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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, 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
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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. [X]
The aggregate market value of voting common stock held by non-affiliates of
the registrant as of February 28, 2002 was approximately $81.2 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, 2002, a total of 84,714,925 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 2002 Annual Meeting of
Stockholders, which is expected to be filed not later than 120 days after the
registrant's fiscal year ended December 31, 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, 2001
TABLE OF CONTENTS
Item Page No.
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PART I
1. Business......................................................... 3
2. Properties....................................................... 10
3. Legal Proceedings................................................ 11
4. Submission of Matters to a Vote of Security Holders.............. 11
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................... 12
6. Selected Financial Data.......................................... 14
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 16
7A. Quantitative and Qualitative Disclosures About Market Risk....... 34
8. Financial Statements and Supplementary Data...................... 35
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 35
PART III
10. Directors and Executive Officers of the Registrant............... 36
11. Executive Compensation........................................... 36
12. Security Ownership of Certain Beneficial Owners and Management... 36
13. Related Party Transactions....................................... 36
PART IV
14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.. 37
Signatures....................................................... 40
2
PART I
ITEM 1. BUSINESS
The words "Equinix," "we," "our," "ours," "us" and the "Company" refer to
Equinix, Inc. All statements in this discussion that are not historical are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding 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 operates Internet Business Exchange ("IBX") centers that serve as
core hubs for the Internet. Equinix IBX hubs allow critical Internet networks,
Internet infrastructure companies, enterprises and content providers to
interconnect their networks to manage and grow their network and Internet
operations for significant cost savings and increased performance and
reliability. Equinix has successfully united the major companies that make up
the Internet under one roof. The world's top tier Internet Service Providers,
the majority of the most important access networks and second tier carriers,
many international carriers and 5 of the top 7 web properties all have located
at Equinix's IBX hubs to directly connect with each other and their customers.
Equinix provides a wide range of colocation, traffic exchange and
multi-network management products and services to its customers. Equinix builds
and manages premier colocation hubs, which offer state of the art design and
security for customers' colocation needs. The colocation products include
cabinets, power, cross connections and professional services for installation
and maintenance. Traffic exchange services allow customers to trade network
traffic with each other simply and easily. More than 75 major bandwidth
providers and Internet service providers have placed their operations at
Equinix IBX hubs in order to interconnect with each other and with business
users of network services. These customers include the world's top networks
such as AT&T, UUNET/WorldCom, Sprint, Genuity, Cable&Wireless, Qwest, and Level
3. Equinix is a neutral or "open" IBX environment because it does not operate
its own network. As a result, it is able to offer direct interconnection to the
largest aggregation of bandwidth providers and Internet service providers. This
aggregation of providers attracts customers such as Associated Press, Charles
Schwab, EDS, EYT, Google, IBM, Loudcloud, MSN, Washingtonpost.Newsweek
Interactive and Yahoo!. Direct interconnection to this aggregation of networks,
which serve more than 90% of the world's Internet routes, allows Equinix
customers to significantly reduce costs, including the costs of purchasing
circuits to reach partners in multiple locations, and significantly enhances
the speed and reliability of their operations.
The wide variety of networks and business partners is an important reason
why customers choose Equinix and customers look to Equinix to help manage this
choice in order to simplify their operations. Equinix recently introduced a
suite of multi-network management services and will continue to provide new
services to help customers maximize the advantage of multiple bandwidth and
Internet service providers. These services include multi-homing and management
products and services. For example, Equinix offers customers access to
bandwidth from multiple carriers and provides all of the necessary management
and routing technology to ensure each customer is getting the maximum benefits
of carrier redundancy. These routing technologies range from standard
multi-homing protocols to sophisticated route optimization technologies.
Equinix also provides customers a single bundle of equipment, interconnection
services and monitoring tools so that customers have direct insight into how
their operations are performing. All of these services provide customers with
one simple
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point of contact for support, maintenance and billing. Equinix will continue to
introduce new services that customers can use to improve the overall
performance of their operations--these services may include backup and
recovery, business continuity or new ways to more easily procure bandwidth
services.
Equinix currently has seven IBX hubs, consisting of more than 810,000 square
feet, which operate in key U.S. Internet intersection points--Washington, D.C.,
New York, Dallas, Chicago, Los Angeles and Silicon Valley areas. In addition,
Equinix has strategic partnerships established in Europe and Asia to serve
customers' needs in those areas.
Industry Background
The Internet is a collection of numerous independent networks interconnected
with each other to form a network of networks. Users on different networks are
able to communicate with each other through the interconnection of the
different networks. For example, when a user of the Internet sends an email to
another user, assuming that each person uses a different network provider, the
email must pass from one network to the other in order to get to the final
destination.
In order to accommodate the rapid growth of Internet traffic, an organized
approach for network interconnection was needed. The exchange of traffic
between these networks became known as peering. Peering is when networks trade
traffic at relatively equal amounts and set up agreements to trade traffic for
free. At first, government and non-profit organizations established places
where these networks could exchange traffic, or peer, with each other--these
points were known as network access points, or NAPs. Over time, many NAPs
became a natural extension of carrier services and were run by such companies
as MFS (later known as Worldcom/UUNET), Sprint, Ameritech and Pacific Bell
(both later known as SBC).
The technologies employed at these early NAPs had some difficulties scaling
with the overall growth of the Internet. This resulted in congestion at the
NAPs and poorer performance seen by the enterprise and consumer user of the
Internet. In addition, the original telephone companies that operated the NAPs
entered the Internet bandwidth market, creating a conflict of interest with
bandwidth providers and Internet service providers, or ISPs, who were NAP
customers that also sold Internet bandwidth. This lack of "neutrality" made
many of these ISPs reluctant to use the NAPs for their interconnection
requirements, creating an urgent need for network-neutral interconnection
points that could accommodate the rapidly growing Internet.
As the sophistication of Internet use increased, particularly with the
development of e-commerce, reliability and security of the Internet core became
of increasing concern to both Internet and enterprise companies worldwide. A
very important change in the development of the Internet economy was the
dominance of certain very large content providers, companies such as Microsoft,
Yahoo! and others. The original NAPs were not designed to accommodate the
increased reliability and security requirements of these types of growing
Internet companies.
The emergence of these new companies, as well as the growing sophistication
of larger enterprises understanding the value of controlling network
performance, created the demand for a new type of Internet exchange point which
included these new companies in the mix and allowed them direct interconnection
with the networks and each other in a secure, simple and cost effective way.
The need for a neutral, high-quality, secure exchange point for network traffic
exchange continued to grow.
At the same time, the amount of traffic exchanged between the large networks
at the NAPs continued to increase exponentially. To accommodate this growth,
the largest of these networks left the NAPs and began trading traffic by
placing private circuits between each other. Peering which once occurred at the
NAP locations was moved to these private peering circuits. Over the years,
these circuits became expensive to expand and could not be built fast enough to
accommodate the growth in traffic. This led to a need by the large carriers to
find a more efficient way to trade traffic or peer.
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Equinix IBX hubs are the next-generation exchange points. They are designed
to handle the scalability issues that exist between both large and small
networks, as well as the interconnection between the emerging companies who
have become critical to the Internet. Additionally, Equinix provides an
important industry leadership role in the area of exchange points and is
consistently looked to as an industry expert and key influence in this arena.
Equinix has been successful in uniting the major companies that make up the
Internet infrastructure under one roof in each of six major U.S. markets. The
world's largest top Internet service providers, most of the major access
networks and second tier backbones, many international telecommunication
carriers and almost every fiber, sonet, Ethernet, competitive local exchange
company, incumbent local exchange company, long-haul or metro area network
provider now use Equinix to interconnect with each other and their customers.
Large and small content providers and enterprises can now control their own
network performance and destiny by choosing the various service providers they
wish to work with and by establishing direct connections. For Equinix
customers, this represents significant cost savings and increased performance.
The Equinix Solution
Equinix IBX hubs provide the environment and services to meet the networking
and IT operations challenges facing enterprises, networks and Internet
businesses today. As a result, we are able to provide the following key
benefits to our customers:
Performance. Because Equinix provides direct access to the providers that
serve more than 90% of the world's Internet networks and users, customers can
quickly, efficiently, cost-effectively and reliably exchange traffic with their
network services providers for higher performance operations. Access to the
more than 75 networks ensures high-quality interconnection. Equinix Internet
exchange services enable customers to quickly and efficiently use multiple
networks for service redundancy and reliability. By using multiple networks,
customers are able to ensure their operations in the event that one of their
network service providers has a service interruption or restructuring in the
business. The network service providers and geographic diversity offered by
Equinix provide customers with the flexibility to enable the highest performing
Internet operations.
Improved Economics. Equinix services such as Equinix GigE Exchange and
Equinix Core Exchange facilitate peering and dramatically reduce costs for
critical transit, peering and traffic exchange operations by eliminating the
costs of private peering or local loops. Networks such as SBC and Shaw
Communications and content providers such as Yahoo!, MSN and Google can save
between 20%-40% of bandwidth costs through the traffic exchange services
available at Equinix. In addition, the content companies and enterprises can
also save significant bandwidth costs because the magnitude of networks
competing for the traffic of these companies lowers prices and increases
performance.
Opportunity to Increase Revenues. With the concentration of networks,
managed services providers, content and enterprise companies participating in
Equinix IBX hubs, our Internet hubs present a large revenue opportunity for
network service providers and Internet infrastructure services providers
selling services in our hubs.
Equinix Strategy
Our objective is to become the premier hub for critical Internet players to
locate their operations in order to gain maximum benefits from the choice of
networks and partners in the most simple and efficient manner. To accomplish
this objective we employ the following strategies:
Leverage the Network Effect. Equinix has assembled a "critical mass" of
premier network providers and content companies and has become one of the core
hubs of the Internet. This critical mass is a key selling point since content
companies want to connect with a diverse set of networks to provide the best
connectivity to their end customers, and network companies want to sell
bandwidth to content customers and interconnect with other
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networks in the most efficient manner. In addition, as these companies locate
at Equinix they often require their suppliers and business partners to do so as
well so that the full economic and performance benefits of direct
interconnection can occur. These partners in turn also pull in their business
partner, thus creating a "network effect" of customer adoption. For example, a
large content provider or network may require that their networking partners
with whom they need to trade traffic with locate in the same Equinix IBX hub.
Similarly, a large financial site that chooses to locate in an Equinix IBX hub
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 hub. In turn, these bandwidth providers or content partners will also bring
their business partners to the IBX hub. As of December 31, 2001, Equinix had 75
unique networks, including all of the top tier networks, allowing Equinix's
customers to directly interconnect with providers that serve more than 90% of
global Internet routes.
Leverage IBX Hubs for New Products and Services. The critical mass of
leading networks that we have assembled across all of our IBX hubs uniquely
positions Equinix as the place to be for critical Internet companies. We intend
to leverage this position and offer additional traffic exchange and
multi-network management services that are important to content peering,
traffic exchange and the ability for enterprise companies to utilize multiple
Internet service providers.
Promote Equinix as the Highest Performance Points on the Internet. With all
of the major U.S. carriers, five of the top seven Media Metrix Web properties,
and the more than 75 total networks as customers, Equinix IBX hubs operate as
the highest performance points on the Internet for network and Internet
operations. We plan to leverage our position as the industry standard for the
highest quality Internet exchange hubs to attract more networks including
international telecommunications carriers, access and cable networks, as well
as additional leading content companies. Equinix has gained a strong brand
following in the networking community and through industry education and
promotion we intend to build on our strong following among all top networks,
managed services providers, enterprises and content providers.
Customers
Customers typically sign renewable contracts of two or more years in length,
often with options on additional space and services. Approximately 31% of our
participant base has signed multi-site contracts. Our single largest customer,
IBM, represented 15% of total revenues for the year ended December 31, 2001. No
other single customer accounted for more than 10% of revenues in 2001.
We consider the following 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:
. Bandwidth providers (telecommunications carriers) and Internet Service
Providers, or ISPs;
. Enterprises, content providers and e-commerce companies supplying
information, education orentertainment content and conducting the sale of
goods and services; and
. site management and hosting companies that integrate and manage a
customer's end-to-end web presence and performance.
Products and Services
Equinix products and services are comprised of three types: Colocation,
Traffic Exchange and Multi-Network Management services.
Internet Business Exchange Colocation Services
The Equinix IBX design provides our customers with reliable and
disaster-resistant environments that are necessary for optimum Internet
commerce interconnection. The level of excellence and consistency achieved in
our IBX architecture and design results in premium, secure, fault-tolerant
exchanges. Additionally, our IBX hubs
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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 currently has seven IBX hubs located in six key U.S. Internet
intersection points--Washington, D.C., New York, Dallas, Chicago, Los Angeles
and Silicon Valley areas.
Within our IBX hubs, customers can place their equipment and interconnect
with a choice of Internet companies. Equinix also provides customized solutions
for customers looking to package Equinix IBX space as part of their complete,
one-stop shop solution. Equinix colocation products and services include:
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 hub within an IBX hub. Cabinets are 84
inches high and are suitable for networking and server colocation. Cable trays
support cables between and among cabinets. As a customer's colocation
requirements increase, they can expand within their original cage or upgrade
into a cage that meets their expanded requirements. Cabinets are priced with an
initial installation fee and an ongoing recurring monthly charge.
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.
IBXflex. This service allows customers to deploy mission-critical
operations personnel and equipment on-site at IBX hubs. 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.
This service is priced with an initial installation fee and an ongoing
recurring monthly charge.
Physical Cross-Connect/Direct Interconnections. Customers needing to
directly and privately connect to another IBX customer can do so through single
or multi-mode fiber. These cross connections are customized and terminated per
customer instructions and may be implemented within 24 hours of request.
Cross-connect services are priced with an initial installation fee and an
ongoing monthly recurring charge.
Professional Services. Our IBX hubs 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 cabling. Professional services are custom-priced
depending on customer requirements.
"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 rebooting, power cycling, card swapping, and performing
emergency equipment replacement. Services are available on-demand or by
customer contract and are priced on an hourly basis.
Traffic Exchange Services
Equinix traffic exchange services enable scalable, reliable and
cost-effective interconnection, service and traffic exchange between bandwidth
providers, Internet service providers and large content companies. In addition,
Equinix also provides an important industry leadership role by acting as the
relationship broker between parties who would like to Interconnect within
Equinix. Equinix staff has held significant positions in the leading industry
groups such as the North American Network Operators' Group, or NANOG, and the
Internet Engineering Task Force, or IETF, and brings a tremendous amount of
intellectual property to this market. Equinix staff has published
industry-recognized white papers and strategy documents in the areas of peering
and interconnection, many of which are used by leading institutions worldwide
in furthering the education and promotion of this important network arena.
Equinix will continue to develop additional services in the area of
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traffic exchange that will allow customers to leverage the critical mass of
networks now available in the IBX hubs. The current exchange services are
comprised of the following:
Equinix Internet Core Exchange. This Internet exchange service enables
direct interconnection for peering between major backbone networks and
providers operating networks at OC-48 or higher. Equinix Internet Core Exchange
is a pre-provisioned interconnection package that enables major backbones to
connect their networks directly in a centralized, neutral environment for
peering and transit. The service includes pre-provisioned interconnections,
premium service levels and specialized customer service features to support the
quality and support levels required by the largest Internet providers in the
world. Internet Core Exchange services are priced with an initial installation
fee and an ongoing monthly recurring charge.
Equinix GigE 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. The GigE Exchange service is offered as a bundled
service that includes a cabinet, power, cross-connects and port charges. The
service is priced with an initial installation fee and an ongoing monthly
recurring charge.
Multi-Network Management Services
With the continued growth in Internet use, networks, service providers,
enterprises and content providers are challenged to deliver fast and reliable
service, while lowering costs. With over 75 ISPs and carriers located in our
IBX hubs, Equinix leverages the value of network choice with our set of
multi-network management services. This set of services provides enterprise and
content providers with the ability to gain maximum benefits from the use of the
networks in a simple and efficient manner.
Equinix Managed Router Service. With Equinix Managed Router Service,
enterprises and content companies can outsource the complications of network
integration, such as multi-homing, to Equinix in order to gain the performance
and redundancy benefits of connecting to multiple networks. This service allows
companies that do not have the internal expertise to configure Border Gateway
Protocol ("BGP") settings to focus on their core competencies while Equinix
manages their connectivity to the customer's choice of networks. In addition,
the service includes router management, administration and network service
provisioning. This service is priced with an initial installation fee and an
ongoing recurring monthly charge.
Equinix Intelligent Routing Service. Equinix Intelligent Routing service is
a managed route optimization service that consists of a software and
infrastructure platform that allows customers to tune their networks to balance
price and performance priorities by routing traffic across the lowest-priced
path that meets performance requirements. The traffic is measured and routed
based on real-time customer traffic across the customer's choice of networks.
Offered as a managed service, Equinix Intelligent Routing Service allows
customer to reduce bandwidth costs without a large hardware or software
investment. This service is priced based upon the amount of traffic a customer
is optimizing.
Equinix Command Center. Through managed software architecture, Equinix
Command Center allows customers to self-monitor, manage and control
applications, network devices, systems resources and user transactions. This
service provides Equinix customers with direct control over infrastructure
performance and service level agreements. The service features network
monitoring and management, aggregated information across multiple IBX hubs,
browser-based access to detailed monitoring, and a single Equinix point of
contact for support and billing. This service is priced based upon the number
of items a customer monitors and is billed monthly.
8
International Partnerships
Equinix has signed agreements with leading international Internet exchange
providers InterXion in Europe and Pihana Pacific in Asia/Pacific in order to
provide Equinix customers with a more comprehensive global solution for their
Internet infrastructure and network exchange needs.
As part of these partnership agreements, Equinix customers can leverage
Internet infrastructure services across 29 network-neutral centers in the
United States, Europe and Asia/Pacific markets. In these markets, Equinix
customers have access to the essential Internet infrastructure services they
need to quickly and cost-effectively build their Internet operations worldwide,
while realizing significant performance gains through a network-neutral
environment.
Sales and Marketing
Sales
We use a direct sales force and channel marketing program to market our
services to network, content provider, enterprise and Internet infrastructure
businesses. We organize our sales force by customer segments as well as by
establishing a sales presence in diverse geographic regions, which enables
efficient servicing of the customer base from a network of regional offices. In
addition to our headquarters office in Silicon Valley, regional offices are
located in New York City, Reston, Los Angeles, Dallas and Chicago. In addition,
Equinix also has over 40 channel partners that work with Equinix through
referral agreements to provide customer leads and relationships.
Our sales team works 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 hub participants encourage their customers,
suppliers and business partners to also come into the IBX hubs. These
customers, suppliers and business partners also, in turn, encourage their
business partners to locate in IBX hubs resulting in additional customer
growth. This network effect significantly reduces Equinix's new customer
acquisition costs.
Marketing
To support our sales effort and to actively promote the Equinix brand, we
conduct comprehensive marketing programs. Our marketing strategies include an
active public relations campaign, strategic partnerships and on-going customer
communications programs. Our marketing effort is focused on major business and
trade publications, online media outlets, industry events and sponsored
activities. Equinix staff holds leadership positions in key networking
organizations and we participate in a variety of Internet, computer and
financial industry conferences and place our officers and employees in keynote
speaking engagements at these conferences. In addition to these activities, we
build recognition through sponsoring or leading industry technical forums and
participating in Internet industry standard-setting bodies. Equinix continues
to develop and host the industry's only educational forums focused on peering
technologies and peering practices for ISPs and content providers.
Competition
Potential competition for Equinix includes:
. Internet data centers operated by established communications carriers
such as AT&T, Level 3, WorldCom and Qwest. Unlike the major network
providers, which constructed data centers primarily to help sell
bandwidth, Equinix has aggregated multiple networks in one location,
providing superior diversity, pricing and performance. Carrier data
centers only provide one choice of carriers and require capacity minimums
as part of their pricing structures. Locating at Equinix provides access
to all the top
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tier networks and allows customers to negotiate the best prices with a
number of carriers resulting in better economics and redundancy.
. Network access points ("NAPs") such as Palo Alto Internet Exchange and
carrier operated NAPs. NAPs, generally operated by carriers, are
typically older facilities and lack the incentive to upgrade the
infrastructure or technologies. Due to their small size and lack of
geographic diversity, the NAPs are limited to basic traffic exchange
services and are unable to expand to colocation services, content peering
or enterprise grade network services. In contrast, Equinix provides
state-of-the-art, secure facilities and geographic diversity with round
the clock support and a full range of network and enterprise service
offerings.
. Vertically integrated web site hosting, colocation and ISP companies such
as AboveNet/MFN, Digex and Exodus/Cable&Wireless. Most managed service
providers require that customers purchase their entire network and
managed services directly from them. Equinix is a network and service
provider aggregator and because it does not offer web hosting services
itself, it allows customers the ability to contract directly with the
networks and web hosting partner best for their business. By locating in
an IBX center, hosting companies add more value to Equinix's business
proposition--by bringing in more partners and customers and thus creating
a network effect.
Unlike other providers that attempted to move into managed services and
therefore began competing with their existing managed service provider
customers, Equinix focused on neutral "Internet Business Exchanges" for
networks, e-businesses, and Internet infrastructure service providers. As a
result, Equinix is free of the channel conflict common at other
hosting/colocation companies, as witnessed by Exodus' disagreements with
AboveNet/MFN and Loudcloud. Equinix competes based on the quality of its
facilities, the superior performance and diversity of its network neutral
strategy, and the economic benefits of the network effect through the
aggregation of top networks and e-businesses under one roof. Specifically,
Equinix has established relationships with a number of leading hosting
companies such as IBM (Equinix's largest customer) and Accenture. Equinix
expects to continue to benefit from the strong growth of the large and stable
service providers and from the "flight to quality" trend evident in today's
market.
Employees
As of December 31, 2001, we had 272 employees. We had 184 employees based at
our corporate headquarters in Mountain View, California and our regional sales
offices in New York, New York and Reston, Virginia. Of those employees, 92 were
in engineering and operations, 57 were in sales and marketing and 35 were in
management and finance. We had 1 employee based in Europe. The remaining 87
employees were based at our Washington, D.C., New York, New York, Dallas,
Texas, Chicago, Illinois, Los Angeles, California and Silicon Valley area IBX
hubs.
ITEM 2. PROPERTIES
Our executive offices are located in Mountain View, California. We have
entered into leases for IBX hubs in Ashburn, Virginia, Newark and Secaucus, New
Jersey, San Jose and Los Angeles, California, Chicago, Illinois, Dallas, Texas,
London, England and Frankfurt, Germany. We also hold a ground leasehold
interest in certain unimproved real property in San Jose, California,
consisting of approximately 79 acres. Relating to future IBX hubs, 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.
During the quarter ended September 30, 2001, the Company took a
restructuring charge related to a revised European services strategy to partner
with other Internet exchange companies in Europe rather than build and operate
its own centers outside the U.S. In addition, the restructuring charge included
the anticipated exit of several smaller, excess U.S. leaseholds. As a result,
the Company successfully negotiated its exit from leases for properties in
Paris, France during 2001 and Amsterdam, The Netherlands in February 2002. The
Company
10
expects to exit its two remaining lease obligations in Europe during 2002.
Additionally, the Company is currently negotiating the exit of several smaller
leases in Ashburn, Virginia, and Mountain View, California, which the Company
anticipates exiting sometime during 2002.
ITEM 3. LEGAL PROCEEDINGS
On July 30, 2001 and August 8, 2001, putative shareholder class action
lawsuits were filed against Equinix, certain of its officers and directors, and
several investment banks that were underwriters of our initial public offering.
The cases were filed in the United States District Court for the Southern
District of New York, purportedly on behalf of investors who purchased our
stock between August 10, 2000 and December 6, 2000. The suits allege that the
underwriter defendants agreed to allocate stock in Equinix's initial public
offering to certain investors in exchange for excessive and undisclosed
commissions and agreements by those investors to make additional purchases in
the aftermarket at pre-determined prices. The plaintiffs allege that the
prospectus for our initial public offering was false and misleading and in
violation of the securities laws because it did not disclose these
arrangements. It is possible that additional similar complaints may also be
filed. Equinix and its officers and directors intend to defend the actions
vigorously.
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, 2001.
11
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 2001
Fourth Fiscal Quarter...................................... $0.39 $ 3.37
Third Fiscal Quarter....................................... 0.38 1.43
Second Fiscal Quarter...................................... 0.59 1.73
First Fiscal Quarter....................................... 1.25 7.00
Fiscal 2000
Fourth Fiscal Quarter...................................... 3.50 9.75
Third Fiscal Quarter (beginning August 11, 2000)........... 8.88 16.19
As of December 31, 2001, there were approximately 422 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. 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.
During the period ended December 31, 2001, we issued and sold the following
securities:
1. In November 2001, we issued a warrant to purchase 30,000 shares of our
common stock with an exercise price of $0.01 per share to Sares Regis
Group of Northern California ("Sares Regis") in connection with a Letter
Agreement dated November 1, 2001 between Sares Regis and ourselves.
2. In December 2001, we issued a warrant to purchase 20,000 shares of our
common stock with an exercise price of $0.01 per share to Bechtel
Corporation ("Bechtel") in connection with a Payment Agreement dated
December 20, 2001 between Bechtel and ourselves.
3. In September 2001, we amended and restated a warrant previously issued
to Worldcom Venture Fund in June 2000, and reduced the total number of
shares of our common stock available to purchase to 295,000 shares of
common stock at an exercise price of $5.33 per share. In return for
providing services to the New York metropolitan area IBX hub, we issued
two new warrants to the Worldcom Venture Fund. The first new warrant is
to purchase 355,000 shares of our common stock with an exercise price of
$0.01 per share. The second new warrant is to purchase 245,000 shares of
our common stock with an exercise price of $0.01 per share.
The sale of the above securities was determined to be exempt from
registration under Section 4(2) of the Securities Act as transactions by an
issuer not involving any public offering. In addition, the recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to
12
the share certificates issued in these transactions. All recipients had
adequate access, through their relationships with us, to information about us.
In March 2001, NorthPoint Communications, Inc. ("NorthPoint") exercised a
warrant issued by the Company to NorthPoint in August 1999 in connection with a
strategic agreement between the Company and NorthPoint. In March 2001,
Comdisco, Inc. ("Comdisco") exercised a warrant issued by the Company to
Comdisco in March 1999 in connection with a loan and security agreement between
the Company and Comdisco. Both NorthPoint and Comdisco exercised their
respective warrants pursuant to the cashless net-exercise provisions thereof.
Upon such exercises, NorthPoint and Comdisco received an aggregate of 1,049,599
shares of the Company's common stock. The issuance of these shares was deemed
to be exempt from registration under Section 3(a)(9) of the Securities Act.
During the quarter ended March 31, 2001, certain holders of warrants issued
in connection with the 13% senior notes due 2007 exercised their warrants
resulting in the issuance of 1,283,069 shares of the Company's common stock.
The issuance of these shares was deemed to be exempt from registration under
Section 3(a)(9) of the Securities Act.
13
ITEM 6. SELECTED FINANCIAL DATA
The following statement of operations data for the years ended December 31,
2001, 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, 2001, 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
Annual Report on Form 10-K.
Period from
June 22, 1998
Years ended December 31, (inception) to
------------------------------ December 31,
2001 2000 1999 1998
--------- --------- -------- --------------
(dollars in thousands, except per share data)
Statement of Operations Data:
Revenues.................................... $ 63,414 $ 13,016 $ 37 $ --
--------- --------- -------- -------
Costs and operating expenses:
Cost of revenues (includes
stock-based compensation of $426,
$766, $177 and none for the
periods ended December 31, 2001,
2000, 1999 and 1998, respectively)..... 94,889 43,401 3,268 --
Sales and marketing (includes
stock-based compensation of
$2,830, $6,318, $1,631 and $13 for
the periods ended December 31,
2001, 2000, 1999 and 1998,
respectively).......................... 16,935 20,139 3,949 47
General and administrative (includes
stock-based compensation of
$15,788, $22,809, $4,819 and $151
for the periods ended December 31,
2001, 2000, 1999 and 1998,
respectively).......................... 58,286 56,585 12,603 902
Restructuring charge..................... 48,565 -- -- --
--------- --------- -------- -------
Total costs and operating
expenses........................... 218,675 120,125 19,820 949
--------- --------- -------- -------
Loss from operations..................... (155,261) (107,109) (19,783) (949)
Interest income............................. 10,656 16,430 2,138 150
Interest expense............................ (43,810) (29,111) (3,146) (220)
--------- --------- -------- -------
Net loss.................................... $(188,415) $(119,790) $(20,791) $(1,019)
========= ========= ======== =======
Net loss per share:
Basic and diluted........................ $ (2.39) $ (3.48) $ (4.98) $ (1.48)
========= ========= ======== =======
Weighted average shares.................. 78,681 34,461 4,173 688
========= ========= ======== =======
14
As of December 31,
---------------------------------------
2001 2000 1999 1998
--------- --------- -------- -------
(dollars in thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term
investments............................... $ 87,721 $ 207,210 $222,974 $ 9,165
Accounts receivable, net.................... 6,909 4,925 178 --
Restricted cash and short-term investments.. 28,044 36,855 38,609 --
Property and equipment, net................. 325,226 315,380 28,444 482
Construction in progress.................... 103,691 94,894 18,312 31
Total assets................................ 575,054 683,485 319,946 10,001
Debt facilities and capital lease
obligations, excluding current portion.... 6,344 6,506 8,808 --
Senior secured credit facility.............. 105,000 -- -- --
Senior notes................................ 187,882 185,908 183,955 --
Redeemable convertible preferred stock...... -- -- 97,227 10,436
Total stockholders' equity (deficit)........ 203,521 375,116 8,472 (846)
Other Financial Data:
Adjusted EBITDA (1)......................... (38,007) (62,400) (12,547) (781)
Net cash used in operating activities....... (68,854) (68,073) (9,908) (796)
Net cash used in investing activities....... (153,014) (302,158) (86,270) (5,265)
Net cash provided by financing activities... 107,799 339,847 295,178 10,226
- --------
(1) Adjusted EBITDA consists of net loss excluding interest, income taxes,
depreciation and amortization of capital assets, amortization of deferred
stock-based compensation and restructuring charges. 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 may
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. The following
represents how the Company calculates Adjusted EBITDA:
For the year or period ended December 31,
----------------------------------------
2001 2000 1999 1998
--------- --------- -------- -----
(dollars in thousands)
Loss from operations................. $(155,261) $(107,109) $(19,783) $(949)
Depreciation......................... 49,645 14,816 609 4
Stock-based compensation............. 19,044 29,893 6,627 164
Restructuring charge................. 48,565 -- -- --
--------- --------- -------- -----
Adjusted EBITDA................... $ (38,007) $ (62,400) $(12,547) $(781)
========= ========= ======== =====
15
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 Annual Report on 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 Annual Report on Form 10-K.
Overview
Equinix designs, builds and operates neutral IBX hubs where Internet
businesses place their equipment and their network facilities in order to
interconnect with each other to improve Internet performance. Our neutral
IBX hubs and Internet exchange services enable network service providers,
enterprises, content providers, managed service providers and other Internet
infrastructure companies to directly interconnect with each other for increased
performance. As of December 31, 2001, Equinix had IBX hubs totaling an
aggregate of 611,000 gross square feet in the Washington, D.C., New York,
Dallas, Chicago, Los Angeles and Silicon Valley areas. We completed
construction of one additional IBX hub during the first quarter of 2002 in the
New York metropolitan area, resulting in seven IBX hubs covering six domestic
markets in the U.S. totaling an aggregate 810,000 gross square feet.
We recorded deferred stock-based compensation in connection with stock
options granted during 2000 and 1999, 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 $19.0 million, $29.9 million
and $6.6 million was amortized to stock-based compensation expense for the
periods ended December 31, 2001, 2000 and 1999, 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 Financial Accounting
Standards Board ("FASB") Interpretation No. 28. The remaining $11.0 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 net loss adjusted before net interest and other expense, income taxes,
depreciation and amortization of capital assets, amortization of stock-based
compensation and restructuring 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 hub and total
company level.
Since inception, we have experienced operating losses and negative cash
flow. As of December 31, 2001 we had an accumulated deficit of $330.0 million
and accumulated cash used in operating and construction activities of $628.8
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".
16
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses Equinix's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the U.S. The preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management evaluates its
estimates and judgments, including those related to revenues and collectibility
of receivables, restructuring charges, income taxes, contingencies and
litigation. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements:
. Revenue recognition and allowance for bad debts;
. Restructuring charges;
. Accounting for income taxes;
. Contingent liabilities; and
. Accounting for property and equipment.
Revenue Recognition and Allowance for Bad Debts. Equinix derives its
revenues from (1) recurring revenue streams, such as from the leasing of
cabinet space, power and interconnection services and (2) non-recurring revenue
streams, such as from the recognized portion of deferred installation revenues
and professional services. Revenues from recurring revenue streams are billed
monthly and recognized ratably over the term of the contract, generally one to
three years. Non-recurring installation fees are deferred and recognized
ratably over the term of the related contract. Professional service fees are
recognized in the period in which the services were provided and represent the
culmination of the earnings process. The Company generally guarantees certain
service levels, such as uptime, as outlined in individual customer contracts.
To the extent that these service levels are not achieved, the Company reduces
revenue for any credits given to the customer as a result.
Revenue is recognized as service is provided and when there is persuasive
evidence of an arrangement, the fee is fixed or determinable and collection of
the receivable is reasonably assured. We assess collection based on a number of
factors, including past transaction history with the customer and the
credit-worthiness of the customer. We do not request collateral from our
customers. If we determine that collection of a fee is not reasonably assured,
we defer the fee and recognize revenue at the time collection becomes
reasonably assured, which is generally upon receipt of cash. In addition,
Equinix also maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments for
those customers that the Company had expected to collect the revenues. If the
financial condition of Equinix's customers were to deteriorate or if they
become insolvent, resulting in an impairment of their ability to make payments,
allowances for doubtful accounts may be required. Management specifically
analyzes accounts receivable and analyzes current economic news and trends,
historical bad debts, customer concentrations, customer credit-worthiness and
changes in customer payment terms when evaluating revenue recognition and the
adequacy of the Company's allowances.
The Company's customer base is primarily composed of businesses throughout
the United States. The Company performs ongoing credit evaluations of its
customers. As of December 31, 2001, one customer accounted for 15% of revenues
and another customer accounted for 10% of accounts receivables. As of December
31, 2000, two customers accounted for 12% and 11% of revenues and two customers
accounted for
17
19% and 14% of accounts receivables. No other single customer accounted for
greater than 10% of accounts receivables or revenues.
During the year ended December 31, 2001, the Company recognized
approximately $200,000 of revenue in relation to equipment received from
customers in lieu of cash. This equipment is being used in the Company's
operations and was valued based on management's assessment of the fair value of
the equipment in relation to external prices for similar equipment.
In 2002, the Company entered into arrangements with numerous vendors to
resell equipment and bandwidth. The Company began to offer such offering in an
effort to provide its customers with a more fully integrated services solution.
Under the terms of the reseller agreements, the Company will sell the vendor's
services or products to its customers and the Company will contract with the
vendor to provide the related services or products. To date, two reseller
agreements have been signed with companies associated with individuals who
serve on the Company's Board of Directors. The Company plans to recognize
revenue from such arrangements on a gross basis in accordance with Emerging
Issue Task Force Issue No. 99-19, Recording Revenue as a Principal versus Net
as an Agent. The Company acts as the principal in the transaction as the
Company's customer services agreement identifies the Company as the party
responsible for the fulfillment of product/ services to the Company's customers
and has full pricing discretion. In the case of products sold under such
arrangements, the Company takes title to the products and bears the inventory
risk as the Company has made minimum purchase commitments for equipment to
various vendors. The Company has credit risk, as it is responsible for
collecting the sales price from a customer, but must pay the amount owed to its
suppliers after the suppliers perform, regardless of whether the sales price is
fully collected. In addition, the Company will often determine the required
equipment configuration and recommend bandwidth providers from numerous
potential suppliers.
Restructuring Charges. During the third quarter of 2001, the Company
recorded a $48.6 million restructuring charge, primarily due to its revised
European services strategy. This restructuring charge was comprised of $40.1
million in write-downs and write-offs of assets and $8.5 million in accrued
restructuring charges, primarily related to lease exit costs. The Company has
analyzed each of the leaseholds that the Company is currently trying to exit
from and made estimates based on how long we think it will take to successfully
negotiate lease terminations for each of these leases and at what cost. The
Company has estimated these costs to be $8.5 million. Should the actual lease
exit costs and other accrued restructuring charges exceed this amount due to
delays in negotiating lease termination agreements or higher than anticipated
settlement payments, additional restructuring charges may be required, which
would decrease net income in the period such determination was made.
Conversely, if actual lease exit and other restructuring charges are less than
the $8.5 million accrued, an adjustment to accrued restructuring charges would
be required, which would increase income in the period such determination was
made. In addition, should the Company realize higher than anticipated proceeds
from sales of equipment currently held for sale or for other assets
written-down or written-off as part of this restructuring charge, an adjustment
to accrued restructuring charges would be required, which would increase income
in the period such determination was made.
Accounting for 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.
Equinix currently has provided for a full valuation allowance against its
net deferred tax assets. Equinix has considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need
18
for the valuation allowance and based on the available objective evidence,
management believes it is more likely than not that the net deferred tax assets
will not be fully realizable. Should Equinix determine that it would be able to
realize its deferred tax assets in the foreseeable future, an adjustment to the
deferred tax assets would increase income in the period such determination was
made.
Contingent Liabilities. Management estimates exposure on contingent
liabilities such as litigation based on the best information available to it at
the time. Management's estimated range of liability related to some of the
pending litigation is based on claims for which our management can estimate the
amount and range of loss. We have recorded the minimum estimated liability
related to those claims, where there is a range of loss. Because of the
uncertainties related to both the amount and range of loss on the remaining
pending litigation, management is unable to make a reasonable estimate of the
liability that could result from an unfavorable outcome. As additional
information becomes available, we will assess the potential liability related
to our pending litigation and revise our estimates. Such revisions in our
estimates of the potential liability could materially impact our results of
operation and financial position.
Accounting for 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 hub equipment and seven to ten years for IBX hub 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. Assets currently under construction, such as the IBX hub in the
New York metropolitan area that will be completed during the first quarter of
2002, are held in a construction in progress account. Construction in progress
includes direct and indirect expenditures for the construction of IBX hubs and
is stated at original cost. The Company has contracted out substantially all of
the construction of the IBX hubs 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
hub becomes operational, these capitalized costs are depreciated at the
appropriate rate consistent with the estimated useful life of the underlying
asset. The Company has issued numerous warrants to certain fiber carriers and
its primary contractor. The Company uses the Black-Scholes option-pricing model
to value these warrants. The value attributed to these warrants is included in
the Company's property and equipment, including construction in progress, and
classified as a leasehold improvement. Amortization of such warrants is
included in depreciation expense.
Should management determine that the actual useful lives of its property and
equipment placed into service is less than originally anticipated, or if any of
the Company's property and equipment, including construction in progress, was
deemed to have incurred an impairment, additional depreciation or an impairment
charge would be required, which would decrease net income in the period such
determination was made. Conversely, should management determine that the actual
useful lives of its property and equipment placed into service was greater than
originally anticipated, less depreciation may be required, which would increase
net income in the period such determination was made.
Results of Operations
Years ended December 31, 2001 and December 31, 2000
Revenues. Revenues increased from $13.0 million for the year ended December
31, 2000 to $63.4 million for the year ended December 31, 2001. Revenues
consist of recurring revenues of $57.6 million for 2001, versus $11.6 million
for 2000, primarily from the leasing of cabinet space, and non-recurring
revenues of $5.8 million for 2001, versus $1.4 million for 2000, related to the
recognized portion of deferred installation revenue and custom service
revenues. Installation fees are recognized ratably over the term of the
contract. Custom service revenues are recognized upon completion of the
services. Revenues increased year over year as we had more IBX hubs open and
operational during 2001 than we had during 2000. We expect revenues to continue
to
19
increase as our customer base continues to grow, and as we open our newest and
largest IBX hub in the New York metropolitan area during the first quarter of
2002.
Cost of Revenues. Cost of revenues increased from $43.4 million for the
year ended December 31, 2000 to $94.9 million for the year ended December 31,
2001. These amounts include depreciation and amortization expense of $11.5
million and $40.0 million, respectively. In addition to depreciation and
amortization, cost of revenues consists primarily of rental payments for our
leased IBX hubs, site employees' salaries and benefits, utility costs, power
and redundancy system engineering support services and related costs and
security services. The increase in cost of revenues was due to additional
leases and increased expenses related to our opening of additional IBX hubs.
During the quarter ended September 30, 2001, the Company incurred a $45.3
million restructuring charge related to its revised European services strategy
that included accruing for leasehold exit costs related to European leases and
an approximate $1.0 million restructuring charge for anticipated U.S. leasehold
exit costs for excess U.S. lease space. The restructuring charge during the
third quarter of 2001 reduced the cost of revenues commencing in fourth quarter
2001; however, these savings will be offset in part by increased cost of
revenues associated with the opening of the New York metropolitan IBX hub
during the first quarter of 2002, including related depreciation and
amortization expense, and additional cost of revenues related to our existing
IBX hubs as the Company's installed base of customers grows.
Sales and Marketing. Sales and marketing expenses decreased from $20.1
million for the year ended December 31, 2000 to $16.9 million for the year
ended December 31, 2001; however, these amounts include stock-based
compensation expense of $6.3 million and $2.8 million, respectively, resulting
in a 2% increase in period over period cash spending. 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 during the first half of 2001, reflecting our increased selling
effort and our initiatives to develop market awareness. During the quarter
ended September 30, 2001, the Company incurred a $1.3 million restructuring
charge related to a reduction in workforce that included some sales and
marketing staff. In addition, the Company is closely monitoring its
discretionary marketing costs as the result of current market conditions. As a
result, we do not expect our sales and marketing costs to increase
significantly in the foreseeable future, until such time as the Company reaches
certain pre-determined levels of profitability.
General and Administrative. General and administrative expenses increased
from $56.6 million for the year ended December 31, 2000 to $58.3 million for
the year ended December 31, 2001. These amounts include stock-based
compensation expense of $22.8 million and $15.8 million, respectively, and,
depreciation and amortization expense of $3.3 million and $9.6 million,
respectively, resulting in an 8% increase in period over period cash spending.
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, particularly during the first quarter of 2001. During the
second quarter of 2001, the Company implemented several cost-savings
initiatives, including some staff reductions and an overall decrease in
discretionary spending. Furthermore, during the quarter ended September 30,
2001, the Company incurred a $1.3 million restructuring charge related to a
reduction in workforce that included some general and administrative staff and
an approximate $1.0 million restructuring charge for leasehold exit costs for
excess office space in the U.S. As a result of these cost saving measures, we
do not expect our general and administrative costs to increase significantly in
the foreseeable future.
Restructuring Charge. During the quarter ended September 30, 2001, the
Company took a restructuring charge of $48.6 million consisting of $45.3
million related to its revised European services strategy, $2.0 million for
certain anticipated excess U.S. leasehold exit costs and $1.3 million related
to a reduction in workforce, primarily in selling, general and administrative
functions at the Company's headquarters. During third quarter
20
2001, the Company decided to partner with other Internet exchange companies in
Europe rather than build and operate its own centers outside of the U.S. As a
result, the Company (i) recorded a write-down of its European construction in
progress assets to their net realizable value and recorded a charge totaling
$29.3 million, (ii) accrued certain leasehold exit costs for its European
leasehold interests in the amount of $6.4 million, (iii) wrote-off its European
letters of credit that secured the European leasehold interests in the amount
of $8.6 million and (iv) accrued various legal, storage and other costs
totaling $1.0 million to facilitate this change in strategy. The Company
experienced some cost savings benefits from this restructuring charge during
the fourth quarter of 2001, particularly in cost of revenues; however, these
cost-savings will be partially offset by the increased operating costs of the
New York metropolitan area IBX hub beginning in the first quarter of 2002. In
addition, the Company incurred a $2.0 million restructuring charge for
leasehold exit costs associated with certain excess U.S. leases and a $1.3
million restructuring charge related to an approximate 15% reduction in
workforce in an effort to streamline and reduce the cost structure of the
Company's headquarter function. The Company began to realize the cost savings
benefits of the $2.0 million U.S. lease restructuring charge and $1.3 million
workforce reduction restructuring charge commencing in the fourth quarter of
2001.
Adjusted EBITDA. Adjusted EBITDA loss decreased from $62.4 million for the
year ended December 31, 2000 to $38.0 million for the year ended December 31,
2001. Although many factors affect Adjusted EBITDA and costs vary from IBX
market to IBX market, the Company achieved Adjusted EBITDA breakeven during the
fourth quarter of 2001. We believe that Adjusted EBITDA losses peaked during
the fourth quarter of 2000.Adjusted EBITDA losses will continue to decline and
trend toward Adjusted EBITDA profitability in subsequent quarters given the
Company achieved Adjusted EBITDA breakeven during the fourth quarter of 2001.
This trend will be offset in part by incremental costs associated with the
opening of the New York metropolitan IBX hub during the first quarter of 2002.
Interest Income. Interest income decreased from $16.4 million for the year
ended December 31, 2000 to $10.7 million for the year ended December 31, 2001
as a result of a decline in short-term interest rates and reduced cash, cash
equivalent and short-term investments.
Interest Expense. Interest expense increased from $29.1 million for the
year ended December 31, 2000 to $43.8 million for the year ended December 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 senior secured credit facility, and amortization of
the senior notes, senior secured credit facility, other debt facilities and
capital lease obligations discount.
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.
Cost of Revenues. Cost of revenues increased from $3.3 million for the year
ended December 31, 1999 to $43.4 million for the year ended December 31, 2000.
Cost of revenues consisted primarily of rental payments for our leased IBX
hubs, 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 hub
build-out and other equipment costs. The increase in cost of revenues was due
to the expansion and deployment of our IBX hubs throughout the U.S. In
addition, cost of revenues included certain costs related to real estate
obtained for future IBX facilities in the U.S. and Europe. Furthermore, these
amounts include $177,000 and $766,000, for the years ended December 31, 1999
and 2000, respectively, of stock-based compensation expense.
21
Sales and Marketing. Sales and marketing expenses increased from $3.9
million for the year ended December 31, 1999 to $20.1 million for the year
ended December 31, 2000. Sales and marketing expenses consisted 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 hub deployment plan and our efforts to
develop market awareness. These amounts include $1.6 million and $6.3 million,
for the years ended December 31, 1999 and 2000, respectively, of stock-based
compensation expense.
General and Administrative. General and administrative expenses increased
from $12.6 million for the year ended December 31, 1999 to $56.6 million for
the year ended December 31, 2000. General and administrative expenses consisted
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 include $4.8
million and $22.8 million, for the years ended December 31, 1999 and 2000,
respectively, of stock-based compensation expense.
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 hubs
achieved positive adjusted EBITDA status.
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.
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 for aggregate
gross proceeds of approximately $844.2 million. As of December 31, 2001, we had
approximately $87.7 million in cash, cash equivalents and short-term
investments. Furthermore, we have an additional $28.0 million of restricted
cash, cash equivalents and short-term investments to 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 and construction
agreements. Our principal sources of liquidity consist of our cash, cash
equivalent and short-term investment balances. As of December 31, 2001, our
total indebtedness from our senior notes, senior secured credit facility and
debt facilities and capital lease obligations was $319.2 million. In October
2001, the Company repaid $50.0 million of the senior secured credit facility
and subsequently borrowed $5.0 million under the amended and restated senior
secured credit facility. This repayment occurred in conjunction with amending
and restating the original agreement to reset certain financial covenants
contained in this facility to more accurately reflect current economic market
conditions.
Net cash used in our operating activities was $68.9 million, $68.1 million
and $9.9 million for the years ended December 31, 2001, 2000 and 1999,
respectively. We used cash primarily to fund our net loss from operations.
22
Net cash used in investing activities was $153.0 million, $302.2 million and
$86.3 million for the years ended December 31, 2001, 2000 and 1999,
respectively. Net cash used in investing activities was primarily attributable
to the construction of our IBX hubs and the purchase of restricted cash and
short-term investments.
Net cash generated by financing activities was $107.8 million, $339.8
million and $295.2 million for the years ended December 31, 2001, 2000 and
1999, respectively. Net cash generated by financing activities during the year
ended December 31, 2001 was primarily attributable to the net $105.0 million
draw down under our amended and restated senior secured credit facility. 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 proceeds from the issuance of the senior
notes and the drawdown of funds related to our debt and capital lease
facilities.
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 December 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 December 31, 2001, this loan
agreement was 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 valued at $187.9 million as of December
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 79
acres of real property in San Jose, California. In June 2000, before 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 on certain designated dates in the future.
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 additional shares to cover over-allotments.
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. As of September 30, 2001, this facility was fully drawn; however, in
October 2001, the Company repaid $50.0 million of this facility. This repayment
occurred in conjunction with amending and restating the original agreement to
reset certain financial covenants contained in this facility to more accurately
reflect current economic market conditions. Of the $50.0 million repaid, a
total of $25.0 million is a permanent reduction of this facility, while the
remaining
23
$25.0 million is available for re-borrow under the amended and restated senior
secured credit facility. In October 2001, $5.0 million was drawn under the
amended and restated senior secured credit facility with the remaining balance
of $20.0 million available for re-borrow during a future designated period. The
remaining $20.0 million is only available for drawdown commencing September 30,
2002 and only if the Company remains in full compliance with all covenants as
outlined in the amended and restated senior secured credit facility, and meets
an additional EBITDA test. The ability to draw on the remaining $20.0 million
expires on December 31, 2002. As of December 31, 2001, a total of $105.0
million was outstanding under the amended and restated senior secured credit
facility. Our amended and restated senior secured credit facility contains a
number of financial ratios and covenants which we must meet each quarter, and
in certain circumstances each month, such as achieving specified revenue
targets at levels significantly above historical revenues, maintaining certain
minimum cash balances and limiting our EBITDA losses. We are in full compliance
with all of these covenants and ratios at this time. If we are unable to
maintain these ratios or comply with these covenants, the banks could require
repayment of amounts previously drawn down. We do not currently have sufficient
cash reserves to repay such amounts. In addition, the inability to draw down
the remaining $20.0 million under this facility may not provide sufficient
funds for the Company to support its spending needs and could adversely affect
our business and the Company's ability to continue as a going concern.
In March 2001, we entered into a loan agreement in the amount of $3.0
million. This loan agreement bears interest at 13.15% and is repayable over 36
months. As of December 31, 2001, this loan agreement was fully drawn.
In June 2001, we entered into a loan agreement in the amount of $5.0
million. This loan agreement bears interest at 13.0% and is repayable over 36
months. As of December 31, 2001, this loan agreement was fully drawn.
The Company leases its IBX hubs and certain equipment under noncancelable
operating lease agreements expiring through 2025. The following represents the
minimum future operating lease payments for these commitments, as well as the
combined aggregate maturities for all of the Company's debt as of December 31,
2001 (in thousands):
Debt
facilities and Senior
capital lease secured credit Senior Operating
obligations facility notes leases Total
-------------- -------------- -------- --------- --------
2002......................... $ 7,206 $ -- $ -- $ 23,780 $ 30,986
2003......................... 5,462 8,400 -- 31,170 45,032
2004......................... 1,498 42,000 -- 31,443 74,941
2005......................... 12 54,600 -- 31,889 86,501
2006......................... -- -- -- 34,219 34,219
2007 and thereafter.......... -- -- 200,000 425,650 625,650
------- -------- -------- -------- --------
$14,178 $105,000 $200,000 $578,151 $897,329
======= ======== ======== ======== ========
During the quarter ended September 30, 2001, the Company recorded a
restructuring charge, primarily as a result of its revised European strategy.
Part of this restructuring charge included the costs associated with exiting
out of several operating leases in Europe and the U.S. As of December 31, 2001,
three European operating leases and two U.S. operating leases remain as
obligations. The total cost of the three European and two U.S. operating leases
for which the Company is pursuing lease terminations is approximately $146.5
million out of the total $578.2 million of the minimum future operating lease
payments indicated above. The Company expects to successfully complete the exit
of these remaining leases during 2002.
In February and March 2002, the Company retired $25.0 million of our 13%
senior notes due 2007 in exchange for approximately 9.3 million shares of the
Company's common stock. The total number of shares outstanding upon completion
of the exchange is approximately 90.2 million shares.
24
We expect that our cash on hand and anticipated cash flow from operations
should be sufficient to complete our seventh IBX hub in the New York
metropolitan area during the first quarter of 2002 and to fund our operations
for the next twelve months. Assuming sufficient customer demand and the
availability of additional financing, we may build or buy additional IBX hubs
and expand certain existing IBX hubs. 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 or implement other cost saving
initiatives in order to preserve cash. 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 our existing cash and the cash flow generated from
the seven IBX hubs, 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 hubs for the next twelve months.
25
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
We have a limited operating history.
We were founded in June 1998 and 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, our business model is unique and remains 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 anticipate our losses will continue in the
future.
As an early-stage company, we have experienced significant operating losses
since inception. As of December 31, 2001, we had cumulative net losses of
$330.0 million and cumulative cash used in operating activities of $147.6
million since inception. We expect to incur significant losses on a quarterly
and annual basis in the foreseeable future. Our failure to significantly
increase revenues will result in increased losses. Our revenues are dependent
on our ability to continue selling our existing services and our ability to
sell new service offerings to both new and existing customers.
We expect our operating results to fluctuate.
We have experienced fluctuations in our results of operations on a quarterly
and annual basis. The fluctuation in our operating results may cause the market
price of our common stock to decline. We expect to experience significant
fluctuations in our operating results in the foreseeable future due to a
variety of factors, including:
. demand for space and services at our IBX hubs;
. our pricing policies and the pricing policies of our competitors;
. the timing of customer installations and related payments;
. customer retention and satisfaction;
. customer insolvency;
. the provision of customer discounts and credits;
. the mix of current and proposed products and services and the gross
margins associated with such products and services;
. 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 effects of terrorist activity and armed conflict, such as disruptions
in general economic activity, changes in logistics and security
arrangements, and reduced customer demand for our services;
. changes in general economic conditions and specific market conditions in
the telecommunications and Internet industries;
26
. the ability of our customers to obtain financing or to fund their capital
expenditures;
. conditions related to international operations;
. the cost and availability of adequate public utilities, including power;
. growth of Internet use; and
. governmental regulation.
Any of the foregoing factors, or other factors discussed elsewhere herein,
could have a material adverse effect on our business, results of operations,
and financial condition. Although we have experienced 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.
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.
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, 2001, we had total indebtedness
of $319.2 million consisting primarily of the following:
. a total of $200.0 million of our 13% senior notes due 2007;
. a total of $105.0 million under our $125.0 million senior secured credit
facility; and
. other outstanding debt facilities and capital lease obligations.
We may incur further debt to fund the acquisition of complementary
businesses, products, services or technologies or to expand our IBX footprint.
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 continues or if
our business experiences difficulties.
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 related to
our 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. Such acceleration could
cause defaults under our other indebtedness.
In February and March 2002, the Company retired $25.0 million of our 13%
senior notes due 2007 in exchange for approximately 9.3 million shares of the
Company's common stock. The total number of shares outstanding upon completion
of the exchange is approximately 90.2 million shares.
27
If we do not maintain specific financial ratios and comply with covenants in
the credit agreement, the banks could require repayment of amounts previously
drawn down and we do not currently have sufficient cash reserves to repay such
amounts.
In October 2001, we amended and restated our $150.0 million senior secured
credit facility with a permanent $25.0 million reduction. We also made an
additional $25.0 million repayment, of which we immediately re-borrowed $5.0
million and the remaining $20.0 million is available to draw during a future
designated period provided certain financial covenants are reached. Our $125.0
million senior secured credit facility contains a number of financial ratios
and covenants which we must meet each quarter, such as achieving specified
revenue targets at levels significantly above historical revenues and limiting
our EBITDA losses. In addition, we have a monthly cash covenant that requires
us to maintain certain minimum cash balances. We are in full compliance with
all of these covenants and ratios at this time. If we are unable to maintain
these ratios or comply with these covenants, the banks could require repayment
of amounts previously drawn down. We do not currently have sufficient cash
reserves to repay such amounts. If we are required to repay amounts currently
outstanding under this facility, we will have insufficient cash to fund
operations and our ability to obtain additional financing will be impaired.
We are subject to restrictive covenants in our credit agreements that limit our
flexibility in managing our business.
Our credit agreements require that we maintain specific financial ratios and
comply with covenants containing 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.
We may continue to have customer concentration and the loss of, or decline in
business from, our key customers would result in a significant decline in our
revenues.
To date, we have relied upon a small number of customers for a majority of
our revenue. For the year ended December 31, 2001, our single largest customer,
IBM, represented 15% of total revenues, and our top 10 customers represented
55% of our total revenues. Some of our customers have experienced significant
business difficulties. The difficulties of these customers have adversely
affected our operating results. For example, customers such as Excite@Home, ICG
Communications, NorthPoint Communications and Global Crossing have filed
voluntary petitions for relief under the Bankruptcy Code. For fiscal year 2001,
sales to customers that have filed for bankruptcy or that otherwise went out of
business totaled approximately 4.9% of total revenues. 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 and would result in a
significant decline in our revenues. To the extent the loss of, or decline in
business from, our customers' results in decreased revenues, we may not be able
to comply with certain covenants in our credit agreement.
We operate in a highly competitive market and we may be unable to compete
successfully against established companies with greater resources and an
ability to adopt aggressive pricing policies.
We must be able to differentiate ourselves from existing providers of space
for telecommunications equipment and web hosting companies. In addition to
competing with neutral colocation providers, we 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. 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. In addition, these competitors
could offer colocation on neutral terms, and may start doing so in the same
metropolitan areas where we have IBX hubs. Some of these competitors may also
28
provide our target customers with additional benefits, including bundled
communication services, and may do so in a manner that is more attractive to
our potential customers than obtaining space in our IBX hubs. We believe our
neutrality provides us with an advantage over these competitors. However, if
these competitors were able to adopt aggressive pricing policies together with
offering colocation space, our ability to generate revenues would be adversely
affected.
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. In addition, other companies may be able to attract the
same potential 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 hubs.
We are exposed to general economic and market conditions.
Our business is subject to the effects of general economic conditions in the
United States and globally, and in particular, market conditions in the
telecommunications and Internet infrastructure services industries. Due to the
inability to obtain additional financing and the condition of the economy in
general, certain companies in the Internet infrastructure services and
telecommunications industries, including some of our customers and our
customer's customers, have experienced significant business difficulties. The
difficulties of these customers and these customer's customers have materially
and adversely affected our operating results. If our customers and our
customer's customers continue to experience business difficulties or cease
operations, such as Excite@Home, Global Crossing and NorthPoint Communications,
if the economic conditions in the United States and globally do not improve or
if we experience a worsening in the global economic slowdown, our operating
results will be adversely affected.
Because we depend on the development and growth of a balanced customer base,
failure to attract and retain 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
network service providers, site and performance management companies, and
enterprise and content companies. The more balanced the customer base within
each IBX hub, the better able we are to generate significant interconnection
revenues, which in turn increases our overall revenues. Our ability to attract
customers to our IBX hubs 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. In
addition, some of our customers are and will continue to 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 hubs.
This may be disruptive to our business and may adversely affect our business,
financial condition and results of operations.
We have a long sales cycle that may adversely affect our business, financial
condition and results of operations.
A customer's decision to lease cabinet space in our IBX hubs typically
involves a significant commitment of resources and will be influenced by, among
other things, the customer's confidence in our financial strength. In addition,
some customers will be reluctant to commit to locating in our IBX hubs until
they are confident that the IBX hub 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.
29
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 hubs. 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 IBX hubs, whether or not within our control,
could result in service interruptions or significant equipment damage. In the
past, a 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 both our ability to generate revenues and our operating
results. To the extent a failure of our physical infrastructure or services
results in decreased revenues, we may not be able to comply with certain
covenants in our credit agreement. If we are unable to comply with covenants in
our credit agreement, the banks may require repayment of amounts previously
drawn down, which amounts we are currently unable to repay.
We depend on a number of third parties to provide Internet connectivity to our
IBX hubs; if connectivity is not established, or is delayed, interrupted or
terminated, our operating results and cash flow will be adversely affected.
The presence of diverse Internet fiber from communications carriers' fiber
networks to our IBX hubs 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 services. We rely primarily on revenue
opportunities from our customers to encourage carriers to invest the capital
and operating resources required to build facilities from their locations to
our IBX hubs. Carriers will likely evaluate the revenue opportunity of an IBX
hub 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 hubs. In addition,
there can be no assurance once a carrier has decided to provide Internet
connectivity to our IBX hubs that it will continue to do so for any period of
time.
The construction required to connect multiple carrier facilities to our IBX
hubs 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 due to some of these factors. If the establishment of highly diverse
Internet connectivity to our IBX hubs does not occur or is materially delayed
or is discontinued, our operating results and cash flow will be adversely
affected. Further, many carriers are experiencing business difficulties. As a
result, some carriers may be forced to terminate connectivity within our IBX
hubs. For example, on January 16, 2001, NorthPoint Communications, a carrier in
one of our IBX hubs, announced that it filed a voluntary petition for
bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result,
NorthPoint terminated connectivity in our IBX hubs after its assets were sold.
30
The ability to retain and recruit key personnel is key to our success.
Our success largely depends on our ability to attract and retain key
management and highly skilled technical, managerial, sales and marketing
personnel. In spite of the economic slowdown, competition for these personnel
remains intense. The loss of services of any of our key personnel, the
inability to retain and attract qualified personnel in the future, or delays in
hiring required personnel could make it difficult to meet key objectives.
If we are unable to successfully operate our management information systems,
our business will be materially and adversely affected.
To date, we have experienced difficulties implementing and upgrading our
management information systems. We may need 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.
Recent terrorist activity in the United States and the military action to
counter terrorism could adversely impact our business.
The September 11, 2001 terrorist attacks in the United States, the ensuing
declaration of war on terrorism and the continued threat of terrorist activity
and other acts of war or hostility appear to be having an adverse effect on
business, financial and general economic conditions in the U.S. These effects
may, in turn, result in increased costs due to the need to provide enhanced
security, which would have a material adverse effect on our business and
results of operations. These circumstances may also adversely affect our
ability to attract and retain customers, our ability to raise capital and the
operation and maintenance of our IBX hubs.
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 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.
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. In addition, to the extent we issue stock to
reduce our debt and deleverage the Company, our stock price may fluctuate as a
result of the increased number of shares in the market.
We are subject to securities class action litigation, which may harm our
business and results of operations.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We are a party to the securities class action litigation described
in Part II, Item 1--"Legal Proceedings" of this report. The defense of the
litigation described in Part II, Item 1 may increase our expenses and divert
our management's attention and resources, and an adverse outcome in this
litigation could seriously harm our business and results of operations. In
addition, we may in the future be the target of other securities class action
or similar litigation.
31
If there is a change of control of Equinix, we may be required under our
indenture and our senior secured credit facility to repurchase or repay the
debt outstanding under those agreements.
Change of control provisions in our indenture and senior secured credit
facility 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 because the change in
control provisions of these agreements can trigger the repayment of the debt
outstanding under those agreements.
Our business could be harmed by prolonged electrical power outages or
shortages, or increased costs of energy.
Our IBX hubs are susceptible to regional costs of power, electrical power
shortages and planned or unplanned power outages caused by these shortages,
such as those that occurred in California during 2001. The overall power
shortage in California has increased the cost of energy, which we may not be
able to pass on to our customers. 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.
Risks Related to Our Industry
If use of the Internet and electronic business does not continue to grow, a
viable market for our IBX hubs 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 hubs 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 hubs 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.
Following the September 11, 2001 terrorist attacks on the United States,
there has been an increased focus by the government on Internet infrastructure
centers, including our IBX hubs. Although, we do not believe there will be
increased government regulation, laws and regulations governing Internet
services, related communications services and information technologies, and
electronic commerce 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
32
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.
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS
141") and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142").
SFAS 141 supercedes Accounting Principles Board Opinion No. 16 ("APB 16"),
Business Combinations, and is effective for all business combinations initiated
after June 30, 2001 and for all business combinations accounted for by the
purchase method for which the date of acquisition is after June 30, 2001. One
of the most significant changes made by SFAS 141 is to require the use of the
purchase method of accounting for all business combinations initiated after
June 30, 2001.
SFAS 142 supercedes Accounting Principles Board Opinion No. 17 ("APB 17"),
Intangible Assets, but will carry forward provisions in APB 17 related to
internally developed intangible assets. SFAS 142 primarily addresses the
accounting for goodwill and intangible assets subsequent to their acquisition
and is effective for fiscal years beginning after December 15, 2001. The most
significant changes made by SFAS 142 that could impact the Company are: (1)
goodwill and indefinite lived intangible assets will no longer be amortized and
(2) goodwill will be tested for impairment at least annually at the reporting
unit level.
The Company does not expect the adoption of either SFAS 141 or SFAS 142 will
have a material effect on its consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 supercedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." SFAS 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30. SFAS 144 develops one accounting model for long-lived assets
that are to be disposed of by sale. SFAS 144 requires that long-lived assets
that are to be disposed of by sale be measured at the lower of book value or
fair value less cost to sell. Additionally, SFAS 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS 144 is effective for the Company for all financial statements issued in
fiscal 2002. The Company is currently evaluating the impacts of the adoption of
SFAS 144 to its financial statements.
In November 2001, the FASB Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue 01-09, Accounting for Consideration Given by a Vendor
to a Customer or a Reseller of the Vendor's Products, which is a codification
of EITF 00-14, 00-22 and 00-25. This issue presumes that consideration from a
vendor to a customer or reseller of the vendor's products to be a reduction of
the selling prices of the vendor's products and, therefore, should be
characterized as a reduction of revenue when recognized in the vendor's income
statement and could lead to negative revenue under certain circumstances.
Revenue reduction is required unless consideration relates to a separate
identifiable benefit and the benefit's fair value can be established. This
issue should be applied no later than in annual or interim financial statements
for periods beginning after December 15, 2001, which is our first quarter ended
March 31, 2002. Upon adoption we are required to reclassify all prior period
amounts to conform to the current period presentation. We have not yet
evaluated the effects of these changes on our consolidated financial statements.
33
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.
In the past, we have employed foreign currency forward exchange contracts
for the purpose of hedging certain specifically identified net currency
exposures. The use of these financial instruments was intended to mitigate some
of the risks associated with fluctuations in currency exchange rates, but does
not eliminate such risks. We may decide to employ such contracts again in the
future. 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, except for the interest expense
associated with our amended and restated senior secured credit facility, which
bears interest at floating rates, plus applicable margins, based on either the
prime rate or LIBOR. As of December 31, 2001, the amended and restated senior
secured credit facility had an effective interest rate of 7.68%. 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
December 31, 2001 is approximately $70.0 million.
Foreign Currency Risk
To date, all of our recognized revenue has been denominated in U.S. dollars,
generated mostly from customers in the U.S., 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 U.S. 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.
34
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 hubs 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 hubs. 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 and for the year ended
December 31, 1999 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.
35
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 2002 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, 2001.
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
"Security 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 "Certain
Relationships and Related Transactions" of the Proxy Statement.
36
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............ 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 June 10,
1999.
10.13*+ Lease Agreement with Carrier Central LA, Inc., as successor in
interest to 600 Seventh Street Associates, Inc., dated as of August
8, 1999.
37
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.
10.19*+ 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 Carrier Central LA, Inc., as successor in
interest to 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.
10.37****+ 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 18, 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.
38
Exhibit
Number Description of Document
------- -----------------------
10.41*****+ Fourth Supplement to the Lease Agreement with Naxos Schmirdelwerk
Mainkur GmbH and A.A.A. Aktiengesellschaft Allgemeine
Anlageverwaltung vorm. Seilwolff AG von 1890, acting in partnership
under the name Naxos-Union Grundstucksverwaltungsgesellschaft GbR,
dated as of July 3, 2001.
10.42*****+ First Amendment to Deed of Lease with TrizecHahn Beaumeade Technology
Center LLC, dated as of March 22, 2001.
10.43*****+ First Lease Amendment Agreement with Market Halsey Urban Renewal,
LLC, dated as of May 23, 2001.
10.44*****+ First Amendment to Lease with Nexcomm Asset Acquisition I, L.P.,
dated as of April 18, 2000.
10.45*****+ Amendment to Lease Agreement with Burlington Realty Associates III
Limited Partnership, dated as of December 18, 2000.
10.46****** First Modification to Ground Lease by and between iStar San Jose, LLC
and Equinix, Inc., dated as of September 26, 2001.
10.47****** Amended and Restated Credit and Guaranty Agreement, dated as of
September 30, 2001.
10.48****** 2001 Supplemental Stock Plan.
10.49 Deed Terminating a Commercial Lease with Compagnie des Entrepots et
Magasins Generaux de Paris, dated as of September 7, 2001.
16.1* Letter regarding change in certifying accountant.
21.1**** Subsidiaries of Equinix.
24.1 Power of Attorney (see page 40).
- --------
* 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.
***** 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
June 30, 2001.
****** 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, 2001.
+ 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.
39
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 25, 2002
By: /s/ PETER F. VAN CAMP
__________________________________
Peter F. Van Camp
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter F. Van Camp or Renee F. Lanam, or either
of them, each with the power of substitution, their 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 their 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 Chairman of the Board and Chief March 25, 2002
- ----------------------------- Executive Officer (Principal Executive
Peter F. Van Camp Officer)
/s/ ALBERT M. AVERY, IV Vice-Chairman of the Board March 25, 2002
- -----------------------------
Albert M. Avery, IV
/s/ RENEE F. LANAM Chief Financial Officer, General March 25, 2002
- ----------------------------- Counsel and Secretary
Renee F. Lanam
/s/ KEITH D. TAYLOR Vice President, Finance (Principal March 25, 2002
- ----------------------------- Accounting Officer)
Keith D. Taylor
/s/ SCOTT KRIENS Director March 25, 2002
- -----------------------------
Scott Kriens
/s/ ANDREW S. RACHLEFF Director March 25, 2002
- -----------------------------
Andrew S. Rachleff
/s/ MICHELANGELO VOLPI Director March 25, 2002
- -----------------------------
Michelangelo Volpi
/s/ JOHN G. TAYSOM Director March 25, 2002
- -----------------------------
John G. Taysom
40
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 37, present fairly, in all material
respects, the financial position of Equinix, Inc. and its subsidiaries at
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001 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 12, 2002, except for Note 12,
which is as of March 22, 2002
F-1
EQUINIX, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
--------------------
2001 2000
--------- ---------
Assets
Current assets:
Cash and cash equivalents................................ $ 58,831 $ 174,773
Short-term investments................................... 28,890 32,437
Accounts receivable, net of allowance for doubtful
accounts of $381 and $608.............................. 6,909 4,925
Current portion of restricted cash and short-term
investments............................................ 47 15,468
Prepaids and other current assets........................ 8,541 10,373
--------- ---------
Total current assets................................. 103,218 237,976
Property and equipment, net................................. 325,226 315,380
Construction in progress.................................... 103,691 94,894
Restricted cash and short-term investments, less current
portion................................................... 27,997 21,387
Debt issuance costs, net.................................... 11,333 11,916
Other assets................................................ 3,589 1,932
--------- ---------
Total assets......................................... $ 575,054 $ 683,485
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses.................... $ 17,499 $ 13,717
Accrued construction costs............................... 34,650 89,343
Accrued interest payable................................. 2,167 2,167
Current portion of debt facilities and capital lease
obligations............................................ 7,206 4,426
Other current liabilities................................ 1,807 1,646
--------- ---------
Total current liabilities............................ 63,329 111,299
Debt facilities and capital lease obligations, less current
portion................................................... 6,344 6,506
Senior secured credit facility.............................. 105,000 --
Senior notes................................................ 187,882 185,908
Other liabilities........................................... 8,978 4,656
--------- ---------
Total liabilities.................................... 371,533 308,369
--------- ---------
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, $0.001 par value per share; 300,000,000
shares authorized in 2001 and 2000; 80,084,076 and
76,978,852 shares issued and outstanding in 2001 and
2000................................................... 80 77
Additional paid-in capital............................... 544,343 553,070
Deferred stock-based compensation........................ (11,022) (38,350)
Accumulated other comprehensive income................... 135 1,919
Accumulated deficit...................................... (330,015) (141,600)
--------- ---------
Total stockholders' equity........................... 203,521 375,116
--------- ---------
Total liabilities and stockholders' equity........... $ 575,054 $ 683,485
========= =========
See accompanying notes to consolidated financial statements.
F-2
EQUINIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year ended December 31,
------------------------------
2001 2000 1999
--------- --------- --------
Revenues.......................................... $ 63,414 $ 13,016 $ 37
--------- --------- --------
Costs and operating expenses:
Cost of revenues (includes stock-based
compensation of $426, $766 and $177 for the
years ended December 31, 2001, 2000, and
1999 respectively)........................... 94,889 43,401 3,268
Sales and marketing (includes stock-based
compensation of $2,830, $6,318, and $1,631
for the years ended December 31, 2001, 2000,
and 1999 respectively)....................... 16,935 20,139 3,949
General and administrative (includes
stock-based compensation of $15,788,
$22,809, and $4,819 for the years ended
December 31, 2001, 2000, and 1999,
respectively)................................ 58,286 56,585 12,603
Restructuring charge........................... 48,565 -- --
--------- --------- --------
Total costs and operating expenses......... 218,675 120,125 19,820
--------- --------- --------
Loss from operations........................... (155,261) (107,109) (19,783)
Interest income................................... 10,656 16,430 2,138
Interest expense.................................. (43,810) (29,111) (3,146)
--------- --------- --------
Net loss.......................................... $(188,415) $(119,790) $(20,791)
========= ========= ========
Net loss per share:
Basic and diluted.............................. $ (2.39) $ (3.48) $ (4.98)
========= ========= ========
Weighted average shares........................ 78,681 34,461 4,173
========= ========= ========
See accompanying notes to consolidated financial statements.
F-3
EQUINIX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2001
(in thousands, except share data )
Accumulated
Common stock Additional Deferred other Total
------------------ paid-in stock-based comprehensive Accumulated stockholders'
Shares Amount capital compensation income (loss) deficit equity
---------- ------ ---------- ------------ ------------- ----------- -------------
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, net
of forfeitures.......................... -- -- 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 unvested common stock...... (346,348) -- (28) -- -- -- (28)
Deferred stock-based compensation, net
of forfeitures.......................... -- -- 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
Issuance of common stock upon exercise
of common stock options................. 496,663 -- 435 -- -- -- 435
Issuance of common stock upon exercise
of common stock warrants................ 2,332,668 2 (2) -- -- -- --
Issuance of common stock under employee
stock purchase plan..................... 525,678 1 1,483 -- -- -- 1,484
Repurchase of unvested common stock...... (249,785) -- (18) -- -- -- (18)
Issuance/revaluation of common stock
warrants................................ -- -- (2,341) -- -- -- (2,341)
Deferred stock-based compensation, net
of forfeitures.......................... -- -- (8,284) 8,284 -- -- --
Amortization of stock-based compensation. -- -- -- 19,044 -- -- 19,044
Comprehensive income (loss):
Net loss.............................. -- -- -- -- -- (188,415) (188,415)
Foreign currency translation loss..... -- -- -- -- (1,873) -- (1,873)
Unrealized appreciation on
short-term investments............... -- -- -- -- 89 -- 89
---------- --- -------- -------- ------- --------- ---------
Net comprehensive loss................ -- -- -- -- (1,784) (188,415) (190,199)
---------- --- -------- -------- ------- --------- ---------
Balances as of December 31, 2001......... 80,084,076 $80 $544,343 $(11,022) $ 135 $(330,015) $ 203,521
========== === ======== ======== ======= ========= =========
See accompanying notes to consolidated financial statements.
F-4
EQUINIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
------------------------------
2001 2000 1999
--------- --------- --------
Cash flows from operating activities:
Net loss....................................... $(188,415) $(119,790) $(20,791)
Adjustments to reconcile net loss to net cash
used in operating activities:................
Depreciation................................... 49,645 14,816 609
Amortization of deferred stock-based
compensation................................. 19,044 29,893 6,627
Amortization of debt-related issuance costs
and discounts................................ 7,195 8,445 1,010
Allowance for doubtful accounts................ 521 608 --
Issuance of common stock to charity............ -- 780 --
Restructuring charge........................... 48,565 -- --
Changes in operating assets and liabilities:
Accounts receivable.......................... (2,505) (5,355) (178)
Prepaids and other current assets............ 2,001 (8,776) (1,429)
Other assets................................. (1,657) (354) (1,244)
Accounts payable and accrued expenses........ (2,742) 9,574 4,481
Accrued restructuring charge................. (2,088) -- --
Other current liabilities.................... 161 1,441 205
Other liabilities............................ 1,421 645 802
--------- --------- --------
Net cash used in operating activities....... (68,854) (68,073) (9,908)
--------- --------- --------
Cash flows from investing activities:
Purchase of short-term investments............... (168,411) (114,968) (22,812)
Sales and maturities of short-term investments... 172,047 102,253 8,017
Purchases of property and equipment.............. (57,791) (296,320) (28,241)
Additions to construction in progress............ (44,343) (74,448) (14,145)
Accrued construction costs....................... (54,693) 79,571 9,520
Purchase of restricted cash and short-term
investments.................................... (25,020) (24,246) (38,609)
Sale of restricted cash and short-term
investments.................................... 25,197 26,000 --
--------- --------- --------
Net cash used in investing activities.......... (153,014) (302,158) (86,270)
--------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock........... 1,918 254,560 1,286
Proceeds from issuance of debt facilities and
capital lease obligations...................... 8,004 6,884 16,114
Repayment of debt facilities and capital lease
obligations.................................... (5,559) (9,955) (988)
Proceeds from senior secured credit facility..... 150,000 -- --
Repayment of senior secured credit facility...... (45,000) -- --
Proceeds from senior notes and common stock
warrants, net.................................. -- -- 193,890
Repurchase of common and preferred stock......... (18) (28) (10)
Proceeds from issuance of redeemable convertible
preferred stock, net........................... -- 94,353 84,886
Debt issuance costs.............................. (1,546) (5,967) --
--------- --------- --------
Net cash provided by financing activities...... 107,799 339,847 295,178
--------- --------- --------
Effect of foreign currency exchange rates on cash
and cash equivalents............................. (1,873) 1,992 --
Net increase (decrease) in cash and cash
equivalents...................................... (115,942) (28,392) 199,000
Cash and cash equivalents at beginning of year.... 174,773 203,165 4,165
--------- --------- --------
Cash and cash equivalents at end of year.......... $ 58,831 $ 174,773 $203,165
========= ========= ========
Noncash financing and investing activities:
Cash paid for taxes............................ $ 18 $ -- $ 68
========= ========= ========
Cash paid for interest......................... $ 38,103 $ 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") hubs 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 hubs 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 hubs 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.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. Since its inception, the
Company has been successful in completing several rounds of financing. During
the same period, the Company has incurred substantial losses and negative cash
flows from operations in every fiscal period since inception. For the year
ended December 31, 2001, the Company incurred a loss from operations of $155.3
million and negative cash flows from operations of $68.9 million. As of
December 31, 2001, the Company had an accumulated deficit of $330.0 million.
For the year ended December 31, 2000, the Company incurred a loss from
operations of $107.1 million and negative cash flows from operations of $68.1
million.
The Company expects that cash on hand and anticipated cash flow from
operations should be sufficient to complete its seventh IBX hub during the
first quarter of 2002. The Company anticipates that its existing cash and the
cash flow generated from the seven IBX hubs, for which the Company has obtained
financing, will be sufficient to meet the working capital, debt service and
corporate overhead requirements associated with those IBX hubs for the next
twelve months. Assuming sufficient customer demand and the availability of
additional financing, the Company may build or buy additional IBX hubs and
expand certain existing IBX hubs. If the Company cannot raise additional funds
on acceptable terms or losses exceed the Company's expectations, the Company
may delay or permanently reduce its rollout plans or implement other cost
saving initiatives in order to preserve cash.
In October 2001, the Company amended and restated the Senior Secured Credit
Facility (see Note 5). The Amended and Restated Senior Secured Credit Facility
contains numerous financial covenants including achieving specified revenue
targets at levels significantly above historical revenues, achieving certain
EBITDA targets, maintaining minimum cash balances and limiting the amount of
capital expenditures. The Company is in full compliance with all of these
financial covenants and ratios as of December 31, 2001; however, if the Company
does not achieve the specified revenue growth required by its financial
covenants or is unable to maintain these ratios and comply with these
covenants, the Company may be required to repay the $105.0 million currently
outstanding under this facility and will not be able to draw down the remaining
$20.0 million of the Amended and Restated Senior Secured Credit Facility. The
Company does not currently have sufficient cash reserves to repay such amounts.
In addition, the inability to draw down the remaining $20.0 million under this
facility may not provide sufficient funds for the Company to support its
spending needs and could adversely affect the business and the Company's
ability to continue as a going concern.
During the first quarter of 2002, the Company retired $25.0 million of the
Senior Notes (see Note 4) in exchange for approximately 9.3 million shares of
common stock (see Note 12).
F-6
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 U.S.
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 an original
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.
Restricted Cash and Short-term Investments
Restricted cash and short-term investments as of December 31, 2001,
consisted of $28,044,000, which was used as collateral to support the issuance
of ten standby letters of credit in lieu of deposits under certain domestic
lease agreements, including two letters of credit posted in connection with
Company's unimproved property in San Jose, California (see Note 8). These lease
agreements have expiration terms at various dates through 2020. During the
quarter ended September 30, 2001, the Company recorded a restructuring charge
as part of its revised European services strategy. Part of this restructuring
charge included the write-off of $8,634,000 related to several letters of
credit related to the Company's long-term European operating leases (see Note
11).
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 lease agreements expire at various dates through 2020.
F-7
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. As of December 31, 2001, one customer accounted for 15% of revenues
and another customer accounted for 10% of accounts receivables. 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 hub equipment and
seven to ten years for IBX hub 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 hubs and is stated at original cost. The Company has
contracted out substantially all of the construction of the IBX hubs 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
hub 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 $1,439,000 as of December 31, 2001 and $6,270,000 as of
December 31, 2000 (see Note 6).
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, 2001, was $45,350,000 and $1,540,000, respectively. 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.
During the quarter ended September 30, 2001, the Company recorded a
restructuring charge as part of its revised European services strategy. Part of
this restructuring charge included the write-down of $29,260,000 in European
construction in progress assets to their net realizable value (see Note 11).
F-8
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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) is based on quoted market prices. The estimated fair value of the Senior
Notes is approximately $70.0 million as of December 31, 2001. During the first
quarter of 2002, the Company retired $25.0 million of the Senior Notes in
exchange for approximately 9.3 million shares of common stock (see Note 12).
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. During the quarter ended September 30, 2001, the
Company wrote-down the value of its European construction in progress to its
net realizable value as part of a larger restructuring charge in conjunction
with a revised European services strategy (see Note 11). 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. No impairment of long-lived
assets was recorded as of December 31, 1999.
Revenue Recognition
Equinix derives its revenues from (1) recurring revenue streams, such as
from the leasing of cabinet space, power and interconnection services and (2)
non-recurring revenue streams, such as from the recognized portion of deferred
installation revenues and professional services. Revenues from recurring
revenue streams are billed monthly and recognized ratably over the term of the
contract, generally one to three years. Non-recurring installation fees are
deferred and recognized ratably over the term of the related contract.
Professional service fees are recognized in the period in which the services
were provided and represent the culmination of the earnings process. The
Company generally guarantees certain service levels, such as uptime, as
outlined in individual customer contracts. To the extent that these service
levels are not achieved, the Company reduces revenue for any credits given to
the customer as a result.
Revenue is recognized as service is provided when there is persuasive
evidence of an arrangement, the fee is fixed or determinable and collection of
the receivable is reasonably assured. The Company assesses collection based on
a number of factors, including past transaction history with the customer and
the credit-worthiness of the customer. The Company does not request collateral
from our customers. If the Company determines that collection of a fee is not
reasonably assured, the Company defers the fee and recognizes revenue at the
time collection becomes reasonably assured, which is generally upon receipt of
cash. In addition, Equinix also maintains an allowance for doubtful accounts
for estimated losses resulting from the inability of its customers to make
required payments for those customers that the Company had expected to collect
the revenues. If the financial condition of Equinix's customers were to
deteriorate or if they become insolvent, resulting in an
F-9
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
impairment of their ability to make payments, allowances for doubtful accounts
may be required. Management specifically analyzes accounts receivable and
analyzes current economic news and trends, historical bad debts, customer
concentrations, customer credit-worthiness and changes in customer payment
terms when evaluating revenue recognition and the adequacy of the Company's
reserves.
During the year ended December 31, 2001, the Company recognized
approximately $200,000 of revenue in relation to equipment received from
customers in lieu of cash. This equipment is being used in the Company's
operations and was valued based on management's assessment of the fair value of
the equipment in relation to external prices for similar equipment.
Subsequent to year-end, the Company entered into arrangements with numerous
vendors to resell equipment and bandwidth (see Note 12).
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.
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 ("EITF")
Abstract 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.
F-10
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 No. 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.
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated.
Year ended Year ended Year ended
December 31, December 31, December 31,
2001 2000 1999
------------- ------------- ------------
Numerator:
Net loss.............................. $(188,415,000) $(119,790,000) $(20,791,000)
============= ============= ============
Denominator:
Weighted average shares............... 81,500,614 40,672,055 8,751,001
Weighted average unvested shares
subject to repurchase............... (2,819,486) (6,211,392) (4,578,122)
------------- ------------- ------------
Total weighted average shares..... 78,681,128 34,460,663 4,172,879
============= ============= ============
Net loss per share:
Basic and diluted................. $ (2.39) $ (3.48) $ (4.98)
============= ============= ============
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,
2001 2000 1999
------------ ------------ ------------
Series A redeemable convertible preferred stock.. -- -- 18,682,500
Series B redeemable convertible preferred stock.. -- -- 15,759,561
Series A preferred stock warrants................ -- -- 1,245,000
Common stock warrants............................ 2,106,600 3,707,245 1,365,645
Common stock options............................. 20,860,963 8,893,292 2,615,394
Common stock subject to repurchase............... 2,819,486 6,211,392 4,578,122
Derivatives and Hedging Activities
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended, at the beginning of its fiscal year 2001. The
standard requires the Company to recognize all derivatives
F-11
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
on the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through the statement of operations. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities or firm commitments through earnings, or recognized
in other comprehensive income (loss) until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will
be immediately recognized in earnings. The adoption of SFAS No. 133 did not
have a material effect on the financial statements of the Company. As of
December 31, 2001, the Company had not entered into any derivative or hedging
activities.
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS
141") and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142").
SFAS 141 supercedes Accounting Principles Board Opinion No. 16 ("APB 16"),
Business Combinations, and is effective for all business combinations initiated
after June 30, 2001 and for all business combinations accounted for by the
purchase method for which the date of acquisition is after June 30, 2001. One
of the most significant changes made by SFAS 141 is to require the use of the
purchase method of accounting for all business combinations initiated after
June 30, 2001.
SFAS 142 supercedes Accounting Principles Board Opinion No. 17 ("APB 17"),
Intangible Assets, but will carry forward provisions in APB 17 related to
internally developed intangible assets. SFAS 142 primarily addresses the
accounting for goodwill and intangible assets subsequent to their acquisition
and is effective for fiscal years beginning after December 15, 2001. The most
significant changes made by SFAS 142 that could impact the Company are: (1)
goodwill and indefinite lived intangible assets will no longer be amortized and
(2) goodwill will be tested for impairment at least annually at the reporting
unit level.
The Company does not expect the adoption of either SFAS 141 or SFAS 142 will
have a material effect on its consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 supercedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." SFAS 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting Principles Board
Opinion No. 30. SFAS 144 develops one accounting model for long-lived assets
that are to be disposed of by sale. SFAS 144 requires that long-lived assets
that are to be disposed of by sale be measured at the lower of book value or
fair value less cost to sell. Additionally, SFAS 144 expands the scope of
discontinued operations to include all components of an entity with operations
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS 144 is effective for the Company for all financial statements issued in
fiscal 2002. The Company is currently evaluating the impacts of the adoption of
SFAS 144 to its financial statements.
In November 2001, the FASB Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue 01-09, Accounting for Consideration Given by a Vendor
to a Customer or a Reseller of the Vendor's Products, which is a codification
of EITF 00-14, 00-22 and 00-25. This issue presumes that consideration from a
vendor to a customer or reseller of the vendor's products to be a reduction of
the selling prices of the vendor's products and, therefore, should be
characterized as a reduction of revenue when recognized in the vendor's income
statement and could lead to negative revenue under certain circumstances.
Revenue reduction is required unless consideration relates to a separate
identifiable benefit and the benefit's fair value can be established. This
F-12
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
issue should be applied no later than in annual or interim financial statements
for periods beginning after December 15, 2001, which is our first quarter ended
March 31, 2002. Upon adoption we are required to reclassify all prior period
amounts to conform to the current period presentation. We have not yet
evaluated the effects of these changes on our consolidated financial statements.
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):
2001 2000
-------- ---------
Money market............................................... $ 26,864 $ 72,325
Municipal bonds............................................ 12,833 19,557
US government and agency obligations....................... 14,397 19,049
Corporate bonds............................................ 4,116 2,024
Other securities........................................... 29,511 94,255
-------- ---------
Total available-for-sale securities..................... 87,721 207,210
Less amounts classified as cash and cash equivalents.... (58,831) (174,773)
-------- ---------
Total market value of short-term investments............ $ 28,890 $ 32,437
======== =========
The original maturities of short-term investments are as follows as of
December 31 (in thousands):
2001 2000
------- -------
Less than one year......................................... $25,320 $32,437
Due in 1-2 years........................................... 3,570 --
------- -------
Total market value of short-term investments............ $28,890 $32,437
======= =======
As of December 31, 2001 and 2000, cost approximated market value of cash,
cash equivalents and short-term investments; unrealized gains and losses were a
gain of $17,000 as of December 31, 2001 and a loss of $73,000 as of December
31, 2000. As of December 31, 2001 and 2000, cash equivalents included
investments in other securities with various contractual maturity dates that 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, 2001 and 2000. For the purpose of determining gross realized gains
and losses, the cost of securities is based upon specific identification.
Accounts Receivable
Accounts receivable, net, consists of the following as of December 31 (in
thousands):
2001 2000
------- -------
Accounts receivable........................................ $12,868 $ 8,670
Unearned revenue........................................... (5,578) (3,137)
Allowance for doubtful accounts............................ (381) (608)
------- -------
$ 6,909 $ 4,925
======= =======
F-13
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unearned revenue consists of pre-billing for services that have not yet been
provided, but which have been billed to customers ahead of time in accordance
with the terms of their contract. Accordingly, the Company invoices its
customers at the end of a calendar month for services to be provided the
following month.
Property & Equipment
Property and equipment is comprised of the following as of December 31 (in
thousands):
2001 2000
-------- --------
Leasehold improvements..................................... $285,090 $243,851
IBX plant and machinery.................................... 54,194 51,305
Computer equipment and software............................ 11,306 12,438
IBX equipment.............................................. 28,704 21,960
Furniture and fixtures..................................... 2,533 1,241
-------- --------
381,827 330,795
Less accumulated depreciation.............................. (56,601) (15,415)
-------- --------
$325,226 $315,380
======== ========
Leasehold improvements, certain computer equipment, software and furniture
and fixtures recorded under capital leases aggregated $5,779,000 and $5,999,000
as of December 31, 2001 and 2000, respectively. 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 several warrants issued to certain fiber carriers and our contractor
totaling $8,105,000 and $5,761,000 as of December 31, 2001 and 2000,
respectively (see Note 6). Amortization of such warrants is included in
depreciation expense.
The Company has included $2,234,000 of equipment held for resale within
other current assets on the accompanying balance sheet as of December 31, 2001.
This represents the estimated net realizable value of assets purchased during
the pre-construction phase of the European IBX hubs that are now being held for
resale that were written down as part of a larger restructuring charge in
conjunction with a revised European services strategy (see Note 11).
Restricted Cash and Short-term Investments
Restricted cash and short-term investments consisted of the following as of
December 31 (in thousands):
2001 2000
------- --------
Certificates of deposit:
Due within one year..................................... $ 47 $ 15,468
Due after one year through two years.................... -- 21,387
Restricted cash in U.S. treasury notes..................... 15,450 --
Restricted cash in money market funds...................... 12,547 --
------- --------
28,044 36,855
Less current portion....................................... (47) (15,468)
------- --------
$27,997 $ 21,387
======= ========
F-14
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 2001 and 2000, 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):
2001 2000
------- -------
Accounts payable........................................... $ 4,242 $ 8,270
Accrued restructuring charge............................... 6,390 --
Accrued compensation and benefits.......................... 2,934 2,613
Accrued taxes.............................................. 1,296 52
Accrued other.............................................. 2,637 2,782
------- -------
$17,499 $13,717
======= =======
3. Debt Facilities and Capital Lease Obligations
Debt facilities and capital lease obligations consisted of the following as
of December 31 (in thousands):
2001 2000
------- -------
Venture Leasing Loan Agreement (net of unamortized discount of $392 and $727
as of December 31, 2001 and 2000, respectively)........................... $ 3,658 $ 6,138
Comdisco Master Lease Agreement and Addendum (net of unamortized discount
of $221 and $412 as of December 31, 2001 and 2000, respectively).......... 3,374 4,794
Heller Loan (net of unamortized discount of $15 and none as of December 31,
2001 and 2000, respectively).............................................. 4,183 --
Wells Fargo Loan............................................................ 2,335 --
------- -------
13,550 10,932
Less current portion........................................................ (7,206) (4,426)
------- -------
$ 6,344 $ 6,506
======= =======
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 hub 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
F-15
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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, 2001, $461,000 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.
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 hub 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 hub 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, 2001, $3,134,000 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
F-16
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 hub 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 hub 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, 2001, $4,050,000 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.
Heller Loan
In June 2001, the Company obtained a $5,000,000 loan from Heller Financial
Leasing, Inc. (the "Heller Loan"). Repayments on the Heller Loan are made over
36 months and interest accrues at 13.0% per annum. The Heller Loan is secured
by certain equipment located in the New York metropolitan area IBX hub. As of
December 31, 2001, $4,198,000 was outstanding under the Heller Loan.
In connection with the Heller Loan, the Company granted Heller Financial
Leasing, Inc. a warrant to purchase 37,500 shares of the Company's common stock
at $4.00 per share (the "Heller Warrant"). This warrant is immediately
exercisable and expires in five years from the date of grant. The fair value of
the warrant using the Black-Scholes option pricing model was $18,000 with the
following assumptions: fair market value per share of $1.13, dividend yield of
0%, expected volatility of 80%, risk-free interest rate of 5% and a contractual
life of 5 years. Such amount was recorded as a discount to the applicable loan
amount, and is being amortized to interest expense using the effective interest
method, over the life of the loan.
The costs related to the issuance of the Heller Loan were capitalized and
are being amortized to interest expense using the effective interest method,
over the life of the Heller Loan. Debt issuance costs, net of amortization, are
$185,000 as of December 31, 2001.
F-17
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
metropolitan area IBX hub currently under construction. As of December 31,
2001, $2,335,000 was outstanding under the Wells Fargo Loan.
The costs related to the issuance of the Wells Fargo Loan were capitalized
and are being amortized to interest expense using the effective interest
method, over the life of the Wells Fargo Loan. Debt issuance costs, net of
amortization, are $108,000 as of December 31, 2001.
Maturities
Combined aggregate maturities for debt facilities and future minimum capital
lease obligations as of December 31, 2001 are as follows (in thousands):
Capital
Debt lease
facilities obligations Total
---------- ----------- -------
2002............................................. $ 5,462 $ 1,744 $ 7,206
2003............................................. 3,746 1,716 5,462
2004............................................. 1,363 135 1,498
2005............................................. 12 -- 12
------- ------- -------
10,583 3,595 14,178
Less amount representing unamortized discount.... (407) (221) (628)
------- ------- -------
10,176 3,374 13,550
Less current portion............................. (5,462) (1,744) (7,206)
------- ------- -------
$ 4,714 $ 1,630 $ 6,344
======= ======= =======
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
$187,882,000 as of December 31, 2001.
Interest is payable semi-annually, in arrears, on June 1 and December 1 of
each year. 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.
F-18
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $5,100,000 as of December 31, 2001.
During the first quarter of 2002, the Company retired $25.0 million of the
Senior Notes in exchange for approximately 9.3 million shares of common stock
(see Note 12).
5. Senior Secured Credit Facility
On December 20, 2000, the Company and a newly created, wholly-owned
subsidiary of the Company, entered into a $150,000,000 Senior Secured Credit
Facility (the "Senior Secured Credit Facility") with a syndicate of lenders.
The Senior Secured Credit Facility consisted 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
was 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. The Company drew this down in June 2001.
The Senior Secured Credit Facility had a number of covenants, which included
achieving certain minimum revenue targets and limiting cumulative EBITDA losses
and maximum capital spending limits among others. As of September 30, 2001, the
Company was not in compliance with one of these covenants. However, the
syndicate of lenders provided a forbearance and, in October 2001, the Company
successfully completed the renegotiation of the Senior Secured Credit Facility
and amended certain of the financial covenants to reflect the prevailing
economic environment as part of the Amended and Restated Senior Secured Credit
Facility (the "Amended and Restated Senior Secured Credit Facility"). As
required under this amendment, the Company repaid $50,000,000 of the
$150,000,000 Senior Secured Credit Facility outstanding as of September 30,
2001, of which $25,000,000 represented a permanent reduction. As such, the
Amended and Restated Senior Secured Credit Facility provides a total of
$125,000,000 of debt financing and consists of the following:
. Term loan facility, redesignated as tranche A, in the amount of
$100,000,000, which represents the remaining $100,000,000 outstanding
after repayment of the $50,000,000 in October 2001.
. Term loan facility, redesignated as tranche B, in the amount of
$25,000,000, of which $5,000,000 was immediately drawn with the remaining
$20,000,000 available for future draw. The remaining $20,000,000 is only
available for drawdown commencing September 30, 2002 and only if the
Company remains in full compliance with all covenants as outlined in the
Amended and Restated Senior Secured Credit Facility, and meets an
additional EBITDA test. The ability to draw on the remaining $20,000,000
expires on December 31, 2002.
F-19
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loans under the Amended and Restated Senior Secured Credit Facility bear
interest at floating rates, plus applicable margins, based on either the prime
rate or LIBOR. Interest rates on the Amended and Restated Senior Secured Credit
Facility were increased by 0.50% and the frequency of interest payments has
been amended to monthly from quarterly. As of December 31, 2001, the Company's
total indebtedness under the Amended and Restated Senior Secured Credit
Facility was $105,000,000 and had an effective interest rate of 7.68%.
Repayment of principal under the Amended and Restated Senior Secured Credit
Facility is summarized as follows as of December 31, 2001 (in thousands):
Year ending:
2003.............................................................. $ 8,400
2004.............................................................. 42,000
2005.............................................................. 54,600
--------
Total......................................................... $105,000
========
As noted above, in connection with the Amended and Restated Senior Secured
Credit Facility, the syndicate of lenders reset and modified the various
covenants related to the Senior Secured Credit Facility to reflect the then
prevailing economic environment in which the Company has been operating in. In
addition to resetting the existing financial covenants, a new covenant
requiring minimum cash balances was added. In addition to various financial
covenants, the Amended and Restated Senior Secured Credit Facility also
includes various non-financial covenants, including those that restrict the
Company's ability to incur additional indebtedness and transfer funds among the
Company's wholly-owned subsidiaries, as well as numerous monthly and quarterly
reporting requirements that the Company must adhere to. The Company was in
compliance with all financial covenants as of December 31, 2001; however, if
the Company does not attain the revenue growth stipulated in the financial
covenants or is unable to maintain these ratios and comply with these
covenants, the Company may be required to repay amounts currently outstanding
under this facility and will not be able to draw down the remaining $20.0
million of the Amended and Restated Senior Secured Credit Facility. The Company
does not currently have sufficient cash reserves to repay such amounts. In
addition, the inability to draw down the remaining $20.0 million under this
facility may not provide sufficient funds for the Company to support its
spending needs and could adversely affect the business and its ability to
continue as a going concern.
Borrowings under the Amended and Restated Senior Secured Credit Facility are
collateralized by a first priority lien against substantially all of the
Company's assets.
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. As a
result of amending and restating the Senior Secured Credit Facility, the
Company incurred additional fees of approximately $1,519,000, which have been
added to debt issuance costs and are being amortized to interest expense using
the effective interest method over the remaining life of the Amended and
Restated Senior Secured Credit Facility. Total debt issuance costs, net of
amortization, were $5,940,000 and $5,966,000 as of December 31, 2001 and
December 31, 2000, respectively.
6. Redeemable Convertible Preferred Stock and Stockholders' Equity
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 68,000,000 shares of redeemable convertible preferred stock,
of which 32,000,000 has been designated as
F-20
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
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 40,704,222 shares of Series A, Series B and Series C 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 agreed to waive the repurchase right with respect to one
of the founder's unvested shares. As of December 31, 2001 and 2000, 340,875 and
1,022,625 shares were 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, 2001 and 2000, there were 1,073,538 and 3,114,743
shares, respectively, subject to repurchase.
As of December 31, 2001, the Company has reserved the following shares of
authorized but unissued shares of common stock for future issuance:
Common stock warrants................................................ 4,512,381
Common stock options................................................. 2,386,938
Common stock purchase plan........................................... 1,074,322
---------
7,973,641
=========
F-21
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Purchase Plan
In May 2000, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") under which 1,000,000 shares were 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, 2001, 525,678 shares have been issued under the Purchase
Plan at a weighted-average purchase price of $2.82 per share. There were no
purchases under the Purchase Plan during fiscal 2000.
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; and in September 2001, the Company adopted the 2001 Supplemental Stock
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 reserved a total of 30,181,541 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.
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.
F-22
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the Plans is as follows:
Weighted-
average
Shares exercise
available for Number of price
grant shares per share
------------- ---------- ---------
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
Additional shares authorized..................... 9,668,731 -- --
Options granted.................................. (16,036,597) 16,036,597 1.46
Options exercised................................ -- (496,663) 0.88
Options forfeited................................ 3,572,263 (3,572,263) 4.40
Shares repurchased............................... 249,785 -- 0.07
----------- ----------
Balances, December 31, 2001...................... 2,386,938 20,860,963 2.32
=========== ==========
The following table summarizes information about stock options outstanding
as of December 31, 2001:
Outstanding Exercisable
-------------------------------- -------------------
Weighted-
average Weighted- Weighted-
remaining average average
Number of contractual exercise Number of exercise
Range of exercise prices shares life price shares price
- ------------------------ ---------- ----------- --------- --------- ---------
$0.01 to $0.39............... 7,598,305 9.56 $ 0.36 1,288,423 $ 0.28
$0.45 to $1.00............... 2,873,375 9.12 0.91 501,532 0.94
$1.04 to $2.38............... 2,012,589 9.32 1.62 239,844 1.70
$2.67 to $5.00............... 6,638,697 8.61 4.08 2,107,222 4.23
$5.50 to $8.50............... 1,643,047 8.57 7.03 574,992 7.06
$8.88 to $12.00.............. 94,950 8.65 11.52 30,713 11.60
---------- ---------
20,860,963 9.09 2.32 4,742,726 3.07
========== =========
The weighted-average remaining contractual life of options outstanding at
December 31, 2001 and December 31, 2000 was 9.09 years and 9.31 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
F-23
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
subsequently determined to be greater than the exercise price of the stock
options at the date of grant. The Company recorded a reduction of $8,119,000 of
deferred stock-based compensation due to forfeitures of pre-IPO stock options
for the year ended December 31, 2001. The Company recorded deferred stock-based
compensation, net of forfeitures, related to employees of $53,206,000 for the
year ended December 31, 2000. A total of $18,993,000, $28,796,000 and
$6,067,000 has been amortized to stock-based compensation expense for the years
ended December 31, 2001, 2000 and 1999, 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 and 1999 was $8.64 and $3.19, 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:
Year ended Year ended Year ended
December 31, December 31, December 31,
2001 2000 1999
------------- ------------- ------------
Net loss:
As reported............... $(188,415,000) $(119,790,000) $(20,791,000)
Pro forma................. (196,979,000) (122,845,000) (21,128,000)
Net loss per share:
As reported............... $ (2.39) $ (3.48) $ (4.98)
Pro forma................. (2.50) (3.57) (5.06)
The Company's fair value 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:
Year ended Year ended Year ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
Dividend yield............................................. 0% 0% 0%
Expected volatility........................................ 80% 80% 0%
Risk-free interest rate.................................... 3.94% 6.14% 5.66%
Expected life (in years)................................... 3.04 2.50 2.52
The Company's fair value calculations for employee's stock purchase rights
under the Purchase Plan were made using the Black-Scholes option pricing model
with weighted average assumptions consistent with those used for employee
grants as indicated above; however, the assumption for expected life (in years)
used for the Purchase Plan was 2 years for both 2001 and 2000.
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 a reduction in deferred stock-based compensation of
$164,000 for the year ended December 31, 2001 due to a reduction in the fair
value of the Company's stock during the year, and an increase in deferred
stock-based compensation of $1,332,000 for the year ended December 31, 2000. A
total of $51,000, $1,097,000 and $560,000 has been amortized to stock-based
compensation expense for the years ended December 31, 2001, 2000, and 1999,
respectively. The weighted average estimated fair value of non-employee stock
options granted at exercise prices below market price at grant during 2001,
2000 and 1999 was $1.17, $0.34 and $2.63 per share, respectively.
F-24
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's calculations for non-employee grants were made using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
Year ended Year ended Year ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
Dividend yield........................................ 0% 0% 0%
Expected volatility................................... 80% 80% 80%
Risk-free interest rate............................... 5.14% 5.99% 5.48%
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 hubs 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 hubs 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 were 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. 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
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 hubs 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
F-25
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. 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
199,053 shares were 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 hubs in exchange for
colocation space and related benefits in such IBX hubs. 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.
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 hubs in
exchange for colocation space and related benefits in such IBX hubs. 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
F-26
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 hubs in exchange for colocation
services and related benefits in such IBX hubs. 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.
In September 2001, the Company amended and restated the Worldcom Venture
Fund Warrant, issued in June 2000, and reduced the total number of shares
available to purchase to 295,000 shares of the Company's common stock at $5.33
per share, which had been previously earned. In return for providing services
to the New York metropolitan area IBX hub, which is currently under
construction, the Company issued two new warrants to the Worldcom Venture Fund.
The first new warrant is to purchase 355,000 shares of the Company's common
stock at $0.01 per share, of which 150,000 shares are immediately vested and
exercisable (the "Second Worldcom Venture Fund Warrant"). The second new
warrant is to purchase 245,000 shares of the Company's common stock at $0.01
per share (the "Third Worldcom Venture Fund Warrant"). All Worldcom Venture
Fund warrants expire five years from the date of grant. The unearned portion of
the Second Worldcom Venture Fund Warrant and the Third Worldcom Venture Fund
Warrant will be fully earned and exercisable at such time as Worldcom provides
services, as defined in the warrant agreements, to the New York metropolitan
area IBX hub. The unearned portion of the Second Worldcom Venture Fund Warrant
and the Third Worldcom Venture Fund Warrant are subject to a reduction in
shares if there are Worldcom-caused delays in providing Worldcom service by the
opening date of the New York metropolitan area IBX hub. The earned portion of
the Second Worldcom Venture Fund Warrant was valued at $56,000 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 earned portion of
this warrant: fair market value per share of $0.38, dividend yield of 0%,
expected volatility of 80%, risk-free interest rate of 6.00% and a contractual
life of 5 years. The unearned portion of the Second Worldcom Venture Fund
Warrant and the Third Worldcom Venture Fund Warrant will be valued at the time
that they are earned.
F-27
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). 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 December 31,
2001.
The Company has the following warrants outstanding as of December 31, 2001:
Warrants Exercise
Common stock warrants outstanding price
- --------------------- ----------- --------
Venture Leasing Loan Agreement Warrant..................... 270,000 $ 3.00
Senior Note Warrants....................................... 1,755,781 0.0067
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.............................. 295,000 5.33
Second Worldcom Venture Fund Warrant....................... 355,000 0.01
Third Worldcom Venture Fund Warrant........................ 245,000 0.01
Heller Warrant............................................. 37,500 4.00
Other warrants............................................. 50,000 0.01
Other warrant.............................................. 6,000 5.00
---------
4,512,381
=========
7. Income Taxes
No provision for federal income taxes was recorded from inception through
December 31, 2001 as the Company incurred net operating losses during the
period.
State tax expense is included in general and administrative expenses and
aggregated less than $16,000 for each of the years in the three year period
ended December 31, 2001.
Based on the available objective evidence, the Company believes it is more
likely than not that the net deferred tax assets will not be fully realizable.
Accordingly, the Company has provided a full valuation allowance against its
net deferred tax assets as of December 31, 2001.
F-28
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred tax assets (liabilities) as of December 31 consists of the
following (in thousands):
December 31,
------------------
2001 2000
-------- --------
Deferred tax assets:
Depreciation and amortization........................... $ (2,767) $ (3,857)
Reserves................................................ 4,840 3,660
Credits................................................. 120 --
Capitalized start-up costs.............................. 5,206 4,855
Net operating losses.................................... 74,577 31,614
Restructuring charges................................... 3,023 --
-------- --------
84,998 36,272
-------- --------
Deferred tax liability..................................... -- --
-------- --------
-- --
-------- --------
Gross deferred tax asset................................... 84,998 36,272
Valuation allowance........................................ (84,998) (36,272)
-------- --------
Net deferred tax asset.................................. $ -- $ --
======== ========
As of December 31, 2001, the Company has a net operating loss carryforward
of approximately $203.6 million for federal and approximately $91.7 million for
state tax purposes. If not utilized, these carryforwards will begin to expire
beginning in 2010 for federal and 2003 for state tax purposes.
The Company has research credit carryforwards of approximately $76,000 and
$67,000 for federal and state income tax purposes, respectively. If not
utilized, the federal carryforward will expire in various amounts beginning in
2010. The California credit can be carried forward indefinitely.
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. In the event the Company has had a change in ownership,
utilization of the carryforwards could be restricted.
8. Commitments and Contingencies
Unimproved Property
In May 2000, the Company entered into a purchase agreement regarding
approximately 79 acres of real property in San Jose, California. In June 2000,
before closing on this property, the Company assigned its 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 the Company for
the property (the "iStar Lease"). Under the terms of the iStar Lease, the
Company has the option to extend the lease for an additional 60 years, for a
total lease term of 80 years. In addition, the Company has the option to
purchase the property from iStar on certain designated dates in the future. In
September 2001, the Company amended the iStar Lease. Previously, the Company
posted a letter of credit in the amount of $10,000,000 and was required to
increase the letter of credit by $25,000,000 to an aggregate of $35,000,000 if
the Company did not meet certain development and financing milestones. The
Company successfully re-negotiated the letter of credit provision in the iStar
Lease whereby the aggregate obligation was reduced by $10,000,000 to
$25,000,000 provided the Company agreed to post an additional letter of credit
totaling $15,000,000 prior to September 30, 2001. In addition, the operating
lease commitments, for the 12-month period ending September 2002, were reduced
by $3,000,000 provided the Company prepaid a full year
F-29
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of lease payments. The benefit of this reduction will be amortized to rent
expense over the full term of the lease. The additional letter of credit was
funded prior to September 30, 2001 and the rent pre-payment was funded
subsequent to September 30, 2001. These letter of credit security deposits
shall be reduced on a pro rata basis based on the status of construction
activity on this property. The Company is currently working with the city of
San Jose and county of Santa Clara to prepare this land for future development.
As a result, the Company will be assessed increased property taxes related to
the improvement of this land commencing in 2004.
Operating Lease Commitments
The Company leases its IBX hubs and certain equipment under noncancelable
operating lease agreements expiring through 2025. The centers' lease agreements
typically provide for base rental rates that 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, including the iStar Lease noted
above, as of December 31, 2001 are summarized as follows (in thousands):
Year ending:
2002......................................................... $ 23,780
2003......................................................... 31,170
2004......................................................... 31,443
2005......................................................... 31,889
2006......................................................... 34,219
Thereafter................................................... 425,650
--------
Total.................................................... $578,151
========
During the quarter ended September 30, 2001, the Company recorded a
restructuring charge, primarily as a result of its revised European strategy
(see Note 11). Part of this restructuring charge included the costs associated
with exiting out of several operating leases in Europe and the U.S. As of
December 31, 2001, three European operating leases and two U.S. operating
leases remain as obligations. The total cost of the three European and two U.S.
operating leases for which the Company is pursuing lease terminations is
approximately $146.5 million of potential savings out of the total $578.2
million of the minimum future operating lease payments indicated above. The
Company expects to successfully complete the exit of these remaining leases
during 2002 (see Note 12).
Total rent expense was approximately $27,150,000, $16,157,000 and $1,739,000
for the years ended December 31, 2001, 2000 and 1999, respectively. Deferred
rent included in other liabilities was $9,691,000 and $3,793,000 as of December
31, 2001 and 2000, respectively.
Legal Actions
During the quarter ended September 30, 2001, putative shareholder class
action lawsuits were filed against the Company, certain of its officers and
directors, and several investment banks that were underwriters of the Company's
initial public offering. The suits allege that the underwriter defendants
agreed to allocate stock in the Company's initial public offering to certain
investors in exchange for excessive and undisclosed commissions and agreements
by those investors to make additional purchases in the aftermarket at
pre-determined prices.
F-30
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Plaintiffs allege that the prospectus for the Company's initial public offering
was false and misleading and in violation of the securities laws because it did
not disclose these arrangements. The Company and its officers and directors
intend to defend the action vigorously. The Company believes that more than one
hundred other companies have been named in nearly identical lawsuits that have
been filed by some of the same plaintiffs' law firms. The Company believes it
has adequate legal defenses and believes that the ultimate outcome of these
actions will not have a material effect on the Company's consolidated financial
position, results of operations or cash flows, although there can be no
assurance as to the outcome of such litigation.
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, results of
operations or cash flows of the Company.
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 2001. Employee
contributions and earnings thereon vest immediately. Although the Company may
make discretionary contributions to the 401(k) Plan, none have ever been made
as of December 31, 2001.
9. Related Party Transactions
Through December 31, 2000, the Company advanced an aggregate of $1,150,000
to three officers of the Company. During 2001, the Company advanced an
additional $2,412,000 to two officers of the Company, including a loan to the
Company's chief executive officer totaling $1,512,000. All such employee loans
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 2006, 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. In October 2001, one of these loans totaling $150,000 was
repaid in full in conjunction with an officer leaving the Company. These loans
are presented in other assets on the accompanying consolidated balance sheets
as of December 31, 2001 and 2000. Subsequent to December 31, 2001, several of
these loans were settled (see Note 12).
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.
10. Segment Information
The Company and its subsidiaries are principally engaged in the design,
build-out and operation of neutral IBX hubs. All revenues result from the
operation of these IBX hubs. 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.
F-31
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the quarter ended September 30, 2001, the Company recorded a
restructuring charge as part of its revised European services strategy. A total
of $45,315,000 of the restructuring charge related to the write-off of certain
European assets to their net realizable value (see Note 11). As of December 31,
2001, all of the Company's operations and assets were based in the United
States with the exception of $2,234,000 of the Company's net identifiable
assets based in Europe and $51,515,000 of the Company's total net loss was
attributable to the development and restructuring of its European operations
for the year ended December 31, 2001. 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.
11. Restructuring Charge
During the quarter ended September 30, 2001, the Company revised its
European services strategy through the development of new partnerships with
other leading international Internet exchange partners rather than build and
operate its own European IBX hubs. In addition, the Company initiated efforts
to exit certain leaseholds relating to certain excess U.S. operating leases.
Also, in September 2001, the Company implemented an approximate 15% reduction
in workforce, primarily in headquarter positions, in an effort to reduce
operating costs. As a result, the Company took a total restructuring charge of
$48,565,000 primarily related to the write-down of European construction in
progress assets to their net realizable value, the write-off of several
European letters of credit related to various European operating leases, the
accrual of estimated European and U.S. leasehold exit costs and the severance
accrual related to the reduction in workforce. The remaining European assets as
of December 31, 2001, totaling $2,234,000, represents assets purchased during
pre-construction activities that are now held for resale. As of December 31,
2001, the Company has successfully surrendered one of the European leases. The
Company expects to successfully complete the exit of the remaining leases
during 2002 (see Note 12). Should it take longer to negotiate the exit of the
remaining leases or the lease settlement amounts exceed the amounts estimated
by management, the actual lease exit costs could exceed the amount estimated
and additional restructuring charges may be required. The reduction in
workforce was substantially completed during the fourth quarter of 2001.
A summary of the restructuring charge is outlined as follows (in thousands):
Accrued
restructuring
Total charge as of
restructuring Non-cash Cash December 31,
charge charges payments 2001
------------- -------- -------- -------------
Write-down of European construction in
progress............................. $29,260 $(29,260) $ -- $ --
Write-off of European letters of credit 8,634 (8,634) -- --
European lease exit costs.............. 6,368 (2,059) (675) 3,634
European legal fees and other charges.. 1,053 -- (81) 972
U.S. lease exit costs.................. 2,000 -- (488) 1,512
Workforce reduction.................... 1,250 (134) (844) 272
------- -------- ------- ------
$48,565 $(40,087) $(2,088) $6,390
======= ======== ======= ======
12. Subsequent Events
On January 1, 2002, pursuant to the provisions of the Company's stock plans
(see Note 6), the number of common shares in reserve automatically increased by
4,805,045 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.
F-32
EQUINIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In January 2002, the Board of Directors forgave $874,000 of the chief
executive officer's employee loan (see Note 9) totaling $1,512,000 in exchange
for the chief executive officer waiving his right to any bonuses earned and
expensed in 2001. The remaining amount due under the loan of $638,000 was
repaid to the Company in full in February 2002. Furthermore, the Company
negotiated with two other executive officers of the Company to repay their
loans in full totaling $1,000,000 in exchange for the Company paying the
interest on their mortgage for their principal residence for a 24-month period.
One of these loans totaling $750,000 was repaid in full in February 2002 and
the second loan totaling $250,000 is scheduled to be repaid in full in March
2002.
In February 2002, the Company entered into a termination agreement for its
operating leasehold in Amsterdam, The Netherlands (the "Termination
Agreement"). As stipulated in the Termination Agreement, the Company will
surrender two previously-posted letters of credit totaling approximately
$4,814,000, which the Company had already fully written-off in conjunction with
the restructuring charge that the Company recorded during the third quarter of
2001 (see Note 11). The first letter of credit was surrendered in March 2002
and the second letter of credit will be surrendered once the landlord submits a
budget to the Company for the costs associated with retrofitting the property
for future subletting. The costs associated with terminating this leasehold are
consistent with those that the Company estimated during the third quarter of
2001.
In February and March 2002, the Company retired $24,950,000 of Senior Notes
(see Note 4) in exchange for 9,313,408 shares of the Company's common stock.
The total number of shares outstanding upon completion of the exchange is
approximately 90.2 million shares. The Company is currently evaluating the
accounting for this transaction.
In March 2002, the Company entered into arrangements with numerous vendors
to resell equipment and bandwidth. The Company began to offer such offering in
an effort to offer its customers a more fully-integrated services solution.
Under the terms of the reseller agreements, the Company will sell the vendor's
services or products to its customers and the Company will contract with the
vendor to provide the related services or products. To date, two reseller
agreements have been signed with companies associated with individuals who
serve on the Company's Board of Directors. The Company plans to recognize
revenue from such arrangements on a gross basis in accordance with Emerging
Issue Task Force Issue No. 99-19, Recording Revenue as a Principal versus Net
as an Agent. The Company acts as the principal in the transaction as the
Company's customer services agreement identifies the Company as the party
responsible for the fulfillment of product/ services to the Company's customers
and has full pricing discretion. In the case of products sold under such
arrangements, the Company takes title to the products and bears the inventory
risk as the Company has made minimum purchase commitments for equipment to
various vendors. The Company has credit risk, as it is responsible for
collecting the sales price from a customer, but must pay the amount owed to its
suppliers after the suppliers perform, regardless of whether the sales price is
fully collected. In addition, the Company will often determine the required
equipment configuration and recommend bandwidth providers from numerous
potential suppliers.
F-33
EQUINIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
QUARTERLY FINANCIAL INFORMATION (Unaudited)
The Company believes that period-to-period comparisons of its financial
results should not be relied upon as an indication of future performance. The
Company's revenues and results of operations have been subject to significant
fluctuations, particularly on a quarterly basis, and the Company's revenues and
results of operations could fluctuate significantly quarter-to-quarter and
year-to-year. Significant quarterly fluctuations in revenues will cause
significant fluctuations in our cash flows and the cash and cash equivalents
and accounts receivable accounts on the Company's balance sheet. Causes of such
fluctuations may include the volume and timing of new orders and renewals, the
sales cycle for our services, the introduction of new services, changes in
service prices and pricing models, trends in the Internet infrastructure
industry, general economic conditions (such as the recent economic slowdown),
extraordinary events such as acquisitions or litigation and the occurrence of
unexpected events.
The unaudited quarterly financial information presented below has been
prepared by the Company and reflects all adjustments, consisting only of normal
recurring adjustments, which in the opinion of management are necessary to
present fairly the financial position and results of operations for the interim
periods presented.
The following table presents selected quarterly information for fiscal 2001,
2000 and 1999:
First Second Third Fourth
quarter quarter quarter quarter
-------- -------- -------- --------
(in thousands, except per share data)
2001:
Revenues.................................... $ 12,613 $ 16,157 $ 17,178 $ 17,466
Net loss.................................... (41,537) (37,857) (81,574)(a) (27,447)
Basic and diluted net loss per share........ (0.54) (0.48) (1.03) (0.34)
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)
- --------
(a) Includes a $48.6 million restructuring charge primarily related to the
Company's revised European strategy.
F-34
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 June 10,
1999.
10.13*+ Lease Agreement with Carrier Central LA, Inc., as successor in
interest to 600 Seventh Street Associates, Inc., dated as of August
8, 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.
10.19*+ 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.
Exhibit
Number Description of Document
------- -----------------------
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 Carrier Central LA, Inc., as successor in
interest to 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.
10.37****+ 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 18, 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.
10.41*****+ Fourth Supplement to the Lease Agreement with Naxos Schmirdelwerk
Mainkur GmbH and A.A.A. Aktiengesellschaft Allgemeine
Anlageverwaltung vorm. Seilwolff AG von 1890, acting in partnership
under the name Naxos-Union Grundstucksverwaltungsgesellschaft GbR,
dated as of July 3, 2001.
10.42*****+ First Amendment to Deed of Lease with TrizecHahn Beaumeade Technology
Center LLC, dated as of March 22, 2001.
10.43*****+ First Lease Amendment Agreement with Market Halsey Urban Renewal,
LLC, dated as of May 23, 2001.
10.44*****+ First Amendment to Lease with Nexcomm Asset Acquisition I, L.P.,
dated as of April 18, 2000.
10.45*****+ Amendment to Lease Agreement with Burlington Realty Associates III
Limited Partnership, dated as of December 18, 2000.
10.46****** First Modification to Ground Lease by and between iStar San Jose, LLC
and Equinix, Inc., dated as of September 26, 2001.
Exhibit
Number Description of Document
------- -----------------------
10.47****** Amended and Restated Credit and Guaranty Agreement, dated as of
September 30, 2001.
10.48****** 2001 Supplemental Stock Plan.
10.49 Deed Terminating a Commercial Lease with Compagnie des Entrepots et
Magasins Generaux de Paris, dated as of September 7, 2001.
16.1* Letter regarding change in certifying accountant.
21.1**** Subsidiaries of Equinix.
24.1 Power of Attorney (see page 40).
- --------
* 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.
***** 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
June 30, 2001.
****** 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, 2001.
+ 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.