================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to _______________
Commission File Number 000-31293
EQUINIX, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0487526
(State of incorporation) (I.R.S. 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)
None
(Former name, former address and former fiscal year, if changed since last
report)
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) Yes X No___ and (2) has
---
been subject to such filing requirements for the past 90 days. Yes X . No ___.
----
The number of shares outstanding of the Registrant's Common Stock as of March
31, 2001 was 79,659,050.
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EQUINIX, INC.
INDEX
Page
No.
Part I. Financial Information
Item 1. Condensed Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2000.............................................................................. 3
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2001
and 2000....................................................................................... 4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001
and 2000....................................................................................... 5
Notes to Condensed Consolidated Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................................... 12
Item 3. Qualitative and Quantitative Disclosure About Market Risk...................................... 25
Part II. Other Information
Item 1. Legal Proceedings.............................................................................. 27
Item 2. Changes in Securities and Use of Proceeds...................................................... 27
Item 3. Defaults Upon Senior Securities................................................................ 27
Item 4. Submission of Matters to a Vote of Security Holders............................................ 27
Item 5. Other Information.............................................................................. 27
Item 6. Exhibits and Reports on Form 8-K............................................................... 28
Signature................................................................................................ 30
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
EQUINIX, INC.
Condensed Consolidated Balance Sheets
(in thousands)
March 31, December 31,
2001 2000
------------ --------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents................................................. $ 165,869 $ 174,773
Short-term investments.................................................... 80,439 32,437
Accounts receivable, net.................................................. 6,378 4,925
Current portion of restricted cash and short-term investments............. 15,231 15,468
Prepaids and other current assets......................................... 13,432 10,373
---------- ----------
Total current assets.................................................. 281,349 237,976
Property and equipment, net.................................................. 342,001 315,380
Construction in progress..................................................... 89,257 94,894
Restricted cash and short-term investments, less current portion............. 20,399 21,387
Debt issuance costs, net..................................................... 11,431 11,916
Other assets................................................................. 3,397 1,932
---------- ----------
Total assets.......................................................... $ 747,834 $ 683,485
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses...................................... $ 12,451 $ 13,717
Accrued construction costs................................................. 55,568 89,343
Current portion of debt facilities and capital lease obligations........... 5,415 4,426
Accrued interest payable................................................... 8,667 2,167
Other current liabilities.................................................. 2,304 1,646
---------- ----------
Total current liabilities................................................ 84,405 111,299
Debt facilities and capital lease obligations, less current portion.......... 7,581 6,506
Senior secured credit facility............................................... 125,000 --
Senior notes................................................................. 186,399 185,908
Other liabilities............................................................ 7,229 4,656
---------- ----------
Total liabilities........................................................ 410,614 308,369
---------- ----------
Stockholders' equity:
Common stock............................................................... 79 77
Additional paid-in capital................................................. 549,681 553,070
Deferred stock-based compensation.......................................... (28,507) (38,350)
Accumulated other comprehensive income (loss).............................. (896) 1,919
Accumulated deficit........................................................ (183,137) (141,600)
---------- ----------
Total stockholders' equity............................................... 337,220 375,116
---------- ----------
Total liabilities and stockholders' equity............................... $ 747,834 $ 683,485
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
EQUINIX, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
Three months ended
March 31,
------------------------------
2001 2000
--------- ----------
(unaudited)
Revenues........................................................................ $ 12,613 $ 136
-------- --------
Costs and operating expenses:
Cost of revenues (includes stock-based compensation of $241 and $106 for the 23,678 3,321
three months ended March 31, 2001 and 2000, respectively)..................
Sales and marketing (includes stock-based compensation of $1,083 and $1,358 5,225 4,516
for the three months ended March 31, 2001 and 2000, respectively)..........
General and administrative (includes stock-based compensation of $6,825 and
$2,018 for the three months ended March 31, 2001 and 2000, respectively)... 18,676 6,254
-------- --------
Total costs and operating expenses...................................... 47,579 14,091
-------- --------
Loss from operations............................................................ (34,966) (13,955)
Interest income.............................................................. 3,947 3,662
Interest expense............................................................. (10,518) (7,716)
-------- --------
Net loss........................................................................ $(41,537) $(18,009)
======== ========
Net loss per share:
Basic and diluted............................................................ $ (0.54) $ (2.40)
======== ========
Weighted average shares...................................................... 76,380 7,516
======== ========
See accompanying notes to condensed consolidated financial statements.
4
EQUINIX, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
Three months ended
March 31,
-----------------------------------------
2001 2000
------------------ -----------------
(unaudited)
Cash flows from operating activities:
Net loss........................................................................... $ (41,537) $(18,009)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation..................................................................... 10,525 1,636
Amortization of deferred stock-based compensation................................ 8,149 3,482
Amortization of debt-related issuance costs and discounts........................ 1,832 1,070
Allowance for doubtful accounts.................................................. 467
Changes in operating assets and liabilities:
Accounts receivable........................................................... (1,920) (107)
Prepaids and other current assets............................................. (3,059) 96
Other assets.................................................................. (1,465) (387)
Accounts payable and accrued expenses......................................... (1,266) 953
Accrued interest payable...................................................... 6,500 6,764
Other current liabilities..................................................... 658 (31)
Other liabilities............................................................. 1,717 357
------------------ -----------------
Net cash used in operating activities....................................... (19,399) (4,176)
------------------ -----------------
Cash flows from investing activities:
Purchase of short-term investments................................................. (72,555) (5,944)
Sales and maturities of short-term investments..................................... 24,617 19,768
Purchases of property and equipment................................................ (34,692) (36,497)
Accrued construction costs......................................................... (33,775) 14,175
Purchase of restricted cash and short-term investments............................. - (2,444)
Sale of restricted cash and short-term investments................................. 1,225 -
------------------ -----------------
Net cash used in investing activities....................................... (115,180) (10,942)
------------------ -----------------
Cash flows from financing activities:
Proceeds from exercise of stock options and employee stock purchase plan........... 1,508 1,064
Proceeds from issuance of debt facilities and capital lease obligations............ 128,004 -
Repayment of debt facilities and capital lease obligations......................... (940) (1,424)
Repurchase of common stock......................................................... (18) (11)
------------------ -----------------
Net cash provided by (used in) financing activities......................... 128,554 (371)
------------------ -----------------
Effect of foreign currency exchange rates on cash and cash equivalents.............. (2,879)
Net decrease in cash and cash equivalents........................................... (8,904) (15,489)
Cash and cash equivalents at beginning of period.................................... 174,773 203,165
------------------ -----------------
Cash and cash equivalents at end of period.......................................... $ 165,869 $187,676
================== =================
Supplemental cash flow information:
Cash paid for interest........................................................... $ 4,599 $ 366
================== =================
See accompanying notes to condensed consolidated financial statements.
5
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have
been prepared by Equinix, Inc. (``Equinix'' or the ``Company'') and reflect all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management are necessary to present fairly the financial position and
the results of operations for the interim periods presented. The balance sheet
at December 31, 2000 has been derived from audited financial statements at that
date. The financial statements have been prepared in accordance with the
regulations of the Securities and Exchange Commission (``SEC''), but omit
certain information and footnote disclosure necessary to present the statements
in accordance with generally accepted accounting principles. For further
information, refer to the Consolidated Financial Statements and Notes thereto
included in Equinix's Form 10-K as filed with the SEC on March 27, 2001. Results
for the interim periods are not necessarily indicative of results for the entire
fiscal year.
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 condensed
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
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.
2. Cash, Cash Equivalents and Short-Term Investments
On January 2, 2001, the Company drew down $50,000,000 in term loans made
available through the Senior Secured Credit Facility entered into by the Company
on December 20, 2000 (see Note 5).
On March 5, 2001, the Company drew down $75,000,000 in term loans made
available through the Senior Secured Credit Facility entered into by the Company
on December 20, 2000 (see Note 5).
3. Property and Equipment
Property and equipment is comprised of the following (in thousands):
March 31, December 31,
2001 2000
----------------- --------------------
(unaudited)
Leasehold improvements................................ $278,843 $243,851
IBX plant and machinery............................... 51,453 51,305
Computer equipment and software....................... 12,821 12,438
IBX equipment......................................... 23,527 21,960
Furniture and fixtures................................ 1,297 1,241
----------------- --------------------
367,941 330,795
Less accumulated depreciation......................... (25,940) (15,415)
----------------- --------------------
$342,001 $315,380
================= ====================
Leasehold improvements, certain computer equipment, IBX plant and
machinery, software and furniture and fixtures recorded under capital leases
aggregated $5,999,000 at both March 31, 2001 and December 31, 2000. Amortization
on the assets recorded under capital leases is included in depreciation expense.
6
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Included within leasehold improvements is the value attributed to the
earned portion of several warrants issued to certain fiber carriers and our
contractor totaling $5,987,000 and $5,761,000 as of March 31, 2001 and December
31, 2000, respectively. Amortization on such warrants within leasehold
improvements is included in depreciation expense.
4. 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 $2,863,000 as of March 31, 2001 and $6,270,000 as of December 31, 2000.
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 three months
ended March 31, 2001, was $11,099,000 and $581,000, respectively. Total
interest cost incurred and total interest capitalized during the three months
ended March 31, 2000, was $7,910,000 and $194,000, respectively.
5. Debt Facilities
Wells Fargo Loan
In March 2001, the Company obtained a $3,004,000 loan from Wells Fargo
Equipment Finance, Inc. (the "Wells Fargo Loan"). Repayments on the Wells Fargo
Loan are made over 36 months and interest accrues at 13.15% per annum. The
Wells Fargo Loan is secured by certain equipment located in the New York metro
area IBX currently under construction.
Senior Secured Credit Facility
On December 20, 2000 the Company, and a newly created, wholly-owned
subsidiary, entered into a $150 million Senior Secured Credit Facility ("Senior
Secured Credit Facility") with a syndicate of lenders. The Senior Secured 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. The Company drew this down in January
2001.
. 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.
The Company drew this down in March 2001.
. 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 March 31, 2001.
7
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Senior Secured 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 March 31, 2001 and December 31, 2000.
Borrowings under the Senior Secured Credit Facility are collateralized by a
first priority lien against substantially all of the Company's assets. The
lenders under the Senior Secured Credit Facility have agreed that the liens
which collateralize the Senior Secured Credit Facility may also collateralize an
additional $100,000,000 of additional borrowings in the event the Senior Secured
Credit Facility is extended, but the lenders have no obligation to provide such
additional financing.
Loans under the Senior Secured Credit Facility bear interest at floating
rates, plus applicable margins, based on either the prime rate or LIBOR. At
March 31, 2001, the Company's total indebtedness against the Senior Senior
Secured Credit Facility totaling $125,000,000 had an effective interest rate of
9.12%.
The costs related to the issuance of the Senior Secured Credit Facility were
capitalized and are being amortized to interest expense using the effective
interest method, over the life of the Senior Secured Credit Facility. Debt
issuance costs, net of amortization, are $5,519,000 and $5,966,000 as of March
31, 2001 and December 31, 2000, respectively.
6. Stockholders' Equity
Stock Plans
On January 1, 2001, pursuant to the provisions of the Company's stock plans,
the number of common shares reserved 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 31, 2001, a total of 222,378 shares were purchased under the
Employee Stock Purchase Plan with total proceeds to the Company of $1,122,000.
8
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Warrants
In March 2001, holders of the NorthPoint Warrant, the Comdisco Loan and
Security Agreement Warrant, the Comdisco Master Lease Agreement Warrant and the
Comdisco Master Lease Agreement Addendum Warrant exercised such warrants
pursuant to the cashless "net-exercise" provisions thereof. Upon such exercises,
such warrant holders received an aggregate of 1,049,599 shares of the Company's
common stock.
During the quarter ended March 31, 2001, certain holders of Senior Note
Warrants exercised their warrants resulting in 1,283,069 shares of the Company's
common stock being issued. A total of 1,755,781 shares underlying these Senior
Note Warrants remain outstanding as of March 31, 2001.
7. Commitments and Contingencies
From time to time, the Company may have certain contingent liabilities that
arise in the ordinary course of its business activities. The Company accrues
contingent liabilities when it is probable that future expenditures will be made
and such expenditures can be reasonably estimated. In the opinion of management,
there are no pending claims of which the outcome is expected to result in a
material adverse effect in the financial position or results of operations of
the Company.
8. Related Party Transactions
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.
9. Comprehensive Loss
The components of comprehensive loss are as follows (in thousands)
(unaudited):
Three months ended March 31,
-------------------------------
2001 2000
------------- -------------
Net loss.......................................... $(41,537) $(18,009)
Unrealized loss on available for sale securities.. (9) (27)
Foreign currency translation gain................. (887) --
------------- -------------
Comprehensive loss................................ $(42,433) $(18,036)
============= =============
There were no significant tax effects on comprehensive loss for the three
months ended March 31, 2001 and 2000.
9
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. Net Loss per Share
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 anti-dilutive.
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except per share data)
(unaudited):
Three months ended March 31,
--------------------------------
2001 2000
------------ ------------
Numerator:
Net loss..................................... $ (41,537) $ (18,009)
=========== ===========
Historical:
Denominator:
Weighted average shares...................... 80,357 15,640
Weighted average unvested shares subject
to repurchase.............................. (3,977) (8,124)
----------- -----------
Total weighted average shares.............. 76,380 7,516
=========== ===========
Net loss per share:
Basic and diluted.......................... $ (0.54) $ (2.40)
=========== ===========
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:
March 31,
------------------------------
2001 2000
---------- ----------
Series A redeemable convertible preferred stock................ -- 18,682,500
Series B redeemable convertible preferred stock................ -- 15,762,373
Series A preferred stock warrants.............................. -- 1,245,000
Common stock warrants.......................................... 4,179,881 4,422,745
Common stock options........................................... 13,444,132 2,896,565
Common stock subject to repurchase............................. 3,976,926 8,124,635
10
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. Segment Information
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. 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 March 31, 2001, all of the Company's operations and assets were based
in the United States with the exception of $33,246,000 of the Company's
identifiable assets based in Europe and $463,000 of the Company's total net loss
was attributable to the development of its European operations. As of March 31,
2000, all of the Company's operations and assets were based in the United
States.
Revenues from two customers accounted for 13% and 11%, respectively, of the
Company's revenues for the three months ended March 31, 2001.
12. 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. The adoption of SFAS 133, as amended by SFAS 137
and SFAS 138, did not have a material impact on our financial position and
results of operations.
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 FIN 44 did
not have a material effect on the Company's financial position and results of
operations.
13. Subsequent Events
The Company has taken and intends to continue to take steps to reduce its
projected operating expenses, including a realignment and reduction of
approximately 10% of its workforce, a reduction of certain discretionary
spending, such as travel and entertainment, and a reduction of marketing
expenses. The Company does not expect to see any impact to operations or
customer services as a result of these cost-saving measures.
11
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are based upon current expectations that involve risks and uncertainties. Any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. For example, the words ``believes,''
``anticipates,'' ``plans,'' ``expects,'' ``intends'' and similar expressions are
intended to identify forward-looking statements. Our actual results and the
timing of certain events may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such a discrepancy
include, but are not limited to, those discussed in ``Other Factors Affecting
Operating Results" and "Liquidity and Capital Resources'' below. All forward-
looking statements in this document are based on information available to us as
of the date hereof and we assume no obligation to update any such forward-
looking statements.
Overview
Equinix, Inc. ("Equinix", the "Company", "we" or "us") designs, builds and
operates neutral Internet Business Exchange ("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 611,000 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 within
the next twelve months, 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.
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
$6.5 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
12
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.
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, 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 $8.1 million and $3.5 million
was amortized to stock-based compensation expense for the three months ended
March 31, 2001 and 2000, 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 $28.5
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 March 31, 2001 we had an accumulated deficit of $183.1 million and
accumulated cash used in operating and construction activities of $491.0
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 "Other Factors Affecting Operating Results".
Results of Operations
Three Months Ended March 31, 2001 and 2000
Revenues. We recognized revenues of $12.6 million for the three months
ended March 31, 2001. Revenues consisted of recurring revenues of $11.7 million
primarily from the leasing of cabinet space and non-recurring revenues of
$916,000 related to the recognized portion of deferred installation revenue and
custom service revenues. Installation and service fees are recognized ratably
over the term of the contract. Custom service revenues are recognized upon
completion of the services. We recognized revenues of $136,000 during the three
months ended March 31, 2000.
Cost of Revenues. Cost of revenues increased from $3.3 million for the
three months ended March 31, 2000 to $23.7 million for the three months ended
March 31, 2001. 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
additional leases and increased expenses related to our opening of additional
IBX centers.
Sales and Marketing. Sales and marketing expenses increased from $4.5
million for the three months ended March 31, 2000 to $5.2 million for the three
months ended March 31, 2001. These amounts include $1.4 million and $1.1
million, respectively, of stock-based compensation expense. Sales and marketing
expenses consist primarily of compensation and related costs for the sales and
marketing
13
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 and our efforts to develop market awareness. We
anticipate that sales and marketing expenses will increase in absolute dollars
as we increase our investment in these areas to coincide with the rollout of
additional IBX centers.
General and Administrative. General and administrative expenses increased
from $6.3 million for the three months ended March 31, 2000 to $18.7 million for
the three months ended March 31, 2001. These amounts include $2.0 million and
$6.8 million, respectively, of stock-based compensation expense. 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.
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 associated with our regional and
international expansion efforts.
Adjusted EBITDA. Adjusted EBITDA loss increased for the three months ended
March 31, 2000 from $8.8 million to $16.3 million for the three months ended
March 31, 2001. Although many factors affect EBITDA and costs vary from IBX
market to IBX market, as of March 31, 2001, three of our six IBX centers
achieved positive EBITDA status. We anticipate that EBITDA losses have now
peaked and will begin to decline in subsequent quarters.
Interest Income. Interest income increased for the three months ended March
31, 2000 from $3.7 million to $3.9 million for the three months ended March 31,
2001. Interest income increased 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 $7.7 million for the
three months ended March 31, 2000 to $10.5 million for the three months ended
March 31, 2001. The increase in interest expense was attributed to interest on
the senior notes, interest related to an increase in our debt facilities and
capital lease obligations, including the new senior secured credit facility, and
amortization of the senior notes, senior secured credit facility, other debt
facilities and capital lease obligations discount.
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 various debt financings, including our
recently completed $150.0 million senior secured credit facility, for aggregate
gross proceeds of approximately $839.2 million. As of March 31, 2001, we had
approximately $246.3 million in cash, cash equivalents and short-term
investments. Furthermore, we have an additional $35.6 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 the remaining $25.0 million from our $150.0 million
senior secured credit facility that we have yet to draw. As of March 31, 2001,
our total indebtedness from our senior notes, debt facilities and capital lease
obligations was $338.0 million.
14
Net cash used in our operating activities was $19.4 million and $4.2
million for the three months ended March 31, 2001 and 2000, respectively. We
used cash primarily to fund our net loss from operations.
Net cash used in investing activities was $115.2 million and $10.9 million
for the three months ended March 31, 2001 and 2000, 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 $128.6 million for the three
months ended March 31, 2001. Net cash used in financing activities was $371,000
for the three months ended March 31, 2000. Net cash generated by financing
activities during the three months ended March 31, 2001 was primarily
attributable to the $125.0 million drawdown of our $150.0 million senior secured
credit facility. Net cash used in financing activities during the three months
ended March 31, 2000 was primarily attributable to the repayment of our 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. As of March 31, 2001, these
capital lease financings were 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. As of March 31, 2001, these capital lease
financings were 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 $186.4 million as of March 31, 2001.
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 ("iStar"). 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.
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.
15
In December 2000, we entered into a $150.0 million senior secured credit
facility. As of March 31, 2001, $125.0 million of this facility has been drawn.
We expect that our cash on hand and anticipated cash flow from operations,
and drawdown of the remaining $25.0 million 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. The adoption of SFAS 133, as amended by SFAS 137
and SFAS 138, 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 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.
Other Factors Affecting Operating Results
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
16
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 March 31, 2001, we had cumulative net losses of $183.1 million
and cumulative cash used in operating activities of $98.2 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;
. 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 is 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;
17
. 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 March 31, 2001, we had total indebtedness of
$338.0 million consisting primarily of the following:
. our 13% senior notes due 2007;
. our $150.0 million senior secured credit facility, of which $125.0
million has been drawn down; and
. other 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;
. 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.
18
We may be able to draw down additional funds from our senior secured credit
facilities an the banks could require repayment of amounts previously drawn down
if we do not maintain specific financial ratios and comply 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 and the banks could require repayment of
amounts previously drawn down. If we are not able to draw down the full amount
of the senior secured credit facilities or if we are required to repay amounts
currently outstanding under the facilities, 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 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;
19
. 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, which 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 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.
20
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 ourselves 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
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 the buildout of 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 adversely affect our operating results.
21
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 have experienced, 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;
. 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 may make acquisitions, which pose integration and other risks that could
harm our business.
22
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
stockholders' 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.
In the event we construct IBX centers outside of the United States, 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;
. 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.
23
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 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.
24
Item 3. Qualitative and Quantitative 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 of the fixed interest rate debt but does not impact earnings
or cash flows of the Company.
The fair market value of our 13% senior notes due 2007 is based on quoted
market prices. The estimated fair value of our 13% senior notes due 2007 as of
March 31, 2001 is approximately $126.0 million.
Foreign Currency Risk
To date, all of our recognized revenue has been denominated in U.S.
dollars, generated mostly from customers in the United States, and our exposure
to foreign currency exchange rate fluctuations has been minimal. We expect that
future revenues may be derived from customers outside of the United States and
may be denominated in foreign currency. As a result, our operating results or
cash flows may be impacted due to currency fluctuations relative to the U.S.
dollar.
Furthermore, to the extent we engage in international sales that are
denominated in U.S. dollars, an increase in the value of the U.S. dollar
relative to foreign currencies could make our services less competitive in the
international markets. Although we will continue to monitor our exposure to
currency fluctuations, and when appropriate, may use financial hedging
techniques in the future to minimize the effect of these fluctuations, we cannot
assure you that exchange rate fluctuations will not adversely affect our
financial results in the future.
We have entered into a number of lease agreements in Europe for which our
liabilities are denominated in foreign currency. As of March 31, 2001, we also
had foreign currency commitments relating to the initiation of our business
within Europe. We use forward exchange contracts to hedge a portion of our
liabilities which are denominated in foreign currencies. The Company's forward
exchange contracts as of March 31, 2001, which mature during 2001, are
represented below (in thousands):
Contract to receive Foreign Currency Contract Amount in Change in Fair Market
currency / Pay US$ Contract amount US$ Value as of March 31, 2001
---------------------------------------------------------------------------------------------
British Pounds Pounds 3,132 US$4,538 US$67
---------------------------------------------------------------------------------------------
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
25
foreign currency commitments as hedged would be approximately $4.1 million and
$5.0 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.
26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
(a) Modification of Constituent Instruments.
None.
(b) Change in Rights.
None.
(c) Issuance of Securities.
None.
(d) Use of Proceeds.
The effective date of the Company's registration statement for our
initial public offering, filed on Form S-1 under the Securities Act of
1933, as amended (Commission File No. 333-93749), was August 10, 2000.
There has been no change to the disclosure contained in the Company's
report on Form 10-Q for the quarter ended September 30, 2000 regarding
the use of proceeds generated by the Company's initial public offering
of its common stock.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
The Company has taken and intends to continue to take steps to reduce
its projected operating expenses, including a realignment and
reduction of approximately 10% of its workforce, a reduction of
certain discretionary spending, such as travel and entertainment, and
a reduction of marketing expenses. The Company does not expect to see
any impact to operations or customer services as a result of these
cost-saving measures.
27
Item 6. Exhibits and Reports on Form 8-K.
(a) 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.
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.
28
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.
___________
* Incorporated herein by reference to the exhibit of the same number in the
Registrant's Registration Statement on Form S-4 (Commission 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 (Commission 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.
**** Incorporated herein by reference to the exhibit of the same number in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 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.
29
EQUINIX, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EQUINIX, INC.
Date: May 3, 2001
By: /s/ Philip J. Koen
----------------------------------------------
Chief Financial Officer, Corporate
Development Officer and Secretary
(Principal Financial and Accounting Officer)
30