriber line, commonly known as DSL, services and Internet
security services which connect our customers to the Internet at high
speeds.
o MANAGED HOSTING services that allow our customers to outsource their
mission-critical content management to us and have us host their website
and networking hardware in our data centers which provide a highly secure,
fault tolerant environment.
We began commercial operations in 1996, offering Internet access services
to local and regional Internet service providers. In April 1999, we were
acquired by Bridge, a global provider of real-time and historical financial
information and news regarding stocks, bonds, foreign exchange and commodities
to the financial services industry. Bridge constructed a highly redundant, fault
tolerant network based on Internet protocol and ATM technologies to service some
of the largest financial institutions and institutional investors in the world.
In September 1999, the SAVVIS Intelligent IP Network(SM) was created through the
combination of the Internet protocol network of Bridge, which was constructed to
meet the exacting requirements of the financial services industry worldwide, and
the SAVVIS network, which was constructed to provide high quality Internet
access in the United States. Both of these networks have been operational since
1996 and we refer to the combined network as the "SAVVIS Intelligent IP
Network(SM)."
On February 18, 2000 simultaneously with the completion of our initial
public offering, we acquired the Internet protocol network assets of Bridge for
total consideration of approximately $150 million and the employees of Bridge
who operate that network were transferred to us. This transaction significantly
expanded our managed data networking services, which we began offering in
September 1999. We also entered into a network services agreement with Bridge
pursuant to which Bridge agreed to use the SAVVIS Intelligent IP Network(SM) to
deliver Bridge's content and applications to its customers.
We currently provide our data networking, Internet access and hosting
services directly to approximately 2,550 customers.
The SAVVIS Intelligent IP Network(SM) architecture, which interconnects
over 6,000 buildings in 121 of the world's major commercial cities in 46
countries, is based on the following technologies:
o asynchronous transfer mode, commonly known as ATM, which supports the
transmission of all kinds of content and allows data to be
prioritized;
o frame relay, which is a shared network technology commonly used in
communications networks; and
o Internet protocol, a communications protocol that is a core element of
the Internet and is used on computers, but that cannot reliably
deliver real-time data currently, unless operated over an ATM network,
such as the SAVVIS Intelligent IP Network(SM).
Additionally, our 121 city global system connects to twelve private
Internet access points, which we call PrivateNAPs(SM), where our network
connects to a number of Internet service providers, including Sprint
Corporation, Cable & Wireless plc and UUNET, an MCI WorldCom company, allowing
us to bypass the congested public Internet access points. This network design
enables us to provide real-time data delivery and guarantee low latency and low
data loss. It also allows us to tailor our service offerings to our customers'
needs and to offer a range of quality of service levels.
We charge each customer an initial installation fee that typically ranges
from $500 to $5,000 and a monthly fixed fee that varies depending on the
services provided, the bandwidth used and the quality of service level chosen.
Our customer agreements are typically for 12 to 36 months.
Currently, our revenue is derived primarily from the sale of data
networking and Internet access services with Bridge representing approximately
81% of our total revenue. Through December 31, 1999, our revenue was primarily
derived from the sale of Internet access services to local and regional Internet
service providers in the United States. Beginning in late 1998, we expanded our
service offering to corporate customers as well.
THE BRIDGE BANKRUPTCY
On February 15, 2001, Bridge's U.S. operating subsidiaries filed for
protection under Chapter 11 of Title 11 of the United States Bankruptcy Code
(the "Bankruptcy Code") in the United States Bankruptcy Court in the Eastern
District of Missouri. In 2000, Bridge accounted for approximately 81% of our
revenues. Pursuant to a network services agreement with us, Bridge has committed
to purchase network services from us through February 2009, including a minimum
of $132 million and $145 million of services in 2001 and 2002, respectively.
Bridge's financial condition and ability and willingness to meet its payment
obligations under the network services agreement will affect our revenues and
our ability to run our business. We may not receive timely payments owed to us
under the network services agreement from Bridge. The Bankruptcy Code may
restrict the amount and recoverability of our claims against Bridge. In
addition, under the automatic stay provisions of the Bankruptcy Code, we are
currently prevented from exercising certain rights and remedies under our
network services agreement with Bridge and from taking certain enforcement
actions against Bridge. As of March 31, 2001, Bridge owed us approximately $33
million (before offsetting our note due to Bridge), of which approximately $17
million represented claims that arose before Bridge filed for bankruptcy,
approximately $2 million represented claims that arose after the commencement of
the bankruptcy, and $14 million represented claims with respect to Bridge's
international operations which are not part of the bankruptcy proceedings. In
addition, Bridge has the right, subject to bankruptcy court approval and certain
other limitations, to assume and assign or reject executory, pre-petition
contracts and unexpired leases, which would include the network services
agreement. In this context, "assumption" requires Bridge to perform its
obligations and cure all existing defaults under the assumed contract or lease
and "rejection" means that Bridge is relieved from its obligations to perform
further under the rejected contract or lease, but is subject to a claim for
damages for the breach thereof subject to certain limitations contained in the
Bankruptcy Code. Generally, any damages resulting from rejection are treated as
general unsecured claims in the reorganization cases. Pre-petition claims that
were contingent or unliquidated at the commencement of the Chapter 11 cases are
generally allowable against the debtor in amounts to be fixed by the bankruptcy
court or otherwise agreed upon. Bridge has announced that it intends to sell its
assets in bankruptcy, including the shares in our Company that it owns. For
further discussions, see Part I, Item 1 "Risks Related to our Business" on page
21, Management's Discussion and Analysis of Financial Condition and Results of
Operations beginning on page 36, and Note 1 to the Consolidated Financial
Statements in Part IV, Item 14 on page F-7.
RELATIONSHIP WITH BRIDGE AND WELSH CARSON
Bridge is a privately held company whose principal shareholders are
investment partnerships managed by Welsh, Carson, Anderson & Stowe, or Welsh
Carson, a sponsor of private equity funds with extensive experience in the
communication and information services industries. On September 10, 1999, Bridge
sold in a private placement approximately 25% of its equity ownership in SAVVIS
to existing stockholders of Bridge, including Welsh Carson. On February 28,
2000, Bridge sold 6,250,000 shares of SAVVIS common stock to an investment
partnership sponsored by Welsh Carson at a price equal to the initial public
offering price of our common stock of $24 per share, totaling $150 million. On
February 20, 2001, we entered into a securities
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purchase agreement and certain related agreements and documents with two
investment entities sponsored by Welsh Carson and several individuals affiliated
with Welsh Carson. Pursuant to the terms of the securities purchase agreement,
the Welsh Carson entities and affiliated individuals purchased $20 million
aggregate principal amount of our 10% convertible senior secured notes due 2006.
The notes, including notes to be issued as payment-in-kind interest thereunder,
are convertible into common stock at a conversion price of $1 5/16 per share
through maturity at the option of the holders into a total of approximately 25
million shares of our common stock.
As of March 31, 2001, Bridge owned approximately 48% of our outstanding
common stock and investment partnerships sponsored by and individuals affiliated
with Welsh Carson owned approximately 16% of our outstanding common stock. After
giving effect to the conversion of $20 million in the aggregate of our senior
secured convertible notes held by Welsh Carson affiliates, Welsh Carson
affiliates would own approximately 34% of our outstanding common stock and
Bridge would own 38%.
In connection with our acquisition of Bridge's network, we entered into a
10-year network services agreement with Bridge that commits Bridge to purchase a
minimum of $132 million and $145 million of network services from us in 2001 and
2002, respectively. Thereafter, Bridge will be required to purchase at least 80%
of its network services from us, declining to 60% in 2006 through the end of the
agreement in 2010. We incur losses from the operation of the network under the
network services agreement, and for the year 2000 Bridge represented
approximately 81% of our revenues. We also entered into a number of other
agreements with Bridge, including a master establishment and transition
agreement, an equipment colocation permit, an administrative services agreement,
a technical services agreement, a GECC sublease and a local network services
agreement. Together these agreements provided for, among other things, the
transfer of Bridge's technical and support personnel to us, and our purchase
from Bridge of support and administrative services, including help-desk services
and network operations center services. These agreements are described in more
detail in Item 13 of this report.
MARKET OVERVIEW
Market opportunity. As the Internet has emerged as a strategic business
component, investment in Internet services has begun to increase dramatically.
According to International Data Corporation, an independent research firm, the
demand for U.S. dedicated Internet access services was $3.4 billion in 1999 and
is expected to grow to $9.7 billion by 2003, a 30% compound annual growth rate.
In addition, demand for data transport services is growing rapidly as evidenced
by International Data Corporation's estimate that Internet service providers'
corporate access revenues will grow from $2.9 billion in 1998 to $12 billion by
2003, a 32.5% compound annual growth rate. We believe a significant Internet
market will continue to be Internet infrastructure and usage.
Internet network services. Since the commercialization of the Internet in
the early 1990s, businesses have rapidly established corporate Internet sites
and connectivity as a means to expand customer reach and improve communications
efficiency. Internet access service is now one of the fastest growing segments
of the global telecommunications services market. According to International
Data Corporation, the number of Internet users worldwide reached 240 million in
1999, 327 million in 2000, and is forecasted to grow to over 600 million by the
year 2003. Internet access services represent the means by which Internet
service providers interconnect users to the Internet or to corporate intranets
and extranets. Access services include dial-up access for mobile workers and
small businesses and high-speed dedicated access used primarily by mid-sized and
larger organizations. In addition to Internet access services, Internet services
providers are increasingly providing a range of value-added services, including
shared and dedicated web hosting and server colocation, security services, and
advanced applications such as Internet protocol-based voice, fax and video
services.
Corporate data network services. Other than Internet related services, the
majority of business data communications today take place over private or
managed corporate data and electronic data interchange networks. According to
Infonetics, the market for IP-VPN's in the United States will grow from
approximately $800 million in 2000 to approximately $10 billion in 2003.
Today, organizations employ local data networks, or local area networks, to
interconnect personal computers and workstations. The highly successful use of
local area networks for information-sharing, messaging and other applications
has led organizations to aggressively deploy wide area networks, which
effectively interconnect local area networks and replicate their functionality
across a much broader geographic area. The demand for wide area networks has
grown as a result of today's competitive business environment. Factors
stimulating higher demand include the need to provide broader and more
responsive customer service and to operate faster and more effectively between
operating units, suppliers and other business partners. In addition, as
businesses become more global in nature, the ability to access business
information across the enterprise has become a competitive necessity.
Convergence between the Internet and corporate data networking. Today, many
businesses are utilizing Internet-related services as lower-cost alternatives to
several traditional telecommunications services. The near ubiquity and
relatively low cost of the Internet have resulted in its widespread use for
specific applications, most notably web access and e-mail. Internet protocol has
become the communications protocol of choice for the desktop and for local area
networks. As a result, Internet protocol wide area network implementation
requires no protocol conversion, reducing overhead and improving performance.
Many corporations are connecting
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their remote locations using intranets to enable more efficient communications
with employees, providing remote access for mobile workers and reducing
telecommunications costs by using value-added services such as Internet
protocol-based fax and video-conferencing.
Rapid growth in e-commerce. While most corporations' early use of the
Internet was to establish an Internet marketing presence, businesses today are
using the Internet much more aggressively: to generate new revenues, to increase
efficiency through improved communications with suppliers and other third
parties, and to improve internal communications. The rapid growth of e-commerce
encompasses both business-to-business and business-to-consumer communications
and transactions, and the projected growth of these markets over the next five
years is dramatic. Forrester Research, Inc. projects that the market for
business-to-business e-commerce will grow from $43 billion in 1998 to $1.3
trillion in 2003. In addition, Forrester Research, Inc. projects that the market
for business-to-consumer e-commerce will grow from $8 billion to $108 billion
over the same period.
Outsourcing of Internet related services. In order to capitalize fully on
the new opportunities presented by the Internet and e-commerce, businesses will
require high quality, reliable and flexible data communications and
infrastructure services capable of supporting mission-critical applications. We
believe that an increasing number of businesses will seek to outsource these
services to third-party providers for several reasons. First, the rapid growth
of Internet-related businesses has created a shortage of information technology
personnel skilled in Internet protocol and e-commerce development. Second, many
companies believe that establishing leadership in their industry with respect to
Internet-related services is important to the future of their business. Given
this posture, time to market is critical and turning to a specialized,
third-party provider can often shorten time to market. Finally, many
infrastructure services require significant up-front investment. Many companies
will choose to preserve their capital to invest in activities that are integral
to their business strategy and seek to develop their infrastructure by
purchasing services rather than investing in networks, systems and equipment.
Rapid growth in colocation and web site hosting. While in the past only the
largest companies provisioned their own data networking services, until recently
businesses of all sizes typically housed, maintained and monitored their own web
and content servers. As Internet-enabled applications become mission-critical,
larger and more difficult to develop and maintain and require increasing amounts
of investment, we believe a substantial number of businesses will outsource
their colocation and web site hosting requirements to third parties. Forrester
Research, Inc. projects that the web site hosting business, including
colocation, dedicated and shared hosting, will grow from approximately $2.5
billion in 2000 to almost $20 billion by 2004. We believe that companies seeking
Internet protocol expertise, high levels of security, fault-tolerant
infrastructure, local and remote support and the cost benefits of a shared
infrastructure will be most likely to outsource these services.
Limitations of Internet protocol and the Internet. Despite the rapid
success of Internet protocol, the Internet faces limitations that may serve as a
bottleneck between the full potential of Internet protocol and its use in
mission-critical applications. First, in Internet protocol routing, packet data
travels through the network without a pre-defined path or guaranteed delivery.
Individual packets may travel separate paths and arrive at the network
destination at different times. Second, Internet protocol packets cannot be
identified as belonging to one class of traffic or another. For example, in a
given flow of Internet protocol packets it is not possible to separate
"real-time" traffic, such as voice over Internet protocol, from lower priority
traffic, such as e-mail. Each of these issues limits the utility of Internet
protocol for mission-critical, real-time enterprise networks. While we believe
that an improved version of Internet protocol will be implemented, the timing
and efficiency of these improvements remain uncertain.
Bottlenecks at network access points. The Internet is a network of
networks. Communication among these networks takes place at access points where
they interconnect. Despite the near ubiquity of the Internet, there are only a
few major public network access points. However, since the introduction of
network access points, the volume of Internet traffic has increased
dramatically, often overwhelming network access points' capacity to handle the
smooth exchange of traffic. The public network access points are now space
constrained, have inadequate power and air conditioning, have poor security,
often employ older, less technologically advanced switching technologies, have
limited or no available maintenance or support staff, and are not centrally
managed. No single entity has the economic incentive or ability to facilitate
problem resolution, to optimize peering of data networks, or to bring about
centralized routing administration. As a consequence of the lack of
coordination, and in order to avoid the increasing congestion at the public
network access points, selected backbone providers have established connections
at private network access points, connecting to other backbone providers for the
exchange of traffic and bypassing public network access points.
BUSINESS STRATEGY
Our objective is to tap the rapidly growing market for reliable, high-speed
data communications, Internet, and managed hosting services. Specifically, we
intend to:
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Establish SAVVIS as a leading provider of public and private Internet
Protocol (IP) transport solutions for business-to-business communications. We
intend to market a combination of our Intelligent IP VPN services and Private
NAP(SM) Internet access services to meet the demand in the market. We see
customers demanding a combination of Internet, extranet and intranet networking
services and believe our Intelligent IP(SM) platform and Private NAP(SM)
architecture sets us apart from the competition in meeting the demand.
Provide the Application Infrastructure Platform (AIP) support utilizing the
SAVVIS Intelligent Hosting services to meet customers e-commerce requirements,
and to compliment our IP transport solutions. Many customers are establishing
new or more robust Internet, extranet and intranet sites and want their service
provider to provide the application infrastructure platform for their servers,
operating system and application software. SAVVIS is focused on providing full
management of the customers' application platform, hosted in our
state-of-the-art data centers in St. Louis, San Francisco, Toronto and London.
In addition, we intend to provide both private and public IP transport to the
customers hosted site.
Capitalize on the demand for outsourced services in the VPN (Virtual Private
Network), Internet, and managed hosting markets. Data communications and the
Internet are mission-critical to thousands of businesses worldwide and,
according to industry studies, the market for these services continues to grow
rapidly. Corporations are continually expanding and enhancing existing networks
and deploying new services in response to this growth. By providing a wide range
of services for Internet, hosting and managed data networking services, we offer
a single source solution to the key challenges faced by corporate information
technology managers implementing Internet, intranet and extranet applications.
We are focused on the demand for simple, flexible solutions, and our
market-leading IP-VPN products and managed hosting services to allow us to
address heretofore untapped segments of the business market.
Capitalize on our connectivity to financial institutions worldwide. We are
aggressively marketing our services to the traditional and emerging financial
services companies, based on our connectivity to over 4,700 companies, including
75 of the top 100 global banks and 45 of the top 50 brokerages. In today's
rapidly deregulating financial market, financial institutions must be
fast-to-market with innovative delivery methodologies that speed transactions or
they risk obsolescence. We believe we are well positioned to meet the need,
because our community-of interest network, Financial Xchange(SM), provides the
performance and security of a private network with the reach and rapid
deployment of the Internet.
Target potential customers in buildings connected to our network. We intend
to actively market our services to the businesses in the over 6,000 buildings
worldwide that are connected to our network. These buildings are generally
located in central business districts of major cities and are typically occupied
by multiple businesses. Because our network is already in place, we expect to
enjoy time-to-market, cost and quality advantages when delivering services to
current and new customers located in these buildings. We are deploying broadband
wireless access to 500 of these buildings, reducing our cost of service delivery
and enhancing our ability to sell high-speed connectivity.
Expand our network and PrivateNAPs(SM) infrastructure and add
industry-leading "intelligence" to our platform. We have completed a major build
out of our global network, now reaching 121 cities in 46 countries. The number
of POPs on the SAVVIS Intelligent IP Network(SM) increased by nearly 57%,
totaling 130 at the end of 2000 versus 83 at the end of 1999. Four new
PrivateNAPs(SM) were added to the network, including the industry's first
European PrivateNAP(SM) in London, for a total of 12 currently in operation.
Since the launch of our Intelligent IP Network(SM) architecture last May, which
puts the "smarts" on the network instead of in customer premises equipment, we
have deployed 58 Nortel Networks Shasta 5000 BSNs. The network also is powered
by 324 Lucent ATM backbone switches; 1,747 Lucent ATM edge devices; and 13,254
Nortel, Cisco and DSL edge routers. In addition, we have entered into agreements
with Nortel Networks and Level 3 Communications through which we intend to
establish our own fiber-optic backbone by the fourth quarter of 2001, replacing
our leased-line network. The initial 20,000 route-mile redundant backbone will
be comprised of 8 rings, connecting 50 of our markets in the U.S. and Canada. We
believe that by implementing and managing our own fiber backbone, we will
achieve greater control over our network.
Grow domestic and international distribution channels. We intend to
aggressively grow our distribution channels, by expanding our direct channel as
well as utilizing alternate channels. We intend to continue to increase the size
of our direct sales force for VPN, Internet and managed hosting services. We
have entered into agreements with multiple partners, including Science
Applications International Corporation (SAIC), PRIMUS Telecommunications Group,
QuantumShift and Viatel, Inc., to resell our services and will continue to sign
up additional partners in 2001.
Provide enabling infrastructure for e-commerce services. We believe that
many of our target customers, particularly financial services companies, are
aggressively pursuing e-commerce strategies. We believe that our network
architecture of ATM technology and PrivateNAPs(SM), highly available domestic
and international managed data networking, and managed hosting offering uniquely
position SAVVIS to help our customers capitalize on the substantial anticipated
growth in e-commerce.
Develop and market new services. We intend to continue to develop new
services, such as voice and video that will enable us to further leverage our
network infrastructure and our customer base. For example, we have deployed ATM
to the edge of our network
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and will aggressively deploy ATM devices at customer premises allowing for the
provision of multiple network applications with different quality of service
levels over the same local access lines and customer equipment. The deployment
of these devices will allow our customers to combine services that they may
currently buy from multiple vendors, each on a different network. We have also
launched the industry's first network-based IP VPN offering, and intend to
continue to develop new tools, such as a web-based Network Creation System, to
enable our customers to outsource the management of their intranets, extranets
and Internet services to us, while maintaining control themselves.
SAVVIS SERVICES
We designed the SAVVIS Intelligent IP Network(SM) to offer a guaranteed,
high level of performance for both Internet and data networking services. We
deliver a comprehensive range of high performance, quality of
service-differentiated products, including data networking, Internet access,
intranets, extranets, e-business hosting and other services.
A common feature among all of the services that we provide to our customers
is the substantial flexibility to choose among a range of offerings, including
from a service-only basis to a fully managed basis. On a service-only basis, the
customer is responsible for the design and integration of its network and the
purchase of network hardware, relying on us only for network services. On a
fully managed basis, we are responsible for the design, implementation,
integration and ongoing support of the customer's network.
INTEGRATED NETWORK SOLUTIONS
SAVVIS put IP Intelligence into our network and extended the benefits all
the way to the customer premises. This enables us to deliver functionality,
security and performance to our customers, and enables our customers to
customize our products according to their needs. Our customers need only to tell
us who they want to talk to, which of four Quality of Service (QoS) levels is
appropriate for each application, and how much bandwidth they require. SAVVIS
then provides them with a bundled solution that delivers the security,
flexibility and affordability they need.
Until now, companies had to work with various service providers, forcing
them to spend lots of time and money patching together different network
configurations to address each of their multifaceted needs. But now that SAVVIS
has put IP Intelligence into our network, we are able to integrate numerous
networking strategies -- Internet, intranet, extranet and e-business hosting --
into one simplified and affordable solution over one local loop. Customers can
take advantage of a full continuum of solutions, without having to manage
customer premises equipment for routing or firewalling. Our customers can
prioritize their applications and select the QoS level, from e-mail to video
streaming. And, they can hook up to the Internet or roll out complex extranet
applications, with a fully integrated networking solution from SAVVIS.
Extranet Solutions. Much of business success depends on being able to
exchange information and communicate with suppliers, partners and customers.
That's why SAVVIS developed its Intelligent IP Network(SM) platform to enable
our customers to choose between having their own private extranet or combining a
private extranet with Internet access to off-net locations. Our customers can
communicate and conduct transactions with multiple partners in a secure and
managed environment, without having to spend lots of time and money deploying
expensive premises-based security. With a SAVVIS extranet, they can take
advantage of our networking capabilities, define who gets access to their
community of users, and determine their own set of rules. We offer a broad range
of ATM-based QoS levels and advanced network-based IP features, with security
policies defined by the customer. The customer is in control, secure in the
knowledge that their extranet application is running on the SAVVIS Intelligent
IP Network(SM).
Intranet Solutions. Intranet communications are confidential, highly
proprietary information that need to be protected from competitors. Businesses
need to maintain tightly controlled user rights and privileges. But up until
now, businesses only had one choice: spend money on expensive, inflexible
traditional private networks, based on either frame relay or private lines.
Today they have new choices. Now they can get intranet solutions that combine
the security and performance of private networking with the flexibility and
economy of the Internet. And once again, SAVVIS makes everything easy for them.
Customers just need to define whom they want to connect to, choose one of four
different QoS levels, and determine their bandwidth requirements. They won't
have to waste money or resources deploying routers and firewall devices at each
office location. SAVVIS will package everything into one simple, flexible
bundled solution. In addition, customers can use the excess bandwidth of their
local loop for extranet or Internet access.
Internet Solutions. SAVVIS built its global Intelligent IP Network(SM) for
high performance and reliability. Customer data speeds through a controlled,
performance-guaranteed environment that completely bypasses the congested public
Internet exchange points. Through our PrivateNAPs(SM) , their data is directly
connected, giving them the most direct route on the Internet and instantaneous
access to the world. SAVVIS offers a wide range of Internet access options,
including 56K, DSL, DS1, OC3 and Ethernet. Our
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customers are able to add new services easily or change existing applications by
using the excess bandwidth of their existing access circuit to add or change
applications virtually instantaneously.
Managed Hosting Services
Whether businesses are deploying an e-business Web site, extranet or
intranet, SAVVIS can help create hosting and networking solutions that will grow
with them. If they want to establish a Web presence on the Internet quickly,
ensure a high level of system availability and assure that their customers and
users have a positive experience, SAVVIS Intelligent Hosting(SM) is the answer.
Intelligent Hosting(SM) includes fully managing their hardware, operating
systems and Web servers within our secure, reliable data center environment and
distributing traffic over our highly rated Internet backbone or over their
intranet or extranet.
Based on their business needs, they can choose other value-added options
including database management, load balancing, security services, back-up and
recovery solutions, WebTrends(TM) reporting and managed storage services
(including business continuance and managed testing environment). Our fully
managed Intelligent Hosting(SM) solutions eliminate the need for our customers
to monitor and manage hardware and operations, stay abreast of the latest
software upgrades and patches, and hire and train the personnel necessary to do
the job. Additional services can then be added as needed for a customized
solution.
By selecting our hosting services, our customers are able to reduce capital
expenditures for expensive networking equipment, eliminate the expense of
supporting their Internet servers and avoid having to spend time and money on
building a secure data center facility. Our customers get direct connectivity to
the SAVVIS network -- giving them unsurpassed reliability, availability and
security -- with no local loop charges, no routers or hubs charges and reduced
staffing expenses. Also, we allow our customers to lease the equipment necessary
to build their site, which helps to further reduce capital costs and scale the
site for future business growth.
ACCESS ALTERNATIVES
How a business connects to the Internet - speed, performance and security -
can be crucial to its success. SAVVIS offers a wide range of scalable Internet
access methods ranging from fractional DS-1 through OC-3, and SAVVIS also
supports Ethernet access. Whether a customer is using the Internet to conduct
business communications or e-commerce, they'll get Internet access that is of
"mission critical" caliber with SAVVIS. And down the road if they decide they
also need an intranet or extranet, they will not need to design a whole new
network. SAVVIS enables its customers to use the excess bandwidth of their
existing access circuit to add or change applications virtually instantaneously.
SAVVIS Internet access solutions include: dedicated Internet connections
(fractional DS1 through OC3) Our dedicated fractional DS1 access gives customers
Internet connection speeds from 128Kbps up to 1.544Mbps. DS3 gives them speeds
up to 45Mbps. And SAVVIS will support OC3 connectivity providing 155Mbps of
bandwidth - for high-volume businesses that need optimum connectivity 24 hours a
days, seven days a week.
Set Usage At A Fixed Monthly Cost. SAVVIS Internet access options give
customers complete control over their usage and monthly cost. DS1 service is
available in fractional increments from 128Kbps up to 1.54Mbps. DS3 service is
available in fractional increments from 3Mbps up to 45Mbps. OC3 and OC12
services are sold on a case by case basis, until we install our fiber rings;
then OC3, OC12 and OC48s will be available as standard products.
Manage The Peaks And Flows Of Data Usage. If a customer's bandwidth needs
fluctuate throughout the month, our burstable access option may be an attractive
choice for them because full bandwidth is available as they need it but they are
billed based on their actual usage. With SAVVIS' burstable Internet access
service, our customers are not required to pay for excess bandwidth that they
don't need.
Digital Subscriber Line (DSL). For businesses that have outgrown dial-up or
ISDN access, are connecting to the Internet for the first time or are adding
remote access locations, DSL offers high-speed Internet service that is "always
on."
Ethernet. For customers who feel comfortable operating in the 10/100 Mbps
Ethernet environment, SAVVIS Ethernet access serves as a cost-effective solution
to support high volume Internet traffic from a multiple user LAN or heavy data
exchange from a Web server.
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SALES AND MARKETING
We contact potential new customers through our direct sales force and our
recently implemented lead referral program. Our direct salespeople together with
our sales engineers develop sales proposals for potential new customers. After a
sale is completed and the services are implemented, the client solutions team
assumes the management of the customer relationship, handling support issues and
selling additional services and connectivity as the customer's business grows.
Direct Sales. Our direct sales force utilizes a "solution selling"
approach, qualifying the customer's IP networking and hosting requirements. We
then bring in product and engineering experts to design the final solution for
the customer. Under this approach, we are able to effectively manage the
relationship with the customer while utilizing more specialized resources to
ensure that the right solution is proposed and implemented. All sales
representatives take part in an extensive training program designed to develop
in-depth technical expertise so they can better understand customers' complex
networking needs and develop customized solutions. In addition, they participate
in "solution selling" training to teach them the best techniques to qualify and
sell the SAVVIS product line. We employ approximately fifty people in ten major
cities in the U.S. and approximately 150 representatives based in Herndon, VA
and St. Louis, MO. We also have small sales teams in Europe, Asia and Latin
America, who are focused on direct sales and engaging alternate distribution
channels by the end of 2001.
Lead Referrals. We believe that additional content providers will be
interested in establishing lead referral programs. A relationship with SAVVIS
will enable a content provider to deliver its service in a real-time, high
quality manner and provide an incremental revenue opportunity through a lead
referral commission.
Alternate Channels. In addition to relationships with content providers, we
are developing new distribution arrangements with small to large partners,
including SAIC, Primus, QuantumShift and Viatel. To help these companies compete
in today's changing market, our alternate channels strategy brings companies
network infrastructure, sales and technical support and value added data
services. Through our Web based access our partners have access to our lead
referral program, free marketing materials and collateral and an exclusive
incentive promotion. Our channel partners will benefit by generating additional
revenues, providing a more complete service bundle and reduce customer churn. We
have identified distribution opportunities with Internet service providers,
competitive local exchange carriers, DSL companies and other communications and
Internet-related companies in the United States, Europe, Asia and Latin America.
Client Solutions. Our client solutions team is responsible for customer
relationship management. The team alerts customers when their bandwidth
utilization approaches capacity and advises customers on methods to improve the
performance and security of their network using additional SAVVIS services. This
team is also able to cross-sell to existing customers additional services, such
as advising on VPN services and managed hosting services.
Marketing. Our marketing programs are designed to build national and global
awareness of the SAVVIS brand name and its association with high performance,
high quality VPN services, Internet services and managed hosting services. We
use brand awareness and direct marketing programs to generate leads, accelerate
the sales process, retain existing customers and promote new products to
existing customers. Our print advertisements are placed in trade journals,
newspapers and special-interest publications. We participate in industry trade
shows, such as Networld+InterOP, Internet World, and the Securities Industry
Association (SIA). We also use direct mail, e-newsletters, widespread fax
distributions, surveys, telemarketing, Internet marketing, on-line and on-site
seminars, collateral materials, advertising, welcome kits and direct response
programs to communicate with existing customers and to reach potential new
customers. Many of these marketing programs are co-funded by our suppliers. Our
marketing programs are targeted at information technology executives, as well as
senior marketing and finance managers. We closely track the impact and
effectiveness of our primary marketing programs.
Sales Force Automation. We use our proprietary sales force automation
system to manage all pre-sales communications with our prospective customers.
All distribution and tracking of sales leads occur through this system. Sales
leads are imported from data sources such as corporate web sites, telemarketing,
direct mail and national advertising campaigns, and assigned regionally to the
desktops of the appropriate sales representatives. All contact with these
prospects is documented in the sales force automation system through every step
of the sales cycle, from initial contact to contract receipt. In addition, this
system allows sales management to monitor the sales activity of their specific
sales representatives and generate sales forecasts based on that activity.
Further, our sales force automation system tracks all marketing communications
with the prospective customers, allowing us to measure the effectiveness of
various collateral materials and marketing campaigns in an effort to maximize
our marketing dollars. Lastly, our sales people use our sales force automation
system to track and manage their personal sales prospects and to send customized
packages of sales literature, brochures and faxes directly from their computer
desktops, thereby improving sales efficiency.
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CUSTOMERS
We currently provide services to approximately 2,550 customers. On February
18, 2000, Bridge entered into a network services agreement with us and became
our largest customer. Bridge represented approximately 81% of our 2000 revenues.
On February 15, 2001, Bridge's U.S. operating subsidiaries filed for bankruptcy
protection. Other than Bridge, no individual customer accounted for more than 5%
of our revenues during the year ended December 31, 2000. We also provide
services to many Internet service providers and Internet-centric businesses.
Our contracts with our customers are typically for one to three years in
length. The Bridge network services agreement is a ten-year contract. Many of
our customer contracts contain service level agreements that provide for service
credits should we fail to maintain specified levels of quality.
CUSTOMER SERVICE
Our goal is to provide the highest level of customer service in the
industry. We believe that high quality customer service is critical to
attracting and retaining customers and to satisfying the rapidly growing data
networking, hosting and Internet services needs of these customers. Our
comprehensive approach to customer service and satisfaction includes a focus on:
o providing written guarantees of service quality;
o providing a choice of services, either standard or fully managed (i.e.
outsourced management and equipment included), and
o providing effective network management, monitoring and support for our
customers' data networks.
We believe our network architecture, proprietary routing policies and
industry leading service level agreements provide our customers with very high
service quality. We are able to offer our customers different levels of service
priority for their different data transmission needs over one high-quality
network. For example, e-commerce and real-time applications, such as market data
delivery, can be assigned the highest level of quality of service, while other
applications, such as e-mail, can be assigned a lower priority of service. By
assigning the highest level of service only to mission-critical or real-time
applications, customers can lower their overall data services costs without
compromising their data networking requirements.
Customer Call Centers. Customer support personnel located in call centers
in St. Louis, Missouri (24 hours a day, 365 days a year), London, England and
Singapore handle service inquiries from our customers and for Bridge customers,
and provide this service in eight languages. These personnel are organized in
client teams and are highly trained to identify and resolve customer issues
rapidly and completely. Our customer call center support services are supplied
to us by Bridge under a ten-year technical services agreement. Bridge reported
to us that in December 2000 its call centers answered an average of 6,000 calls
per week, maintained an average speed of answer of under 15 seconds and resolved
98% of customer issues with front-line support personnel. To track trouble
tickets and customer information, Bridge uses a proprietary management platform
based on Vantive enterprise software, a highly scaleable platform for problem
tracking and customer record access and maintenance that is easily accessible by
personnel at all of our network operations centers. We use an integrated
client/circuit information database that allows our customer support personnel
to quickly access a customer's profile from any of our support centers. In our
local markets, we have available to us over 270 field technicians who are
experts in Internet protocol, Unix, NT and ISDN technology and who are generally
able to respond to customer requests within two hours.
Management, Monitoring and Maintenance. We provide our customers with
detailed monitoring, reporting and management tools that allow them to review
their usage patterns, network availability, outage events, latency and data
loss. These tools allow our customers to evaluate the performance of our service
against our service level guarantee as well as review utilization and
performance data to facilitate their network planning and design activities.
Service Level Agreements. The consistent, reliable performance of the
SAVVIS Intelligent IP Network(SM) enables us to provide effective service level
agreements to our customers. We believe that companies unable to support a
commensurate level of predictable network performance will not be able to
provide service level agreements with value to the customer or will do so at
substantial risk to their own business.
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SAVVIS INTELLIGENT IP NETWORK(SM) INFRASTRUCTURE
OVERVIEW
The SAVVIS Intelligent IP Network(SM) reaches 46 countries, with facilities
in 121 major cities, including 64 international cities and 57 U.S. cities. Our
network interconnects over 6,000 buildings worldwide and is based on ATM, frame
relay and Internet protocol technologies. In addition, our network incorporates
12 PrivateNAPs(SM), which allows our Internet traffic to bypass the congested
public Internet access points.
We have designed our network to enable us to offer our customers high
speed, high quality services, as well as a range of quality of service levels
and multiple levels of redundancy. Our network is designed with:
Open System Architectures. Our network is based on ATM, frame relay and
Internet protocol technologies. These are open systems networking protocols that
are in widespread use in data communications. Internet protocol is the most
commonly used and fastest growing networking protocol in the world. By carrying
Internet protocol on our network, we generally allow our customers to connect to
their customers, suppliers and remote offices using equipment already installed
in their networks and the networks to which they connect. Additionally, by using
ATM and frame relay in our network, we enhance network utilization and quality
of service, and we are able to easily communicate with third party networks for
the delivery of traffic on and off our network without procuring special
interface technologies or devices.
Quality of Service Differentiation. Our network architecture allows us to
offer and guarantee different levels of service priority for customers'
different data transmission needs. For example, e-commerce and real-time
applications, such as voice, can be assigned the highest level of priority,
while other applications, such as e-mail, can be assigned a lower priority of
service. By offering a quality of service differentiated product, we enable
customers to select a price/performance combination that is appropriate for
their needs. Customer sites where we have deployed ATM devices at the customer
premises enable the customers to run multiple applications, such as Internet
access, intranet and private voice, over the same equipment and local access,
thereby saving on local network transport and equipment costs.
High Reliability. We utilize multiple, redundant circuits, switches and
physical locations to substantially reduce the effects of a single point of
failure within our network. This redundancy, combined with our switching and
routing equipment, generally enables us to automatically reroute traffic when a
failure occurs, resulting in higher overall network performance and integrity.
Our backbone switches also incorporate high levels of equipment-specific
redundancies, resulting in higher levels of availability than those found in
basic routing platforms. We also employ uninterruptable power supplies and/or
electric generator back-ups at each switching facility, designed to limit the
impact of local power outages on our network.
Global Network Components
The components of our network include the following:
Switching Facilities. There are over 300 Lucent ATM and frame relay
switches, providing a highly redundant switch backbone deployed throughout the
SAVVIS Intelligent IP Network(SM). We have over 300 backbone routers installed
and there are approximately 14,700 customer premise routers located in office
buildings and customer sites. Our switches are located in secure facilities,
which provide highly reliable, direct access to high-speed telecommunications
infrastructure. In each switching facility, we rent space, install networking
equipment, including ATM or frame relay switches, routers and high-speed analog
and digital modems.
Backbone Capacity. Our network is designed with a highly redundant backbone
infrastructure, including diversely routed long haul and local access
connections from multiple carriers. We interconnect our switching facilities
through high speed lines leased from a variety of carriers, including Qwest
Communications International, Inc., MCI WorldCom, Inc. and Broadwing, Inc.,
formerly known as IXC Communications, Inc. Our leased line connections range in
capacity from 45 Mbps through 620 Mbps in the U.S. and up to 155 Mbps
internationally. To enhance our redundancy, we lease ATM service from Sprint
Corporation. This service is delivered using the highest quality of service mode
available and our service connections range in capacity from 45 Mbps through 620
Mbps. The combination of our leased lines and Sprint ATM service makes our
transmission backbone highly redundant so that at least two diverse paths exist
between all of our switching facilities. The "fault tolerant" configuration of
our network allows data packets to travel on many alternate paths to connect
points on our network.
In addition to our leased line backbone, we are in the process of lighting
our own dark fiber network in the United States. This network consists of
approximately 20,000 route miles of fiber covering the vast majority of
high-density cities within the U.S. The
12
fiber is being purchased from Level 3 and lit with Nortel optronics gear. The
initial development will light one bi-directional, protected OC192 (10 Gbps)
circuit on each fiber span, with OC48 (2.5 Gbps) handoffs in each U.S. city
where we connect to the fiber backbone. This initiative is presently on hold
pending waiver discussions due to the fact that we are in default under the
Nortel agreement. (See Note 7 to the Company's 2000 financial statements
beginning on F-1 included herein).
PrivateNAPs(SM). For our customers' Internet traffic, we have built private
network access points, or PrivateNAPs(SM), where we connect to the Internet
backbones operated by Sprint Corporation, Cable & Wireless plc and UUNET, an MCI
WorldCom company. At each of our PrivateNAPs(SM), we are connected to these
carriers through transit agreements that allow us to connect to their Internet
networks for a monthly fee. Since we are a paying customer of each of these
Internet backbone providers, we believe we realize better response times,
installation intervals, service levels and routing flexibility than Internet
service providers that rely solely on free public or private peering
arrangements. We currently operate 11 PrivateNAPs(SM) in the U.S. and one in
London. In addition, to enhance our carrier redundancy, at each of our
PrivateNAPs(SM), we connect to other Internet backbones through peering
arrangements where each party to the peering arrangement agrees to carry the
other party's traffic for free. We have peering arrangements in place with
AboveNet Communications, Inc., America Online, Inc., DIGEX, Incorporated, Exodus
Communications, Inc., Frontier GlobalCenter, Level 3 Communications, LLC, Inc.,
PSINet Inc., Williams Communications Group, Inc. and Winstar Wireless, Inc.
These peering arrangements allow for settlement-free, direct connections between
networks, where local access charges are generally split evenly between the
applicable parties. Smaller Internet service providers typically connect to our
network through transit agreements that allow them to connect to our network for
a fee.
Our PrivateNAP(SM) architecture combined with our proprietary routing
policies enables us to route customer traffic directly onto the Internet
backbone of its destination for a substantial portion of global Internet
addresses. This network architecture allows our customers' Internet traffic to
generally bypass congested public Internet network access points, thereby
reducing data loss and latency and improving reliability and performance. In
addition, customers directly connected to the same PrivateNAP(SM) typically get
one-hop access, meaning their data pass through only one router, when
communicating with each other, and two customers connected to different
PrivateNAPs(SM) typically enjoy two-hop access, meaning their data pass through
only two routers, when communicating with each other, in both cases completely
bypassing the public Internet.
Managed Hosting. We have approximately 150,000 square feet of data center
facilities located in St. Louis, San Francisco, London and Toronto. All of these
facilities are served by high speed connections for local access. These
facilities are built to state-of-the-art levels with high availability,
mission-critical environments, including uninterruptable power supplies, back-up
generators, fire suppression, separate cooling zones and seismically braced
racks. These facilities will be accessible 24 hours a day, 365 days a year, both
locally and remotely, and will have high levels of physical security.
Network Operations Centers
Our global network operations center, which is owned and managed by Bridge
and located in St. Louis, Missouri, operates 24 hours a day, 365 days a year,
and is staffed by over 20 of our skilled technicians. We also have regional
network operations centers in London and Singapore. These regional centers
operate for ensuring backup for the St. Louis facility. From these network
operations centers, we remotely monitor the components of the SAVVIS Intelligent
IP Network(SM), including our PrivateNAPs(SM), and perform network diagnostics
and equipment surveillance. The network operations centers use sophisticated,
proprietary network management platforms based on the Lucent NavisCore, HP
OpenView, and Nortel Optivity programs to monitor and manage our switching
facilities and our routers.
TECHNOLOGY OVERVIEW
Private networks. Private networks typically comprise a number of private,
leased lines that interconnect multiple corporate locations. The advantages of
private lines include quality, since capacity is reserved for the exclusive use
of the network owner, and security, since the owner's data transmissions are not
commingled with those of other customers. Private line networks have been most
popular in the U.S., where capacity prices are lowest. While private lines are
typically secure and reliable, they do not use network capacity efficiently and
are not flexible or scaleable as changes in network topology are implemented.
Shared networks. Until recently, prices for long-haul telecommunications
capacity outside of the U.S., particularly international capacity, were
relatively expensive. Since the advent of data networking, only users with
extremely high capacity requirements invested in private networks in these
locations. Most other users employed shared networking technologies, whereby
multiple corporate locations would be interconnected with the data network of a
major telecommunications carrier or value-added network service provider for
carriage to the appropriate destination. X.25 was an early open shared network
protocol that was designed to support mission-critical communications over
analog networks. X.25 has been extremely popular outside of the U.S., where
until recently private line networks have remained expensive, and in developing
markets where the telecommunications infrastructure is sometimes unreliable.
X.25 contemplates extensive error detection and data recovery processes, which
slows the effective rate of transmission.
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Today, ATM, frame relay and Internet protocol are driving the migration of
traffic from private line networks to shared networks and from older open
protocols such as X.25 to newer architectures.
Frame Relay. Frame relay evolved from X.25 networks and today is widely
used for applications such as local area network-to-local area network
communications. Unlike X.25, frame relay does not perform any complex error
detection or error recovery of data. As a result, it is a simpler and faster
technology. Frame relay circuits are effective to create a network of
interconnected sites because each site needs only one link into the frame relay
network to communicate with all other sites. Frame relay is less costly than
point-to-point private networks, and its software-defined "virtual circuits"
make it easier to alter network topology as connectivity requirements change.
One limitation of the frame relay protocol is its application for real-time
services. Frame relay packets are variable in length, and as large data files
transit the network they can cause delays at key aggregation and switching
points, often causing other traffic to be delayed. These delays can materially
degrade the quality of real-time services such as voice and video.
ATM. The ATM protocol was specifically designed to support the transmission
of all types of content, including data, video and voice, over a single network.
ATM generally has the ability to prioritize cells to ensure that real-time data
takes priority over less time-sensitive material when transiting the network.
This enables service providers to offer service guarantees with a greater degree
of confidence and facilitates the introduction of real-time services that are
difficult under other protocols.
Additionally, ATM data cells are small and fixed in size, facilitating
high-speed line transport at speeds up to 2.5 billion bits per second. One
limitation of ATM is that the benefits created by the small, fixed nature of ATM
cells also create incremental traffic on the network. Each cell requires its own
identification and addressing information, which is repeated in each of many
individual ATM cells that comprise a given data transmission. The replication of
this "header" information generates additional overhead for the network,
requiring the network operator to provision additional transmission capacity.
Internet Protocol. Internet protocol is a simple, highly scaleable protocol
that is a core element of the architecture of the Internet and can be used
across most network technologies in use today. Internet protocol has also become
the communications protocol of choice for the desktop and the local area
network, thus data networking over Internet protocol requires no protocol
conversion, reducing overhead and improving performance. The protocol does not
distinguish among classes of traffic, which limits its ability to deliver
real-time services.
Our Network. We have built the SAVVIS Intelligent IP Network(SM) to take
advantage of the rapid growth of Internet protocol in corporate networks, to
offer customers the ability to run multiple applications on a single network and
to allow customers to choose the quality of service level which best meets their
needs. By building our network to run Internet protocol over ATM, we allow our
customers to overcome the limitations of Internet protocol and designate the
level of priority to be accorded to their traffic.
COMPETITION
The markets that we serve are intensely competitive. In addition, we expect
to face significant additional competition in the future from existing
competitors and new market entrants. Many of our competitors have greater
financial, technical and marketing resources, larger customer bases, greater
name recognition and more established relationships in the industries that we
operate in than we do.
We believe that a highly reliable network infrastructure, a broad range of
quality products and services, a knowledgeable sales force and the quality of
customer support are the primary competitive factors in our targeted markets and
that price is generally secondary to these factors. We believe that we presently
are well positioned to compete favorably with respect to most of these factors.
Our current and potential competitors in our targeted markets include:
VPN and Data Networking Companies. Several data networking companies such
as Equant N.V., Infonet Services Corporation, Concert Management Services Inc.
and Global One offer data networking services to business customers worldwide.
These services include ATM and frame relay, private line, Internet access and
network outsourcing. In addition, many competitors in the U.S. offer traditional
data communications services, such as AT&T, Sprint and WorldCom. These companies
have significant experience in offering tailored services and market their
expertise in providing these services and related technology.
Internet Service Providers. Our current and potential competitors in the
market include Internet service providers with a significant regional, national
or global presence targeting business customers, such as AT&T Corp., Cable &
Wireless plc, Genuity, PSINet Inc., Sprint Corporation, and UUNET, an MCI
WorldCom company. Many of these companies are developing Internet-based virtual
private network services that attempt to replicate some or all of the
functionality of our VPN services.
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Telecommunications Carriers. Many large carriers, including AT&T Corp.,
British Telecommunications plc, Cable & Wireless plc, MCI WorldCom, Inc.,
Deutsche Telekom AG and Sprint Corporation, offer data networking and Internet
access services. They compete with us by bundling various services such as local
and long distance voice, data transmission and video services to their business
customers. We believe that there is a move toward horizontal integration by
telecommunications companies through acquisitions of or joint ventures with
Internet service providers to meet the Internet access and data networking
requirements of business customers. Accordingly, we expect to experience
increased competition from these telecommunications carriers.
Managed Hosting Competitors. There are more limited competitors in the
managed hosting market, including Digex and Exodus as the two primary players.
Other carriers and Internet service providers are also entering the managed
hosting market, including AT&T, Sprint, UUNET and Qwest. Many of these
competitors have struggled in providing managed hosting services, and have been
more focused on colocation services until this year.
REGULATORY MATTERS
As with any provider of global data networking and Internet access
services, we face regulatory and market access barriers in various countries
resulting from restrictive laws, policies and licensing requirements. Our major
regional markets consist of North America (United States and Canada), the
European Union and the Asia Pacific Rim. The market for our data networking and
Internet access services in each of the major economies within these regions are
now open to foreign competition, including the United States, Canada, France,
Germany, Italy, the United Kingdom, Australia, Hong Kong, Japan, and Singapore.
We believe that we are authorized to provide data networking and Internet access
services as an independent operator under the applicable telecommunications
regulations in all of these countries.
In the United States, Australia, France, and the United Kingdom, no
specific license or authorization is required to provide our services. In
Canada, we hold a Class A License for the Provision of Basic International
Telecommunications Services; no specific license is required to provide domestic
services. In Hong Kong, we hold a Public Non-Exclusive Telecommunications
License. In Japan, we hold a Special Type II Telecommunications Business
License. In Singapore, we hold a Services-Based Operator (Individual) License.
In the countries of Germany and Italy we have complied with notification
requirements.
Most other countries that we believe represent significant revenue
potential have opened their markets to our data networking and Internet access
services, although authorization is required in many of them. In some of these
countries, including Austria, Belgium, Denmark, Finland, Ireland, Luxembourg,
Netherlands, New Zealand, Norway, Poland, Puerto Rico, Spain, Sweden,
Switzerland, and Taiwan, we are authorized to provide data networking and
Internet access services to Bridge and third party customers. Of these
countries, in Belgium, Denmark, Finland, New Zealand, Norway, Puerto Rico, and
Switzerland, no individual license is required. In Ireland we hold a Basic
Telecommunications License. In Spain, we hold a General Type C Authorization. In
Taiwan, we hold a Type II Telecommunications License. In the countries of
Austria, Luxembourg, Netherlands, Poland and Sweden we have complied with
notification requirements.
In other countries, including Argentina, Brazil, Chile, Columbia, Panama,
Peru, and South Korea, we are currently authorized to offer data networking and
Internet access services only to Bridge. However, we have already filed license
applications in Argentina, Brazil and Chile that will enable us to provide
services to third party customers and are in the process of preparing
authorization requests for the remainder. Although we expect to obtain the
necessary approvals to provide services in these countries to both Bridge and
third party customers, we cannot assure you that we will obtain any of these
approvals. In addition, while we are authorized to provide services to Bridge in
the Bahamas, Bermuda, India, Indonesia, Mexico, Philippines, and Turkey, these
countries' regulations do not yet permit us to provide services to third party
customers. Our business plan does not contemplate selling significant services
in these markets other than to Bridge in the near term. Therefore, we do not
believe that our inability to offer services to third parties in these countries
is significant.
In addition, we face regulatory and market access barriers in countries in
which we do not operate but in which we have an obligation to purchase the
Bridge Internet protocol network assets that we have not already acquired in the
Bridge asset transfer. In some of these countries, we are currently unable to
purchase these assets due to regulatory restrictions prohibiting foreign
competition. These countries include Bahrain, China, Kuwait, Macau, Saudi
Arabia, Thailand, and the United Arab Emirates. As these countries liberalize
their telecommunications markets, we will seek the authorizations necessary to
acquire and operate the network assets in order to provide services to Bridge
and, if permissible, other third party customers. Our business plan does not
contemplate selling services in these closed markets to either Bridge or other
customers in the near term. Therefore, we do not believe that our inability to
access these markets is significant.
In the remaining countries where we have an obligation to purchase the
Bridge assets, regulatory conditions now permit us to acquire these assets and
provide services to both Bridge and other customers. Consequently, we are in the
process of seeking regulatory approvals to offer services to Bridge and third
parties in Greece, Hungary, Malaysia, South Africa, and Venezuela. We are
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in the process of preparing authorization requests for the each country in this
group. Although we expect to obtain the necessary approvals to acquire the
Bridge assets and provide services to both Bridge and third party customers in
these countries, we cannot assure you that we will obtain any of these
approvals. As our business plan does not contemplate selling significant amounts
of services in these markets in the near term, we do not believe that the
failure to obtain the authorizations in these countries will have a material
impact on our revenues. At present, we do not know the extent to which Bridge,
its international affiliates or any future purchaser of all or a substantial
part of its international operations will continue to operate in these countries
due to the uncertainties surrounding the overall resolution of Bridge's
bankruptcy proceedings, which may impact our ability to acquire the assets not
already transferred by Bridge to SAVVIS.
World Trade Organization Agreement and its Implications
In December 1993, 54 countries during the Uruguay Round of World Trade
Organization ("WTO") negotiations made commitments to permit market access for
Value-Added Services. On February 15, 1997, 69 countries at the WTO reached an
agreement to liberalize basic telecommunications services. This Agreement on
Basic Telecommunications Services (the "ABT") formally entered into force,
binding the signatory countries, on February 5,1998. Since then, the number of
signatories has increased to 80. Before the agreement came into force, only 17
percent of the world's top 20 global markets were open to U.S. firms; now,
measured by annual sales, U.S. companies have gained access to over 95% of
global telecommunications markets, according to the International
Telecommunications Union. The current round of WTO negotiations on Trade in
Services commenced in 2000. With respect to the telecommunications, the United
States has proposed a negotiating framework which calls on all WTO members to
implement fully their basic telecommunications commitments, adhere to the ABT's
Reference Paper on Regulatory Principles, establish the goal of full
privatization of telecommunications operators and networks, ensure full
value-added services commitments, and maximize commitments in all services that
can be delivered electronically.
Despite the enactment of the ABT, regulatory obstacles continue to exist in
a number of signatory countries. First, some signatory countries made only
limited commitments in terms of the services that they were willing to
liberalize and the timeframe in which they were willing to do so. Second, some
less developed signatory countries are not well prepared for competition or for
effectively regulating a liberalized market; gaining the requisite experience
and expertise is likely to be a long and difficult process. Finally, even in the
more liberalized countries, there remains considerable "post-liberalization red
tape," such as complicated licensing rules, foreign ownership limits, high fees
and undeveloped competition and interconnection safeguards. Finally, some
countries with potentially large markets for telecommunications services, such
as China and Russia, are not yet WTO members and thus are not bound by the ABT's
framework on market access.
Corporate Presence
In a number of jurisdictions, we are permitted to provide services to local
customers only after first establishing a corporate presence, by way of either
the incorporation of a subsidiary or the registration of a branch or
representative office. We have established or will establish such a local
presence in each of the jurisdictions where such a presence is legally required.
Regulatory Analysis by Service Type
Data Networking Services. The core of our data networking services business
is providing managed data networking services to corporate customers, which we
market under various trade names. The managed data networking services that we
provide are generally characterized as data transmission services or value added
services for licensing purposes. We are authorized by law or by individual
license or a general authorization obtainable by simple notification or
declaration by an automatic "class" license to provide these services in all
countries in which we expect to generate significant revenue from data
networking services, including the United States, Canada, France, Germany,
Italy, the United Kingdom, Australia, Hong Kong, Japan, and Singapore.
Internet Access Services. The Internet access services that we offer
generally do not require any authorization beyond those required for managed
data networking services and value added services. In many countries, Internet
services are less heavily regulated than other enhanced data services. In the
United States, for instance, no individual authorization is required. However,
because Internet and IP technology is so new, regulations concerning Internet
access remain ill-defined or in flux in many countries. Moreover, certain
countries which today impose few restrictions on the provision of Internet
services may, in the future, adopt rules treating such services similarly to
basic voice telecommunications services. In addition, there is a risk that
customers may attempt to use our network to access the Internet in countries
that may prohibit or restrict such access or, after accessing the Internet, may
create or view content or engage in other activities that certain countries may
wish to prohibit or restrict. We may limit this risk by discontinuing such
access if measures are taken or threatened by the pertinent authorities to
restrict the use of our network for these purposes.
Hosting Services. The hosting services that SAVVIS currently provides in
the United States and other foreign countries are not considered
telecommunications service. Our four data center facilities are designed to
ensure a secure environment in which
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customers locate mission critical networking hardware, which enables us to
provide value-added hosting management and service options including server
management, operating system management, co-location, hardware management and
space and environmental provisioning. In most countries, hosting is a relatively
new product offering and therefore regulations do not specifically address it.
We do not foresee, however, the emergence of any regulatory issues that will
prevent us from selling our hosting services in accordance with our business
plan. However, we cannot guarantee that governments will not institute laws and
regulations that may impact the provision of these services.
Substantive Regulation in Key Markets
The regulatory regimes applicable to countries in North America (United
States and Canada), the European Union and the Asia Pacific Rim, our three major
regional markets, are summarized below.
North America
United States. We believe that the regulatory framework governing the
provision of telecommunications services in the United States permits us to
offer all of our planned services without significant legal constraints. We
provide these services on a resale basis today, however, we have entered into
certain agreements that will enable us to provide these services on a facilities
basis, as well. To the extent that any of these planned or future services
require prior authorization, either by the Federal Communications Commission
("FCC"), or by a state public utility commission, we believe there is no
significant risk that such an application would be denied or would face
processing delays that would have a material adverse effect on us.
Nevertheless, services offered over the Internet or using Internet protocol
may present distinct regulatory issues. Advancements in technology, moreover,
are increasingly narrowing the distinctions, from a customer's perspective,
between traditional or basic telecommunications services and Internet protocal
or Internet based services, and thus may lead regulators to reassess their
treatment of such services. The regulatory classification and treatment of some
of these services has not been resolved authoritatively in the United States, at
either the federal or state levels, and it is possible that various
Internet-related services will be subject to prior authorization and to as yet
undefined terms and conditions under which such authorizations may be granted.
The Telecommunications Act of 1996 distinguishes between telecommunications
services, which are regulated at the federal level by the FCC, and information
services, which are not. This Act defines "telecommunications services" as
"transmission, between or among points specified by the user, of information of
the user's choosing, without change in the form or content of the information as
sent and received." This Act defines "information services" as "the offering of
a capability for generating, acquiring, storing, transforming, processing,
retrieving, utilizing, or making available information via telecommunications."
The provisioning of telecommunications services on a common carrier basis
requires authorization and is subject to tariff requirements, as well as
contributions to a universal service fund ("USF") based on interstate and
international revenues. Providers of telecommunications services on a private
carrier basis are not required to obtain a specific authorization or files
tariffs, but are required to make USF contributions based on international and
interstate revenues. Intrastate telecommunications services are subject to
regulation by the relevant state public utility commission and may be subject to
licensing requirements, tariffs, and/or subsidy mechanisms.
Certain services may have components of both "telecommunications" and
"information." In its 1998 Report to Congress on Universal Service, the FCC
identified such services as "hybrids," defined as "services in which a provider
offers a capability for generating, acquiring, storing, transforming,
processing, retrieving, utilizing or making available information via
telecommunications, and as an inseparable part of that service transmits
information supplied or requested by the user." The FCC has determined that
certain hybrid services are exempt from federal regulation.
We believe that the products and services we offer, whether on a facilities
or resale basis, qualify as information services as defined by the
Telecommunications Act or exempt hybrid services as classified by the FCC and
thus are not subject to federal regulation. Nor do we believe that our services
are subject to regulation by the various states in which we provide intrastate
services. There is some risk that the FCC or a state commission could determine
that our products and services require specific authorization or are subject to
tariff filing or USF obligations or other regulations. In such case, we may be
required to obtain such authorizations and/or comply with other regulatory
obligations. We have no reason to believe, however, that any applications for
federal or state authorizations would be denied or would face processing delays
that would have a material adverse effect on us.
There also is some uncertainty about the regulatory status of voice
services provided over data networks. If we were to offer voice services in the
future, there is some risk that those services could be subject to regulation
and that those services could be treated similarly to voice services provided
over conventional circuit-switched network facilities for purposes of making
payments to local telephone companies for origination and termination of calls
and for other purposes.
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Canada. Communications services in Canada are governed by the
Telecommunications Act of 1993 and administered by the Canadian Radio-Television
and Telecommunications Commission ("CRTC"). This Act requires that providers of
international telecommunications services obtain a license; however, no specific
license is required to provide domestic telecommunications services. SAVVIS has
obtained a Class A License for the Provision of Basic International
Telecommunications. With respect to facilities, an entity that wishes to own or
operate a transmission facility to provide telecommunications services to the
public for a fee must qualify as a Common Carrier. Because Canada has not fully
liberalized its telecommunications market, Common Carriers may not be owned and
controlled by foreign persons. Currently, we provide our services in Canada over
lines leased from authorized providers. Although SAVVIS is pursuing the
acquisition of transmissions facilities in Canada on an Indefeasible Right of
Use ("IRU) basis, we do not believe that we will either "own or operate" the
facility as defined by the Canadian Telecommunications Act and interpreted by
the CRTC. Therefore, we do not believe we will be required to qualify as a
Common Carrier in order to use these facilities to provide our services in
Canada.
European Union. In the last ten years, the European Union has established a
comprehensive and flexible regulatory system, culminating in the full
liberalization of telecommunication networks and services effective on January
1, 1998. By that date, ten European Union member countries were required to
adopt a fully liberalized telecommunications regime. These countries were
Austria, Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands,
Sweden and the United Kingdom. The five remaining European Union countries,
Luxembourg, Ireland, Spain, Portugal and Greece, were allowed a derogation
permitting them to delay the full liberalization of their telecommunications
regime. As a result, Luxembourg liberalized its telecommunications regime on
July 1, 1998; Spain and Ireland on December 1, 1998; Portugal on January 1,
2000; and Greece on December 31, 2000.
The process of opening up the region's telecommunications markets was
achieved through European Union legislation called directives. Directives are
addressed to and binding on European Union member countries and require
implementation into national law. There are two types of European Union
directives relating to telecommunications: first, directives adopted by the
European Commission aimed at liberalizing European Union markets and, second,
directives adopted by the European Council aimed at ensuring that a minimum set
of harmonized rules applies throughout the European Union. All 15 European Union
member countries were obligated to incorporate the principles contained in these
directives into their respective domestic legal frameworks. However, the impact
of the European Union directives has been affected in some cases by delayed or
inadequate implementation, as well as the irregular enforcement by the domestic
regulatory authorities of some European Union member states. In addition, new
market entrants may encounter cumbersome licensing and reporting requirements,
difficulty negotiating interconnection agreements and obtaining local loops, and
burdensome requirements concerning data protection and privacy.
United Kingdom. The Telecommunications Act of 1984 provides the regulatory
framework for the provision of telecommunications services in the United
Kingdom. The authorization regime established by this Act is largely
infrastructure based, meaning that systems or facilities are licensed; services
are generally exempted from individual license requirements. Accordingly, with
minor exceptions, regulatory treatment under this Act does not hinge on whether
the license applies to data or voice.
SAVVIS provides its services over international private leased circuits
("IPLCs") and leased local loops which are not connected to the public switch
and, as such, is not required to obtain an individual license. Our services are
provided under the Telecommunications Services Class License. This Class License
authorizes the provision of fixed telecommunications services of any
description, other than international voice services, broadcasting and
conditional access services. The class license allows us to connect our network
to essentially any other licensed system and to provide commercial services to
third parties from up to twenty premises. Internet access services are not
subject to additional service-specific regulation.
Germany. The legal framework for the deregulation of the telecommunications
sector in Germany is contained in the Telecommunications Act of 1996, which
became effective on August 1, 1996, and its implementing ordinances adopted
since then. Under this Act, only two services require individual licenses:
transmission, which requires a Class 4 license, and voice, which requires a
Class 3. Non-voice services are not subject to individual licensing, however,
notification to the regulator describing the services to be provided is
required. We lease our IPLCs and local loops from authorized providers and do
not provide voice services. Therefore, we are only subject to the notification
procedure, which we have completed. Should we wish to own and operate facilities
or provide voice services in the future, we might be required to obtain a Class
4 or Class 3 license. These licenses remain expensive, because Germany has yet
to implement the EU directive requiring that license fees only reflect
administrative costs.
France. The legal framework for regulation in the telecommunications sector
in France is set forth in the Telecommunications Act of 1996, which became
effective on July 28, 1996, and subsequent decrees on interconnection, universal
service, numbering, licensing and rights-of-way. This Act has liberalized most
telecommunications services. The services that SAVVIS provides in France,
whether over IPLCs are on an IRU basis, are governed by section L34.2, which
provides that such telecommunications services may be provided without
restriction, and as such do not require any form of authorization or
notification. Were SAVVIS in the future to acquire dark fiber and light it, then
it may be required to obtain a L33.1 license to establish and operate a public
telecommunications network.
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Italy. Pursuant to Law No. 103 on Telecommunications of 1995 and subsequent
decrees, the provision of telecommunications services in Italy to general public
is subject to the granting of authorizations from the Ministry of
Communications. Two of the authorizations are applicable to SAVVIS' services.
The first covers the provision of telecommunications services through direct
access to the public network, including Internet access services, and the second
covers the provision of packet-switched data services or simple resale of
capacity, including data transmission. For the provision of telecommunications
services through switched access to the public network, a notice must be filed
with the Ministry of Communication. SAVVIS has received both of the above
referenced authorizations and provided the requisite notice.
Asia-Pacific Rim. The last decade has witnessed dramatic changes across the
Asia-Pacific Rim as emerging markets have begun to open their economies to trade
and competition. The Asia-Pacific Economic Cooperation ("APEC"), established in
1989 in response to the growing interdependence among Asia-Pacific economies,
has become the primary vehicle for promoting open trade and economic cooperation
in the region. APEC includes 21 member countries, including the United States.
With respect to telecommunications, degrees of liberalization vary significantly
among the APEC members. Australia and New Zealand have fully liberalized the
sectors. Japan, Singapore, and Taiwan have opened their markets to foreign
competition, however, one or more factors, such as complicated and
time-consuming regulatory procedures, lack of complete independence of
regulators, and continued governmental ownership of incumbent operators, impose
costs on new market entrants, restricting competition. China and the Philippines
continue to restrict direct foreign investment in the telecommunications sector
to minority ownership or prohibit it all together.
Australia. The Australian telecommunications market is largely based on
principles of self-regulation and open competition, introduced by the
Telecommunications Act of 1997. Under this Act, the services SAVVIS provides
have been deregulated and are not subject to licensing. Furthermore, SAVVIS
leases the local loops and IPLCs in Australia and thus is not required to obtain
a Carrier License. However, there are no regulatory impediments preventing
SAVVIS from obtaining a Carrier License should we acquire our facilities in the
future. We have, however, registered with the Telecommunications Industry
Ombudsman, which provides a mechanism for addressing consumer complaints.
Hong Kong. Telecommunications in Hong Kong is governed by the
Telecommunications Ordinance which provides that no one shall operate a public
telecommunications network or provide services without a license from the Office
of the Telecommunications Authority ("OFTA"). Authorization to provide managed
data network services and Internet access over public switched networks or IPLCs
is covered by the Public Non-Exclusive Telecommunications ("PNETS") License,
which SAVVIS has obtained.
Japan. The legal framework for regulation in the telecommunications sector
in Japan is governed by the Telecommunications Business Law of 1985. The Law
distinguishes between Type I and Type II carriers, with the former installing
and operating its own telecommunications circuit facilities, and the latter
providing services with the use of circuit facilities leased from Type I
carriers. Type II carriers are further divided into two sub-groups: Special Type
II licensees are defined as carriers with large network capacity who provide
service to many unspecified users or who provide international communications
services; all other Type II carriers are classified as General Type IIs.
Specific authorization is required to provide Type I or Special Type II
services, while only prior notification is required to provide General Type II
services. SAVVIS leases its facilities from Type I carriers and provides
services covered under the Special Type II Telecommunications Business License,
which it has received. If SAVVIS were to obtain its own facilities in the
future, it would be required to obtain a Type I License. Under its WTO
commitments, Japan has lifted foreign ownership restrictions on Type I carriers,
however, the application procedures remain cumbersome and subject to substantial
regulatory discretion.
Singapore. Singapore introduced open competition and removed foreign
ownership restrictions on April 1, 2000. Facilities-based operators are required
to obtain individual licenses; service-based operators are authorized either by
class license or individual license. There are no restrictions on the number of
entrants in the sector. Both our managed data network and Internet access
services fall under the Services-Based Operators (Individual) License category,
which we have obtained. We are also authorized under the Class License for Store
& Retrieve Value Added Network Services. As we currently lease transmission
capacity from Facilities Based Operators ("FBO"), we are not required to obtain
an FBO license; however, if we elect to operate our own facilities in the
future, we would not anticipate any significant barriers to obtaining that
license.
Regulatory Assessment of Other Markets
Europe, excluding European Union member countries. Telecommunications
services are liberalized in varying degrees in European countries that are not
EU members. As a matter of practice, Switzerland and Norway conform their
regulatory frameworks to the European Union model and we are authorized to
provide services to Bridge and third parties in both countries. In Poland, the
new Telecommunication Law of 2000 lifted foreign ownership restrictions,
permitting the provisioning of data networking and Internet access services upon
notification to the regulator, which we have done. By contrast, in Hungary, upon
filing the necessary notification, a foreign owned subsidiary may provide
certain data networking services only to a defined closed user group and, upon
receipt of necessary authorizations, may provide Internet access services. We
anticipate filing application materials in the near future in Hungary, however,
we cannot guarantee that we will obtain the requisite authorizations to provide
services.
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Asia, excluding Australia, Hong Kong, Japan and Singapore. Regulatory
regimes vary greatly in character throughout Asia. At the liberalized end of the
spectrum, countries such as New Zealand have adopted policies that require no
licenses to provide data networking and Internet access services and we are
authorized to provide services in New Zealand both to individual Bridge and
third parties. Other countries, such as Taiwan, are open to competition, but
require service providers to comply with extensive licensing procedures; we have
completed that process in Taiwan and hold a Type II Telecommunications License.
At the more restrictive end, countries such as, Indonesia and Philippines
require some minimum level of domestic ownership in order to provide data
networking and Internet access services to persons other than Bridge;
regulations in countries such as China and Thailand restrict our ability to
provide services to any customer.
Central and South America/Caribbean
Use of the Internet is growing rapidly throughout Latin America, due in
large part to the introduction of competition and the lifting of foreign
ownership constraints in the major markets of Argentina, Brazil and Chile.
Individual licenses are generally required throughout the region in order to
provide data networking and Internet access services. In Argentina, we have
filed a license application for the Provision of Data Transmission and Value
Added Services. In Brazil we have filed a license application for Specialized
Network Services and Specialized Circuit Services. In Chile, we have filed for
an Intermediate Concession for Value Added Services. Although we expect to
obtain all of these approvals, we cannot assure you that we will obtain any of
them. In Mexico, we are registered to provide Value Added Services for Bridge.
However, foreign ownership restrictions prevent us from obtaining a license to
provide services directly to other customers. In addition, the regulator Cofetel
still lacks true independence and the incumbent operator continues to exercise
monopoly-like powers. In December 2000, the United States requested that the WTO
convene a panel to investigate Mexico's compliance with its obligations to
provide foreign access to its telecommunications market under its WTO
commitments.
Middle East/Africa
The telecommunications market in much of the Middle East and Africa remains
largely closed to foreign competition in a wide range of services. In addition,
some governments impose strict content restrictions and hold the network service
providers liable for content that runs over the network. The market in South
Africa, by contrast, is now open for SAVVIS to provide its services by obtaining
a Value Added Network Services License. The incumbent operator, however, remains
the only provider of local loops and has been reluctant to provision lines to
unaffiliated companies. SAVVIS is in the process of preparing the license
application materials, however, we cannot guarantee that we will obtain the
authorization to provide our services in South Africa.
INTELLECTUAL PROPERTY
We do not own any patents or registered trademarks, except for our business
name and several product names for which we are in the process of applying, nor
do we hold any material licenses, franchises or concessions. We enter into
confidentiality and invention assignment agreements with our employees and
consultants and control access to and distribution of our proprietary
information.
EMPLOYEES
As of December 31, 2000, we employed 589 full-time persons, 275 of whom
were engaged in engineering, operations and customer service, 264 in sales and
marketing, and 50 in finance and administration. Approximately 100 personnel
were transferred from Bridge to SAVVIS upon the transfer of the Bridge network
on February 18, 2000, and approximately 30 additional personnel were transferred
from Bridge to SAVVIS into various departments subsequent to the network
transfer. None of our employees is represented by a labor union, and we have not
experienced any work stoppages to date. We consider our employee relations to be
good.
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RISK FACTORS
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, set forth below are cautionary statements
identifying important factors that could cause our actual results to differ
materially from those projected in any forward-looking statements made by or on
behalf of us, whether oral or written. We wish to ensure that any
forward-looking statements are accompanied by meaningful cautionary statements
in order to maximize to the fullest extent possible the projections of the safe
harbor established in the Private Securities Litigation Reform Act of 1995.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the following important factors that could cause our
actual results to differ materially from those projected in our forward-looking
statements.
RISKS RELATED TO OUR BUSINESS
OUR LARGEST CUSTOMER HAS FILED FOR PROTECTION UNDER THE BANKRUPTCY LAWS, WHICH
MAY HAVE A MATERIAL ADVERSE EFFECT ON US.
Effect of Bridge Bankruptcy on Our Revenues. Bridge is our largest customer,
accounting for approximately 81% of our revenues in 2000. On February 15, 2001,
Bridge's U.S. operating subsidiaries filed for protection under Chapter 11 of
the Bankruptcy Code. Bridge's financial condition, ability and willingness to
meet its payment obligations under the network services agreement will affect
our revenues and our ability to run our business. There can be no assurance that
we will receive timely payments owed to us under the network services agreement
from Bridge. The Bankruptcy Code may restrict the amount and recoverability of
our claims against Bridge. In addition, under the automatic stay provisions of
the Bankruptcy Code, we are currently prevented from exercising certain rights
and remedies under our network services agreement with Bridge and from taking
certain enforcement actions against Bridge. Under section 362 of the Bankruptcy
Code, during a Chapter 11 case, creditors and other parties in interest may not
do the following without bankruptcy court approval:
o commence or continue judicial, administrative or other cases against
the debtor that were or could have been commenced prior to
commencement of the Chapter 11 case, or recover a claim that arose
prior to commencement of the case;
o enforce any pre-petition judgments against the debtor;
o take any action to obtain possession of or exercise control over the
debtor's property or estates;
o create, perfect or enforce any lien against the debtor's property;
o collect, assess or recover claims against the debtor that arose before
the commencement of the case; or
o set off any debt owing to the debtor that arose prior to the
commencement of the case against a claim of such creditor or
party-in-interest against the debtor that arose before the
commencement of the case.
As of March 31, 2001, Bridge owed us approximately $33 million (before
offsetting our note due to Bridge), of which approximately $17 million
represented claims that arose before Bridge filed for bankruptcy, approximately
$2 million represented claims that arose after the commencement of the
bankruptcy, and approximately $14 million represented claims with respect to
Bridge's international operations which are not part of the bankruptcy
proceedings.
In addition, Bridge has the right, subject to bankruptcy court approval and
certain other limitations, to assume and assign or reject executory,
pre-petition contracts and unexpired leases. In this context, "assumption"
requires Bridge to perform its obligations and cure all existing defaults under
the assumed contract or lease and "rejection" means that Bridge is relieved from
its obligations to perform further under the rejected contract or lease, but is
subject to a claim for damages for the breach thereof subject to certain
limitations contained in the Bankruptcy Code. Generally, any damages resulting
from rejection are treated as general unsecured claims in the reorganization
cases. Pre-petition claims that were contingent or unliquidated at the
commencement of the Chapter 11 cases are generally allowable against the debtor
in amounts to be fixed by the bankruptcy court or otherwise agreed upon. In the
event that Bridge rejects the network services agreement, our expected revenues
would be materially reduced and such reduction could have a material adverse
effect on our business. It is unlikely that we would be able to replace the
expected revenues from the Bridge network services contract with new customers
or increased demand from existing customers on such a timetable that would allow
us to meet our obligations to our suppliers under existing contracts. The data
center we have constructed in St. Louis, Missouri is located on land owned by
Bridge. Bridge has given its banks a mortgage on the land. We do not have a
written agreement with Bridge and, because Bridge is in bankruptcy, we are not
able to obtain one. If we are unable to come to an agreement with Bridge
regarding the land on which the data center is located, such dispute between us
and Bridge would have to be resolved by the bankruptcy court.
Effect of Bridge Bankruptcy on Our Operations. Bridge provides to us many
technical, administrative and operational services and related support
functions, including technical and customer support service and project
management in the procurement and installation of equipment. Our network
equipment, including our PrivateNAPs,(SM) is located in spaces subleased from
Bridge. Bridge also provides to us additional administrative and operational
services, such as payroll and accounting functions, benefit management
21
and office space. If Bridge were to cease operations, liquidate its assets or
reject all of these contracts or otherwise stop providing these services, our
operations would be disrupted and we could face significant challenges and costs
in assuming these services or finding an alternative to Bridge. This could
impair our operations, adversely affect our reputation and harm our financial
results.
In addition, we sublease from Bridge some network assets that Bridge
currently leases from General Electric Capital Corporation, or GECC. As of March
31, 2001, the aggregate amount of our capitalized lease obligations to Bridge
was approximately $9.3 million. We do not have a direct relationship with GECC.
Bridge has failed to perform its obligations under its agreements with GECC and
with Savvis, including forwarding to GECC payments we made to Bridge, and as a
result our rights to such network assets may be impaired. Furthermore, SAVVIS
has deposited the the March and April 2001 payments, amounting to $ 1.2 million,
into a separate account instead of making payment to Bridge, thus causing a
default with Bridge under this lease.
Sale of Our Shares by Bridge. Bridge has announced that it is seeking ways
to sell its assets in bankruptcy, including the shares in our company that it
owns. The sale of Bridge or the sale of all or substantially all of our shares
owned by Bridge could result in a change of control in our company as Bridge
currently owns approximately 48% of our outstanding common shares.
Effect of Bridge Bankruptcy on Our Credit Facility. The Bridge bankruptcy
constituted an event of default under our credit facility with Nortel Networks,
Inc. Pursuant to the terms of the credit facility, the Bridge bankruptcy event
of default resulted in the automatic acceleration of all amounts outstanding
under the credit facility and the termination of the remaining commitments under
the credit facility. As a result, we are not currently able to borrow under the
credit facility and are therefore unable to perform our obligations under our
equipment purchase agreements with Nortel and Level 3. While Nortel has not
demanded that we repay amounts owed under the credit facility, all amounts
incurred thereunder are due and payable and they have the right to demand
payment at any time. We have requested from Nortel a waiver of defaults under
the credit facility, however, there can be no assurance that a waiver will be
granted. On February 20, 2001, we received a $20 million investment from
affiliates of Welsh Carson in the form of a five y