Amendment No. 1 to Form 10-K/A
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-K/A

 

x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2002

 

OR

 

¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

 

Commission file number 000-31293

 


 

EQUINIX, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

77-0487526

(State of incorporation)

 

(IRS Employer Identification No.)

 

301 Velocity Way, Fifth Floor, Foster City, California 94404

(Address of principal executive offices, including ZIP code)

 

(650) 513-7000

(Registrant’s telephone number, including area code)

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $0.001

 


 

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.    x  Yes    ¨  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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). ¨  Yes    x  No

 

The aggregate market value of the voting and non-voting common stock held by non-affiliates computed by reference to the price at which the common stock was last sold, or the average bid and asked price of such common stock, as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $27.5 million.

 

As of March 31, 2003, a total of 8,518,790 shares of the registrant’s common stock were outstanding.

 



Table of Contents

EQUINIX, INC.

 

FORM 10-K

 

DECEMBER 31, 2002

 

TABLE OF CONTENTS

 

Item


        

Page No.


   

PART I

      

1.

 

Business

    

3

2.

 

Properties

    

11

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

    

15

7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    

17

7A.

 

Quantitative and Qualitative Disclosures About Market Risk

    

41

8.

 

Financial Statements and Supplementary Data

    

43

9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    

43

   

PART III

      

10.

 

Directors and Executive Officers of the Registrant

    

44

11.

 

Executive Compensation

    

47

12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

    

51

13.

 

Certain Relationships and Related Transactions

    

53

14.

 

Controls and Procedures

    

54

   

PART IV

      

15.

 

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

    

55

   

Signatures

    

60

   

Certification of Chief Executive Officer

    

62

   

Certification of Chief Financial Officer

    

63

 

 

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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 designs, builds and operates Internet Business Exchange (“IBX”) hubs where Internet businesses place their equipment and their network facilities in order to interconnect with each other to improve Internet performance. We currently operate fifteen IBX hubs located in six countries in the United States and Asia-Pacific that allow critical Internet networks, global enterprises, content providers and other infrastructure providers to connect their networks to manage and grow their network and Internet operations for significant cost savings and increased performance and reliability. We have successfully united the major companies that make up the Internet under one roof, which provides our customers the opportunity to directly connect to networks and managed service partners in order to increase performance and lower their costs of operations. 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 have all located at our IBX hubs to directly connect with each other and their customers.

 

We provide a wide range of network-neutral colocation, traffic exchange, connectivity and managed IT infrastructure services to our customers. We build and manage 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 of our customers’ colocation products. Traffic exchange services allow customers to trade network traffic with each other simply and easily. More than 100 major bandwidth providers and Internet service providers have placed their operations at our 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, WorldCom/UUNET, Sprint, KDDI, British Telecom, Cable&Wireless, Qwest, and Level 3. We are a neutral or “open” IBX environment because we do not operate our own network. As a result, we are able to offer direct interconnection to the largest aggregation of bandwidth providers and Internet service providers. This aggregation of providers attracts customers such as Electronic Arts, Electronic Data Systems, Goldman Sachs, Google, IBM, Kyocera, MSN, Washingtonpost.Newsweek Interactive and Yahoo!. Direct interconnection to our aggregation of networks, which serve more than 90% of the world’s Internet routes, allows our 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 us, and customers look to Equinix to help manage this choice in order to simplify their operations. We also offer a suite of managed IT infrastructure services and will continue to provide new services to help customers maximize the advantage of multiple bandwidth and Internet service providers. These services include the management of multiple carriers, disaster recovery and other outsourcing services. For example, we offer customers connectivity

 

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to bandwidth from multiple carriers and provide all of the necessary management and routing technology to ensure each customer is getting the maximum benefits of carrier redundancy. We also provide customers monitoring and site management services so that customers have direct insight into how their operations are performing. Disaster recovery services include remote backup and recovery, standby operations facilities and data storage services. In addition, a wider suite of managed services such as messaging services is offered in select Asia-Pacific locations. All of these services provide customers with one simple point of contact for contracting and ongoing support and maintenance. We will continue to introduce new services that customers can use to improve the overall performance of their operations.

 

In December 2002, Equinix merged with two of the leading network-neutral colocation providers in Asia to expand our footprint into the fast growing Asia-Pacific market. We now have fifteen IBX hubs, consisting of more than one million square feet, which operate in key United States and Asia-Pacific Internet intersection points. In the US, Equinix has an IBX hub in Washington, D.C., Dallas, Chicago, Honolulu, Silicon Valley and two each in Los Angeles and the New York area. In Asia-Pacific, Equinix has an IBX hub in Hong Kong, Tokyo, Sydney, Bangkok and two IBX hubs in Singapore. In addition, we have a strategic partnership established in Europe to serve our customers’ needs.

 

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 interconnection between these 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).

 

Ultimately, these NAPs were unable to scale with the growth of the Internet and the lack of “neutrality” by the carrier owners of these NAPs created a conflict of interest with the participants. This created a market need for network-neutral interconnection points that could accommodate the rapidly growing need to increase performance for enterprise and consumer users of the Internet, especially with the rise of important content providers such as Microsoft, Yahoo!, America Online and others. In addition, the providers, as well as a growing number of enterprises required a more secure, reliable solution for direct connection to a variety of telecommunications networks as the importance of the Internet continued to grow.

 

To accommodate Internet traffic 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 were moved to these private 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. Customers have chosen Equinix for their peering operations because they are now able to reach all of the networks they peer with all in one location, with simple direct connections. Their ability to peer across the room, instead of across a metro area has increased the scalability of their operations while decreasing cost by upwards of 50%.

 

Our 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. We have been successful in uniting the major companies that make up

 

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the Internet infrastructure including AT&T, Cable & Wireless, Level 3, Qwest, Sprint and UUNET/Worldcom. These companies, which constitute the world’s largest top Internet service providers, together with most of the major access networks, including SBC, Shaw Communications, Cox Communications, Comcast Corporation, America Online and MSN, second tier backbones such as Williams, Global Crossing, and Verio, top international telecommunications carriers, including British Telecom, Deutsche Telecom, France Telecom, KDDI, Singapore Telecom, StarHub, Japan Telecom, Hutchison, Bell Canada, Telia and Telstra, and almost every fiber, sonet, Ethernet and competitive local exchange company, including OnFiber Communications, Yipes, Looking Glass Networks and Cogent Communications, and incumbent local exchange company, including Verizon, SBC and Ameritech, are our customers and use us to interconnect with each other and their customers. Additionally, we provide an important industry leadership role in the area of exchange points and are consistently looked to as an industry expert and key influence in this subject matter.

 

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 or by contracting through Equinix for this connectivity. For our customers, this represents significant cost savings and increased performance.

 

Our Solution

 

Our 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 we provide 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 100 networks ensures high-quality interconnection. With the mass of networks present, global enterprises are increasingly looking at ways to provide network diversity and increase performance of their operations, and are utilizing our IBX hubs to ensure their IT infrastructures are operating at the core of the Internet. By using multiple networks, customers are able to insure 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 we offer provides customers with the flexibility to enable the highest performing Internet operations.

 

Improved Economics.    Our U.S. services such as Equinix GigE Exchange and Equinix Internet 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% to 40% of bandwidth costs through the traffic exchange services we offer. In addition, in both the U.S. and Asia-Pacific, content companies and enterprises can save significant bandwidth costs because the number of networks housed within Equinix competing for the traffic of these companies results in lowers prices while increasing performance.

 

Access to International Markets.    Equinix offers it’s network, content and enterprise customers a one-stop solution for their outsourced IT infrastructure needs in the U.S. and Asia-Pacific. This is especially important for U.S. enterprises who want to expand into Asia-Pacific, where a myriad of complexities for doing business in each country remains challenging. Equinix offers a consistent standard of quality, a single contract and a single point of support for all our locations throughout the U.S. and Asia-Pacific.

 

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Our 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.    We have assembled a “critical mass” of premier network providers and content companies and have 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 networks in the most efficient manner. In addition, as these companies locate in our IBX hubs, 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, pull in their business partners, 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 IBX hub. Similarly, a large financial site that chooses to locate in one of our IBX hubs may encourage a bandwidth provider, a site management company or another content partner, like a financial news service, to locate in the same IBX hub. In turn, these bandwidth providers or content partners will bring their business partners to the IBX hub. We have over 100 unique networks, including all of the top tier networks, allowing our customers to directly interconnect with providers that serve more than 90% of global Internet routes.

 

Leverage IBX Hubs for New Products and Services.    The leading networks that we have assembled uniquely positions our IBX hubs as the place to be for critical Internet companies in the U.S. and Asia-Pacific. We intend to leverage this position and offer additional traffic exchange and managed IT infrastructure services that are important to traffic exchange and the ability for enterprise companies to utilize multiple networks.

 

Promote our IBX hubs as the Highest Performance Points on the Internet.    With all of the major U.S. carriers, many of the key international networks, five of the top seven web properties, and the more than 100 total networks as customers, our 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 additional international networks, access and cable networks, as well as additional leading content and global enterprise companies. We have established 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 one or more years in length, often with options on additional space and services. Our single largest customer, IBM, represented approximately 20% and 15% of total revenues for the twelve months ended December 31, 2002 and 2001, respectively. No other single customer accounted for more than 10% of revenues for the twelve months ended December 31, 2002 or 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 or entertainment content and conducting the sale of goods and services; and

 

    Systems Integrators and hosting companies that integrate and manage a customer’s end-to-end web presence and performance.

 

Products and Services

 

Our products and services are comprised of four types: Colocation, Connectivity, Traffic Exchange and Managed IT Infrastructure services.

 

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Colocation Services

 

The Equinix IBX provides our customers with secure, reliable and fault-tolerant environments that are necessary for optimum Internet commerce interconnection. Our IBX hubs 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. Some specifications or services provided may differ in our Asian-Pacific locations in order to properly meet the local needs of customers in those locations.

 

Within our IBX hubs, customers can place their equipment and interconnect with a choice of Internet companies. We also provide customized solutions for customers looking to package our IBX space as part of their complete, one-stop shop solution. Our colocation products and services include:

 

Cabinets.    Customers have several choices for colocating their networking and server equipment. They can place the equipment in one of our shared or private cages or customize their space to build their own data hub within an IBX hub. 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 electronic locking 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 or other appropriate security.

 

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 solution than available in traditional colocation facilities. This space can also be used as a secure disaster recovery point for customers’ business and operations personnel. 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.

 

Connectivity Services

 

Internet Connectivity Services.    Customers who are installing in our IBX hubs generally require IP connectivity or bandwidth services. Equinix offers customers the ability to contract for these services directly with the carrier or through Equinix. Customers who wish to receive a single bill and a single point of support for all of their services contract through Equinix for their bandwidth needs. In order to maintain our network neutrality, Equinix has relationships with the top network carriers to provide these services. Equinix provides

 

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these services on a retail basis with each individual carrier and customer and does not aggregate this traffic or run a network. Customers get the benefit of operating directly with branded carriers with the convenience of a single bill and support. Internet Connectivity Services are priced with an initial installation fee and an ongoing monthly recurring charge based on amount of bandwidth committed or used.

 

Traffic Exchange Services

 

Our traffic exchange services, currently available in Equinix U.S. locations, enable scalable, reliable and cost-effective interconnection, service and traffic exchange between bandwidth providers, Internet service providers and large content companies. In addition, we also provide an important industry leadership role by acting as the relationship broker between parties who would like to interconnect within our IBX hubs. Our 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 bring a tremendous amount of intellectual knowledge to this market. Our staff have 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. We will continue to develop additional services in the area of 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. 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 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.

 

Managed IT Infrastructure 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 100 ISPs and carriers located in our IBX hubs, we leverage the value of network choice with our set of multi-network management and other outsourced IT services.

 

Equinix Performance Packages.    With Equinix Performance Packages, enterprises and content companies can outsource the complications of network integration to us in order to gain the performance and redundancy benefits of connecting to multiple networks. These services address a wide range of customer needs ranging from the basics of configuring traffic to efficiently traverse multiple networks to sophisticated applications that allow customers to tune their networks to balance price and performance priorities by routing traffic across the lowest-priced path. These services are priced with an initial installation fee and an ongoing recurring monthly charge.

 

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 our 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 point of contact for support and billing. The service is priced based upon the number of items a customer monitors and is billed monthly.

 

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Equinix Backup and Recovery.    The Equinix Backup & Recovery service is a business continuity solution that provides an enterprise-class, fully managed and monitored tape backup solution in the IBX Center. The service ensures end-customer data is always secure and available whenever the customer needs to restore data to a production system, including an option to maintain copies of data outside the IBX Center. Equinix Backup & Recovery can support multiple end-customer applications, operating systems and database management systems across an extensive variety of server makes and models. The service is priced with an initial installation fee and an ongoing monthly recurring charge.

 

Equinix Storage Services.    Equinix Storage Services provide outsourced data solutions for storage area networks, network-attached storage and backup & recovery. Services are available with different classes of redundancy, clustering, monitoring and failover functionality, meeting customer needs for both uniform and varying system environments. This functionality provides customers with a robust, easily managed, and cost effective shared storage solution. Equinix Storage Services are only available in select Asia-Pacific locations.

 

Equinix Mail Service.    Equinix’s enterprise messaging service is a complete outsourced solution, primarily based mainly on the Lotus Notes and Microsoft Exchange platform, which enterprises entrust the operation and support of their messaging application. This service is currently only available in the Equinix Singapore location and the service is priced with an initial installation fee and an ongoing monthly recurring charge.

 

Managed Platform Solutions.    Managed Platform Solutions delivers pre-qualified, pre-installed, pre-hardened and fully managed systems platforms upon which customers can host their co-located applications. These platforms are available in different configuration to meet the needs of the customer. Each configuration includes the server(s), operating system, network connectivity, and system administration management as well as options for database and network administration. This service is only available in the Equinix Singapore location and the service is priced with an initial installation fee and an ongoing monthly recurring charge.

 

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 worldwide headquarters office in Silicon Valley, we have established an Asian-Pacific regional headquarters location in Singapore. Our U.S. sales offices are located in New York; Reston, Virginia; Los Angeles; Honolulu; Dallas; Chicago and Silicon Valley. Our Asia-Pacific sales offices are located in Bangkok, Hong Kong, Tokyo, Singapore and Sydney.

 

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 come into the IBX hubs. These customers, suppliers and business partners, in turn, encourage their business partners to locate in IBX hubs resulting in additional customer growth. This network effect significantly reduces our new customer acquisition costs.

 

Marketing.    To support our sales effort and to actively promote our brand in the U.S. and Asia-Pacific, 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. Our 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. We continue to develop and host the industry’s most successful educational forums focused on peering technologies and peering practices for ISPs and content providers.

 

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Competition

 

Our current and potential competition includes:

 

    Internet data centers operated by established U.S. and Asian-Pacific communications carriers such as AT&T, Qwest, NTT and SingTel.    Unlike the major network providers, who constructed data centers primarily to help sell bandwidth, we have aggregated multiple networks in one location, providing superior diversity, pricing and performance. Carrier data centers only provide one choice of carriers and generally require capacity minimums as part of their pricing structures. Locating in our IBX hubs provides access to top tier networks and allows customers to negotiate the best prices with a number of carriers resulting in better economics and redundancy.

 

    U.S. 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 in order to scale with traffic growth. In contrast, we provide state-of-the-art, secure facilities and geographic diversity with round the clock support and a full range of network and content provider offerings.

 

    Vertically integrated web site hosting, colocation and ISP companies such as AboveNet/MFN, Digex/WorldCom and Cable&Wireless/Exodus.    Most managed service providers require that customers purchase their entire network and managed services directly from them. We are a network and service provider aggregator and allow 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 our business proposition—by bringing in more partners and customers and thus creating a network effect.

 

Unlike other providers whose core business are bandwidth or managed services, we focus on neutral hubs for networks, content providers and global enterprises. As a result, we are free of the channel conflict common at other hosting/colocation companies. We compete based on the quality of our facilities, our ability to provide a one-stop solution for U.S. and Asia-Pacific locations, the superior performance and diversity of our network neutral strategy, and the economic benefits of the aggregation of top networks and Internet businesses under one roof. Specifically, we have established relationships with a number of leading hosting companies such as IBM (our largest customer) and EDS. We expect to continue to benefit from several industry trends including the consolidation of supply in the colocation market, the need for contracting with multiple networks due to the uncertainty in the telecommunications market and the continued strong growth of the large and stable systems integrators.

 

Employees

 

As of December 31, 2002, we had 475 employees. We had 169 employees based at our corporate headquarters in Mountain View, California (our corporate headquarters moved to Foster City, California in March 2003) and our regional sales offices. Of those employees, 73 were in engineering and operations, 55 were in sales and marketing and 41 were in management and finance. We had 96 employees based at our Washington, D.C., New York, New York, Dallas, Texas, Chicago, Illinois, Los Angeles, California and Silicon Valley area IBX hubs. In addition, as a result of the combination with i-STT and Pihana, we added 210 employees throughout Asia-Pacific, as well as locations in Honolulu, Hawaii and Los Angeles, California. Of these employees, 24 were in engineering and operations, 61 were in sales and marketing and 44 were in management and finance. The remaining 81 employees were based at our Singapore, Tokyo, Hong Kong, Sydney and Bangkok IBX hubs in the Asia-Pacific region, as well as in the two additional U.S. IBX hubs in Los Angeles and Honolulu.

 

Corporate Information

 

We were incorporated in Delaware in June 1998. We are required to file reports under the Exchange Act with the SEC. You may read and copy our materials on file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information regarding the SEC’s Public

 

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Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website at http://www.sec.gov that contains reports, proxy and information statements and other information. You may also obtain copies of our annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K by visiting the investor relations page on our website, www.equinix.com.

 

ITEM 2.

  

PROPERTIES

 

Our executive offices are located in Foster City, California (we moved our corporate headquarters from Mountain View, California in March 2003). 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; Honolulu, Hawaii; Tokyo, Japan; Hong Kong and Shanghai, China; Sydney, Australia; Bangkok, Thailand and Singapore. We also hold a ground leasehold interest in certain unimproved real property in San Jose, California, consisting of approximately 40 acres.

 

We are currently looking to exit from our lease in Shanghai, China, which is an undeveloped property with no IBX hub operations. Additionally, the Company is currently negotiating the exit of a small lease in Ashburn, Virginia, which is also an undeveloped property with no current IBX hub operations.

 

ITEM 3.

  

LEGAL PROCEEDINGS

 

On July 30, 2001 and August 8, 2001, putative shareholder class action lawsuits were filed against us, certain of our 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 our 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. We and our officers and directors intend to defend the actions vigorously. On October 9, 2002, as part of an agreement with the plaintiffs in such lawsuits, all claims against our officers and directors were dismissed without prejudice.

 

Under our terminated loan agreement with Wells Fargo, the Company was required to maintain a minimum cash balance at all times or post a letter of credit. As of June 30, 2002, the Company was not in compliance with this requirement. Wells Fargo filed a lawsuit against the company seeking to force the Company to obtain a letter of credit. As part of an agreement with Wells Fargo entered into in January 2003, Equinix made a payment to Wells Fargo of approximately $1.7 million in full satisfaction of all amounts owed to Wells Fargo under the loan agreement. As part of the same agreement, the lawsuit has been dismissed and the loan agreement has been terminated.

 

ITEM 4.

  

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

On December 30, 2002, a special meeting of the stockholders of Equinix was held in New York, New York, asking our stockholders to vote for two special proposals. The table below, which is presented on a pre-reverse stock split basis, presents the results of these votes based on 98,892,711 shares outstanding on November 22, 2002, the record date for our special meeting:

 

    

Affirmative Votes


  

Votes

Against


  

Abstentions


    

Broker’s Non-Votes


Proposal 1—The issuance of shares in connection with the combination, the financing and the senior note exchange

  

54,051,215

  

569,823

  

82,606

    

0

Proposal 2—The charter merger

  

54,038,260

  

548,426

  

116,958

    

0

 

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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. Our common stock began trading in August 2000. 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 during the last two years. On December 31, 2002, we completed a 32 for 1 reverse stock split of our common stock in order to comply with Nasdaq initial listing requirements. The per share information presented below reflects this reverse stock split.

 

    

Low


  

High


Fiscal 2002:

             

Fourth Fiscal Quarter

  

$

5.70

  

$

11.52

Third Fiscal Quarter

  

 

6.72

  

 

18.56

Second Fiscal Quarter

  

 

11.20

  

 

36.80

First Fiscal Quarter

  

 

33.92

  

 

108.16

Fiscal 2001:

             

Fourth Fiscal Quarter

  

 

12.48

  

 

107.84

Third Fiscal Quarter

  

 

12.16

  

 

45.76

Second Fiscal Quarter

  

 

19.00

  

 

55.36

First Fiscal Quarter

  

 

40.00

  

 

224.00

 

As of December 31, 2002, we had issued 8,448,683 shares of our common stock held by approximately 257 stockholders of record.

 

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 contractual 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 quarter ended December 31, 2002, we issued and sold the following securities:

 

  1.   In October 2002, we amended and restated warrants previously issued to the lenders under the Venture Leasing Loan Agreement in August 1999, as well as issuing new warrants to the lenders, in return for the lenders agreeing to amend the terms of this debt facility. The amended and restated warrants, representing the right to purchase 8,438 shares of our common stock, were repriced from an original per share exercise price of $96.00 to a per share exercise price of $0.32. The new warrants allow for the purchase of an additional 32,188 shares of our common stock with an exercise price of $0.32 per share.

 

  2.  

In December 2002, we issued a warrant to purchase 965,674 of our Series A or Series A-1 preferred stock with an exercise price of $0.01 per share to STT Communications Ltd. in conjunction with the issuance of a $30.0 million 14% convertible secured note (the “Convertible Secured Note”), with interest payable in kind in the form of additional convertible secured notes (the “PIK Notes”). Both the Convertible Secured Note, as well as the PIK Notes, are convertible into shares of our Series A preferred stock, Series A-1 preferred stock or common stock. On this same date, we also issued to

 

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STT Communications Ltd. a Change of Control Warrant, a Series A Cash Trigger Warrant and a Series B Cash Trigger Warrant (collectively, the “Contingently Exercisable Warrants”). The Contingently Exercisable Warrants allow the holder to purchase shares of our common stock in the event of (i) a change of control for the Change of Control Warrant or (ii) a default under our Credit Facility, as amended, for the Series A Cash Trigger Warrant and Series B Cash Trigger Warrant. The number of shares exercisable under the Contingently Exercisable Warrants are based on formulas contained in each of the individual warrant agreements.

 

  3.   In December 2002, we issued 1,084,686 shares of our common stock and 1,868,667 of our Series A preferred stock in consideration for the acquisition of i-STT Pte Ltd, a wholly-owned subsidiary of STT Communications Ltd.

 

  4.   In December 2002, we issued 2,416,379 shares of our common stock in consideration for the acquisition of Pihana Pacific, Inc. (“Pihana”). In addition, we issued warrants to purchase 133,442 shares of our common stock with an exercise price of $191.81 per share to certain stockholders of Pihana.

 

  5.   In December 2002, we issued 1,857,436 shares of our common stock and $15.2 million of cash in exchange for the retirement of $116.8 million of our 13% senior notes due in 2007. The issuance of these shares was deemed to be exempt from registration under Section 3(a)(9) of the Securities Act.

 

Unless otherwise noted, 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 the share certificates issued in these transactions. All recipients had adequate access, through their relationships with us, to information about us.

 

2001 Supplemental Stock Plan

 

The Equinix 2001 Supplemental Stock Plan was adopted by the board of directors effective September 26, 2001. The Company has reserved 1,493,961 shares of common stock for issuance under the 2001 Supplemental Stock Plan. Nonstatutory options and restricted stock awards may be granted under the 2001 Supplemental Stock Plan to employees of the Company (or any parent or subsidiary corporation) who are neither officers nor Board members at the time of grant or to consultants. All option grants will have an exercise price per share equal to not less than 85% of the fair market value per share of common stock on the grant date. Each option will vest in installments over the optionee’s period of service with the Company. The purchase price for newly issued restricted shares awarded under the 2001 Supplemental Stock Plan may be paid in cash, by promissory note or by the rendering of past or future services. As of February 28, 2003, options covering 104,835 shares of common stock were outstanding under the 2001 Supplemental Stock Plan, 1,381,210 shares remained available for future option grants, and options covering 7,916 shares had been exercised. The options will vest on an accelerated basis in the event the Company is acquired and those options are not assumed or replaced by the acquiring entity. An option or award will become fully exercisable or fully vested if the holder’s employment or service is involuntarily terminated within 18 months following the acquisition. The Board may amend or terminate the 2001 Supplemental Stock Plan at any time. The 2001 Supplemental Stock Plan will continue in effect indefinitely unless the board decides to terminate the plan earlier.

 

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Table of Contents

 

Equity Compensation Plan Information

 

The following information is as of December 31, 2002.

 

      

(a)


    

(b)


    

(c)


 

Plan category


    

Number of securities to be issued upon exercise of outstanding options and rights


    

Weighted-average exercise price of outstanding options and rights


    

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))


 

Equity compensation plans approved by security holders

    

620,986

    

$

74.51

    

3,407,262

*

Equity compensation plans not approved by security holders

    

104,835

    

$

12.17

    

1,381,210

 

      
    

    

Totals

    

725,821

    

$

65.51

    

4,788,472

 

      
    

    


*   Includes 35,634 shares from the Employee Stock Purchase Plan.

 

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Table of Contents

 

ITEM 6.

  

SELECTED FINANCIAL DATA

 

The following statement of operations data for the years ended December 31, 2002, 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, 2002, 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.

 

    

Years ended December 31,


    

Period from June 22, 1998 (inception) to December 31,

1998


 
    

2002


    

2001


    

2000


    

1999


    
    

(dollars in thousands, except per share data)

 

Statement of Operations Data:

                                            

Revenues

  

$

77,188

 

  

$

63,414

 

  

$

13,016

 

  

$

37

 

  

$

 

    


  


  


  


  


Costs and operating expenses:

                                            

Cost of revenues (includes stock-based compensation of $266, $426, $766, $177 and none for the periods ended December 31, 2002, 2001, 2000, 1999 and 1998, respectively)

  

 

104,073

 

  

 

94,889

 

  

 

43,401

 

  

 

3,268

 

  

 

 

Sales and marketing (includes stock-based compensation of $952, $2,830, $6,318, $1,631 and $13 for the periods ended December 31, 2002, 2001, 2000, 1999 and 1998, respectively)

  

 

15,247

 

  

 

16,935

 

  

 

20,139

 

  

 

3,949

 

  

 

47

 

General and administrative (includes stock-based compensation of $5,660, $15,788, $22,809, $4,819 and $151 for the periods ended December 31, 2002, 2001, 2000, 1999 and 1998, respectively)

  

 

30,659

 

  

 

58,286

 

  

 

56,585

 

  

 

12,603

 

  

 

902

 

Restructuring charges

  

 

28,885

 

  

 

48,565

 

  

 

 

  

 

 

  

 

 

    


  


  


  


  


Total costs and operating expenses

  

 

178,864

 

  

 

218,675

 

  

 

120,125

 

  

 

19,820

 

  

 

949

 

    


  


  


  


  


Loss from operations

  

 

(101,676

)

  

 

(155,261

)

  

 

(107,109

)

  

 

(19,783

)

  

 

(949

)

Interest income

  

 

998

 

  

 

10,656

 

  

 

16,430

 

  

 

2,138

 

  

 

150

 

Interest expense

  

 

(35,098

)

  

 

(43,810

)

  

 

(29,111

)

  

 

(3,146

)

  

 

(220

)

Gain on debt extinguishment

  

 

114,158

 

  

 

 

  

 

 

  

 

 

  

 

 

    


  


  


  


  


Net loss

  

$

(21,618

)

  

$

(188,415

)

  

$

(119,790

)

  

$

(20,791

)

  

$

(1,019

)

    


  


  


  


  


Net loss per share:

                                            

Basic and diluted

  

$

(7.23

)

  

$

(76.62

)

  

$

(111.23

)

  

$

(159.93

)

  

$

(46.32

)

    


  


  


  


  


Weighted average shares

  

 

2,990

 

  

 

2,459

 

  

 

1,077

 

  

 

130

 

  

 

22

 

    


  


  


  


  


 

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Table of Contents

 

    

As of December 31,


 
    

2002


    

2001


    

2000


    

1999


    

1998


 
    

(dollars in thousands)

 

Balance Sheet Data:

                                            

Cash, cash equivalents and short-term investments

  

$

41,216

 

  

$

87,721

 

  

$

207,210

 

  

$

222,974

 

  

$

9,165

 

Accounts receivable, net

  

 

9,152

 

  

 

6,909

 

  

 

4,925

 

  

 

178

 

  

 

 

Restricted cash and short-term investments

  

 

1,981

 

  

 

28,044

 

  

 

36,855

 

  

 

38,609

 

  

 

 

Property and equipment, net

  

 

390,048

 

  

 

325,226

 

  

 

315,380

 

  

 

28,444

 

  

 

482

 

Construction in progress

  

 

 

  

 

103,691

 

  

 

94,894

 

  

 

18,312

 

  

 

31

 

Total assets

  

 

492,003

 

  

 

575,054

 

  

 

683,485

 

  

 

319,946

 

  

 

10,001

 

Debt facilities and capital lease obligations, excluding current portion

  

 

3,633

 

  

 

6,344

 

  

 

6,506

 

  

 

8,808

 

  

 

 

Credit facility, excluding current portion

  

 

89,529

 

  

 

105,000

 

  

 

 

  

 

 

  

 

 

Senior notes

  

 

28,908

 

  

 

187,882

 

  

 

185,908

 

  

 

183,955

 

  

 

 

Redeemable convertible preferred stock

  

 

 

  

 

 

  

 

 

  

 

97,227

 

  

 

10,436

 

Total stockholders’ equity (deficit)

  

 

284,194

 

  

 

203,521

 

  

 

375,116

 

  

 

8,472

 

  

 

(846

)

Other Financial Data:

                                            

Net cash used in operating activities

  

 

(27,509

)

  

 

(68,854

)

  

 

(68,073

)

  

 

(9,908

)

  

 

(796

)

Net cash used in investing activities

  

 

(7,528

)

  

 

(153,014

)

  

 

(302,158

)

  

 

(86,270

)

  

 

(5,265

)

Net cash provided by financing activities

  

 

16,294

 

  

 

107,799

 

  

 

339,847

 

  

 

295,178

 

  

 

10,226

 

 

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Table of Contents

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 IBX hubs where Internet businesses place their equipment and their network facilities in order to interconnect with each other to improve Internet performance. Our IBX hubs and Internet exchange services enable network service providers, enterprises, content providers, managed service providers and other Internet infrastructure companies to directly connect with each other for increased performance. As of December 31, 2002, we had IBX hubs totaling an aggregate of more than one million gross square feet in the Washington, D.C., New York, Dallas, Chicago, Los Angeles, Honolulu and Silicon Valley areas in the United States and in Singapore, Tokyo, Hong Kong, Bangkok and Sydney in the Asia-Pacific region.

 

Recent Developments.    In September 2002, we exercised an option we had purchased in May 2002 and reduced our obligation under our San Jose ground lease by approximately one-half. In connection with the exercise of this option, we permitted the landlord to unconditionally draw down on the full $25.0 million in letters of credit that had been posted as security for our San Jose ground lease and had been classified as restricted cash and short-term investments on the accompanying balance sheet as of December 31, 2001. The Company recorded a restructuring charge of $19.0 million and the remaining portion of the letters of credit, representing approximately $6.0 million, was recorded as prepaid rent, representing the fair value of the lease payments for the 15-month period commencing October 1, 2002 to December 31, 2003. The prepaid rent represents the total payments that would have otherwise been paid during this period for the remaining one-half of the lease. The prepaid rent will be amortized ratably over this 15-month period.

 

In October 2002, we entered into agreements to consummate a series of related acquisition and financing transactions. These transactions closed on December 31, 2002. Under the terms of these agreements, we combined our business with two similar businesses, that of i-STT Pte Ltd (“i-STT”) and Pihana Pacific, Inc. (“Pihana”). i-STT’s business is based in Singapore, with operations in Singapore and Thailand. Pihana’s business is based in Hawaii, with operations in Hawaii, Los Angeles, Hong Kong, Singapore, Tokyo and Sydney, Australia. In connection with acquisition of i-STT and Pihana, we issued approximately 3.5 million shares of our common stock and approximately 1.9 million shares of our Series A preferred stock. We refer to this transaction as the “combination”. In conjunction with the combination, we issued to i-STT’s former parent company, STT Communications Ltd. (“STT Communications”), a $30.0 million convertible secured note in exchange for cash. We refer to this transaction as the “financing”.

 

i-STT’s operations are, and are expected to continue to be, essentially break-even from operating activities. Although Pihana’s centers are expected to operate at a loss for approximately 24 months from the closing of the combination, Pihana contributed $33.3 million of cash at closing (approximately $21.7 million, net of working capital), which we believe will be sufficient cash to offset its IBX hubs’ projected loss from operations for this period.

 

In addition, by combining Equinix’s, i-STT’s and Pihana’s businesses, we expect to be able to reduce the annual operating expenses of the combined company by approximately $13.0 million. This will be done through

 

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the elimination of duplicate corporate overhead costs, specifically including the closing of Pihana’s corporate headquarters, and a reduction in headcount of the combined companies of nearly 20%, primarily in the general and administrative areas. Furthermore, by using a portion of the cash raised in the transactions to reduce approximately $125.3 million of our debt, we have reduced the annual cash interest expense of the company by approximately $15.8 million.

 

As of December 31, 2002, we had $41.2 million of cash and cash equivalents. We believe that this cash, together with anticipated positive cash flow from operations commencing by the end of 2003 and projected cost-savings in connection with the combination, will be sufficient to meet our working capital, debt service and corporate overhead requirements associated with our operations for the next twelve months. Although we believe we have sufficient cash to reach cash flow break-even from operating, investing and financing activities, we will continue to look for opportunities to raise additional capital to provide the company with greater operating flexibility.

 

In connection with the combination and financing, we amended the terms of the indenture governing our senior notes and extinguished $116.8 million of our senior notes in exchange for a combination of 1.9 million shares of our common stock and $15.2 million of cash. We refer to this transaction as the “senior note exchange”. Because we extinguished the debt in the senior note exchange at a significant discount, we recognized a substantial gain on debt extinguishment during the fourth quarter of 2002.

 

In connection with the combination, financing and the senior note exchange, we amended our credit facility. The most significant terms and conditions of this amendment were:

 

    we were granted a full waiver of previous covenant breaches and were granted consent to use cash in connection with the senior note exchange;

 

    future revenue and EBITDA covenants were eliminated and the remaining minimum cash balance and maximum capital expenditure covenants and other ratios were reset consistent with expected future performance of the combined company for the remaining term of the loan;

 

    we permanently repaid $8.5 million of the then currently outstanding $100.0 million balance, bringing our total amount owed under this facility to $91.5 million as of December 31, 2002; and

 

    the amortization schedule for our credit facility was amended such that the minimum amortization due in 2003-2004 was significantly reduced.

 

Furthermore, in conjunction with the combination, financing, senior note exchange and amendment of our credit facility, on December 31, 2002, we completed a 32 for 1 reverse stock split of our common stock in order to comply with Nasdaq initial listing requirements. Unless otherwise noted, all share and per share amounts in this Annual Report on Form 10-K have been adjusted to give effect to the reverse stock split.

 

Risks and Uncertainties.    Since inception, we have experienced operating losses and negative cash flow. As of December 31, 2002 we had an accumulated deficit of $351.6 million and accumulated cash used in operating and construction activities of $691.5 million. Given our limited operating history, we may not generate sufficient revenue to achieve desired profitability. We therefore believe that we will continue to experience operating losses for the foreseeable future, particularly from our newly-acquired operations in the Asia-Pacific region. See “Risk Factors”.

 

Under the terms of the amended credit facility, we must meet certain financial and non-financial covenants. While these covenants were reset consistent with our expected future performance as a combined company, if we do not achieve the intended growth required or are unable to reduce costs to a level to comply with these covenants, we may be required to repay the $91.5 million currently outstanding under this facility. Since we do not have sufficient cash reserves to pay this if an event of default occurs, we may be required to renegotiate with the debt issuers for forbearance, make other financial arrangements or take other actions in order to pay down the

 

18


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loan. There can be no assurance that such revised covenants will be met, or that we will be able to obtain a forbearance or that replacement financing will be available. In addition, a default in the credit facility will trigger cross-default provisions in our other debt facilities. If the cash flows from operations are not sufficient to support the Company’s cash requirements, cost reductions implemented as a result of this could adversely affect the business and our ability to achieve our business objectives.

 

Critical Accounting Policies and Estimates

 

The preparation of our 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. 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 doubtful accounts;

 

    Restructuring charges;

 

    Accounting for income taxes;

 

    Contingent liabilities;

 

    Accounting for property and equipment;

 

    Impairment of long-lived assets; and

 

    Consolidation.

 

Revenue Recognition and Allowance for Doubtful Accounts.    We derive our revenues from (a) recurring revenue streams, such as from the leasing of cabinet space, power and interconnection services and bandwidth and (b) non-recurring revenue streams, such as from the recognized portion of deferred installation revenues, professional services and resale of equipment. 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. Fees for the provision of e-business services are recognized progressively as the services are rendered in accordance with the contract terms, except where the future costs cannot be estimated reliably, in which case fees are recognized upon the completion of services. We generally guarantee service levels, such as uptime, as outlined in individual customer contracts. To the extent that these service levels are not achieved, we reduce revenue for any credits given to the customer as a result. The Company has the ability to determine such service level credits prior to the associated revenue being recognized, and historically, these service level credits have not been significant.

 

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. It is our customary business practice to obtain a signed master sales agreement and sales order prior to recognizing revenue in an arrangement. 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, we also maintain an

 

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allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our 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 for revenue we had previously expected to collect. 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 our allowances.

 

Our customer base has historically been composed of businesses throughout the U.S. Commencing in fiscal 2003, our revenues will include revenues from our newly-acquired Asia-Pacific operations. We expect that revenues commencing in 2003 will be split approximately 85% in the U.S. and 15% in Asia-Pacific. We perform ongoing credit evaluations of our customers. As of December 31, 2002, one customer, IBM, accounted for 20% of annual revenues and 15% of accounts receivable. As of December 31, 2001, one customer, IBM, accounted for 15% of annual revenues and another customer, SiteSmith, accounted for 10% of accounts receivable. As of December 31, 2000, two customers, IBM and Loudcloud (now known as Opsware), accounted for 12% and 11% of annual revenues, respectively, and two customers, IBM and UUNET, accounted for 19% and 14% of accounts receivable, respectively. No other single customer accounted for greater than 10% of accounts receivable or annual revenues for the periods presented.

 

During the year ended December 31, 2001, we recognized approximately $200,000 of revenue in relation to equipment received from customers in lieu of cash. This equipment is being used in our 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 February and March 2002, we entered into arrangements with numerous vendors to resell bandwidth, as well as equipment. We began to offer such services in an effort to provide our customers a more fully-integrated services solution. Under the terms of the reseller agreements, we sell the vendors’ services or products to our customers and we will contract with the vendor to provide the related services or products. We recognize revenue from such arrangements on a gross basis in accordance with Emerging Issues Task Force (“EITF”) Abstract No. 99-19, “Recording Revenue as a Principal versus Net as an Agent”. We act as the principal in the transaction as our customer services agreement identifies us as the party responsible for the fulfillment of product/ services to our customers and have full pricing discretion. In the case of products sold under such arrangements, we take title to the products and bear the inventory risk as we have made minimum purchase commitments to various vendors. We have credit risk, as we are responsible for collecting the sales price from a customer, but must pay the amount owed to our suppliers after the suppliers perform, regardless of whether the sales price is fully collected. In addition, we will often determine the required equipment configuration and recommend bandwidth providers from numerous potential suppliers.

 

While we do not anticipate significant future equipment sales, as noted above, we entered into arrangements with numerous vendors to resell equipment in 2002. For the year ended December 31, 2002, we recognized gross revenue of $2.9 million in connection with these reseller agreements as we acted as the primary obligor in these transactions.

 

Restructuring Charges.    During the third quarter of 2001 and the second, third and fourth quarters of 2002, we recorded restructuring charges, primarily due to our revised European services strategy and exit costs related to excess leaseholds. These restructuring charges were comprised primarily of write-downs and write-offs of assets and accrued unfavorable lease commitments and related lease exit costs. The amount of the restructuring charges we recorded was based on our estimates of how long it would take to successfully negotiate lease terminations for the leaseholds we desired to exit and the related exit costs. In addition, we may incur additional restructuring charges if, in the future, we decide to modify our Asia-Pacific strategy in one or more of the countries we now operate in within the Asia-Pacific region. Should the actual lease exit costs and other accrued restructuring charges exceed the amount accrued, or a new restructuring activity is identified, additional

 

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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 amount accrued, an adjustment to accrued restructuring charges would be required, which would increase income in the period such determination was made. See Recent Accounting Pronouncements for a discussion of “Accounting for Costs Associated with Exit or Disposal Activities.”

 

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 carry-forwards. 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.

 

We currently have provided for a full valuation allowance against our net deferred tax assets. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. Based on the available objective evidence, management does not believe that the net deferred tax assets will be fully realizable. Should we determine that we would be able to realize our 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 at the time of determination. For litigation claims, when management can reasonably estimate the range of loss and when an unfavorable outcome is probable, a contingent liability is recorded. For current legal proceedings, management believes that it has adequate legal defenses and that the ultimate outcome of these actions will not have a material effect on the Company’s financial position, results of operations and cashflows. Furthermore, because of the uncertainties as to the outcome of these proceedings and since no range of loss can be estimated at this time, management has determined that no accrual is needed. As additional information becomes available, we will assess the potential liability related to our pending litigation and revise our estimates. 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. In addition, we have 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. We have issued numerous warrants to certain fiber carriers and our primary contractor responsible for the construction of many of our IBX hubs. We use the Black-Scholes option-pricing model to value these warrants. The value attributed to these warrants are included in our property and equipment and classified as a leasehold improvement. Amortization of such warrants is included in depreciation expense.

 

Should management determine that the actual useful lives of our property and equipment placed into service is less than originally anticipated, or if any of our property and equipment was deemed to have incurred an impairment, additional depreciation, 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.

 

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Impairment of Long-Lived Assets.    We account for the impairment of long-lived assets in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which we adopted in fiscal 2002. We evaluate the carrying value of our long-lived assets, consisting primarily of our IBX hubs, whenever certain events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Such events or circumstances include, but are not limited to, a prolonged industry downturn, a significant decline in our market value, or significant reductions in projected future cash flows. We prepare this analysis by assessing the future net cash flows generated by each IBX hub over their respectful useful lives and comparing this against the carrying value of that IBX hub. Our revenue and cost assumptions used in this analysis are based on numerous factors, including the current revenue and cost performance of each IBX hub, historical growth rates, the remaining space to fill each IBX hub to full capacity relative to the market demand in each of the individual geographic markets of each IBX hub, expected inflation rates and any other available economic indicators and factors that we feel are relevant. If the total of the undiscounted future cash flows is less than the carrying amount of the assets, we write down such assets based on the excess of the carrying amount over the fair value of the assets. Fair value is generally determined by calculating the discounted future cash flows using a discount rate based upon our weighted average cost of capital. Significant judgments and assumptions are required in the forecast of future operating results used in the preparation of the estimated future cash flows, including profit margins, long-term forecasts of the amounts and timing of overall market growth and our percentage of that market, groupings of assets, discount rates and terminal growth rates. In addition, significant estimates and assumptions are required in the determination of the fair value of our tangible long-lived assets, including replacement cost, economic obsolescence, and the value that could be realized in orderly liquidation. Changes in these estimates could have a material adverse effect on the assessment of our long-lived assets, thereby requiring us to write down the assets. Our long-lived assets at December 31, 2002, including property and equipment and goodwill and identifiable intangible assets, totaled $389.9 million and $22.9 million, respectively.

 

Consolidation.    We follow the provisions of SFAS No. 94, “Consolidation of All Majority-Owned Subsidiaries” and EITF Abstract No. 96-16, “Investor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights”. As a result, all majority-owned subsidiaries are consolidated unless: (1) control is likely to be temporary, or (2) we do not have control. Evidence of such a lack of effective control includes our inability to direct or cause the direction of the management and policies of a person, whether through the ownership of voting shares, by contract, or otherwise.

 

As a result of the combination, we acquired a 60% interest in i-STT Nation Limited, an IBX hub operation in Thailand. However, as a result of certain substantive participating rights granted to minority shareholders, i-STT Nation Limited is not considered a controlled subsidiary and accordingly, it is not consolidated. Accordingly, we account for i-STT Nation Limited as an equity investment using the equity method of accounting. Under the preliminary purchase price allocation, we attributed no value to this investment as i-STT Nation Limited is in the early stages of operations and is not able to generate positive operating cashflow for the foreseeable future. We are continuing to review our strategic alternatives related to i-STT Nation Limited.

 

Results of Operations

 

Years Ended December 31, 2002 and 2001

 

Revenues.    We recognized revenues of $77.2 million for the year ended December 31, 2002, as compared to revenues of $63.4 million for the year ended December 31, 2001. Revenues consisted of recurring revenues of $65.3 million and $57.6 million, respectively, for the year ended December 31, 2002 and 2001, primarily from the leasing of cabinet space, power and cross connects. Non-recurring revenues were $11.9 million and $5.8 million, respectively, for the year ended December 31, 2002 and 2001, primarily related to the recognized portion of deferred installation revenue and custom service revenues and one-time settlement fees associated with certain customer right-sizing or contract terminations. One-time settlement fees recognized during the year ended

 

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December 31, 2002 totaled approximately $4.5 million, including a $2.8 million one-time settlement with Qwest received in the third quarter of 2002, and approximately $562,000 for the corresponding period in 2001. Installation and service fees are recognized ratably over the term of the contract. Custom service revenues are recognized upon completion of the services. One-time settlement fees are recognized upon contract termination. In February and March 2002, we entered into equipment reseller agreements with two related party companies. Included within the $11.9 million of non-recurring revenues for the year ended December 31, 2002, were $2.9 million of equipment sales resulting from these two equipment reseller agreements. There were no equipment sales in the year ended December 31, 2001. Excluding equipment sales, we recognized revenues of $74.2 million for the year ended December 31, 2002 as compared to revenues of $63.4 million for the year ended December 31, 2001, a 17% increase.

 

The period over period growth in revenues was primarily the result of an increase in orders from existing customers and growth in our customer base from 218 customers as of December 31, 2001 to 303 customers as of December 31, 2002 on a pre-merger basis and one-time settlement fees associated with certain customer right-sizing or contract terminations. However, this growth in our customer base is partially offset by a number of our larger customers reducing the size of their contractual commitments to us. We refer to this effort as the “right-sizing” of our larger customer contracts. During the past year, we have proactively worked with certain of our larger customers to right-size their contractual commitments to help them better react to a slowdown in customer demand as a result of weaker economic conditions. Although these right-sizing efforts often result in a reduction in the number of cabinets these customers are obligated to pay for, many of these right-sizing efforts have resulted in the customer extending the term for the remaining cabinets. As a result, although the short-term recurring revenues from such customers are reduced, the overall contract value at times remains intact and the relationship with the customer is preserved, if not improved. As of December 31, 2002, we had successfully completed the right-sizing of most of our customers that had more than 100 cabinets booked, a booking level that represents our larger customers. These right-sizing efforts have, over the past several quarters, been netted out against our new customer cabinet bookings, limiting our overall revenue growth during the past five quarters.

 

Commencing in fiscal 2003, our revenues will include revenues from our newly-acquired Asia-Pacific operations. We expect that revenues commencing in 2003 will be split approximately 85% in the U.S. and 15% in Asia-Pacific.

 

Cost of Revenues.    Cost of revenues increased to $104.1 million for the year ended December 31, 2002 from $94.9 million for the year ended December 31, 2001. These amounts included $47.8 million and $40.0 million, respectively, of depreciation expense and $266,000 and $426,000, respectively, of stock-based compensation expense. In addition to depreciation and stock-based compensation, 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. Furthermore, cost of revenues for the year ended December 31, 2002 included the costs associated with $2.9 million in equipment sales we recorded, which was approximately $2.8 million. Excluding depreciation, stock-based compensation expense and the costs of equipment sales, cash cost of revenues decreased slightly period over period to $53.1 million for the year ended December 31, 2002 from $54.4 million for the year ended December 31, 2001, a 2% decrease.

 

Cash cost of revenues for the year ended December 31, 2001 included $5.0 million in costs related to our European expansion plans. Due to the restructuring charge that we recorded in the third quarter of 2001, these costs were not in our cash cost of revenues for the year ended December 31, 2002; however, these savings were partially offset by the additional costs incurred of $3.7 million from (a) our newest and largest IBX hub opened during the first quarter of 2002 in the New York metropolitan area and (b) the costs associated with the ramp-up of our existing IBX hubs. In September 2002, we exercised an option to reduce the monthly operating costs under the San Jose ground lease by approximately one-half commencing October 2002, which resulted in savings of approximately $1.1 million as compared to the prior year. We anticipate that the costs associated with the continued ramp-up of our IBX hubs and the additional costs associated with some of our new services, such as

 

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bandwidth, will continue to increase in the foreseeable future; however, the cost savings resulting from the elimination of approximately half of the San Jose ground lease costs, which commenced in October 2002, should offset most of these increases for the foreseeable future in the U.S. However, commencing in fiscal 2003, our cost of revenues will include the cost of revenues associated with our Asia-Pacific operations. We expect that these additional costs will be substantial and will result in a significant increase in our total cost of revenues.

 

Sales and Marketing.    Sales and marketing expenses decreased to $15.2 million for the year ended December 31, 2002 from $16.9 million for the year ended December 31, 2001. These amounts included $952,000 and $2.8 million, respectively, of stock-based compensation expense. In addition, we recorded $2.3 million in bad debt expense for the year ended December 31, 2002, as compared to $477,000 recorded in the prior year. This substantial increase in bad debt expense was primarily the result of full provisions against aged receivables associated with two customers, Teleglobe and WorldCom, both of which filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in 2002. Excluding stock-based compensation and bad debt expense, cash sales and marketing costs decreased to $12.0 million for the year ended December 31, 2002 from $13.6 million for the year ended December 31, 2001, a 12% decrease. Cash sales and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel, sales commissions, marketing programs, public relations, promotional materials and travel. The decrease in sales and marketing expenses is the result of several cost saving initiatives that we undertook, including staff reductions of approximately 25% during 2001 that resulted in approximately $2.6 million in annual savings in sales and marketing costs and an overall decrease in discretionary spending. We continue to closely monitor our spending in all areas as a result of the current market conditions. However, commencing in fiscal 2003, our sales and marketing expenses will include the sales and marketing expenses associated with our Asia-Pacific operations. We expect that these additional costs will be substantial and result in a significant increase in our sales and marketing expenses.

 

General and Administrative.    General and administrative expenses decreased to $30.7 million for the year ended December 31, 2002 from $58.3 million for the year ended December 31, 2001. These amounts included $5.7 million and $15.8 million, respectively, of stock-based compensation expense and $6.2 million and $9.6 million, respectively, of depreciation expense, resulting in $14.1 million or 43% decrease in period over period cash spending. Cash 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 significant decrease in general and administrative expenses was primarily the result of several cost saving initiatives that we undertook, including staff reductions of approximately 25% during 2001 that resulted in approximately $4.9 million in annual savings in general and administrative costs and an overall decrease in discretionary spending. We continue to closely monitor our spending as a result of the current market conditions. However, commencing in fiscal 2003, our general and administrative expenses will include the general and administrative expenses associated with our Asia-Pacific operations. We expect that these additional costs will be substantial and result in a significant increase in our general and administrative expenses.

 

Restructuring Charges.    During the year ended December 31, 2002, we recorded restructuring charges of $28.9 million. The restructuring charges consisted of (a) a $5.0 million option fee paid in May 2002 related to the amendment of our approximately 80 acre ground lease in San Jose, California from which we subsequently elected to exercise the option to permanently exclude 40 acres commencing October 1, 2002; (b) a write-off of property and equipment of $2.6 million, primarily leasehold improvements and some equipment, located in two unnecessary U.S. IBX expansion and headquarter office space operating leaseholds we had decided to exit and that do not currently provide any ongoing benefit; (c) a write-off of one U.S. letters of credit totaling $250,000 related to one U.S. operating leasehold we had committed to exit; (d) an accrual of $1.0 million related to the remaining estimated European exit costs; (e) an accrual of $925,000 in severance charges related to a less than 10% reduction in workforce in an effort to reduce the cost structure of our corporate headquarter function that will result in approximately $2.8 million in annual savings; (f) an accrual of $115,000 related to additional U.S. leasehold exit costs and (g) a partial write-off of two letters of credit totaling $19.0 million associated with the exercise in September 2002 of our option to permanently terminate approximately one-half of our lease obligations under the San Jose ground lease.

 

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During the quarter ended September 30, 2001, the Company took a restructuring charge of $48.6 million consisting of $45.3 million related to a 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 2001, the Company decided to partner with another Internet exchange company 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. 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.

 

As of December 31, 2002, a total restructuring reserve of $1.7 million remained outstanding for all of the above accrued but unpaid restructuring charges. We began to realize the cost savings benefits resulting from the partial San Jose ground lease termination in cost of revenues during October 2002.

 

Interest Income.    Interest income decreased to $998,000 from $10.7 million for the year ended December 31, 2002 and 2001, respectively. Interest income decreased due to lower cash, cash equivalent and short-term investment balances held in interest bearing accounts and lower interest rates received on those invested balances.

 

Interest Expense.    Interest expense decreased to $35.1 million from $43.8 million for the year ended December 31, 2002 and 2001, respectively. The decrease in interest expense was attributable to the retirement of $52.8 million of our 13% senior notes during the first half of 2002 and to the decline in both the principal due and the interest rates associated with our credit facility.

 

Gain on Debt Extinguishment.    During the first half of 2002, we retired $52.8 million of our senior notes in exchange for approximately 500,000 shares of our common stock and approximately $2.5 million of cash. On December 31, 2002, we retired an additional $116.8 million of our senior notes in exchange for approximately 1.9 million shares of our common stock and approximately $15.2 million of cash. As a result of these transactions, we recognized a $114.2 million net gain on debt extinguishment during 2002, after deducting transaction costs, interest waived and allocation of unamortized debt issuance costs and debt discount.

 

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 because we had more IBX hubs open and operational during 2001 than we had during 2000. We expect revenues to continue to increase as our customer base continues to grow and as a result of opening 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.

 

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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, we revised our European services strategy that included exiting our European leases and various U.S. leaseholds. These actions reduced the cost of revenues commencing in fourth quarter 2001; however, these savings have been 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 our 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, we incurred a $1.3 million restructuring charge related to a reduction in workforce that included some sales and marketing staff. In addition, we are closely monitoring our discretionary marketing costs as the result of current market conditions.

 

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 our expansion, particularly during the first quarter of 2001. During the second and third quarters of 2001, we implemented several cost-savings initiatives, including some staff reductions and an overall decrease in discretionary spending.

 

Restructuring Charge.    During the quarter ended September 30, 2001, we 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 our corporate headquarters. During third quarter 2001, we decided to partner with other Internet exchange companies in Europe rather than build and operate our own centers outside of the U.S. As a result, we (a) recorded a write-down of our European construction in progress assets to their net realizable value and recorded a charge totaling $29.3 million, (b) accrued certain leasehold exit costs for our European leasehold interests in the amount of $6.4 million, (c) wrote-off our European letters of credit that secured the European leasehold interests in the amount of $8.6 million and (d) accrued various legal, storage and other costs totaling $1.0 million to facilitate this change in strategy. We experienced some cost savings benefits from this restructuring charge during the fourth quarter of 2001, particularly in cost of revenues; however, these cost-savings were partially offset by the increased operating costs of the New York metropolitan area IBX hub beginning in the first quarter of 2002. In addition, we 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 reduce the cost structure of our corporate headquarter functions. We 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.

 

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.

 

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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 related to an increase in our debt facilities and capital lease obligations, including the credit facility, and amortization of the credit facility and other debt facilities and capital lease obligations debt issuance costs and discounts.

 

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, our credit facility, which was later amended, our convertible secured notes, our combination with i-STT and Pihana and various types of debt facilities and capital lease obligations, for aggregate gross proceeds of approximately $909.2 million. As of December 31, 2001, our total indebtedness from senior notes, our credit facility and other debt facilities and capital lease obligations was $319.2 million. As of December 31, 2002, this amount was reduced to $161.6 million, including our $30.0 million convertible secured notes issued in December 2002 that do not require cash interest payments.

 

As of December 31, 2002, our principal source of liquidity was approximately $41.2 million in cash and cash equivalents.

 

Uses of Cash

 

Net cash used in our operating activities was $27.5 million, $68.9 million and $68.1 million for the years ended December 31, 2002, 2001 and 2000, respectively. We used cash primarily to fund our net loss, including cash interest payments on senior notes and our credit facility.

 

Net cash used in investing activities was $7.5 million, $153.0 million and $302.2 million for the years ended December 31, 2002, 2001 and 2000, 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. The amount of cash used in investing activities has decreased substantially as we have now completed our IBX hub rollout plan.

 

Net cash generated by financing activities was $16.9 million, $107.8 million and $339.8 million for the years ended December 31, 2002, 2001 and 2000, respectively. Net cash generated by financing activities during the year ended December 31, 2002 was primarily attributable to the cash acquired in the acquisitions of i-STT and Pihana and proceeds from our $30.0 million convertible secured notes, offset by payments of $17.7 million used to retire approximately $169.5 million of our senior notes and the costs associated with the exchange of the senior notes and repayments under our credit facility of $13.5 million. 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 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 of our common stock and the issuance of Series C redeemable convertible preferred stock.

 

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Debt Obligations

 

As of December 31, 2002, our total indebtedness from our senior notes, credit facility, convertible secured notes and debt facilities and capital lease obligations was $161.6 million, as follows:

 

Senior Notes.    In December 1999, we issued $200.0 million aggregate principal amount of 13% senior notes. Our aggregate net proceeds of this offering were $193.4 million, net of offering expenses. During the first half of 2002, we retired $52.8 million of the senior notes in exchange for approximately 500,000 shares of common stock and approximately $2.5 million of cash. On December 31, 2002, we retired an additional $116.8 million of the senior notes in exchange for approximately 1.9 million shares of our common stock and approximately $15.2 million of cash. As of December 31, 2002, a total of $30.5 million of senior note principal remains outstanding.

 

Credit Facility.    In December 2000, we entered into the credit facility with a syndicate of lenders under which, subject to our compliance with a number of financial ratios and covenants, we were permitted to borrow up to $150.0 million. As of September 30, 2001, we had borrowed the entire $150.0 million under this facility. In October 2001, in conjunction with the repayment of $50.0 million, we amended the credit facility to decrease total borrowing allowed to $125.0 million and to reset certain financial covenants to more accurately reflect market conditions. As of September 30, 2002, a total of $100.0 million was outstanding under the credit facility. The credit facility required us to maintain specific financial ratios and comply with quarterly, and in some circumstances, monthly covenants requiring us to, among other things, achieve specific revenue targets at levels significantly above historical revenues, maintain certain minimum cash balances and limit our EBITDA losses. As of September 30, 2002, we were not in compliance with several of these provisions, including the revenue covenant. In August and November 2002, the senior lenders provided us with various waivers and further amended the credit facility. Under the August 2002 amendment, we agreed to prepay $5.0 million and agreed to a reduction in the total borrowing allowed under the credit facility to $100.0 million (permanently eliminating the $20.0 million which was previously available for borrowing). The November 2002 amendment primarily provided the company with some additional time and flexibility in order to complete the senior note exchange. In connection with the combination, financing and completed senior note exchange, we entered into a further amendment to the credit facility. The most significant terms and conditions of this amendment were:

 

    we were granted a full waiver of previous covenant breaches and were granted consent to use cash to retire our senior notes in connection with the senior note exchange;

 

    future revenue and EBITDA covenants were eliminated and the remaining covenants and ratios were reset consistent with expected future performance of the combined company for the remaining term of the loan;

 

    we permanently repaid $8.5 million of the then currently outstanding $100.0 million balance, bringing our total amount owed under this facility to $91.5 million as of December 31, 2002; and

 

    the amortization schedule for the credit facility was amended such that the minimum amortization due in 2003–2004 was significantly reduced.

 

Convertible Secured Note.    In December 2002, in conjunction with the combination, STT Communications made a $30.0 million strategic investment in the company in the form of a 14% convertible secured note with an initial term of five years. The interest on the convertible secured note is payable in kind in the form of additional convertible secured notes.

 

Other Debt Facilities and Capital Lease Obligations.    In May 1999, we entered into a master lease agreement with Comdisco 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, 2002, these capital lease financings were fully drawn and $1.9 million remained outstanding.

 

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In August 1999, we entered into a loan agreement with Venture Lending and Leasing in the amount of $10.0 million and fully drew down on this amount. This loan agreement bears interest at 8.5% and was repayable over 42 months in equal monthly payments with a final interest payment equal to 15% of the advance amounts due on maturity. In October 2002, we amended the loan agreement to secure certain short-term cash deferment benefits. Under the terms of this amendment, we extended the maturity of the loan by 24 months and amortized the remaining principal balance and related balloon interest payment over this amended period ending March 1, 2005; and in exchange, the Company issued new warrants and re-priced their original warrants. As of December 31, 2002, principal of $1.3 million remained outstanding.

 

In March 2001, we entered into a loan agreement with Wells Fargo in the amount of $3.0 million and fully drew down on this amount. This loan agreement bears interest at 13.15% and is repayable over 36 months. As of June 30, 2002, we were not in compliance with one of the requirements of this loan. As a result, we have reflected the full amount outstanding under this facility totaling $1.6 million as a current obligation on the accompanying balance sheet as of December 31, 2002. In January 2003, we reached an agreement with Wells Fargo and made a payment to Wells Fargo of approximately $1.7 million in full satisfaction of all amounts owed to Wells Fargo under the loan agreement.

 

In June 2001, we entered into a loan agreement with Heller Financial Leasing in the amount of $5.0 million and fully drew down on this amount. This loan agreement bears interest at 13.0% and is repayable over 36 months. In August 2002, we amended this loan to secure certain short-term cash deferment. Under the amended terms of this loan agreement, we extended the maturity of the loan by nine months. Commencing September 2002, we began to benefit from the reduction in monthly payments over the following 14 months thereby deferring approximately $1.2 million of principal payments. Commencing November 2003, the deferred principal payments will be repaid over the remaining 17 months of the loan ending March 2005. As of December 31, 2002, principal of $3.3 million remained outstanding.

 

In December 2002, in conjunction with our merger with Pihana, we acquired multiple capital leases with Orix. The original amount financed was approximately $3.5 million. These capital lease arrangements bear interest at an average rate of 6.4% per annum and are repayable over 30 months. As of December 31, 2002, principal of $1.5 million remained outstanding.

 

Debt Maturities and Operating Lease Commitments

 

We lease our IBX hubs and certain equipment under non-cancelable operating lease agreements expiring through 2020. The following represents the minimum future operating lease payments for these commitments, as well as the combined aggregate maturities for all of our debt as of December 31, 2002 (in thousands):

 

      

Debt facilities & capital lease obligations


  

Credit facility


  

Senior notes


  

Convertible secured notes


  

Operating leases


  

Total


2003

    

$

5,852

  

$

1,981

  

$

  

$

  

$

20,913

  

$

28,746

2004

    

 

3,019

  

 

6,981

  

 

  

 

  

 

23,075

  

 

33,075

2005

    

 

729

  

 

82,548

  

 

  

 

  

 

26,134

  

 

109,411

2006

    

 

  

 

  

 

  

 

  

 

27,189

  

 

27,189

2007

    

 

  

 

  

 

30,475

  

 

30,000

  

 

28,050

  

 

88,525

2008 and thereafter

    

 

  

 

  

 

  

 

  

 

206,840

  

 

206,840

      

  

  

  

  

  

      

$

9,600

  

$

91,510

  

$

30,475

  

$

30,000

  

$

332,201

  

$

493,786

      

  

  

  

  

  

 

We believe that our cash on hand, together with anticipated positive cash flow from operations commencing by the end of 2003 and projected cost-savings in connection with the combination, will be sufficient to meet our working capital, debt service and corporate overhead requirements associated with our operations for the next twelve months. Although we believe we have sufficient cash to reach cash flow break-even from operating, investing and financing activities, we will continue to look for opportunities to raise additional capital to provide the company with greater operating flexibility.

 

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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

 

Equinix, i-STT and Pihana have limited operating histories and the market for each company’s services is still in its early stages.

 

We were founded in June 1998 and did not recognize any revenue until November 1999. i-STT was founded in January 2000 and did not recognize any revenue until May 2000. Pihana was founded in June 1999 and did not recognize any revenue until June 2000. We expect that we will encounter challenges and difficulties frequently experienced by early-stage companies in new and rapidly evolving international 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 our failure to do so would seriously harm our business plan and operating results, and affect our ability to raise additional funds.

 

If we are unable to meet these challenges and generate higher revenues while reducing costs, we may not be able to comply with the covenants in the credit facility. If we breach our credit facility, the banks could require repayment of all amounts previously drawn down and we will not have sufficient cash reserves to repay such amounts.

 

Equinix, i-STT and Pihana have each incurred substantial losses in the past, may continue to incur additional losses in the future and will not be profitable until the combined company reverses this trend.

 

Equinix incurred losses of approximately $21.6 million for 2002 ($135.8 million, excluding the gain on debt extinguishment), i-STT incurred losses of approximately $8.0 million for 2002 and Pihana incurred losses of approximately $148.5 million for the same period. In recent periods, Equinix, i-STT and Pihana have not generated cash from operations. Even if the combined company achieves profitability, given the competitive and evolving nature of the industry in which it operates, the combined company may not be able to sustain or increase profitability on a quarterly or annual basis.

 

The combination will delay, and may prevent, our profitability as a result of factors including:

 

    significant operating losses and lower gross margins generated by Pihana’s IBX hubs;

 

    costs associated with integrating the three businesses; and

 

    fees and costs associated with completing these transactions, including professional fees.

 

As a result of these increased expenses, the combined company will need to increase revenues in order to reach profitability. If we are unable to sufficiently grow revenues while reducing costs, we may not be able to comply with the covenants in our credit facility. If we breach the credit facility, the banks could require repayment of all amounts previously drawn down and we do not have sufficient cash reserves to repay such amounts.

 

We expect our operating results to fluctuate.

 

Equinix, i-STT and Pihana have each experienced fluctuations in their respective results of operations on a quarterly and annual basis. The fluctuation in their 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:

 

    changes in general economic conditions and specific market conditions in the telecommunications and Internet industries;

 

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    growth or decline of Internet use;

 

    customer insolvency;

 

    the ability of our customers to obtain financing or to fund their capital expenditures;

 

    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;

 

    the provision of customer discounts and credits;

 

    the mix of current and proposed products and services and the gross margins associated with our products and services;

 

    competition in the markets;

 

    conditions related to international operations;

 

    the timing and magnitude of capital expenditures and expenses related to the expansion of sales, marketing, operations and acquisitions, if any, of complementary businesses and assets;

 

    the cost and availability of adequate public utilities, including power;

 

    ability to obtain, transfer, or maintain licenses required by governmental entities with respect to the combined business; and

 

    compliance with governmental regulation with which we have little experience.

 

    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;

 

Any of the foregoing factors, or other factors discussed elsewhere in this report, could have a material adverse effect on our business, results of operations, and financial condition. Although Equinix, i-STT and Pihana have experienced growth in revenues in recent quarters, this growth rate is not necessarily indicative of future operating results. It is possible that the combined company may never achieve profitability on a quarterly or annual basis. In addition, a relatively large portion of our expenses are fixed in the short-term, particularly with respect to lease and personnel expenses, depreciation and amortization, and interest expenses. Therefore, our results of operations are particularly sensitive to fluctuations in revenues. As such, comparisons to prior reporting periods should not be relied upon as indications of the combined company’s future performance. In addition, our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors. If this occurs, we could experience an immediate and significant decline in the trading price of its stock.

 

If we cannot generate higher revenues, while reducing costs by combining the businesses, we may not be able to comply with the covenants in the credit facility. If the combined company breaches the credit facility, the banks could require repayment of all amounts previously drawn and the combined company will not have sufficient cash reserves to repay such amounts.

 

If we cannot successfully integrate Pihana’s and i-STT’s respective existing business operations, we may not achieve the anticipated benefits of the combination.

 

Integrating i-STT and Pihana into our business operations involves a number of risks, including:

 

    the difficulties and expenses in combining the operations, technology and computer systems and software applications of the three companies;

 

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    the different geographic locations of the principal operations of us, i-STT and Pihana;

 

    the difficulties in integrating the companies’ key revenue-generating services in a way that would be accepted in the market;

 

    the difficulties in the creation and maintenance of uniform standards, controls, procedures and policies;

 

    the diversion of management’s attention from ongoing operations;

 

    the challenges in keeping and attracting customers; and

 

    the introduction of new or enhanced services.

 

If we are to realize the anticipated benefits of the combination, our operations must be efficiently and effectively integrated with the operation of i-STT and Pihana. There can be no assurance that the integration will be successful or that the anticipated benefits of the combination will be realized. If we cannot generate higher revenues, while reducing costs, we may not be able to comply with the covenants in our credit facility. If we breach the credit facility, the banks could require repayment of all amounts previously drawn down and we do not have sufficient cash reserves to repay such amounts.

 

If we cannot effectively integrate and manage international operations, our revenues may not increase and our business and results of operations would be harmed.

 

In 2002, our sales outside North America represented less than 1% of our revenues, i-STT’s sales outside North America represented approximately 100% of its revenues and Pihana’s sales outside North America represented approximately 45% of its revenues. We anticipate that, for the foreseeable future, approximately 15% of the combined company’s revenues will be derived from sources outside North America. Our management team is comprised primarily of Equinix executives before the combination, some of whom have had limited or no experience overseeing international operations.

 

To date, the neutrality of the Equinix IBX hubs and the variety of networks available to our customers has often been a competitive advantage for us. In certain of our recently acquired IBX hubs, in Singapore in particular, the limited number of carriers available diminishes that advantage. As a result, we may need to adapt our key revenue-generating services and pricing to be competitive in that market.

 

We may experience gains and losses resulting from fluctuations in foreign currency exchange rates, for which hedging activities may not adequately protect us. Where our prices are denominated in U.S. dollars, our sales could be adversely affected by declines in foreign currencies relative to the U.S. dollar, thereby making our products more expensive in local currencies. Our international operations are generally subject to a number of additional risks, including:

 

    costs of customizing IBX hubs for foreign countries;

 

    protectionist laws and business practices favoring local competition;

 

    greater difficulty or delay in accounts receivable collection;

 

    difficulties in staffing and managing foreign operations;

 

    political and economic instability;

 

    ability to obtain, transfer, or maintain licenses required by governmental entities with respect to the combined business; and

 

    compliance with governmental regulation with which we have little experience.

 

To date, the majority of Equinix’s revenues and costs have been denominated in U.S. dollars; the majority of i-STT’s revenues and costs have been denominated in Singapore dollars and the majority of Pihana’s revenues and costs have been denominated in U.S. dollars, Japanese yen and Australian and Singapore dollars. However,

 

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we expect that in the future an increasing portion of revenues and costs will be denominated in foreign currencies. Although the combined company may undertake foreign exchange hedging transactions to reduce foreign currency transaction exposure, it does not currently intend to eliminate all foreign currency transaction exposure.

 

STT Communications holds a substantial portion of our stock and has significant influence over matters requiring stockholder consent.

 

STT Communications currently owns approximately 28% of our outstanding voting stock. Because of the diffuse ownership of our stock, STT Communications has significant influence over matters requiring our stockholder approval. Following the expiration of restrictions on STT Communications preventing it from converting its convertible secured notes and warrants into voting stock if, as a result, STT Communications will own more than 40% of our voting stock, STT Communications will effectively control the company and the election of directors to our board of directors. Consequently, STT Communications will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could prevent or delay a third party from acquiring or merging with us.

 

We need to improve and implement financial and managerial controls and improve our reporting systems and procedures. If we are unable to do so successfully, we may not be able to manage growth effectively and our operating results would be harmed.

 

In order to manage the integration of the i-STT and Pihana businesses, we need to continue to improve our financial and managerial controls and reporting systems and procedures. Any inability of our management to integrate additional companies, employees, technology advances and customer service into operations and to eliminate unnecessary duplication may have a materially adverse effect on our business, financial condition and results of operations.

 

We may be forced to take steps, and may be prevented from pursuing certain business opportunities, to ensure compliance with certain tax-related covenants agreed to by us in the combination agreement.

 

We agreed to a covenant in the combination agreement (which we refer to as the FIRPTA covenant) that we would use all commercially reasonable efforts to ensure that at all times from and after the closing of the combination until such time as neither STT Communications nor its affiliates hold our capital stock or debt securities (or the capital stock received upon conversion of the debt securities) received by STT Communications in connection with the consummation of the transactions contemplated in the combination agreement, none of our capital stock issued to STT Communications constitute “United States real property interests” within the meaning of Section 897(c) of the Internal Revenue Code of 1986, which we call the Code. Under Section 897(c) of the Code, our capital stock issued to STT Communications would generally constitute “United States real property interests” at such point in time that the fair market value of the “United States real property interests” owned by us equals or exceeds 50% of the sum of the aggregate fair market values of (a) our “United States real property interests,” (b) our interests in real property located outside the U.S., and (c) any other assets held by us which are used or held for use in our trade or business. Given that we currently own significant amounts of “United States real property interests,” we may be limited with respect to the business opportunities we may pursue, particularly if the business opportunities would increase the amounts of “United States real property interests” owned by us or decrease the amount of other assets owned by us. In addition, pursuant to the FIRPTA covenant we may be forced to take commercially reasonable proactive steps to ensure our compliance with the FIRPTA covenant, including, but not limited to, (a) a sale-leaseback transaction with respect to all real property interests, or (b) the formation of a holding company organized under the laws of the Republic of Singapore which would issue shares of its capital stock in exchange for all of our outstanding stock (this reorganization would require the submission of that transaction to our stockholders for their approval and the consummation of that exchange).

 

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Our non-U.S. customers include numerous related parties of i-STT.

 

In the past, a substantial portion of i-STT’s financing, as well as its revenues, has been derived from its affiliates. We continue to have contractual and other business relationships and may engage in material transactions with affiliates of STT Communications. Circumstances may arise in which the interests of STT Communications’ affiliates may conflict with the interests of our other stockholders. In addition, Singapore Technologies Pte Ltd, an affiliate of STT Communications, makes investments in various companies; it has invested in the past, and may invest in the future, in entities that compete with us. In the context of negotiating commercial arrangements with affiliates, conflicts of interest have arisen in the past and may arise, in this or other contexts, in the future. There can be no assurance that any conflicts of interest will be resolved in our favor.

 

Our success is dependent on the retention of our executive officers and key employees.

 

We are substantially dependent upon the continued service of our executive officers. In addition, we are dependent on the retention of key employees of Pihana and i-STT who have knowledge of the applicable local business environment and data center operations. Without these individuals as part of the management team, it would be significantly more difficult to efficiently and effectively integrate our critical functions and compete effectively against other Internet infrastructure companies.

 

We have significant debt and we may not generate sufficient cash flow to meet our debt service obligations.

 

Our total debt consists primarily of the following:

 

    a total of $30.5 million principal amount of senior notes;

 

    a total of $91.5 million principal amount of loans under our credit facility;

 

    a total of $30.0 million of a newly issued convertible secured note; and

 

    approximately $9.6 million of other outstanding debt facilities and capital lease obligations.

 

Under the terms of the combination agreement, we are contractually obligated to use our reasonable best efforts to obtain the release of STT Communications from a bank guarantee associated with i-STT’s unconsolidated Thailand joint venture. Such efforts may include i-STT assuming such guarantee if it is commercially reasonable to do so. Currently, we have not assumed such guarantee and accordingly, no liability has been recorded for this potential liability as of December 31, 2002. This guarantee is for a Thai baht 260,000,000 bank loan (approximately $6,032,000 as translated using effective exchange rates at December 31, 2002), of which Thai baht 54,900,000 is currently outstanding as of December 31, 2002 (approximately $1,274,000 as translated using effective exchange rates at December 31, 2002).

 

The amount of our debt 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 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 its businesses experience difficulties.

 

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If we cannot generate sufficient additional revenue and recognize sufficient synergy savings by combining the businesses, we may not be able to meet our debt service obligations or repay our debt when due or comply with other covenants in the credit facility. If we breach the credit facility, the banks could require repayment of all amounts previously drawn down, and we do not have sufficient cash reserves to repay such amounts.

 

We may be unable to raise the funds necessary to repay or refinance our indebtedness.

 

We are obligated to make principal and/or interest payments on our credit facility each year until up to 2006 and on our senior notes each year until 2007. Additionally, our credit facility matures in 2006 and the convertible secured notes and our senior notes mature in 2007. Each of these obligations require significant amounts of liquidity. We may need additional capital to fund those obligations. Our ability to arrange financing and the cost of this financing will depend upon many factors, including:

 

    general economic and capital markets conditions generally, and in particular the non-investment grade debt market;

 

    conditions in the Internet infrastructure market;

 

    credit availability from banks or other lenders;

 

    investor confidence in the telecommunications industry generally and our company specifically;

 

    the success of our IBX hubs; and

 

    provisions of tax and securities laws that are conducive to raising capital.

 

If we need additional funds, our inability to raise them will have an adverse effect on our operations. If we decide to raise additional funds by incurring debt, we may become subject to additional or more restrictive financial covenants and ratios.

 

We are subject to restrictive covenants under the credit facility that limit our flexibility in managing our business.

 

Our credit facility requires that the combined company maintain specific financial ratios and comply with covenants, including a monthly cash covenant, and contains 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 financial arrangements are, and future financing arrangements are likely to be, secured by substantially all of our assets. If we are unable to meet the terms of the financial covenants or if we breach any of these covenants, a default could result under one or more of these agreements. A default, if not waived by our lenders, could result in the acceleration of outstanding indebtedness and cause our debt to become immediately due and payable. If an acceleration occurs, we will not be able to repay our debt, and it is unlikely that we will be able to borrow sufficient additional funds to refinance our debt. Even if new financing is made available to us, it may not be available on terms acceptable to us.

 

A significant number of shares of our capital stock issued in connection with the combination, the financing and the senior note exchange may be sold in the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

 

We issued a large number of shares of our capital stock to the former Pihana stockholders, STT Communications, and holders of our senior notes in connection with the combination, financing and senior note exchange. The shares of common stock issued in the senior note exchange may be sold into the public market immediately following the closing of the exchange. The shares of common stock issued in connection with the combination will be registered for resale within six months. Subject to the restrictions described in this proxy statement, the senior notes and warrants issued in connection with the financing are immediately convertible or exercisable into shares of common stock and the underlying shares of common stock may be registered for resale

 

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within six months of the closing. Sales of a substantial number of shares of our common stock by these parties within any narrow period of time could cause our stock price to fall. In addition, the issuance of the additional shares of our common stock as a result of these transactions will reduce our earnings per share, if any. This dilution could reduce the market price of our common stock unless and until we achieve revenue growth or cost savings and other business economies sufficient to offset the effect of this issuance. There can be no assurance that we will achieve revenue growth, cost savings or other business economies.

 

Our profitability is affected by the average selling price of our services and our operations efficiency rates.

 

Decreases in the average selling prices of our, i-STT’s, and Pihana’s services have had and will continue to have a material adverse effect on our profitability. Historically, the average per square foot selling price of our, i-STT’s and Pihana’s services have declined since the commencement of their respective operations. Our ability to achieve profitability will continue to be dependent, in large part, upon our ability to offset any decreases in average per square foot selling prices by improving operations efficiency, and increasing the value added services provided at our IBX hubs. If we are unable to do so, our business, financial condition and results of operations could be materially adversely affected.

 

We resell products and services of third parties that may require us to pay for such services even if our customers fail to pay us for the services which may have a negative impact on our operating results.

 

In order to provide resale services such as bandwidth, managed services, backup and recovery services and other network management services, we will contract with third party service providers. These services require us to enter into fixed term contracts for services with third party suppliers of products and services. If we experience the loss of a customer who has purchased a resale product, we will remain obligated to continue paying monies to our suppliers for the term of the underlying contracts. The payment of these obligations without a corresponding payment from customers will reduce our financial resources and may have a material adverse affect on our financial performance and operating results.

 

We may not be able to compete successfully against current and future competitors.

 

Our IBX hubs and other products and services must be able to differentiate themselves from existing providers of space and services for telecommunications companies, web hosting companies and other colocation providers. In addition to competing with neutral colocation providers, we must compete with traditional colocation providers, including local phone companies, long distance phone companies, Internet service providers and web hosting facilities. Likewise, with respect to our other products and services, including managed services, bandwidth services and security services, we must compete with more established providers of similar services. Most of these companies have longer operating histories and significantly greater financial, technical, marketing and other resources than us.

 

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 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 materially adversely affected.

 

We may also face competition from persons seeking to replicate our IBX concept. Competitors may operate more successfully 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

 

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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 competitors’ facilities, it will be extremely difficult to convince them to relocate to our IBX hubs.

 

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 we will be able 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 mix of products and services offered by us, the overall mix of customers, the IBX hub’s 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 the IBX hubs. This may be disruptive to our business and may adversely affect our business, financial condition and results of operations.

 

Our products and services have a long sales cycle that may materially adversely affect our business, financial condition and results of operations.

 

A customer’s decision to license cabinet space in the IBX hubs and to purchase additional services 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. Delays due to the length our sales cycle may materially adversely affect our business, financial condition and results of operations.

 

We depend on a number of third parties to provide Internet connectivity to our IBX hubs; if connectivity is interrupted or terminated, our operating results and cash flow will be materially adversely affected.

 

The presence of diverse telecommunications carriers’ fiber networks to our IBX hubs is critical to our ability to attract new customers. We believe that the availability of carrier capacity will directly affect our ability to achieve our projected results.

 

We are not a telecommunications carrier, and as such we rely on third parties to provide our customers with carrier services. We rely primarily on revenue opportunities from their 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 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. 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.

 

We have service level commitment obligations to certain of our customers. As a result, service interruptions or significant equipment damage in our IBX hubs, whether or not within our control, could result in service level

 

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commitments to these customers. 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.

 

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 customers with highly reliable service. We must protect customers’ IBX infrastructure and 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;

 

    sabotage and vandalism; and

 

    failure of business partners who provide the combined company’s resale products.

 

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 and failure of our services levels on products such as bandwidth connectivity. 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.

 

Furthermore, we will be dependent upon internet service providers, telecommunications carriers and other website operators in the U.S., Asia and elsewhere, some of which may have experienced significant system failures and electrical outages in the past. Users of our services may in the future experience difficulties due to system failures unrelated to our systems and services. If for any reason, these providers failed to provide the required services, our business, financial condition and results of operations could be materially adversely impacted.

 

A portion of the managed services business we acquired in the combination involves the processing and storage of confidential customer information. Inappropriate use of those services could jeopardize the security of customers’ confidential information causing losses of data or financially impacting us or our customers. Efforts to alleviate problems caused by computer viruses or other inappropriate uses or security breaches may lead to interruptions, delays or cessation of our managed services.

 

There is no known prevention or defense against denial of service attacks. During a prolonged denial of service attack, the Internet service will not be available for several hours, thus impacting hosted customers on-line business transactions. Affected customers might file claims against us under such circumstances.

 

To the extent a failure of our physical infrastructure, services, or services provided by service providers results in decreased revenues, we may not be able to comply with covenants in our credit facility. If we are

 

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unable to comply with covenants in our credit facility, the banks may require repayment of all outstanding amounts, and we do not have sufficient cash reserves to repay those amounts.

 

Our business could be harmed by prolonged electrical power outages or shortages, increased costs of energy or general availability of electrical resources.

 

Our IBX hubs are susceptible to regional costs of power, electrical power shortages, planned or unplanned power outages caused by these shortages, such as those that occurred in California during 2001, and limitations, especially internationally, of adequate power resources. 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.

 

We may experience service interruptions, loss of customers and drain on resources if we are unable to renew our facility leases.

 

We have several short-term leases on our IBX hubs that are located outside of North America. For example, we currently lease approximately 86,100 square feet for our facility in Singapore, of which approximately 71,900 square feet expire in July 2003. Upon its expiration, we may not be able to renew our leases under reasonable terms, if at all and may have to relocate our IBX hubs to other facilities. A relocation of any IBX hub could result in service interruptions and significant additional expenses. In addition, seeking a new facility could divert management’s attention and our resources.

 

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 combined 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.

 

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. During the quarter ended September 30, 2001, putative shareholder class action lawsuits were filed against us, a number of our officers and directors, and several investment banks that were underwriters of our initial public offering. The suits allege that the underwriter defendants agreed to allocate stock in our 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. 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. The defense of this litigation may increase our expenses and divert management’s attention and resources. An adverse outcome in this litigation could seriously harm our business and results of operations. In addition, we may, in the future, be subject to other securities class action or similar litigation.

 

Risks related to our Industry

 

If the economy does not improve and the use of the Internet and electronic business does not grow, our revenues may not grow.

 

Acceptance and use of the Internet 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

 

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commerce. Demand for Internet services and products are subject to a high level of uncertainty and are subject to significant pricing pressure, especially in Asia-Pacific. In addition, even if consumers do adopt and continue to use online services, we do not expect a significant increase in revenues until the economy begins to improve generally. As a result, we cannot be certain that a viable market for our IBX hubs will materialize. If the market for our IBX hubs grows more slowly than we currently anticipate, our revenues will not grow and our operating results will suffer. If we cannot grow revenues while reducing costs, we may not be able to comply with the covenants in our credit facility. If we breach the credit facility, the banks could require repayment of all amounts previously drawn down and we do not have sufficient cash reserves to repay such amounts.

 

Government regulation may adversely affect the use of the Internet and our business.

 

Various laws and governmental regulations governing Internet related services, related communications services and information technologies, and electronic commerce remain largely unsettled, even in areas where there has been some legislative action. This is true both in the U.S. and the various foreign countries in which we now operate. It may take years to determine whether and how existing laws, such as those governing intellectual property, privacy, libel, telecommunications services, and taxation, apply to the Internet and to related services such as ours. The combined company has little experience with such international regulatory issues and substantial resources of the company may be required to comply with regulations or bring any non-complaint business practices into compliance with such regulations. In addition, the development of the market for online commerce and the displacement of traditional telephony service by the Internet and related communications services may prompt increased call for more stringent consumer protection laws or other regulation both in the U.S. and abroad, that may impose additional burdens on companies conducting business online and their services providers. The compliance with, adoption of or modification of laws or regulations relating to the Internet, or interpretations of the existing law, could have a material adverse effect on our business, financial condition and results of operation.

 

Recent terrorist activity throughout the world and military action to counter terrorism could adversely impact our business.

 

The September 11, 2001 terrorist attacks in the U.S., 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 internationally. 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.

 

Recent Accounting Pronouncements

 

In May 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). SFAS 145 rescinds the automatic treatment of gains or losses from extinguishment of debt as extraordinary unless they meet the criteria for extraordinary items as outlined in APB Opinion No. 30, “Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” In addition, SFAS 145 also requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions and makes various technical corrections to existing pronouncements. SFAS 145 is effective for us for all financial statements issued in fiscal 2003; however, as allowed under the provisions of SFAS 145, we decided to early adopt SFAS 145 in relation to extinguishments of debt for the year ended December 31, 2002. As a result of the early adoption of SFAS 145, the gains on debt extinguishment that we realized in 2002 from the extinguishment of senior notes during the year were not reported as extraordinary transactions.

 

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In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS 146 eliminates the definition and requirement for recognition of exit costs in Emerging Issues Task Force Issue No. 94-3 where a liability for an exit cost was recognized at the date of an entity’s commitment to an exit plan. This statement is effective for exit or disposal activities initiated after December 31, 2002. The Company will adopt the provisions of SFAS 146 during the first quarter of 2003. We do not believe that the adoption of this statement will have a material impact on our results of operations, financial position or cash flows.

 

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires a guarantor to recognize a liability for obligations it has undertaken in relation to the issuance of a guarantee in addition to providing additional disclosures on such guarantees. The liability would be recorded at fair value on the date the guarantee is issued. The disclosure requirements of FIN 45 are effective for the interim and annual periods ending after December 15, 2002. The recognition and measurement provisions of FIN 45 are effective after December 31, 2002. As of December 31, 2002, the Company adopted the disclosure requirements of FIN 45. We are currently evaluating the effects of the liability measurement provisions of FIN 45 on our financial statements commencing in fiscal 2003.

 

In November 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We are currently assessing the impact of the adoption of this pronouncement on our consolidated financial statements.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation— Transition and Disclosure—an Amendment of SFAS No. 123” (“SFAS 148”). SFAS 148 encourages the adoption of the accounting provisions of SFAS 123 and requires additional disclosure, including in interim financial statements, for all companies regardless of whether or not they adopt the accounting provisions of SFAS 123. This statement is effective for our fiscal 2002 Annual Report on Form 10-K and the new interim disclosure provisions are effective for the first quarter of 2004.

 

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. We are currently assessing the impact of the pronouncement on our consolidated financial statements.

 

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.

 

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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 credit facility, which bears interest at floating rates, plus applicable margins, based on either the prime rate or LIBOR. As of December 31, 2002, the credit facility had an effective interest rate of 6.21%. 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 our earnings or cash flows.

 

The fair market value of our senior notes is based on quoted market prices. The estimated fair value of our senior notes as of December 31, 2002 was approximately $4.6 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. However, commencing in fiscal 2003, as a result of the combination, approximately 15% of our revenues will be in the Asia-Pacific region, and a large portion of those revenues will be denominated in a currency other than the U.S. dollar, primarily the Singapore dollar, Japanese yen and Hong Kong and Australian dollars. As a result, our operating results and cash flows will be impacted due to currency fluctuations relative to the U.S. dollar.

 

Furthermore, to the extent that our international sales 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.

 

Commodity Price Risk

 

Certain operating costs incurred by us 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 supplies and equipment used in our IBX hubs. 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. We do not employ forward contracts or other financial instruments to hedge commodity price risk.

 

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ITEM 8.

  

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The financial statements and supplementary data required by this Item 8 are listed in Item 15(a)(1) and begin at page F-1 of this Report.

 

ITEM 9.

  

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

There is no disclosure to report pursuant to Item 9.

 

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PART III

 

ITEM 10.

  

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

Directors


  

Age


  

Positions and Offices Held with the Company


Lee Theng Kiat

  

50

  

Chairman of the Board

Steven Eng (1) (2) (4)

  

46

  

Director

Harry Hopper

  

49

  

Director

Scott Kriens (1) (4)

  

45

  

Director

Jean Mandeville

  

43

  

Director

Andrew Rachleff (2) (4)

  

44

  

Director

Dennis Raney (2)

  

60

  

Director

Peter Van Camp (3)

  

47

  

Director and Chief Executive Officer

Michelangelo Volpi (1)

  

36

  

Director


(1)   Member of Compensation Committee
(2)   Member of Audit Committee
(3)   Member of Option Committee
(4)   Member of Nominating Committee

 

Lee Theng Kiat has served as the chairman of the board since December 2002. Mr. Lee has been president and chief executive officer of Singapore Technologies Telemedia Pte. Ltd, an information and communications company, since November 1995. Mr. Lee also serves on the board of directors of Enersave Holdings Limited and Horizon Education & Technologies Limited, both public-listed companies in Singapore, as well as several privately held and non-listed public companies in Singapore.

 

Steven Eng has served as a director of Equinix since December 2002. Mr. Eng has been a program manager of network management systems at WAM!NET Government Services, Inc. since April 2002. Prior to joining WAM!NET Mr. Eng served as vice president of Exodus Communications from March 1995 to September 2001.

 

Harry Hopper has served as a director of Equinix since December 2002. Mr. Hopper has been a partner of Columbia Capital, LLC, a venture capital firm, since 1994. Mr. Hopper also serves on the board of directors of DSL.Net, Inc., a public company, as well as several privately held companies.

 

Scott Kriens has served as a director of Equinix since July 2000. Mr. Kriens has been president, chief executive officer and chairman of the board of directors of Juniper Networks, Inc., an Internet infrastructure solutions company, since January 1996. From April 1986 to January 1996, Mr. Kriens served as vice president of sales and vice president of operations at StrataCom, Inc., a telecommunications equipment company, which he co-founded in 1986. Mr. Kriens serves on the board of directors of Verisign, Inc. and Juniper Networks, Inc., both public companies, as well as several privately held companies.

 

Jean Mandeville has served as a director of Equinix since December 2002. Mr. Mandeville has been the chief financial officer of Singapore Technologies Telemedia Pte. Ltd since July 2002. From January 1998 to June 2002, Mr. Mandeville served in various capacities at British Telecom PLC, including President of Asia Pacific from July 2000 to June 2002, Director of International Development Asia Pacific from June 1999 to July 2000 and GM, Special Projects from January 1998 to July 1999. Mr. Mandeville also served on the board of directors of SmarTone HK and LGT Korea, both public companies, and serves on the board of several privately held companies.

 

Andrew Rachleff has served as a director of Equinix since September 1998. In May 1995, Mr. Rachleff co-founded Benchmark Capital, a venture capital firm, and has served as a general partner since that time. Prior to co-founding Benchmark Capital, Mr. Rachleff spent ten years as a general partner with Merrill, Pickard,

 

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Anderson & Eyre, a venture capital firm. Mr. Rachleff also serves on the board of directors of Opsware, Inc. and Blue Coat Systems, Inc. (formerly known as CacheFlow Inc.), both public companies, as well as several privately held companies.

 

Dennis Raney has served as a director of Equinix since April 2003. Mr. Raney has been the chief financial officer of eONE Global, LP since July 2001. Prior to joining eONE Global, Mr. Raney held the position of chief financial officer and executive vice president at Novell Inc. from March 1998 to July 2001. Mr. Raney also serves on the board of directors of ProBusiness, a public company, and Redleaf Group Inc., a privately held company.

 

Peter Van Camp has served as Equinix’s chief executive officer and as a director since May 2000. From June 2001 to December 2002, Mr. Van Camp was also chairman of the board. From January 1997 to May 2000, Mr. Van Camp was employed at UUNET, the Internet division of WorldCom, where he served as president of Internet markets and, most recently, as president of the Americas region. During the period from May 1995 to January 1997, Mr. Van Camp was president of Compuserve Network Services, an Internet access provider. Before holding this position, Mr. Van Camp held various positions at Compuserve, Inc. during the period between October 1982 to May 1995. Mr. Van Camp currently serves as a director of Packeteer, Inc., a public company.

 

Michelangelo Volpi has served as a director of Equinix since November 1999. Mr. Volpi joined Cisco Systems, Inc. (“Cisco”), a data communications equipment manufacturer, in 1994. Currently, he holds the position of senior vice president for Cisco’s Internet switching and services group. Prior to his current position, Mr. Volpi was chief strategy officer for Cisco where he played an instrumental role in the creation of Cisco’s acquisition and investment strategies. Before joining Cisco, Mr. Volpi spent three years at Hewlett Packard’s Optoelectronics Division.

 

Nomination of Board of Directors

 

Under the provisions of the Company’s Bylaws, the number of directors is fixed at nine. In addition, the Bylaws provide that, until December 31, 2004, or if earlier, the termination of the governance provisions in the bylaws, (i) three directors shall be nominated by STT Communications; and (ii) three directors, known as the Equinix directors, shall be nominated by the three directors appointed to Equinix’s current Board of Directors by Equinix’s Board of Directors as it existed prior to December 31, 2002. Three directors shall be nominated by the Company’s nominating committee, and must be independent. The three directors nominated by STT are Lee Theng Kiat, Steven Eng and Jean Mandeville. The three directors nominated by the Equinix directors are Andrew Rachleff, Peter Van Camp and Michelangelo Volpi. The directors nominated by the nominating committee are Scott Kriens and Dennis Raney. These governance provisions are more fully described in our definitive proxy statement dated December 12, 2002. There will be one vacancy on the board of directors as of the date of the Annual Meeting. However, proxies can not be voted for a greater number of persons than the eight nominees named herein.

 

Executive Officers

 

The following are additional executive officers of the Company, their ages as of April 1, 2003, their positions and offices held with the Company and certain biographical information. All executive officers serve at the discretion of the Board of Directors.

 

Executive Officers


  

Age


  

Positions and Offices Held with the Company


Marjorie S. Backaus

  

41

  

Chief Marketing Officer and Vice President     of Market Strategy

Peter T. Ferris

  

45

  

Vice President, Worldwide Sales

Brandi L. Galvin

  

30

  

General Counsel and Assistant Secretary

Philip J. Koen

  

51

  

President and Chief Operating Officer

Renée F. Lanam

  

40

  

Chief Financial Officer and Secretary

Keith D. Taylor

  

41

  

Vice President, Finance and Chief Accounting Officer

 

 

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Marjorie S. Backaus has served as Equinix’s chief marketing officer since November 1999, and as Vice President of Market Strategy since February 2000. During the period from August 1996 to November 1999, Ms. Backaus was vice president of marketing at Global One, an international telecommunications company. From November 1987 to August 1996, Ms. Backaus served in various positions at AT&T, a telecommunications company, including positions in regulatory, product management and strategic alliances.

 

Peter T. Ferris has served as Equinix’s vice president, worldwide sales since July 1999. During the period from June 1997 to July 1999, Mr. Ferris was vice president of sales for Frontier Global Center, a provider of complex web site hosting services. From June 1996 to June 1997, Mr. Ferris served as vice president, eastern sales at Genuity Inc., an Internet services provider. From December 1993 to June 1996, Mr. Ferris was vice president, mid-Atlantic sales at MFS DataNet Inc., a telecommunications services provider.

 

Brandi L. Galvin has served as Equinix’s general counsel and assistant secretary since January 2003. Before joining Equinix, Ms. Galvin was employed at the law firm of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP (“Gunderson Dettmer”), where she was an associate from September 1997 to January 2003.

 

Philip J. Koen has served as Equinix’s president and chief operating officer since May 2001. From July 1999 to May 2001, Mr. Koen also served as Equinix’s chief financial officer and secretary. In addition, Mr. Koen served as the Company’s corporate development officer from May 2000 to May 2001. Before joining Equinix, Mr. Koen was employed at PointCast, Inc., an Internet company, where he served as chief executive officer during the period from March 1999 to June 1999; chief operating officer during the period from November 1998 to March 1999; and chief financial officer and executive vice president responsible for software development and network operations during the period from July 1997 to November 1998. From December 1993 to May 1997, Mr. Koen was vice president of finance and chief financial officer of Etec Systems, Inc., a semi-conductor equipment company. Mr. Koen currently serves as a director of BlueCoat Systems, Inc., a public company.

 

Renée F. Lanam has served as Equinix’s chief financial officer and secretary since February 2002, and as general counsel from April 2000 to January 2003. From April 2000 to February 2002, Ms. Lanam also served as Equinix’s assistant secretary. In addition, Ms. Lanam served as vice president of corporate finance from November 2001 to February 2002. Before joining Equinix, Ms. Lanam was employed at Gunderson Dettmer, where she was an associate from January 1996 to January 2000 and a partner from January 2000 to April 2000. Prior to joining Gunderson Dettmer, Ms. Lanam was an associate at the law firms of Jackson, Tufts, Cole & Black and Brobeck, Phleger & Harrison, LLP.

 

Keith D. Taylor has served as Equinix’s vice president, finance, and chief accounting officer since February 2001. From February 1999 to February 2001, Mr. Taylor served as Equinix’s director of finance and administration. Before joining Equinix, Mr. Taylor was employed by International Wireless Communications, Inc., an operator, owner and developer of wireless communication networks, as vice president finance and interim chief financial officer. Prior to joining International Wireless Communications, Inc., Mr. Taylor was employed by Becton Dickinson & Company, a medical and diagnostic device manufacturer, as a senior sector analyst for the diagnostic businesses in Asia, Latin America and Europe.

 

 

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ITEM 11.

  

EXECUTIVE COMPENSATION

 

Compensation of Executive Officers

 

The following table sets forth information with respect to compensation for the fiscal years ended December 31, 2000, 2001 and 2002 paid by the Company for services rendered by the Company’s chief executive officer and the four most highly compensated executive officers whose salary and bonus for the fiscal year ended December 31, 2002 were in excess of $100,000 for services rendered in all capacities to the Company for that fiscal year (collectively, the “Named Executive Officers”):

 

    

Annual Compensation


      

Long Term Compensation


      
    

Year


  

Salary


  

Bonus


      

Awards Securities Underlying Options (#)


    

All Other Compensation (5)


Peter F. Van Camp (1)

  

2002

  

$

310,000

  

0

 

    

7,813

    

 

0

Director and Chief Executive Officer

  

2001

  

 

308,708

  

873,692

(2)

    

68,750

    

$

109,349

    

2000

  

 

194,938

  

1,169

 

    

97,031

    

 

150,000

Albert M.Avery, IV

  

2002

  

 

250,000

  

0

 

    

1,563

    

 

0

Vice Chairman of the Board

  

2001

  

 

307,416

  

0

 

    

3,125

    

 

0

    

2000

  

 

310,000

  

0

 

    

1,7500

    

 

0

Marjorie S. Backaus

  

2002

  

 

225,000

  

29,946

(3)

    

4,688

    

 

0

Chief Marketing Officer and

  

2001

  

 

221,562

  

41,132

 

    

14,843

    

 

0

Vice President of Market Strategy

  

2000

  

 

200,781

  

4,328

 

    

1,750

    

 

51,789

Peter F. Ferris

  

2002

  

 

205,000

  

99,110

(4)

    

4,688

    

 

0

Vice President, Worldwide Sales

  

2001

  

 

202,244

  

62,572

 

    

14,843

    

 

0

    

2000

  

 

192,995

  

64,157

 

    

1,750

    

 

0

Renee F. Lanam

  

2002

  

 

230,500

  

80,000

 

    

10,157

    

 

0

Chief Financial Officer, Secretary

  

2001

  

 

214,083

  

1,015

 

    

14,845

    

 

0

    

2000

  

 

138,223

  

1,234

 

    

11,798

    

 

0


(1)   Mr. Van Camp joined the Company in May 2000.

 

(2)   Represents the partial forgiveness of an employee loan in exchange for Mr. Van Camp waiving his right to any bonuses earned and expensed in 2001.

 

(3)   Represents interest payments on a home loan pursuant to early repayment agreements. See “Certain Relationships and Related Transactions—Loans to Executive Officers” for a description of such repayment agreements.

 

(4)   Includes $59,110 in interest payments on a home loan pursuant to early repayment agreements. See “Certain Relationships and Related Transactions—Loans to Executive Officers” for a description of such repayment agreements.

 

(5)   Except as otherwise noted, All Other Compensation reflects payment of relocation expenses.

 

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Stock Option Grants

 

The following table shows for the year ended December 31, 2002, certain information regarding options granted to the Named Executive Officers:

 

                              

Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(4)($)


Name


    

Number of Securities

Underlying Options granted (#)(1)


    

% of Total Options Granted to Employees in 2002 (2)


    

Exercise or Base Price ($/sh)(3)


  

Expiration

Date


  

5%


  

10%


Peter F. Van Camp

    

7,813

    

5.60

%

  

$

22.40

  

4/22/2012

  

$

110,064

  

$

278,923

Albert M. Avery, IV

    

1,563

    

1.12

%

  

$

22.40

  

4/22/2012

  

 

22,018

  

 

55,799

Marjorie S. Backaus

    

4,688

    

3.36

%

  

$

22.40

  

4/22/2012

  

 

66,041

  

 

167,361

Peter Ferris

    

4,688

    

3.36

%

  

$

22.40

  

4/22/2012

  

 

66,041

  

 

167,361

Renee F. Lanam

    

4,688

    

3.36

%

  

$

51.20

  

2/19/2012

  

 

150,951

  

 

382,539

      

5,469

    

3.92

%

  

$

22.40

  

4/22/2012

  

 

77,043

  

 

195,242


(1)   The options in the table that show an expiration date of February 19, 2012 were granted on February 19, 2002 and the options in the table that show an expiration date of April 22, 2012 were granted on April 22, 2002. These options are exercisable in 48 equal monthly installments from the grant date. The plan administrator has the discretionary authority to re-price the options through the cancellation of those options and the grant of replacement options with an exercise price based on the fair market value of the option shares on the re-grant date. The options have a maximum term of 10 years measured from the option grant date, subject to earlier termination in the event of the optionee’s cessation of service with the Company. Under each of the options, the option shares vest upon an acquisition of the Company by merger or asset sale, unless the acquiring entity or its parent corporation assumes the outstanding options. Any options which are assumed or replaced in the transaction and do not otherwise accelerate at that time automatically accelerate (and any unvested option shares which do not otherwise vest at that time automatically vest) in the event the optionee’s service terminates by reason of an involuntary or constructive termination within 18 months following the transaction.

 

(2)   Based on an aggregate of 139,618 shares subject to options granted in the fiscal year ended December 31, 2002.

 

(3)   The exercise price for each option may be paid in cash, in shares of common stock valued at fair market value on the exercise date or through a cashless exercise procedure involving a same-day sale of the purchased shares. The Company may also finance the option exercise by loaning the optionee sufficient funds to pay the exercise price for the purchased shares, together with any federal and state income tax liability incurred by the optionee in connection with such exercise.

 

(4)   In accordance with the rules of the Securities and Exchange Commission (“SEC”), the table sets forth the hypothetical gains or “option spreads” that would exist for the options at the end of their respective ten-year terms based on assumed annualized rates of compound stock price appreciation of 5% and 10% from the dates the options were granted to the end of the respective option terms. Actual gains, if any, on option exercises are dependent on the future performance of the Company’s common stock and overall market conditions. There can be no assurance that the potential realizable values shown in this table will be achieved.

 

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Table of Contents

 

Aggregate Option Exercises in 2002 and Fiscal Year-End Option Values

 

No options were exercised by the Named Executive Officers in 2002. The following table sets forth for each of the Named Executive Officers the number and value of securities underlying options held by the Named Executive Officers at December 31, 2002:

 

Name


  

Number of Securities Underlying Unexercised Options at
December 31, 2002 (#)


    

Value of Unexercised In-The-Money Options at December 31, 2002 (1)


    

Exercisable


    

Unexercisable


    

Exercisable


    

Unexercisable


Peter F. Van Camp

  

132,189

    

41,407

    

$

0

    

$

0

Albert M. Avery, IV

  

3,703

    

2,735

    

$

0

    

$

0

Marjorie S. Backaus

  

21,005

    

10,825

    

$

0

    

$

0

Peter Ferris

  

10,458

    

10,825

    

$

0

    

$

0

Renee F. Lanam

  

19,528

    

15,318

    

$

0

    

$

0


(1)   Based on the fair market value of the Company’s common stock as of December 31, 2002 ($5.70 per share), minus the exercise price, multiplied by the number of shares underlying the options.

 

Employment Agreements, Change of Control Arrangements and Severance Agreements

 

The Compensation Committee, as plan administrator of the 2000 Equity Incentive Plan, has the authority to provide for accelerated vesting of the shares of common stock subject to outstanding options held by the Named Executive Officers and any other person in connection with certain changes in control of Equinix. In connection with the adoption of the 2000 Equity Incentive Plan, the Company has provided that upon a change in control of the Company, each outstanding option and all shares of restricted stock will generally become fully vested unless the surviving corporation assumes the option or award or replaces it with a comparable award. Any options which are assumed or replaced in the transaction and do not otherwise accelerate at that time shall automatically accelerate (and any unvested option shares which do not otherwise vest at that time shall automatically vest) in the event the optionee’s service terminates by reason of an involuntary or constructive termination within 18 months following the transaction. In addition, options granted to the executive officers of the Company prior to the Company’s initial public offering provide for an additional 12 months vesting upon a change in control of the Company and our form of offer letter for officers provides for an additional 12 months of vesting upon a change in control, provided such officer is employed upon the closing of the change in control. Except as noted below, none of the Company’s executive officers have employment agreements with the Company, and their employment may be terminated at any time.

 

In August 2002, the Company entered into Severance Agreements with its executive officers, Peter Van Camp, Marjorie S. Backaus, Peter Ferris, Philip J. Koen, Renee Lanam, and Keith Taylor. The agreements provide for severance payments equal to the officer’s annual base salary and target bonus in the event such officer’s employment is terminated for any reason other than cause or the officer resigns for good reason as defined in the agreement.

 

The initial stock option agreement for Peter F. Van Camp, the Company’s chief executive officer, provides that he will vest an additional 12 months in his initial option upon a change in control of the Company.

 

The Company extended an offer of employment to Marjorie S. Backaus, the Company’s Chief Marketing Officer, pursuant to an offer letter dated October 21, 1999. The agreement provides that she will vest an additional 12 months in her options upon a change in control of the Company.

 

The Company extended an offer of employment to Peter T. Ferris, the Company’s vice president, worldwide sales, pursuant to an offer letter dated June 28, 1999. The letter provides for acceleration of vesting of option shares for an additional 12 months if there are certain changes in control of the Company.

 

 

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The Company entered into an agreement on February 8, 2000 with Albert M. Avery, IV, its former vice chairman of the Board of Directors, which provides that his base compensation will be the same as the CEO’s base compensation and also provides for continuation of his salary and continued option vesting for 12 months should his employment with the Company cease. Any options granted to Mr. Avery after February 8, 2000 will allow 24 months to exercise post-termination of employment. On January 1, 2003, the Company entered into an agreement with Albert M. Avery IV relating to his cessation of employment with the Company effective January 6, 2003. Under the agreement, Mr. Avery received severance benefits consisting of a lump sum cash payment of $311,292 pursuant to the terms of his existing employment contract, plus $9,554.52 in payment of COBRA premiums, payment of legal fees to Mr. Avery’s counsel, and a personal computer, blackberry, and cell phone used by Mr. Avery while employed by the Company. In addition, he will continue to vest in his stock options through December 31, 2003 and will have two years to exercise vested options. The agreement also contains certain restrictive covenants, mutual releases and other customary terms and conditions.

 

 

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Table of Contents

ITEM 12.

  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth, as of February 28, 2003, certain information with respect to shares beneficially owned by (i) each person who is known by the Company to be the beneficial owner of more than five percent of the Company’s outstanding shares of common stock, (ii) each of the Company’s directors, (iii) each of the executive officers named in Executive Compensation and Related Information, and (iv) all current directors and executive officers as a group. Beneficial ownership has been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Under this rule, certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire shares (for example, upon exercise of an option or warrant) within sixty (60) days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of such acquisition rights. As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person’s actual voting power at any particular date. Unless otherwise indicated, the address for each listed stockholder is c/o Equinix, Inc., 301 Velocity Way, Fifth Floor, Foster City, California 94404.

 

    

Shares Beneficially Owned


 

Name of Beneficial Owner


  

Number

of Shares


  

Percentage of Total


 

Peter F. Van Camp (1)

  

168,724

  

1.95

%

Albert M. Avery, IV (2)

  

83,423

  

*

 

Steven Poy Eng

    51 Cuppage Road

    #10-11/17

    StarHub Centre

    Singapore 229469

  

0

  

 

Harry F. Hopper III (3)

  

498,014

  

5.86

%

Theng Kiat Lee (4)

    51 Cuppage Road

    #10-11/17

    StarHub Centre

    Singapore 229469

  

0

  

 

Renee F. Lanam (5)

  

39,411

  

*

 

Jean F.H.P. Mandeville (6)

    51 Cuppage Road

    #10-11/17

    StarHub Centre

    Singapore 229469

  

0

  

 

Andrew S. Rachleff (7)

  

271,429

  

3.19

%

Michelangelo Volpi (8)

  

0

  

 

Scott Kriens (9)

  

938

  

*

 

Marjorie S. Backaus (10)

  

36,252

  

*

 

Peter T. Ferris (11)

  

37,294

  

*

 

Entities affiliated with STT Communications Ltd.(12)

    51 Cuppage Road

    #10-11/17

    Starhub Centre

    Singapore 229469

  

4,943,569

  

40.00

%

Entities affiliated with Goldman Sachs (13)

    85 Broad Street

    New York, NY 10004

  

1,042,799

  

12.26

%

All current directors and executive officers as a group (15 persons)(14)

  

1,251,117

  

14.41

%

 

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   *   Less than 1%.
  (1)   Includes 162,474 shares subject to options that are exercisable within 60 days of February 28, 2003.
  (2)   Includes 3,703 shares subject to options that are exercisable within 60 days of February 28, 2003.
  (3)   Represents 310,824 shares of common stock held by Columbia PIXC Partners III, L.L.C., 96,166 shares of common stock held by Columbia PIXC Partners, L.L.C., and 91,024 shares of common stock held by Columbia Capital Equity Partners (QP) L.P. Mr. Hopper is a managing member of Columbia PIXC Partners III, L.L.C. and Columbia PIXC Partners III, L.L.C. Mr. Hopper may be deemed to share voting and investment power with respect to all shares owned by Columbia Capital entities.
  (4)   Mr. Kiat is President of Singapore Technologies Telemedia Pte. Ltd., which may be deemed to beneficially own 4,596,495 shares which are beneficially owned by STT Communications Ltd., a subsidiary of Singapore Technologies Telemedia Ptc. Ltd., as set forth in footnote 12.
  (5)   Includes 37,600 shares subject to options that are exercisable within 60 days of February 28, 2003.
  (6)   Mr. Mandeville is Chief Financial Officer of Singapore Technologies Telemedia Pte. Ltd., which may be deemed to beneficially own 4,596,495 shares which are beneficially owned by STT Communications Ltd., a subsidiary of Singapore Technologies Telemedia Ptc. Ltd., as set forth in footnote 12.
  (7)   Represents 266,718 shares of common stock held by Benchmark Capital Partners II, L.P., as nominee for Benchmark Capital Partners II, L.P., Benchmark Founders’ Fund II, L.P., Benchmark Founders’ Fund II-A, L.P. and Benchmark Members’ Fund II, L.P., and 3,578 shares of common stock held by Benchmark Capital Partners IV, L.P., as nominee for Benchmark Capital Partners, IV, L.P., Benchmark Founders’ Fund IV, L.P., Benchmark Founders’ Fund IV-A, L.P. and related individuals. Mr. Rachleff is a managing member of Benchmark Capital Management Co. II, LLC, the general partner of Benchmark Capital Partners, II, L.P., Benchmark Founders’ Fund II, L.P. Benchmark Founders’ Fund II-A, L.P. and Benchmark Members’ Fund II, L.P. Mr. Rachleff is also a managing member of Benchmark Capital Management Co., IV, LLC, the general partner of Benchmark Capital Partners, IV, L.P., Benchmark Founders’ Fund IV, L .P. and Benchmark Founders’ Fund IV-A, L.P. In addition, includes 195 shares of common stock and 938 shares subject to options that are exercisable within 60 days of February 28, 2003.
  (8)   Mr. Volpi is senior vice president of Cisco Systems, Inc., which beneficially holds 212,217 shares of common stock.
  (9)   Includes 938 shares subject to options that are exercisable within 60 days of February 28, 2003.
(10)   Includes 32,658 shares subject to options that are exercisable within 60 days of February 28, 2003.
(11)   Includes 21,277 shares subject to options that are exercisable within 60 days of February 28, 2003.
(12)   Includes 1,084,686 shares of common stock beneficially owned by i-STT Investments Pte. Ltd., (“i-STTI”) a wholly-owned subsidiary of STT Communications Ltd., and 1,868,667 shares of common stock that may be acquired upon conversion of the Series A Convertible Preferred Stock (“Series A Preferred Stock”) owned by i-STTI. Also includes 1,990,216 shares that may be acquired within 60 days of February 28, 2003 upon conversion of Series A-1 Convertible Secured Notes (the “Notes”) or upon the exercise of Series A-1 Preferred Stock Warrants (the “Warrants”) owned of record by i-STTI. As more fully described in our definitive proxy statement filed with the Securities and Exchange Commission on December 12, 2002 and subject to the qualifications described therein, until December 31, 2004, or if earlier, the termination of the governance provisions in the bylaws, STT and its affiliates may not convert the Notes or exercise the Warrants for shares of our voting stock if such conversion or exercise would cause STT, when combined with shares beneficially held by its affiliates, to beneficially hold more than 40% of our outstanding voting stock. Accordingly, the Notes and Warrants are convertible into or exercisable for shares of common stock or Series A Preferred Stock only to the extent that such exchange will not cause STT or its affiliates to exceed the 40% threshold. If such conversion or exercise would cause STT or its affiliates to exceed the 40% threshold, the Notes and Warrants become convertible or exercisable for shares of non-voting Series A-1 Preferred Stock.
(13)   Represents 287,500 shares held by GS Capital Partners 2000, L.P., 104,466 shares held by GS Capital Partners 2000 Offshore, L.P., 12,017 shares held by GS Capital Partners 2000 GmbH & Co. Beteiligungs KG, 91,347 shares held by GS Capital Partners 2000 Employee Fund, L.P., 26,070 shares held by Stone Street Fund 2000, L.P., 147,688 shares held by GS Special Opportunities (Asia) Fund, L.P., 107,668 shares held by GS Special Opportunities (Asia) Offshore Fund, L.P., 173,943 shares held by Whitehall Street Real Estate Limited Partnership XIII, 60,687 shares held by Whitehall Parallel Real Estate Limited Partnership XIII, 5,343 shares held by Stone Street Asia Fund, L.P. and 26,070 shares held by Stone Street Real Estate Fund 2000, L.P.
(14)   Includes the shares described in Notes 1 through 11, plus shares held by or subject to options exercisable within 60 days of February 28, 2003 held by executive officers not named above.

 

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Table of Contents

 

The data regarding equity compensation plans required by this Item 12 are listed in Item 5 and begin on page 13 of this report.

 

ITEM 13.

  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Loans to Executive Officers.    From July 1999 through January 2001, the Company hired a number of individuals from out-of-state and relocated them to California. The market in California during this period was very competitive for certain positions and the most qualified individuals available at that time were located in other states. In order to induce three executive officers to relocate to California from cities with lower housing costs, the Company offered each of these executive officers a non-interest bearing home loan to assist them with the purchase of a new residence in California. These loans expired upon the earlier of 5 years or certain liquidity events, none of which have happened to date. In early 2002, the Company negotiated with all three of these executive officers for the early repayment of these loans. In January 2002, in exchange for Peter Van Camp, the Company’s Chief Executive Officer, agreeing to repay the loan four years earlier than its maturity, and in exchange for his waiving his right to any bonuses earned and expensed in 2001, the Compensation Committee of the Board of Directors forgave $874,000 of Mr. Van Camp’s loan of $1,512,000. The remaining amount due under the loan of $638,000 was repaid to the Company in full in February 2002. In addition, the Company negotiated with the other two executive officers of the Company, Peter Ferris and Marjorie Backaus, to repay their loans in full several years prior to the loans’ maturity dates. In exchange, the Company agreed to pay a portion of the interest on each of the officer’s mortgage for their principal residence through December 31, 2003. Mr. Ferris’ loan, totaling $750,000, was repaid in full in February 2002 and Ms. Backaus’ loan, totaling $250,000, was repaid in full in March 2002.

 

Equipment Reseller Agreements with Affiliated Companies.    In March 2002, the Company entered into an agreement to resell equipment with Cisco Systems, Inc. (“Cisco”), a greater than 5% stockholder in the Company. Michelangelo Volpi, one of the Company’s directors, is an executive officer of Cisco. The Company plans to recognize revenue from this arrangement 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 this arrangement, 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. The Company has purchased and resold equipment for $968,000 under the agreement with Cisco.

 

In February 2002, the Company entered into an agreement to resell equipment with Juniper Networks (IS), Inc., an entity affiliated with Juniper Networks, Inc. (“Juniper”). Scott Kriens, one of the Company’s directors, is both a director and an executive officer of Juniper. The Company plans to recognize revenue from this arrangement 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 this agreement, 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. The Company has purchased and resold equipment for $1,805,000 under the agreement with Juniper.

 

Convertible Secured Note Sold to Affiliated Company.    In December 2002, i-STT Investments Pte Ltd, an affiliate of STT Communications, made a $30.0 million investment in the Company through the purchase of a

 

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Table of Contents

14% convertible secured note with an initial term of five years. The interest on the convertible secured note is payable in kind in the form of additional convertible secured notes. The convertible secured note is secured by a first priority lien on certain of the Company’s assets located in Asia and a second priority lien on all of the Company’s other assets. In addition, the Company issued the following warrants to i-STT Investments in conjunction with the convertible secured note:

 

    Preferred Stock Warrant. A warrant to purchase 965,674 shares of the Company’s Series A or Series A-1 preferred stock at a price of $.01 per share at any time at the option of STT Communications.

 

    Change in Control Warrant. If the Company experiences a change in control, the change in control warrant will become exercisable for shares of the Company’s common stock with a total current market value of up to 20% of the then outstanding principal amount of notes, including notes issued as interest on convertible notes, plus accrued but unpaid interest. The change in control warrant terminates on December 31, 2007 and has an exercise price of $0.01 per share.

 

    Cash Trigger Warrants. In order to provide a mechanism to allow STT Communications to ensure the company’s compliance with cash covenants under its senior secured credit facility, STT Communications has the right, but not the obligation, to exercise one or both of two cash trigger warrants. Pursuant to the Series A Cash Trigger Warrant, STT Communications or its affiliates may purchase additional shares of the company’s stock for an aggregate exercise price of up to $10,000,000. The per share exercise price for the Series A Cash Trigger Warrant is the lesser of (a) $9.792 or (b) 90% of the then current market value of shares of the Company’s common stock. Pursuant to the Series B Cash Trigger Warrant, STT Communications or its affiliates may purchase additional shares of the company’s stock for an aggregate exercise price of up to $20,000,000. The per share exercise price for the Series B Cash Trigger Warrant is 90% of the then current market value of the Company’s common stock. The cash trigger warrants will become exercisable if the Company fails to satisfy certain covenants of the senior secured credit facility.

 

The convertible secured note and warrants are more fully described in the Company’s definitive proxy statement dated December 12, 2002.

 

STT Communications, along with its affiliates, is a greater than 5% stockholder in the Company and Lee Theng Kiat and Jean Mandeville, two of the Company’s directors, are executive officers of STT Communications.

 

ITEM 14.

  

CONTROLS AND PROCEDURES

 

Within 90 days prior to the date of filing this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective for gathering, analyzing and disclosing the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of this evaluation.

 

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Table of Contents

PART IV

 

ITEM 15.     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 and Other Comprehensive Loss

  

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


2.1**********

 

Combination Agreement, dated as of October 2, 2002, by and among Equinix, Inc., Eagle Panther Acquisition Corp., Eagle Jaguar Acquisition Corp., i-STT Pte Ltd, STT Communications Ltd., Pihana Pacific, Inc. and Jane Dietze, as representative of the stockholders of Pihana Pacific, Inc.

3.1

 

Amended and Restated Certificate of Incorporation of the Registrant, as amended to date.

3.2†

 

Bylaws of the Registrant.

3.3

 

Certificate of Designation of Series A and Series A-1 Convertible Preferred Stock.

4.1

 

Reference is made to Exhibits 3.1, 3.2 and 3.3.

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).

4.10†

 

Registration Rights Agreement (See Exhibit 10.75).

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.

 

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Table of Contents

Exhibit

Number


 

Description of Document


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.

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.

 

56


Table of Contents

Exhibit

Number


 

Description of Document


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.

10.50********

 

Agreement terminating the Lease Agreement with Naxos Schmirdelwork Mainkur GmbH and A.A.A. Aktiengesellschaft Allgemeine Anlageverwaltung vorm. Seilwolff AG von 1890, dated as of April 26, 2002.

10.51********

 

Agreement to Surrender of a Lease Agreement by and between Equinix UK Limited and Quattrocentro Limited, dated as of February 27, 2002.

10.52********

 

Termination Agreement by and among Equinix, Inc. and Deka Immobilien Investment GMBH, successor in title to GIP Airport B.V., dated as of February 18, 2002, terminating the Lease Agreement with GIP Airport B.V., dated as of April 28, 2000.

10.53********

 

Second Modification to Ground Lease by and between iStar San Jose, LLC and Equinix, Inc., dated as of May 20, 2002.

10.54********+

 

Amended and Restated Master Service Agreement by and between International Business Machines Corporation and Equinix, Inc., dated as of May 1, 2002.

10.55********

 

Agreement for Termination of Lease and Voluntary Surrender of Premises by and between ARE-2425/2400/2450 Garcia Bayshore LLC and Equinix Operating Co., Inc., dated as of July 12, 2002.

10.56*********+

 

Second Amendment to Lease Agreement with Burlington Realty Associates III Limited Partnership, dated as of October 1, 2002.

10.57*********+

 

First Amendment to Lease Agreement for property located at 2450 Bayshore Parkway, Mountain View, CA 94043, dated as of October 1, 2002.

10.58*********

 

Form of Severance Agreement entered into by the Company and each of the Company’s executive officers.

10.59†

 

Second Amended and Restated Credit and Guaranty Agreement, dated as of December 31, 2002.

10.60†

 

Governance Agreement by and among Equinix, Inc., STT Communications Ltd., i-STT Communications Ltd.,—STT Investments Pte Ltd and the Pihana Pacific stockholder named therein, dated as of December 31, 2002.

10.61†

 

Tenancy Agreement over units #06-01, #06-05, #06-06, #06-07 and #06-08 of Block 20 Ayer Rajah Crescent, Singapore 139964.

10.62†

 

Tenancy Agreement over units #05-05, #05-06, #05-07 and #05-08 of Block 20 Ayer Rajah Crescent, Singapore 139964.

10.63†

 

Tenancy Agreement over units #03-01 and #03-02 of Block 28 Ayer Rajah Crescent, Singapore 139959.

 

57


Table of Contents

Exhibit

Number


 

Description of Document


10.64†

 

Tenancy Agreement over units #05-01, #05-02, #05-03 and #05-04 of Block 20 Ayer Rajah Crescent, Singapore 139964.

10.65†

 

Tenancy Agreement over units #03-05, #03-06, #03-07 and #03-08 of Block 20 Ayer Rajah Crescent, Singapore 139964.

10.66†

 

Lease Agreement with Nation Multimedia Group Public Co., Ltd. For 1st and 3rd Floor of Nation Building II, Bangkok, dated as of February 1, 2001.

10.67†

 

Lease Agreement with Nation Multimedia Group Public Co., Ltd. For 6th Floor of Nation Tower, Bangkok, dated as of October 1, 2001.

10.68†

 

General Factory Lease Agreement dated February 21, 2001.

10.69†

 

Lease Agreement with Downtown Properties, LLC dated April 10, 2000, as amended.

10.70†

 

Lease Agreement with Comfort Development Limited dated November 10, 2000.

10.71†

 

Lease Agreement with PacEast Telecom Corporation dated June 15, 2000, as amended.

10.72†

 

Lease Agreement Lend Lease Real Estate Investments Limited dated October 20, 2000.

10.73†

 

Lease Agreement with AIPA Properties, LLC dated November 1, 1999, as amended.

10.74†

 

Third Modification to Ground Lease by and between iStar San Jose, LLC and Equinix, Inc., dated as of September 30, 2002.

10.75†

 

Registration Rights Agreement by and among Equinix and the Initial Purchasers, dated as of December 31, 2002.

10.76†

 

Securities Purchase Agreement by and among Equinix, the Guarantors and the Purchasers, dated as of October 2, 2002.

10.77†

 

Series A-1 Convertible Secured Note Due 2007 issued to i-STT Investments Pte Ltd on December 31, 2002.

10.78†

 

Preferred Stock Warrant issued to i-STT Investments Pte Ltd on December 31, 2002.

10.79†

 

Change in Control Warrant issued to i-STT Investments Pte Ltd on December 31, 2002.

10.80†

 

Series A Cash Trigger Warrant issued to i-STT Investments Pte Ltd on December 31, 2002.

10.81†

 

Series B Cash Trigger Warrant issued to i-STT Investments Pte Ltd on December 31, 2002.

10.82†

 

First Supplemental Indenture between Equinix and State Street Bank and Trust Company of California, N.A., as Trustee, dated as of December 28, 2002.

16.1*

 

Letter regarding change in certifying accountant.

21.1†

 

Subsidiaries of Equinix.

23.1

 

Consent of PricewaterhouseCoopers LLP, Independent Accountants.

99.1

 

Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2

 

Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*   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.

 

58


Table of Contents
******   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.
*******   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, 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 June 30, 2002.
*********   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, 2002.
**********   Incorporated herein by reference to Annex A of Equinix’s Definitive Proxy Statement filed with the Commission December 12, 2002.
  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, 2002.
+   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.

 

On October 9, 2002, the Company filed a Current Report on Form 8-K to report the announcement that on October 2, 2002, the Company entered into a combination agreement to acquire the outstanding stock of i-STT Pte Ltd from STT Communications Ltd. (“STT Communications”), as well as to merge one of the Company’s wholly-owned subsidiaries with Pihana Pacific, Inc. (“Pihana”), in which Pihana would become a wholly-owned subsidiary of the Company (collectively, the combination). In connection with the combination, the Company also announced that it had entered into a securities purchase agreement with STT Communications, in which at the closing of the combination, the Company would issue up to $40.0 million aggregate principal amount of convertible secured notes to STT Communications and other purchasers.

 

On December 26, 2002, the Company filed a Current Report on Form 8-K to make public a pro forma balance sheet as of November 30, 2002 as if the combination had occurred on such date as required by the Nasdaq Qualifications Panel. On August 15, 2002, Equinix received a notice from Nasdaq indicating that the failure of its common stock to maintain Nasdaq’s minimum closing bid price requirement of $1.00 had continued beyond the 90-day probationary period allowed under The Nasdaq National Marketplace Rules and, therefore, its common stock may be delisted. On August 21, 2002, Equinix appealed the delisting decision and requested the delisting be stayed pending a hearing before the Nasdaq Qualifications Panel. A hearing was granted and Equinix appeared before the panel on October 3, 2002. On November 25, 2002 the Nasdaq Qualifications Panel issued a decision to continue the listing of our common stock on The Nasdaq National Market. However, such continuance is contingent upon our ability to demonstrate compliance with all of the requirements for initial listing on The Nasdaq National Market and the completion of the combination and related transactions on or before December 31, 2002. In connection with the Panel’s decision, the Panel required Equinix to make a public filing, which includes a pro forma balance sheet no older than 45 days from the closing of the combination. This filing on Current Report on Form 8-K met this requirement.

 

(c)  Exhibits.

 

See (a)(3) above.

 

(d)  Financial Statement Schedule.

 

See (a)(2) above.

 

59


Table of Contents

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)

By

 

/s/    RENEE F. LANAM        


   

Renee F. Lanam

Chief Financial Officer

 

April 25, 2003

 

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*      


Peter F. Van Camp

  

Chief Executive Officer and Director (Principal Executive Officer)

 

April 25, 2003

/s/    RENEE F. LANAM      


Renee F. Lanam

  

Chief Financial Officer and Secretary

(Principal Financial Officer)

 

April 25, 2003

/s/    KEITH D. TAYLOR*      


Keith D. Taylor

  

Vice President, Finance

(Principal Accounting Officer)

 

April 25, 2003


Lee Theng Kiat

  

Chairman of the Board

   

/s/    SCOTT KRIENS*        


Scott Kriens

  

Director

 

April 25, 2003

/s/    ANDREW S. RACHLEFF*      


Andrew S. Rachleff

  

Director

 

April 25, 2003

 

60


Table of Contents

Signature


  

Title


 

Date


/s/    MICHELANGELO VOLPI*      


Michelangelo Volpi

  

Director

 

April 25, 2003

/s/    JEAN F.H.P. MANDEVILLE*      


Jean F.H.P. Mandeville

  

Director

 

April 25, 2003

/s/    HARRY F. HOPPER III*      


Harry F. Hopper III

  

Director

 

April 25, 2003


  

Director

   

Steven Poy Eng

        

 

*By:

 

/s/    RENEE F. LANAM        


     

April 25, 2003

   

Renee F. Lanam

Attorney-in-Fact

       

 

61


Table of Contents

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

 

I, Peter F. Van Camp, certify that:

 

1.   I have reviewed this annual report on Form 10-K/A of Equinix, Inc.

 

2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

 

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) for the registrant and we have:

 

  a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

  b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

  c)   presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

 

  a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

  b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.   The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Dated: April 25, 2003

 

/s/    PETER F. VAN CAMP

 

Peter F. Van Camp

Chief Executive Officer

 

62


Table of Contents

CERTIFICATION OF CHIEF FINANCIAL OFFICER

 

I, Renee F. Lanam, certify that:

 

1.   I have reviewed this annual report on Form 10-K/A of Equinix, Inc.

 

2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

 

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) for the registrant and we have:

 

  a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

  b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

  c)   presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

 

  a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

  b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.   The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Dated: April 25, 2003

 

/s/    RENEE F. LANAM

 

Renee F. Lanam

Chief Financial Officer

 

63


Table of Contents

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 15(a)(1) on page 45, present fairly, in all material respects, the financial position of Equinix, Inc. and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 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

March 21, 2003

 

F-1


Table of Contents

EQUINIX, INC.

 

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

    

December 31,


 
    

2002


    

2001


 

Assets

                 

Current assets:

                 

Cash and cash equivalents

  

$

41,216

 

  

$

58,831

 

Short-term investments

  

 

 

  

 

28,890

 

Accounts receivable, net of allowance for doubtful accounts of $397 and $381

  

 

9,152

 

  

 

6,909

 

Current portion of restricted cash and short-term investments

  

 

1,981

 

  

 

47

 

Prepaids and other current assets

  

 

11,146

 

  

 

8,541

 

    


  


Total current assets

  

 

63,495

 

  

 

103,218

 

Property and equipment, net

  

 

390,048

 

  

 

325,226

 

Construction in progress

  

 

 

  

 

103,691

 

Restricted cash and short-term investments, less current portion

  

 

2,426

 

  

 

27,997

 

Intangible assets

  

 

24,981

 

  

 

 

Debt issuance costs, net

  

 

7,250

 

  

 

11,333

 

Other assets

  

 

3,803

 

  

 

3,589

 

    


  


Total assets

  

$

492,003

 

  

$

575,054

 

    


  


Liabilities and Stockholders’ Equity

                 

Current liabilities:

                 

Accounts payable and accrued expenses

  

$

20,347

 

  

$

11,109

 

Accrued restructuring charges

  

 

11,528

 

  

 

6,390

 

Accrued construction costs

  

 

 

  

 

34,650

 

Accrued interest payable

  

 

2,311

 

  

 

2,167

 

Current portion of debt facilities and capital lease obligations.

  

 

5,591

 

  

 

7,206

 

Current portion of credit facility

  

 

1,981

 

  

 

 

Other current liabilities

  

 

4,413

 

  

 

1,807

 

    


  


Total current liabilities

  

 

46,171

 

  

 

63,329

 

Debt facilities and capital lease obligations, less current portion

  

 

3,633

 

  

 

6,344

 

Credit facility

  

 

89,529

 

  

 

105,000

 

Senior notes

  

 

28,908

 

  

 

187,882

 

Convertible secured note

  

 

25,354

 

  

 

 

Other liabilities

  

 

14,214

 

  

 

8,978

 

    


  


Total liabilities

  

 

207,809

 

  

 

371,533

 

    


  


Commitments and contingencies (Note 10)

                 

Stockholders’ equity:

                 

Preferred stock, $0.001 par value per share; 100,000,000 and 10,000,000 shares authorized in 2002 and 2001; 1,868,667 and zero shares issued and outstanding in 2002 and 2001; liquidation preference of $18,298 as of December 31, 2002

  

 

2

 

  

 

 

Common stock, $0.001 par value per share; 300,000,000 shares authorized in 2002 and 2001; 8,448,683 and 2,502,412 shares issued and outstanding in 2002 and 2001

  

 

8

 

  

 

3

 

Additional paid-in capital

  

 

638,065

 

  

 

544,420

 

Deferred stock-based compensation

  

 

(2,865

)

  

 

(11,022

)

Accumulated other comprehensive income

  

 

617

 

  

 

135

 

Accumulated deficit

  

 

(351,633

)

  

 

(330,015

)

    


  


Total stockholders’ equity

  

 

284,194

 

  

 

203,521

 

    


  


Total liabilities and stockholders’ equity

  

$

492,003

 

  

$

575,054

 

    


  


 

See accompanying notes to consolidated financial statements.

 

F-2


Table of Contents

EQUINIX, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

    

Year ended December 31,


 
    

2002


    

2001


    

2000


 

Revenues

  

$

77,188

 

  

$

63,414

 

  

$

13,016

 

    


  


  


Costs and operating expenses:

                          

Cost of revenues (includes stock-based compensation of $266, $426 and $766 for the years ended December 31, 2002, 2001, and 2000 respectively)

  

 

104,073

 

  

 

94,889

 

  

 

43,401

 

Sales and marketing (includes stock-based compensation of $952, $2,830, and $6,318 for the years ended December 31, 2002, 2001, and 2000 respectively)

  

 

15,247

 

  

 

16,935

 

  

 

20,139

 

General and administrative (includes stock-based compensation of $5,660, $15,788, and $22,809 for the years ended December 31, 2002, 2001, and 2000, respectively)

  

 

30,659

 

  

 

58,286

 

  

 

56,585

 

Restructuring charges

  

 

28,885

 

  

 

48,565

 

  

 

 

    


  


  


Total costs and operating expenses

  

 

178,864

 

  

 

218,675

 

  

 

120,125

 

    


  


  


Loss from operations

  

 

(101,676

)

  

 

(155,261

)

  

 

(107,109

)

Interest income

  

 

998

 

  

 

10,656

 

  

 

16,430

 

Interest expense

  

 

(35,098

)

  

 

(43,810

)

  

 

(29,111

)

Gain on debt extinguishment

  

 

114,158

 

  

 

 

  

 

 

    


  


  


Net loss

  

$

(21,618

)

  

$

(188,415

)

  

$

(119,790

)

    


  


  


Net loss per share:

                          

Basic and diluted

  

$

(7.23

)

  

$

(76.62

)

  

$

(111.23

)

    


  


  


Weighted average shares

  

 

2,990

 

  

 

2,459

 

  

 

1,077

 

    


  


  


 

 

See accompanying notes to consolidated financial statements.

 

 

F-3


Table of Contents

EQUINIX, INC.

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND OTHER COMPREHENSIVE LOSS

FOR THE THREE YEARS ENDED DECEMBER 31, 2002

(in thousands, except share data )

 

    

Preferred stock


 

Common stock


  

Additional

paid-in capital


    

Deferred

stock-based

compensation


    

Accumulated

other

comprehensive

   

Accumulated

deficit


   

Total

stockholders’

equity


 
  

Shares


  

Amount


 

Shares


    

Amount


        

income (loss)


     

Balances as of December 31, 1999

  

  

$

 —

 

364,756

 

  

$

 —

  

$

43,974

 

  

$

(13,706

)

  

$

14

 

 

$

(21,810

)

 

$

8,472

 

Issuance of common stock for cash

  

  

 

 

3,600

 

  

 

  

 

1,033

 

  

 

 

  

 

 

 

 

 

 

 

1,033

 

Issuance of common stock upon exercise of common stock options

  

  

 

 

44,442

 

  

 

  

 

2,472

 

  

 

 

  

 

 

 

 

 

 

 

2,472

 

Issuance of common stock upon exercise of common stock warrants

  

  

 

 

22,126

 

  

 

  

 

353

 

  

 

 

  

 

 

 

 

 

 

 

353

 

Issuance of common stock from initial public offering, net

  

  

 

 

709,399

 

  

 

1

  

 

251,481

 

  

 

 

  

 

 

 

 

 

 

 

251,482

 

Conversion of redeemable convertible preferred stock

  

  

 

 

1,271,877

 

  

 

1

  

 

191,579

 

                           

 

191,580

 

Repurchase of unvested common stock

  

  

 

 

(10,824

)

  

 

  

 

(28

)

  

 

 

  

 

 

 

 

 

 

 

(28

)

Issuance/revaluation of common stock options and warrants

  

  

 

 

 

  

 

  

 

7,744

 

  

 

 

  

 

 

 

 

 

 

 

7,744

 

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 loss on short-term investments

  

  

 

 

 

  

 

  

 

 

  

 

 

  

 

(87

)

 

 

 

 

 

(87

)

    
  

 

  

  


  


  


 


 


Net comprehensive loss

  

  

 

 

 

  

 

  

 

 

  

 

 

  

 

1,905

 

 

 

(119,790

)

 

 

(117,885

)

    
  

 

  

  


  


  


 


 


Balances as of December 31, 2000

  

  

 

 

2,405,376

 

  

 

2

  

 

553,145

 

  

 

(38,350

)

  

 

1,919

 

 

 

(141,600

)

 

 

375,116

 

Issuance of common stock upon exercise of common stock options

  

  

 

 

15,534

 

  

 

  

 

435

 

  

 

 

  

 

 

 

 

 

 

 

435

 

Issuance of common stock upon exercise of common stock warrants

  

  

 

 

72,882

 

  

 

  

 

 

  

 

 

  

 

 

 

 

 

 

 

 

Issuance of common stock under employee stock purchase plan

  

  

 

 

16,427

 

  

 

1

  

 

1,483

 

  

 

 

  

 

 

 

 

 

 

 

1,484

 

Repurchase of unvested common stock

  

  

 

 

(7,807

)

  

 

  

 

(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 gain on short-term investments

  

  

 

 

 

  

 

  

 

 

  

 

 

  

 

89

 

 

 

 

 

 

89

 

    
  

 

  

  


  


  


 


 


Net comprehensive loss

  

  

 

 

 

  

 

  

 

 

  

 

 

  

 

(1,784

)

 

 

(188,415

)

 

 

(190,199

)

    
  

 

  

  


  


  


 


 


Balances as of December 31, 2001

  

  

 

 

2,502,412

 

  

 

3

  

 

544,420

 

  

 

(11,022

)

  

 

135

 

 

 

(330,015

)

 

 

203,521

 

Issuance of common stock upon exercise of common stock options

  

  

 

 

12,965

 

  

 

  

 

112

 

  

 

 

  

 

 

 

 

 

 

 

112

 

Issuance of common stock upon exercise of common stock warrants

  

  

 

 

58,551

 

  

 

  

 

11

 

  

 

 

  

 

 

 

 

 

 

 

11

 

Issuance of common stock under employee stock purchase plan

  

  

 

 

16,689

 

  

 

  

 

415

 

  

 

 

  

 

 

 

 

 

 

 

415

 

Issuance of common stock upon exchange of senior notes

  

  

 

 

2,357,001

 

  

 

2

  

 

30,831

 

  

 

 

  

 

 

 

 

 

 

 

30,833

 

Issuance of common and preferred stock upon acquisition of i-STT

  

1,868,667

  

 

2

 

1,084,686

 

  

 

1

  

 

31,184

 

  

 

 

  

 

 

 

 

 

 

 

31,187

 

Issuance of common stock upon acquisition of Pihana

  

  

 

 

2,416,379

 

  

 

2

  

 

25,515

 

  

 

 

  

 

 

 

 

 

 

 

25,517

 

Issuance/revaluation of common and preferred stock warrants

  

  

 

 

 

  

 

  

 

6,856

 

  

 

 

  

 

 

 

 

 

 

 

6,856

 

Deferred stock-based compensation, net of forfeitures

  

  

 

 

 

  

 

  

 

(1,279

)

  

 

1,279

 

  

 

 

 

 

 

 

 

 

Amortization of stock-based compensation

  

  

 

 

 

  

 

  

 

 

  

 

6,878

 

  

 

 

 

 

 

 

 

6,878

 

Comprehensive income (loss):

                                                                   

Net loss

  

  

 

 

 

  

 

  

 

 

  

 

 

  

 

 

 

 

(21,618

)

 

 

(21,618

)

Foreign currency translation gain

  

  

 

 

 

  

 

  

 

 

  

 

 

  

 

498

 

 

 

 

 

 

498

 

Unrealized loss on short-term investments

  

  

 

 

 

  

 

  

 

 

  

 

 

  

 

(16

)

 

 

 

 

 

(16

)

    
  

 

  

  


  


  


 


 


Net comprehensive loss

  

  

 

 

 

  

 

  

 

 

  

 

 

  

 

482

 

 

 

(21,618

)

 

 

(21,136

)

    
  

 

  

  


  


  


 


 


Balances as of December 31, 2002

  

1,868,667

  

$

2

 

8,448,683

 

  

$

8

  

$

638,065

 

  

$

(2,865

)

  

$

617

 

 

$

(351,633

)

 

$

284,194

 

    
  

 

  

  


  


  


 


 


 

See accompanying notes to consolidated financial statements.

 

F-4


Table of Contents

EQUINIX, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

    

Year ended December 31,


 
    

2002


    

2001


    

2000


 

Cash flows from operating activities:

                          

Net loss.

  

$

(21,618

)

  

$

(188,415

)

  

$

(119,790

)

Adjustments to reconcile net loss to net cash used in operating activities:

                          

Depreciation

  

 

54,082

 

  

 

49,645

 

  

 

14,816

 

Amortization of stock-based compensation

  

 

6,878

 

  

 

19,044

 

  

 

29,893

 

Amortization of debt-related issuance costs and discounts

  

 

5,977

 

  

 

7,195

 

  

 

8,445

 

Allowance for doubtful accounts

  

 

2,329

 

  

 

521

 

  

 

608

 

Issuance of common stock to charity

  

 

 

  

 

 

  

 

780

 

Loss on disposal of fixed assets

  

 

11

 

  

 

 

  

 

 

Gain on debt extinguishment

  

 

(114,158

)

  

 

 

  

 

 

Restructuring charges

  

 

28,885

 

  

 

48,565

 

  

 

 

Changes in operating assets and liabilities:

                          

Accounts receivable

  

 

(2,511

)

  

 

(2,505