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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, 2001
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
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(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. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 15, 2002 was approximately $32,900,000.
The number of shares of the registrant's common stock outstanding as of
March 15, 2002 was 94,025,382.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of the Form 10-K into which the document is incorporated:
Portions of the definitive proxy statement for the 2002 annual meeting of
stockholders to be held on June 7, 2002, to be filed within 120 days after the
end of the registrant's fiscal year, are incorporated by reference into Part
III, Items 10-13 of this Form 10-K.
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SAVVIS COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business ..................................................................... 3
Item 2. Properties ................................................................... 32
Item 3. LegalProceedings ............................................................. 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 37
Operations ...................................................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................... 49
Item 8. Financial Statements and Supplementary Data .................................. 49
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ................................................................... 49
PART III
Item 10. Directors and Executive Officers of the Registrant ........................... 50
Item 11. Executive Compensation ....................................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and Management ............... 53
Item 13. Certain Relationships and Related Transactions ............................... 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .............. 54
Signatures ................................................................... 60
Index to Consolidated Financial Statement .................................... F-1
2
PART I
ITEM 1. BUSINESS.
Cautionary Statement
Some of the statements contained in this Form 10-K discuss future
expectations, contain projections of results of operations or financial
condition or state other forward-looking information. Any statements in this
report that are not statements of historical facts, are intended to be, and
are, "forward-looking statements" under the safe harbor provided by the Private
Securities Litigation Reform Act of 1995. These statements are subject to known
and unknown risks, uncertainties and other factors that could cause the actual
events to differ materially from those contemplated by the statements. The
forward-looking information is based on various factors and was derived using
numerous assumptions. In some cases, you can identify these so-called
"forward-looking statements" by our use of words such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"project," "intend" or "potential" or the negative of those words and other
comparable words. You should be aware that those statements only reflect our
predictions. Actual events or results may differ substantially. Important
factors that could cause actual events or results to be materially different
from the forward-looking statements include those discussed under the heading
"Business--Risk Factors" and throughout this Form 10-K. Although we believe the
expectations reflected in our forward-looking statements are based upon
reasonable assumptions, we can give no assurance that we will attain these
expectations or that any deviations will not be material. Except as otherwise
required by the federal securities laws, we disclaim any obligations or
undertaking to publicly release any updates or revisions to any forward-looking
statement contained in this annual report on Form 10-K and the information
incorporated by reference in this report to reflect any change in our
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
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.
OVERVIEW
SAVVIS is a global network service provider ("NSP") that delivers IP VPNs
(virtual private networks), Internet services, and managed hosting to
medium-sized enterprises and the financial services market.
o The mid-market, which is underserved by traditional data
communications carriers, is the fastest growing segment of the IP VPN
market.
o In financial services, SAVVIS is a leading provider of
high-performance networking services, including Financial Xchange(SM),
which delivers speed-to-market advantages through connectivity to more
than 4,700 financial institutions worldwide.
SAVVIS' services are briefly described below:
o MANAGED IP VPNS combine the advantages of private networks
(reliability, performance and security) with the popular features of
the Internet (scalability and flexibility), at a price often less than
both. Enterprises can connect their offices, partners, remote
employees and telecommuters over an affordable private network, which
was named Product of the Year for 2001 by the editors of Network
Magazine. SAVVIS was selected over well-known VPN providers such as
ATT, WorldCom, Sprint and Genuity.
o INTERNET ACCESS bypasses the bottlenecks of the Internet, based on
SAVVIS' award-winning PrivateNAP(SM) architecture. This service is
available in both managed and unmanaged offerings.
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o MANAGED HOSTING allows our customers to outsource their
mission-critical content in a highly secure, fault tolerant data
center environment. SAVVIS can satisfy both complex hosting needs with
its a la carte service offering, as well as provide pre-packaged
solutions for web, enterprise and database applications that can be
installed in a few as 5 days.
HISTORY
SAVVIS began commercial operations in 1996, offering Internet access
services to local and regional Internet service providers. We pioneered the use
of Private Network Access Points ("PrivateNAPs(SM)"), where SAVVIS exchanges
data through dynamic "on net" connections with the other major Internet network
providers. PrivateNAPs(SM) dramatically minimize latency and packet loss by
bypassing the PublicNAPs, which are the bottlenecks of the Internet.
In April 1999, SAVVIS was acquired by Bridge Information Systems
("Bridge"), a global provider of real-time/historical financial information, as
well as news about stocks, bonds, foreign exchange and commodities. Bridge
constructed a highly redundant, fault tolerant network based on Internet
protocol ("IP") and asynchronous transfer mode ("ATM") technologies to provide
its services to some of the largest financial companies and institutional
investors in the world. In September 1999, the two networks were combined: the
original SAVVIS network, which was constructed to provide high quality Internet
access in the United States, and the IP network of Bridge, which had been
constructed to meet the exacting requirements of the financial services
industry worldwide. 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 IP VPN services, which we began offering in
September 1999.
We currently provide IP VPN, Internet access and hosting services directly
to approximately 1,500 customers. Each of these services is described below:
NETWORK-BASED IP VPNS
Three months after our IPO, SAVVIS enhanced our IP VPN offerings by
introducing network-based IP VPN services across our entire global platform.
SAVVIS was the first global network service provider to provide IP VPNs that
were network-based, i.e., the "intelligence" needed to make networking
decisions resides inside our network, rather than residing inside complex
hardware at the customer's premises.
The SAVVIS Intelligent IP Network(SM) architecture, which interconnects
over 6,000 buildings in 121 of the world's major commercial cities in 45
countries, is based on the unique marriage of two technologies:
o ATM which supports the transmission of all kinds of content and allows
data to be prioritized, and
o IP, 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).
We believe that the widely predicted growth in Internet-based IP VPNs was
not realized because of the inherent unpredictable performance of the Internet,
which SAVVIS' unique architecture solves. SAVVIS' Intelligent IP Networking(SM)
combines the security, reliability and performance of private networking with
the affordability and flexibility of the Internet, delivering the ultimate
solution demanded by businesses. Cahners, an Industry Analyst firm, now predicts
that network-based VPNs will become the most prevalent IP VPN implementation,
growing to 90% of the networks implemented by 2003. With over 475 customers and
$200 million in revenue in this new category, SAVVIS is leading the way in this
market.
SAVVIS' Intelligent IP Networking(SM) platform has four other significant
distinctions:
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o First, the service is simple to deploy and easy to scale because there
are no complicated meshing, since the routing and firewalling are virtual
services, provided by the "intelligence" in-net.
o Second, SAVVIS can provide numerous networking solutions over a single
connection to the network, enabling customers to save on expensive "local
loop" charges, as well as quickly and cost-effectively change their
networking requirements as their business changes;
o Third, customers can manage their data services costs by assigning high
Quality of Service ("QoS") levels to mission-critical applications and
lower QoS to less time-sensitive applications such as e-mail. Other
carriers force the customer to pay for the highest common denominator,
since they do not have the flexibility to ascribe different QoS levels to
each application.
o Fourth, SAVVIS' Network Creation System enables us to easily design,
implement and change parameters on customer's individual networks without
adding costly overhead, thereby enabling us to keep our prices
competitive.
All of this capability is provided with simplified pricing more in line
with the price structure of the Internet. Furthermore, the customer does not
need technical staff at each location, which provides further price benefits.
Unburdened by complex IT requirements, businesses can focus on their core
competencies.
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 QoS level chosen. Our customer
agreements are typically for 12 to 36 months.
Our revenue is derived primarily from the sale of IP VPN services. Our two
largest customers, Reuters plc ("Reuters") and MoneyLine Telerate represent
approximately 75% of our revenues. Reuters and MoneyLine Telerate acquired
substantially all of the operating assets of Bridge in September and October
2001, respectively. Reuters and MoneyLine Telerate have each entered into
network service agreements with us providing for aggregate minimum revenue
commitments over five years totaling $566 million, less payments made by Bridge
to the Company in the period from May 3, 2001 to September 28, 2001. Prior to
October 2001, Bridge, which filed for bankruptcy in February 2001, was our
largest customer (representing approximately 80% of our revenues) and our
largest shareholder (holding approximately 48% of our outstanding common
shares). 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.
INTERNET ACCESS
SAVVIS offers a wide range of Internet access options designed to meet the
needs of businesses of all sizes. From its inception in 1995 as a national
Internet service provider, SAVVIS designed its global network infrastructure to
deliver the superior performance, reliability and security demanded by
companies for whom data transmission is critical to success. Surpassing 36
other well-known service providers, SAVVIS was rated #1 in network performance
for the second year in a row by Keynote Systems, Inc., an independent ISP
auditor, as reported in the Boardwatch Magazine Year 2000 Directory of Internet
Service Providers
SAVVIS pioneered the use of strategically located Private Network Access
Points ("PrivateNAPs(SM)") to provide businesses with the most direct route on
the Internet. Today, SAVVIS has 13 PrivateNAPs on our network, including its
first European PrivateNAP in London and a PrivateNAP in Singapore.
SAVVIS has also deployed 142 Points of Presence ("POPs"), and the global
network currently reaches 121 cities in 45 countries. POPs bring the edge of the
network closer to customers and provide cost-effective geographic outreach.
Customer traffic is then routed through a PrivateNAP, directly reaching the
ultimate Internet destination over 95% of the time, rather than traversing
multiple PublicNAPs as most competitive ISPs must do in order to reach the
desired location.
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SAVVIS offers both fully managed Internet solutions, as well as Internet
access. With managed solutions, we provide all of the equipment, installation
and technical support to manage the circuit. These solutions also provide the
flexibility that growing companies need, as they can add new Internet
applications or increase their bandwidth virtually instantaneously.
MANAGED HOSTING
Intelligent Hosting(SM) services round out SAVVIS' integrated package of
outsourced solutions, bringing to the commercial market more than five years'
experience in managing over 20,000 servers for the financial services industry.
Although simple shared hosting and colocation services have dominated the market
to date, analysts estimate that managed and custom hosting will capture the
lion's share of revenues by 2004.
Four characteristics drive businesses' decision-making for hosting:
reliable, high-performance Internet connectivity; data center security;
scalability; and the ability to monitor performance at the site.
Data Center Availability and Connectivity: SAVVIS has built 150,000 square
feet of data center facilities around the globe, with the highest levels of
security, redundancy, availability and on-site support. We believe that no
other hosting service provider offers guaranteed 100% availability to the
hosting environment, 100% available connectivity to the Internet and 99.9%
availability to systems. The company's main data center is in St. Louis, with
regional centers in San Francisco, London, Singapore and Toronto.
Security and Performance: Power failures, fires, earthquakes, intrusions,
inadvertent tampering and other forces can compromise data. SAVVIS' data
centers have taken safeguards against these possibilities. For instance, in the
St. Louis data center, walls are constructed with reinforced concrete four-feet
thick; tanks hold 20,000 gallons of diesel fuel to protect against power
outages; the Center is built to withstand an earthquake of 7.5 on the Richter
scale. SAVVIS' Intelligent Hosting is further differentiated by the patented
Intelligent RackTM enclosure, which sets a new standard for physical security.
The Intelligent Rack is standard in all SAVVIS data centers and features a
card-based reader that provides access control, authorization and
authentication capabilities.
Superior Scalability: SAVVIS built its data centers to full capacity from
day one, with connectivity to its backbone pre-provisioned to each of its
Intelligent Racks. As a result, the company can bring up customers quickly and
reliably, ensuring the scalability needed by rapidly growing companies.
Integrated Site Monitoring and Reporting: Customers gain full visibility
into their hosted environment through the SAVVIS Customer Command Center, which
is a secure information portal that allows customers remote access to
statistics and information regarding the performance of their site. The
Customer Command Center is unique because it integrates hosting and network
statistics.
In addition to managed hosting services, SAVVIS also provides colocation at
its Private Network Access Point (PrivateNAP(SM)) locations for companies that
want direct access to the top ranked Internet backbone, but prefer to manage
their own hosting environments.
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 McKinsey, an independent research firm, the demand for dedicated
Internet access services will grow to $16.3 billion by 2005, a 31% 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 to $12 billion by 2003, a
32.5% compound annual growth rate.
IP VPNs. 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 to approximately $35 billion in 2004, of which fully $10 billion will
be comprised of network-based IP VPNs, a market in which SAVVIS has a
leadership position.
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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 deploy wide area networks aggressively,
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.
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 still a fast growing segment of the
global telecommunications services market. According to International Data
Corporation, the number of Internet users worldwide 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 IP-based
voice, fax and video services.
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.
IP has become the communications protocol of choice for the desktop and for
local area networks. As a result, IP wide area network implementation requires
no protocol conversion, reducing overhead and improving performance. Many
corporations are connecting their remote locations using intranets to enable
more efficient communications with employees, providing remote access for
mobile workers and reducing telecommunications costs by using value-added
services such as IP-based fax and video-conferencing.
Rapid growth in e-commerce. While most corporations' early use of the
Internet in e-commerce was to establish an Internet marketing presence,
businesses today are using the Internet much more aggressively to: generate new
revenues, increase efficiency through improved communications with suppliers
and other third parties, and 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 to $1.3 trillion in 2003.
In addition, Forrester Research, Inc. projects that the market for
business-to-consumer e-commerce will grow to $108 billion over the same period.
Outsourcing of IP based 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 IP and e-commerce development. Second, many companies
believe that establishing leadership in their industry with respect to IP based
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. Businesses of all sizes
historically house, maintain and monitor their own web and content servers. As
IP-enabled applications became mission-critical, larger, more difficult to
develop, and maintain and required increasing amounts of investment, a
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substantial number of businesses began to outsource their colocation and
hosting requirements to third parties. Forrester Research, Inc. projects that
the managed hosting business will grow from approximately $3.7 billion in 2002
to almost $20 billion by 2004. We believe that companies seeking IP 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.
BUSINESS STRATEGY
Our objective is to tap the rapidly growing market for reliable,
high-speed IP VPN's, Internet, and managed hosting services. Specifically, we
intend to:
Establish SAVVIS as a leading provider of public and private IP transport
solutions for business-to-business communications. We intend to market a
combination of our Intelligent IP Networking(SM) services, Intelligent
Hosting(SM) and Internet 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 Networking(SM) platform and Private
NAP(SM) architecture sets us apart from the competition in meeting the demand.
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.
Capitalize on the demand for outsourced services in the VPN, 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.
Provide the Application Infrastructure Platform support utilizing the
SAVVIS Intelligent Hosting(SM) services to meet customers e-commerce
requirements, and to complement 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 , London and
Singapore. In addition, we intend to provide both private and public IP
transport to the customers hosted site.
Grow domestic and international distribution channels. We intend to grow
our distribution channels aggressively, 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 and
QuantumShift to resell our services and will continue to sign up additional
partners in 2002.
Leverage our network and PrivateNAPs(SM) infrastructure which include
industry-leading "intelligence" built into our platform. We have completed a
major build out of our global network, now reaching 121 cities in 45 countries.
Four new PrivateNAPs(SM) were added to the network, including a PrivateNAP(SM)
in Singapore and the industry's first European PrivateNAP(SM) in London, for a
total of 13 currently in operation. Since the launch of our Intelligent IP
Network(SM)
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architecture last May, which puts the "smarts" inside our 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 digital subscriber lines
("DSL") edge routers.
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), provides highly available
domestic and international managed data networking. As well, our managed hosting
offering uniquely positions 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 IP based voice and video that will enable us to further
leverage our network infrastructure and our customer base. For example, we have
deployed ATM to the edge of our network and 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
We 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 with the IP
Intelligence in 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.
Additionally, 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.
SAVVIS' Intelligent IP Network(SM) platform enables our customers to choose
between having their own private extranet or combining a private
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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. Until now,
however, 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. 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 DS1, DS3, OC3 and Ethernet. Our 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 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
10
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. 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 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.
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.
SALES AND MARKETING
We contact potential new customers through our direct sales force and our
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 manage the relationship
effectively 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 seventy
people in ten major cities in the U.S. and approximately eighty 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.
Lead Referrals. We believe that additional content providers will be
interested in establishing lead referral programs. We seek to enter into
relationships with content providers to enable them to deliver their services 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 and QuantumShift. To help these companies compete in
today's changing market, our alternate channels strategy provides companies
with network infrastructure, sales and technical support and value added data
services. Our partners have web 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,
11
providing a more complete service bundle and reduce customer churn. We have
identified distribution opportunities with Internet service providers,
competitive local exchange carriers, 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 additional services to existing customers,
such as advising on VPN and managed hosting solutions.
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, Internet 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, from
time to time. 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. Our marketing programs are targeted at information technology
executives, as well as senior marketing and finance managers. We closely track
the impact and effectiveness of our primary marketing programs.
Sales Force Automation. We use our proprietary sales force automation
system to manage all pre-sales communications with our prospective customers.
All distribution and tracking of sales leads occur through this system. Sales
leads are imported from data sources such as corporate web sites,
telemarketing, direct mail and national advertising campaigns, and assigned
regionally to the desktops of the appropriate sales representatives. All
contact with these prospects is documented in the sales force automation system
through every step of the sales cycle, from initial contact to contract
receipt. In addition, this system allows sales management to monitor the sales
activity of their specific sales representatives and generate sales forecasts
based on that activity. Further, our sales force automation system tracks all
marketing communications with the prospective customers, allowing us to measure
the effectiveness of various collateral materials and marketing campaigns in an
effort to maximize our marketing dollars. Lastly, our sales people use our
sales force automation system to track and manage their personal sales
prospects and to send customized packages of sales literature, brochures and
faxes directly from their computer desktops, thereby improving sales
efficiency.
CUSTOMERS
We currently provide services to approximately 1,500 customers. In
September and October 2001 we entered into five year agreements with Reuters
and MoneyLine Telerate providing for aggregate minimum revenue commitments of
$566 million over the contract terms. These contracts replaced the monthly
revenue from the Bridge network services agreement, which we entered into on
February 18, 2000. Bridge, which was our largest customer through the fall of
2001, represented approximately 55% of our 2001 revenues. Reuters and MoneyLine
Telerate represented approximately 12% and 6% respectively in 2001. No other
individual customer accounted for more than 5% of our revenues during the year
ended December 31, 2001. We also provide services to many financial service
companies and mid-sized organizations.
Our contracts with our customers are typically for one to three years in
length. The Reuters and MoneyLine Telerate contracts are five-year contracts.
Many of our customer contracts contain service level agreements that provide
for service credits should we fail to maintain specified levels of quality.
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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, voice service and video conferencing can be assigned higher
quality of service levels, 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 from a single, uniform
customer database. These personnel are organized in client teams and are highly
trained to identify and resolve customer issues rapidly and completely. A
portion of our customer call center support services are currently supplied to
us by Reuters, a third party vendor, however we plan to internalize these
functions directly over the course of 2002. To track trouble tickets and
customer information, we use 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 outsourced field technical services with firms 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.
SAVVIS INTELLIGENT IP NETWORK(SM) INFRASTRUCTURE
OVERVIEW
The SAVVIS Intelligent IP Network(SM) reaches 45 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
13 PrivateNAPs(SM), which allows our Internet traffic to bypass the congested
public Internet access points.
13
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 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., Our
leased line connections range in capacity from 45 Mbps through 620 Mbps in the
U.S. and up to 155 Mbps internationally. This backbone network has generally
been established in ring architecture so that at least two diverse paths exist
between our switching facilities. The "fault tolerant" configuration of our
network allows data packets in ring architecture so that at least two diverse
paths exist between our switching facilities to travel on many alternate paths
to connect points on our network.
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
affiliate of MCI WorldCom. 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
14
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., one in London and one in Singapore. 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 a number of companies, including America Online,
Inc., Broadwing, DIGEX, Incorporated, Exodus Communications, Inc., Level 3
Communications, LLC, Inc. and Williams Communications Group, Inc. These peering
arrangements allow for settlement-free, direct connections between networks,
where local access charges are generally split evenly between the applicable
parties. Smaller Internet service providers typically connect to our network
through transit agreements that allow them to connect to our network for a fee.
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 180,000 square feet of data center
facilities located in St. Louis, San Francisco, London, Toronto and Singapore.
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 are accessible 24 hours a day, 365 days a year,
both locally and remotely, and have high levels of physical security.
SAVVIS OPERATIONS CENTERS
Our global network operations center located in St. Louis, Missouri,
operates 24 hours a day, 365 days a year, and is staffed by 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 SAVVIS 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
SAVVIS 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. Unlike
most of our competitors, our entire global network is managed by a single
network management system for all SAVVIS products. This makes our customer
service uniform worldwide, and makes rolling out new products far easier than
having to deal with the myriad of legacy systems with which our competitors
often have to contend.
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
15
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.
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:
16
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, Sprint Corporation, and UUNET, a MCIWorldcom affiliate.
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.
Telecommunications Carriers. Many large carriers, including AT&T Corp.,
British Telecommunications plc, Cable & Wireless plc, 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, a MCIWorldcom affiliate, and Exodus as
the two primary players. Other carriers and Internet service providers are also
entering the managed hosting market, including AT&T, Sprint 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
OVERVIEW
The following section describes laws and regulatory developments that we
believe are currently applicable to our business. It does not cover all present
or pending federal, state, local or foreign regulations affecting the
communications industry.
REGULATORY ANALYSIS BY SERVICE TYPE
We offer three general categories of services and products today, which we
market under various different trade names: Managed IP, High Bandwidth Internet
Access and Managed Hosting.
Managed IP. The core of our managed IP services business is providing
managed data networking services to corporate customers. The managed data
networking services that we provide are generally characterized as data
transmission services or value added services for licensing purposes. We are
authorized by law or by individual license or a general authorization
obtainable by simple notification or declaration by an automatic "class"
license to provide these services in all countries in which we expect to
generate significant revenue from managed IP services, including the United
States, Canada, France, Germany, Italy, the United Kingdom, Australia, Hong
Kong, Japan, and Singapore.
High Bandwidth Internet Access. The high bandwidth 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 currently required for provision of Internet access. However, because
Internet and IP technology is so new, regulations concerning Internet access
remain ill defined or in flux in many countries, including in the United
States. Further, voice over the Internet or voice over IP (collectively
referred to as "VOIP") may be regulated as
17
traditional voice service in certain countries. Moreover, countries that today
impose few restrictions on the provision of Internet services, including VOIP,
may, in the future, adopt rules regulating VOIP 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.
Managed Hosting. The managed hosting services that SAVVIS currently
provides in the United States and other foreign countries are generally not
considered telecommunications service. Our data center facilities are designed
to ensure a secure environment in which customers locate mission critical
networking hardware, which enables us to provide value-added hosting management
and service options including server management, operating system management,
colocation, 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.
In the United States and abroad we deliver our services over leased
facilities. We do not have current plans to purchase, own and operate our own
fiber. The regulatory regime for facilities-based carriers in the United States
and in many foreign countries may differ from that of providers which use
leased facilities. Therefore, if in the future we elected to acquire our own
dark fiber to provide our services we would need to evaluate the regulatory
implications. In some cases, we may be required to obtain additional licenses
and authorizations.
With respect to all of our current services, we do not foresee the
emergence of any significant regulatory issues that will prevent us from
selling any of them 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.
US REGULATORY MATTERS
Our existing and planned data networking, Internet and hosting operations
are not actively regulated by the Federal Communications Commission ("FCC") or
any other government agency of the United States at the present time, other
than regulations that apply to businesses generally.
Federal Regulatory Matters. 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 currently
regulated by the FCC. 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 FCC authorization, as well as contributions to the federal 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, but are required to make USF contributions
based on international and interstate telecommunications 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
("Stevens Report"), 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, largely 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. There remains some
uncertainty at
18
the FCC regarding the distinction between information and telecommunications
services. Moreover, while we provide these services on a resale basis today, we
may elect to acquire the capability to provide certain of theses service on a
facilities basis in the future. If so, we will need to consider at that time
whether such services would qualify as regulated services under the
Telecommunications Act. Moreover, there is also some risk that the FCC could
determine that our products and services as currently provided required
specific authorization or are subject to USF obligations or other regulations.
In such case, we may be required to obtain such authorizations, make such
payments and/or comply with other regulatory obligations.
With respect to universal service, in the Stevens Report, the FCC stated
that "in those cases where an Internet service provider owns transmission
facilities, and engages in data transport over those facilities in order to
provide an information service, we do not currently require it to contribute to
universal service mechanisms." The FCC also explained that while it may be
"advisable" to require facilities-based ISPs to contribute, it would refrain
from doing so because of "significant operational difficulties associated with
determining the amount of an Internet service provider's revenues to be
assessed for universal service purposes and with enforcing such requirements."
These same operational difficulties and enforcement problems could also
theoretically apply to other types of facilities-based enhanced data service
providers.
Subsequently, at least one federal appeals court has found that, when an
ISP owns the transmission facilities, it provides "telecommunications" services
as defined in the 1996 US Telecommunications Act. In response partially to that
decision, the FCC has taken a number of steps to address the regulatory status
of access to the Internet over cable and other facilities. Accordingly, the FCC
continues to consider whether or not facilities-based providers of Internet
access services should be required to unbundle the "information" portion from
the "telecommunications" portion of their services. If the FCC adopts such a
requirement, all facilities-based ISPs could be required to contribute to the
USF based on revenues derived from providing the telecommunications services
underlying provision of their information service offerings. To the extent that
we elect to become or are deemed to be a facilities-based ISP, we would
therefore be required to make these USF contributions.
There are numerous proceedings pending before the FCC regarding the
appropriate regulatory classification of broadband Internet access services,
and other data transmission services. Although the FCC has tentatively
concluded that broadband wireline Internet access services are "information
services", there is no guarantee that the FCC will adopt this tentative
conclusion, or that the FCC will not impose regulatory obligations on providers
of broadband Internet access services, such as USF contribution requirements.
Even if the tentative conclusion is adopted, it is unclear what affect such a
ruling would have on the regulatory classification of our data networking
services.
Further, the FCC is considering revising the methodology for assessment
and recovery of USF contributions. The FCC is reviewing whether to assess
contributions based on the number and capacity of connections provided to the
public network, rather than based on a percentage of end-user
telecommunications revenues. This could lead to the elimination of the
requirement that private carriers which operate private networks contribute to
the USF fund based on telecommunications revenues. However, there is no
guarantee that the FCC will adopt this proposal, and even it if it did, it is
unclear whether or not private network operators will be required to contribute
to USF in some other manner.
Services offered over the Internet or using Internet protocol may present
distinct regulatory issues. Advancements in technology are increasingly
narrowing the distinctions, from a customer's perspective, between traditional
or basic telecommunications services and Internet protocol 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.
There also is some uncertainty about the regulatory status of voice
services provided over data networks. In the Stevens Report, for instance, the
FCC concluded that some of the services currently offered over the Internet,
such as phone-to-phone IP telephone services, may be functionally
19
indistinguishable from traditional telecommunications service offering, and
that their non-regulatory status may have to be reexamined. Therefore, there is
some risk that Internet telephony and other voice services that we might offer
in the future could be subject to regulation, including requirements to make
USF contributions, 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 call and for other purposes.
State Regulatory Matters. States also regulate telecommunications
services, including through certification of providers of intrastate services,
regulation of intrastate rates and services offering, and other regulations.
The Telecommunications Act prohibits state and local governments from enforcing
any law, rule or legal requirement that prohibits or has the effect of
prohibiting any person from providing any interstate or intrastate
telecommunications services. Under the Telecommunications Act, states retain
jurisdiction to adopt regulations necessary to preserve universal services,
protect public safety and welfare, ensure the continued quality of
communications services and safeguard the rights of consumers. Accordingly, the
degree of state involvement in local telecommunications services may be
substantial. Furthermore, states generally give municipal authorities
responsibility over the access to rights-of way franchises, zoning, and other
matters of local concern, which means that localities may also have involvement
in the regulation of the telecommunications industry.
Because SAVVIS bundles its data transmission services with information
services, we do not believe our services are regulated at the state level for
similar reasons that our services are not regulated by the FCC. However, very
little case law exists on the regulation of information or hybrid services at
the state level. As such, it is less clear as to how most states currently
regulate these types of services. However, generally, state public utility
commissions have followed federal interpretations in this area and few of our
competitors in the enhanced data service providers industry have obtained state
certifications.
Future Federal and State Developments. We do not believe we are currently
subject to direct regulation by the FCC or any other federal or state
governmental agency, other than regulations that apply to all business
organizations. However, the FCC and state regulators continue to review their
regulatory positions on the usage of the basic network and communications
facilities by the Internet companies. Moreover, various existing U.S. federal
and state regulations are currently the subject of judicial proceedings,
legislative hearings and administrative proposals which could change, in
varying degrees, the manner in which the telecommunications industry operates.
We cannot predict the outcome of these proceedings, or the impact they may have
on the telecommunications or information services industries generally, or on
us particularly. In addition, we cannot assure you that future legislative,
regulatory or judicial changes in the United States or other countries in which
we operate will not have a material adverse impact on our business. To the
extent that future regulatory licenses or permissions are necessary or useful
for us to provide our services, however, we will seek to obtain those licenses
and permissions and do not believe that such applications will be denied or we
would face processing delays that will have a material adverse effect on us.
Moreover, if new regulations are imposed on our industry, or existing
regulations are extended to cover our industry, these regulations will almost
certainly also apply to all similarly situated parties offering comparable
services, including our competitors.
INTERNATIONAL REGULATORY MATTERS
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 "BAT") formally entered into force, binding
the signatory countries, on February 5, 1998. Since then, the number of
signatories has increased to over 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. Despite the enactment of the BAT, 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,
20
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. Overall, we believe that the BAT, and its implementation by the
signatory countries, offers us significant opportunities to provide our
services to and from these countries.
SAVVIS' International Operations and Authorizations. Our major regional
markets outside the United States consist of Canada, the European Union and the
Asia Pacific Rim. As is true in the United States, the market for our managed
IP VPN, Internet access and managed hosting services in each of the major
economies within these regions are now open to foreign competition, including
Canada, France, Germany, Italy, the United Kingdom, Australia, Hong Kong,
Japan, and Singapore. We believe that we are authorized to provide our services
as an independent operator under the applicable telecommunications regulations
in each of these countries.
As in the United States, no specific license or authorization is required
to provide our services in Australia, France, and the United Kingdom. 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. We are authorized
in Argentina, Austria, Belgium, Brazil, Chile, Denmark, Finland, Greece,
Ireland, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Puerto Rico,
Spain, Sweden, Switzerland, and Taiwan to provide data networking and Internet
access services. Of these countries, in Belgium, Denmark, Finland, New Zealand,
Norway, Puerto Rico, and Switzerland, no individual license is required. In
Argentina, we hold a Provision of Data and Value Added Services License. In
Brazil we hold a Specialized Network Services License. In Chile, we hold an
Intermediate Concession License for Value Add Services. 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, Greece, Luxembourg, Netherlands, Poland and Sweden we
have complied with notification requirements.
In other countries, including Bahamas, Bermuda, Colombia, India,
Indonesia, Mexico, Panama, Philippines, South Korea, and Turkey, we own network
equipment but are not currently authorized to offer data networking and
Internet access services directly. With respect to each of these countries
other than South Korea, regulatory and market access barriers prevent us from
providing services directly to customers. Our business plan does not
contemplate selling significant services in any of these countries in the near
term. Therefore, we do not believe that our inability to offer services
directly to customers in these countries is significant. We are, however, able
to provide certain services through licensed distributors. We are currently
seeking authorization to offer services directly in South Korea, and although
we expect to obtain the necessary approvals, we cannot assure you when or if we
will obtain any of these approvals. However, because our business plan does not
contemplate selling significant services in South Korea in the near term, we do
not believe that our inability to offer services directly to customers there 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 option to purchase network
assets from MoneyLine Telerate that we did not already acquire in the Bridge
asset transfer. In some of these countries, we are currently unable to offer
services due to regulatory barriers restricting foreign competition. These
countries include Bahrain, China, Kuwait, Saudi Arabia, Thailand, and the
United Arab Emirates. As these countries liberalize their telecommunications
markets, we may elect to seek the authorizations necessary to acquire and
operate the network assets in order to provide services. Our business plan does
not contemplate selling services in these closed markets to customers in the
near term. Therefore, we do not believe that our inability to access these
markets is significant.
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In a few countries where we have an option to purchase the network assets
from MoneyLine Telerate that we did not already acquire in the Bridge asset
transfer, regulatory conditions now permit us to acquire these assets and
provide services to customers, upon obtaining proper governmental
authorizations. Consequently, we are in the process of seeking regulatory
approvals to offer services in Hungary and Malaysia. Although we expect to
obtain the necessary approvals to provide services to customers in these
countries in the near future, 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 be
significant.
In most jurisdictions around the world, we may provide services only after
first establishing a corporate presence, by way of the incorporation of a
subsidiary or the registration of a branch or representative office. In each
country where we provide services currently we have established such a local
presence where such a presence is legally required and will do so in any other
jurisdiction we may elect to enter in the future with a similar requirement.
SPECIFIC COUNTRY AND REGIONAL REGULATIONS.
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. We do not
anticipate becoming a facilities-based provider in Canada in the near term, and
therefore we do not believe that the common carrier restrictions are
significant to us. However, were we to acquire transmissions facilities in
Canada on an Indefeasible Right of Use ("IRU") basis, we do not believe that
that would constitute owning or operating a facility as defined by the Canadian
Telecommunications Act and interpreted by the CRTC. Therefore, even in that
case, we do not believe we would be required to qualify as a common carrier in
order to use such facilities to provide our services in Canada.
European Union. Over the last decade, the European Union has established a
comprehensive and flexible regulatory system, culminating in the full
liberalization of telecommunications networks and services effective on January
1, 1998. By that date, ten European Union member countries adopted a fully
liberalized telecommunications regime. By December 31, 2000 five more had
conformed. All 18 European Union member countries were obligated to incorporate
the principles set forth in the EU legislation 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 have encountered
cumbersome licensing and reporting requirements, difficulty negotiating
interconnection agreements and obtaining local loops, and burdensome
requirements concerning data protection and privacy.
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. In
countries such as Poland and Hungary, the markets are open to varying degrees,
although certain market access barriers continue to exist.
United Kingdom. The Telecommunications Act of 1984 provides the regulatory
framework for the provision of telecommunications services in the United
Kingdom, our largest single market in terms of revenue within the European
Union. 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
22
international private leased circuits ("IPLCs") and leased local loops which
are not connected to the public switched network 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.
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 over 20 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. While Japan, Singapore, Taiwan,
Malaysia and South Korea have opened their markets to foreign competition, 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, India, Indonesia, the Philippines and Thailand
continue to restrict direct foreign investment in the telecommunications sector
to minority ownership or prohibit it all together.
Latin America. 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 Mexico,
market barriers remain -- regulator not truly independent, incumbent with
monopoly-like powers, foreign ownership limitations -- and thus complicate our
ability to provide services directly to our customers. The United States is
currently pursuing at the WTO its complaint against Mexico for failing to
comply with its obligations to provide foreign access to its telecommunications
market under Mexico's 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. In recent years, South Africa has taken steps to lift certain barriers
to foreign competition, although the incumbent continues to exercise
monopoly-like power in certain sectors.
OTHER PERTINENT REGULATORY DEVELOPMENTS
The laws and regulations relating to the liability of Internet access
providers for information carried on or disseminated through their networks are
currently unsettled both in the United States and abroad. Several private
lawsuits seeking to impose liability on online services companies and Internet
access providers are pending in US courts. The imposition of the potential
liability on us and other Internet access providers for information carried on
or disseminated through our systems could require us to implement measures to
reduce our exposure to this liability, which may in turn require the
expenditure of substantial resources or the discontinuance of various service
offerings. The costs of defending against any claims and potential adverse
outcomes of these claims could have a material adverse effect on our business.
In addition, because of the increased popularity and use of the Internet,
additional laws and regulations are being and will likely continue to be
adopted at the federal, state, and local levels, as well as in the foreign
countries in which we operate, governing such issues as privacy, consumer
protection, child protection, intellectual property, libel, taxation, mass
circulation of unsolicited e-mail, gambling, pornography, law enforcement and
national security, among others. The implementation of any such legislation
could result in direct or indirect regulation of service providers such as
ourselves. In that case, it is likely that we would have to implement
additional policies and procedures, and incur additional costs, designed to
assure our compliance with the particular legislation.
23
INTELLECTUAL PROPERTY
We do not own any patents or registered trademarks except for our business
name and several product and service names. We have also registered various
Internet domain names in the United States and United Kingdom in connection
with the SAVVIS corporate website. In addition, we have applied for patents and
trademark protection for various other products and services. We do not 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, 2001, we employed 566 full-time persons, 255 were
engaged in engineering, operations and customer service, 256 in sales and
marketing, and 55 in finance and administration. None of our employees are
represented by a labor union, and we have not experienced any work stoppages to
date. We consider our employee relations to be good.
24
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 actual events or results to
differ materially from 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 protections 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
actual events or results to differ materially from our forward-looking
statements.
RISKS RELATED TO OUR BUSINESS
THE LOSS OF EITHER OF OUR TWO LARGEST CUSTOMERS, WHO REPRESENT APPROXIMATELY
75% OF OUR REVENUES, WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Reuters and MoneyLine Telerate account for approximately 75% of our
revenue in 2001. The service agreements each contain minimum revenue
commitments. However, material defaults by us under the agreements or failure
by us to maintain the service level commitments could lead to reductions of
these minimum commitments and/or termination of the agreements. In addition, a
business downturn that negatively impacted either Reuters or MoneyLine Telerate
could also lead to a reduction of their minimum commitments. The loss of either
of these customers, or a significant reduction in either's minimum revenue
commitments, would materially reduce our revenues which, to the extent not
offset by cost reductions or new customer additions, would materially reduce
our cash flow. Furthermore, Reuters owns 51% of a joint venture company which
competes directly with SAVVIS and which was formed to be Reuters preferred
network partner. If that company develops and deploys network technologies
which allow for the reliable transmission of real-time IP data, Reuters could
migrate business from SAVVIS to its joint-venture company which would
materially reduce our revenues.
OUR LIMITED HISTORY, AND THE FACT THAT WE ONLY RECENTLY BEGAN OFFERING DATA
NETWORKING AND HOSTING SERVICES, MAKES IT DIFFICULT FOR YOU TO EVALUATE OUR
PERFORMANCE.
Although we began commercial operations in 1996, we only began offering
data networking and hosting services in 2000. We expect to generate a
substantial portion of our revenues from these services in the future. In
addition, many of our executive officers and key technical employees joined us
in late 1999 and in 2000, and we have adopted our business strategies recently.
Because of our short operating history, you have very limited operating and
financial data about us upon which to base an evaluation of our performance and
prospects and an investment in our common stock. Therefore, you should consider
and evaluate our prospects in light of the risks and difficulties frequently
encountered by rapidly growing companies, particularly companies in the rapidly
evolving data networking, Internet access and hosting markets.
WE EXPECT TO CONTINUE TO INCUR SUBSTANTIAL NET LOSSES.
We incurred losses of approximately $46.7 million, $164.9 million and
$288.9 million in 1999, 2000 and 2001 and had negative cash flows from
operating activities of $24.5 million, $79.8 million and $41.9 million in these
years. We expect to incur significant net losses before extraordinary items at
least through 2003.
WE ARE CONTROLLED BY PARTIES WHOSE INTERESTS MAY NOT BE ALIGNED WITH YOURS.
Investment partnerships sponsored by Welsh, Carson, Anderson & Stowe
("Welsh Carson") currently own approximately 56% of our outstanding voting
stock, On March 18, 2002, in order to obtain additional funding for our
operations, we issued $158.1 million of our 11.5% convertible preferred stock
to investment partnerships sponsored by, and individuals affiliated with, Welsh
Carson. The preferred stock is convertible into our common stock at $0.75 per
share, which was the closing bid of our common
25
stock the day prior to the execution of the securities purchase agreement. The
Welsh Carson affiliates have the right to appoint the majority of the Board of
Directors. The terms of the preferred stock contain provisions related to
registration rights, pre-emptive rights and premiums in change of control
situations which among other factors could result in decisions concerning our
operations or financial structure that may present conflicts of interest
between the Welsh Carson affiliates and our other stockholders.
WE DEPEND ON KEY PERSONNEL. IF WE ARE UNABLE TO HIRE AND RETAIN QUALIFIED
PERSONNEL, WE MAY BE UNABLE TO IMPLEMENT OUR BUSINESS STRATEGY EFFECTIVELY.
Our future performance depends to a significant degree on the continued
contributions of our management team, sales force and key technical personnel.
In particular, we depend on Robert McCormick, our Chairman of the Board and
Chief Executive Officer. Mr. McCormick was appointed Chief Executive Officer in
November 1999. In addition, our business plan contemplates the significant
expansion of our field sales organization and the retention of our established
inside sales, marketing and product management staff. The industries in which
we compete are characterized by a high level of employee mobility and
aggressive recruiting of skilled personnel. As a result, we may have difficulty
in hiring and retaining highly skilled employees. Our future performance
depends on our ability to attract, retain and motivate highly skilled
employees. In the event of a change of control at our company, the outstanding
and unvested options held by some of our officers and other key employees will
vest, under certain circumstances, which may make retaining such officers and
key employees more difficult.
FAILURES IN OUR NETWORK OR WITH THE NETWORK OPERATIONS CENTER COULD DISRUPT OUR
ABILITY TO PROVIDE OUR DATA NETWORKING, INTERNET ACCESS AND HOSTING SERVICES,
WHICH COULD HARM OUR BUSINESS AND INCREASE OUR CAPITAL COSTS.
Our ability to successfully implement our business plan depends upon our
ability to provide high quality, reliable services. Interruptions in our
ability to provide our data networking, Internet access and hosting services to
our customers could adversely affect our business and reputation. Our
operations depend upon our ability to protect our equipment and network
infrastructure, including connections to our communications transmission, or
backbone, providers, and our customers' data and equipment, against damage from
natural disasters, as well as power loss, telecommunications failure and
similar events. The occurrence of a natural disaster or other unanticipated
problem could result in interruptions in the services we provide to our
customers and could seriously harm our business and business prospects.
IF OUR ESTIMATES REGARDING OUR TRAFFIC LEVELS ARE NOT CORRECT, WE MAY HAVE TOO
MUCH OR TOO LITTLE CAPACITY IN A GIVEN PERIOD.
We rely on other carriers to provide several data transmission services.
We generally lease or purchase data transmission capacity before we have
secured customers. Our leased or purchased capacity costs are typically fixed
monthly payments based on the capacity made available to us. Our failure to
correctly estimate transmission capacity could increase the cost or reduce the
quality of our services. Underestimation of traffic levels could lead to a
shortage of capacity, requiring us to lease or purchase more capacity, which
may be at unfavorable rates, or could lead to a lower quality of service
because of increased data loss and latency. Overestimation of traffic levels,
because our traffic volumes decrease or do not grow as expected, would result
in idle capacity, thereby increasing our per-unit costs.
WE HAVE EXPERIENCED CUSTOMER TURNOVER IN THE PAST AND MAY CONTINUE TO DO SO IN
THE FUTURE. IF WE CONTINUE TO EXPERIENCE CUSTOMER TURNOVER WITHOUT A
CORRESPONDING GROWTH IN NEW CUSTOMERS, OUR BUSINESS MAY BE ADVERSELY AFFECTED.
Customer turnover in the Internet access business is high. Customer loss
results in loss of future revenue from subscribers who discontinue or reduce
their services. Customer loss occurs for several reasons, such as voluntary
disconnection by subscribers who choose to switch to a competing service and
termination by Internet access providers for nonpayment of bills or abuse of
the network. We have experienced customer turnover in the past and as our
subscriber base grows and the industry matures, our customer loss may continue
or even increase. In addition, due to the downturn in the technology and
26
Internet sector of the economy, we may see increased customer turnover as these
customers reduce their operations or cease to do business. If, in the future,
we were to lose a large number of customers without signing contracts with new
customers, there could be an adverse impact on our business.
OUR BRAND IS NOT AS WELL KNOWN AS SOME OF OUR COMPETITORS. FAILURE TO DEVELOP
BRAND RECOGNITION COULD HURT OUR ABILITY TO COMPETE EFFECTIVELY.
We need to strengthen our brand awareness to realize our strategic and
financial objectives. Many of our competitors have well-established brands
associated with the provision of data networking, Internet access and hosting
services. The promotion and enhancement of our brand also will depend in part
on our success in continuing to provide high quality Internet access services
and in providing high quality data networking and hosting services. We cannot
assure you that we will be able to maintain or achieve these levels of quality.
ANY BREACH OF SECURITY OF OUR NETWORK COULD NEGATIVELY IMPACT OUR BUSINESS.
Our network may be vulnerable to unauthorized access, computer viruses