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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-31293
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EQUINIX, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0487526
(State of incorporation) (IRS Employer Identification No.)
2450 Bayshore Parkway, Mountain View, California 94043
(Address of principal executive offices, including ZIP code)
(650) 316-6000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting common stock held by non-affiliates of
the registrant as of February 28, 2001 was approximately $260.1 million.
Shares of common stock held by each officer and director have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of February 28, 2001, a total of 77,099,198 shares of the registrant's
common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III--Portions of the registrant's definitive Proxy Statement to be
issued in conjunction with the registrant's Annual Meeting of Stockholders to
be held on June 1, 2001. Except as expressly incorporated by reference, the
registrant's Proxy Statement shall not be deemed to be a part of this report
on Form 10-K.
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EQUINIX, INC.
FORM 10-K
DECEMBER 31, 2000
TABLE OF CONTENTS
Item Page No.
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PART I
1. Business...................................................... 3
2. Properties.................................................... 20
3. Legal Proceedings............................................. 20
4. Submission of Matters to a Vote of Security Holders........... 20
PART II
Market for Registrant's Common Equity and Related Stockholder
5. Matters....................................................... 21
6. Selected Financial Data....................................... 22
Management's Discussion and Analysis of Financial Condition
7. and Results of Operations..................................... 23
7A. Quantitative and Qualitative Disclosures About Market Risk.... 29
8. Financial Statements and Supplementary Data................... 30
Changes in and Disagreements with Accountants on Accounting
9. and Financial Disclosure...................................... 30
PART III
10. Directors and Executive Officers of the Registrant............ 31
11. Executive Compensation........................................ 31
Security Ownership of Certain Beneficial Owners and
12. Management.................................................... 31
13. Related Party Transactions.................................... 31
PART IV
Exhibits, Financial Statement Schedule, and Reports on Form 8-
14. K............................................................. 32
Signatures.................................................... 35
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PART I
ITEM 1. BUSINESS
All statements in this discussion that are not historical are forward-
looking statements within the meaning of Section 21E of the Securities Exchange
Act, including statements regarding the Equinix's "expectations", "beliefs",
"hopes", "intentions", "strategies" or the like. Such statements are based on
management's current expectations and are subject to a number of factors and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. Equinix cautions investors that
there can be no assurance that actual results or business conditions will not
differ materially from those projected or suggested in such forward-looking
statements as a result of various factors, including, but not limited to, the
risk factors discussed in this Annual Report on Form 10-K. Equinix expressly
disclaims any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in Equinix's expectations with regard thereto or any change in events,
conditions, or circumstances on which any such statements are based.
Overview
Equinix designs, builds and operates neutral IBX centers where enterprises
and Internet businesses place their equipment and their network facilities in
order to interconnect with each other to grow their businesses and to improve
Internet performance. Our neutral IBX centers place our customers' operations
at a central location and provide them with the highest level of security,
multiple back-up services, flexibility to grow and technical assistance. Our
neutral IBX centers provide enterprises, content providers, ASPs and e-commerce
companies with the ability to directly interconnect with a competitive choice
of bandwidth providers, ISPs, site management companies and content
distribution companies. Each IBX center provides access to multiple bandwidth
providers and ISPs, including UUNET/Worldcom, AT&T, Excite@Home, Qwest,
Williams, InterNAP, Verio, Global Crossing, Cable & Wireless and Level 3, which
currently serve over 85% of the world's Internet networks. Equinix IBX centers
enable enterprises and Internet companies to quickly, easily and privately
interconnect with a choice of business partners and customers as well as
aggregate services in order to provide them with the flexibility, speed and
scalability they need to accelerate business growth in a more cost effective
way.
Equinix currently has IBX centers in the Washington, D.C., New York, Dallas,
Chicago, Los Angeles and Silicon Valley areas. We intend to complete
construction of an additional IBX center in the New York area in 2001,
resulting in a total of seven IBX centers in the U.S.
We were incorporated in Delaware in June 1998.
Market Opportunity
Since the early 1990s, the Internet has experienced tremendous growth and is
emerging as a global medium for communications and commerce. According to
International Data Corporation, worldwide Internet commerce is forecast to grow
from approximately $50 billion at the end of 1998 to approximately $2.6
trillion by the end of 2004. In addition, Forrester Research shows Worldwide
Net commerce, both business-to-business and business-to-consumer, growing from
$657 billion in 2000 to $6.8 trillion in 2004. Cahners In-Stat Group estimates
that large and mid-sized businesses invested $49 billion in Internet-enabling
technologies in 2000 which figure will nearly double to $110 billion in 2004.
As a result of competitive pressures, enterprises and Internet businesses
are demanding facilities that provide multiple interconnections with a broad
cross-section of product and service providers and customers. The tremendous
growth of Internet usage and e-commerce has aggravated the inefficiencies of
the current Internet architecture, which has constrained businesses' abilities
to effectively grow and manage their Internet operations. As the Internet and
Internet businesses experienced significant growth and demand, content
providers emerged and enterprise companies expanded to leverage this growth.
Vertically integrated hosting providers then evolved to serve these content
providers and enterprise companies. Until now, enterprises and Internet
businesses have had to rely on these vertically integrated hosting providers
for the
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distribution of content and delivery of services between thousands of
individual networks. Internet and Internet businesses that choose to colocate
equipment at these facilities typically have no choice but to purchase
bandwidth, typically known as the rate at which data flows over a network and
measured in bits per second, from the owner of the facility. This can be
costly, given the lack of competition, and a significant risk if the facility
owner's network were to fail or have performance problems.
As content becomes more critical, the choice of suppliers and direct
interconnection become increasingly important. International Data Corporation
predicts that a combination of rapid Internet growth and increased outsourcing
of Internet-related services will create an acute need for Internet-related
hosting and colocation services, producing U.S. revenue growth from
approximately $4.0 billion in the year 2000 to over $24.8 billion by 2004.
The Equinix Solution
Equinix IBX centers provide the environment and services to meet the
challenges facing enterprises and Internet businesses today. Our centers
provide a free market environment where choice stimulates efficient business
growth. Because enterprises and Internet companies have a broad choice of
product and service providers, they can cost-effectively and reliably manage
their web operations, increase their service offerings, deliver services more
efficiently and have access to a larger potential customer base. As a result,
we are able to provide the following key benefits to our customers:
Choice. We believe that the ability of customers to choose among a variety
of product and service providers is the fundamental driver of dynamic growth in
commerce. By offering this crucial element of choice, our IBX centers are
designed to serve as a catalyst for our customers that creates synergy among
them and makes it possible for them to adapt their business models to
successfully scale, or keep pace, with the growth of each other and of the
Internet. Enterprises and Internet businesses view the IBX center as a forum to
attract additional customers and diversify sources of supply for their
businesses.
Opportunity to Increase Revenues and Reduce Costs. Our customers have access
to a variety of potential business partners. Accordingly, our customers have a
better opportunity to increase the size of their addressable markets,
accelerate revenue growth and improve the quality of their services at our IBX
centers. In addition, participants are able to enhance their ability to control
costs by aggregating their service purchases at a single location and through
improved purchasing power.
Scalability. Our IBX centers both stimulate and support the efficient growth
of our customers. From a facility perspective, we construct our IBX centers to
be large enough to accommodate our customers' short- term needs, and our plan
is to maintain sufficient available expansion space to meet their long-term
growth needs where possible. On an individual basis, customers are able to
design their own unique cabinet configurations within a shared or private cage
environment. As the need arises, customers can expand within their original
cage or upgrade into a cage that meets their expanded requirements.
Reliability. Our IBX design provides our customers with reliable and
disaster-resistant environments that are necessary for optimum Internet
commerce interconnection. We believe that the level of excellence and
consistency achieved in our IBX architecture and design results in premium,
secure, fault-tolerant exchanges. Our IBX centers are designed to offer our
customers redundant, high-bandwidth Internet connectivity through multiple
third-party connections. Additionally, our solutions include multiple layers of
physical security, scalable cabinet space availability, on- site trained staff
24 hours per day, 365 days per year, dedicated areas for customer care and
equipment staging, redundant AC/DC power systems and multiple other redundant,
fault-tolerant infrastructure systems.
Equinix Strategy
Our objective is to provide enterprises, content providers, ASPs and e-
commerce companies with the ability to directly interconnect with a choice of
bandwidth providers, ISPs, site management companies and
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content distribution companies to grow their business. Equinix IBX centers
enable enterprises and Internet companies to quickly, easily and privately
interconnect with a choice of business partners and customers, providing them
with the flexibility, speed and adaptability they need to accelerate business
growth and to allow a faster, more reliable Internet. To accomplish this
objective we are employing the following strategies:
Provide Customer Choice. We provide our customers with the freedom to choose
their preferred product and service providers. We call this a neutral
environment and it is one of the fundamental characteristics of an IBX center.
We believe this is a significantly improved approach compared with the current
Internet model because it offers customers increased value and reliability
based on the availability of multiple providers of needed services. In
traditional colocation or Web hosting environments, customers are often limited
to a single choice of bandwidth provider, ISP, site management company, or
performance management company. This limited choice can lead to single points
of failure for customers or a limited number of options to choose from for
value added services. The Equinix model of choice gives customers a wide range
of providers to choose from for each of the services they require for increased
Internet performance and reliability. For instance, in each IBX center
customers can choose from multiple bandwidth providers, ISPs and Web management
companies. The ability to choose whom they work with directly leads to better
Internet business performance due to the increased diversity and an improved
overall total cost of ownership since these suppliers are competing for the
customers' business within the IBX center. Our customers will benefit from an
open environment that stimulates efficient business growth through accelerated
network economics, or the value derived by a provider at an IBX center from
being able to sell its services to a locally-aggregated set of customers,
created by the efficient and rapidly growing interaction between Internet
businesses.
Manage Choice to Create Network Effect. To attract the widest choice of
Internet partners, it is important to provide a robust mix of leading companies
from a variety of businesses and services. This allows enterprises, content
providers, e- commerce companies and ASPs the opportunity to interconnect with
a wide variety of companies. As a result of the IBX interconnection model, IBX
participants encourage their customers, suppliers and business partners to also
come into the IBX center. These customers, suppliers and business partners may
also, in turn, encourage their business partners to locate in IBX centers
resulting in additional customer growth. For example, a large financial site
that chooses to locate in an Equinix IBX centers may encourage a bandwidth
provider, a site management company or another content partner, like a
financial news service, to also locate in the same IBX. In turn, these
bandwidth providers or content partners will also bring their business partners
to the IBX center. This network effect enhances the value of an IBX center with
each new customer as interconnections provide monthly recurring revenues.
Leverage IBX Centers as Hubs for Internet Exchange. The Equinix IBX model of
network aggregation and choice provides a platform for offering new services
beyond those offered by traditional hosting or colocation companies. Equinix
provides customers with direct access to the bandwidth providers and ISPs that
currently serve over 85% of the world's Internet networks. This critical mass
of leading networks that we have assembled across all of our IBX centers
uniquely positions Equinix to offer Internet exchange services that are
important to the scaling and growing of the Internet, such as content peering
and traffic exchange. Equinix will continue to leverage IBX centers as hubs for
Internet exchange, extending our model of direct interconnections with new
exchange-based services designed to allow faster and more reliable exchange of
traffic.
Leverage Strategically Scalable Centers. The network effect created by the
Equinix IBX model requires strategic scalability to support the dynamic IBX
growth environment. Our expansion plans are designed to meet the growth of our
customers. Our IBX centers will both stimulate and support the efficient growth
of our customers. From a facility perspective, we construct our IBX centers to
be large enough to accommodate our customers' short- term needs, and our plan
is to maintain sufficient available expansion space to meet their long-term
growth needs where possible.
Expand Globally and Capitalize on First-Mover Advantage. We believe that
capitalizing on our first mover advantage is essential to establishing
leadership in the rapidly developing neutral Internet business exchange market.
As a result, we currently plan to open additional IBX centers in the United
States and
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internationally. We believe the demand for our international IBX centers and
services will be significant due to the early stage of Internet infrastructure
deployment outside of the U.S.
Establish Equinix as the Highest Performance Points on the Internet. We plan
to establish Equinix as the industry standard for the highest quality business
to business Internet exchanges. Through brand awareness and promotion we intend
to create a strong following among all top content providers, ASPs and e-
commerce companies. We believe that this strong brand awareness, combined with
our ability to provide the highest quality business to business marketplace
facilities and professional services will provide us with a competitive
advantage in our market.
Customers
Customers typically sign renewable contracts of two or more years in length,
often with options on additional space. In addition to bandwidth providers such
as UUNET/Worldcom, AT&T, Excite@Home, Qwest, Williams, InterNAP, Verio, Global
Crossing, Cable & Wireless and Level 3, our customers include IBM, Loudcloud
and Storage Networks. Additionally, approximately 42% of our participant base
have signed multi-site contracts.
Historically, Internet businesses have been vertically integrated and
provided all services directly to their customers. These services typically
included marketing, access and Internet backbone connectivity, server hosting,
and other services such as e-mail and Usenet newsgroups. Continued rapid
growth, innovation, competition and scarce human resources have opened the door
for companies to specialize in core Internet services and outsource other
elements of their business or product to suppliers. These specialized players
include:
. Enterprises, content providers and e-commerce companies supplying
information, education or entertainment content and conducting the sale
of goods and services;
. ASPs offering hosted applications over the Internet;
. ISPs and content distribution companies offering end-users Internet
access and content distribution network services and customer support;
. bandwidth providers (telecommunications carriers); and
. site management companies which integrate and manage a customer's end-to-
end web presence and performance.
We consider these companies to be the core of our customer base and we offer
each customer a choice of business partners and solutions that are designed to
meet their unique and changing needs.
We believe our IBX centers provide choice and neutrality that are important
to companies interested in the growth and reliability of the Internet. Equinix
offers choice within each customer segment. We believe most enterprises and
Internet companies benefit from the choice of a wide variety of Internet
business partners because their business interaction is greatly enhanced, which
in turn can translate to new revenue sources, greater efficiency and growth.
We believe the additional benefits to all customer segments include:
. Expedited service delivery
. Scalable, flexible, fault-tolerant environment
. Cost savings through aggregating purchases and sales at a single location
. Minimize packet loss and latency, or time that elapses between a request
for information and its arrival
. Ability to focus on core competencies
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. Centralized market with access to dozens of potential customers and
partners
. Proximity to service providers reduces operations, technology and
marketing costs, quickens service deployment, and improves performance
. Multiple layers of physical security
. Elimination of capital investment for facilities
. On-site Internet and telecommunications-trained staff 24 hours per day,
365 days per year
We believe our IBX centers offer the following additional benefits to our
customers:
Type of Customer: Benefits:
----------------- ---------
Enterprises, Content Providers, ASPs and . Direct interconnection with a choice of
E-Commerce Companies multiple bandwidth providers, Internet
service providers, site management and
content distribution companies. Choice
gives participants the ability to decide
which suppliers are the most cost-
effective and provide the level of
service they require. The benefits to
enterprises, content providers, ASPs and
e-commerce companies include maximized
Web presence, increased revenue streams,
greater security and increased customer
satisfaction.
. Simplified outsourcing of various
component services including DSL, e-mail,
Usenet and content distribution.
. Content providers benefit from direct
peering, or traffic exchange, with ISPs
over private high-speed dedicated
interconnections or via a gigabit
switching fabric.
Internet Service Providers and Content . Direct peering, or traffic exchange, with
Distribution Companies other ISPs over private high-speed
dedicated interconnections or via a
gigabit switching fabric.
. Simplified outsourcing of various
component services including DSL, e-mail,
Usenet and content distribution.
. Expedited, flexible, scalable and cost-
efficient bandwidth provisioning
Bandwidth Providers (Carriers) . Economies of scale with reduced capital
costs.
. Centralized market with access to dozens
of potential customers.
Site Management Companies . Direct interconnection with a choice of
multiple bandwidth providers, ISPs and
other service providers. Choice gives
site management companies the ability to
decide which suppliers are the most cost-
effective and provide the level of
service they require.
. Centralized market with access to dozens
of potential customers.
7
Services
Within our IBX centers, customers can place their equipment and interconnect
with a choice of Internet companies. Equinix also provides customized solutions
for customers looking to resell IBX space component as part of their complete,
one-stop shop solution.
Cabinets. Customers have several choices for colocating their equipment.
They can place the equipment in an Equinix shared or private cage or customize
their space to build their own data center within an IBX center. Cabinets are
84 inches high, suitable for networking and server colocation. Cable trays
support cables between and among cabinets. Stationary or slide shelves and
enclosed cabinets are available upon request. As a customer's colocation
requirements increase, they can expand within their original cage or upgrade
into a cage that meets their expanded requirements.
Shared Cages. A shared cage environment is designed for customers
needing less than five full cabinets to house their equipment. Each cabinet
in a shared cage is individually secured with an advanced trackable
electronic locking system and the cage itself is secured with the biometric
hand-geometry system.
Private Cages. Customers that contract for a minimum of five full
cabinets can use a private cage to house their equipment. Private cages are
also available in larger full cabinet sizes. Each private cage is
individually secured with the biometric hand-geometry system.
Outsourced Data Centers. Customers interested in providing a hosting service
or colocation center have the option of outsourcing the design, construction
and management of the physical facility to Equinix. Each customer can customize
the cabinet configuration within the space they purchase from Equinix in order
to satisfy their specific customers' needs.
IBXflex. This service allows customers to deploy mission-critical operations
personnel and equipment on-site at IBX centers. Because of the close proximity
to their end-users, IBXflex customers can offer a faster response and quicker
troubleshooting than available in traditional colocation facilities.
Interconnection
Physical Cross-Connect/Direct Interconnections. Customers needing to
directly connect to another IBX customer can do so for a set price. These
direct connections are Any Mode Any Speed, which means they can include single-
mode fiber, multi-mode fiber, and other media upon request, as well as handle
any speed required by the customer. These cross connections are customized and
terminated per customer instructions and may be implemented within 24 hours of
request.
Equinix Exchange. Customers may choose to connect to our Equinix Exchange
central switching fabric rather than purchase a direct physical cross
connection. With a connection to this switch, a customer can aggregate multiple
interconnects over one physical connection instead of purchasing individual
physical cross connects.
Value-Added Services
Our IBX centers are staffed with Internet and telecommunications specialists
who are on-site and available 24 hours per day, 365 days per year. These
professionals are trained to perform installations of customer equipment and
cross connections.
"Smart Hands" Services. Our customers can take advantage of our professional
"Smart Hands" service, which gives customers access to our IBX staff for a
variety of tasks, when their own staff is not on site. These tasks may include
equipment installation, power cycling, card swapping, and performing emergency
equipment replacement. Services are available on-demand or by customer
contract.
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Equinix MATRIX Services. MATRIX is a service designed to facilitate
transactions between IBX participants for faster service provisioning and time
to market advantages. The service combines a browser-based automated system
with dedicated staff to provide a single mechanism to improve the efficiency,
scalability and economics of buying and selling Internet infrastructure
services.
IBX Design and Staffing
Our IBX centers are designed to provide a state-of-the-art, secure, full-
service, neutral operating environment. The IBX centers are designed to provide
specific and compelling improvements over legacy facilities, including
scalability to meet our customer's ongoing growth, improved security,
redundancy of all key infrastructure systems and improved customer care. An IBX
center is divided into six basic functional areas--access, customer care,
colocation, telecommunications access, mechanical and power systems and
operations.
Access Area. The access area includes a bullet-resistant guard booth, a
welcome area, a hand-geometry enrollment station, and a mantrap to further
control access to the IBX center. All doors and access ways are secured with
biometric hand-geometry readers to ensure absolute identification and
authentication. All customers and Equinix employees entering an Equinix IBX
center must be cleared through this secured zone.
Customer Care Area. The customer care area includes a seating section,
conference rooms, Internet workstations, customer equipment preparation work
areas, equipment lockers, a game room, bathrooms, showers and a kitchen.
Colocation Area. The colocation area is divided into large cages to house
networking and customer computer equipment that is secured by biometric
security access systems. This area includes dual independent AC and DC power
distribution systems, full-automated CCTV digital camera security surveillance,
and a tamper-proof overhead cable-management system with separate trays for
fiber and copper data and AC and DC power cables. Secured access to the
colocation area is through the customer care area.
Telecommunications Access Area. All IBX centers will have a minimum of two
dedicated fiber entry vaults for telecommunications carrier access to the
colocation area. In addition, every IBX center has roof space or a separate
platform for customers who access the IBX center via wireless devices such as
satellite dishes, radio antennae and microwave.
Mechanical and Power Systems Area. The mechanical and power systems area
includes machine rooms and space used to house all mechanical, power safety and
security equipment. Fully redundant heating, ventilation, air conditioning and
power systems, as well as dual electric utility feeds, support the IBX center.
Power systems are designed and periodically tested to transparently handle
rapid transition from public utility power to back-up power. The AC
uninterruptable power supply and DC battery systems are configured to operate a
fully occupied IBX center for a minimum of fifteen minutes. If there is a
utility power failure, the on-site generator system could be brought on-line in
less than eight seconds through an automatic transfer switch to supply
seamless, uninterrupted power to the IBX center. The emergency generators,
located in a specially equipped area, supply power to the AC and DC systems.
On-site fuel tanks store sufficient fuel to power a fully occupied IBX center
for a minimum of 48 hours.
Operations Area. The operations area houses the IBX manager's office, an
operations center for staff technicians and office space for visiting Equinix
employees. It includes consoles for monitoring all IBX environmental systems
and for tracking all activities at the IBX center. In selected IBX centers,
this area will house regional operations centers that will monitor the
operations of several IBX centers.
Additional Specifications
Security System. All access controls and other security functions are
connected to a central security computer system that controls access to the
interior and exterior perimeters of the IBX centers. A security
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guard located behind the bullet-resistant security console controls access to
the colocation area. The caged sections of the colocation area can only be
accessed through hand-geometry readers located on cage doors. Digital cameras
connected to a central system at the security console monitor and record all
activity within the IBX center, as well as the perimeter and the roof.
Staffing. A typical IBX center staff includes by one IBX manager, a chief
engineer, a warehouse coordinator and eight technical service personnel who
provide coverage for customer support needs 24 hours per day, 365 days per
year. In addition, an IBX center has security guards on duty at all times and
24-hour technical support.
Other. For security purposes, an Equinix IBX center is anonymous. No
indications of center ownership or function are visible from the exterior. In
addition, there are no raised floors and all walls are airtight and without
windows. Our IBX centers are designed with advanced fire suppression systems
which are armed with sensory mechanisms to sample the air and raise alarms
before pressurization or release. Finally, Equinix IBX centers are built in
compliance with location-dependent seismic standards.
IBX Rollout Schedule
The objective of our rollout strategy is to rapidly establish a leadership
position in the mission critical Internet infrastructure services and exchange
market.
Equinix currently has IBX centers in the Washington, D.C. New York, Dallas,
Chicago, Los Angeles metropolitan areas and in Silicon Valley. We intend to
complete construction of one additional IBX center in 2001, resulting in a
total of seven IBX centers in the U.S. The scalable nature of our IBX model
enables us to be flexible in response to changing market opportunities. As a
result, the timing and placement of our IBX centers will vary depending on
numerous factors, including customer need and technological and other
developments.
Sales and Marketing
Sales
We use a direct sales force to market our services to Internet and e-
commerce related businesses. We are organizing our sales force by customer
segments as well as establishing a sales presence in diverse geographic
regions, which will enable efficient servicing of the customer base from a
network of regional offices. A regional office is comprised of a manager, sales
representatives and technical support personnel. In addition, our sales team
will work closely with each customer to foster the natural network effect of
our IBX model, resulting in access to a wider potential customer base via our
existing customers. As a result of the IBX interconnection model, IBX
participants encourage their customers, suppliers and business partners to also
come into the IBX. These customers, suppliers and business partners also, in
turn, encourage their business partners to locate in IBX centers resulting in
additional customer growth. This network effect significantly reduces Equinix's
customer acquisition costs.
Before opening an IBX center, we secure key anchor customers and focus on
generating sales commitments for between at least 10% to 20% of the available
capacity. Our sales strategy is to target the top 25 companies in our customer
segments, which include enterprises, content providers, ASPs, e-commerce
companies, carriers, ISPs and site and performance management companies.
Momentum in the selling process and the presence of anchor customers are
important to attracting additional potential customers who see the IBX center
as an opportunity to generate new customers and revenues, as well as high
performance points for efficient and reliable web operations. We expect a
substantial number of customers to contract for services at multiple IBX
centers and have already received orders from such customers. At each IBX
center, our sales representatives will screen prospective customers and will
manage the population of the IBX center to ensure an appropriate mix of
customer types.
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Marketing
To support our sales effort and to actively promote and solidify the Equinix
brand, we plan to conduct comprehensive marketing programs. Our marketing
strategies will include an active public relations campaign, print
advertisements, online advertisements, trade shows, speaking engagements,
strategic partnerships and on-going customer communications programs. We are
focusing our marketing effort on business and trade publications, online media
outlets, industry events and sponsored activities. We participate in a variety
of Internet, computer and financial industry conferences and encourage our
officers and employees to pursue speaking engagements at these conferences. In
addition to these activities, we intend to build recognition through sponsoring
or leading industry technical forums and participating in Internet industry
standard-setting bodies.
Competition
Our market is new, rapidly evolving, and likely to have an increasing number
of competitors. To be successful in this emerging market, we must be able to
sufficiently differentiate our IBX model from traditional colocation and web
hosting companies. We may also face competition from persons seeking to
replicate our IBX concept. We may not be successful in differentiating
ourselves or achieving widespread market acceptance of our business.
Furthermore, enterprises that have already invested substantial resources in
peering arrangements may be reluctant or slow to adopt our approach that may
replace, limit or compete with their existing systems. If we are unable to
complete our IBX centers in a timely manner, other companies will be able to
attract the same customers that we are targeting. Once the customers are
located in our competitors' facilities, it will be very difficult, if not
impossible, to convince them to relocate to our IBX centers.
We may encounter competition from a number of sources, some of which may
also be our customers, including:
. vertically integrated Web site hosting, colocation and ISP companies such
as AboveNet, Exodus and Globix;
. established communications carriers such as AT&T, Level 3, WorldCom and
Qwest; and
. emerging colocation service providers such as Colo.com, InterNAP, and
Telehouse.
Potential competitors may bundle their products or incorporate colocation
services in a manner that is more attractive to our potential customers than
purchasing cabinet space in our IBX centers and utilizing our services.
Furthermore, new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. Our competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements than we can.
Some of our potential competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
we do. In particular, carriers and several hosting and colocation companies
have extensive customer bases and broad customer relationships that they can
leverage, including relationships with many of our potential customers. These
companies also have significantly greater customer support and professional
service capabilities than we do. Because of their greater financial resources,
some of these companies have the ability to adopt aggressive pricing policies.
As a result, in the future we may have to adopt pricing strategies that compete
with such competitors to attract and retain customers. Any such pricing
pressures would adversely affect our ability to generate revenues.
Employees
As of December 31, 2000, we had 316 employees and 56 full-time consultants.
We had 211 employees based at our corporate headquarters in Mountain View,
California and our regional sales offices in New York, NY and Reston, VA. Of
those employees, 103 were in engineering and operations, 64 were in sales and
marketing and 44 were in management and finance. We had 4 employees based in
Europe. The remaining 101 employees were based at our Washington, D.C., New
York, NY, Los Angeles, CA, Dallas, TX, Chicago, IL and Silicon Valley IBX
centers.
11
RISK FACTORS
In addition to the other information in this report, the following risk
factors should be considered carefully in evaluating our business and us:
Risks Related to Our Business
Our business model is new and unproven and we may not succeed in generating
sufficient revenue to sustain or grow our business.
We were founded in June 1998. We did not recognize any revenue until
November 1999. Our limited history and lack of meaningful financial or
operating data makes evaluating our operations and the proposed scale of our
business difficult. Moreover, the neutrality aspect of our business model is
unique and largely unproven. We expect that we will encounter challenges and
difficulties frequently experienced by early-stage companies in new and rapidly
evolving markets, such as our ability to generate cash flow, hire, train and
retain sufficient operational and technical talent, and implement our plan with
minimal delays. We may not successfully address any or all of these challenges
and the failure to do so would seriously harm our business plan and operating
results, and affect our ability to raise additional funds.
We have a history of losses, and we expect our operating expenses and losses to
increase significantly.
As an early-stage company, we have experienced operating losses since
inception. As of December 31, 2000, we had cumulative net losses of $141.6
million and cumulative cash used in operating activities of $78.8 million since
inception. We expect to incur significant losses on a quarterly and annual
basis in the foreseeable future. Our losses will increase as we:
. increase the number and size of IBX centers;
. increase our sales and marketing activities, including expanding our
direct sales force; and
. enlarge our customer support and professional services organizations.
In addition, we may also use significant amounts of cash and equity to
acquire complementary businesses, products, services and technologies, which
could further increase our expenses and losses.
We expect our operating results to fluctuate.
We have experienced fluctuations in our results of operations on a quarterly
and annual basis. We expect to experience significant fluctuations in the
foreseeable future due to a variety of factors, many of which are outside of
our control, including:
. the timely completion of our IBX centers;
. demand for space and services at our IBX centers;
. our pricing policies and the pricing policies of our competitors;
. the timing of customer installations and related payments;
. customer retention and satisfaction;
. the provision of customer discounts and credits;
. competition in our markets;
. the timing and magnitude of capital expenditures and expenses related to
the expansion of sales, marketing, operations and acquisitions, if any,
of complementary businesses and assets;
. the cost and availability of adequate public utilities, including power;
12
. growth of Internet use;
. governmental regulation;
. conditions related to international operations;
. economic conditions specific to the Internet industry; and
. general economic factors.
In addition, a relatively large portion of our expenses are fixed in the
short-term, particularly with respect to real estate and personnel expenses,
depreciation and amortization, and interest expenses. Therefore, our results of
operations are particularly sensitive to fluctuations in revenues.
Because our ability to generate enough revenues to achieve profitability
depends on numerous factors, we may not become profitable.
Our IBX centers may not generate sufficient revenue to achieve
profitability. Our ability to generate sufficient revenues to achieve
profitability will depend on a number of factors, including:
. the timely completion of our IBX centers;
. demand for space and services at our IBX centers;
. our pricing policies and the pricing policies of our competitors;
. the timing of customer installations and related payments;
. customer retention and satisfaction;
. the provision of customer discounts and credits;
. competition in our markets;
. growth of Internet use;
. governmental regulation;
. conditions related to international operations;
. economic conditions specific to the Internet industry; and
. general economic factors.
Although we have experienced significant growth in revenues in recent
quarters, this growth rate is not necessarily indicative of future operating
results. It is possible that we may never achieve profitability on a quarterly
or annual basis.
We are substantially leveraged and we may not generate sufficient cash flow to
meet our debt service and working capital requirements.
We are highly leveraged. As of December 31, 2000, we had total indebtedness
of $210.9 million consisting primarily of the following:
. our 13% senior notes due 2007; and
. outstanding debt facilities and capital lease obligations.
We expect to incur further debt to fund our IBX construction plans and
operating losses. Our highly leveraged position could have important
consequences, including:
. impairing our ability to obtain additional financing for working capital,
capital expenditures, acquisitions or general corporate purposes;
13
. requiring us to dedicate a substantial portion of our operating cash flow
to paying principal and interest on our indebtedness, thereby reducing
the funds available for operations;
. limiting our ability to grow and make capital expenditures due to the
financial covenants contained in our debt arrangements;
. impairing our ability to adjust rapidly to changing market conditions,
invest in new or developing technologies, or take advantage of
significant business opportunities that may arise; and
. making us more vulnerable if a general economic downturn occurs or if our
business experiences difficulties.
In the past, we have experienced unforeseen delays and expenses in
connection with our IBX construction activities. We will need to successfully
implement our business strategy on a timely basis to meet our debt service and
working capital needs. We may not successfully implement our business strategy,
and even if we do, we may not realize the anticipated results of our strategy
or generate sufficient operating cash flow to meet our debt service obligations
and working capital needs.
In the event our cash flow is inadequate to meet our obligations, we could
face substantial liquidity problems. If we are unable to generate sufficient
cash flow or otherwise obtain funds needed to make required payments under
indebtedness, or if we breach any covenants under this indebtedness, we would
be in default under its terms and the holders of such indebtedness may be able
to accelerate the maturity of such indebtedness, which could cause defaults
under our other indebtedness.
Our ability to draw down additional funds from our senior secured credit
facilities is dependent on our maintaining specific financial ratios and
complying with covenants in the credit agreement.
Our senior secured credit facilities contain financial ratios and covenants
that must be complied with in order for us to draw down the full amount of the
facilities. These ratios and covenants include minimum quarterly revenue
requirements, maximum EBITDA losses, maximum capital expenditures and maximum
debt to capital ratios. If we are unable to maintain these ratios or comply
with these covenants, we will not be able to draw down additional funds from
the senior secured credit facilities. If we are not able to draw down the full
amount of the senior secured credit facility, we may not be able to meet some
of our spending needs and this could harm our business.
We are subject to restrictive covenants in our credit agreements that limit our
flexibility in managing our business.
Our credit agreements contain numerous restrictions on our ability to incur
debt, pay dividends or make other restricted payments, sell assets, enter into
affiliate transactions and take other actions. Furthermore, our existing
financing arrangements are, and future financing arrangements are likely to be,
secured by substantially all of our assets. The existing financing arrangements
require, and future financing arrangements are likely to require, that we
maintain specific financial ratios and comply with covenants restricting our
ability to incur additional debt, specifically including additional debt under
the senior secured credit facilities, pay dividends or make other restricted
payments, sell assets, enter into affiliate transactions or take other actions.
In addition, we are restricted in how we use funds raised in our debt
financings. As a result, from time to time we may not be able to meet some of
our spending needs and this could harm our business.
The success of our business depends on the overall demand for data center space
and services and internet infrastructure services.
Our success depends on the growth of overall demand for data center
services. In addition, a large percentage of our revenues are and will in the
future be derived from companies providing internet
14
infrastructure services, such as web hosting companies, managed service
providers, storage service providers and performance enhancers. A softening of
demand for data center services or internet infrastructure services caused by a
weakening of the global economy in general and the U.S. economy in particular
may result in decreased revenues or slower growth for us.
We may continue to have customer concentration
To date, we have relied upon a small number of customers for a majority of
our revenue. We expect that we will continue to rely upon a limited number of
customers for a significant percentage of our revenue. As a result of this
concentration, a loss of or decrease in business from one or more of our large
customers could have a material and adverse effect on our results of
operations.
Any failure of our physical infrastructure or services could lead to
significant costs and disruptions that could reduce our revenue and harm our
business reputation and financial results.
Our business depends on providing our customers with highly reliable
service. We must protect our IBX infrastructure and our customers' equipment
located in our IBX centers. The services we provide are subject to failure
resulting from numerous factors, including:
. human error;
. physical or electronic security breaches;
. fire, earthquake, flood and other natural disasters;
. water damage;
. power loss; and
. sabotage and vandalism.
Problems at one or more of our centers, whether or not within our control,
could result in service interruptions or significant equipment damage. To date,
our aggregate customer uptime has been in excess of 99.99% across all our
operational IBX centers; however, in the past, a very limited number of our
customers have experienced temporary losses of power. If we incur significant
financial commitments to our customers in connection with a loss of power, or
our failure to meet other service level commitment obligations, our liability
insurance may not be adequate to cover those expenses. In addition, any loss of
services, equipment damage or inability to meet our service level commitment
obligations, particularly in the early stage of our development, could reduce
the confidence of our customers and could consequently impair our ability to
obtain and retain customers that would adversely affect our ability to generate
revenues and affect our operating results.
Our business could be harmed by prolonged electrical power outages or
shortages, or increased costs of energy.
Our IBX centers are susceptible to regional costs of power, electrical power
shortages and planned or unplanned power outages caused by these shortages,
such as those currently occurring in California. The overall power shortage in
California has increased the cost of energy, which we may not be able to pass
on to our customers. To date, none of our customers have experienced any
interruption of service in our IBX centers as a result of any power shortage.
We attempt to limit exposure to system downtime by using backup generators and
power supplies. Power outages which last beyond our backup and alternative
power arrangements could harm our customers and our business.
Our rollout plan is subject to change and we may need to alter our plan and
reallocate funds.
Our IBX center rollout plan has been developed from our current market data
and research, projections and assumptions. If we are able to secure additional
funds, we expect to pursue additional IBX projects and to
15
reconsider the timing and approach to IBX projects. We expect to continually
reevaluate our business and rollout plan in light of evolving competitive and
market conditions and the availability of suitable sites, financing and
customer demand. As a result, we may alter our IBX center rollout and
reallocate funds, or eliminate segments of our plan entirely if there are:
. changes or inaccuracies in our market data and research, projections or
assumptions;
. unexpected results of operations or strategies in our target markets;
. regulatory, technological, and competitive developments, including
additional market developments and new opportunities; or
. changes in, or discoveries of, specific market conditions or factors
favoring expedited development in other markets.
We rely upon Bechtel to complete our IBX center rollout plans on time.
We have agreed to use Bechtel Corporation exclusively as our contractor to
provide program management, site identification and evaluation and construction
services to build our IBX centers under mutually agreed upon guaranteed
completion dates. Problems in our relationship with Bechtel, including Bechtel
rendering services to our potential competitors, could have a material adverse
affect on our ability to achieve our business objectives on a timely and cost-
effective basis.
We depend on third parties to provide Internet connectivity to our IBX centers;
if connectivity is not established or continued or is delayed, our operating
results and cash flow will be adversely affected.
The presence of diverse Internet fiber from communications carriers' fiber
networks to an Equinix IBX center is critical to our ability to attract new
customers. We believe that the availability of such carrier capacity will
directly affect our ability to achieve our projected results.
We are not a communications carrier, and as such we rely on third parties to
provide our customers with carrier facilities. We intend to rely primarily on
revenue opportunities from our customers to encourage carriers to incur the
expenses required to build facilities from their points of presence to our IBX
centers. Carriers will likely evaluate the revenue opportunity of an IBX center
based on the assumption that the environment will be highly competitive. There
can be no assurance that, after conducting such an evaluation, any carrier will
elect to offer its services within our IBX centers. In addition, there can be
no assurance once a carrier has decided to provide Internet connectivity to our
IBX centers that it will continue to do so for any period of time.
The construction required to connect multiple carrier facilities to our IBX
centers is complex and involves factors outside of our control, including
regulatory processes and the availability of construction resources. For
example, in the past carriers have experienced delays in connecting to our
facilities. If the establishment of highly diverse Internet connectivity to our
IBX centers does not occur or is materially delayed or is discontinued, our
operating results and cash flow will be adversely affected.
We will operate in a new highly competitive market and we may be unable to
compete successfully against new entrants and established companies with
greater resources.
In a market that we believe will likely have an increasing number of
competitors, we must be able to differentiate ourself from existing providers
of space for telecommunications equipment and web hosting companies. In
addition to competing with other neutral colocation providers, we will compete
with traditional colocation providers, including local phone companies, long
distance phone companies, Internet service providers and web hosting
facilities. Most of these companies have longer operating histories and
significantly greater financial, technical, marketing and other resources than
we do. We believe our neutrality provides us with an advantage over these
competitors. However, these competitors could offer colocation on neutral
terms, and may start doing so in the metropolitan areas where we have IBX
centers. In addition, some of these
16
competitors provide our target customers with additional benefits, including
bundled communication services, and may do so at reduced prices or in a manner
that is more attractive to our potential customers than obtaining space in our
IBX centers. If these competitors were to provide communication services at
reduced prices together with colocation space, it may lower the total price of
these services in a fashion that we cannot match.
We may also face competition from persons seeking to replicate our IBX
concept. Our competitors may operate more successfully than we do or form
alliances to acquire significant market share. Furthermore, enterprises that
have already invested substantial resources in peering arrangements may be
reluctant or slow to adopt our approach that may replace, limit or compete with
their existing systems. If we are unable to complete our IBX centers in a
timely manner, other companies may be able to attract the same customers that
we are targeting. Once customers are located in our competitors' facilities, it
will be extremely difficult to convince them to relocate to our IBX centers.
Because of their greater financial resources, some of these companies have
the ability to adopt aggressive pricing policies. As a result, in the future,
we may suffer from pricing pressure that would adversely affect our ability to
generate revenues and affect our operating results.
Because we depend on the development and growth of a balanced customer base,
failure to attract this base of customers could harm our business and operating
results.
Our ability to maximize revenues depends on our ability to develop and grow
a balanced customer base, consisting of a variety of companies, including
content providers, application service providers, e-commerce companies,
bandwidth providers and site and performance management companies. Our ability
to attract customers to our IBX centers will depend on a variety of factors,
including the presence of multiple carriers, the overall mix of our customers,
our operating reliability and security and our ability to effectively market
our services. Construction delays, our inability to find suitable locations to
build additional IBX centers, equipment and material shortages or our inability
to obtain necessary permits on a timely basis could delay our IBX center
rollout schedule and prevent us from developing our anticipated customer base.
A customer's decision to lease cabinet space in our IBX centers typically
involves a significant commitment of resources and will be influenced by, among
other things, the customer's confidence that other Internet and e-commerce
related businesses will be located in a particular IBX center. In particular,
some customers will be reluctant to commit to locating in our IBX centers until
they are confident that the IBX center has adequate carrier connections. As a
result, we have a long sales cycle. We generally incur significant expenses in
sales and marketing prior to getting customer commitments for our services.
Delays due to the length of our sales cycle may adversely affect our business,
financial condition and results of operations.
Our success will also depend upon generating significant interconnection
revenues from customers which may depend upon a balanced customer base, as well
as upon the success of our IBX centers at facilitating business among
customers. In addition, some of our customers will be Internet companies that
face many competitive pressures and that may not ultimately be successful. If
these customers do not succeed, they will not continue to use our IBX centers.
This may be disruptive to our business and may adversely affect our business,
financial condition and results of operations.
If not properly managed, our growth and expansion could significantly harm our
business and operating results.
We are experiencing, and expect to continue to experience, rapid growth.
This growth has placed, and we expect it to continue to place, a significant
strain on our financial, management, operational and other resources. Any
failure to manage growth effectively could seriously harm our business and
operating results. To succeed, we will need to:
. hire, train and retain new employees and qualified engineering personnel
at each IBX center;
. implement additional management information systems;
17
. locate additional office space for our corporate headquarters;
. improve our operating, administrative, financial and accounting systems
and controls; and
. maintain close coordination among our executive, engineering, accounting,
finance, marketing, sales and operations organizations.
To date, we have experienced difficulties implementing and upgrading our
management information systems. We do not currently have a permanent Chief
Information Officer. We intend to hire a permanent Chief Information Officer
and additional information technology personnel to upgrade and operate our
management information systems. If we are unable to hire and retain such
personnel, and successfully upgrade and operate adequate management information
systems to support our growth effectively, our business will be materially and
adversely affected.
We must attract and retain key personnel to maintain and grow our business.
We require the services of additional personnel in positions related to our
growth. For example, we need to expand our marketing and direct sales
operations to increase market awareness of our IBX centers, market our services
to a greater number of enterprises and generate increased revenues. We also
require highly capable technical personnel to provide the quality services we
are promoting. As a result, we plan to hire additional personnel in related
capacities. Our success depends on our ability to identify, hire, train and
retain additional qualified personnel, including managers, particularly in
areas related to our anticipated growth and geographic expansion.
We may not be successful in attracting, assimilating or retaining qualified
personnel. In addition, due to generally tight labor markets, our industry, in
particular, suffers from a lack of available qualified personnel. If we lose
one or more of our key employees, we may not be able to find a replacement and
our business and operating results could be adversely affected.
We may make acquisitions, which pose integration and other risks that could
harm our business.
We may seek to acquire complementary businesses, products, services and
technologies. As a result of these acquisitions, we may:
. be required to incur additional debt and expenditures; and
. issue additional shares of our stock to pay for the acquired business,
product, service or technology, which will dilute existing shareholders'
ownership interest in the Company.
In addition, if we fail to successfully integrate and manage acquired
businesses, products, services and technologies, our business and financial
results would be harmed. Currently, we have no present commitments or
agreements with respect to any such acquisitions.
We face risks associated with international operations that could harm our
business.
We intend to construct IBX centers outside of the United States and we will
commit significant resources to our international sales and marketing
activities. Our management has limited experience conducting business outside
of the United States and we may not be aware of all the factors that affect our
business in foreign jurisdictions. We will be subject to a number of risks
associated with international business activities that may increase our costs,
lengthen our sales cycles and require significant management attention. These
risks include:
. increased costs and expenses related to the leasing of foreign IBX
centers;
. difficulty or increased costs of constructing IBX centers in foreign
countries;
. difficulty in staffing and managing foreign operations;
18
. increased expenses associated with marketing services in foreign
countries;
. business practices that favor local competition and protectionist laws;
. difficulties associated with enforcing agreements through foreign legal
systems;
. general economic and political conditions in international markets;
. potentially adverse tax consequences, including complications and
restrictions on the repatriation of earnings;
. currency exchange rate fluctuations;
. unusual or burdensome regulatory requirements or unexpected changes to
those requirements;
. tariffs, export controls and other trade barriers; and
. longer accounts receivable payment cycles and difficulties in collecting
accounts receivable.
To the extent that our operations are incompatible with, or not economically
viable within, any given foreign market, we may not be able to locate an IBX
center in that particular foreign jurisdiction.
Our stock price has been volatile in the past and is likely to continue to be
volatile.
The market price of our common stock has been volatile in the past and is
likely to continue to be volatile. In addition, the securities markets in
general, and Internet stocks in particular, have experienced significant price
volatility and accordingly the trading price of our common stock is likely to
be affected by this activity.
If there is a change of control of Equinix, we may be required under our
indenture and our senior secured credit facilities to repurchase or repay the
debt outstanding under those agreements.
Change of control provisions in our indenture and senior secured credit
facilities could limit the price that investors might be willing to pay in the
future for shares of our common stock and significantly impede the ability of
the holders of our common stock to change management.
Risks Related to Our Industry
If use of the Internet and electronic business does not continue to grow, a
viable market for our IBX centers may not develop.
Rapid growth in the use of and interest in the Internet has occurred only
recently. Acceptance and use may not continue to develop at historical rates
and a sufficiently broad base of consumers may not adopt or continue to use the
Internet and other online services as a medium of commerce. Demand and market
acceptance for recently introduced Internet services and products are subject
to a high level of uncertainty and there are few proven services and products.
As a result, we cannot be certain that a viable market for our IBX centers will
emerge or be sustainable.
We must respond to rapid technological change and evolving industry standards
in order to meet the needs of our customers.
The market for IBX centers will be marked by rapid technological change,
frequent enhancements, changes in customer demands and evolving industry
standards. Our success will depend, in part, on our ability to address the
increasingly sophisticated and varied needs of our current and prospective
customers. Our failure to adopt and implement the latest technology in our
business could negatively affect our business and operating results.
In addition, we have made and will continue to make assumptions about the
standards that may be adopted by our customers and competitors. If the
standards adopted differ from those on which we have based
19
anticipated market acceptance of our services or products, our existing
services could become obsolete. This would have a material adverse effect on
our business, financial condition and results of operations.
Government regulation may adversely affect the use of the Internet and our
business.
Laws and regulations governing Internet services, related communications
services and information technologies, and electronic commerce are beginning to
emerge but remain largely unsettled, even in areas where there has been some
legislative action. It may take years to determine whether and how existing
laws, such as those governing intellectual property, privacy, libel,
telecommunications, and taxation, apply to the Internet and to related services
such as ours. In addition, the development of the market for online commerce
and the displacement of traditional telephony services by the Internet and
related communications services may prompt increased calls for more stringent
consumer protection laws or other regulation, both in the United States and
abroad, that may impose additional burdens on companies conducting business
online and their service providers. The adoption or modification of laws or
regulations relating to the Internet, or interpretations of existing law, could
have a material adverse effect on our business, financial condition and results
of operations.
ITEM 2. PROPERTIES
Our executive offices are currently located in Mountain View, CA. We have
entered into leases for IBX centers in Ashburn, VA, Newark, NJ, San Jose and
Los Angeles, CA, Chicago, IL, Dallas, TX, Secaucus, NJ, Amsterdam, The
Netherlands, Paris, France, London, England and Frankfurt, Germany. We also
hold a ground leasehold interest in certain unimproved real property in San
Jose, CA, consisting of approximately 79 acres. Relating to future IBX centers,
we do not intend to own real estate or buildings but rather continue to enter
into lease agreements with a minimum term of ten years, renewal options and
rights of first refusal on space for expansion.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended
December 31, 2000.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market System under the
symbol of EQIX. The following table sets forth, for the periods indicated, the
low and high bid prices per share for our common stock as reported by the
Nasdaq National Market.
Low High
----- ------
Fiscal 2000
Fourth Fiscal Quarter.......................................... $3.50 $ 9.75
Third Fiscal Quarter (beginning August 11, 2000)............... 8.88 16.19
As of December 31, 2000, there were approximately 255 holders of record of
our common stock.
No dividends have been paid on the common stock. We currently intend to
retain all future earnings, if any, for use in our business and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. Other than restrictions that are a part of our various debt
instruments, there are no legal restrictions on paying dividends.
The effective date of the Registration Statement for our initial public
offering, filed on Form S-1 under the Securities Act of 1933 (File No. 333-
93749), was August 10, 2000. The class of securities registered was Common
Stock. The managing underwriters for the offering were Goldman, Sachs & Co.,
Salomon Smith Barney Inc., Chase Securities Inc. and Epoch Securities, Inc.
The offering commenced on August 11, 2000 and terminated on September 7,
2000 after we had sold 22,704,596 shares out of a total of 23,000,000 shares of
common stock registered under the Registration Statement for aggregate gross
offering proceeds of $272,455,152.
We incurred expenses of approximately $20,973,000, of which $19,071,860
represented underwriting discounts and commissions and approximately $1,901,140
represented other expenses related to the offering. The net offering proceeds
after total expenses were $251,482,000.
We expect to use the proceeds for general corporate purposes, including
working capital, and to fund the construction of new IBX centers and existing
IBX center expansion projects. A portion of the net proceeds may also be used
for the acquisition of businesses, products and technologies that are
complimentary to ours. We have no current agreements or commitments for
acquisitions of complementary businesses, products or technologies. Pending
these uses, the net proceeds have been invested in investment grade and
interest-bearing securities. The use of proceeds from the offering does not
represent a material change in the use of proceeds described in the
Registration Statement.
21
ITEM 6. SELECTED FINANCIAL DATA
The following statement of operations data for the years ended December 31,
2000 and 1999, and for the period from our inception on June 22, 1998 to
December 31, 1998, and the balance sheet data as of December 31, 2000, 1999 and
1998 have been derived from our audited consolidated financial statements and
the related notes to the financial statements. Our historical results are not
necessarily indicative of the results to be expected for future periods. The
following selected consolidated financial data should be read in conjunction
with our consolidated financial statements and the related notes to the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
report.
Period from
June 22, 1998
Years ended (inception)
December 31, to
------------------- December 31,
2000 1999 1998
--------- -------- -------------
(dollars in thousands, except
per share data)
Statement of Operations Data:
Revenues.................................... $ 13,016 $ 37 $ --
--------- -------- -------
Costs and operating expenses:
Cost of revenues (excludes stock-based
compensation of $766, $177 and none for
the periods ended December 31, 2000, 1999
and 1998, respectively).................. 42,635 3,091 --
Sales and marketing (excludes stock-based
compensation of $6,318, $1,631 and $13
for the periods ended December 31, 2000,
1999 and 1998, respectively)............. 13,821 2,318 34
General and administrative (excludes
stock-based compensation of $22,809,
$4,819 and $151 for the periods ended
December 31, 2000, 1999 and 1998,
respectively)............................ 33,776 7,784 751
Stock-based compensation.................. 29,893 6,627 164
--------- -------- -------
Total costs and operating expenses...... 120,125 19,820 949
--------- -------- -------
Loss from operations...................... (107,109) (19,783) (949)
Interest income............................. 16,430 2,138 150
Interest expense............................ (29,111) (3,146) (220)
--------- -------- -------
Net loss.................................... $(119,790) $(20,791) $(1,019)
========= ======== =======
Net loss per share:
Basic and diluted......................... $ (3.48) $ (4.98) $ (1.48)
========= ======== =======
Weighted average shares................... 34,461 4,173 688
========= ======== =======
As of December 31,
----------------------------------
2000 1999 1998
--------- -------- -------------
(dollars in thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term
investments................................ $ 207,210 $222,974 $ 9,165
Accounts receivable, net.................... 4,925 178 --
Restricted cash and short-term investments.. 36,855 38,609 --
Property and equipment, net................. 315,380 28,444 482
Construction in progress.................... 94,894 18,312 31
Total assets................................ 683,485 319,946 10,001
Debt facilities and capital lease
obligations, excluding current portion..... 6,506 8,808 --
Senior notes................................ 185,908 183,955 --
Redeemable convertible preferred stock...... -- 97,227 10,436
Total stockholders' equity (deficit)........ 375,116 8,472 (846)
Other Financial Data:
Adjusted EBITDA (1)......................... (62,400) (12,547) (782)
Net cash used in operating activities....... (68,073) (9,908) (796)
Net cash used in investing activities....... (302,158) (86,270) (5,265)
Net cash provided by financing activities... 339,847 295,178 10,226
- -------
(1) Adjusted EBITDA consists of net loss excluding interest, income taxes,
depreciation and amortization of capital assets and amortization of
deferred stock-based compensation. Adjusted EBITDA is presented to enhance
an understanding of our operating results, it is not intended to represent
cash flow or results of operations in accordance with generally accepted
accounting principles for the period indicated and my be calculated
differently than Adjusted EBITDA for other companies. Adjusted EBITDA is
not a measure determined under generally accepted accounting principles nor
is it a measure of liquidity.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following commentary should be read in conjunction with the financial
statements and related notes contained elsewhere in this Form 10-K. The
discussion contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In many cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "intend" or "continue," or
the negative of such terms and other comparable terminology. These statements
are only predictions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of a variety of
factors, including, but not limited to, those set forth under "Risk Factors"
and elsewhere in this Form 10-K.
Overview
Equinix designs, builds and operates neutral IBX centers where Internet
businesses place their equipment and their network facilities in order to
interconnect with each other to improve internet performance. Our neutral IBX
centers provide content providers, application service providers, or ASPs and
e-commerce companies with the ability to directly interconnect with a choice of
bandwidth providers, Internet service providers, or ISPs, and site and
performance management companies. Equinix currently has IBX centers totaling an
aggregate of 543,000 gross square feet in the Washington, D.C. metropolitan
area, the New York metropolitan area, Silicon Valley, Dallas, Los Angeles and
Chicago. We intend to complete construction of one additional IBX center and
several expansion projects by the end of 2001, resulting in IBX centers
covering seven domestic markets in the United States. Since our inception on
June 22, 1998, our operating activities have consisted primarily of designing,
building and operating our IBX centers, developing our management team and
raising equity and third party debt.
In August 2000, we completed our initial public offering and obtained
aggregate net proceeds of $251.5 million, which included proceeds from the
exercise of the underwriters' over-allotment option. In December 2000, we
completed our $150.0 million senior secured credit facility.
We generate recurring revenues primarily from the leasing of cabinet space
and power. In addition, we offer value-added services and professional services
including direct interconnections between our customers and "Smart Hands"
service for customer equipment installations and maintenance. Customer
contracts for the lease of cabinet space, power, interconnections and switch
ports are renewable and typically are for two or more years with payments for
services made on a monthly basis. In addition, we generate non-recurring
revenues, which are comprised of installation charges that are billed upon
successful installation of our customer cabinets, power, interconnections and
switch ports. Both recurring and non-recurring revenues are recognized ratably
over the term of the contract.
Many of our customers have signed multi-site and multi-year contracts.
Assuming completion of our planned IBX projects, the full installation of the
customer equipment contemplated by these contracts and no incremental
interconnection revenue beyond the minimum provided for by these contracts,
these contracts would provide us with monthly recurring revenue of
approximately $6.3 million. Because we may alter our rollout schedule and we
depend upon third parties to construct and connect our facilities with fiber
and accordingly, the timing of customer installations, Equinix cannot predict
when and whether we will realize the full value of these contracts. Moreover,
many of our customer contracts can be terminated upon requisite written notice.
Our cost of revenues consists primarily of lease payments on our existing
and proposed IBX centers, site employees' salaries and benefits, utility costs,
amortization and depreciation of IBX center build-out costs and equipment and
engineering, power, redundancy and security systems support and services. In
addition, cost of revenues includes certain costs related to real estate
obtained for future IBX facilities in the United States and Europe. We will
continue to fund these costs and these costs will be expensed as incurred. We
expect our cost of revenues to increase for the foreseeable future.
23
Our selling, general and administrative expenses consist primarily of costs
associated with recruiting, training and managing of employees, salaries and
related costs of our operations, customer fulfillment and support functions
costs and finance and administrative personnel and related professional fees.
Our selling, general and administrative expenses will increase as we continue
to expand our operations.
We recorded deferred stock-based compensation of approximately $54.5
million, $19.4 million and $1.1 million in connection with stock options
granted during 2000, 1999 and 1998, respectively, where the deemed fair market
value of the underlying common stock was subsequently determined to be greater
than the exercise price on the date of grant. Approximately $29.9 million, $6.6
million and $164,000 was amortized to stock-based compensation expense for the
periods ended December 31, 2000, 1999 and 1998, respectively. The options
granted are typically subject to a four-year vesting period. We are amortizing
the deferred stock-based compensation on an accelerated basis over the vesting
periods of the applicable options in accordance with FASB Interpretation No.
28. The remaining $38.4 million of deferred stock-based compensation will be
amortized over the remaining vesting periods. We expect amortization of
deferred stock-based compensation expense to impact our reported results
through December 31, 2004.
Our adjusted net loss before net interest and other expense, income taxes,
depreciation and amortization of capital assets, amortization of stock-based
compensation and other non-cash charges ("Adjusted EBITDA") is calculated to
enhance an understanding of our operating results. Adjusted EBITDA is a
financial measurement commonly used in capital-intensive telecommunication and
infrastructure industries. Other companies may calculate Adjusted EBITDA
differently than we do. It is not intended to represent cash flow or results of
operations in accordance with generally accepted accounting principles nor a
measure of liquidity. We measure Adjusted EBITDA at both the IBX center and
total company level.
Since inception, we have experienced operating losses and negative cash
flow. As of December 31, 2000 we had an accumulated deficit of $141.6 million
and accumulated cash used in operating and construction activities of $403.1
million. Given the revenue and income potential of our service offerings is
still unproven and we have a limited operating history, we may not generate
sufficient operating results to achieve desired profitability. We therefore
believe that we will continue to experience operating losses for the
foreseeable future. See "Risk Factors".
Results of Operations
Years ended December 31, 2000 and December 31, 1999
Revenues. Revenues increased from $37,000 for the year ended December 31,
1999 to $13.0 million for the year ended December 31, 2000. Revenues consisted
of recurring revenues of $11.6 million, primarily from the leasing of cabinet
space and power, and non-recurring revenues of $1.4 million related to the
recognized portion of deferred installation revenue and custom installation
revenues. Installation and service fees are recognized ratably over the term of
the contract. We anticipate revenues will continue to increase substantially in
the future.
Cost of Revenues. Cost of revenues increased from $3.1 million for the year
ended December 31, 1999 to $42.6 million for the year ended December 31, 2000.
Cost of revenues consists primarily of rental payments for our leased IBX
centers, site employees' salaries and benefits, utility costs, power and
redundancy system engineering support services and related costs, security
services and related costs and depreciation and amortization of our IBX center
build-out and other equipment costs. The increase in cost of revenues was due
to the expansion and deployment of our IBX centers throughout the United
States. In addition, cost of revenues include certain costs related to real
estate obtained for future IBX facilities in the United States and Europe. We
will continue to fund these costs as the Company continues to expand its IBX
centers in the United States and Europe. These costs will be expensed as
incurred. Furthermore, these amounts exclude $177,000 and $766,000, for the
years ended December 31, 1999 and 2000, respectively, of stock-based
compensation expense.
24
Sales and Marketing. Sales and marketing expenses increased from $2.3
million for the year ended December 31, 1999 to $13.8 million for the year
ended December 31, 2000. Sales and marketing expenses consist primarily of
compensation and related costs for the sales and marketing personnel, sales
commissions, marketing programs, public relations, promotional materials and
travel. The increase in sales and marketing expense resulted from the addition
of personnel in our sales and marketing organizations, reflecting our increased
selling effort to support our IBX center deployment plan and our efforts to
develop market awareness. These amounts exclude $1.6 million and $6.3 million,
for the years ended December 31, 1999 and 2000, respectively, of stock-based
compensation expense. We anticipate that sales and marketing expenses will
increase in absolute dollars due to continued customer acquisition costs and
further expansion of our market awareness initiatives. In addition, these costs
will increase consistent with our future IBX center deployment and expansion
plans.
General and Administrative. General and administrative expenses increased
from $7.8 million for the year ended December 31, 1999 to $33.8 million for the
year ended December 31, 2000. General and administrative expenses consist
primarily of salaries and related expenses, accounting, legal and
administrative expenses, professional service fees and other general corporate
expenses. The increase in general and administrative expenses was primarily the
result of increased expenses associated with additional hiring of personnel in
management, finance and administration, as well as other related costs
associated with supporting the Company's expansion. These amounts exclude $4.8
million and $22.8 million, for the years ended December 31, 1999 and 2000,
respectively, of stock-based compensation expense. We anticipate that general
and administrative expenses will increase in absolute dollars due to increased
staffing levels consistent with the growth in our infrastructure and related
operating costs.
Adjusted EBITDA. Adjusted EBITDA loss increased from $12.5 million for the
year ended December 31, 1999 to $62.4 million for the year ended December 31,
2000. Although many factors affect adjusted EBITDA and costs vary from IBX
market to IBX market, as of December 31, 2000, three of our six IBX centers
achieved positive adjusted EBITDA status. We anticipate our adjusted EBITDA
losses to decline as we leverage our existing cost base and expand our revenue
growth.
Interest Income. Interest income increased from $2.1 million for the year
ended December 31, 1999 to $16.4 million for the year ended December 31, 2000.
Interest income increased substantially due to higher cash, cash equivalent and
short-term investment balances held in interest bearing accounts, resulting
from the proceeds of the initial public offering and preferred stock financing
activities.
Interest Expense. Interest expense increased from $3.1 million for the year
ended December 31, 1999 to $29.1 million for the year ended December 31, 2000.
The increase in interest expense was attributed to interest on the senior
notes, interest related to our debt facilities and capital lease obligations
and amortization of the senior notes, debt facilities and capital lease
obligations discount.
Year Ended December 31, 1999 and Period from Inception (June 22, 1998) through
December 31, 1998
Revenues. We recognized revenues of $37,000 for the year ended December 31,
1999. In addition, we entered into contracts with other customers and allocated
cabinet space to these customers as of December 31, 1999. Although we entered
into these customer contracts, we did not recognize such amounts as revenues as
the sales cycle was not yet complete by December 31, 1999. We did not offer IBX
center colocation or interconnection exchange services from the date of
inception through December 31, 1998, and as such, no revenues were recognized
from the date of inception to December 31, 1998.
Cost of Revenues. We incurred cost of revenues of $3.1 million for the year
ended December 31, 1999. Cost of revenues is primarily comprised of rental
payments on our leased IBX centers, site employees' salaries and benefits,
utilities costs, power and redundancy system engineering support services and
related costs, security services and related costs and depreciation and
amortization of our IBX center build-out and other
25
equipment costs. This amount excludes $177,000 for the year ended December 31,
1999 of stock-based compensation expense. We did not offer IBX center
colocation or interconnection exchange services from the date of inception
through December 31, 1998, and as such, no cost of revenues was incurred from
the date of inception to December 31, 1998.
Sales and Marketing. Sales and marketing expenses increased from $34,000 for
the period from the date of inception to December 31, 1998 to $2.3 million for
the year ended December 31, 1999. These expenses consist primarily of salary
and benefit costs from the hiring of both sales and marketing personnel and
certain related recruiting and relocation costs and the establishment of sales
and marketing programs. These amounts exclude the recognition of stock-based
compensation expense in the amount of approximately $13,000 and $1.6 million
for the period from the date of inception to December 31, 1998 and the year
ended December 31, 1999, respectively. In addition, we established two regional
sales offices to support the New York and Washington, D.C. metropolitan area
IBX centers. We anticipate that sales and marketing expenses will increase
substantially to coincide with the commercial operation of our IBX centers and
additional stock-based compensation expense.
General and Administrative. General and administrative expenses increased
from $752,000 for the period from the date of inception to December 31, 1998 to
$7.8 million for the year ended December 31, 1999. General and administrative
expenses are primarily comprised of salaries and employee benefits expenses,
professional and consultant fees and corporate headquarter operating costs,
including facility and other rental costs. These amounts exclude the
recognition of stock-based compensation expenses in the amount of approximately
$151,000 and $4.8 million for the period from the date of inception to December
31, 1998 and the year ended December 31, 1999, respectively. We anticipate that
general and administrative expenses will increase significantly due to
increased staffing levels consistent with the growth in our infrastructure and
related operating costs associated with our regional and international
expansion efforts and additional stock-based compensation expense.
Adjusted EBITDA. Adjusted EBITDA loss increased from $782,000 for the period
from the date of inception to December 31, 1998 to $12.5 million for the year
ended December 31, 1999. As of December 31, 1998, no IBX centers had been
constructed. We anticipate our adjusted EBITDA losses to increase as we build
our IBX centers and decline as these centers become profitable as we leverage
our existing cost base and expand our revenue growth.
Interest Income. We recognized interest income of $2.1 million for the year
ended December 31, 1999 compared to $150,000 for the period from the date of
inception to December 31, 1998. Interest income increased substantially due to
higher cash, cash equivalent and short-term investment balances resulting from
the senior notes and preferred stock financing activities.
Interest Expense. Interest expense was $3.1 million for the year ended
December 31, 1999 compared to $220,000 for the period from the date of
inception to December 31, 1998. Interest expense increased due to the issuance
of senior notes, increased debt facilities and capital lease obligations and
amortization of the senior notes and debt facilities and capital lease
obligation discount. Interest expense for the period from the date of inception
to December 31, 1998 consisted of the interest charge from the conversion right
of the convertible loan arrangement, under which the initial lenders to the
Company converted their promissory notes into Series A redeemable convertible
preferred stock at a more beneficial rate than other Series A investors.
Liquidity and Capital Resources
Since inception, we have financed our operations and capital requirements
primarily through the issuance of senior notes, the private sale of preferred
stock, our initial public offering and debt financings, excluding our recently
completed $150.0 million senior secured credit facility which has not been
drawn upon as of December 31, 2000, for aggregate gross proceeds of
approximately $686.2 million. As of December 31, 2000, we had approximately
$207.2 million in cash, cash equivalents and short-term investments.
Furthermore, we
26
have an additional $36.9 million of restricted cash, cash equivalents and
short-term investments to fund interest expense through June 2001 on our 13%
senior notes due 2007, provide collateral under a number of separate security
agreements for standby letters of credit and escrow accounts entered into and
in accordance with certain lease agreements. Our principal sources of liquidity
consist of our cash, cash equivalent and short-term investment balances and
proceeds from our $150.0 million senior secured credit facility. As of December
31, 2000, our total indebtedness from our senior notes, debt facilities and
capital lease obligations was $210.9 million.
Net cash used in our operating activities was $68.1 million and $9.9 million
for the years ended December 31, 2000 and 1999, respectively. We used cash
primarily to fund our net loss from operations.
Net cash used in investing activities was $302.2 million and $86.3 million
for the years ended December 31, 2000 and 1999, respectively. Net cash used in
investing activities was primarily attributable to the construction of our IBX
centers and the purchase of restricted cash and short-term investments.
Net cash generated by financing activities was $339.8 million and $295.2
million for the years ended December 31, 2000 and 1999, respectively. Net cash
generated by financing activities during the year ended December 31, 2000 was
primarily attributable to the proceeds from the initial public offering and
issuance of Series C redeemable convertible preferred stock. Net cash generated
by financing activities during the year ended December 31, 1999 was primarily
attributable to the proceeds from the issuance of Series B redeemable
convertible preferred stock and the drawdown on the debt facilities and capital
lease obligations.
In March 1999, we entered into a loan and security agreement in the amount
of $7.0 million, bearing interest at 7.5% to 9.0% per annum, repayable in 36 to
42 equal monthly payments with a final interest payment equal to 15% of the
advance amounts due at maturity. The outstanding principal and interest balance
under this loan and security agreement, including the final interest payment,
was repaid in December 2000.
In May 1999, we entered into a master lease agreement in the amount of $1.0
million. This master lease agreement was increased by addendum in August 1999
by $5.0 million. This agreement bears interest at either 7.5% or 8.5% and is
repayable over 42 months in equal monthly payments with a final interest
payment equal to 15% of the advance amounts due on maturity. At December 31,
2000, these capital lease financings have been fully drawn.
In August 1999, we entered into a loan agreement in the amount of $10.0
million. This loan agreement bears interest at 8.5% and is repayable over 42
months in equal monthly payments with a final interest payment equal to 15% of
the advance amounts due on maturity. At December 31, 2000, this debt financing
has been fully drawn.
In December 1999, we issued $200.0 million aggregate principal amount of 13%
senior notes due 2007 for aggregate net proceeds of $193.4 million, net of
offering expenses. Of the $200.0 million gross proceeds, $16.2 million was
allocated to additional paid-in capital for the fair market value of the common
stock warrants and recorded as a discount to the senior notes. Senior notes,
net of the unamortized discount, are $185.9 million as of December 31, 2000.
In December 1999, we completed the private sale of our Series B redeemable
convertible preferred stock, net of issuance costs, in the amount of $81.7
million.
In May 2000, we entered into a purchase agreement regarding approximately 80
acres of real property in San Jose, California. In June 2000, before the
closing on this property, we assigned our interest in the purchase agreement to
iStar San Jose, LLC. On the same date, iStar purchased this property and
entered into a 20-year lease with us for the property. Under the terms of the
lease, we have the option to extend the lease for an additional 60 years, for a
total lease term of 80 years. In addition, we have the option to purchase the
property from iStar after 10 years.
27
In June 2000, we completed the private sale of our Series C redeemable
convertible preferred stock in the amount of $94.4 million.
In August 2000, we completed an initial public offering of 20,000,000 shares
of common stock. In addition, in September 2000, the underwriters exercised
their option to purchase 2,704,596 shares to cover over-allotments of shares.
Total net proceeds from the offering and over-allotment were $251.5 million.
In December 2000, we entered into a $150.0 million senior secured credit
facility. At December 31, 2000, no proceeds from this facility have been drawn.
We expect that our cash on hand and anticipated cash flow from operations,
and drawdown of our senior secured credit facility, should be sufficient to
build our additional IBX center by the end of 2001. Assuming sufficient
customer demand and the availability of additional financing, we will build
additional IBX centers and expand certain existing IBX centers. We are
continually evaluating the location, number and size of our facilities based
upon the availability of suitable sites, financing and customer demand. If we
cannot raise additional funds on acceptable terms or our losses exceed our
expectations, we may delay or permanently reduce our rollout plans. Additional
financing may take the form of debt or equity. If we are unable to raise
additional funds to further our rollout, we anticipate that the cash flow
generated from the seven IBX centers, for which we will have obtained
financing, will be sufficient to meet the working capital, debt service and
corporate overhead requirements associated with those IBX centers.
Recent Accounting Pronouncements
In September 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
137 ("SFAS 137"), "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133." In June
2000, the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities--an Amendment of FASB Statement No. 133." SFAS
133 establishes new standards of accounting and reporting for derivative
instruments and hedging activities, and requires that all derivatives,
including foreign currency exchange contracts, be recognized on the balance
sheet at fair value. Equinix will adopt SFAS 133, as amended by SFAS 137 and
SFAS 138, in the first fiscal quarter of 2001, and does not expect the adoption
to have a material effect on its financial condition or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin 101, or SAB 101,
Revenue Recognition, which outlines the basic criteria that must be met to
recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements
filed with the SEC. The adoption of SAB 101 did not have a material impact on
our financial position and results of operations.
In March 2000, the FASB issued Interpretation No. 44, or FIN 44, Accounting
for Certain Transactions Involving Stock Compensation--an Interpretation of APB
25. This Interpretation clarifies (a) the definition of employee for purposes
of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after
either December 15, 1998, or January 12, 2000. The adoption of certain of the
conclusions of FIN 44 did not have a material effect on the Company's financial
position and results of operations.
Impact of the Year 2000
We have not experienced any disruption related to the year 2000 in the
operation of our systems. Although most year 2000 problems should have become
evident on January 1, 2000, additional problems related to the year 2000 may
become evident only after that date.
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The following discussion about market risk disclosures involves forward-
looking statements. Actual results could differ materially from those projected
in the forward-looking statements. We may be exposed to market risks related to
changes in interest rates and foreign currency exchange rates and to a lesser
extent we are exposed to fluctuations in the prices of certain commodities,
primarily electricity.
Equinix attempts to net individual exposures on a consolidated basis, when
feasible, to take advantage of natural offsets. In addition, we employ foreign
currency forward exchange contracts for the purpose of hedging certain
specifically identified net currency exposures. The use of these financial
instruments is intended to mitigate some of the risks associated with
fluctuations in currency exchange rates, but does not eliminate such risks. We
do not use financial instruments for trading or speculative purposes.
Interest Rate Risk
Our exposure to market risk resulting from changes in interest rates relates
primarily to our investment portfolio. Our interest income is impacted by
changes in the general level of U.S. interest rates, particularly since the
majority of our investments are in short-term instruments. Due to the short-
term nature of our investments, we do not believe that we are subject to any
material market risk exposure. An immediate 10% increase or decrease in current
interest rates would not have a material effect on the fair market value of our
investment portfolio. We would not expect our operating results or cash flows
to be significantly affected by a sudden change in market interest rates in our
investment portfolio.
An immediate 10% increase or decrease in current interest rates would
furthermore not have a material impact to our debt obligations due to the fixed
nature of our long-term debt obligations. The fair market value of our long
term fixed interest rate debt is subject to interest rate risk. Generally, the
fair market value of fixed interest rate debt will increase as interest rates
fall and decrease as interest rates rise. These interest rate changes may
affect the fair market value and do impact earnings or cash flows of the
Company. An immediate 10% change in interest rates would not have a material
impact on future operating results or cash flows.
The fair market value of our 13% senior notes due 2007 are based on quoted
market prices. The estimated fair value of our 13% senior notes due 2007 as of
December 31, 2000 is approximately $140.0 million.
Foreign Currency Risk
To date, all of our recognized revenue has been denominated in U.S. dollars,
generated mostly from customers in the United States, and our exposure to
foreign currency exchange rate fluctuations has been minimal. We expect that
future revenues may be derived from customers outside of the United States and
may be denominated in foreign currency. As a result, our operating results or
cash flows may be impacted due to currency fluctuations relative to the U.S.
dollar. Furthermore, to the extent we engage in international sales that are
denominated in U.S. dollars, an increase in the value of the U.S. dollar
relative to foreign currencies could make our services less competitive in the
international markets. Although we will continue to monitor our exposure to
currency fluctuations, and when appropriate, may use financial hedging
techniques in the future to minimize the effect of these fluctuations, we
cannot assure you that exchange rate fluctuations will not adversely affect our
financial results in the future.
29
We have entered into a number of lease agreements in Europe for which our
liabilities are denominated in foreign currency. As of December 31, 2000, we
also had foreign currency commitments relating to the initiation of our
business within Europe. We use forward exchange contracts to hedge a portion of
our liabilities which are denominated in foreign currencies. The Company's
forward exchange contracts as of December 31, 2000, which mature during 2001,
are represented below (in thousands):
Contract to receive Foreign Currency Contract Amount Change in Fair Market Value
currency / Pay US$ Contract amount in US$ as of December 31, 2000
------------------------------------------------------------------------------------
British
Pounds Pounds 28,313 US$41,003 US$1,337
Assuming a 10% increase in the value of the U.S. dollar relative to the
British Pound, and a 10% decrease in the value of the U.S. dollar relative to
the British Pound, the aggregate fair value of these foreign currency
commitments as hedged would be approximately $36.9 million and $45.1 million,
respectively.
Commodity Price Risk
Certain operating costs incurred by Equinix are subject to price
fluctuations caused by the volatility of underlying commodity prices. The
commodities most likely to have an impact on our results of operations in the
event of significant price changes are electricity and building materials for
the construction of our IBX centers such as steel. We are closely monitoring
the cost of electricity, particularly in California. To the extent that
electricity costs continue to rise, we are investigating opportunities to pass
these additional power costs onto our customers that utilize this power. For
building materials, we rely on Bechtel's expertise and bulk purchasing power to
best manage the procurement of these required materials for the construction of
our IBX centers. We do not employ forward contracts or other financial
instruments to hedge commodity price risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item 8 are
listed in Item 14(a)(1) and begin at page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 7, 2000, KPMG LLP resigned as our independent accountants upon
determining that they may no longer be independent of Equinix as a result of
Cisco Systems, Inc.'s investment in both KPMG Consulting, Inc., a subsidiary of
KPMG LLP and Equinix. We subsequently appointed PricewaterhouseCoopers LLP as
our principal accountants on March 21, 2000. There were no disagreements with
the former accountants during the fiscal years ended December 31, 1998 and 1999
or during any subsequent interim period preceding their replacement on any
matter of accounting principles or practices, financial statement disclosure,
or auditing scope or procedures, which disagreements, if not resolved to the
former accountants' satisfaction, would have caused them to make reference to
the subject matter of the disagreement in connection with their reports. The
former independent accountants issued an unqualified report on the financial
statements as of December 31, 1999 and 1998 and for the year ended December 31,
1999 and the period from June 22, 1998 (inception) to December 31, 1998. For
purposes of this filing, the financial statements as of December 31, 1999 and
1998 and for the year ended December 31, 1999 and the period from June 22, 1998
(inception) to December 31, 1998 have been audited by PricewaterhouseCoopers
LLP. Prior to March 21, 2000, we did not consult with PricewaterhouseCoopers
LLP on items that involved our accounting principles or the form of audit
opinion to be issued on our financial statements. The change in accountants was
approved by our board of directors.
30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding our Directors and Executive Officers is
incorporated herein by reference from the section entitled "Election of
Directors" of our definitive Proxy Statement (the "Proxy Statement") to be
filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended, for our Year 2001 Annual Meeting of Stockholders. The Proxy Statement
is anticipated to be filed within 120 days after the end of our fiscal year
ended December 31, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated herein by
reference from the section entitled "Executive Compensation and Related
Information" of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from the section entitled "Stock
Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.
ITEM 13. RELATED PARTY TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated herein by reference from the section entitled "Related Party
Transactions" of the Proxy Statement.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements:
Report of Independent Accountants...................................... F-1
Consolidated Balance Sheets............................................ F-2
Consolidated Statements of Operations.................................. F-3
Consolidated Statements of Stockholders' Equity (Deficit).............. F-4
Consolidated Statements of Cash Flows.................................. F-5
Notes to Consolidated Financial Statements............................. F-6
(a)(2) All schedules have been omitted because they are not applicable or
the required information is shown in the financial statements or notes thereto.
(a)(3) Exhibits:
Exhibit
Number Description of Document
------- -----------------------
3.1** Amended and Restated Certificate of Incorporation of the Registrant,
as amended to date.
3.2* Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2** Form of Registrant's Common Stock certificate.
4.6* Common Stock Registration Rights Agreement (See Exhibit 10.3).
4.9* Amended and Restated Investors' Rights Agreement (See Exhibit 10.6).
10.1* Indenture, dated as of December 1, 1999, by and among the Registrant
and State Street Bank and Trust Company of California, N.A. (as
trustee).
10.2* Warrant Agreement, dated as of December 1, 1999, by and among the
Registrant and State Street Bank and Trust Company of California,
N.A. (as warrant agent).
10.3* Common Stock Registration Rights Agreement, dated as of December 1,
1999, by and among the Registrant, Benchmark Capital Partners II,
L.P., Cisco Systems, Inc., Microsoft Corporation, ePartners, Albert
M. Avery, IV and Jay S. Adelson (as investors), and the Initial
Purchasers.
10.4* Registration Rights Agreement, dated as of December 1, 1999, by and
among the Registrant and the Initial Purchasers.
10.5* Form of Indemnification Agreement between the Registrant and each of
its officers and directors.
10.6* Amended and Restated Investors' Rights Agreement, dated as of May 8,
2000, by and between the Registrant, the Series A Purchasers, the
Series B Purchasers, the Series C Purchasers and members of the
Registrant's management.
10.8* The Registrant's 1998 Stock Option Plan.
10.9*+ Lease Agreement with Carlyle-Core Chicago LLC, dated as of September
1, 1999.
10.10*+ Lease Agreement with Market Halsey Urban Renewal, LLC, dated as of
May 3, 1999.
10.11*+ Lease Agreement with Laing Beaumeade, dated as of November 18, 1998.
10.12*+ Lease Agreement with Rose Ventures II, Inc., dated as of September
10, 1999.
10.13*+ Lease Agreement with 600 Seventh Street Associates, Inc., dated as of
August 6, 1999.
32
Exhibit
Number Description of Document
------- -----------------------
10.14*+ First Amendment to Lease Agreement with TrizecHahn Centers, Inc.
(dba TrizecHahn Beaumeade Corporate Management), dated as of
October 28, 1999.
10.15*+ Lease Agreement with Nexcomm Asset Acquisition I, L.P., dated as of
January 21, 2000.
10.16*+ Lease Agreement with TrizecHahn Centers, Inc. (dba TrizecHahn
Beaumeade Corporate Management), dated as of December 15, 1999.
10.17* Lease Agreement with ARE-2425/2400/2450 Garcia Bayshore LLC, dated
as of January 28, 2000.
10.18* Sublease Agreement with Insweb Corporation, dated as of November 1,
1998.
10.19*+ Master Agreement for Program Management, Site Identification and
Evaluation, Engineering and Construction Services between Equinix,
Inc. and Bechtel Corporation, dated November 3, 1999.
10.20*+ Agreement between Equinix, Inc. and WorldCom, Inc., dated November
16, 1999.
10.21* Customer Agreement between Equinix, Inc. and WorldCom, Inc., dated
November 16, 1999.
10.22*+ Lease Agreement with GIP Airport B.V., dated as of April 28, 2000.
10.23* Purchase Agreement between International Business Machines
Corporation and Equinix, Inc. dated May 23, 2000.
10.24** 2000 Equity Incentive Plan.
10.25** 2000 Director Option Plan.
10.26** 2000 Employee Stock Purchase Plan.
10.27** Ground Lease by and between iStar San Jose, LLC and Equinix, Inc.,
dated June 21, 2000.
10.28***+ Lease Agreement with TrizecHahn Beaumeade Technology Center LLC,
dated as of July 1, 2000.
10.29***+ Lease Agreement with TrizecHahn Beaumeade Technology Center LLC,
dated as of May 1, 2000.
10.30***+ Lease Agreement with 600 Seventh Street Associates, Inc., dated as
of August 24, 2000.
10.31***+ Lease Agreement with Burlington Associates III Limited Partnership,
dated as of July 24, 2000.
10.32***+ Lease Agreement with Naxos Schmirdelwerk Mainkur GmbH and A.A.A.
Aktiengesellschaft Allgemeine Anlageverwaltung vorm. Seilwolff AG
von 1890, dated as of August 7, 2000.
10.33***+ Lease Agreement with Quattrocento Limited, dated as of June 1,
2000.
10.34*** Lease Agreement with ARE-2425/2400/2450 Garcia Bayshore, LLC, dated
as of March 20, 2000.
10.35*** First Supplement to the Lease Agreement with Naxos Schmirdelwerk
Mainkur GmbH and A.A.A. Aktiengesellschaft Allgemeine
Anlageverwaltung vorm. Seilwolff AG von 1890, dated as of October
11, 2000.
10.36 Credit and Guaranty Agreement for $150,000,000 Senior Secured
Credit Facilities, dated as of December 20, 2000.
10.37+ Lease Agreement with Quattrocentro Limited, dated as of June 9,
2000.
10.38+ Lease Agreement with Compagnie des Entrepots et Magasins Generaux
de Paris, dated as of July 28, 2000.
10.39+ Second Supplement to the Lease Agreement with Naxos Schmirdelwerk
Mainkur GmbH and A.A.A. Aktiengesellschaft Allgemeine
Anlageverwaltung vorm. Seilwolff AG von 1890, dated as of December
22, 2000.
33
Exhibit
Number Description of Document
------- -----------------------
10.40 Third Supplement to the Lease Agreement with Naxos Schmirdelwerk
Mainkur GmbH and A.A.A. Aktiengesellschaft Allgemeine Anlageverwaltung
vorm. Seilwolff AG von 1890, dated as of March 8, 2001.
16.1* Letter regarding change in certifying accountant.
21.1 Subsidiaries of Equinix.
24.1 Power of Attorney (see page 35).
- --------
* Incorporated herein by reference to the exhibit of the same number in the
Registrant's Registration Statement on Form S-4 (file No. 333-93749).
** Incorporated herein by reference to the exhibit of the same number in the
Registrant's Registration Statement in Form S-1 (file No. 333-39752).
*** Incorporated herein by reference to the exhibit of the same number in the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 2000.
+ Confidential treatment has been requested for certain portions which are
omitted in the copy of the exhibit electronically filed with the
Securities and Exchange Commission. The omitted information has been filed
separately with the Securities and Exchange Commission pursuant to
Equinix's application for confidential treatment.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
See (a)(3) above.
(d) Financial Statement Schedule.
See (a)(2) above.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EQUINIX, INC.
(Registrant)
March 27, 2001
/s/ Peter F. Van Camp ___________
Chief Executive Officer and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter F. Van Camp or Philip J. Koen, or either
of them, each with the power of substitution, his attorney-in-fact, to sign any
amendments to this Form 10-K (including post-effective amendments), and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact, or his substitute or substitutes, may
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Peter F. Van Camp Chief Executive Officer and March 27, 2001
_________________________ Director (Principal
Peter F. Van Camp Executive Officer)
/s/ Albert M. Avery, IV President, Chief Operating March 27, 2001
_________________________ Officer and Director
Albert M. Avery, IV
/s/ Philip J. Koen Chief Financial Officer, March 27, 2001
_________________________ Corporate Development
Philip J. Koen Officer and Secretary
(Principal Financial and
Accounting Officer)
/s/ Scott Kriens Director March 27, 2001
_________________________
Scott Kriens
/s/ Dawn G. Lepore Director March 27, 2001
_________________________
Dawn G. Lepore
/s/ Andrew S. Rachleff Director March 27, 2001
_________________________
Andrew S. Rachleff
/s/ Michelangelo Volpi Director March 27, 2001
_________________________
Michelangelo Volpi
35
INDEX TO EXHIBITS
Exhibit
Number Description of Document
------- -----------------------
3.1** Amended and Restated Certificate of Incorporation of the Registrant,
as amended to date.
3.2* Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2** Form of Registrant's Common Stock certificate.
4.6* Common Stock Registration Rights Agreement (See Exhibit 10.3).
4.9* Amended and Restated Investors' Rights Agreement (See Exhibit 10.6).
10.1* Indenture, dated as of December 1, 1999, by and among the Registrant
and State Street Bank and Trust Company of California, N.A. (as
trustee).
10.2* Warrant Agreement, dated as of December 1, 1999, by and among the
Registrant and State Street Bank and Trust Company of California, N.A.
(as warrant agent).
10.3* Common Stock Registration Rights Agreement, dated as of December 1,
1999, by and among the Registrant, Benchmark Capital Partners II,
L.P., Cisco Systems, Inc., Microsoft Corporation, ePartners, Albert M.
Avery, IV and Jay S. Adelson (as investors), and the Initial
Purchasers.
10.4* Registration Rights Agreement, dated as of December 1, 1999, by and
among the Registrant and the Initial Purchasers.
10.5* Form of Indemnification Agreement between the Registrant and each of
its officers and directors.
10.6* Amended and Restated Investors' Rights Agreement, dated as of May 8,
2000, by and between the Registrant, the Series A Purchasers, the
Series B Purchasers, the Series C Purchasers and members of the
Registrant's management.
10.8* The Registrant's 1998 Stock Option Plan.
10.9*+ Lease Agreement with Carlyle-Core Chicago LLC, dated as of September
1, 1999.
10.10*+ Lease Agreement with Market Halsey Urban Renewal, LLC, dated as of May
3, 1999.
10.11*+ Lease Agreement with Laing Beaumeade, dated as of November 18, 1998.
10.12*+ Lease Agreement with Rose Ventures II, Inc., dated as of September 10,
1999.
10.13*+ Lease Agreement with 600 Seventh Street Associates, Inc., dated as of
August 6, 1999.
10.14*+ First Amendment to Lease Agreement with TrizecHahn Centers, Inc. (dba
TrizecHahn Beaumeade Corporate Management), dated as of October 28,
1999.
10.15*+ Lease Agreement with Nexcomm Asset Acquisition I, L.P., dated as of
January 21, 2000.
10.16*+ Lease Agreement with TrizecHahn Centers, Inc. (dba TrizecHahn
Beaumeade Corporate Management), dated as of December 15, 1999.
10.17* Lease Agreement with ARE-2425/2400/2450 Garcia Bayshore LLC, dated as
of January 28, 2000.
10.18* Sublease Agreement with Insweb Corporation, dated as of November 1,
1998.
10.19*+ Master Agreement for Program Management, Site Identification and
Evaluation, Engineering and Construction Services between Equinix,
Inc. and Bechtel Corporation, dated November 3, 1999.
10.20*+ Agreement between Equinix, Inc. and WorldCom, Inc., dated November 16,
1999.
10.21* Customer Agreement between Equinix, Inc. and WorldCom, Inc., dated
November 16, 1999.
36
Exhibit
Number Description of Document
------- -----------------------
10.22*+ Lease Agreement with GIP Airport B.V., dated as of April 28, 2000.
10.23* Purchase Agreement between International Business Machines
Corporation and Equinix, Inc. dated May 23, 2000.
10.24** 2000 Equity Incentive Plan.
10.25** 2000 Director Option Plan.
10.26** 2000 Employee Stock Purchase Plan.
10.27** Ground Lease by and between iStar San Jose, LLC and Equinix, Inc.,
dated June 21, 2000.
10.28***+ Lease Agreement with TrizecHahn Beaumeade Technology Center LLC,
dated as of July 1, 2000.
10.29***+ Lease Agreement with TrizecHahn Beaumeade Technology Center LLC,
dated as of May 1, 2000.
10.30***+ Lease Agreement with 600 Seventh Street Associates, Inc., dated as
of August 24, 2000.
10.31***+ Lease Agreement with Burlington Associates III Limited Partnership,
dated as of July 24, 2000.
10.32***+ Lease Agreement with Naxos Schmirdelwerk Mainkur GmbH and A.A.A.
Aktiengesellschaft Allgemeine Anlageverwaltung vorm. Seilwolff AG
von 1890, dated as of August 7, 2000.
10.33***+ Lease Agreement with Quattrocento Limited, dated as of June 1, 2000.
10.34*** Lease Agreement with ARE-2425/2400/2450 Garcia Bayshore, LLC, dated
as of March 20, 2000.
10.35*** First Supplement to the Lease Agreement with Naxos Schmirdelwerk
Mainkur GmbH and A.A.A. Aktiengesellschaft Allgemeine
Anlageverwaltung vorm. Seilwolff AG von 1890, dated as of October
11, 2000.
10.36 Credit and Guaranty Agreement for $150,000,000 Senior Secured Credit
Facilities, dated as of December 20, 2000.
10.37+ Lease Agreement with Quattrocentro Limited, dated as of June 9,
2000.
10.38+ Lease Agreement with Compagnie des Entrepots et Magasins Generaux de
Paris, dated as of July 28, 2000.
10.39+ Second Supplement to the Lease Agreement with Naxos Schmirdelwerk
Mainkur GmbH and A.A.A. Aktiengesellschaft Allgemeine
Anlageverwaltung vorm. Seilwolff AG von 1890, dated as of December
22, 2000.
10.40 Third Supplement to the Lease Agreement with Naxos Schmirdelwerk
Mainkur GmbH and A.A.A. Aktiengesellschaft Allgemeine
Anlageverwaltung vorm. Seilwolff AG von 1890, dated as of March 8,
2001.
16.1* Letter regarding change in certifying accountant.
21.1 Subsidiaries of Equinix.
24.1 Power of Attorney (see page 35).
- --------
* Incorporated herein by reference to the exhibit of the same number in the
Registrant's Registration Statement on Form S-4 (file No. 333-93749).
** Incorporated herein by reference to the exhibit of the same number in the
Registrant's Registration Statement in Form S-1 (file No. 333-39752).
*** Incorporated herein by reference to the exhibit of the same number in the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 2000.
+ Confidential treatment has been requested for certain portions which are
omitted in the copy of the exhibit electronically filed with the
Securities and Exchange Commission. The omitted information has been filed
separately with the Securities and Exchange Commission pursuant to
Equinix's application for confidential treatment.
37
Report of Independent Accountants
To Board of Directors and
Stockholders of Equinix, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 32, present fairly, in all material
respects, the financial position of Equinix, Inc. at December 31, 2000 and
1999, and the results of its operations and its cash flows for each of the two
years ended December 31, 2000 and for the period from June 22, 1998 (date of
inception) to December 31, 1998 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
PricewaterhouseCoopers LLP
San Jose, California
February 1, 2001
F-1
EQUINIX, INC.
Consolidated Balance Sheets
(in thousands)
December 31,
--------------------
2000 1999
--------- ---------
Assets
Current assets:
Cash and cash equivalents.............................. $ 174,773 $ 203,165
Short-term investments................................. 32,437 19,809
Accounts receivable, net of allowance for doubtful
accounts of $608 and none............................. 4,925 178
Current portion of restricted cash and short-term
investments........................................... 15,468 25,111
Prepaids and other current assets...................... 10,373 1,597
--------- ---------
Total current assets................................. 237,976 249,860
Property and equipment, net.............................. 315,380 28,444
Construction in progress................................. 94,894 18,312
Restricted cash and short-term investments, less current
portion................................................. 21,387 13,498
Debt issuance costs, net................................. 11,916 7,125
Other assets............................................. 1,932 2,707
--------- ---------
Total assets............................................. $ 683,485 $ 319,946
========= =========
Liabilities, Redeemable Convertible Preferred
Stock and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses.................. $ 13,717 $ 4,143
Accrued construction costs............................. 89,343 9,772
Current portion of debt facilities and capital lease
obligations........................................... 4,426 4,395
Accrued interest payable............................... 2,167 2,167
Other current liabilities.............................. 1,646 205
--------- ---------
Total current liabilities............................ 111,299 20,682
Debt facilities and capital lease obligations, less
current portion......................................... 6,506 8,808
Senior notes............................................. 185,908 183,955
Other liabilities........................................ 4,656 802
--------- ---------
Total liabilities.................................... 308,369 214,247
--------- ---------
Commitments and contingencies (Note 8)
Redeemable convertible preferred stock................... -- 97,227
Stockholders' equity:
Common stock, $0.001 par value per share; 300,000,000
and 112,500,000 shares authorized in 2000 and 1999;
76,978,852 and 11,672,196 shares issued and
outstanding in 2000 and 1999.......................... 77 12
Additional paid-in capital............................. 553,070 43,962
Deferred stock-based compensation...................... (38,350) (13,706)
Accumulated other comprehensive income................. 1,919 14
Accumulated deficit.................................... (141,600) (21,810)
--------- ---------
Total stockholders' equity........................... 375,116 8,472
--------- ---------
Total liabilities, redeemable convertible preferred
stock and stockholders' equity...................... $ 683,485 $ 319,946
========= =========
See accompanying notes to consolidated financial statements.
F-2
EQUINIX, INC.
Consolidated Statements of Operations
(in thousands, except per share data)
Period from
June 22, 1998
(inception)
Year ended Year ended to
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ -------------
Revenues............................... $ 13,016 $ 37 $ --
--------- -------- -------
Costs and operating expenses:
Cost of revenues (excludes stock-based
compensation of $766, $177 and none
for the periods ended December 31,
2000, 1999, and 1998 respectively)... 42,635 3,091 --
Sales and marketing (excludes stock-
based compensation of $6,318, $1,631,
and $13 for the periods ended
December 31, 2000, 1999, and 1998
respectively)........................ 13,821 2,318 34
General and administrative (excludes
stock-based compensation of $22,809,
$4,819, and $151 for the periods
ended December 31, 2000, 1999, and
1998, respectively).................. 33,776 7,784 751
Stock-based compensation.............. 29,893 6,627 164
--------- -------- -------
Total costs and operating
expenses.......................... 120,125 19,820 949
--------- -------- -------
Loss from operations.................. (107,109) (19,783) (949)
Interest income........................ 16,430 2,138 150
Interest expense....................... (29,111) (3,146) (220)
--------- -------- -------
Net loss............................... $(119,790) $(20,791) $(1,019)
========= ======== =======
Net loss per share:
Basic and diluted..................... $ (3.48) $ (4.98) $ (1.48)
========= ======== =======
Weighted average shares............... 34,461 4,173 688
========= ======== =======
See accompanying notes to consolidated financial statements.
F-3
EQUINIX, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
Period from June 22, 1998 (inception) to December 31, 2000
(in thousands, except per share data)
Accumulated
Common stock Additional Deferred other Total
------------------ paid-in stock-based comprehensive Accumulated stockholders'
Shares Amount capital compensation income (loss) deficit equity (deficit)
---------- ------ ---------- ------------ ------------- ----------- ----------------
Issuance of common stock
for cash................ 6,060,000 $ 6 $ (2) $ -- $ -- $ -- $ 4
Issuance of common stock
upon exercise of common
stock options........... 90,000 -- 6 -- -- -- 6
Deferred stock-based
compensation............ -- -- 1,136 (1,136) -- -- --
Amortization of stock-
based compensation...... -- -- -- 164 -- -- 164
Net loss................ -- -- -- -- -- (1,019) (1,019)
---------- --- -------- -------- ------ --------- ---------
Balances as of December
31, 1998................ 6,150,000 6 1,140 (972) -- (1,019) (845)
Issuance of common stock
upon exercise of common
stock options........... 5,522,196 6 1,280 -- -- -- 1,286
Issuance of common stock
warrants................ -- -- 22,181 -- -- -- 22,181
Deferred stock-based
compensation............ -- -- 19,361 (19,361) -- -- --
Amortization of stock-
based compensation...... -- -- -- 6,627 -- -- 6,627
Comprehensive income
(loss):
Net loss................ -- -- -- -- -- (20,791) (20,791)
Unrealized appreciation
on short-term
investments............. -- -- -- -- 14 -- 14
---------- --- -------- -------- ------ --------- ---------
Net comprehensive loss.. -- -- -- -- 14 (20,791) (20,777)
---------- --- -------- -------- ------ --------- ---------
Balances as of December
31, 1999................ 11,672,196 12 43,962 (13,706) 14 (21,810) 8,472
Issuance of common stock
for cash................ 115,213 -- 1,033 -- -- -- 1,033
Issuance of common stock
upon exercise of common
stock options........... 1,420,914 1 2,471 -- -- -- 2,472
Issuance of common stock
upon exercise of common
stock warrants.......... 708,059 -- 353 -- -- -- 353
Issuance of common stock
from initial public
offering, net........... 22,704,596 23 251,459 -- -- -- 251,482
Conversion of redeemable
convertible preferred
stock................... 40,704,222 41 191,539 -- -- -- 191,580
Issuance/revaluation of
common stock warrants... -- -- 7,744 -- -- -- 7,744
Repurchase of common
stock................... (346,348) -- (28) -- -- -- (28)
Deferred stock-based
compensation............ -- -- 54,537 (54,537) -- -- --
Amortization of stock-
based compensation...... -- -- -- 29,893 -- -- 29,893
Comprehensive income
(loss):
Net loss............... -- -- -- -- -- (119,790) (119,790)
Foreign currency
translation gain....... -- -- -- -- 1,992 -- 1,992
Unrealized depreciation
on short-term
investments............ -- -- -- -- (87) -- (87)
---------- --- -------- -------- ------ --------- ---------
Net comprehensive
loss................... -- -- -- -- 1,905 (119,790) (117,885)
---------- --- -------- -------- ------ --------- ---------
Balances as of December
31, 2000................ 76,978,852 $77 $553,070 $(38,350) $1,919 $(141,600) $ 375,116
========== === ======== ======== ====== ========= =========
See accompanying notes to consolidated financial statements.
F-4
EQUINIX, INC.
Consolidated Statements of Cash Flows
( in thousands)
Period from
June 22, 1998
(inception)
Year ended Year ended to
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ -------------
Cash flows from operating activities:
Net loss.............................. $(119,790) $(20,791) $(1,019)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation......................... 14,816 609 4
Interest charge on beneficial
conversion of convertible debt...... -- -- 220
Amortization of deferred stock-based
compensation........................ 29,893 6,627 164
Amortization of debt-related issuance
costs and discounts................. 8,445 1,010 --
Allowance for doubtful accounts...... 608 -- --
Issuance of common stock to charity.. 780 -- --
Changes in operating assets and
liabilities:
Accounts receivable.................. (5,355) (178) --
Prepaids and other current assets.... (8,776) (1,429) (168)
Other assets......................... (354) (1,244) (156)
Accounts payable and accrued
expenses............................ 9,574 4,481 159
Other current liabilities............ 1,441 205 --
Other liabilities.................... 645 802 --
--------- -------- -------
Net cash used in operating
activities......................... (68,073) (9,908) (796)
--------- -------- -------
Cash flows from investing activities:
Purchase of short-term investments.... (114,968) (22,812) (5,000)
Sales and maturities of short-term
investments.......................... 102,253 8,017 --
Purchases of property and equipment... (296,320) (28,241) (486)
Additions to construction in
progress............................. (74,448) (14,145) (31)
Accrued construction costs............ 79,571 9,520 252
Purchase of restricted cash and short-
term investments..................... (24,246) (38,609) --
Sale of restricted cash and short-term
investments.......................... 26,000 -- --
--------- -------- -------
Net cash used in investing
activities......................... (302,158) (86,270) (5,265)
--------- -------- -------
Cash flows from financing activities:
Proceeds from issuance of common
stock................................ 254,560 1,286 10
Proceeds from issuance of debt
facilities and capital lease
obligations.......................... 6,884 16,114 --
Repayment of debt facilities and
capital lease obligations............ (9,955) (988) --
Proceeds from issuance of promissory
notes................................ -- -- 220
Proceeds from senior notes and common
stock warrants, net.................. -- 193,890 --
Repurchase of common and preferred
stock................................ (28) (10) --
Proceeds from issuance of redeemable
convertible preferred stock, net..... 94,353 84,886 9,996
Debt issuance costs................... (5,967) -- --
--------- -------- -------
Net cash provided by financing
activities......................... 339,847 295,178 10,226
--------- -------- -------
Effect of foreign currency exchange
rates on cash and cash equivalents.... 1,992 -- --
Net increase (decrease) in cash and
cash equivalents...................... (28,392) 199,000 4,165
Cash and cash equivalents at beginning
of period............................. 203,165 4,165 --
--------- -------- -------
Cash and cash equivalents at end of
period................................ $ 174,773 $203,165 $ 4,165
========= ======== =======
Noncash financing and investing
activities:
Cash paid for taxes.................. $ -- $ 68 $ --
========= ======== =======
Cash paid for interest............... $ 28,876 $ 153 $ --
========= ======== =======
See accompanying notes to consolidated financial statements.
F-5
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Equinix, Inc. ("Equinix" or the "Company") was incorporated as Quark
Communications, Inc. in Delaware on June 22, 1998. The Company changed its name
to Equinix, Inc. on October 13, 1998. Equinix designs, builds, and operates
neutral Internet Business Exchange ("IBX") centers where enterprises and
Internet businesses place their equipment and their network facilities in order
to interconnect with each other to grow their businesses and to improve
Internet performance. The Company's neutral IBX centers place our customers'
operations at a central location and provide them with the highest level of
security, multiple back-up services, flexibility to grow and technical
assistance. The Company's neutral IBX centers provide enterprises, content
providers, ASPs and e-commerce companies with the ability to directly
interconnect with a competitive choice of bandwidth providers, ISPs, site
management companies and content distribution companies.
For the period June 22, 1998 (inception) through December 31, 1998 and the
period ended September 30, 1999, the Company was a development stage
enterprise. Subsequent to this period, the Company opened its second IBX center
for commercial operation. In addition, the Company began to recognize revenue
from its IBX centers.
Stock Split
In January 2000, the Company's stockholders approved a three-for-two stock
split effective January 19, 2000 whereby three shares of common stock and
redeemable convertible preferred stock, respectively, were exchanged for every
two shares of common stock and redeemable convertible preferred stock then
outstanding. All share and per share amounts in these financial statements have
been adjusted to give effect to the stock split.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Equinix and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid instruments with a maturity from the
date of purchase of three months or less to be cash equivalents. Cash
equivalents consist of money market mutual funds and certificates of deposit
with financial institutions with maturities of between 7 and 60 days. Short-
term investments generally consist of certificates of deposits with maturities
of between 90 and 180 days and highly liquid debt and equity securities of
corporations, municipalities and the U.S. government. Short-term investments
are classified as "available-for-sale" and are carried at fair value based on
quoted market prices, with unrealized gains and losses reported in
stockholders' equity as a component of comprehensive income. The cost of
securities sold is based on the specific identification method.
F-6
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Cash and Short-term Investments
Restricted cash and short-term investments as of December 31, 2000 consisted
of $12,801,000 deposited with an escrow agent to pay the third interest payment
on the Senior Notes (see Note 4) and restricted cash of $24,054,000 as
collateral for the issuance of twelve standby letters of credit, two bonds and
three escrow accounts entered into and pursuant to certain lease agreements.
These agreements expire at various dates through 2014.
Restricted cash and short-term investments as of December 31, 1999 consisted
of $37,079,000 deposited with an escrow agent to pay the first three interest
payments on the Senior Notes and restricted cash of $1,530,000 provided as
collateral under three separate security agreements for standby letters of
credit entered into and in accordance with certain lease agreements. These
agreements expire at various dates through 2014.
Financial Instruments and Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash, cash equivalents and short-term
investments to the extent these exceed federal insurance limits and accounts
receivable. Risks associated with cash, cash equivalents and short-term
investments are mitigated by the Company's investment policy, which limits the
Company's investing to only those marketable securities rated at least A-1 or
P-1 investment grade, as determined by independent credit rating agencies.
The Company's customer base is primarily composed of businesses throughout
the United States. The Company performs ongoing credit evaluations of its
customers. Write-offs since inception have been immaterial. As of December 31,
2000, two customers accounted for 12% and 11% of revenues and two customers
accounted for 19% and 14% of accounts receivables. No other single customer
accounted for greater than 10% of accounts receivables or revenues.
Property and Equipment
Property and equipment are stated at original cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
respective assets, generally two to five years for non-IBX center equipment and
seven to ten years for IBX center equipment. Leasehold improvements and assets
acquired under capital lease are amortized over the shorter of the lease term
or the estimated useful life of the asset or improvement.
Construction in Progress
Construction in progress includes direct and indirect expenditures for the
construction of IBX centers and is stated at original cost. The Company has
contracted out substantially all of the construction of the IBX centers to
independent contractors under construction contracts. Construction in progress
includes certain costs incurred under a construction contract including project
management services, site identification and evaluation services, engineering
and schematic design services, design development and construction services and
other construction-related fees and services. In addition, the Company has
capitalized certain interest costs during the construction phase. Once an IBX
center becomes operational, these capitalized costs are depreciated at the
appropriate rate consistent with the estimated useful life of the underlying
asset.
Included within construction in progress is the value attributed to the
unearned portion of warrants issued to certain fiber carriers and our
contractor totaling $6,270,000 as of December 31, 2000 and $4,136,000 as of
December 31, 1999 (see Note 6).
F-7
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest incurred is capitalized in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 34, Capitalization of Interest Costs. Total
interest cost incurred and total interest capitalized during the year ended
December 31, 2000 was $34,102,000 and $4,991,000, respectively. Total interest
cost incurred and total interest capitalized during the year ended December 31,
1999, was $3,324,000 and $177,000, respectively.
Fair Value of Financial Instruments
The carrying value amounts of the Company's financial instruments, which
include cash equivalents, short-term investments, accounts receivable, accounts
payable, accrued expenses and long-term obligations approximate their fair
value due to either the short-term maturity or the prevailing interest rates of
the related instruments. The fair value of the Company's Senior Notes (see Note
4) are based on quoted market prices. The estimated fair value of the Senior
Notes is approximately $140,000,000 as of December 31, 2000.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, the Company considers the
impairment of long-lived assets and certain identifiable intangibles whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. No impairment of long-lived assets has been recorded
as of December 31, 1999. In December 2000, based on the uncertainty of the
Company's future business relationship with NorthPoint (see Note 6), as a
result of their filing under Chapter 11 bankruptcy protection, the Company
determined that the future value of the other asset attributed to the
unamortized portion of the fully-vested, nonforfeitable warrant was
questionable and accordingly, the remaining asset totaling approximately
$700,000 was written off.
Revenue Recognition
Revenues consist of monthly recurring fees for colocation and
interconnection services at the IBX centers, service fees associated with the
delivery of professional services and non-recurring installation fees. Revenues
from colocation and interconnection services are billed monthly and recognized
ratably over the term of the contract, generally one to three years.
Professional service fees are recognized in the period in which the services
were provided and represent the culmination of the earnings process. Non-
recurring installation fees are deferred and recognized ratably over the term
of the related contract.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary to reduce
tax assets to the amounts expected to be realized.
F-8
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
The Company accounts for its stock-based compensation plans in accordance
with SFAS No. 123, Accounting for Stock-Based Compensation. As permitted under
SFAS No. 123, the Company uses the intrinsic value-based method of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, to account for its employee stock-based compensation plans.
The Company accounts for stock-based compensation arrangements with
nonemployees in accordance with the Emerging Issues Task Force Abstract
("EITF") No. 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.
Accordingly, unvested options and warrants held by nonemployees are subject to
revaluation at each balance sheet date based on the then current fair market
value.
Unearned deferred compensation resulting from employee and nonemployee
option grants is amortized on an accelerated basis over the vesting period of
the individual options, in accordance with FASB Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans ("FASB Interpretation No. 28").
Segment Reporting
The Company has adopted the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
annual and interim reporting standards for operating segments of a company. The
statement requires disclosures of selected segment-related financial
information about products, major customers and geographic areas.
Comprehensive Income
The Company has adopted the provisions of SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components; however, the adoption of
this statement had no impact on the Company's net loss or stockholders' equity.
SFAS 130 requires unrealized gains or losses on the Company's available-for-
sale securities to be included in other comprehensive income (loss).
Comprehensive income (loss) consists of net loss and other comprehensive
income.
Net Loss Per Share
The Company computes net loss per share in accordance with SFAS No. 128,
Earnings per Share, and SEC Staff Accounting Bulletin ("SAB") No. 98. Under the
provisions of SFAS No. 128 and SAB No. 98 basic and diluted net loss per share
are computed using the weighted average number of common shares outstanding.
Options, warrants and preferred stock were not included in the computation of
diluted net loss per share because the effect would be antidilutive.
F-9
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated.
Period from
June 22, 1998
Year ended Year ended to
December 31, December 31, December 31,
2000 1999 1998
------------- ------------ -------------
Numerator:
Net loss...................... $(119,790,000) $(20,791,000) $(1,019,000)
============= ============ ===========
Denominator:
Weighted average shares....... 40,672,055 8,751,001 3,174,917
Weighted average unvested
shares subject to
repurchase................... (6,211,392) (4,578,122) (2,486,889)
------------- ------------ -----------
Total weighted average
shares..................... 34,460,663 4,172,879 688,028
============= ============ ===========
Net loss per share:
Basic and diluted........... $ (3.48) $ (4.98) $ (1.48)
============= ============ ===========
The following table sets forth potential shares of common stock that are not
included in the diluted net loss per share calculation above because to do so
would be anti-dilutive for the periods indicated:
Year ended Year ended Year ended
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ ------------
Series A redeemable convertible
preferred stock................... -- 18,682,500 15,697,500
Series B redeemable convertible
preferred stock................... -- 15,759,561 --
Series A preferred stock warrants.. -- 1,245,000 --
Common stock warrants.............. 3,707,245 1,365,645 --
Common stock options............... 8,893,292 2,780,988 2,074,050
Common stock subject to
repurchase........................ 6,211,392 4,578,122 2,486,889
Recent Accounting Pronouncements
In September 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
137 ("SFAS 137"), "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133." In June
2000, the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities--an Amendment of FASB Statement No. 133." SFAS
133 establishes new standards of accounting and reporting for derivative
instruments and hedging activities, and requires that all derivatives,
including foreign currency exchange contracts, be recognized on the balance
sheet at fair value. Equinix will adopt SFAS 133, as amended by SFAS 137 and
SFAS 138, in the first fiscal quarter of 2001, and does not expect the adoption
to have a material effect on its financial condition or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101,
Revenue Recognition, which outlines the basic criteria that must be met to
recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements
filed with the SEC. The adoption of SAB 101 did not have a material impact on
the Company's financial position and results of operations.
F-10
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"), Accounting
for Certain Transactions Involving Stock Compensation--an Interpretation of APB
25. This Interpretation clarifies (a) the definition of employee for purposes
of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after
either December 15, 1998, or January 12, 2000. The adoption of certain of the
conclusions of FIN 44 did not have a material effect on the Company's financial
position and results of operations.
2. Balance Sheet Components
Cash, Cash Equivalents and Short-term Investments
Cash, cash equivalents and short-term investments consisted of the following
as of December 31 (in thousands):
2000 1999
--------- ---------
Money market......................................... $ 72,325 $ 11,144
Municipal bonds...................................... 19,557 --
US government and agency obligations................. 19,049 --
Corporate bonds...................................... 2,024 --
Other debt securities................................ 94,255 211,830
--------- ---------
Total available-for-sale securities................ 207,210 222,974
Less amounts classified as cash and cash
equivalents....................................... (174,773) (203,165)
--------- ---------
Total market value of short-term investments....... $ 32,437 $ 19,809
========= =========
As of December 31, 2000 and 1999, cost approximated market value of cash,
cash equivalents and short-term investments; unrealized gains and losses were
not significant. As of December 31, 2000, cash equivalents included investments
in corporate debt securities with various contractual maturity dates which do
not exceed 90 days. Gross realized gains and losses from the sale of securities
classified as available-for-sale were not material for the years ended December
31, 2000 and 1999. For the purpose of determining gross realized gains and
losses, the cost of securities is based upon specific identification.
Property & Equipment
Property and equipment is comprised of the following as of December 31 (in
thousands):
2000 1999
-------- -------
Leasehold improvements.................................... $243,851 $16,664
IBX plant and machinery................................... 51,305 8,235
Computer equipment and software........................... 12,438 3,126
IBX equipment............................................. 21,960 659
Furniture and fixtures.................................... 1,241 374
-------- -------
330,795 29,058
Less accumulated depreciation............................. (15,415) (614)
-------- -------
$315,380 $28,444
======== =======
F-11
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Leasehold improvements, certain computer equipment, software and furniture
and fixtures recorded under capital leases aggregated $5,999,000 as of
December 31, 2000 and $661,000 as of December 31, 1999. Amortization on the
assets recorded under capital leases is included in depreciation expense.
Included within leasehold improvements is the value attributed to the
earned portion of the WorldCom Venture Fund Warrant, the Bechtel Warrant, and
the Fiber Warrant totaling $4,233,000, $758,000, and $770,000, respectively,
as of December 31, 2000 and $330,000, none, and none, respectively, as of
December 31, 1999 (see Note 6). Amortization on such warrants is included in
depreciation expense.
Restricted Cash and Short-term Investments
Restricted cash and short-term investments consisted of the following as of
December 31 (in thousands):
2000 1999
-------- --------
United States treasury
notes:
Due within one year..... $ 15,468 $ 25,111
Due after one year
through two years...... -- 11,968
Restricted cash in
accordance with security
agreements............... 21,387 1,530
-------- --------
36,855 38,609
Less current portion...... (15,468) (25,111)
-------- --------
$ 21,387 $ 13,498
======== ========
As of December 31, 2000 and December 31, 1999, cost approximated market
value of restricted cash and short-term investments; unrealized gains and
losses were not significant.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following as of
December 31 (in thousands):
2000 1999
------- ------
Accounts payable............................................. $ 8,270 $1,978
Accrued compensation and benefits............................ 2,613 303
Accrued debt issuance costs.................................. 593 490
Other........................................................ 2,241 1,372
------- ------
$13,717 $4,143
======= ======
3. Debt Facilities and Capital Lease Obligations
Debt facilities and capital lease obligations consisted of the following as
of December 31 (in thousands):
2000 1999
------- -------
Comdisco Loan and Security Agreement (net of unamortized
discount of none and $901 as of December 31, 2000 and
1999, respectively)..................................... $ -- $ 4,141
Venture Leasing Loan Agreement (net of unamortized
discount of $727 and $1,034 as of December 31, 2000 and
1999, respectively) 6,138 8,417
Comdisco Master Lease Agreement and Addendum (net of
unamortized discount of $412 and $12 as of December 31,
2000 and 1999, respectively) 4,794 645
------- -------
10,932 13,203
Less current portion..................................... (4,426) (4,395)
------- -------
$ 6,506 $ 8,808
======= =======
F-12
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comdisco Loan and Security Agreement
In March 1999, one of the Company's subsidiaries entered into a $7,000,000
Loan and Security Agreement with Comdisco, Inc. ("Comdisco" and the "Comdisco
Loan and Security Agreement"). In December 2000, the outstanding principal and
interest balance under this facility, including the final balloon interest
payment, was repaid in full. Under the terms of the Comdisco Loan and Security
Agreement, Comdisco agreed to lend the Company up to $3,000,000 for equipment
(referred to as the "hard" loan) and up to $4,000,000 for software and tenant
improvements ("soft" loan) for the Ashburn, Virginia IBX center buildout. The
loans, which were collateralized by the assets of the Ashburn IBX, were
available in minimum advances of $1,000,000 and each loan was evidenced by a
secured promissory note. The hard and soft loans issued beared interest at
rates of 7.5% and 9% per annum, respectively, and were repayable in 42 and 36
equal monthly installments, respectively, plus a final balloon interest payment
equal to 15% of the original advance amount. The Comdisco Loan and Security
Agreement had an effective interest rate of 18.1% per annum.
In connection with the Comdisco Loan and Security Agreement, the Company
granted Comdisco a warrant to purchase 765,000 shares of the Company's Series A
redeemable convertible preferred stock at $0.67 per share (the "Comdisco Loan
and Security Agreement Warrant"). This warrant is immediately exercisable and
expires in ten years from the date of grant. The fair value of the warrant,
using the Black-Scholes option pricing model with the following assumptions:
deemed fair market value per share of $1.80, dividend yield of 0%, expected
volatility of 80%, risk-free interest rate of 5.0% and a contractual life of 10
years, was $1,255,000. Such amount was recorded as a discount to the applicable
debt, and was being amortized to interest expense, using the effective interest
method, over the life of the agreement. The remaining unamortized discount was
amortized when the loan was paid in full in December 2000.
Comdisco Master Lease Agreement
In May 1999, the Company entered into a Master Lease Agreement with Comdisco
(the "Comdisco Master Lease Agreement"). Under the terms of the Comdisco Master
Lease Agreement, the Company sells equipment to Comdisco, which it will then
lease back. The amount of financing to be provided is up to $1,000,000.
Repayments are made monthly over 42 months with a final balloon interest
payment equal to 15% of the balance amount due at maturity. Interest accrues at
7.5% per annum. The Comdisco Master Lease Agreement has an effective interest
rate of 14.6% per annum. As of December 31, 2000, $740,200 was outstanding
under the Comdisco Master Lease Agreement.
The Company leases certain leasehold improvements, computer equipment and
software and furniture and fixtures under capital leases under the Comdisco
Master Lease Agreement. These leases were entered into as sales-leaseback
transactions. The Company deferred a gain of $78,000 related to the sale-
leaseback in July 1999, and a deferred loss of $19,000 related to the sale-
leasebacks in fiscal 2000, which is being amortized in proportion to the
amortization of the leased assets.
In connection with the Comdisco Master Lease Agreement, the Company granted
Comdisco a warrant to purchase 30,000 shares of the Company's Series A
redeemable convertible preferred stock at $1.67 per share (the "Comdisco Master
Lease Agreement Warrant"). This warrant is immediately exercisable and expires
in ten years from the date of grant. The fair value of the warrant using the
Black-Scholes option pricing model with the following assumptions: deemed fair
market value per share of $3.00, dividend yield 0%, expected volatility of 80%,
risk-free interest rate of 5.0% and a contractual life of 10 years, was
$80,000. Such amount was recorded as a discount to the applicable capital lease
obligation, and is being amortized to interest expense, using the effective
interest method, over the life of the agreement.
F-13
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comdisco Master Lease Agreement Addendum
In August 1999, the Company amended the Comdisco Master Lease Agreement.
Under the terms of the Comdisco Master Lease Agreement Addendum, the Company
sells equipment (hard items) and software and tenant improvements (soft items)
in its San Jose IBX center to Comdisco, which it then leases back. The amount
of financing available under the Comdisco Master Lease Agreement Addendum is up
to $2,150,000 for hard items and up to $2,850,000 for soft items. Amounts drawn
under this addendum will be collateralized by the underlying hard and soft
assets of the San Jose IBX center that were funded under the Comdisco Master
Lease Agreement Addendum. Repayments are made monthly over the course of 42
months. Interest accrues at 8.5% per annum, with a final balloon interest
payment equal to 15% of the original acquisition cost of the property financed.
The Comdisco Master Lease Agreement Addendum has an effective interest rate of
15.3% per annum. As of December 31, 2000, $4,466,000 was outstanding under the
Comdisco Master Lease Agreement Addendum.
In connection with the Comdisco Master Lease Agreement Addendum, the Company
granted Comdisco a warrant to purchase 150,000 shares of the Company's Series A
redeemable convertible preferred stock at $3.00 per share (the "Comdisco Master
Lease Agreement Addendum Warrant"). This warrant is immediately exercisable and
expires in seven years from the date of grant or three years from the effective
date of the Company's initial public offering, whichever is shorter. The fair
value of the warrant using the Black-Scholes option pricing model with the
following assumptions: deemed fair market value per share of $4.80, dividend
yield 0%, expected volatility of 80%, risk-free interest rate of 5.0% and a
contractual life of seven years, was $587,000. Such amount was recorded as a
discount to the applicable capital lease obligation, and is being amortized to
interest expense, using the effective interest method, over the life of the
agreement.
Venture Leasing Loan Agreement
In August 1999, the Company entered into a Loan Agreement with Venture
Lending & Leasing II, Inc. and other lenders ("VLL" and the "Venture Leasing
Loan Agreement"). The Venture Leasing Loan Agreement provides financing for
equipment and tenant improvements at the Newark, New Jersey IBX center and a
secured term loan facility for general working capital purposes. The amount of
financing to be provided is up to $10,000,000, which may be used to finance up
to 85% of the projected cost of tenant improvements and equipment for the
Newark IBX center and is collateralized by the assets of the Newark IBX. Notes
issued bear interest at a rate of 8.5% per annum and are repayable in 42
monthly installments plus a final balloon interest payment equal to 15% of the
original advance amount due at maturity and are collateralized by the assets of
the New Jersey IBX. The Venture Leasing Loan Agreement has an effective
interest rate of 14.7% per annum. As of December 31, 2000, $6,865,000 was
outstanding under the Venture Leasing Loan Agreement.
In connection with the Venture Leasing Loan Agreement, the Company granted
VLL a warrant to purchase 300,000 shares of the Company's Series A redeemable
convertible preferred stock at $3.00 per share (the "Venture Leasing Loan
Agreement"). This warrant is immediately exercisable and expires on June 30,
2006. The fair value of the warrant using the Black-Scholes option pricing
model with the following assumptions: deemed fair market value per share of
$4.80, dividend yield 0%, expected volatility of 80%, risk-free interest rate
of 5.0% and a contractual life of seven years, was $1,174,000. Such amount was
recorded as a discount to the applicable debt, and is being amortized to
interest expense, using the effective interest method, over the life of the
agreement.
F-14
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Maturities
Combined aggregate maturities for debt facilities and future minimum capital
lease obligations as of December 31, 2000 are as follows (in thousands):
Capital
Debt lease
facilities obligations Total
---------- ----------- -------
2001....................................... $ 2,815 $ 1,611 $ 4,426
2002....................................... 3,063 1,744 4,807
2003....................................... 987 1,716 2,703
2004 and thereafter........................ -- 135 135
------- ------- -------
6,865 5,206 12,071
Less amount representing unamortized
discount................................ (727) (412) (1,139)
------- ------- -------
6,138 4,794 10,932
Less current portion..................... (2,815) (1,611) (4,426)
------- ------- -------
$ 3,323 $ 3,183 $ 6,506
======= ======= =======
4. Senior Notes
On December 1, 1999, the Company issued 200,000 units, each consisting of a
$1,000 principal amount 13% Senior Note due 2007 (the "Senior Notes") and one
warrant to purchase 16.8825 shares (for an aggregate of 3,376,500 shares) of
common stock for $0.0067 per share (the "Senior Note Warrants"), for aggregate
net proceeds of $193,400,000, net of offering expenses. Of the $200,000,000
gross proceeds, $16,207,000 was allocated to additional paid-in capital for the
deemed fair value of the Senior Note Warrants and recorded as a discount to the
Senior Notes. The discount on the Senior Notes is being amortized to interest
expense, using the effective interest method, over the life of the debt. The
Senior Notes have an effective interest rate of 14.1% per annum. The fair value
attributed to the Senior Note Warrants was consistent with the Company's
treatment of its other common stock transactions prior to the issuance of the
Senior Notes. The fair value was based on recent equity transactions by the
Company. The amount of the Senior Notes, net of the unamortized discount, is
$185,908,000 as of December 31, 2000.
As of December 31, 2000, restricted cash and short-term investments,
including accrued interest thereon, includes $12,801,000 deposited with an
escrow agent that will be used to pay the third interest payment. Interest is
payable semi-annually, in arrears, on June 1 and December 1 of each year. The
Senior Notes are partially collateralized by the restricted cash and short-term
investments. Except for this security interest, the notes are unsecured, senior
obligations of the Company and are effectively subordinated to all existing and
future indebtedness of the Company, whether or not secured.
The Senior Notes are governed by the Indenture dated December 1, 1999,
between the Company, as issuer, and State Street Bank and Trust Company of
California, N.A., as trustee (the "Indenture"). Subject to certain exceptions,
the Indenture restricts, among other things, the Company's ability to incur
additional indebtedness and the use of proceeds therefrom, pay dividends, incur
certain liens to secure indebtedness or engage in merger transactions.
The costs related to the issuance of the Senior Notes were capitalized and
are being amortized to interest expense using the effective interest method,
over the life of the Senior Notes. Debt issuance costs, net of amortization,
are $5,950,000 as of December 31, 2000.
F-15
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Senior Secured Credit Facility
On December 20, 2000 Company, and a newly created, wholly-owned subsidiary,
entered into a $150 million Senior Secured Credit Facility ("Credit Facility")
with a syndicate of lenders. The Credit Facility consists of the following:
. Term loan facility in the amount of $50,000,000. The outstanding term
loan amount is required to be paid in quarterly installments beginning
in March 2003 and ending in December 2005. None of the term loan
facility was drawn down as of December 31, 2000 (see Note 11).
. Delayed draw term loan facility in the amount of $75,000,000. The
Company is required to borrow the entire facility on or before December
20, 2001. The outstanding delayed draw term loan amount is required to
be paid in quarterly installments beginning in March 2003 and ending in
December 2005. None of the delayed draw term loan facility was drawn
down as of December 31, 2000 (see Note 11).
. Revolving credit facility in an amount up to $25,000,000. The
outstanding revolving credit facility is required to be paid in full on
or before December 15, 2005. None of the revolving credit facility was
drawn down as of December 31, 2000.
The Credit Facility has a number of covenants, which include reaching
certain minimum revenue targets and limiting cumulative EBITDA losses and
maximum capital spending limits among others. The Company was in compliance
with all covenants as of December 31, 2000.
Borrowings under the Credit Facility are collateralized by a first priority
lien against substantially all of the Company's assets. The lenders under the
Credit Facility have agreed that the liens which collateralize the Credit
Facility may also collateralize an additional $100,000,000 of additional
borrowings in the event the Credit Facility is extended, but the lenders have
no obligation to provide such additional financing.
Loans under the Credit Facility bear interest at floating rates, plus
applicable margins, based on either the prime rate or LIBOR. At December 31,
2000, had the Company drawn down on the Credit Facility, the effective interest
rate would have been approximately 10.82%.
The costs related to the issuance of the Credit Facility were capitalized
and are being amortized to interest expense using the effective interest
method, over the life of the Credit Facility. Debt issuance costs, net of
amortization, are $5,966,000 as of December 31, 2000.
6. Redeemable Convertible Preferred Stock and Stockholders' Equity
In August 1999, the Company amended and restated its Certificate of
Incorporation to increase the authorized share capital to 112,500,000 shares of
common stock and 45,000,000 shares of redeemable convertible preferred stock,
of which 21,000,000 has been designated as Series A and 24,000,000 as Series B.
In January 2000, the Company's stockholders approved a three-for-two stock
split of its common and redeemable convertible preferred stock effective
January 19, 2000. The Company amended and restated its Certificate of
Incorporation to increase the authorized share capital to 132,000,000 shares of
common stock and
F-16
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
68,000,000 shares of redeemable convertible preferred stock, of which
32,000,000 has been designated as Series A and 36,000,000 as Series B, to give
effect to the three-for-two stock split. The accompanying consolidated
financial statements have been adjusted to reflect this stock split.
In May 2000, the Company amended and restated its Certificate of
Incorporation to change the authorized share capital to 80,000,000 shares of
common stock and 43,000,000 shares of redeemable convertible preferred stock,
of which 20,000,000 has been designated as Series A, 16,000,000 has been
designated as Series B and 7,000,000 has been designated as Series C.
In August 2000, the Company amended and restated its Certificate of
Incorporation to change the authorized share capital to 300,000,000 shares of
common stock and 10,000,000 shares of preferred stock.
Redeemable Convertible Preferred Stock
On September 10, 1998, 15,037,500 shares of Series A redeemable convertible
preferred stock were issued at a price of $0.67 per share. Concurrent with the
issuance of the Series A redeemable convertible preferred stock, promissory
notes of $220,000 were converted into 660,000 shares of Series A redeemable
convertible preferred stock. During July 1998, the Company had borrowed
$220,000 in the aggregate under a convertible loan arrangement with a number of
individual investors. The loans accrued interest of 5.83% per annum while
outstanding, which was paid in cash. During the period ended December 31, 1998,
the Company recorded a charge of $220,000 to account for the "in the money"
conversion right of the convertible loan arrangement. On January 27, 1999,
3,000,000 shares of Series A redeemable convertible preferred stock were
issued, at a price of $0.67 per share in the second closing of the Series A
financing.
Between August and December 1999, the Company completed its Series B
redeemable convertible preferred stock financing. The Company issued 15,759,561
shares of Series B redeemable convertible preferred stock, at a price of $5.33
per share.
As of December 31, 1999, there were 18,682,500 and 15,759,561 shares of
Series A and B redeemable convertible preferred stock issued and outstanding,
respectively, with a total liquidation value of $12,517,000 for Series A and
$83,998,000 for Series B.
Between May and June 2000, the Company completed its Series C redeemable
convertible preferred stock financing. The Company issued 6,261,161 shares of
Series C redeemable convertible preferred stock, at a price of $15.08 per share
All shares of redeemable convertible preferred stock were converted to
shares of common stock on a one-for-one basis upon the closing of the Company's
initial public offering ("IPO) in August 2000. All outstanding warrants to
purchase preferred stock are now exercisable for common stock.
Common Stock
On August 11, 2000 the Company completed an IPO of 20,000,000 shares of its
common stock. On September 7, 2000 the underwriters exercised their option to
purchase 2,704,596 shares to cover the over-allotment of shares.
The Company's founders purchased 6,060,000 shares of stock. Approximately
5,454,000 shares are subject to restricted stock purchase agreements whereby
the Company has the right to repurchase the stock upon voluntary or involuntary
termination of the founder's employment with the Company at $0.00033 per share.
The Company's repurchase right lapses at a rate of 25% per year. In May 2000,
the board of directors
F-17
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
agreed to waive the repurchase right with respect to one of the founder's
unvested shares. As of December 31, 2000 and 1999, 1,022,625 and 3,408,750
shares are subject to repurchase at a price of $0.00033 per share,
respectively.
Upon the exercise of certain unvested stock options, the Company issued to
employees common stock which is subject to repurchase by the Company at the
original exercise price of the stock option. This right lapses over the vesting
period. As of December 31, 2000 and 1999, there were 3,114,743 and 4,499,518
shares, respectively, subject to repurchase.
At December 31, 2000, the Company has reserved the following shares of
authorized but unissued shares of common stock for future issuance:
Common stock warrants............................................. 6,746,095
Common stock options.............................................. 13,826,048
Common stock purchase plan........................................ 1,000,000
----------
21,572,143
==========
Stock Purchase Plan
In May 2000, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") under which 1,000,000 shares have been reserved for issuance
thereafter. On each January 1, the number of shares in reserve will
automatically increase by 2% of the total number of shares of common stock
outstanding at that time, or, if less, by 600,000 shares. The Puchase Plan
permits purchases of common stock via payroll deductions. The maximum payroll
deduction is 15% of the employee's cash compensation. Purchases of the common
stock will occur on February 1 and August 1 of each year. The price of each
share purchased will be 85% of the lower of:
. The fair market value per share of common stock on the date immediately
before the first day of the applicable offering period (which lasts 24
months); or
. The fair market value per share of common stock on the purchase date.
The value of the shares purchased in any calendar year may not exceed
$25,000.
As of December 31, 2000 no shares have been issued under the Purchase Plan.
Stock Option Plans
In September 1998, the Company adopted the 1998 Stock Plan. In May 2000, the
Company adopted the 2000 Equity Incentive Plan and 2000 Director Stock Option
Plan (collectively, the "Plans") under which nonstatutory stock options and
restricted stock may be granted to employees, outside directors, consultants,
and incentive stock options may be granted to employees. Accordingly, the
Company has reserved a total of 20,512,810 shares of the Company's common stock
for issuance upon the grant of restricted stock or exercise of options granted
in accordance with the Plans. On each January 1, commencing with the year 2001,
the number of shares in reserve will automatically increase by 6% of the total
number of shares of common stock that are outstanding at that time or, if less,
by 6,000,000 shares for the 2000 Equity Incentive Plan and by 50,000 shares for
the 2000 Director Stock Option Plan. Options granted under the Plans generally
expire 10 years following the date of grant and are subject to limitations on
transfer. The Plans are administered by the Board of Directors.
The Plans provide for the granting of incentive stock options at not less
than 100% of the fair market value of the underlying stock at the grant date.
Nonstatutory options may be granted at not less than 85% of the fair market
value of the underlying stock at the date of grant.
F-18
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Option grants under the Plans are subject to various vesting provisions,
all of which are contingent upon the continuous service of the optionee and
may not impose vesting criterion more restrictive than 20% per year. Stock
options may be exercised at anytime subsequent to grant. Stock obtained
through exercise of unvested options is subject to repurchase at the original
purchase price. The Company's repurchase right decreases as the shares vest
under the original option terms.
Options granted to stockholders who own greater than 10% of the outstanding
stock must have vesting periods not to exceed five years and must be issued at
prices not less than 110% of the fair market value of the stock on the date of
grant as determined by the Board of Directors. Upon a change of control, all
shares granted under the Plans shall immediately vest.
A summary of the Plans is as follows:
Weighted-
average
Shares exercise
available Number of price per
for grant shares share
---------- ---------- ---------
Initial shares authorized.................. 8,262,810 -- $ --
Options granted............................ (2,164,050) 2,164,050 0.07
Options exercised.......................... -- (90,000) 0.07
---------- ----------
Balances, December 31, 1998................ 6,098,760 2,074,050 0.07
Options granted............................ (6,404,040) 6,404,040 0.46
Options exercised.......................... -- (5,522,196) 0.23
Options forfeited.......................... 340,500 (340,500) 0.06
---------- ----------
Balances, December 31, 1999................ 35,220 2,615,394 0.68
Additional shares authorized............... 12,250,000 -- --
Options granted............................ (8,160,625) 8,160,625 5.48
Options exercised.......................... -- (1,420,914) 1.74
Options forfeited.......................... 461,813 (461,813) 6.43
Shares repurchased......................... 346,348 -- 0.08
---------- ----------
Balances, December 31, 2000................ 4,932,756 8,893,292 4.62
========== ==========
The following table summarizes information about stock options outstanding
as of December 31, 2000:
Outstanding Exercisable
------------------------------------ -----------------
Weighted- Weighted- Weighted-
average average Number average
Number of remaining exercise of exercise
Range of exercise prices shares contractual life price shares price
------------------------ --------- ---------------- --------- ------- ---------
$0.01 to $0.67.......... 671,469 8.07 $0.15 164,945 $0.13
$0.67 to $1.00.......... 707,250 8.86 1.00 26,172 1.00
$1.01 to $2.67.......... 155,625 8.93 2.67 18,313 2.67
$2.68 to $4.94.......... 4,549,304 9.36 4.39 507,453 4.45
$4.95 to $7.00.......... 2,517,444 9.66 6.94 -- --
$7.01 to $9.75.......... 292,200 9.79 8.33 -- --
--------- -------
8,893,292 9.31 4.62 716,883 3.28
========= =======
F-19
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted-average remaining contractual life of options outstanding at
December 31, 2000 and December 31, 1999 was 9.31 years and 9.53 years,
respectively.
Stock-Based Compensation
Employees
The Company uses the intrinsic-value method prescribed in APB No. 25 in
accounting for its stock-based compensation arrangements with employees. Stock-
based compensation expense is recognized for employee stock option grants in
those instances in which the deemed fair value of the underlying common stock
was subsequently determined to be greater than the exercise price of the stock
options at the date of grant. The Company recorded deferred stock-based
compensation related to employees of $53,206,000 and $18,719,000 and for the
years ended December 31, 2000 and 1999, respectively, and $28,796,000,
$6,067,000 and $135,000 has been amortized to stock-based compensation expense
for the period and years ended December 31, 2000, 1999 and 1998, respectively,
on an accelerated basis over the vesting period of the individual options, in
accordance with FASB Interpretation No. 28. The weighted average estimated fair
value of employee stock options granted at exercise prices below market price
at grant during 2000, 1999 and 1998 was $8.64, $3.19 and $0.54 per share,
respectively.
Had compensation costs been determined using the fair value method for the
Company's stock-based compensation plans including the employee stock purchase
plan, net loss would have been changed to the amounts indicated below:
Period from
June 22,
1998
Year ended Year ended (inception)
December 31, December 31, to December
2000 1999 31, 1998
------------- ------------ -----------
Net loss:
As reported...................... $(119,790,000) $(20,791,000) $(1,019,000)
Pro forma........................ (122,845,000) (21,128,000) (1,022,000)
Net loss per share:
As reported...................... $ (3.48) $ (4.98) $ (1.48)
Pro forma........................ (3.57) (5.06) (1.48)
The Company's calculations for employee grants were made using the minimum
value method prior to the IPO and the Black-Scholes option pricing model after
the IPO with the following weighted average assumptions:
Period from
June 22, 1998
(inception)
Year ended Year ended to
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ -------------
Dividend yield....................... 0% 0% 0%
Expected volatility.................. 80% 0% 0%
Risk-free interest rate.............. 6.14% 5.66% 5.77%
Expected life (in years)............. 2.50 2.52 2.67
Non-Employees
The Company uses the fair value method to value options granted to non-
employees. In connection with its grant of options to non-employees, the
Company has recognized deferred stock-based compensation of
F-20
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$1,332,000 and $642,000 for the years ended December 31, 2000 and 1999,
respectively, and $1,097,000, $560,000 and $29,000 has been amortized to stock-
based compensation expense for the period and years ended December 31, 2000,
1999, and 1998, respectively, on an accelerated basis over the vesting period
of the individual options, in accordance with FASB Interpretation No. 28. The
weighted average estimated fair value of non-employee stock options granted at
exercise prices below market price at grant during 2000, 1999 and 1998 was
$0.34, $2.63 and $0.58 per share, respectively.
The Company's calculations for non-employee grants were made using the
Black-Scholes option pricing model with the following weighted average
assumptions:
Period from
June 22, 1998
(inception)
Year ended Year ended to
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ -------------
Dividend yield.......................... 0% 0% 0%
Expected volatility..................... 80% 80% 80%
Risk-free interest rate................. 5.99% 5.48% 4.99%
Expected life (in years)................ 10.00 10.00 10.00
Warrants
In August 1999, the Company entered into a strategic agreement with
NorthPoint Communications, Inc. ("NorthPoint"). Under the terms of the
strategic agreement, NorthPoint has agreed to use certain of the Company's
domestic IBX centers and install their operational nodes in such centers. In
exchange, the Company granted NorthPoint a warrant to purchase 338,145 shares
of the Company's common stock at $0.53 per share (the "NorthPoint Warrant").
The NorthPoint Warrant was earned upon execution of the strategic agreement as
Northpoint's performance commitment was complete. The NorthPoint Warrant is
immediately exercisable and expires five years from the date of grant. The
NorthPoint Warrant was valued at $1,508,000 using the Black-Scholes option-
pricing model, which was capitalized on the accompanying consolidated balance
sheet in other assets as a customer acquisition cost and is being amortized
over the term of the agreement as a reduction of revenues recognized. The
following assumptions were used in determining the fair value of the warrant:
deemed fair market value per share of $4.80, dividend yield of 0%, expected
volatility of 80%, risk-free interest rate of 5.0% and a contractual life of 5
years. In December 2000, based on the uncertainty of the Company's future
business relationship with NorthPoint, as a result of their filing under
Chapter 11 bankruptcy protection, the Company determined that the future value
of the other asset attributed to the unamortized portion of the fully-vested,
nonforfeitable warrant was questionable and accordingly, the remaining asset
totaling approximately $700,000 was written off.
In November 1999, the Company entered into a definitive agreement with
WorldCom, whereby WorldCom agreed to install high-bandwidth local connectivity
services to the Company's first seven IBX centers by a pre-determined date in
exchange for a warrant to purchase 675,000 shares of common stock of the
Company at $0.67 per share (the "WorldCom Warrant"). The WorldCom Warrant is
immediately exercisable and expires five years from the date of grant. As of
December 31, 1999, warrants for 600,000 shares are subject to repurchase at the
original exercise price if WorldCom's performance commitments are not
completed. The WorldCom Warrant was valued at $2,969,000 using the Black-
Scholes option-pricing model and was recorded to construction in progress on
the accompanying consolidated balance sheet as of December 31, 1999. Under the
applicable guidelines in EITF 96-18, the underlying shares of common stock
associated with the WorldCom Warrant subject to repurchase are revalued at each
balance sheet date to reflect their current fair value until
F-21
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
WorldCom's performance commitment is complete. Any resulting increase in fair
value of the warrants is recorded as a leasehold improvement. In addition, the
following assumptions were used in determining the fair value of the warrant:
deemed fair market value per share of $4.80, dividend yield of 0%, expected
volatility of 80%, risk-free interest rate of 5.5% and a contractual life of 5
years.
In November 1999, the Company entered into a master agreement with Bechtel
Corporation, or Bechtel, whereby Bechtel agreed to act as the exclusive
contractor under a Master Agreement to provide program management, site
identification and evaluation, engineering and construction services to build
approximately 29 IBX centers over a four year period under mutually agreed upon
guaranteed completion dates. As part of the agreement, the Company granted
Bechtel a warrant to purchase 352,500 shares of the Company's common stock at
$1.00 per share (the "Bechtel Warrant"). The Bechtel Warrant is immediately
exercisable and expires five years from date of grant. The Bechtel Warrant was
valued at $1,497,000 using the Black-Scholes option-pricing model and was
recorded to construction in progress on the accompanying consolidated balance
sheet as of December 31, 1999. Under EITF 96-18, the underlying shares of
common stock associated with the Bechtel Warrant subject to repurchase are
revalued at each balance sheet date to reflect their current fair value until
Bechtel's performance commitment is complete. Any resulting increase in fair
value of the warrants is recorded as a leasehold improvement. In addition, the
following assumptions were used in determining the fair value of the warrant:
deemed fair market value per share of $4.80, dividend yield of 0%, expected
volatility of 80%, risk-free interest rate of 5.5% and a contractual life of 5
years. In January 2000, the Bechtel Warrant was exercised. As of December 31,
2000, a total of 219,324 shares are subject to repurchase at the original
exercise price, if Bechtel's performance commitments are not complete.
In January 2000, the Company entered into an operating lease agreement for
its new corporate headquarters facility in Mountain View, California. In
connection with the lease agreement, the Company granted the lessor a warrant
to purchase up to 33,100 shares of the Company's common stock at $6.00 per
share (the "Headquarter Warrant"). The warrant expires 10 years from the date
of grant. The warrant was valued at $186,000 using the Black-Scholes option
pricing model and will be recorded as additional rent expense over the life of
the lease. The following assumptions were used in determining the fair value of
the warrants: deemed fair value per share of $6.55, dividend yield of 0%,
expected volatility of 80%, risk-free interest rate of 6.0% and a contractual
life of 10 years.
In April 2000, the Company entered into a definitive agreement with a fiber
carrier whereby the fiber carrier agreed to install high-bandwidth local
connectivity services to a number of the Company's IBX centers in exchange for
colocation space and related benefits in such IBX centers. In connection with
this agreement, the Company granted the fiber carrier a warrant to purchase up
to 540,000 shares of the Company's common stock at $4.00 per share (the "Fiber
Warrant"). The warrant is immediately exercisable and expire five years from
date of grant. A total of 140,000 shares are immediately vested and the
remaining 400,000 shares are subject to repurchase at the original exercise
price if certain performance commitments are not completed by a pre-determined
date. The fiber carrier is not obligated to install high-bandwidth local
connectivity services and, apart from forfeiting the relevant number of
warrants and colocation space, will not be penalized for not installing. The
warrant was valued at $5,372,000 using the Black-Scholes option-pricing model
and has been recorded initially to construction in progress until installation
is complete. The following assumptions were used in determining the fair value
of the warrant: deemed fair market value per share of $11.82, dividend yield of
0%, expected volatility of 80%, risk-free interest rate of 6.56% and a
contractual life of 5 years. Under the applicable guidelines in EITF 96-18, the
underlying shares of common stock associated with these warrants subject to
repurchase are revalued at each balance sheet date to reflect their current
fair value until the performance commitment is complete. Any resulting increase
in fair value of the warrant will ultimately be recorded as a leasehold
improvement.
F-22
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 2000, the Company entered into a memorandum of understanding with
COLT Telecommunications ("Colt") whereby Colt agreed to install high-bandwidth
local connectivity services to a number of the Company's European IBX centers
in exchange for colocation space and related benefits in such IBX centers. In
connection with this agreement, the Company granted Colt a warrant to purchase
up to 250,000 shares of the Company's common stock at $5.33 per share (the
"Colt Warrant"). The warrant is immediately exercisable and expire five years
from the date of grant. The shares are subject to repurchase at the original
exercise price if certain performance commitments are not completed by a pre-
determined date. Colt is not obligated to install high-bandwidth local
connectivity services and, apart from forfeiting the relevant number of
warrants and colocation space, will not be penalized for not installing. The
warrant was valued at $2,795,000 using the Black-Scholes option-pricing model
and has been recorded initially to construction in progress until installation
is complete. The following assumptions were used in determining the fair value
of the warrants: deemed fair market value per share of $13.58, dividend yield
of 0%, expected volatility of 80%, risk-free interest rate of 6.23% and a
contractual life of 5 years. Under the applicable guidelines in EITF 96-18, the
underlying shares of common stock associated with this warrant subject to
repurchase are revalued at each balance sheet date to reflect their current
fair value until the performance commitment is complete. Any resulting increase
in fair value of the warrant will ultimately be recorded as a leasehold
improvement.
In June 2000, the Company entered into a strategic agreement with WorldCom
and UUNET, an affiliate of WorldCom (the "UUNET Strategic Agreement"), which
amends, supersedes and restates the definitive agreement entered into with
WorldCom in November 1999 and the related WorldCom Warrant. Under the UUNET
Strategic Agreement, WorldCom agreed to install high-bandwidth local
connectivity services and UUNET agreed to provide high-speed data entrance
facilities to a number of the Company's IBX centers in exchange for colocation
services and related benefits in such IBX centers. In connection with this
strategic agreement, the Company granted WorldCom Venture Fund a warrant (the
"WorldCom Venture Fund Warrant") to purchase up to 650,000 shares of Company's
common stock at $5.33 per share. All but 37,500 of the shares under the earlier
WorldCom Warrant are immediately vested under the UUNET Strategic Agreement.
The WorldCom Venture Fund Warrant is immediately exercisable and expires five
years from the date of grant. The warrant is subject to repurchase at the
original exercise price if certain performance commitments are not completed by
a pre-determined date. WorldCom and UUNET are not obligated to install high-
bandwidth local connectivity services and provide high-speed data entrance
facilities, respectively, and, apart from forfeiting the relevant number of
warrants and colocation space, will not be penalized for not performing. The
warrant was valued at $7,255,000 using the Black-Scholes option-pricing model
and has been recorded initially to construction in progress until installation
is complete. The following assumptions were used in determining the fair value
of the warrant: deemed fair market value per share of $13.58, dividend yield of
0%, expected volatility of 80%, risk-free interest rate of 6.23% and a
contractual life of 5 years. Under the applicable guidelines in EITF 96-18, the
underlying shares of common stock associated with this warrant subject to
repurchase are revalued at each balance sheet date to reflect their current
fair value until the performance commitment is complete. Any resulting increase
in fair value of the warrant will ultimately be recorded as a leasehold
improvement.
F-23
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, the Company has issued several warrants in connection with its
debt facilities and capital lease obligations (see Note 3) and the Senior Notes
(see Note 4). The Company has the following warrants outstanding as of December
31, 2000:
Warrants Exercise
Common stock warrants outstanding price
--------------------- ----------- --------
Comdisco Loan and Security Agreement Warrant............ 765,000 $ 0.67
Comdisco Master Lease Agreement Warrant................. 30,000 1.67
Comdisco Master Lease Agreement Addendum Warrant........ 150,000 3.00
Venture Leasing Loan Agreement Warrant.................. 270,000 3.00
Senior Note Warrants.................................... 3,038,850 0.0067
NorthPoint Warrant...................................... 338,145 0.53
WorldCom Warrant........................................ 675,000 0.67
Headquarter Warrant..................................... 33,100 6.00
Fiber Warrant........................................... 540,000 4.00
Colt Warrant............................................ 250,000 5.33
Worldcom Venture Fund Warrant........................... 650,000 5.33
Other warrant........................................... 6,000 5.00
---------
6,746,095
=========
7. Income Taxes
No provision for federal income taxes was recorded from inception through
December 31, 2000 as the Company incurred net operating losses during the
period.
State tax expense is included in general and administrative expenses.
Actual income tax expense differs from the expected tax benefit computed by
applying the statutory federal income tax rate of approximately 34% for the
periods ended December 31, 2000 and 1999, primarily as a result of the change
in valuation allowance and stock based compensation.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets as of December 31 is presented as follows
(in thousands):
2000 1999
-------- -------
Deferred tax assets:
Start-up expenses....................................... $ 4,855 $ 2,551
Net operating loss...................................... 31,614 3,134
Reserves and accruals................................... 3,660 8
-------- -------
Deferred tax assets................................... 40,129 5,693
Deferred tax liability:
Depreciation and amortization........................... (3,857) (38)
-------- -------
Net deferred tax assets............................... 36,272 5,655
Valuation allowance................................... (36,272) (5,655)
-------- -------
$ -- $ --
======== =======
The net change in the total valuation allowance for the year ended December
31, 2000 and the year ended December 31, 1999, was an increase of $30,617,000
and $5,655,000, respectively.
F-24
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has established a valuation allowance against that portion of
deferred tax assets where management has determined that it is more likely than
not that the asset will not be realized.
At December 31, 2000, the Company had net operating loss carryforwards of
approximately $86,269,000 and $39,125,000 for federal and for state tax
purposes, respectively. If not earlier utilized, the federal net operating loss
carryforward will expire in 2014 and the state loss carryforward will expire in
2004.
Under the Tax Reform Act of 1986, the amounts of and the benefit from net
operating losses that can be carried forward may be limited in certain
circumstances. Events that may cause limitations in the utilization of net
operating losses include a cumulative stock ownership change of more than 50%
over a three year period and other events. Equinix has not yet determined the
extent that its net operating loss benefit will be limited.
8. Commitments and Contingencies
Operating Lease Commitments
The Company leases its IBX centers and certain equipment under noncancelable
operating lease agreements expiring through 2014. The centers' lease agreements
typically provide for base rental rates which increase at defined intervals
during the term of the lease. In addition, the Company has negotiated rent
expense abatement periods to better match the phased build-out of its centers.
The Company accounts for such abatements and increasing base rentals using the
straight-line method over the life of the lease. The difference between the
straight-line expense and the cash payment is recorded as deferred rent.
Minimum future operating lease payments as of December 31, 2000 are
summarized as follows (in thousands):
Year ending:
2001.............................................................. $ 28,597
2002.............................................................. 31,818
2003.............................................................. 32,104
2004.............................................................. 32,442
2005.............................................................. 32,874
Thereafter........................................................ 346,954
--------
Total........................................................... $504,789
========
Total rent expense was approximately $16,157,000 and $1,739,000 and for the
years ended December 31, 2000 and 1999, respectively.
Deferred rent included in accrued expenses was none and $18,000 as of
December 31, 2000 and 1999, respectively. Deferred rent included in other
liabilities was $3,793,000 and $567,000 as of December 31, 2000 and 1999,
respectively.
Letter of Credit
In connection with the execution of one of the Company's long-term operating
leases, the Company posted a letter of credit in the amount of $10.0 million.
This letter of credit shall increase to $35.0 million if the Company does not
meet certain financing targets. This security deposit shall be reduced on a pro
rata basis based on the status of construction activity.
F-25
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employment Agreement
The Company has agreed to indemnify an officer of the Company for any claims
brought by his former employer under an employment and non-compete agreement
the officer had with this employer.
Employee Benefit Plan
The Company has a 401(k) Plan that allows eligible employees to contribute
up to 15% of their compensation, limited to $10,500 in 2000. Employee
contributions and earnings thereon vest immediately. Although the Company may
make discretionary contributions to the 401(k) Plan, none have been made as of
December 31, 2000.
9. Related Party Transactions
Through December 31, 2000 the Company advanced an aggregate of $1,150,000 to
three officers of the Company, which are evidenced by promissory notes. The
proceeds of these loans were used to fund the purchase of personal residences.
The loans are due at various dates through 2005, but are subject to certain
events of acceleration and are secured by a second deed of trust on the
officers' residences. The loans are non-interest bearing. These loans are
presented in other assets on the accompanying consolidated balance sheets as of
December 31, 2000 and 1999.
In March 1999, the Company entered into an equipment lease facility with a
preferred stockholder under which the Company leased $137,000 of equipment for
a 24-month term.
In August 1999, the Company entered into a strategic agreement with
NorthPoint. Under the terms of the strategic agreement, NorthPoint has agreed
to use certain of the Company's domestic IBX centers and install their
operational nodes in such centers. In exchange, the Company granted NorthPoint
a warrant to purchase 338,145 shares of the Company's common stock at $0.53 per
share. The NorthPoint Warrant was earned upon execution of the strategic
agreement as NorthPoint's performance commitment was complete. The NorthPoint
Warrant is immediately exercisable and expires five years from date of grant.
The NorthPoint Warrant was valued at $1,508,000 using the Black-Scholes option-
pricing model (see Note 6).
10. Segment Information
During the year ended December 31, 1999, the Company adopted the provisions
of SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 requires disclosures of selected segment-related
financial information about products, major customers and geographic areas.
The Company and its subsidiaries are principally engaged in the design,
build-out and operation of neutral IBX centers. All revenues result from the
operation of these IBX centers. Accordingly, the Company considers itself to
operate in a single segment for purposes of disclosure under SFAS No. 131. The
Company's chief operating decision-maker evaluates performance, makes operating
decisions and allocates resources based on financial data consistent with the
presentation in the accompanying consolidated financial statements.
As of December 31, 2000, all of the Company's operations and assets were
based in the United States with the exception of $24,459,000 of the Company's
identifiable assets based in Europe and $429,000 of the Company's total net
loss was attibutable to the development of its European operations. As of
December 31, 1999, all of the Company's operations and assets were based in the
United States.
F-26
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Subsequent Events (unaudited)
On January 1, 2001, pursuant to the provisions of the Company's stock plans
(see Note 6), the number of common shares in reserve automatically increased by
4,618,731 shares for the 2000 Equity Incentive Plan, 600,000 shares for the
Employee Stock Purchase Plan and 50,000 shares for the 2000 Director Stock
Option Plan.
On January 2, 2001, the Company drew down $50,000,000 in term loans made
available through the Credit Facility entered into by the Company on December
20, 2000 (see Note 5).
On February 27, 2001, the Company advanced an aggregate of $1,514,000 to an
officer of the Company, which is evidenced by a promissory note. The proceeds
of this loan were used to fund the purchase of a principal residence. The loan
is due February 27, 2006, but is subject to certain events of acceleration. The
loan is non-interest bearing.
On March 5, 2001, the Company drew down $75,000,000 in delayed draw term
loans made available through the Credit Facility entered into by the Company on
December 20, 2000 (see Note 5).
12. Selected Quarterly Financial Data (unaudited)
The following table presents selected quarterly information for fiscal 2000
and 1999:
First Second Third Fourth
quarter quarter quarter quarter
-------- -------- -------- --------
(in thousands, except per share
data)
2000:
Revenues........................... $ 136 $ 892 $ 3,933 $ 8,055
Net loss........................... (18,009) (26,811) (32,085) (42,885)
Basic and diluted net loss per
share............................. (2.40) (2.62) (0.70) (0.57)
1999:
Revenues........................... $ -- $ -- $ -- $ 37
Net loss........................... (1,345) (3,120) (6,288) (10,038)
Basic and diluted net loss per
share............................. (0.74) (1.90) (1.45) (2.11)
F-27