Equinix
Annual Report 2001

Plain-text annual report

================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-K[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission file number 000-31293 ----------------- EQUINIX, INC. (Exact name of registrant as specified in its charter) Delaware 77-0487526 (State of incorporation) (IRS Employer Identification No.) 2450 Bayshore Parkway, Mountain View, California 94043 (Address of principal executive offices, including ZIP code) (650) 316-6000 (Registrant's telephone number, including area code) ----------------- 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 reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item405 of Regulation S-K is not contained herein, and will not be contained, tothe best of registrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. [X] The aggregate market value of voting common stock held by non-affiliates ofthe registrant as of February 28, 2002 was approximately $81.2 million. Sharesof common stock held by each officer and director have been excluded in thatsuch persons may be deemed to be affiliates. This determination of affiliatestatus is not necessarily a conclusive determination for other purposes. As of February 28, 2002, a total of 84,714,925 shares of the registrant'scommon stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part III--Portions of the registrant's definitive Proxy Statement to beissued in conjunction with the registrant's 2002 Annual Meeting ofStockholders, which is expected to be filed not later than 120 days after theregistrant's fiscal year ended December 31, 2001. Except as expresslyincorporated by reference, the registrant's Proxy Statement shall not be deemedto be a part of this report on Form 10-K.================================================================================ EQUINIX, INC. FORM 10-K DECEMBER 31, 2001 TABLE OF CONTENTSItem Page No.---- -------- PART I1. Business......................................................... 32. Properties....................................................... 103. Legal Proceedings................................................ 114. Submission of Matters to a Vote of Security Holders.............. 11 PART II5. Market for Registrant's Common Equity and Related Stockholder Matters.......................................................... 126. Selected Financial Data.......................................... 147. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 167A. Quantitative and Qualitative Disclosures About Market Risk....... 348. Financial Statements and Supplementary Data...................... 359. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................. 35 PART III10. Directors and Executive Officers of the Registrant............... 3611. Executive Compensation........................................... 3612. Security Ownership of Certain Beneficial Owners and Management... 3613. Related Party Transactions....................................... 36 PART IV14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.. 37 Signatures....................................................... 40 2 PART IITEM 1. BUSINESS The words "Equinix," "we," "our," "ours," "us" and the "Company" refer toEquinix, Inc. All statements in this discussion that are not historical areforward-looking statements within the meaning of Section 21E of the SecuritiesExchange 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 subjectto a number of factors and uncertainties that could cause actual results todiffer materially from those described in the forward-looking statements.Equinix cautions investors that there can be no assurance that actual resultsor business conditions will not differ materially from those projected orsuggested in such forward-looking statements as a result of various factors,including, but not limited to, the risk factors discussed in this Annual Reporton Form 10-K. Equinix expressly disclaims any obligation or undertaking torelease publicly any updates or revisions to any forward-looking statementscontained herein to reflect any change in Equinix's expectations with regardthereto or any change in events, conditions, or circumstances on which any suchstatements are based.Overview Equinix operates Internet Business Exchange ("IBX") centers that serve ascore hubs for the Internet. Equinix IBX hubs allow critical Internet networks,Internet infrastructure companies, enterprises and content providers tointerconnect their networks to manage and grow their network and Internetoperations for significant cost savings and increased performance andreliability. Equinix has successfully united the major companies that make upthe Internet under one roof. The world's top tier Internet Service Providers,the majority of the most important access networks and second tier carriers,many international carriers and 5 of the top 7 web properties all have locatedat Equinix's IBX hubs to directly connect with each other and their customers. Equinix provides a wide range of colocation, traffic exchange andmulti-network management products and services to its customers. Equinix buildsand manages premier colocation hubs, which offer state of the art design andsecurity for customers' colocation needs. The colocation products includecabinets, power, cross connections and professional services for installationand maintenance. Traffic exchange services allow customers to trade networktraffic with each other simply and easily. More than 75 major bandwidthproviders and Internet service providers have placed their operations atEquinix IBX hubs in order to interconnect with each other and with businessusers of network services. These customers include the world's top networkssuch as AT&T, UUNET/WorldCom, Sprint, Genuity, Cable&Wireless, Qwest, and Level3. Equinix is a neutral or "open" IBX environment because it does not operateits own network. As a result, it is able to offer direct interconnection to thelargest aggregation of bandwidth providers and Internet service providers. Thisaggregation of providers attracts customers such as Associated Press, CharlesSchwab, EDS, EYT, Google, IBM, Loudcloud, MSN, Washingtonpost.NewsweekInteractive and Yahoo!. Direct interconnection to this aggregation of networks,which serve more than 90% of the world's Internet routes, allows Equinixcustomers to significantly reduce costs, including the costs of purchasingcircuits to reach partners in multiple locations, and significantly enhancesthe speed and reliability of their operations. The wide variety of networks and business partners is an important reasonwhy customers choose Equinix and customers look to Equinix to help manage thischoice in order to simplify their operations. Equinix recently introduced asuite of multi-network management services and will continue to provide newservices to help customers maximize the advantage of multiple bandwidth andInternet service providers. These services include multi-homing and managementproducts and services. For example, Equinix offers customers access tobandwidth from multiple carriers and provides all of the necessary managementand routing technology to ensure each customer is getting the maximum benefitsof carrier redundancy. These routing technologies range from standardmulti-homing protocols to sophisticated route optimization technologies.Equinix also provides customers a single bundle of equipment, interconnectionservices and monitoring tools so that customers have direct insight into howtheir operations are performing. All of these services provide customers withone simple 3point of contact for support, maintenance and billing. Equinix will continue tointroduce new services that customers can use to improve the overallperformance of their operations--these services may include backup andrecovery, business continuity or new ways to more easily procure bandwidthservices. Equinix currently has seven IBX hubs, consisting of more than 810,000 squarefeet, which operate in key U.S. Internet intersection points--Washington, D.C.,New York, Dallas, Chicago, Los Angeles and Silicon Valley areas. In addition,Equinix has strategic partnerships established in Europe and Asia to servecustomers' needs in those areas.Industry Background The Internet is a collection of numerous independent networks interconnectedwith each other to form a network of networks. Users on different networks areable to communicate with each other through the interconnection of thedifferent networks. For example, when a user of the Internet sends an email toanother user, assuming that each person uses a different network provider, theemail must pass from one network to the other in order to get to the finaldestination. In order to accommodate the rapid growth of Internet traffic, an organizedapproach for network interconnection was needed. The exchange of trafficbetween these networks became known as peering. Peering is when networks tradetraffic at relatively equal amounts and set up agreements to trade traffic forfree. At first, government and non-profit organizations established placeswhere these networks could exchange traffic, or peer, with each other--thesepoints were known as network access points, or NAPs. Over time, many NAPsbecame a natural extension of carrier services and were run by such companiesas MFS (later known as Worldcom/UUNET), Sprint, Ameritech and Pacific Bell(both later known as SBC). The technologies employed at these early NAPs had some difficulties scalingwith the overall growth of the Internet. This resulted in congestion at theNAPs and poorer performance seen by the enterprise and consumer user of theInternet. In addition, the original telephone companies that operated the NAPsentered the Internet bandwidth market, creating a conflict of interest withbandwidth providers and Internet service providers, or ISPs, who were NAPcustomers that also sold Internet bandwidth. This lack of "neutrality" mademany of these ISPs reluctant to use the NAPs for their interconnectionrequirements, creating an urgent need for network-neutral interconnectionpoints that could accommodate the rapidly growing Internet. As the sophistication of Internet use increased, particularly with thedevelopment of e-commerce, reliability and security of the Internet core becameof increasing concern to both Internet and enterprise companies worldwide. Avery important change in the development of the Internet economy was thedominance of certain very large content providers, companies such as Microsoft,Yahoo! and others. The original NAPs were not designed to accommodate theincreased reliability and security requirements of these types of growingInternet companies. The emergence of these new companies, as well as the growing sophisticationof larger enterprises understanding the value of controlling networkperformance, created the demand for a new type of Internet exchange point whichincluded these new companies in the mix and allowed them direct interconnectionwith the networks and each other in a secure, simple and cost effective way.The need for a neutral, high-quality, secure exchange point for network trafficexchange continued to grow. At the same time, the amount of traffic exchanged between the large networksat the NAPs continued to increase exponentially. To accommodate this growth,the largest of these networks left the NAPs and began trading traffic byplacing private circuits between each other. Peering which once occurred at theNAP locations was moved to these private peering circuits. Over the years,these circuits became expensive to expand and could not be built fast enough toaccommodate the growth in traffic. This led to a need by the large carriers tofind a more efficient way to trade traffic or peer. 4 Equinix IBX hubs are the next-generation exchange points. They are designedto handle the scalability issues that exist between both large and smallnetworks, as well as the interconnection between the emerging companies whohave become critical to the Internet. Additionally, Equinix provides animportant industry leadership role in the area of exchange points and isconsistently looked to as an industry expert and key influence in this arena. Equinix has been successful in uniting the major companies that make up theInternet infrastructure under one roof in each of six major U.S. markets. Theworld's largest top Internet service providers, most of the major accessnetworks and second tier backbones, many international telecommunicationcarriers and almost every fiber, sonet, Ethernet, competitive local exchangecompany, incumbent local exchange company, long-haul or metro area networkprovider now use Equinix to interconnect with each other and their customers. Large and small content providers and enterprises can now control their ownnetwork performance and destiny by choosing the various service providers theywish to work with and by establishing direct connections. For Equinixcustomers, this represents significant cost savings and increased performance.The Equinix Solution Equinix IBX hubs provide the environment and services to meet the networkingand IT operations challenges facing enterprises, networks and Internetbusinesses today. As a result, we are able to provide the following keybenefits to our customers: Performance. Because Equinix provides direct access to the providers thatserve more than 90% of the world's Internet networks and users, customers canquickly, efficiently, cost-effectively and reliably exchange traffic with theirnetwork services providers for higher performance operations. Access to themore than 75 networks ensures high-quality interconnection. Equinix Internetexchange services enable customers to quickly and efficiently use multiplenetworks for service redundancy and reliability. By using multiple networks,customers are able to ensure their operations in the event that one of theirnetwork service providers has a service interruption or restructuring in thebusiness. The network service providers and geographic diversity offered byEquinix provide customers with the flexibility to enable the highest performingInternet operations. Improved Economics. Equinix services such as Equinix GigE Exchange andEquinix Core Exchange facilitate peering and dramatically reduce costs forcritical transit, peering and traffic exchange operations by eliminating thecosts of private peering or local loops. Networks such as SBC and ShawCommunications and content providers such as Yahoo!, MSN and Google can savebetween 20%-40% of bandwidth costs through the traffic exchange servicesavailable at Equinix. In addition, the content companies and enterprises canalso save significant bandwidth costs because the magnitude of networkscompeting for the traffic of these companies lowers prices and increasesperformance. Opportunity to Increase Revenues. With the concentration of networks,managed services providers, content and enterprise companies participating inEquinix IBX hubs, our Internet hubs present a large revenue opportunity fornetwork service providers and Internet infrastructure services providersselling services in our hubs.Equinix Strategy Our objective is to become the premier hub for critical Internet players tolocate their operations in order to gain maximum benefits from the choice ofnetworks and partners in the most simple and efficient manner. To accomplishthis objective we employ the following strategies: Leverage the Network Effect. Equinix has assembled a "critical mass" ofpremier network providers and content companies and has become one of the corehubs of the Internet. This critical mass is a key selling point since contentcompanies want to connect with a diverse set of networks to provide the bestconnectivity to their end customers, and network companies want to sellbandwidth to content customers and interconnect with other 5networks in the most efficient manner. In addition, as these companies locateat Equinix they often require their suppliers and business partners to do so aswell so that the full economic and performance benefits of directinterconnection can occur. These partners in turn also pull in their businesspartner, thus creating a "network effect" of customer adoption. For example, alarge content provider or network may require that their networking partnerswith whom they need to trade traffic with locate in the same Equinix IBX hub.Similarly, a large financial site that chooses to locate in an Equinix IBX hubmay encourage a bandwidth provider, a site management company or anothercontent partner, like a financial news service, to also locate in the sameIBX hub. In turn, these bandwidth providers or content partners will also bringtheir business partners to the IBX hub. As of December 31, 2001, Equinix had 75unique networks, including all of the top tier networks, allowing Equinix'scustomers to directly interconnect with providers that serve more than 90% ofglobal Internet routes. Leverage IBX Hubs for New Products and Services. The critical mass ofleading networks that we have assembled across all of our IBX hubs uniquelypositions Equinix as the place to be for critical Internet companies. We intendto leverage this position and offer additional traffic exchange andmulti-network management services that are important to content peering,traffic exchange and the ability for enterprise companies to utilize multipleInternet service providers. Promote Equinix as the Highest Performance Points on the Internet. With allof the major U.S. carriers, five of the top seven Media Metrix Web properties,and the more than 75 total networks as customers, Equinix IBX hubs operate asthe highest performance points on the Internet for network and Internetoperations. We plan to leverage our position as the industry standard for thehighest quality Internet exchange hubs to attract more networks includinginternational telecommunications carriers, access and cable networks, as wellas additional leading content companies. Equinix has gained a strong brandfollowing in the networking community and through industry education andpromotion we intend to build on our strong following among all top networks,managed services providers, enterprises and content providers.Customers Customers typically sign renewable contracts of two or more years in length,often with options on additional space and services. Approximately 31% of ourparticipant base has signed multi-site contracts. Our single largest customer,IBM, represented 15% of total revenues for the year ended December 31, 2001. Noother single customer accounted for more than 10% of revenues in 2001. We consider the following companies to be the core of our customer base andwe offer each customer a choice of business partners and solutions that aredesigned to meet their unique and changing needs: . Bandwidth providers (telecommunications carriers) and Internet Service Providers, or ISPs; . Enterprises, content providers and e-commerce companies supplying information, education orentertainment content and conducting the sale of goods and services; and . site management and hosting companies that integrate and manage a customer's end-to-end web presence and performance.Products and Services Equinix products and services are comprised of three types: Colocation,Traffic Exchange and Multi-Network Management services.Internet Business Exchange Colocation Services The Equinix IBX design provides our customers with reliable anddisaster-resistant environments that are necessary for optimum Internetcommerce interconnection. The level of excellence and consistency achieved inour IBX architecture and design results in premium, secure, fault-tolerantexchanges. Additionally, our IBX hubs 6include multiple layers of physical security, scalable cabinet spaceavailability, on- site trained staff 24 hours per day, 365 days per year,dedicated areas for customer care and equipment staging, redundant AC/DC powersystems and multiple other redundant, fault-tolerant infrastructure systems.Equinix currently has seven IBX hubs located in six key U.S. Internetintersection points--Washington, D.C., New York, Dallas, Chicago, Los Angelesand Silicon Valley areas. Within our IBX hubs, customers can place their equipment and interconnectwith a choice of Internet companies. Equinix also provides customized solutionsfor customers looking to package Equinix IBX space as part of their complete,one-stop shop solution. Equinix colocation products and services include: Cabinets. Customers have several choices for colocating their equipment.They can place the equipment in an Equinix shared or private cage or customizetheir space to build their own data hub within an IBX hub. Cabinets are 84inches high and are suitable for networking and server colocation. Cable trayssupport cables between and among cabinets. As a customer's colocationrequirements increase, they can expand within their original cage or upgradeinto a cage that meets their expanded requirements. Cabinets are priced with aninitial installation fee and an ongoing recurring monthly charge. Shared Cages. A shared cage environment is designed for customers needingless than five full cabinets to house their equipment. Each cabinet in a sharedcage is individually secured with an advanced trackable electronic lockingsystem and the cage itself is secured with the biometric hand-geometry system. Private Cages. Customers that contract for a minimum of five full cabinetscan use a private cage to house their equipment. Private cages are alsoavailable in larger full cabinet sizes. Each private cage is individuallysecured with the biometric hand-geometry system. IBXflex. This service allows customers to deploy mission-criticaloperations personnel and equipment on-site at IBX hubs. Because of the closeproximity to their end-users, IBXflex customers can offer a faster response andquicker troubleshooting than available in traditional colocation facilities.This service is priced with an initial installation fee and an ongoingrecurring monthly charge. Physical Cross-Connect/Direct Interconnections. Customers needing todirectly and privately connect to another IBX customer can do so through singleor multi-mode fiber. These cross connections are customized and terminated percustomer instructions and may be implemented within 24 hours of request.Cross-connect services are priced with an initial installation fee and anongoing monthly recurring charge. Professional Services. Our IBX hubs are staffed with Internet andtelecommunications specialists who are on-site and available 24 hours per day,365 days per year. These professionals are trained to perform installations ofcustomer equipment and cabling. Professional services are custom-priceddepending on customer requirements. "Smart Hands" Services. Our customers can take advantage of ourprofessional "Smart Hands" service, which gives customers access to our IBXstaff for a variety of tasks, when their own staff is not on site. These tasksmay include equipment rebooting, power cycling, card swapping, and performingemergency equipment replacement. Services are available on-demand or bycustomer contract and are priced on an hourly basis.Traffic Exchange Services Equinix traffic exchange services enable scalable, reliable andcost-effective interconnection, service and traffic exchange between bandwidthproviders, Internet service providers and large content companies. In addition,Equinix also provides an important industry leadership role by acting as therelationship broker between parties who would like to Interconnect withinEquinix. Equinix staff has held significant positions in the leading industrygroups such as the North American Network Operators' Group, or NANOG, and theInternet Engineering Task Force, or IETF, and brings a tremendous amount ofintellectual property to this market. Equinix staff has publishedindustry-recognized white papers and strategy documents in the areas of peeringand interconnection, many of which are used by leading institutions worldwidein furthering the education and promotion of this important network arena.Equinix will continue to develop additional services in the area of 7traffic exchange that will allow customers to leverage the critical mass ofnetworks now available in the IBX hubs. The current exchange services arecomprised of the following: Equinix Internet Core Exchange. This Internet exchange service enablesdirect interconnection for peering between major backbone networks andproviders operating networks at OC-48 or higher. Equinix Internet Core Exchangeis a pre-provisioned interconnection package that enables major backbones toconnect their networks directly in a centralized, neutral environment forpeering and transit. The service includes pre-provisioned interconnections,premium service levels and specialized customer service features to support thequality and support levels required by the largest Internet providers in theworld. Internet Core Exchange services are priced with an initial installationfee and an ongoing monthly recurring charge. Equinix GigE Exchange. Customers may choose to connect to our Equinixexchange central switching fabric rather than purchase a direct physical crossconnection. With a connection to this switch, a customer can aggregate multipleinterconnects over one physical connection instead of purchasing individualphysical cross connects. The GigE Exchange service is offered as a bundledservice that includes a cabinet, power, cross-connects and port charges. Theservice is priced with an initial installation fee and an ongoing monthlyrecurring charge.Multi-Network Management Services With the continued growth in Internet use, networks, service providers,enterprises and content providers are challenged to deliver fast and reliableservice, while lowering costs. With over 75 ISPs and carriers located in ourIBX hubs, Equinix leverages the value of network choice with our set ofmulti-network management services. This set of services provides enterprise andcontent providers with the ability to gain maximum benefits from the use of thenetworks in a simple and efficient manner. Equinix Managed Router Service. With Equinix Managed Router Service,enterprises and content companies can outsource the complications of networkintegration, such as multi-homing, to Equinix in order to gain the performanceand redundancy benefits of connecting to multiple networks. This service allowscompanies that do not have the internal expertise to configure Border GatewayProtocol ("BGP") settings to focus on their core competencies while Equinixmanages their connectivity to the customer's choice of networks. In addition,the service includes router management, administration and network serviceprovisioning. This service is priced with an initial installation fee and anongoing recurring monthly charge. Equinix Intelligent Routing Service. Equinix Intelligent Routing service isa managed route optimization service that consists of a software andinfrastructure platform that allows customers to tune their networks to balanceprice and performance priorities by routing traffic across the lowest-pricedpath that meets performance requirements. The traffic is measured and routedbased on real-time customer traffic across the customer's choice of networks.Offered as a managed service, Equinix Intelligent Routing Service allowscustomer to reduce bandwidth costs without a large hardware or softwareinvestment. This service is priced based upon the amount of traffic a customeris optimizing. Equinix Command Center. Through managed software architecture, EquinixCommand Center allows customers to self-monitor, manage and controlapplications, network devices, systems resources and user transactions. Thisservice provides Equinix customers with direct control over infrastructureperformance and service level agreements. The service features networkmonitoring and management, aggregated information across multiple IBX hubs,browser-based access to detailed monitoring, and a single Equinix point ofcontact for support and billing. This service is priced based upon the numberof items a customer monitors and is billed monthly. 8International Partnerships Equinix has signed agreements with leading international Internet exchangeproviders InterXion in Europe and Pihana Pacific in Asia/Pacific in order toprovide Equinix customers with a more comprehensive global solution for theirInternet infrastructure and network exchange needs. As part of these partnership agreements, Equinix customers can leverageInternet infrastructure services across 29 network-neutral centers in theUnited States, Europe and Asia/Pacific markets. In these markets, Equinixcustomers have access to the essential Internet infrastructure services theyneed to quickly and cost-effectively build their Internet operations worldwide,while realizing significant performance gains through a network-neutralenvironment.Sales and Marketing Sales We use a direct sales force and channel marketing program to market ourservices to network, content provider, enterprise and Internet infrastructurebusinesses. We organize our sales force by customer segments as well as byestablishing a sales presence in diverse geographic regions, which enablesefficient servicing of the customer base from a network of regional offices. Inaddition to our headquarters office in Silicon Valley, regional offices arelocated in New York City, Reston, Los Angeles, Dallas and Chicago. In addition,Equinix also has over 40 channel partners that work with Equinix throughreferral agreements to provide customer leads and relationships. Our sales team works closely with each customer to foster the naturalnetwork effect of our IBX model, resulting in access to a wider potentialcustomer base via our existing customers. As a result of the IBXinterconnection model, IBX hub participants encourage their customers,suppliers and business partners to also come into the IBX hubs. Thesecustomers, suppliers and business partners also, in turn, encourage theirbusiness partners to locate in IBX hubs resulting in additional customergrowth. This network effect significantly reduces Equinix's new customeracquisition costs. Marketing To support our sales effort and to actively promote the Equinix brand, weconduct comprehensive marketing programs. Our marketing strategies include anactive public relations campaign, strategic partnerships and on-going customercommunications programs. Our marketing effort is focused on major business andtrade publications, online media outlets, industry events and sponsoredactivities. Equinix staff holds leadership positions in key networkingorganizations and we participate in a variety of Internet, computer andfinancial industry conferences and place our officers and employees in keynotespeaking engagements at these conferences. In addition to these activities, webuild recognition through sponsoring or leading industry technical forums andparticipating in Internet industry standard-setting bodies. Equinix continuesto develop and host the industry's only educational forums focused on peeringtechnologies and peering practices for ISPs and content providers.Competition Potential competition for Equinix includes: . Internet data centers operated by established communications carriers such as AT&T, Level 3, WorldCom and Qwest. Unlike the major network providers, which constructed data centers primarily to help sell bandwidth, Equinix has aggregated multiple networks in one location, providing superior diversity, pricing and performance. Carrier data centers only provide one choice of carriers and require capacity minimums as part of their pricing structures. Locating at Equinix provides access to all the top 9 tier networks and allows customers to negotiate the best prices with a number of carriers resulting in better economics and redundancy. . Network access points ("NAPs") such as Palo Alto Internet Exchange and carrier operated NAPs. NAPs, generally operated by carriers, are typically older facilities and lack the incentive to upgrade the infrastructure or technologies. Due to their small size and lack of geographic diversity, the NAPs are limited to basic traffic exchange services and are unable to expand to colocation services, content peering or enterprise grade network services. In contrast, Equinix provides state-of-the-art, secure facilities and geographic diversity with round the clock support and a full range of network and enterprise service offerings. . Vertically integrated web site hosting, colocation and ISP companies such as AboveNet/MFN, Digex and Exodus/Cable&Wireless. Most managed service providers require that customers purchase their entire network and managed services directly from them. Equinix is a network and service provider aggregator and because it does not offer web hosting services itself, it allows customers the ability to contract directly with the networks and web hosting partner best for their business. By locating in an IBX center, hosting companies add more value to Equinix's business proposition--by bringing in more partners and customers and thus creating a network effect. Unlike other providers that attempted to move into managed services andtherefore began competing with their existing managed service providercustomers, Equinix focused on neutral "Internet Business Exchanges" fornetworks, e-businesses, and Internet infrastructure service providers. As aresult, Equinix is free of the channel conflict common at otherhosting/colocation companies, as witnessed by Exodus' disagreements withAboveNet/MFN and Loudcloud. Equinix competes based on the quality of itsfacilities, the superior performance and diversity of its network neutralstrategy, and the economic benefits of the network effect through theaggregation of top networks and e-businesses under one roof. Specifically,Equinix has established relationships with a number of leading hostingcompanies such as IBM (Equinix's largest customer) and Accenture. Equinixexpects to continue to benefit from the strong growth of the large and stableservice providers and from the "flight to quality" trend evident in today'smarket.Employees As of December 31, 2001, we had 272 employees. We had 184 employees based atour corporate headquarters in Mountain View, California and our regional salesoffices in New York, New York and Reston, Virginia. Of those employees, 92 werein engineering and operations, 57 were in sales and marketing and 35 were inmanagement and finance. We had 1 employee based in Europe. The remaining 87employees were based at our Washington, D.C., New York, New York, Dallas,Texas, Chicago, Illinois, Los Angeles, California and Silicon Valley area IBXhubs.ITEM 2. PROPERTIES Our executive offices are located in Mountain View, California. We haveentered into leases for IBX hubs in Ashburn, Virginia, Newark and Secaucus, NewJersey, San Jose and Los Angeles, California, Chicago, Illinois, Dallas, Texas,London, England and Frankfurt, Germany. We also hold a ground leaseholdinterest in certain unimproved real property in San Jose, California,consisting of approximately 79 acres. Relating to future IBX hubs, we do notintend to own real estate or buildings but rather continue to enter into leaseagreements with a minimum term of ten years, renewal options and rights offirst refusal on space for expansion. During the quarter ended September 30, 2001, the Company took arestructuring charge related to a revised European services strategy to partnerwith other Internet exchange companies in Europe rather than build and operateits own centers outside the U.S. In addition, the restructuring charge includedthe anticipated exit of several smaller, excess U.S. leaseholds. As a result,the Company successfully negotiated its exit from leases for properties inParis, France during 2001 and Amsterdam, The Netherlands in February 2002. TheCompany 10expects to exit its two remaining lease obligations in Europe during 2002.Additionally, the Company is currently negotiating the exit of several smallerleases in Ashburn, Virginia, and Mountain View, California, which the Companyanticipates exiting sometime during 2002.ITEM 3. LEGAL PROCEEDINGS On July 30, 2001 and August 8, 2001, putative shareholder class actionlawsuits were filed against Equinix, certain of its officers and directors, andseveral investment banks that were underwriters of our initial public offering.The cases were filed in the United States District Court for the SouthernDistrict of New York, purportedly on behalf of investors who purchased ourstock between August 10, 2000 and December 6, 2000. The suits allege that theunderwriter defendants agreed to allocate stock in Equinix's initial publicoffering to certain investors in exchange for excessive and undisclosedcommissions and agreements by those investors to make additional purchases inthe aftermarket at pre-determined prices. The plaintiffs allege that theprospectus for our initial public offering was false and misleading and inviolation of the securities laws because it did not disclose thesearrangements. It is possible that additional similar complaints may also befiled. Equinix and its officers and directors intend to defend the actionsvigorously.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the year endedDecember 31, 2001. 11 PART IIITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the NASDAQ National Market System under thesymbol of EQIX. The following table sets forth, for the periods indicated, thelow and high bid prices per share for our common stock as reported by theNASDAQ National Market. Low High ----- ------ Fiscal 2001 Fourth Fiscal Quarter...................................... $0.39 $ 3.37 Third Fiscal Quarter....................................... 0.38 1.43 Second Fiscal Quarter...................................... 0.59 1.73 First Fiscal Quarter....................................... 1.25 7.00 Fiscal 2000 Fourth Fiscal Quarter...................................... 3.50 9.75 Third Fiscal Quarter (beginning August 11, 2000)........... 8.88 16.19 As of December 31, 2001, there were approximately 422 holders of record ofour common stock. No dividends have been paid on the common stock. We currently intend toretain all future earnings, if any, for use in our business and do notanticipate paying any cash dividends on our common stock in the foreseeablefuture. Other than restrictions that are a part of our various debtinstruments, there are no legal restrictions on paying dividends. The effective date of the Registration Statement for our initial publicoffering, 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 commonstock. There has been no change to the disclosure contained in the Company'sreport on Form 10-Q for the quarter ended September 30, 2000 regarding the useof proceeds generated by the Company's initial public offering of its commonstock. During the period ended December 31, 2001, we issued and sold the followingsecurities: 1. In November 2001, we issued a warrant to purchase 30,000 shares of our common stock with an exercise price of $0.01 per share to Sares Regis Group of Northern California ("Sares Regis") in connection with a Letter Agreement dated November 1, 2001 between Sares Regis and ourselves. 2. In December 2001, we issued a warrant to purchase 20,000 shares of our common stock with an exercise price of $0.01 per share to Bechtel Corporation ("Bechtel") in connection with a Payment Agreement dated December 20, 2001 between Bechtel and ourselves. 3. In September 2001, we amended and restated a warrant previously issued to Worldcom Venture Fund in June 2000, and reduced the total number of shares of our common stock available to purchase to 295,000 shares of common stock at an exercise price of $5.33 per share. In return for providing services to the New York metropolitan area IBX hub, we issued two new warrants to the Worldcom Venture Fund. The first new warrant is to purchase 355,000 shares of our common stock with an exercise price of $0.01 per share. The second new warrant is to purchase 245,000 shares of our common stock with an exercise price of $0.01 per share. The sale of the above securities was determined to be exempt fromregistration under Section 4(2) of the Securities Act as transactions by anissuer not involving any public offering. In addition, the recipients ofsecurities in each such transaction represented their intentions to acquire thesecurities for investment only and not with a view to or for sale in connectionwith any distribution thereof and appropriate legends were affixed to 12the share certificates issued in these transactions. All recipients hadadequate access, through their relationships with us, to information about us. In March 2001, NorthPoint Communications, Inc. ("NorthPoint") exercised awarrant issued by the Company to NorthPoint in August 1999 in connection with astrategic agreement between the Company and NorthPoint. In March 2001,Comdisco, Inc. ("Comdisco") exercised a warrant issued by the Company toComdisco in March 1999 in connection with a loan and security agreement betweenthe Company and Comdisco. Both NorthPoint and Comdisco exercised theirrespective warrants pursuant to the cashless net-exercise provisions thereof.Upon such exercises, NorthPoint and Comdisco received an aggregate of 1,049,599shares of the Company's common stock. The issuance of these shares was deemedto be exempt from registration under Section 3(a)(9) of the Securities Act. During the quarter ended March 31, 2001, certain holders of warrants issuedin connection with the 13% senior notes due 2007 exercised their warrantsresulting in the issuance of 1,283,069 shares of the Company's common stock.The issuance of these shares was deemed to be exempt from registration underSection 3(a)(9) of the Securities Act. 13ITEM 6. SELECTED FINANCIAL DATA The following statement of operations data for the years ended December 31,2001, 2000 and 1999, and for the period from our inception on June 22, 1998 toDecember 31, 1998, and the balance sheet data as of December 31, 2001, 2000,1999 and 1998 have been derived from our audited consolidated financialstatements and the related notes to the financial statements. Our historicalresults are not necessarily indicative of the results to be expected for futureperiods. The following selected consolidated financial data should be read inconjunction with our consolidated financial statements and the related notes tothe consolidated financial statements and "Management's Discussion and Analysisof Financial Condition and Results of Operations" included elsewhere in thisAnnual Report on Form 10-K. Period from June 22, 1998 Years ended December 31, (inception) to ------------------------------ December 31, 2001 2000 1999 1998 --------- --------- -------- -------------- (dollars in thousands, except per share data) Statement of Operations Data:Revenues.................................... $ 63,414 $ 13,016 $ 37 $ -- --------- --------- -------- -------Costs and operating expenses: Cost of revenues (includes stock-based compensation of $426, $766, $177 and none for the periods ended December 31, 2001, 2000, 1999 and 1998, respectively)..... 94,889 43,401 3,268 -- Sales and marketing (includes stock-based compensation of $2,830, $6,318, $1,631 and $13 for the periods ended December 31, 2001, 2000, 1999 and 1998, respectively).......................... 16,935 20,139 3,949 47 General and administrative (includes stock-based compensation of $15,788, $22,809, $4,819 and $151 for the periods ended December 31, 2001, 2000, 1999 and 1998, respectively).......................... 58,286 56,585 12,603 902 Restructuring charge..................... 48,565 -- -- -- --------- --------- -------- ------- Total costs and operating expenses........................... 218,675 120,125 19,820 949 --------- --------- -------- ------- Loss from operations..................... (155,261) (107,109) (19,783) (949)Interest income............................. 10,656 16,430 2,138 150Interest expense............................ (43,810) (29,111) (3,146) (220) --------- --------- -------- -------Net loss.................................... $(188,415) $(119,790) $(20,791) $(1,019) ========= ========= ======== =======Net loss per share: Basic and diluted........................ $ (2.39) $ (3.48) $ (4.98) $ (1.48) ========= ========= ======== ======= Weighted average shares.................. 78,681 34,461 4,173 688 ========= ========= ======== ======= 14 As of December 31, --------------------------------------- 2001 2000 1999 1998 --------- --------- -------- ------- (dollars in thousands) Balance Sheet Data:Cash, cash equivalents and short-term investments............................... $ 87,721 $ 207,210 $222,974 $ 9,165Accounts receivable, net.................... 6,909 4,925 178 --Accounts receivable, net.................... 6,909 4,925 178 --Restricted cash and short-term investments.. 28,044 36,855 38,609 --Property and equipment, net................. 325,226 315,380 28,444 482Construction in progress.................... 103,691 94,894 18,312 31Total assets................................ 575,054 683,485 319,946 10,001Debt facilities and capital lease obligations, excluding current portion.... 6,344 6,506 8,808 --Senior secured credit facility.............. 105,000 -- -- --Senior notes................................ 187,882 185,908 183,955 --Redeemable convertible preferred stock...... -- -- 97,227 10,436Total stockholders' equity (deficit)........ 203,521 375,116 8,472 (846)Other Financial Data:Adjusted EBITDA (1)......................... (38,007) (62,400) (12,547) (781)Net cash used in operating activities....... (68,854) (68,073) (9,908) (796)Net cash used in investing activities....... (153,014) (302,158) (86,270) (5,265)Net cash provided by financing activities... 107,799 339,847 295,178 10,226--------(1) Adjusted EBITDA consists of net loss excluding interest, income taxes, depreciation and amortization of capital assets, amortization of deferred stock-based compensation and restructuring charges. Adjusted EBITDA is presented to enhance an understanding of our operating results, it is not intended to represent cash flow or results of operations in accordance with generally accepted accounting principles for the period indicated and may be calculated differently than Adjusted EBITDA for other companies. Adjusted EBITDA is not a measure determined under generally accepted accounting principles nor is it a measure of liquidity. The following represents how the Company calculates Adjusted EBITDA: For the year or period ended December 31, ---------------------------------------- 2001 2000 1999 1998 --------- --------- -------- ----- (dollars in thousands) Loss from operations................. $(155,261) $(107,109) $(19,783) $(949) Depreciation......................... 49,645 14,816 609 4 Stock-based compensation............. 19,044 29,893 6,627 164 Restructuring charge................. 48,565 -- -- -- --------- --------- -------- ----- Adjusted EBITDA................... $ (38,007) $ (62,400) $(12,547) $(781) ========= ========= ======== ===== 15ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following commentary should be read in conjunction with the financialstatements and related notes contained elsewhere in this Annual Report on Form10-K. The discussion contains forward-looking statements that involve risks anduncertainties. These statements relate to future events or our future financialperformance. In many cases, you can identify forward-looking statements byterminology such as "may," "will," "should," "expects," "plans," "anticipates,""believes," "estimates," "predicts," "potential," "intend" or "continue," orthe negative of such terms and other comparable terminology. These statementsare only predictions. Our actual results may differ materially from thoseanticipated in these forward-looking statements as a result of a variety offactors, including, but not limited to, those set forth under "Risk Factors"and elsewhere in this Annual Report on Form 10-K.Overview Equinix designs, builds and operates neutral IBX hubs where Internetbusinesses place their equipment and their network facilities in order tointerconnect with each other to improve Internet performance. Our neutralIBX hubs and Internet exchange services enable network service providers,enterprises, content providers, managed service providers and other Internetinfrastructure companies to directly interconnect with each other for increasedperformance. As of December 31, 2001, Equinix had IBX hubs totaling anaggregate of 611,000 gross square feet in the Washington, D.C., New York,Dallas, Chicago, Los Angeles and Silicon Valley areas. We completedconstruction of one additional IBX hub during the first quarter of 2002 in theNew York metropolitan area, resulting in seven IBX hubs covering six domesticmarkets in the U.S. totaling an aggregate 810,000 gross square feet. We recorded deferred stock-based compensation in connection with stockoptions granted during 2000 and 1999, where the deemed fair market value of theunderlying common stock was subsequently determined to be greater than theexercise price on the date of grant. Approximately $19.0 million, $29.9 millionand $6.6 million was amortized to stock-based compensation expense for theperiods ended December 31, 2001, 2000 and 1999, respectively. The optionsgranted are typically subject to a four-year vesting period. We are amortizingthe deferred stock-based compensation on an accelerated basis over the vestingperiods of the applicable options in accordance with Financial AccountingStandards Board ("FASB") Interpretation No. 28. The remaining $11.0 million ofdeferred stock-based compensation will be amortized over the remaining vestingperiods. We expect amortization of deferred stock-based compensation expense toimpact our reported results through December 31, 2004. Our net loss adjusted before net interest and other expense, income taxes,depreciation and amortization of capital assets, amortization of stock-basedcompensation and restructuring charges ("Adjusted EBITDA") is calculated toenhance an understanding of our operating results. Adjusted EBITDA is afinancial measurement commonly used in capital-intensive telecommunication andinfrastructure industries. Other companies may calculate Adjusted EBITDAdifferently than we do. It is not intended to represent cash flow or results ofoperations in accordance with generally accepted accounting principles nor ameasure of liquidity. We measure Adjusted EBITDA at both the IBX hub and totalcompany level. Since inception, we have experienced operating losses and negative cashflow. As of December 31, 2001 we had an accumulated deficit of $330.0 millionand accumulated cash used in operating and construction activities of $628.8million. Given the revenue and income potential of our service offerings isstill unproven and we have a limited operating history, we may not generatesufficient operating results to achieve desired profitability. We thereforebelieve that we will continue to experience operating losses for theforeseeable future. See "Risk Factors". 16Critical Accounting Policies and Estimates Management's Discussion and Analysis of Financial Condition and Results ofOperations discusses Equinix's consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe U.S. The preparation of these financial statements requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period. On an on-going basis, management evaluates itsestimates and judgments, including those related to revenues and collectibilityof receivables, restructuring charges, income taxes, contingencies andlitigation. Management bases its estimates and judgments on historicalexperience and on various other factors that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. Management believes the following critical accounting policies, amongothers, affect its more significant judgments and estimates used in thepreparation of its consolidated financial statements: . Revenue recognition and allowance for bad debts; . Restructuring charges; . Accounting for income taxes; . Contingent liabilities; and . Accounting for property and equipment. Revenue Recognition and Allowance for Bad Debts. Equinix derives itsrevenues from (1) recurring revenue streams, such as from the leasing ofcabinet space, power and interconnection services and (2) non-recurring revenuestreams, such as from the recognized portion of deferred installation revenuesand professional services. Revenues from recurring revenue streams are billedmonthly and recognized ratably over the term of the contract, generally one tothree years. Non-recurring installation fees are deferred and recognizedratably over the term of the related contract. Professional service fees arerecognized in the period in which the services were provided and represent theculmination of the earnings process. The Company generally guarantees certainservice levels, such as uptime, as outlined in individual customer contracts.To the extent that these service levels are not achieved, the Company reducesrevenue for any credits given to the customer as a result. Revenue is recognized as service is provided and when there is persuasiveevidence of an arrangement, the fee is fixed or determinable and collection ofthe receivable is reasonably assured. We assess collection based on a number offactors, including past transaction history with the customer and thecredit-worthiness of the customer. We do not request collateral from ourcustomers. If we determine that collection of a fee is not reasonably assured,we defer the fee and recognize revenue at the time collection becomesreasonably assured, which is generally upon receipt of cash. In addition,Equinix also maintains an allowance for doubtful accounts for estimated lossesresulting from the inability of its customers to make required payments forthose customers that the Company had expected to collect the revenues. If thefinancial condition of Equinix's customers were to deteriorate or if theybecome insolvent, resulting in an impairment of their ability to make payments,allowances for doubtful accounts may be required. Management specificallyanalyzes accounts receivable and analyzes current economic news and trends,historical bad debts, customer concentrations, customer credit-worthiness andchanges in customer payment terms when evaluating revenue recognition and theadequacy of the Company's allowances. The Company's customer base is primarily composed of businesses throughoutthe United States. The Company performs ongoing credit evaluations of itscustomers. As of December 31, 2001, one customer accounted for 15% of revenuesand another customer accounted for 10% of accounts receivables. As of December31, 2000, two customers accounted for 12% and 11% of revenues and two customersaccounted for 1719% and 14% of accounts receivables. No other single customer accounted forgreater than 10% of accounts receivables or revenues. During the year ended December 31, 2001, the Company recognizedapproximately $200,000 of revenue in relation to equipment received fromcustomers in lieu of cash. This equipment is being used in the Company'soperations and was valued based on management's assessment of the fair value ofthe equipment in relation to external prices for similar equipment. In 2002, the Company entered into arrangements with numerous vendors toresell equipment and bandwidth. The Company began to offer such offering in aneffort to provide its customers with a more fully integrated services solution.Under the terms of the reseller agreements, the Company will sell the vendor'sservices or products to its customers and the Company will contract with thevendor to provide the related services or products. To date, two reselleragreements have been signed with companies associated with individuals whoserve on the Company's Board of Directors. The Company plans to recognizerevenue from such arrangements on a gross basis in accordance with EmergingIssue Task Force Issue No. 99-19, Recording Revenue as a Principal versus Netas an Agent. The Company acts as the principal in the transaction as theCompany's customer services agreement identifies the Company as the partyresponsible for the fulfillment of product/ services to the Company's customersand has full pricing discretion. In the case of products sold under sucharrangements, the Company takes title to the products and bears the inventoryrisk as the Company has made minimum purchase commitments for equipment tovarious vendors. The Company has credit risk, as it is responsible forcollecting the sales price from a customer, but must pay the amount owed to itssuppliers after the suppliers perform, regardless of whether the sales price isfully collected. In addition, the Company will often determine the requiredequipment configuration and recommend bandwidth providers from numerouspotential suppliers. Restructuring Charges. During the third quarter of 2001, the Companyrecorded a $48.6 million restructuring charge, primarily due to its revisedEuropean services strategy. This restructuring charge was comprised of $40.1million in write-downs and write-offs of assets and $8.5 million in accruedrestructuring charges, primarily related to lease exit costs. The Company hasanalyzed each of the leaseholds that the Company is currently trying to exitfrom and made estimates based on how long we think it will take to successfullynegotiate lease terminations for each of these leases and at what cost. TheCompany has estimated these costs to be $8.5 million. Should the actual leaseexit costs and other accrued restructuring charges exceed this amount due todelays in negotiating lease termination agreements or higher than anticipatedsettlement payments, additional restructuring charges may be required, whichwould decrease net income in the period such determination was made.Conversely, if actual lease exit and other restructuring charges are less thanthe $8.5 million accrued, an adjustment to accrued restructuring charges wouldbe required, which would increase income in the period such determination wasmade. In addition, should the Company realize higher than anticipated proceedsfrom sales of equipment currently held for sale or for other assetswritten-down or written-off as part of this restructuring charge, an adjustmentto accrued restructuring charges would be required, which would increase incomein the period such determination was made. Accounting for Income Taxes. Income taxes are accounted for under the assetand liability method. Deferred tax assets and liabilities are recognized forthe future tax consequences attributable to differences between financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases and operating loss and tax credit carryforwards. Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date. Valuation allowances are established whennecessary to reduce tax assets to the amounts expected to be realized. Equinix currently has provided for a full valuation allowance against itsnet deferred tax assets. Equinix has considered future taxable income andongoing prudent and feasible tax planning strategies in assessing the need 18for the valuation allowance and based on the available objective evidence,management believes it is more likely than not that the net deferred tax assetswill not be fully realizable. Should Equinix determine that it would be able torealize its deferred tax assets in the foreseeable future, an adjustment to thedeferred tax assets would increase income in the period such determination wasmade. Contingent Liabilities. Management estimates exposure on contingentliabilities such as litigation based on the best information available to it atthe time. Management's estimated range of liability related to some of thepending litigation is based on claims for which our management can estimate theamount and range of loss. We have recorded the minimum estimated liabilityrelated to those claims, where there is a range of loss. Because of theuncertainties related to both the amount and range of loss on the remainingpending litigation, management is unable to make a reasonable estimate of theliability that could result from an unfavorable outcome. As additionalinformation becomes available, we will assess the potential liability relatedto our pending litigation and revise our estimates. Such revisions in ourestimates of the potential liability could materially impact our results ofoperation and financial position. Accounting for Property and Equipment. Property and equipment are stated atoriginal cost. Depreciation is computed using the straight-line method over theestimated useful lives of the respective assets, generally two to five yearsfor non-IBX hub equipment and seven to ten years for IBX hub equipment.Leasehold improvements and assets acquired under capital lease are amortizedover the shorter of the lease term or the estimated useful life of the asset orimprovement. Assets currently under construction, such as the IBX hub in theNew York metropolitan area that will be completed during the first quarter of2002, are held in a construction in progress account. Construction in progressincludes direct and indirect expenditures for the construction of IBX hubs andis stated at original cost. The Company has contracted out substantially all ofthe construction of the IBX hubs to independent contractors under constructioncontracts. Construction in progress includes certain costs incurred under aconstruction contract including project management services, siteidentification and evaluation services, engineering and schematic designservices, design development and construction services and otherconstruction-related fees and services. In addition, the Company hascapitalized certain interest costs during the construction phase. Once an IBXhub becomes operational, these capitalized costs are depreciated at theappropriate rate consistent with the estimated useful life of the underlyingasset. The Company has issued numerous warrants to certain fiber carriers andits primary contractor. The Company uses the Black-Scholes option-pricing modelto value these warrants. The value attributed to these warrants is included inthe Company's property and equipment, including construction in progress, andclassified as a leasehold improvement. Amortization of such warrants isincluded in depreciation expense. Should management determine that the actual useful lives of its property andequipment placed into service is less than originally anticipated, or if any ofthe Company's property and equipment, including construction in progress, wasdeemed to have incurred an impairment, additional depreciation or an impairmentcharge would be required, which would decrease net income in the period suchdetermination was made. Conversely, should management determine that the actualuseful lives of its property and equipment placed into service was greater thanoriginally anticipated, less depreciation may be required, which would increasenet income in the period such determination was made.Results of OperationsYears ended December 31, 2001 and December 31, 2000 Revenues. Revenues increased from $13.0 million for the year ended December31, 2000 to $63.4 million for the year ended December 31, 2001. Revenuesconsist of recurring revenues of $57.6 million for 2001, versus $11.6 millionfor 2000, primarily from the leasing of cabinet space, and non-recurringrevenues of $5.8 million for 2001, versus $1.4 million for 2000, related to therecognized portion of deferred installation revenue and custom servicerevenues. Installation fees are recognized ratably over the term of thecontract. Custom service revenues are recognized upon completion of theservices. Revenues increased year over year as we had more IBX hubs open andoperational during 2001 than we had during 2000. We expect revenues to continueto 19increase as our customer base continues to grow, and as we open our newest andlargest IBX hub in the New York metropolitan area during the first quarter of2002. Cost of Revenues. Cost of revenues increased from $43.4 million for theyear ended December 31, 2000 to $94.9 million for the year ended December 31,2001. These amounts include depreciation and amortization expense of $11.5million and $40.0 million, respectively. In addition to depreciation andamortization, cost of revenues consists primarily of rental payments for ourleased IBX hubs, site employees' salaries and benefits, utility costs, powerand redundancy system engineering support services and related costs andsecurity services. The increase in cost of revenues was due to additionalleases and increased expenses related to our opening of additional IBX hubs.During the quarter ended September 30, 2001, the Company incurred a $45.3million restructuring charge related to its revised European services strategythat included accruing for leasehold exit costs related to European leases andan approximate $1.0 million restructuring charge for anticipated U.S. leaseholdexit costs for excess U.S. lease space. The restructuring charge during thethird quarter of 2001 reduced the cost of revenues commencing in fourth quarter2001; however, these savings will be offset in part by increased cost ofrevenues associated with the opening of the New York metropolitan IBX hubduring the first quarter of 2002, including related depreciation andamortization expense, and additional cost of revenues related to our existingIBX hubs as the Company's installed base of customers grows. Sales and Marketing. Sales and marketing expenses decreased from $20.1million for the year ended December 31, 2000 to $16.9 million for the yearended December 31, 2001; however, these amounts include stock-basedcompensation expense of $6.3 million and $2.8 million, respectively, resultingin a 2% increase in period over period cash spending. Sales and marketingexpenses consist primarily of compensation and related costs for the sales andmarketing personnel, sales commissions, marketing programs, public relations,promotional materials and travel. The increase in sales and marketing expenseresulted from the addition of personnel in our sales and marketingorganizations during the first half of 2001, reflecting our increased sellingeffort and our initiatives to develop market awareness. During the quarterended September 30, 2001, the Company incurred a $1.3 million restructuringcharge related to a reduction in workforce that included some sales andmarketing staff. In addition, the Company is closely monitoring itsdiscretionary marketing costs as the result of current market conditions. As aresult, we do not expect our sales and marketing costs to increasesignificantly in the foreseeable future, until such time as the Company reachescertain pre-determined levels of profitability. General and Administrative. General and administrative expenses increasedfrom $56.6 million for the year ended December 31, 2000 to $58.3 million forthe year ended December 31, 2001. These amounts include stock-basedcompensation 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 relatedexpenses, accounting, legal and administrative expenses, professional servicefees and other general corporate expenses. The increase in general andadministrative expenses was primarily the result of increased expensesassociated with additional hiring of personnel in management, finance andadministration, as well as other related costs associated with supporting theCompany's expansion, particularly during the first quarter of 2001. During thesecond quarter of 2001, the Company implemented several cost-savingsinitiatives, including some staff reductions and an overall decrease indiscretionary spending. Furthermore, during the quarter ended September 30,2001, the Company incurred a $1.3 million restructuring charge related to areduction in workforce that included some general and administrative staff andan approximate $1.0 million restructuring charge for leasehold exit costs forexcess office space in the U.S. As a result of these cost saving measures, wedo not expect our general and administrative costs to increase significantly inthe foreseeable future. Restructuring Charge. During the quarter ended September 30, 2001, theCompany took a restructuring charge of $48.6 million consisting of $45.3million related to its revised European services strategy, $2.0 million forcertain anticipated excess U.S. leasehold exit costs and $1.3 million relatedto a reduction in workforce, primarily in selling, general and administrativefunctions at the Company's headquarters. During third quarter 202001, the Company decided to partner with other Internet exchange companies inEurope rather than build and operate its own centers outside of the U.S. As aresult, the Company (i) recorded a write-down of its European construction inprogress assets to their net realizable value and recorded a charge totaling$29.3 million, (ii) accrued certain leasehold exit costs for its Europeanleasehold interests in the amount of $6.4 million, (iii) wrote-off its Europeanletters of credit that secured the European leasehold interests in the amountof $8.6 million and (iv) accrued various legal, storage and other coststotaling $1.0 million to facilitate this change in strategy. The Companyexperienced some cost savings benefits from this restructuring charge duringthe fourth quarter of 2001, particularly in cost of revenues; however, thesecost-savings will be partially offset by the increased operating costs of theNew York metropolitan area IBX hub beginning in the first quarter of 2002. Inaddition, the Company incurred a $2.0 million restructuring charge forleasehold exit costs associated with certain excess U.S. leases and a $1.3million restructuring charge related to an approximate 15% reduction inworkforce in an effort to streamline and reduce the cost structure of theCompany's headquarter function. The Company began to realize the cost savingsbenefits of the $2.0 million U.S. lease restructuring charge and $1.3 millionworkforce reduction restructuring charge commencing in the fourth quarter of2001. Adjusted EBITDA. Adjusted EBITDA loss decreased from $62.4 million for theyear ended December 31, 2000 to $38.0 million for the year ended December 31,2001. Although many factors affect Adjusted EBITDA and costs vary from IBXmarket to IBX market, the Company achieved Adjusted EBITDA breakeven during thefourth quarter of 2001. We believe that Adjusted EBITDA losses peaked duringthe fourth quarter of 2000.Adjusted EBITDA losses will continue to decline andtrend toward Adjusted EBITDA profitability in subsequent quarters given theCompany achieved Adjusted EBITDA breakeven during the fourth quarter of 2001.This trend will be offset in part by incremental costs associated with theopening of the New York metropolitan IBX hub during the first quarter of 2002. Interest Income. Interest income decreased from $16.4 million for the yearended December 31, 2000 to $10.7 million for the year ended December 31, 2001as a result of a decline in short-term interest rates and reduced cash, cashequivalent and short-term investments. Interest Expense. Interest expense increased from $29.1 million for theyear ended December 31, 2000 to $43.8 million for the year ended December 31,2001. The increase in interest expense was attributed to interest on the seniornotes, interest related to an increase in our debt facilities and capital leaseobligations, including the senior secured credit facility, and amortization ofthe senior notes, senior secured credit facility, other debt facilities andcapital lease obligations discount.Years ended December 31, 2000 and December 31, 1999 Revenues. Revenues increased from $37,000 for the year ended December 31,1999 to $13.0 million for the year ended December 31, 2000. Revenues consistedof recurring revenues of $11.6 million, primarily from the leasing of cabinetspace and power, and non-recurring revenues of $1.4 million related to therecognized portion of deferred installation revenue and custom installationrevenues. Cost of Revenues. Cost of revenues increased from $3.3 million for the yearended December 31, 1999 to $43.4 million for the year ended December 31, 2000.Cost of revenues consisted primarily of rental payments for our leased IBXhubs, site employees' salaries and benefits, utility costs, power andredundancy system engineering support services and related costs, securityservices and related costs and depreciation and amortization of our IBX hubbuild-out and other equipment costs. The increase in cost of revenues was dueto the expansion and deployment of our IBX hubs throughout the U.S. Inaddition, cost of revenues included certain costs related to real estateobtained for future IBX facilities in the U.S. and Europe. Furthermore, theseamounts include $177,000 and $766,000, for the years ended December 31, 1999and 2000, respectively, of stock-based compensation expense. 21 Sales and Marketing. Sales and marketing expenses increased from $3.9million for the year ended December 31, 1999 to $20.1 million for the yearended December 31, 2000. Sales and marketing expenses consisted primarily ofcompensation and related costs for the sales and marketing personnel, salescommissions, marketing programs, public relations, promotional materials andtravel. The increase in sales and marketing expense resulted from the additionof personnel in our sales and marketing organizations, reflecting our increasedselling effort to support our IBX hub deployment plan and our efforts todevelop market awareness. These amounts include $1.6 million and $6.3 million,for the years ended December 31, 1999 and 2000, respectively, of stock-basedcompensation expense. General and Administrative. General and administrative expenses increasedfrom $12.6 million for the year ended December 31, 1999 to $56.6 million forthe year ended December 31, 2000. General and administrative expenses consistedprimarily of salaries and related expenses, accounting, legal andadministrative expenses, professional service fees and other general corporateexpenses. The increase in general and administrative expenses was primarily theresult of increased expenses associated with additional hiring of personnel inmanagement, finance and administration, as well as other related costsassociated with supporting the Company's expansion. These amounts include $4.8million and $22.8 million, for the years ended December 31, 1999 and 2000,respectively, of stock-based compensation expense. Adjusted EBITDA. Adjusted EBITDA loss increased from $12.5 million for theyear ended December 31, 1999 to $62.4 million for the year ended December 31,2000. Although many factors affect adjusted EBITDA and costs vary from IBXmarket to IBX market, as of December 31, 2000, three of our six IBX hubsachieved positive adjusted EBITDA status. Interest Income. Interest income increased from $2.1 million for the yearended December 31, 1999 to $16.4 million for the year ended December 31, 2000.Interest income increased substantially due to higher cash, cash equivalent andshort-term investment balances held in interest bearing accounts, resultingfrom the proceeds of the initial public offering and preferred stock financingactivities. Interest Expense. Interest expense increased from $3.1 million for the yearended December 31, 1999 to $29.1 million for the year ended December 31, 2000.The increase in interest expense was attributed to interest on the seniornotes, interest related to our debt facilities and capital lease obligationsand amortization of the senior notes, debt facilities and capital leaseobligations discount.Liquidity and Capital Resources Since inception, we have financed our operations and capital requirementsprimarily through the issuance of senior notes, the private sale of preferredstock, our initial public offering and various debt financings for aggregategross proceeds of approximately $844.2 million. As of December 31, 2001, we hadapproximately $87.7 million in cash, cash equivalents and short-terminvestments. Furthermore, we have an additional $28.0 million of restrictedcash, cash equivalents and short-term investments to provide collateral under anumber of separate security agreements for standby letters of credit and escrowaccounts entered into and in accordance with certain lease and constructionagreements. Our principal sources of liquidity consist of our cash, cashequivalent and short-term investment balances. As of December 31, 2001, ourtotal indebtedness from our senior notes, senior secured credit facility anddebt facilities and capital lease obligations was $319.2 million. In October2001, the Company repaid $50.0 million of the senior secured credit facilityand subsequently borrowed $5.0 million under the amended and restated seniorsecured credit facility. This repayment occurred in conjunction with amendingand restating the original agreement to reset certain financial covenantscontained in this facility to more accurately reflect current economic marketconditions. Net cash used in our operating activities was $68.9 million, $68.1 millionand $9.9 million for the years ended December 31, 2001, 2000 and 1999,respectively. We used cash primarily to fund our net loss from operations. 22 Net cash used in investing activities was $153.0 million, $302.2 million and$86.3 million for the years ended December 31, 2001, 2000 and 1999,respectively. Net cash used in investing activities was primarily attributableto the construction of our IBX hubs and the purchase of restricted cash andshort-term investments. Net cash generated by financing activities was $107.8 million, $339.8million and $295.2 million for the years ended December 31, 2001, 2000 and1999, respectively. Net cash generated by financing activities during the yearended December 31, 2001 was primarily attributable to the net $105.0 milliondraw down under our amended and restated senior secured credit facility. Netcash generated by financing activities during the year ended December 31, 2000was primarily attributable to the proceeds from the initial public offering andissuance of Series C redeemable convertible preferred stock. Net cash generatedby financing activities during the year ended December 31, 1999 was primarilyattributable to the proceeds from the issuance of Series B redeemableconvertible preferred stock and the proceeds from the issuance of the seniornotes and the drawdown of funds related to our debt and capital leasefacilities. In May 1999, we entered into a master lease agreement in the amount of $1.0million. This master lease agreement was increased by addendum in August 1999by $5.0 million. This agreement bears interest at either 7.5% or 8.5% and isrepayable over 42 months in equal monthly payments with a final interestpayment equal to 15% of the advance amounts due on maturity. As of December 31,2001, these capital lease financings were fully drawn. In August 1999, we entered into a loan agreement in the amount of $10.0million. This loan agreement bears interest at 8.5% and is repayable over 42months in equal monthly payments with a final interest payment equal to 15% ofthe advance amounts due on maturity. As of December 31, 2001, this loanagreement was fully drawn. In December 1999, we issued $200.0 million aggregate principal amount of 13%senior notes due 2007 for aggregate net proceeds of $193.4 million, net ofoffering expenses. Of the $200.0 million gross proceeds, $16.2 million wasallocated to additional paid-in capital for the fair market value of the commonstock warrants and recorded as a discount to the senior notes. Senior notes,net of the unamortized discount, are valued at $187.9 million as of December31, 2001. In December 1999, we completed the private sale of our Series B redeemableconvertible preferred stock, net of issuance costs, in the amount of $81.7million. In May 2000, we entered into a purchase agreement regarding approximately 79acres of real property in San Jose, California. In June 2000, before closing onthis property, we assigned our interest in the purchase agreement to iStar SanJose, LLC ("iStar"). On the same date, iStar purchased this property andentered into a 20-year lease with us for the property. Under the terms of thelease, we have the option to extend the lease for an additional 60 years, for atotal lease term of 80 years. In addition, we have the option to purchase theproperty from iStar on certain designated dates in the future. In June 2000, we completed the private sale of our Series C redeemableconvertible preferred stock in the amount of $94.4 million. In August 2000, we completed an initial public offering of 20,000,000 sharesof common stock. In addition, in September 2000, the underwriters exercisedtheir option to purchase 2,704,596 additional shares to cover over-allotments.Total net proceeds from the offering and over-allotment were $251.5 million. In December 2000, we entered into a $150.0 million senior secured creditfacility. As of September 30, 2001, this facility was fully drawn; however, inOctober 2001, the Company repaid $50.0 million of this facility. This repaymentoccurred in conjunction with amending and restating the original agreement toreset certain financial covenants contained in this facility to more accuratelyreflect current economic market conditions. Of the $50.0 million repaid, atotal of $25.0 million is a permanent reduction of this facility, while theremaining 23$25.0 million is available for re-borrow under the amended and restated seniorsecured credit facility. In October 2001, $5.0 million was drawn under theamended and restated senior secured credit facility with the remaining balanceof $20.0 million available for re-borrow during a future designated period. Theremaining $20.0 million is only available for drawdown commencing September 30,2002 and only if the Company remains in full compliance with all covenants asoutlined in the amended and restated senior secured credit facility, and meetsan additional EBITDA test. The ability to draw on the remaining $20.0 millionexpires on December 31, 2002. As of December 31, 2001, a total of $105.0million was outstanding under the amended and restated senior secured creditfacility. Our amended and restated senior secured credit facility contains anumber of financial ratios and covenants which we must meet each quarter, andin certain circumstances each month, such as achieving specified revenuetargets at levels significantly above historical revenues, maintaining certainminimum cash balances and limiting our EBITDA losses. We are in full compliancewith all of these covenants and ratios at this time. If we are unable tomaintain these ratios or comply with these covenants, the banks could requirerepayment of amounts previously drawn down. We do not currently have sufficientcash reserves to repay such amounts. In addition, the inability to draw downthe remaining $20.0 million under this facility may not provide sufficientfunds for the Company to support its spending needs and could adversely affectour business and the Company's ability to continue as a going concern. In March 2001, we entered into a loan agreement in the amount of $3.0million. This loan agreement bears interest at 13.15% and is repayable over 36months. As of December 31, 2001, this loan agreement was fully drawn. In June 2001, we entered into a loan agreement in the amount of $5.0million. This loan agreement bears interest at 13.0% and is repayable over 36months. As of December 31, 2001, this loan agreement was fully drawn. The Company leases its IBX hubs and certain equipment under noncancelableoperating lease agreements expiring through 2025. The following represents theminimum future operating lease payments for these commitments, as well as thecombined aggregate maturities for all of the Company's debt as of December 31,2001 (in thousands): Debt facilities and Senior capital lease secured credit Senior Operating obligations facility notes leases Total -------------- -------------- -------- --------- -------- 2002......................... $ 7,206 $ -- $ -- $ 23,780 $ 30,9862003......................... 5,462 8,400 -- 31,170 45,0322004......................... 1,498 42,000 -- 31,443 74,9412005......................... 12 54,600 -- 31,889 86,5012006......................... -- -- -- 34,219 34,2192007 and thereafter.......... -- -- 200,000 425,650 625,650 ------- -------- -------- -------- -------- $14,178 $105,000 $200,000 $578,151 $897,329 ======= ======== ======== ======== ======== During the quarter ended September 30, 2001, the Company recorded arestructuring charge, primarily as a result of its revised European strategy.Part of this restructuring charge included the costs associated with exitingout of several operating leases in Europe and the U.S. As of December 31, 2001,three European operating leases and two U.S. operating leases remain asobligations. The total cost of the three European and two U.S. operating leasesfor which the Company is pursuing lease terminations is approximately $146.5million out of the total $578.2 million of the minimum future operating leasepayments indicated above. The Company expects to successfully complete the exitof these remaining leases during 2002. In February and March 2002, the Company retired $25.0 million of our 13%senior notes due 2007 in exchange for approximately 9.3 million shares of theCompany's common stock. The total number of shares outstanding upon completionof the exchange is approximately 90.2 million shares. 24 We expect that our cash on hand and anticipated cash flow from operationsshould be sufficient to complete our seventh IBX hub in the New Yorkmetropolitan area during the first quarter of 2002 and to fund our operationsfor the next twelve months. Assuming sufficient customer demand and theavailability of additional financing, we may build or buy additional IBX hubsand expand certain existing IBX hubs. We are continually evaluating thelocation, number and size of our facilities based upon the availability ofsuitable sites, financing and customer demand. If we cannot raise additionalfunds on acceptable terms or our losses exceed our expectations, we may delayor permanently reduce our rollout plans or implement other cost savinginitiatives in order to preserve cash. Additional financing may take the formof debt or equity. If we are unable to raise additional funds to further ourrollout, we anticipate that our existing cash and the cash flow generated fromthe seven IBX hubs, for which we will have obtained financing, will besufficient to meet the working capital, debt service and corporate overheadrequirements associated with those IBX hubs for the next twelve months. 25RISK FACTORS In addition to the other information in this report, the following riskfactors should be considered carefully in evaluating our business and us.Risks Related to Our BusinessWe have a limited operating history. We were founded in June 1998 and we did not recognize any revenue untilNovember 1999. Our limited history and lack of meaningful financial oroperating data makes evaluating our operations and the proposed scale of ourbusiness difficult. Moreover, our business model is unique and remains largelyunproven. We expect that we will encounter challenges and difficultiesfrequently experienced by early-stage companies in new and rapidly evolvingmarkets, such as our ability to generate cash flow, hire, train and retainsufficient operational and technical talent, and implement our plan withminimal delays. We may not successfully address any or all of these challengesand the failure to do so would seriously harm our business plan and operatingresults, and affect our ability to raise additional funds.We have a history of losses and we anticipate our losses will continue in thefuture. As an early-stage company, we have experienced significant operating lossessince inception. As of December 31, 2001, we had cumulative net losses of$330.0 million and cumulative cash used in operating activities of $147.6million since inception. We expect to incur significant losses on a quarterlyand annual basis in the foreseeable future. Our failure to significantlyincrease revenues will result in increased losses. Our revenues are dependenton our ability to continue selling our existing services and our ability tosell new service offerings to both new and existing customers.We expect our operating results to fluctuate. We have experienced fluctuations in our results of operations on a quarterlyand annual basis. The fluctuation in our operating results may cause the marketprice of our common stock to decline. We expect to experience significantfluctuations in our operating results in the foreseeable future due to avariety of factors, including: . demand for space and services at our IBX hubs; . our pricing policies and the pricing policies of our competitors; . the timing of customer installations and related payments; . customer retention and satisfaction; . customer insolvency; . the provision of customer discounts and credits; . the mix of current and proposed products and services and the gross margins associated with such products and services; . competition in our markets; . the timing and magnitude of capital expenditures and expenses related to the expansion of sales, marketing, operations and acquisitions, if any, of complementary businesses and assets; . the effects of terrorist activity and armed conflict, such as disruptions in general economic activity, changes in logistics and security arrangements, and reduced customer demand for our services; . changes in general economic conditions and specific market conditions in the telecommunications and Internet industries; 26 . the ability of our customers to obtain financing or to fund their capital expenditures; . conditions related to international operations; . the cost and availability of adequate public utilities, including power; . growth of Internet use; and . governmental regulation. Any of the foregoing factors, or other factors discussed elsewhere herein,could have a material adverse effect on our business, results of operations,and financial condition. Although we have experienced growth in revenues inrecent quarters, this growth rate is not necessarily indicative of futureoperating results. It is possible that we may never achieve profitability on aquarterly or annual basis. In addition, a relatively large portion of our expenses is fixed in theshort-term, particularly with respect to real estate and personnel expenses,depreciation and amortization, and interest expenses. Therefore, our results ofoperations are particularly sensitive to fluctuations in revenues.We are substantially leveraged and we may not generate sufficient cash flow tomeet our debt service and working capital requirements. We are highly leveraged. As of December 31, 2001, we had total indebtednessof $319.2 million consisting primarily of the following: . a total of $200.0 million of our 13% senior notes due 2007; . a total of $105.0 million under our $125.0 million senior secured credit facility; and . other outstanding debt facilities and capital lease obligations. We may incur further debt to fund the acquisition of complementarybusinesses, products, services or technologies or to expand our IBX footprint.Our highly leveraged position could have important consequences, including: . impairing our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes; . requiring us to dedicate a substantial portion of our operating cash flow to paying principal and interest on our indebtedness, thereby reducing the funds available for operations; . limiting our ability to grow and make capital expenditures due to the financial covenants contained in our debt arrangements; . impairing our ability to adjust rapidly to changing market conditions, invest in new or developing technologies, or take advantage of significant business opportunities that may arise; and . making us more vulnerable if a general economic downturn continues or if our business experiences difficulties. In the event our cash flow is inadequate to meet our obligations, we couldface substantial liquidity problems. If we are unable to generate sufficientcash flow or otherwise obtain funds needed to make required payments related toour indebtedness, or if we breach any covenants under this indebtedness, wewould be in default under its terms and the holders of such indebtedness may beable to accelerate the maturity of such indebtedness. Such acceleration couldcause defaults under our other indebtedness. In February and March 2002, the Company retired $25.0 million of our 13%senior notes due 2007 in exchange for approximately 9.3 million shares of theCompany's common stock. The total number of shares outstanding upon completionof the exchange is approximately 90.2 million shares. 27If we do not maintain specific financial ratios and comply with covenants inthe credit agreement, the banks could require repayment of amounts previouslydrawn down and we do not currently have sufficient cash reserves to repay suchamounts. In October 2001, we amended and restated our $150.0 million senior securedcredit facility with a permanent $25.0 million reduction. We also made anadditional $25.0 million repayment, of which we immediately re-borrowed $5.0million and the remaining $20.0 million is available to draw during a futuredesignated period provided certain financial covenants are reached. Our $125.0million senior secured credit facility contains a number of financial ratiosand covenants which we must meet each quarter, such as achieving specifiedrevenue targets at levels significantly above historical revenues and limitingour EBITDA losses. In addition, we have a monthly cash covenant that requiresus to maintain certain minimum cash balances. We are in full compliance withall of these covenants and ratios at this time. If we are unable to maintainthese ratios or comply with these covenants, the banks could require repaymentof amounts previously drawn down. We do not currently have sufficient cashreserves to repay such amounts. If we are required to repay amounts currentlyoutstanding under this facility, we will have insufficient cash to fundoperations and our ability to obtain additional financing will be impaired.We are subject to restrictive covenants in our credit agreements that limit ourflexibility in managing our business. Our credit agreements require that we maintain specific financial ratios andcomply with covenants containing numerous restrictions on our ability to incurdebt, pay dividends or make other restricted payments, sell assets, enter intoaffiliate transactions and take other actions. Furthermore, our existingfinancing arrangements are, and future financing arrangements are likely to be,secured by substantially all of our assets.We may continue to have customer concentration and the loss of, or decline inbusiness from, our key customers would result in a significant decline in ourrevenues. To date, we have relied upon a small number of customers for a majority ofour revenue. For the year ended December 31, 2001, our single largest customer,IBM, represented 15% of total revenues, and our top 10 customers represented55% of our total revenues. Some of our customers have experienced significantbusiness difficulties. The difficulties of these customers have adverselyaffected our operating results. For example, customers such as Excite@Home, ICGCommunications, NorthPoint Communications and Global Crossing have filedvoluntary petitions for relief under the Bankruptcy Code. For fiscal year 2001,sales to customers that have filed for bankruptcy or that otherwise went out ofbusiness totaled approximately 4.9% of total revenues. We expect that we willcontinue to rely upon a limited number of customers for a significantpercentage of our revenue. As a result of this concentration, a loss of, ordecrease in business from, one or more of our large customers could have amaterial and adverse effect on our results of operations and would result in asignificant decline in our revenues. To the extent the loss of, or decline inbusiness from, our customers' results in decreased revenues, we may not be ableto comply with certain covenants in our credit agreement.We operate in a highly competitive market and we may be unable to competesuccessfully against established companies with greater resources and anability to adopt aggressive pricing policies. We must be able to differentiate ourselves from existing providers of spacefor telecommunications equipment and web hosting companies. In addition tocompeting with neutral colocation providers, we compete with traditionalcolocation providers, including local phone companies, long distance phonecompanies, Internet service providers and web hosting facilities. Most of thesecompanies have longer operating histories and significantly greater financial,technical, marketing and other resources than we do. Because of their greaterfinancial resources, some of these companies have the ability to adoptaggressive pricing policies. As a result, in the future, we may suffer frompricing pressure that would adversely affect our ability to generate revenuesand adversely affect our operating results. In addition, these competitorscould offer colocation on neutral terms, and may start doing so in the samemetropolitan areas where we have IBX hubs. Some of these competitors may also 28provide our target customers with additional benefits, including bundledcommunication services, and may do so in a manner that is more attractive toour potential customers than obtaining space in our IBX hubs. We believe ourneutrality provides us with an advantage over these competitors. However, ifthese competitors were able to adopt aggressive pricing policies together withoffering colocation space, our ability to generate revenues would be adverselyaffected. We may also face competition from persons seeking to replicate our IBXconcept. Our competitors may operate more successfully than we do or formalliances to acquire significant market share. Furthermore, enterprises thathave already invested substantial resources in peering arrangements may bereluctant or slow to adopt our approach that may replace, limit or compete withtheir existing systems. In addition, other companies may be able to attract thesame potential customers that we are targeting. Once customers are located inour competitors' facilities, it will be extremely difficult to convince them torelocate to our IBX hubs.We are exposed to general economic and market conditions. Our business is subject to the effects of general economic conditions in theUnited States and globally, and in particular, market conditions in thetelecommunications and Internet infrastructure services industries. Due to theinability to obtain additional financing and the condition of the economy ingeneral, certain companies in the Internet infrastructure services andtelecommunications industries, including some of our customers and ourcustomer's customers, have experienced significant business difficulties. Thedifficulties of these customers and these customer's customers have materiallyand adversely affected our operating results. If our customers and ourcustomer's customers continue to experience business difficulties or ceaseoperations, such as Excite@Home, Global Crossing and NorthPoint Communications,if the economic conditions in the United States and globally do not improve orif we experience a worsening in the global economic slowdown, our operatingresults will be adversely affected.Because we depend on the development and growth of a balanced customer base,failure to attract and retain this base of customers could harm our businessand operating results. Our ability to maximize revenues depends on our ability to develop and growa balanced customer base, consisting of a variety of companies, includingnetwork service providers, site and performance management companies, andenterprise and content companies. The more balanced the customer base withineach IBX hub, the better able we are to generate significant interconnectionrevenues, which in turn increases our overall revenues. Our ability to attractcustomers to our IBX hubs will depend on a variety of factors, including thepresence of multiple carriers, the overall mix of our customers, our operatingreliability and security and our ability to effectively market our services. Inaddition, some of our customers are and will continue to be Internet companiesthat face many competitive pressures and that may not ultimately be successful.If these customers do not succeed, they will not continue to use our IBX hubs.This may be disruptive to our business and may adversely affect our business,financial condition and results of operations.We have a long sales cycle that may adversely affect our business, financialcondition and results of operations. A customer's decision to lease cabinet space in our IBX hubs typicallyinvolves a significant commitment of resources and will be influenced by, amongother things, the customer's confidence in our financial strength. In addition,some customers will be reluctant to commit to locating in our IBX hubs untilthey are confident that the IBX hub has adequate carrier connections. As aresult, we have a long sales cycle. We generally incur significant expenses insales and marketing prior to getting customer commitments for our services.Delays due to the length of our sales cycle may adversely affect our business,financial condition and results of operations. 29Any failure of our physical infrastructure or services could lead tosignificant costs and disruptions that could reduce our revenue and harm ourbusiness reputation and financial results. Our business depends on providing our customers with highly reliableservice. We must protect our IBX infrastructure and our customers' equipmentlocated in our IBX hubs. The services we provide are subject to failureresulting from numerous factors, including: . human error; . physical or electronic security breaches; . fire, earthquake, flood and other natural disasters; . water damage; . power loss; and . sabotage and vandalism. Problems at one or more of our IBX hubs, whether or not within our control,could result in service interruptions or significant equipment damage. In thepast, a limited number of our customers have experienced temporary losses ofpower. If we incur significant financial commitments to our customers inconnection with a loss of power, or our failure to meet other service levelcommitment obligations, our liability insurance may not be adequate to coverthose expenses. In addition, any loss of services, equipment damage orinability to meet our service level commitment obligations, particularly in theearly stage of our development, could reduce the confidence of our customersand could consequently impair our ability to obtain and retain customers, whichwould adversely affect both our ability to generate revenues and our operatingresults. To the extent a failure of our physical infrastructure or servicesresults in decreased revenues, we may not be able to comply with certaincovenants in our credit agreement. If we are unable to comply with covenants inour credit agreement, the banks may require repayment of amounts previouslydrawn down, which amounts we are currently unable to repay.We depend on a number of third parties to provide Internet connectivity to ourIBX hubs; if connectivity is not established, or is delayed, interrupted orterminated, our operating results and cash flow will be adversely affected. The presence of diverse Internet fiber from communications carriers' fibernetworks to our IBX hubs is critical to our ability to attract new customers.We believe that the availability of such carrier capacity will directly affectour ability to achieve our projected results. We are not a communications carrier, and as such we rely on third parties toprovide our customers with carrier services. We rely primarily on revenueopportunities from our customers to encourage carriers to invest the capitaland operating resources required to build facilities from their locations toour IBX hubs. Carriers will likely evaluate the revenue opportunity of an IBXhub based on the assumption that the environment will be highly competitive.There can be no assurance that, after conducting such an evaluation, anycarrier will elect to offer its services within our IBX hubs. In addition,there can be no assurance once a carrier has decided to provide Internetconnectivity to our IBX hubs that it will continue to do so for any period oftime. The construction required to connect multiple carrier facilities to our IBXhubs is complex and involves factors outside of our control, includingregulatory processes and the availability of construction resources. Forexample, in the past carriers have experienced delays in connecting to ourfacilities due to some of these factors. If the establishment of highly diverseInternet connectivity to our IBX hubs does not occur or is materially delayedor is discontinued, our operating results and cash flow will be adverselyaffected. Further, many carriers are experiencing business difficulties. As aresult, some carriers may be forced to terminate connectivity within our IBXhubs. For example, on January 16, 2001, NorthPoint Communications, a carrier inone of our IBX hubs, announced that it filed a voluntary petition forbankruptcy under Chapter 11 of the U.S. Bankruptcy Code. As a result,NorthPoint terminated connectivity in our IBX hubs after its assets were sold. 30The ability to retain and recruit key personnel is key to our success. Our success largely depends on our ability to attract and retain keymanagement and highly skilled technical, managerial, sales and marketingpersonnel. In spite of the economic slowdown, competition for these personnelremains intense. The loss of services of any of our key personnel, theinability to retain and attract qualified personnel in the future, or delays inhiring required personnel could make it difficult to meet key objectives.If we are unable to successfully operate our management information systems,our business will be materially and adversely affected. To date, we have experienced difficulties implementing and upgrading ourmanagement information systems. We may need additional information technologypersonnel to upgrade and operate our management information systems. If we areunable to hire and retain such personnel, and successfully upgrade and operateadequate management information systems to support our growth effectively, ourbusiness will be materially and adversely affected.Recent terrorist activity in the United States and the military action tocounter terrorism could adversely impact our business. The September 11, 2001 terrorist attacks in the United States, the ensuingdeclaration of war on terrorism and the continued threat of terrorist activityand other acts of war or hostility appear to be having an adverse effect onbusiness, financial and general economic conditions in the U.S. These effectsmay, in turn, result in increased costs due to the need to provide enhancedsecurity, which would have a material adverse effect on our business andresults of operations. These circumstances may also adversely affect ourability to attract and retain customers, our ability to raise capital and theoperation and maintenance of our IBX hubs.We may make acquisitions, which pose integration and other risks that couldharm our business. We may seek to acquire complementary businesses, products, services andtechnologies. As a result of these acquisitions, we may be required to incuradditional debt and expenditures and issue additional shares of our stock topay for the acquired business, product, service or technology, which willdilute existing stockholders' ownership interest in the Company. In addition,if we fail to successfully integrate and manage acquired businesses, products,services and technologies, our business and financial results would be harmed.Currently, we have no present commitments or agreements with respect to anysuch acquisitions.Our stock price has been volatile in the past and is likely to continue to bevolatile. The market price of our common stock has been volatile in the past and islikely to continue to be volatile. In addition, the securities markets ingeneral, and Internet stocks in particular, have experienced significant pricevolatility and accordingly the trading price of our common stock is likely tobe affected by this activity. In addition, to the extent we issue stock toreduce our debt and deleverage the Company, our stock price may fluctuate as aresult of the increased number of shares in the market.We are subject to securities class action litigation, which may harm ourbusiness and results of operations. In the past, securities class action litigation has often been broughtagainst a company following periods of volatility in the market price of itssecurities. We are a party to the securities class action litigation describedin Part II, Item 1--"Legal Proceedings" of this report. The defense of thelitigation described in Part II, Item 1 may increase our expenses and divertour management's attention and resources, and an adverse outcome in thislitigation could seriously harm our business and results of operations. Inaddition, we may in the future be the target of other securities class actionor similar litigation. 31If there is a change of control of Equinix, we may be required under ourindenture and our senior secured credit facility to repurchase or repay thedebt outstanding under those agreements. Change of control provisions in our indenture and senior secured creditfacility could limit the price that investors might be willing to pay in thefuture for shares of our common stock and significantly impede the ability ofthe holders of our common stock to change management because the change incontrol provisions of these agreements can trigger the repayment of the debtoutstanding under those agreements.Our business could be harmed by prolonged electrical power outages orshortages, or increased costs of energy. Our IBX hubs are susceptible to regional costs of power, electrical powershortages and planned or unplanned power outages caused by these shortages,such as those that occurred in California during 2001. The overall powershortage in California has increased the cost of energy, which we may not beable to pass on to our customers. We attempt to limit exposure to systemdowntime by using backup generators and power supplies. Power outages, whichlast beyond our backup and alternative power arrangements, could harm ourcustomers and our business.Risks Related to Our IndustryIf use of the Internet and electronic business does not continue to grow, aviable market for our IBX hubs may not develop. Rapid growth in the use of and interest in the Internet has occurred onlyrecently. Acceptance and use may not continue to develop at historical ratesand a sufficiently broad base of consumers may not adopt or continue to use theInternet and other online services as a medium of commerce. Demand and marketacceptance for recently introduced Internet services and products are subjectto a high level of uncertainty and there are few proven services and products.As a result, we cannot be certain that a viable market for our IBX hubs willemerge or be sustainable.We must respond to rapid technological change and evolving industry standardsin order to meet the needs of our customers. The market for IBX hubs will be marked by rapid technological change,frequent enhancements, changes in customer demands and evolving industrystandards. Our success will depend, in part, on our ability to address theincreasingly sophisticated and varied needs of our current and prospectivecustomers. Our failure to adopt and implement the latest technology in ourbusiness could negatively affect our business and operating results. In addition, we have made and will continue to make assumptions about thestandards that may be adopted by our customers and competitors. If thestandards adopted differ from those on which we have based anticipated marketacceptance of our services or products, our existing services could becomeobsolete. This would have a material adverse effect on our business, financialcondition and results of operations.Government regulation may adversely affect the use of the Internet and ourbusiness. Following the September 11, 2001 terrorist attacks on the United States,there has been an increased focus by the government on Internet infrastructurecenters, including our IBX hubs. Although, we do not believe there will beincreased government regulation, laws and regulations governing Internetservices, related communications services and information technologies, andelectronic commerce remain largely unsettled, even in areas where there hasbeen some legislative action. It may take years to determine whether and howexisting laws, such as those governing intellectual property, privacy, libel,telecommunications, and taxation, apply to the Internet and to related servicessuch as ours. In addition, the development of the market for online commerceand the displacement of traditional telephony services by the Internet andrelated communications services may 32prompt increased calls for more stringent consumer protection laws or otherregulation, both in the United States and abroad, that may impose additionalburdens on companies conducting business online and their service providers.The adoption or modification of laws or regulations relating to the Internet,or interpretations of existing law, could have a material adverse effect on ourbusiness, financial condition and results of operations.Recent Accounting Pronouncements In July 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS141") and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 supercedes Accounting Principles Board Opinion No. 16 ("APB 16"),Business Combinations, and is effective for all business combinations initiatedafter June 30, 2001 and for all business combinations accounted for by thepurchase method for which the date of acquisition is after June 30, 2001. Oneof the most significant changes made by SFAS 141 is to require the use of thepurchase method of accounting for all business combinations initiated afterJune 30, 2001. SFAS 142 supercedes Accounting Principles Board Opinion No. 17 ("APB 17"),Intangible Assets, but will carry forward provisions in APB 17 related tointernally developed intangible assets. SFAS 142 primarily addresses theaccounting for goodwill and intangible assets subsequent to their acquisitionand is effective for fiscal years beginning after December 15, 2001. The mostsignificant changes made by SFAS 142 that could impact the Company are: (1)goodwill and indefinite lived intangible assets will no longer be amortized and(2) goodwill will be tested for impairment at least annually at the reportingunit level. The Company does not expect the adoption of either SFAS 141 or SFAS 142 willhave a material effect on its consolidated financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for theImpairment or Disposal of Long-Lived Assets". SFAS 144 supercedes SFAS 121,"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of." SFAS 144 applies to all long-lived assets (includingdiscontinued operations) and consequently amends Accounting Principles BoardOpinion No. 30. SFAS 144 develops one accounting model for long-lived assetsthat are to be disposed of by sale. SFAS 144 requires that long-lived assetsthat are to be disposed of by sale be measured at the lower of book value orfair value less cost to sell. Additionally, SFAS 144 expands the scope ofdiscontinued operations to include all components of an entity with operationsthat (1) can be distinguished from the rest of the entity and (2) will beeliminated from the ongoing operations of the entity in a disposal transaction.SFAS 144 is effective for the Company for all financial statements issued infiscal 2002. The Company is currently evaluating the impacts of the adoption ofSFAS 144 to its financial statements. In November 2001, the FASB Emerging Issues Task Force ("EITF") reached aconsensus on EITF Issue 01-09, Accounting for Consideration Given by a Vendorto a Customer or a Reseller of the Vendor's Products, which is a codificationof EITF 00-14, 00-22 and 00-25. This issue presumes that consideration from avendor to a customer or reseller of the vendor's products to be a reduction ofthe selling prices of the vendor's products and, therefore, should becharacterized as a reduction of revenue when recognized in the vendor's incomestatement and could lead to negative revenue under certain circumstances.Revenue reduction is required unless consideration relates to a separateidentifiable benefit and the benefit's fair value can be established. Thisissue should be applied no later than in annual or interim financial statementsfor periods beginning after December 15, 2001, which is our first quarter endedMarch 31, 2002. Upon adoption we are required to reclassify all prior periodamounts to conform to the current period presentation. We have not yetevaluated the effects of these changes on our consolidated financial statements. 33ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKMarket Risk The following discussion about market risk disclosures involvesforward-looking statements. Actual results could differ materially from thoseprojected in the forward-looking statements. We may be exposed to market risksrelated to changes in interest rates and foreign currency exchange rates and toa lesser extent we are exposed to fluctuations in the prices of certaincommodities, primarily electricity. In the past, we have employed foreign currency forward exchange contractsfor the purpose of hedging certain specifically identified net currencyexposures. The use of these financial instruments was intended to mitigate someof the risks associated with fluctuations in currency exchange rates, but doesnot eliminate such risks. We may decide to employ such contracts again in thefuture. 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 relatesprimarily to our investment portfolio. Our interest income is impacted bychanges in the general level of U.S. interest rates, particularly since themajority of our investments are in short-term instruments. Due to theshort-term nature of our investments, we do not believe that we are subject toany material market risk exposure. An immediate 10% increase or decrease incurrent interest rates would not have a material effect on the fair marketvalue of our investment portfolio. We would not expect our operating results orcash flows to be significantly affected by a sudden change in market interestrates in our investment portfolio. An immediate 10% increase or decrease in current interest rates wouldfurthermore not have a material impact to our debt obligations due to the fixednature of our long-term debt obligations, except for the interest expenseassociated with our amended and restated senior secured credit facility, whichbears interest at floating rates, plus applicable margins, based on either theprime rate or LIBOR. As of December 31, 2001, the amended and restated seniorsecured credit facility had an effective interest rate of 7.68%. The fairmarket value of our long-term fixed interest rate debt is subject to interestrate risk. Generally, the fair market value of fixed interest rate debt willincrease as interest rates fall and decrease as interest rates rise. Theseinterest rate changes may affect the fair market value of the fixed interestrate debt but does not impact earnings or cash flows of the Company. The fair market value of our 13% senior notes due 2007 is based on quotedmarket prices. The estimated fair value of our 13% senior notes due 2007 as ofDecember 31, 2001 is approximately $70.0 million.Foreign Currency Risk To date, all of our recognized revenue has been denominated in U.S. dollars,generated mostly from customers in the U.S., and our exposure to foreigncurrency exchange rate fluctuations has been minimal. We expect that futurerevenues may be derived from customers outside of the U.S. and may bedenominated in foreign currency. As a result, our operating results or cashflows may be impacted due to currency fluctuations relative to the U.S. dollar. Furthermore, to the extent we engage in international sales that aredenominated in U.S. dollars, an increase in the value of the U.S. dollarrelative to foreign currencies could make our services less competitive in theinternational markets. Although we will continue to monitor our exposure tocurrency fluctuations, and when appropriate, may use financial hedgingtechniques in the future to minimize the effect of these fluctuations, wecannot assure you that exchange rate fluctuations will not adversely affect ourfinancial results in the future. 34Commodity Price Risk Certain operating costs incurred by Equinix are subject to pricefluctuations caused by the volatility of underlying commodity prices. Thecommodities most likely to have an impact on our results of operations in theevent of significant price changes are electricity and building materials forthe construction of our IBX hubs such as steel. We are closely monitoring thecost of electricity, particularly in California. To the extent that electricitycosts continue to rise, we are investigating opportunities to pass theseadditional power costs onto our customers that utilize this power. For buildingmaterials, we rely on Bechtel's expertise and bulk purchasing power to bestmanage the procurement of these required materials for the construction of ourIBX hubs. We do not employ forward contracts or other financial instruments tohedge commodity price risk.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by this Item 8 arelisted in Item 14(a)(1) and begin at page F-1 of this Report.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On March 7, 2000, KPMG LLP resigned as our independent accountants upondetermining that they may no longer be independent of Equinix as a result ofCisco Systems, Inc.'s investment in both KPMG Consulting, Inc., a subsidiary ofKPMG LLP and Equinix. We subsequently appointed PricewaterhouseCoopers LLP asour principal accountants on March 21, 2000. There were no disagreements withthe former accountants during the fiscal years ended December 31, 1998 and 1999or during any subsequent interim period preceding their replacement on anymatter of accounting principles or practices, financial statement disclosure,or auditing scope or procedures, which disagreements, if not resolved to theformer accountants' satisfaction, would have caused them to make reference tothe subject matter of the disagreement in connection with their reports. Theformer independent accountants issued an unqualified report on the financialstatements as of December 31, 1999 and 1998 and for the year ended December 31,1999 and the period from June 22, 1998 (inception) to December 31, 1998. Forpurposes of this filing, the financial statements as of and for the year endedDecember 31, 1999 have been audited by PricewaterhouseCoopers LLP. Prior toMarch 21, 2000, we did not consult with PricewaterhouseCoopers LLP on itemsthat involved our accounting principles or the form of audit opinion to beissued on our financial statements. The change in accountants was approved byour board of directors. 35 PART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding our Directors and Executive Officers isincorporated herein by reference from the section entitled "Election ofDirectors" of our definitive Proxy Statement (the "Proxy Statement") to befiled pursuant to Regulation 14A of the Securities Exchange Act of 1934, asamended, for our 2002 Annual Meeting of Stockholders. The Proxy Statement isanticipated to be filed within 120 days after the end of our fiscal year endedDecember 31, 2001.ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated herein byreference from the section entitled "Executive Compensation and RelatedInformation" of the Proxy Statement.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners andmanagement is incorporated herein by reference from the section entitled"Security Ownership of Certain Beneficial Owners and Management" of the ProxyStatement.ITEM 13. RELATED PARTY TRANSACTIONS Information regarding certain relationships and related transactions isincorporated herein by reference from the section entitled "CertainRelationships and Related Transactions" of the Proxy Statement. 36 PART IVITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a)(1) Financial Statements: Report of Independent Accountants.......................... F-1 Consolidated Balance Sheets................................ F-2 Consolidated Statements of Operations...................... F-3 Consolidated Statements of Stockholders' Equity............ F-4 Consolidated Statements of Cash Flows...................... F-5 Notes to Consolidated Financial Statements................. F-6 (a)(2) All schedules have been omitted because they are not applicable orthe required information is shown in the financial statements or notes thereto. (a)(3) Exhibits: Exhibit Number Description of Document ------- ----------------------- 3.1** Amended and Restated Certificate of Incorporation of the Registrant, as amended to date. 3.2* Bylaws of the Registrant. 4.1 Reference is made to Exhibits 3.1 and 3.2. 4.2** Form of Registrant's Common Stock certificate. 4.6* Common Stock Registration Rights Agreement (See Exhibit 10.3). 4.9* Amended and Restated Investors' Rights Agreement (See Exhibit 10.6). 10.1* Indenture, dated as of December 1, 1999, by and among the Registrant and State Street Bank and Trust Company of California, N.A. (as trustee). 10.2* Warrant Agreement, dated as of December 1, 1999, by and among the Registrant and State Street Bank and Trust Company of California, N.A. (as warrant agent). 10.3* Common Stock Registration Rights Agreement, dated as of December 1, 1999, by and among the Registrant, Benchmark Capital Partners II, L.P., Cisco Systems, Inc., Microsoft Corporation, ePartners, Albert M. Avery, IV and Jay S. Adelson (as investors), and the Initial Purchasers. 10.4* Registration Rights Agreement, dated as of December 1, 1999, by and among the Registrant and the Initial Purchasers. 10.5* Form of Indemnification Agreement between the Registrant and each of its officers and directors. 10.6* Amended and Restated Investors' Rights Agreement, dated as of May 8, 2000, by and between the Registrant, the Series A Purchasers, the Series B Purchasers, the Series C Purchasers and members of the Registrant's management. 10.8* The Registrant's 1998 Stock Option Plan. 10.9*+ Lease Agreement with Carlyle-Core Chicago LLC, dated as of September 1, 1999. 10.10*+ Lease Agreement with Market Halsey Urban Renewal, LLC, dated as of May 3, 1999. 10.11*+ Lease Agreement with Laing Beaumeade, dated as of November 18, 1998. 10.12*+ Lease Agreement with Rose Ventures II, Inc., dated as of June 10, 1999. 10.13*+ Lease Agreement with Carrier Central LA, Inc., as successor in interest to 600 Seventh Street Associates, Inc., dated as of August 8, 1999. 37 Exhibit Number Description of Document ------- ----------------------- 10.14*+ First Amendment to Lease Agreement with TrizecHahn Centers, Inc. (dba TrizecHahn Beaumeade Corporate Management), dated as of October 28, 1999.10.15*+ Lease Agreement with Nexcomm Asset Acquisition I, L.P., dated as of January 21, 2000.10.16*+ Lease Agreement with TrizecHahn Centers, Inc. (dba TrizecHahn Beaumeade Corporate Management), dated as of December 15, 1999.10.17* Lease Agreement with ARE-2425/2400/2450 Garcia Bayshore LLC, dated as of January 28, 2000.10.19*+ Master Agreement for Program Management, Site Identification and Evaluation, Engineering and Construction Services between Equinix, Inc. and Bechtel Corporation, dated November 3, 1999.10.20*+ Agreement between Equinix, Inc. and WorldCom, Inc., dated November 16, 1999.10.21* Customer Agreement between Equinix, Inc. and WorldCom, Inc., dated November 16, 1999.10.22*+ Lease Agreement with GIP Airport B.V., dated as of April 28, 2000.10.23* Purchase Agreement between International Business Machines Corporation and Equinix, Inc. dated May 23, 2000.10.24** 2000 Equity Incentive Plan.10.25** 2000 Director Option Plan.10.26** 2000 Employee Stock Purchase Plan.10.27** Ground Lease by and between iStar San Jose, LLC and Equinix, Inc., dated June 21, 2000.10.28***+ Lease Agreement with TrizecHahn Beaumeade Technology Center LLC, dated as of July 1, 2000.10.29***+ Lease Agreement with TrizecHahn Beaumeade Technology Center LLC, dated as of May 1, 2000.10.30***+ Lease Agreement with Carrier Central LA, Inc., as successor in interest to 600 Seventh Street Associates, Inc., dated as of August 24, 2000.10.31***+ Lease Agreement with Burlington Associates III Limited Partnership, dated as of July 24, 2000.10.32***+ Lease Agreement with Naxos Schmirdelwerk Mainkur GmbH and A.A.A. Aktiengesellschaft Allgemeine Anlageverwaltung vorm. Seilwolff AG von 1890, dated as of August 7, 2000.10.33***+ Lease Agreement with Quattrocento Limited, dated as of June 1, 2000.10.34*** Lease Agreement with ARE-2425/2400/2450 Garcia Bayshore, LLC, dated as of March 20, 2000.10.35*** First Supplement to the Lease Agreement with Naxos Schmirdelwerk Mainkur GmbH and A.A.A. Aktiengesellschaft Allgemeine Anlageverwaltung vorm. Seilwolff AG von 1890, dated as of October 11, 2000.10.37****+ Lease Agreement with Quattrocentro Limited, dated as of June 9, 2000.10.38****+ Lease Agreement with Compagnie des Entrepots et Magasins Generaux de Paris, dated as of July 18, 2000.10.39****+ Second Supplement to the Lease Agreement with Naxos Schmirdelwerk Mainkur GmbH and A.A.A. Aktiengesellschaft Allgemeine Anlageverwaltung vorm. Seilwolff AG von 1890, dated as of December 22, 2000.10.40**** Third Supplement to the Lease Agreement with Naxos Schmirdelwerk Mainkur GmbH and A.A.A. Aktiengesellschaft Allgemeine Anlageverwaltung vorm. Seilwolff AG von 1890, dated as of March 8, 2001. 38 Exhibit Number Description of Document ------- ----------------------- 10.41*****+ Fourth Supplement to the Lease Agreement with Naxos Schmirdelwerk Mainkur GmbH and A.A.A. Aktiengesellschaft Allgemeine Anlageverwaltung vorm. Seilwolff AG von 1890, acting in partnership under the name Naxos-Union Grundstucksverwaltungsgesellschaft GbR, dated as of July 3, 2001.10.42*****+ First Amendment to Deed of Lease with TrizecHahn Beaumeade Technology Center LLC, dated as of March 22, 2001.10.43*****+ First Lease Amendment Agreement with Market Halsey Urban Renewal, LLC, dated as of May 23, 2001.10.44*****+ First Amendment to Lease with Nexcomm Asset Acquisition I, L.P., dated as of April 18, 2000.10.45*****+ Amendment to Lease Agreement with Burlington Realty Associates III Limited Partnership, dated as of December 18, 2000.10.46****** First Modification to Ground Lease by and between iStar San Jose, LLC and Equinix, Inc., dated as of September 26, 2001.10.47****** Amended and Restated Credit and Guaranty Agreement, dated as of September 30, 2001.10.48****** 2001 Supplemental Stock Plan.10.49 Deed Terminating a Commercial Lease with Compagnie des Entrepots et Magasins Generaux de Paris, dated as of September 7, 2001.16.1* Letter regarding change in certifying accountant.21.1**** Subsidiaries of Equinix.24.1 Power of Attorney (see page 40).-------- * Incorporated herein by reference to the exhibit of the same number in the Registrant's Registration Statement on Form S-4 (Commission File No. 333-93749). ** Incorporated herein by reference to the exhibit of the same number in the Registrant's Registration Statement in Form S-1 (Commission File No. 333-39752). *** Incorporated herein by reference to the exhibit of the same number in the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. **** Incorporated herein by reference to the exhibit of the same number in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000. ***** Incorporated herein by reference to the exhibit of the same number in the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.****** Incorporated herein by reference to the exhibit of the same number in the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.+ Confidential treatment has been requested for certain portions which are omitted in the copy of the exhibit electronically filed with the Securities and Exchange Commission. The omitted information has been filed separately with the Securities and Exchange Commission pursuant to Equinix's application for confidential treatment. (b) Reports on Form 8-K. None. (c) Exhibits. See (a)(3) above. (d) Financial Statement Schedule. See (a)(2) above. 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has caused this Report to be signed on itsbehalf by the undersigned, thereunto duly authorized. EQUINIX, INC. (Registrant)March 25, 2002 By: /s/ PETER F. VAN CAMP __________________________________ Peter F. Van Camp Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appearsbelow constitutes and appoints Peter F. Van Camp or Renee F. Lanam, or eitherof them, each with the power of substitution, their attorney-in-fact, to signany amendments to this Form 10-K (including post-effective amendments), and tofile the same, with exhibits thereto and other documents in connectiontherewith, with the Securities and Exchange Commission, hereby ratifying andconfirming all that each of said attorneys-in-fact, or their substitute orsubstitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, thisreport has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ PETER F. VAN CAMP Chairman of the Board and Chief March 25, 2002----------------------------- Executive Officer (Principal Executive Peter F. Van Camp Officer) /s/ ALBERT M. AVERY, IV Vice-Chairman of the Board March 25, 2002----------------------------- Albert M. Avery, IV /s/ RENEE F. LANAM Chief Financial Officer, General March 25, 2002----------------------------- Counsel and Secretary Renee F. Lanam /s/ KEITH D. TAYLOR Vice President, Finance (Principal March 25, 2002----------------------------- Accounting Officer) Keith D. Taylor /s/ SCOTT KRIENS Director March 25, 2002----------------------------- Scott Kriens /s/ ANDREW S. RACHLEFF Director March 25, 2002----------------------------- Andrew S. Rachleff /s/ MICHELANGELO VOLPI Director March 25, 2002----------------------------- Michelangelo Volpi /s/ JOHN G. TAYSOM Director March 25, 2002----------------------------- John G. Taysom 40 Report of Independent AccountantsTo Board of Directors andStockholders of Equinix, Inc. In our opinion, the consolidated financial statements listed in the indexappearing under Item 14(a)(1) on page 37, present fairly, in all materialrespects, the financial position of Equinix, Inc. and its subsidiaries atDecember 31, 2001 and 2000, and the results of their operations and their cashflows for each of the three years in the period ended December 31, 2001 inconformity with accounting principles generally accepted in the United Statesof America. These financial statements are the responsibility of the Company'smanagement; our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audits of these statements inaccordance with auditing standards generally accepted in the United States ofAmerica, which require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.PricewaterhouseCoopers LLPSan Jose, CaliforniaFebruary 12, 2002, except for Note 12, which is as of March 22, 2002 F-1 EQUINIX, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) December 31, -------------------- 2001 2000 --------- --------- AssetsCurrent assets: Cash and cash equivalents................................ $ 58,831 $ 174,773 Short-term investments................................... 28,890 32,437 Accounts receivable, net of allowance for doubtful accounts of $381 and $608.............................. 6,909 4,925 Current portion of restricted cash and short-term investments............................................ 47 15,468 Prepaids and other current assets........................ 8,541 10,373 --------- --------- Total current assets................................. 103,218 237,976Property and equipment, net................................. 325,226 315,380Construction in progress.................................... 103,691 94,894Restricted cash and short-term investments, less current portion................................................... 27,997 21,387Debt issuance costs, net.................................... 11,333 11,916Other assets................................................ 3,589 1,932 --------- --------- Total assets......................................... $ 575,054 $ 683,485 ========= ========= Liabilities and Stockholders' EquityCurrent liabilities: Accounts payable and accrued expenses.................... $ 17,499 $ 13,717 Accrued construction costs............................... 34,650 89,343 Accrued interest payable................................. 2,167 2,167 Current portion of debt facilities and capital lease obligations............................................ 7,206 4,426 Other current liabilities................................ 1,807 1,646 --------- --------- Total current liabilities............................ 63,329 111,299Debt facilities and capital lease obligations, less current portion................................................... 6,344 6,506Senior secured credit facility.............................. 105,000 --Senior notes................................................ 187,882 185,908Other liabilities........................................... 8,978 4,656 --------- --------- Total liabilities.................................... 371,533 308,369 --------- ---------Commitments and contingencies (Note 8)Stockholders' equity: Common stock, $0.001 par value per share; 300,000,000 shares authorized in 2001 and 2000; 80,084,076 and 76,978,852 shares issued and outstanding in 2001 and 2000................................................... 80 77 Additional paid-in capital............................... 544,343 553,070 Deferred stock-based compensation........................ (11,022) (38,350) Accumulated other comprehensive income................... 135 1,919 Accumulated deficit...................................... (330,015) (141,600) --------- --------- Total stockholders' equity........................... 203,521 375,116 --------- --------- Total liabilities and stockholders' equity........... $ 575,054 $ 683,485 ========= ========= See accompanying notes to consolidated financial statements. F-2 EQUINIX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Year ended December 31, ------------------------------ 2001 2000 1999 --------- --------- -------- Revenues.......................................... $ 63,414 $ 13,016 $ 37 --------- --------- --------Costs and operating expenses: Cost of revenues (includes stock-based compensation of $426, $766 and $177 for the years ended December 31, 2001, 2000, and 1999 respectively)........................... 94,889 43,401 3,268 Sales and marketing (includes stock-based compensation of $2,830, $6,318, and $1,631 for the years ended December 31, 2001, 2000, and 1999 respectively)....................... 16,935 20,139 3,949 General and administrative (includes stock-based compensation of $15,788, $22,809, and $4,819 for the years ended December 31, 2001, 2000, and 1999, respectively)................................ 58,286 56,585 12,603 Restructuring charge........................... 48,565 -- -- --------- --------- -------- Total costs and operating expenses......... 218,675 120,125 19,820 --------- --------- -------- Loss from operations........................... (155,261) (107,109) (19,783)Interest income................................... 10,656 16,430 2,138Interest expense.................................. (43,810) (29,111) (3,146) --------- --------- --------Net loss.......................................... $(188,415) $(119,790) $(20,791) ========= ========= ========Net loss per share: Basic and diluted.............................. $ (2.39) $ (3.48) $ (4.98) ========= ========= ======== Weighted average shares........................ 78,681 34,461 4,173 ========= ========= ======== See accompanying notes to consolidated financial statements. F-3 EQUINIX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 2001 (in thousands, except share data ) Accumulated Common stock Additional Deferred other Total ------------------ paid-in stock-based comprehensive Accumulated stockholders' Shares Amount capital compensation income (loss) deficit equity ---------- ------ ---------- ------------ ------------- ----------- ------------- Balances as of December 31, 1998......... 6,150,000 $ 6 $ 1,140 $ (972) $ -- $ (1,019) $ (845)Issuance of common stock upon exercise of common stock options................. 5,522,196 6 1,280 -- -- -- 1,286Issuance of common stock warrants........ -- -- 22,181 -- -- -- 22,181Deferred stock-based compensation, net of forfeitures.......................... -- -- 19,361 (19,361) -- -- --Amortization of stock-based compensation. -- -- -- 6,627 -- -- 6,627Comprehensive income (loss): Net loss.............................. -- -- -- -- -- (20,791) (20,791) Unrealized appreciation on short-term investments............... -- -- -- -- 14 -- 14 ---------- --- -------- -------- ------- --------- --------- Net comprehensive loss................ -- -- -- -- 14 (20,791) (20,777) ---------- --- -------- -------- ------- --------- ---------Balances as of December 31, 1999......... 11,672,196 12 43,962 (13,706) 14 (21,810) 8,472Issuance of common stock for cash........ 115,213 -- 1,033 -- -- -- 1,033Issuance of common stock upon exercise of common stock options................. 1,420,914 1 2,471 -- -- -- 2,472Issuance of common stock upon exercise of common stock warrants................ 708,059 -- 353 -- -- -- 353Issuance of common stock from initial public offering, net.................... 22,704,596 23 251,459 -- -- -- 251,482Conversion of redeemable convertible preferred stock......................... 40,704,222 41 191,539 191,580Issuance/revaluation of common stock warrants................................ -- -- 7,744 -- -- -- 7,744Repurchase of unvested common stock...... (346,348) -- (28) -- -- -- (28)Deferred stock-based compensation, net of forfeitures.......................... -- -- 54,537 (54,537) -- -- --Amortization of stock-based compensation. -- -- -- 29,893 -- -- 29,893Comprehensive income (loss): Net loss.............................. -- -- -- -- -- (119,790) (119,790) Foreign currency translation gain..... -- -- -- -- 1,992 -- 1,992 Unrealized depreciation on short-term investments............... -- -- -- -- (87) -- (87) ---------- --- -------- -------- ------- --------- --------- Net comprehensive loss................ -- -- -- -- 1,905 (119,790) (117,885) ---------- --- -------- -------- ------- --------- ---------Balances as of December 31, 2000......... 76,978,852 77 553,070 (38,350) 1,919 (141,600) 375,116Issuance of common stock upon exercise of common stock options................. 496,663 -- 435 -- -- -- 435Issuance of common stock upon exercise of common stock warrants................ 2,332,668 2 (2) -- -- -- --Issuance of common stock under employee stock purchase plan..................... 525,678 1 1,483 -- -- -- 1,484Repurchase of unvested common stock...... (249,785) -- (18) -- -- -- (18)Issuance/revaluation of common stock warrants................................ -- -- (2,341) -- -- -- (2,341)Deferred stock-based compensation, net of forfeitures.......................... -- -- (8,284) 8,284 -- -- --Amortization of stock-based compensation. -- -- -- 19,044 -- -- 19,044Comprehensive income (loss): Net loss.............................. -- -- -- -- -- (188,415) (188,415) Foreign currency translation loss..... -- -- -- -- (1,873) -- (1,873) Unrealized appreciation on short-term investments............... -- -- -- -- 89 -- 89 ---------- --- -------- -------- ------- --------- --------- Net comprehensive loss................ -- -- -- -- (1,784) (188,415) (190,199) ---------- --- -------- -------- ------- --------- ---------Balances as of December 31, 2001......... 80,084,076 $80 $544,343 $(11,022) $ 135 $(330,015) $ 203,521 ========== === ======== ======== ======= ========= ========= See accompanying notes to consolidated financial statements. F-4 EQUINIX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year ended December 31, ------------------------------ 2001 2000 1999 --------- --------- -------- Cash flows from operating activities: Net loss....................................... $(188,415) $(119,790) $(20,791) Adjustments to reconcile net loss to net cash used in operating activities:................ Depreciation................................... 49,645 14,816 609 Amortization of deferred stock-based compensation................................. 19,044 29,893 6,627 Amortization of debt-related issuance costs and discounts................................ 7,195 8,445 1,010 Allowance for doubtful accounts................ 521 608 -- Issuance of common stock to charity............ -- 780 -- Restructuring charge........................... 48,565 -- --Changes in operating assets and liabilities: Accounts receivable.......................... (2,505) (5,355) (178) Prepaids and other current assets............ 2,001 (8,776) (1,429) Other assets................................. (1,657) (354) (1,244) Accounts payable and accrued expenses........ (2,742) 9,574 4,481 Accrued restructuring charge................. (2,088) -- -- Other current liabilities.................... 161 1,441 205 Other liabilities............................ 1,421 645 802 --------- --------- -------- Net cash used in operating activities....... (68,854) (68,073) (9,908) --------- --------- --------Cash flows from investing activities: Purchase of short-term investments............... (168,411) (114,968) (22,812) Sales and maturities of short-term investments... 172,047 102,253 8,017 Purchases of property and equipment.............. (57,791) (296,320) (28,241) Additions to construction in progress............ (44,343) (74,448) (14,145) Accrued construction costs....................... (54,693) 79,571 9,520 Purchase of restricted cash and short-term investments.................................... (25,020) (24,246) (38,609) Sale of restricted cash and short-term investments.................................... 25,197 26,000 -- --------- --------- -------- Net cash used in investing activities.......... (153,014) (302,158) (86,270) --------- --------- --------Cash flows from financing activities: Proceeds from issuance of common stock........... 1,918 254,560 1,286 Proceeds from issuance of debt facilities and capital lease obligations...................... 8,004 6,884 16,114 Repayment of debt facilities and capital lease obligations.................................... (5,559) (9,955) (988) Proceeds from senior secured credit facility..... 150,000 -- -- Repayment of senior secured credit facility...... (45,000) -- -- Proceeds from senior notes and common stock warrants, net.................................. -- -- 193,890 Repurchase of common and preferred stock......... (18) (28) (10) Proceeds from issuance of redeemable convertible preferred stock, net........................... -- 94,353 84,886 Debt issuance costs.............................. (1,546) (5,967) -- --------- --------- -------- Net cash provided by financing activities...... 107,799 339,847 295,178 --------- --------- --------Effect of foreign currency exchange rates on cash and cash equivalents............................. (1,873) 1,992 --Net increase (decrease) in cash and cash equivalents...................................... (115,942) (28,392) 199,000Cash and cash equivalents at beginning of year.... 174,773 203,165 4,165 --------- --------- --------Cash and cash equivalents at end of year.......... $ 58,831 $ 174,773 $203,165 ========= ========= ======== Noncash financing and investing activities: Cash paid for taxes............................ $ 18 $ -- $ 68 ========= ========= ======== Cash paid for interest......................... $ 38,103 $ 28,876 $ 153 ========= ========= ======== See accompanying notes to consolidated financial statements. F-5 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Nature of Business and Summary of Significant Accounting PoliciesNature of Business Equinix, Inc. ("Equinix" or the "Company") was incorporated as QuarkCommunications, Inc. in Delaware on June 22, 1998. The Company changed its nameto Equinix, Inc. on October 13, 1998. Equinix designs, builds, and operatesneutral Internet Business Exchange ("IBX") hubs where enterprises and Internetbusinesses place their equipment and their network facilities in order tointerconnect with each other to grow their businesses and to improve Internetperformance. The Company's neutral IBX hubs place our customers' operations ata central location and provide them with the highest level of security,multiple back-up services, flexibility to grow and technical assistance. TheCompany's neutral IBX hubs provide enterprises, content providers, ASPs ande-commerce companies with the ability to directly interconnect with acompetitive choice of bandwidth providers, ISPs, site management companies andcontent distribution companies. The accompanying consolidated financial statements have been preparedassuming the Company will continue as a going concern. Since its inception, theCompany has been successful in completing several rounds of financing. Duringthe same period, the Company has incurred substantial losses and negative cashflows from operations in every fiscal period since inception. For the yearended December 31, 2001, the Company incurred a loss from operations of $155.3million and negative cash flows from operations of $68.9 million. As ofDecember 31, 2001, the Company had an accumulated deficit of $330.0 million.For the year ended December 31, 2000, the Company incurred a loss fromoperations of $107.1 million and negative cash flows from operations of $68.1million. The Company expects that cash on hand and anticipated cash flow fromoperations should be sufficient to complete its seventh IBX hub during thefirst quarter of 2002. The Company anticipates that its existing cash and thecash flow generated from the seven IBX hubs, for which the Company has obtainedfinancing, will be sufficient to meet the working capital, debt service andcorporate overhead requirements associated with those IBX hubs for the nexttwelve months. Assuming sufficient customer demand and the availability ofadditional financing, the Company may build or buy additional IBX hubs andexpand certain existing IBX hubs. If the Company cannot raise additional fundson acceptable terms or losses exceed the Company's expectations, the Companymay delay or permanently reduce its rollout plans or implement other costsaving initiatives in order to preserve cash. In October 2001, the Company amended and restated the Senior Secured CreditFacility (see Note 5). The Amended and Restated Senior Secured Credit Facilitycontains numerous financial covenants including achieving specified revenuetargets at levels significantly above historical revenues, achieving certainEBITDA targets, maintaining minimum cash balances and limiting the amount ofcapital expenditures. The Company is in full compliance with all of thesefinancial covenants and ratios as of December 31, 2001; however, if the Companydoes not achieve the specified revenue growth required by its financialcovenants or is unable to maintain these ratios and comply with thesecovenants, the Company may be required to repay the $105.0 million currentlyoutstanding under this facility and will not be able to draw down the remaining$20.0 million of the Amended and Restated Senior Secured Credit Facility. TheCompany does not currently have sufficient cash reserves to repay such amounts.In addition, the inability to draw down the remaining $20.0 million under thisfacility may not provide sufficient funds for the Company to support itsspending needs and could adversely affect the business and the Company'sability to continue as a going concern. During the first quarter of 2002, the Company retired $25.0 million of theSenior Notes (see Note 4) in exchange for approximately 9.3 million shares ofcommon stock (see Note 12). F-6 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)Stock Split In January 2000, the Company's stockholders approved a three-for-two stocksplit effective January 19, 2000 whereby three shares of common stock andredeemable convertible preferred stock, respectively, were exchanged for everytwo shares of common stock and redeemable convertible preferred stock thenoutstanding. All share and per share amounts in these financial statements havebeen adjusted to give effect to the stock split.Basis of Presentation The accompanying consolidated financial statements include the accounts ofEquinix and its subsidiaries. All significant intercompany accounts andtransactions have been eliminated in consolidation.Use of Estimates The preparation of consolidated financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from these estimates.Cash, Cash Equivalents and Short-Term Investments The Company considers all highly liquid instruments with an originalmaturity from the date of purchase of three months or less to be cashequivalents. Cash equivalents consist of money market mutual funds andcertificates of deposit with financial institutions with maturities of between7 and 60 days. Short-term investments generally consist of certificates ofdeposits with maturities of between 90 and 180 days and highly liquid debt andequity securities of corporations, municipalities and the U.S. government.Short-term investments are classified as "available-for-sale" and are carriedat fair value based on quoted market prices with unrealized gains and lossesreported in stockholders' equity as a component of comprehensive income. Thecost of securities sold is based on the specific identification method.Restricted Cash and Short-term Investments Restricted cash and short-term investments as of December 31, 2001,consisted of $28,044,000, which was used as collateral to support the issuanceof ten standby letters of credit in lieu of deposits under certain domesticlease agreements, including two letters of credit posted in connection withCompany's unimproved property in San Jose, California (see Note 8). These leaseagreements have expiration terms at various dates through 2020. During thequarter ended September 30, 2001, the Company recorded a restructuring chargeas part of its revised European services strategy. Part of this restructuringcharge included the write-off of $8,634,000 related to several letters ofcredit related to the Company's long-term European operating leases (see Note11). Restricted cash and short-term investments as of December 31, 2000,consisted of $12,801,000 deposited with an escrow agent to pay the thirdinterest payment on the Senior Notes (see Note 4) and restricted cash of$24,054,000 as collateral for the issuance of twelve standby letters of credit,two bonds and three escrow accounts entered into and pursuant to certain leaseagreements. These lease agreements expire at various dates through 2020. F-7 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)Financial Instruments and Concentration of Credit Risk Financial instruments, which potentially subject the Company toconcentrations of credit risk, consist of cash, cash equivalents and short-terminvestments to the extent these exceed federal insurance limits and accountsreceivable. Risks associated with cash, cash equivalents and short-terminvestments are mitigated by the Company's investment policy, which limits theCompany's investing to only those marketable securities rated at least A-1 orP-1 investment grade, as determined by independent credit rating agencies. The Company's customer base is primarily composed of businesses throughoutthe United States. The Company performs ongoing credit evaluations of itscustomers. As of December 31, 2001, one customer accounted for 15% of revenuesand another customer accounted for 10% of accounts receivables. As of December31, 2000, two customers accounted for 12% and 11% of revenues and two customersaccounted for 19% and 14% of accounts receivables. No other single customeraccounted for greater than 10% of accounts receivables or revenues.Property and Equipment Property and equipment are stated at original cost. Depreciation is computedusing the straight-line method over the estimated useful lives of therespective assets, generally two to five years for non-IBX hub equipment andseven to ten years for IBX hub equipment. Leasehold improvements and assetsacquired under capital lease are amortized over the shorter of the lease termor the estimated useful life of the asset or improvement.Construction in Progress Construction in progress includes direct and indirect expenditures for theconstruction of IBX hubs and is stated at original cost. The Company hascontracted out substantially all of the construction of the IBX hubs toindependent contractors under construction contracts. Construction in progressincludes certain costs incurred under a construction contract including projectmanagement services, site identification and evaluation services, engineeringand schematic design services, design development and construction services andother construction-related fees and services. In addition, the Company hascapitalized certain interest costs during the construction phase. Once an IBXhub becomes operational, these capitalized costs are depreciated at theappropriate rate consistent with the estimated useful life of the underlyingasset. Included within construction in progress is the value attributed to theunearned portion of warrants issued to certain fiber carriers and ourcontractor totaling $1,439,000 as of December 31, 2001 and $6,270,000 as ofDecember 31, 2000 (see Note 6). Interest incurred is capitalized in accordance with Statement of FinancialAccounting Standards ("SFAS") No. 34, Capitalization of Interest Costs. Totalinterest cost incurred and total interest capitalized during the year endedDecember 31, 2001, was $45,350,000 and $1,540,000, respectively. Total interestcost incurred and total interest capitalized during the year ended December 31,2000 was $34,102,000 and $4,991,000, respectively. Total interest cost incurredand total interest capitalized during the year ended December 31, 1999 was$3,324,000 and $177,000, respectively. During the quarter ended September 30, 2001, the Company recorded arestructuring charge as part of its revised European services strategy. Part ofthis restructuring charge included the write-down of $29,260,000 in Europeanconstruction in progress assets to their net realizable value (see Note 11). F-8 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)Fair Value of Financial Instruments The carrying value amounts of the Company's financial instruments, whichinclude cash equivalents, short-term investments, accounts receivable, accountspayable, accrued expenses and long-term obligations approximate their fairvalue due to either the short-term maturity or the prevailing interest rates ofthe related instruments. The fair value of the Company's Senior Notes (see Note4) is based on quoted market prices. The estimated fair value of the SeniorNotes is approximately $70.0 million as of December 31, 2001. During the firstquarter of 2002, the Company retired $25.0 million of the Senior Notes inexchange for approximately 9.3 million shares of common stock (see Note 12).Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of In accordance with SFAS No. 121, Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to Be Disposed Of, the Company considers theimpairment of long-lived assets and certain identifiable intangibles wheneverevents or changes in circumstances indicate that the carrying amount of suchassets may not be recoverable. Recoverability of assets to be held and used ismeasured by a comparison of the carrying amount of an asset to future net cashflows expected to be generated by the asset. If such assets are considered tobe impaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of the assets. Assetsto be disposed of are reported at the lower of the carrying amount or fairvalue less costs to sell. During the quarter ended September 30, 2001, theCompany wrote-down the value of its European construction in progress to itsnet realizable value as part of a larger restructuring charge in conjunctionwith a revised European services strategy (see Note 11). In December 2000,based on the uncertainty of the Company's future business relationship withNorthPoint (see Note 6), as a result of their filing under Chapter 11bankruptcy protection, the Company determined that the future value of theother asset attributed to the unamortized portion of the fully-vested,nonforfeitable warrant was questionable and accordingly, the remaining assettotaling approximately $700,000 was written off. No impairment of long-livedassets was recorded as of December 31, 1999.Revenue Recognition Equinix derives its revenues from (1) recurring revenue streams, such asfrom the leasing of cabinet space, power and interconnection services and (2)non-recurring revenue streams, such as from the recognized portion of deferredinstallation revenues and professional services. Revenues from recurringrevenue streams are billed monthly and recognized ratably over the term of thecontract, generally one to three years. Non-recurring installation fees aredeferred and recognized ratably over the term of the related contract.Professional service fees are recognized in the period in which the serviceswere provided and represent the culmination of the earnings process. TheCompany generally guarantees certain service levels, such as uptime, asoutlined in individual customer contracts. To the extent that these servicelevels are not achieved, the Company reduces revenue for any credits given tothe customer as a result. Revenue is recognized as service is provided when there is persuasiveevidence of an arrangement, the fee is fixed or determinable and collection ofthe receivable is reasonably assured. The Company assesses collection based ona number of factors, including past transaction history with the customer andthe credit-worthiness of the customer. The Company does not request collateralfrom our customers. If the Company determines that collection of a fee is notreasonably assured, the Company defers the fee and recognizes revenue at thetime collection becomes reasonably assured, which is generally upon receipt ofcash. In addition, Equinix also maintains an allowance for doubtful accountsfor estimated losses resulting from the inability of its customers to makerequired payments for those customers that the Company had expected to collectthe revenues. If the financial condition of Equinix's customers were todeteriorate or if they become insolvent, resulting in an F-9 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)impairment of their ability to make payments, allowances for doubtful accountsmay be required. Management specifically analyzes accounts receivable andanalyzes current economic news and trends, historical bad debts, customerconcentrations, customer credit-worthiness and changes in customer paymentterms when evaluating revenue recognition and the adequacy of the Company'sreserves. During the year ended December 31, 2001, the Company recognizedapproximately $200,000 of revenue in relation to equipment received fromcustomers in lieu of cash. This equipment is being used in the Company'soperations and was valued based on management's assessment of the fair value ofthe equipment in relation to external prices for similar equipment. Subsequent to year-end, the Company entered into arrangements with numerousvendors to resell equipment and bandwidth (see Note 12).Income Taxes Income taxes are accounted for under the asset and liability method.Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between financial statement carryingamounts of existing assets and liabilities and their respective tax bases andoperating loss and tax credit carryforwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in income in the period that includes theenactment date. Valuation allowances are established when necessary to reducetax assets to the amounts expected to be realized.Stock-Based Compensation The Company accounts for its stock-based compensation plans in accordancewith SFAS No. 123, Accounting for Stock-Based Compensation. As permitted underSFAS No. 123, the Company uses the intrinsic value-based method of AccountingPrinciples Board ("APB") Opinion No. 25, Accounting for Stock Issued toEmployees, to account for its employee stock-based compensation plans. The Company accounts for stock-based compensation arrangements withnonemployees in accordance with the Emerging Issues Task Force ("EITF")Abstract No. 96-18, Accounting for Equity Instruments That Are Issued to OtherThan Employees for Acquiring, or in Conjunction with Selling Goods or Services.Accordingly, unvested options and warrants held by nonemployees are subject torevaluation at each balance sheet date based on the then current fair marketvalue. Unearned deferred compensation resulting from employee and nonemployeeoption grants is amortized on an accelerated basis over the vesting period ofthe individual options, in accordance with FASB Interpretation No. 28,Accounting for Stock Appreciation Rights and Other Variable Stock Option orAward Plans ("FASB Interpretation No. 28").Segment Reporting The Company has adopted the provisions of SFAS No. 131, Disclosures aboutSegments of an Enterprise and Related Information. SFAS No. 131 establishesannual and interim reporting standards for operatingsegments of a company. The statement requires disclosures of selectedsegment-related financial information about products, major customers andgeographic areas. F-10 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)Comprehensive Income The Company has adopted the provisions of SFAS No. 130, ReportingComprehensive Income. SFAS No. 130 establishes standards for the reporting anddisplay of comprehensive income and its components; however, the adoption ofthis statement had no impact on the Company's net loss or stockholders' equity.SFAS No. 130 requires unrealized gains or losses on the Company'savailable-for-sale securities to be included in other comprehensive income(loss). Comprehensive income (loss) consists of net loss and othercomprehensive income.Net Loss Per Share The Company computes net loss per share in accordance with SFAS No. 128,Earnings per Share, and SEC Staff Accounting Bulletin ("SAB") No. 98. Under theprovisions of SFAS No. 128 and SAB No. 98 basic and diluted net loss per shareare computed using the weighted average number of common shares outstanding.Options, warrants and preferred stock were not included in the computation ofdiluted net loss per share because the effect would be antidilutive. The following table sets forth the computation of basic and diluted net lossper share for the periods indicated. Year ended Year ended Year ended December 31, December 31, December 31, 2001 2000 1999 ------------- ------------- ------------  Numerator: Net loss.............................. $(188,415,000) $(119,790,000) $(20,791,000) ============= ============= ============Denominator: Weighted average shares............... 81,500,614 40,672,055 8,751,001 Weighted average unvested shares subject to repurchase............... (2,819,486) (6,211,392) (4,578,122) ------------- ------------- ------------ Total weighted average shares..... 78,681,128 34,460,663 4,172,879 ============= ============= ============Net loss per share: Basic and diluted................. $ (2.39) $ (3.48) $ (4.98) ============= ============= ============ The following table sets forth potential shares of common stock that are notincluded in the diluted net loss per share calculation above because to do sowould be anti-dilutive for the periods indicated: Year ended Year ended Year ended December 31, December 31, December 31, 2001 2000 1999 ------------ ------------ ------------ Series A redeemable convertible preferred stock.. -- -- 18,682,500Series B redeemable convertible preferred stock.. -- -- 15,759,561Series A preferred stock warrants................ -- -- 1,245,000Common stock warrants............................ 2,106,600 3,707,245 1,365,645Common stock options............................. 20,860,963 8,893,292 2,615,394Common stock subject to repurchase............... 2,819,486 6,211,392 4,578,122 Derivatives and Hedging Activities The Company adopted SFAS No. 133, Accounting for Derivative Instruments andHedging Activities, as amended, at the beginning of its fiscal year 2001. Thestandard requires the Company to recognize all derivatives F-11 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)on the balance sheet at fair value. Derivatives that are not hedges must beadjusted to fair value through the statement of operations. If the derivativeis a hedge, depending on the nature of the hedge, changes in the fair value ofderivatives will either be offset against the change in fair value of thehedged assets, liabilities or firm commitments through earnings, or recognizedin other comprehensive income (loss) until the hedged item is recognized inearnings. The ineffective portion of a derivative's change in fair value willbe immediately recognized in earnings. The adoption of SFAS No. 133 did nothave a material effect on the financial statements of the Company. As ofDecember 31, 2001, the Company had not entered into any derivative or hedgingactivities.Recent Accounting Pronouncements In July 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS141") and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 supercedes Accounting Principles Board Opinion No. 16 ("APB 16"),Business Combinations, and is effective for all business combinations initiatedafter June 30, 2001 and for all business combinations accounted for by thepurchase method for which the date of acquisition is after June 30, 2001. Oneof the most significant changes made by SFAS 141 is to require the use of thepurchase method of accounting for all business combinations initiated afterJune 30, 2001. SFAS 142 supercedes Accounting Principles Board Opinion No. 17 ("APB 17"),Intangible Assets, but will carry forward provisions in APB 17 related tointernally developed intangible assets. SFAS 142 primarily addresses theaccounting for goodwill and intangible assets subsequent to their acquisitionand is effective for fiscal years beginning after December 15, 2001. The mostsignificant changes made by SFAS 142 that could impact the Company are: (1)goodwill and indefinite lived intangible assets will no longer be amortized and(2) goodwill will be tested for impairment at least annually at the reportingunit level. The Company does not expect the adoption of either SFAS 141 or SFAS 142 willhave a material effect on its consolidated financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for theImpairment or Disposal of Long-Lived Assets". SFAS 144 supercedes SFAS 121,"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of." SFAS 144 applies to all long-lived assets (includingdiscontinued operations) and consequently amends Accounting Principles BoardOpinion No. 30. SFAS 144 develops one accounting model for long-lived assetsthat are to be disposed of by sale. SFAS 144 requires that long-lived assetsthat are to be disposed of by sale be measured at the lower of book value orfair value less cost to sell. Additionally, SFAS 144 expands the scope ofdiscontinued operations to include all components of an entity with operationsthat (1) can be distinguished from the rest of the entity and (2) will beeliminated from the ongoing operations of the entity in a disposal transaction.SFAS 144 is effective for the Company for all financial statements issued infiscal 2002. The Company is currently evaluating the impacts of the adoption ofSFAS 144 to its financial statements. In November 2001, the FASB Emerging Issues Task Force ("EITF") reached aconsensus on EITF Issue 01-09, Accounting for Consideration Given by a Vendorto a Customer or a Reseller of the Vendor's Products, which is a codificationof EITF 00-14, 00-22 and 00-25. This issue presumes that consideration from avendor to a customer or reseller of the vendor's products to be a reduction ofthe selling prices of the vendor's products and, therefore, should becharacterized as a reduction of revenue when recognized in the vendor's incomestatement and could lead to negative revenue under certain circumstances.Revenue reduction is required unless consideration relates to a separateidentifiable benefit and the benefit's fair value can be established. This F-12 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)issue should be applied no later than in annual or interim financial statementsfor periods beginning after December 15, 2001, which is our first quarter endedMarch 31, 2002. Upon adoption we are required to reclassify all prior periodamounts to conform to the current period presentation. We have not yetevaluated the effects of these changes on our consolidated financial statements.2. Balance Sheet ComponentsCash, Cash Equivalents and Short-term Investments Cash, cash equivalents and short-term investments consisted of the followingas of December 31 (in thousands): 2001 2000 -------- --------- Money market............................................... $ 26,864 $ 72,325Municipal bonds............................................ 12,833 19,557US government and agency obligations....................... 14,397 19,049Corporate bonds............................................ 4,116 2,024Other securities........................................... 29,511 94,255 -------- --------- Total available-for-sale securities..................... 87,721 207,210 Less amounts classified as cash and cash equivalents.... (58,831) (174,773) -------- --------- Total market value of short-term investments............ $ 28,890 $ 32,437 ======== ========= The original maturities of short-term investments are as follows as ofDecember 31 (in thousands): 2001 2000 ------- ------- Less than one year......................................... $25,320 $32,437 Due in 1-2 years........................................... 3,570 -- ------- ------- Total market value of short-term investments............ $28,890 $32,437 ======= ======= As of December 31, 2001 and 2000, cost approximated market value of cash,cash equivalents and short-term investments; unrealized gains and losses were again of $17,000 as of December 31, 2001 and a loss of $73,000 as of December31, 2000. As of December 31, 2001 and 2000, cash equivalents includedinvestments in other securities with various contractual maturity dates that donot exceed 90 days. Gross realized gains and losses from the sale of securitiesclassified as available-for-sale were not material for the years endedDecember 31, 2001 and 2000. For the purpose of determining gross realized gainsand losses, the cost of securities is based upon specific identification.Accounts Receivable Accounts receivable, net, consists of the following as of December 31 (inthousands): 2001 2000 ------- ------- Accounts receivable........................................ $12,868 $ 8,670 Unearned revenue........................................... (5,578) (3,137) Allowance for doubtful accounts............................ (381) (608) ------- ------- $ 6,909 $ 4,925 ======= ======= F-13 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Unearned revenue consists of pre-billing for services that have not yet beenprovided, but which have been billed to customers ahead of time in accordancewith the terms of their contract. Accordingly, the Company invoices itscustomers at the end of a calendar month for services to be provided thefollowing month.Property & Equipment Property and equipment is comprised of the following as of December 31 (inthousands): 2001 2000 -------- -------- Leasehold improvements..................................... $285,090 $243,851IBX plant and machinery.................................... 54,194 51,305Computer equipment and software............................ 11,306 12,438IBX equipment.............................................. 28,704 21,960Furniture and fixtures..................................... 2,533 1,241 -------- -------- 381,827 330,795Less accumulated depreciation.............................. (56,601) (15,415) -------- -------- $325,226 $315,380 ======== ======== Leasehold improvements, certain computer equipment, software and furnitureand fixtures recorded under capital leases aggregated $5,779,000 and $5,999,000as of December 31, 2001 and 2000, respectively. Amortization on the assetsrecorded under capital leases is included in depreciation expense. Included within leasehold improvements is the value attributed to the earnedportion of several warrants issued to certain fiber carriers and our contractortotaling $8,105,000 and $5,761,000 as of December 31, 2001 and 2000,respectively (see Note 6). Amortization of such warrants is included indepreciation expense. The Company has included $2,234,000 of equipment held for resale withinother current assets on the accompanying balance sheet as of December 31, 2001.This represents the estimated net realizable value of assets purchased duringthe pre-construction phase of the European IBX hubs that are now being held forresale that were written down as part of a larger restructuring charge inconjunction with a revised European services strategy (see Note 11).Restricted Cash and Short-term Investments Restricted cash and short-term investments consisted of the following as ofDecember 31 (in thousands): 2001 2000 ------- -------- Certificates of deposit: Due within one year..................................... $ 47 $ 15,468 Due after one year through two years.................... -- 21,387 Restricted cash in U.S. treasury notes..................... 15,450 -- Restricted cash in money market funds...................... 12,547 -- ------- -------- 28,044 36,855 Less current portion....................................... (47) (15,468) ------- -------- $27,997 $ 21,387 ======= ======== F-14 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of December 31, 2001 and 2000, cost approximated market value ofrestricted cash and short-term investments; unrealized gains and losses werenot significant.Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consisted of the following as ofDecember 31 (in thousands): 2001 2000 ------- ------- Accounts payable........................................... $ 4,242 $ 8,270 Accrued restructuring charge............................... 6,390 -- Accrued compensation and benefits.......................... 2,934 2,613 Accrued taxes.............................................. 1,296 52 Accrued other.............................................. 2,637 2,782 ------- ------- $17,499 $13,717 ======= =======3. Debt Facilities and Capital Lease Obligations Debt facilities and capital lease obligations consisted of the following asof December 31 (in thousands): 2001 2000 ------- ------- Venture Leasing Loan Agreement (net of unamortized discount of $392 and $727 as of December 31, 2001 and 2000, respectively)........................... $ 3,658 $ 6,138Comdisco Master Lease Agreement and Addendum (net of unamortized discount of $221 and $412 as of December 31, 2001 and 2000, respectively).......... 3,374 4,794Heller Loan (net of unamortized discount of $15 and none as of December 31, 2001 and 2000, respectively).............................................. 4,183 --Wells Fargo Loan............................................................ 2,335 -- ------- ------- 13,550 10,932Less current portion........................................................ (7,206) (4,426) ------- ------- $ 6,344 $ 6,506 ======= =======Comdisco Loan and Security Agreement In March 1999, one of the Company's subsidiaries entered into a $7,000,000Loan and Security Agreement with Comdisco, Inc. ("Comdisco" and the "ComdiscoLoan and Security Agreement"). In December 2000, the outstanding principal andinterest balance under this facility, including the final balloon interestpayment, was repaid in full. Under the terms of the Comdisco Loan and SecurityAgreement, Comdisco agreed to lend the Company up to $3,000,000 for equipment(referred to as the "hard" loan) and up to $4,000,000 for software and tenantimprovements ("soft" loan) for the Ashburn, Virginia IBX hub buildout. Theloans, which were collateralized by the assets of the Ashburn IBX, wereavailable in minimum advances of $1,000,000 and each loan was evidenced by asecured promissory note. The hard and soft loans issued beared interest atrates of 7.5% and 9% per annum, respectively, and were repayable in 42 and 36equal monthly installments, respectively, plus a final balloon interest paymentequal to 15% of the original advance amount. The Comdisco Loan and SecurityAgreement had an effective interest rate of 18.1% per annum. In connection with the Comdisco Loan and Security Agreement, the Companygranted Comdisco a warrant to purchase 765,000 shares of the Company's Series Aredeemable convertible preferred stock at $0.67 per share F-15 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)(the "Comdisco Loan and Security Agreement Warrant"). This warrant isimmediately exercisable and expires in ten years from the date of grant. Thefair value of the warrant, using the Black-Scholes option pricing model withthe following assumptions: deemed fair market value per share of $1.80,dividend yield of 0%, expected volatility of 80%, risk-free interest rate of5.0% and a contractual life of 10 years, was $1,255,000. Such amount wasrecorded as a discount to the applicable debt, and was being amortized tointerest expense, using the effective interest method, over the life of theagreement. The remaining unamortized discount was amortized when the loan waspaid in full in December 2000.Comdisco Master Lease Agreement In May 1999, the Company entered into a Master Lease Agreement with Comdisco(the "Comdisco Master Lease Agreement"). Under the terms of the Comdisco MasterLease Agreement, the Company sells equipment to Comdisco, which it will thenlease back. The amount of financing to be provided is up to $1,000,000.Repayments are made monthly over 42 months with a final balloon interestpayment equal to 15% of the balance amount due at maturity. Interest accrues at7.5% per annum. The Comdisco Master Lease Agreement has an effective interestrate of 14.6% per annum. As of December 31, 2001, $461,000 was outstandingunder the Comdisco Master Lease Agreement. The Company leases certain leasehold improvements, computer equipment andsoftware and furniture and fixtures under capital leases under the ComdiscoMaster Lease Agreement. These leases were entered into as sales-leasebacktransactions. The Company deferred a gain of $78,000 related to thesale-leaseback in July 1999, and a deferred loss of $19,000 related to thesale-leasebacks in fiscal 2000, which is being amortized in proportion to theamortization of the leased assets. In connection with the Comdisco Master Lease Agreement, the Company grantedComdisco a warrant to purchase 30,000 shares of the Company's Series Aredeemable convertible preferred stock at $1.67 per share (the "Comdisco MasterLease Agreement Warrant"). This warrant is immediately exercisable and expiresin ten years from the date of grant. The fair value of the warrant using theBlack-Scholes option pricing model with the following assumptions: deemed fairmarket value per share of $3.00, dividend yield 0%, expected volatility of 80%,risk-free interest rate of 5.0% and a contractual life of 10 years, was$80,000. Such amount was recorded as a discount to the applicable capital leaseobligation, and is being amortized to interest expense, using the effectiveinterest method, over the life of the agreement.Comdisco Master Lease Agreement Addendum In August 1999, the Company amended the Comdisco Master Lease Agreement.Under the terms of the Comdisco Master Lease Agreement Addendum, the Companysells equipment (hard items) and software and tenant improvements (soft items)in its San Jose IBX hub to Comdisco, which it then leases back. The amount offinancing available under the Comdisco Master Lease Agreement Addendum is up to$2,150,000 for hard items and up to $2,850,000 for soft items. Amounts drawnunder this addendum will be collateralized by the underlying hard and softassets of the San Jose IBX hub that were funded under the Comdisco Master LeaseAgreement Addendum. Repayments are made monthly over the course of 42 months.Interest accrues at 8.5% per annum, with a final balloon interest payment equalto 15% of the original acquisition cost of the property financed. The ComdiscoMaster Lease Agreement Addendum has an effective interest rate of 15.3% perannum. As of December 31, 2001, $3,134,000 was outstanding under the ComdiscoMaster Lease Agreement Addendum. In connection with the Comdisco Master Lease Agreement Addendum, the Companygranted Comdisco a warrant to purchase 150,000 shares of the Company's Series Aredeemable convertible preferred stock at $3.00 F-16 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)per share (the "Comdisco Master Lease Agreement Addendum Warrant"). Thiswarrant is immediately exercisable and expires in seven years from the date ofgrant or three years from the effective date of the Company's initial publicoffering, whichever is shorter. The fair value of the warrant using theBlack-Scholes option pricing model with the following assumptions: deemed fairmarket value per share of $4.80, dividend yield 0%, expected volatility of 80%,risk-free interest rate of 5.0% and a contractual life of seven years, was$587,000. Such amount was recorded as a discount to the applicable capitallease obligation, and is being amortized to interest expense, using theeffective interest method, over the life of the agreement.Venture Leasing Loan Agreement In August 1999, the Company entered into a Loan Agreement with VentureLending & Leasing II, Inc. and other lenders ("VLL" and the "Venture LeasingLoan Agreement"). The Venture Leasing Loan Agreement provides financing forequipment and tenant improvements at the Newark, New Jersey IBX hub and asecured term loan facility for general working capital purposes. The amount offinancing to be provided is up to $10,000,000, which may be used to finance upto 85% of the projected cost of tenant improvements and equipment for theNewark IBX hub and is collateralized by the assets of the Newark IBX. Notesissued bear interest at a rate of 8.5% per annum and are repayable in 42monthly installments plus a final balloon interest payment equal to 15% of theoriginal advance amount due at maturity and are collateralized by the assets ofthe New Jersey IBX. The Venture Leasing Loan Agreement has an effectiveinterest rate of 14.7% per annum. As of December 31, 2001, $4,050,000 wasoutstanding under the Venture Leasing Loan Agreement. In connection with the Venture Leasing Loan Agreement, the Company grantedVLL a warrant to purchase 300,000 shares of the Company's Series A redeemableconvertible preferred stock at $3.00 per share (the "Venture Leasing LoanAgreement"). This warrant is immediately exercisable and expires on June 30,2006. The fair value of the warrant using the Black-Scholes option pricingmodel with the following assumptions: deemed fair market value per share of$4.80, dividend yield 0%, expected volatility of 80%, risk-free interest rateof 5.0% and a contractual life of seven years, was $1,174,000. Such amount wasrecorded as a discount to the applicable debt, and is being amortized tointerest expense, using the effective interest method, over the life of theagreement.Heller Loan In June 2001, the Company obtained a $5,000,000 loan from Heller FinancialLeasing, Inc. (the "Heller Loan"). Repayments on the Heller Loan are made over36 months and interest accrues at 13.0% per annum. The Heller Loan is securedby certain equipment located in the New York metropolitan area IBX hub. As ofDecember 31, 2001, $4,198,000 was outstanding under the Heller Loan. In connection with the Heller Loan, the Company granted Heller FinancialLeasing, Inc. a warrant to purchase 37,500 shares of the Company's common stockat $4.00 per share (the "Heller Warrant"). This warrant is immediatelyexercisable and expires in five years from the date of grant. The fair value ofthe warrant using the Black-Scholes option pricing model was $18,000 with thefollowing assumptions: fair market value per share of $1.13, dividend yield of0%, expected volatility of 80%, risk-free interest rate of 5% and a contractuallife of 5 years. Such amount was recorded as a discount to the applicable loanamount, and is being amortized to interest expense using the effective interestmethod, over the life of the loan. The costs related to the issuance of the Heller Loan were capitalized andare being amortized to interest expense using the effective interest method,over the life of the Heller Loan. Debt issuance costs, net of amortization, are$185,000 as of December 31, 2001. F-17 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)Wells Fargo Loan In March 2001, the Company obtained a $3,004,000 loan from Wells FargoEquipment Finance, Inc. (the "Wells Fargo Loan"). Repayments on the Wells FargoLoan are made over 36 months and interest accrues at 13.15% per annum. TheWells Fargo Loan is secured by certain equipment located in the New Yorkmetropolitan area IBX hub currently under construction. As of December 31,2001, $2,335,000 was outstanding under the Wells Fargo Loan. The costs related to the issuance of the Wells Fargo Loan were capitalizedand are being amortized to interest expense using the effective interestmethod, over the life of the Wells Fargo Loan. Debt issuance costs, net ofamortization, are $108,000 as of December 31, 2001.Maturities Combined aggregate maturities for debt facilities and future minimum capitallease obligations as of December 31, 2001 are as follows (in thousands): Capital Debt lease facilities obligations Total ---------- ----------- ------- 2002............................................. $ 5,462 $ 1,744 $ 7,2062003............................................. 3,746 1,716 5,4622004............................................. 1,363 135 1,4982005............................................. 12 -- 12 ------- ------- ------- 10,583 3,595 14,178Less amount representing unamortized discount.... (407) (221) (628) ------- ------- ------- 10,176 3,374 13,550Less current portion............................. (5,462) (1,744) (7,206) ------- ------- ------- $ 4,714 $ 1,630 $ 6,344 ======= ======= =======4. Senior Notes On December 1, 1999, the Company issued 200,000 units, each consisting of a$1,000 principal amount 13% Senior Note due 2007 (the "Senior Notes") and onewarrant to purchase 16.8825 shares (for an aggregate of 3,376,500 shares) ofcommon stock for $0.0067 per share (the "Senior Note Warrants"), for aggregatenet proceeds of $193,400,000, net of offering expenses. Of the $200,000,000gross proceeds, $16,207,000 was allocated to additional paid-in capital for thedeemed fair value of the Senior Note Warrants and recorded as a discount to theSenior Notes. The discount on the Senior Notes is being amortized to interestexpense, using the effective interest method, over the life of the debt. TheSenior Notes have an effective interest rate of 14.1% per annum. The fair valueattributed to the Senior Note Warrants was consistent with the Company'streatment of its other common stock transactions prior to the issuance of theSenior Notes. The fair value was based on recent equity transactions by theCompany. The amount of the Senior Notes, net of the unamortized discount, is$187,882,000 as of December 31, 2001. Interest is payable semi-annually, in arrears, on June 1 and December 1 ofeach year. The notes are unsecured, senior obligations of the Company and areeffectively subordinated to all existing and future indebtedness of theCompany, whether or not secured. F-18 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Senior Notes are governed by the Indenture dated December 1, 1999,between the Company, as issuer, and State Street Bank and Trust Company ofCalifornia, N.A., as trustee (the "Indenture"). Subject to certain exceptions,the Indenture restricts, among other things, the Company's ability to incuradditional indebtedness and the use of proceeds therefrom, pay dividends, incurcertain liens to secure indebtedness or engage in merger transactions. The costs related to the issuance of the Senior Notes were capitalized andare being amortized to interest expense using the effective interest method,over the life of the Senior Notes. Debt issuance costs, net of amortization,are $5,100,000 as of December 31, 2001. During the first quarter of 2002, the Company retired $25.0 million of theSenior Notes in exchange for approximately 9.3 million shares of common stock(see Note 12).5. Senior Secured Credit Facility On December 20, 2000, the Company and a newly created, wholly-ownedsubsidiary of the Company, entered into a $150,000,000 Senior Secured CreditFacility (the "Senior Secured Credit Facility") with a syndicate of lenders.The Senior Secured Credit Facility consisted of the following: . Term loan facility in the amount of $50,000,000. The outstanding term loan amount is required to be paid in quarterly installments beginning in March 2003 and ending in December 2005. The Company drew this down in January 2001. . Delayed draw term loan facility in the amount of $75,000,000. The Company was required to borrow the entire facility on or before December 20, 2001. The outstanding delayed draw term loan amount is required to be paid in quarterly installments beginning in March 2003 and ending in December 2005. The Company drew this down in March 2001. . Revolving credit facility in an amount up to $25,000,000. The outstanding revolving credit facility is required to be paid in full on or before December 15, 2005. The Company drew this down in June 2001. The Senior Secured Credit Facility had a number of covenants, which includedachieving certain minimum revenue targets and limiting cumulative EBITDA lossesand maximum capital spending limits among others. As of September 30, 2001, theCompany was not in compliance with one of these covenants. However, thesyndicate of lenders provided a forbearance and, in October 2001, the Companysuccessfully completed the renegotiation of the Senior Secured Credit Facilityand amended certain of the financial covenants to reflect the prevailingeconomic environment as part of the Amended and Restated Senior Secured CreditFacility (the "Amended and Restated Senior Secured Credit Facility"). Asrequired under this amendment, the Company repaid $50,000,000 of the$150,000,000 Senior Secured Credit Facility outstanding as of September 30,2001, of which $25,000,000 represented a permanent reduction. As such, theAmended and Restated Senior Secured Credit Facility provides a total of$125,000,000 of debt financing and consists of the following: . Term loan facility, redesignated as tranche A, in the amount of $100,000,000, which represents the remaining $100,000,000 outstanding after repayment of the $50,000,000 in October 2001. . Term loan facility, redesignated as tranche B, in the amount of $25,000,000, of which $5,000,000 was immediately drawn with the remaining $20,000,000 available for future draw. The remaining $20,000,000 is only available for drawdown commencing September 30, 2002 and only if the Company remains in full compliance with all covenants as outlined in the Amended and Restated Senior Secured Credit Facility, and meets an additional EBITDA test. The ability to draw on the remaining $20,000,000 expires on December 31, 2002. F-19 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Loans under the Amended and Restated Senior Secured Credit Facility bearinterest at floating rates, plus applicable margins, based on either the primerate or LIBOR. Interest rates on the Amended and Restated Senior Secured CreditFacility were increased by 0.50% and the frequency of interest payments hasbeen amended to monthly from quarterly. As of December 31, 2001, the Company'stotal indebtedness under the Amended and Restated Senior Secured CreditFacility was $105,000,000 and had an effective interest rate of 7.68%. Repayment of principal under the Amended and Restated Senior Secured CreditFacility is summarized as follows as of December 31, 2001 (in thousands): Year ending: 2003.............................................................. $ 8,400 2004.............................................................. 42,000 2005.............................................................. 54,600 -------- Total......................................................... $105,000 ======== As noted above, in connection with the Amended and Restated Senior SecuredCredit Facility, the syndicate of lenders reset and modified the variouscovenants related to the Senior Secured Credit Facility to reflect the thenprevailing economic environment in which the Company has been operating in. Inaddition to resetting the existing financial covenants, a new covenantrequiring minimum cash balances was added. In addition to various financialcovenants, the Amended and Restated Senior Secured Credit Facility alsoincludes various non-financial covenants, including those that restrict theCompany's ability to incur additional indebtedness and transfer funds among theCompany's wholly-owned subsidiaries, as well as numerous monthly and quarterlyreporting requirements that the Company must adhere to. The Company was incompliance with all financial covenants as of December 31, 2001; however, ifthe Company does not attain the revenue growth stipulated in the financialcovenants or is unable to maintain these ratios and comply with thesecovenants, the Company may be required to repay amounts currently outstandingunder this facility and will not be able to draw down the remaining $20.0million of the Amended and Restated Senior Secured Credit Facility. The Companydoes not currently have sufficient cash reserves to repay such amounts. Inaddition, the inability to draw down the remaining $20.0 million under thisfacility may not provide sufficient funds for the Company to support itsspending needs and could adversely affect the business and its ability tocontinue as a going concern. Borrowings under the Amended and Restated Senior Secured Credit Facility arecollateralized by a first priority lien against substantially all of theCompany's assets. The costs related to the issuance of the Senior Secured Credit Facility werecapitalized and are being amortized to interest expense using the effectiveinterest method, over the life of the Senior Secured Credit Facility. As aresult of amending and restating the Senior Secured Credit Facility, theCompany incurred additional fees of approximately $1,519,000, which have beenadded to debt issuance costs and are being amortized to interest expense usingthe effective interest method over the remaining life of the Amended andRestated Senior Secured Credit Facility. Total debt issuance costs, net ofamortization, were $5,940,000 and $5,966,000 as of December 31, 2001 andDecember 31, 2000, respectively.6. Redeemable Convertible Preferred Stock and Stockholders' Equity In January 2000, the Company's stockholders approved a three-for-two stocksplit of its common and redeemable convertible preferred stock effectiveJanuary 19, 2000. The Company amended and restated its Certificate ofIncorporation to increase the authorized share capital to 132,000,000 shares ofcommon stock and 68,000,000 shares of redeemable convertible preferred stock,of which 32,000,000 has been designated as F-20 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)Series A and 36,000,000 as Series B, to give effect to the three-for-two stocksplit. The accompanying consolidated financial statements have been adjusted toreflect this stock split. In May 2000, the Company amended and restated its Certificate ofIncorporation to change the authorized share capital to 80,000,000 shares ofcommon stock and 43,000,000 shares of redeemable convertible preferred stock,of which 20,000,000 has been designated as Series A, 16,000,000 has beendesignated as Series B and 7,000,000 has been designated as Series C. In August 2000, the Company amended and restated its Certificate ofIncorporation to change the authorized share capital to 300,000,000 shares ofcommon stock and 10,000,000 shares of preferred stock.Redeemable Convertible Preferred Stock Between May and June 2000, the Company completed its Series C redeemableconvertible preferred stock financing. The Company issued 6,261,161 shares ofSeries C redeemable convertible preferred stock, at a price of $15.08 per share. All 40,704,222 shares of Series A, Series B and Series C redeemableconvertible preferred stock were converted to shares of common stock on aone-for-one basis upon the closing of the Company's initial public offering("IPO") in August 2000. All outstanding warrants to purchase preferred stockare now exercisable for common stock.Common Stock On August 11, 2000 the Company completed an IPO of 20,000,000 shares of itscommon stock. On September 7, 2000 the underwriters exercised their option topurchase 2,704,596 shares to cover the over-allotment of shares. The Company's founders purchased 6,060,000 shares of stock. Approximately5,454,000 shares are subject to restricted stock purchase agreements wherebythe Company has the right to repurchase the stock upon voluntary or involuntarytermination of the founder's employment with the Company at $0.00033 per share.The Company's repurchase right lapses at a rate of 25% per year. In May 2000,the board of directors agreed to waive the repurchase right with respect to oneof the founder's unvested shares. As of December 31, 2001 and 2000, 340,875 and1,022,625 shares were subject to repurchase at a price of $0.00033 per share,respectively. Upon the exercise of certain unvested stock options, the Company issued toemployees common stock which is subject to repurchase by the Company at theoriginal exercise price of the stock option. This right lapses over the vestingperiod. As of December 31, 2001 and 2000, there were 1,073,538 and 3,114,743shares, respectively, subject to repurchase. As of December 31, 2001, the Company has reserved the following shares ofauthorized but unissued shares of common stock for future issuance: Common stock warrants................................................ 4,512,381Common stock options................................................. 2,386,938Common stock purchase plan........................................... 1,074,322 --------- 7,973,641 ========= F-21 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)Stock Purchase Plan In May 2000, the Company adopted the Employee Stock Purchase Plan (the"Purchase Plan") under which 1,000,000 shares were reserved for issuancethereafter. On each January 1, the number of shares in reserve willautomatically increase by 2% of the total number of shares of common stockoutstanding at that time, or, if less, by 600,000 shares. The Puchase Planpermits purchases of common stock via payroll deductions. The maximum payrolldeduction is 15% of the employee's cash compensation. Purchases of the commonstock will occur on February 1 and August 1 of each year. The price of eachshare purchased will be 85% of the lower of: . The fair market value per share of common stock on the date immediately before the first day of the applicable offering period (which lasts 24 months); or . The fair market value per share of common stock on the purchase date. The value of the shares purchased in any calendar year may not exceed$25,000. As of December 31, 2001, 525,678 shares have been issued under the PurchasePlan at a weighted-average purchase price of $2.82 per share. There were nopurchases under the Purchase Plan during fiscal 2000.Stock Option Plans In September 1998, the Company adopted the 1998 Stock Plan. In May 2000, theCompany adopted the 2000 Equity Incentive Plan and 2000 Director Stock OptionPlan; and in September 2001, the Company adopted the 2001 Supplemental StockPlan (collectively, the "Plans") under which nonstatutory stock options andrestricted stock may be granted to employees, outside directors, consultants,and incentive stock options may be granted to employees. Accordingly, theCompany reserved a total of 30,181,541 shares of the Company's common stock forissuance upon the grant of restricted stock or exercise of options granted inaccordance with the Plans. On each January 1, commencing with the year 2001,the number of shares in reserve will automatically increase by 6% of the totalnumber of shares of common stock that are outstanding at that time or, if less,by 6,000,000 shares for the 2000 Equity Incentive Plan and by 50,000 shares forthe 2000 Director Stock Option Plan. Options granted under the Plans generallyexpire 10 years following the date of grant and are subject to limitations ontransfer. The Plans are administered by the Board of Directors. The Plans provide for the granting of incentive stock options at not lessthan 100% of the fair market value of the underlying stock at the grant date.Nonstatutory options may be granted at not less than 85% of the fair marketvalue of the underlying stock at the date of grant. Option grants under the Plans are subject to various vesting provisions, allof which are contingent upon the continuous service of the optionee and may notimpose vesting criterion more restrictive than 20% per year. Stock options maybe exercised at anytime subsequent to grant. Stock obtained through exercise ofunvested options is subject to repurchase at the original purchase price. TheCompany's repurchase right decreases as the shares vest under the originaloption terms. Options granted to stockholders who own greater than 10% of the outstandingstock must have vesting periods not to exceed five years and must be issued atprices not less than 110% of the fair market value of the stock on the date ofgrant as determined by the Board of Directors. Upon a change of control, allshares granted under the Plans shall immediately vest. F-22 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A summary of the Plans is as follows: Weighted- average Shares exercise available for Number of price available for Number of price grant shares per share ------------- ---------- --------- Balances, December 31, 1998...................... 6,098,760 2,074,050 0.07Options granted.................................. (6,404,040) 6,404,040 0.46Options exercised................................ -- (5,522,196) 0.23Options forfeited................................ 340,500 (340,500) 0.06 ----------- ----------Balances, December 31, 1999...................... 35,220 2,615,394 0.68Additional shares authorized..................... 12,250,000 -- --Options granted.................................. (8,160,625) 8,160,625 5.48Options exercised................................ -- (1,420,914) 1.74Options forfeited................................ 461,813 (461,813) 6.43Shares repurchased............................... 346,348 -- 0.08 ----------- ----------Balances, December 31, 2000...................... 4,932,756 8,893,292 4.62Additional shares authorized..................... 9,668,731 -- --Options granted.................................. (16,036,597) 16,036,597 1.46Options exercised................................ -- (496,663) 0.88Options forfeited................................ 3,572,263 (3,572,263) 4.40Shares repurchased............................... 249,785 -- 0.07 ----------- ----------Balances, December 31, 2001...................... 2,386,938 20,860,963 2.32 =========== ========== The following table summarizes information about stock options outstandingas of December 31, 2001: Outstanding Exercisable -------------------------------- ------------------- Weighted- average Weighted- Weighted- remaining average average Number of contractual exercise Number of exerciseRange of exercise prices shares life price shares price------------------------ ---------- ----------- --------- --------- --------- $0.01 to $0.39............... 7,598,305 9.56 $ 0.36 1,288,423 $ 0.28$0.45 to $1.00............... 2,873,375 9.12 0.91 501,532 0.94$1.04 to $2.38............... 2,012,589 9.32 1.62 239,844 1.70$2.67 to $5.00............... 6,638,697 8.61 4.08 2,107,222 4.23$5.50 to $8.50............... 1,643,047 8.57 7.03 574,992 7.06$8.88 to $12.00.............. 94,950 8.65 11.52 30,713 11.60 ---------- --------- 20,860,963 9.09 2.32 4,742,726 3.07 ========== ========= The weighted-average remaining contractual life of options outstanding atDecember 31, 2001 and December 31, 2000 was 9.09 years and 9.31 years,respectively.Stock-Based Compensation Employees The Company uses the intrinsic-value method prescribed in APB No. 25 inaccounting for its stock-based compensation arrangements with employees.Stock-based compensation expense is recognized for employee stock option grantsin those instances in which the deemed fair value of the underlying commonstock was F-23 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)subsequently determined to be greater than the exercise price of the stockoptions at the date of grant. The Company recorded a reduction of $8,119,000 ofdeferred stock-based compensation due to forfeitures of pre-IPO stock optionsfor the year ended December 31, 2001. The Company recorded deferred stock-basedcompensation, net of forfeitures, related to employees of $53,206,000 for theyear ended December 31, 2000. A total of $18,993,000, $28,796,000 and$6,067,000 has been amortized to stock-based compensation expense for the yearsended December 31, 2001, 2000 and 1999, respectively, on an accelerated basisover the vesting period of the individual options, in accordance with FASBInterpretation No. 28. The weighted average estimated fair value of employeestock options granted at exercise prices below market price at grant during2000 and 1999 was $8.64 and $3.19, respectively. Had compensation costs been determined using the fair value method for theCompany's stock-based compensation plans including the employee stock purchaseplan, net loss would have been changed to the amounts indicated below: Year ended Year ended Year ended December 31, December 31, December 31, 2001 2000 1999 ------------- ------------- ------------ Net loss: As reported............... $(188,415,000) $(119,790,000) $(20,791,000) Pro forma................. (196,979,000) (122,845,000) (21,128,000) Net loss per share: As reported............... $ (2.39) $ (3.48) $ (4.98) Pro forma................. (2.50) (3.57) (5.06) The Company's fair value calculations for employee grants were made usingthe minimum value method prior to the IPO and the Black-Scholes option pricingmodel after the IPO with the following weighted average assumptions: Year ended Year ended Year ended December 31, December 31, December 31, 2001 2000 1999 ------------ ------------ ------------ Dividend yield............................................. 0% 0% 0%Expected volatility........................................ 80% 80% 0%Risk-free interest rate.................................... 3.94% 6.14% 5.66%Expected life (in years)................................... 3.04 2.50 2.52 The Company's fair value calculations for employee's stock purchase rightsunder the Purchase Plan were made using the Black-Scholes option pricing modelwith weighted average assumptions consistent with those used for employeegrants as indicated above; however, the assumption for expected life (in years)used for the Purchase Plan was 2 years for both 2001 and 2000. Non-Employees The Company uses the fair value method to value options granted tonon-employees. In connection with its grant of options to non-employees, theCompany has recognized a reduction in deferred stock-based compensation of$164,000 for the year ended December 31, 2001 due to a reduction in the fairvalue of the Company's stock during the year, and an increase in deferredstock-based compensation of $1,332,000 for the year ended December 31, 2000. Atotal of $51,000, $1,097,000 and $560,000 has been amortized to stock-basedcompensation expense for the years ended December 31, 2001, 2000, and 1999,respectively. The weighted average estimated fair value of non-employee stockoptions granted at exercise prices below market price at grant during 2001,2000 and 1999 was $1.17, $0.34 and $2.63 per share, respectively. F-24 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's calculations for non-employee grants were made using theBlack-Scholes option-pricing model with the following weighted averageassumptions: Year ended Year ended Year ended December 31, December 31, December 31, 2001 2000 1999 ------------ ------------ ------------ Dividend yield........................................ 0% 0% 0%Expected volatility................................... 80% 80% 80%Risk-free interest rate............................... 5.14% 5.99% 5.48%Expected life (in years).............................. 10.00 10.00 10.00Warrants In August 1999, the Company entered into a strategic agreement withNorthPoint Communications, Inc. ("NorthPoint"). Under the terms of thestrategic agreement, NorthPoint has agreed to use certain of the Company'sdomestic IBX hubs and install their operational nodes in such centers. Inexchange, the Company granted NorthPoint a warrant to purchase 338,145 sharesof the Company's common stock at $0.53 per share (the "NorthPoint Warrant").The NorthPoint Warrant was earned upon execution of the strategic agreement, asNorthpoint's performance commitment was complete. The NorthPoint Warrant isimmediately exercisable and expires five years from the date of grant. TheNorthPoint Warrant was valued at $1,508,000 using the Black-Scholesoption-pricing model, which was capitalized on the accompanying consolidatedbalance sheet in other assets as a customer acquisition cost and is beingamortized over the term of the agreement as a reduction of revenues recognized.The following assumptions were used in determining the fair value of thewarrant: deemed fair market value per share of $4.80, dividend yield of 0%,expected volatility of 80%, risk-free interest rate of 5.0% and a contractuallife of 5 years. In December 2000, based on the uncertainty of the Company'sfuture business relationship with NorthPoint, as a result of their filing underChapter 11 bankruptcy protection, the Company determined that the future valueof the other asset attributed to the unamortized portion of the fully-vested,nonforfeitable warrant was questionable and accordingly, the remaining assettotaling approximately $700,000 was written off. In November 1999, the Company entered into a definitive agreement withWorldCom, whereby WorldCom agreed to install high-bandwidth local connectivityservices to the Company's first seven IBX hubs by a pre-determined date inexchange for a warrant to purchase 675,000 shares of common stock of theCompany at $0.67 per share (the "WorldCom Warrant"). The WorldCom Warrant isimmediately exercisable and expires five years from the date of grant. As ofDecember 31, 1999, warrants for 600,000 shares were subject to repurchase atthe original exercise price if WorldCom's performance commitments are notcompleted. The WorldCom Warrant was valued at $2,969,000 using theBlack-Scholes option-pricing model and was recorded to construction inprogress. Under the applicable guidelines in EITF 96-18, the underlying sharesof common stock associated with the WorldCom Warrant subject to repurchase arerevalued at each balance sheet date to reflect their current fair value untilWorldCom's performance commitment is complete. Any resulting increase in fairvalue of the warrants is recorded as a leasehold improvement. In addition, thefollowing assumptions were used in determining the fair value of the warrant:deemed fair market value per share of $4.80, dividend yield of 0%, expectedvolatility of 80%, risk-free interest rate of 5.5% and a contractual life of 5years. In November 1999, the Company entered into a master agreement with BechtelCorporation, or Bechtel, whereby Bechtel agreed to act as the exclusivecontractor under a Master Agreement to provide program management, siteidentification and evaluation, engineering and construction services to buildapproximately 29 IBX hubs over a four year period under mutually agreed uponguaranteed completion dates. As part of the agreement, the Company grantedBechtel a warrant to purchase 352,500 shares of the Company's common stock at$1.00 per share (the "Bechtel Warrant"). The Bechtel Warrant is immediatelyexercisable and expires five F-25 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)years from date of grant. The Bechtel Warrant was valued at $1,497,000 usingthe Black-Scholes option-pricing model and was recorded to construction inprogress. Under EITF 96-18, the underlying shares of common stock associatedwith the Bechtel Warrant subject to repurchase are revalued at each balancesheet date to reflect their current fair value until Bechtel's performancecommitment is complete. Any resulting increase in fair value of the warrants isrecorded as a leasehold improvement. In addition, the following assumptionswere used in determining the fair value of the warrant: deemed fair marketvalue per share of $4.80, dividend yield of 0%, expected volatility of 80%,risk-free interest rate of 5.5% and a contractual life of 5 years. In January2000, the Bechtel Warrant was exercised. As of December 31, 2000, a total of199,053 shares were subject to repurchase at the original exercise price, ifBechtel's performance commitments are not complete. In January 2000, the Company entered into an operating lease agreement forits new corporate headquarters facility in Mountain View, California. Inconnection with the lease agreement, the Company granted the lessor a warrantto purchase up to 33,100 shares of the Company's common stock at $6.00 pershare (the "Headquarter Warrant"). The warrant expires 10 years from the dateof grant. The warrant was valued at $186,000 using the Black-Scholes optionpricing model and will be recorded as additional rent expense over the life ofthe lease. The following assumptions were used in determining the fair value ofthe warrants: deemed fair value per share of $6.55, dividend yield of 0%,expected volatility of 80%, risk-free interest rate of 6.0% and a contractuallife of 10 years. In April 2000, the Company entered into a definitive agreement with a fibercarrier whereby the fiber carrier agreed to install high-bandwidth localconnectivity services to a number of the Company's IBX hubs in exchange forcolocation space and related benefits in such IBX hubs. In connection with thisagreement, the Company granted the fiber carrier a warrant to purchase up to540,000 shares of the Company's common stock at $4.00 per share (the "FiberWarrant"). The warrant is immediately exercisable and expire five years fromdate of grant. A total of 140,000 shares are immediately vested and theremaining 400,000 shares are subject to repurchase at the original exerciseprice if certain performance commitments are not completed by a pre-determineddate. The fiber carrier is not obligated to install high-bandwidth localconnectivity services and, apart from forfeiting the relevant number ofwarrants and colocation space, will not be penalized for not installing. Thewarrant was valued at $5,372,000 using the Black-Scholes option-pricing modeland has been recorded initially to construction in progress until installationis complete. The following assumptions were used in determining the fair valueof the warrant: deemed fair market value per share of $11.82, dividend yield of0%, expected volatility of 80%, risk-free interest rate of 6.56% and acontractual life of 5 years. Under the applicable guidelines in EITF 96-18, theunderlying shares of common stock associated with these warrants subject torepurchase are revalued at each balance sheet date to reflect their currentfair value until the performance commitment is complete. Any resulting increasein fair value of the warrant will ultimately be recorded as a leaseholdimprovement. In June 2000, the Company entered into a memorandum of understanding withCOLT Telecommunications ("Colt") whereby Colt agreed to install high-bandwidthlocal connectivity services to a number of the Company's European IBX hubs inexchange for colocation space and related benefits in such IBX hubs. Inconnection with this agreement, the Company granted Colt a warrant to purchaseup to 250,000 shares of the Company's common stock at $5.33 per share (the"Colt Warrant"). The warrant is immediately exercisable and expire five yearsfrom the date of grant. The shares are subject to repurchase at the originalexercise price if certain performance commitments are not completed by apre-determined date. Colt is not obligated to install high-bandwidth localconnectivity services and, apart from forfeiting the relevant number ofwarrants and colocation space, will not be penalized for not installing. Thewarrant was valued at $2,795,000 using the Black-Scholes option-pricing modeland has been recorded initially to construction in progress until installationis complete. The following assumptions were used in determining the fair valueof the warrants: deemed fair market value per share of $13.58, dividend yieldof 0%, expected volatility of 80%, risk-free interest rate of 6.23% and acontractual life of F-26 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)5 years. Under the applicable guidelines in EITF 96-18, the underlying sharesof common stock associated with this warrant subject to repurchase are revaluedat each balance sheet date to reflect their current fair value until theperformance commitment is complete. Any resulting increase in fair value of thewarrant will ultimately be recorded as a leasehold improvement. In June 2000, the Company entered into a strategic agreement with WorldComand UUNET, an affiliate of WorldCom (the "UUNET Strategic Agreement"), whichamends, supersedes and restates the definitive agreement entered into withWorldCom in November 1999 and the related WorldCom Warrant. Under the UUNETStrategic Agreement, WorldCom agreed to install high-bandwidth localconnectivity services and UUNET agreed to provide high-speed data entrancefacilities to a number of the Company's IBX hubs in exchange for colocationservices and related benefits in such IBX hubs. In connection with thisstrategic agreement, the Company granted WorldCom Venture Fund a warrant (the"WorldCom Venture Fund Warrant") to purchase up to 650,000 shares of Company'scommon stock at $5.33 per share. All but 37,500 of the shares under the earlierWorldCom Warrant are immediately vested under the UUNET Strategic Agreement.The WorldCom Venture Fund Warrant is immediately exercisable and expires fiveyears from the date of grant. The warrant is subject to repurchase at theoriginal exercise price if certain performance commitments are not completed bya pre-determined date. WorldCom and UUNET are not obligated to installhigh-bandwidth local connectivity services and provide high-speed data entrancefacilities, respectively, and, apart from forfeiting the relevant number ofwarrants and colocation space, will not be penalized for not performing. Thewarrant was valued at $7,255,000 using the Black-Scholes option-pricing modeland has been recorded initially to construction in progress until installationis complete. The following assumptions were used in determining the fair valueof the warrant: deemed fair market value per share of $13.58, dividend yield of0%, expected volatility of 80%, risk-free interest rate of 6.23% and acontractual life of 5 years. Under the applicable guidelines in EITF 96-18, theunderlying shares of common stock associated with this warrant subject torepurchase are revalued at each balance sheet date to reflect their currentfair value until the performance commitment is complete. Any resulting increasein fair value of the warrant will ultimately be recorded as a leaseholdimprovement. In September 2001, the Company amended and restated the Worldcom VentureFund Warrant, issued in June 2000, and reduced the total number of sharesavailable to purchase to 295,000 shares of the Company's common stock at $5.33per share, which had been previously earned. In return for providing servicesto the New York metropolitan area IBX hub, which is currently underconstruction, the Company issued two new warrants to the Worldcom Venture Fund.The first new warrant is to purchase 355,000 shares of the Company's commonstock at $0.01 per share, of which 150,000 shares are immediately vested andexercisable (the "Second Worldcom Venture Fund Warrant"). The second newwarrant is to purchase 245,000 shares of the Company's common stock at $0.01per share (the "Third Worldcom Venture Fund Warrant"). All Worldcom VentureFund warrants expire five years from the date of grant. The unearned portion ofthe Second Worldcom Venture Fund Warrant and the Third Worldcom Venture FundWarrant will be fully earned and exercisable at such time as Worldcom providesservices, as defined in the warrant agreements, to the New York metropolitanarea IBX hub. The unearned portion of the Second Worldcom Venture Fund Warrantand the Third Worldcom Venture Fund Warrant are subject to a reduction inshares if there are Worldcom-caused delays in providing Worldcom service by theopening date of the New York metropolitan area IBX hub. The earned portion ofthe Second Worldcom Venture Fund Warrant was valued at $56,000 using theBlack-Scholes option-pricing model and has been recorded initially toconstruction in progress until installation is complete. The followingassumptions were used in determining the fair value of the earned portion ofthis warrant: fair market value per share of $0.38, dividend yield of 0%,expected volatility of 80%, risk-free interest rate of 6.00% and a contractuallife of 5 years. The unearned portion of the Second Worldcom Venture FundWarrant and the Third Worldcom Venture Fund Warrant will be valued at the timethat they are earned. F-27 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In addition, the Company has issued several warrants in connection with itsdebt facilities and capital lease obligations (see Note 3) and the Senior Notes(see Note 4). In March 2001, holders of the NorthPoint Warrant, the ComdiscoLoan and Security Agreement Warrant, the Comdisco Master Lease AgreementWarrant and the Comdisco Master Lease Agreement Addendum Warrant exercised suchwarrants pursuant to the cashless "net-exercise" provisions thereof. Upon suchexercises, such warrant holders received an aggregate of 1,049,599 shares ofthe Company's common stock. During the quarter ended March 31, 2001, certainholders of Senior Note Warrants exercised their warrants resulting in 1,283,069shares of the Company's common stock being issued. A total of 1,755,781 sharesunderlying these Senior Note Warrants remain outstanding as of December 31,2001. The Company has the following warrants outstanding as of December 31, 2001: Warrants ExerciseCommon stock warrants outstanding price--------------------- ----------- -------- Venture Leasing Loan Agreement Warrant..................... 270,000 $ 3.00Senior Note Warrants....................................... 1,755,781 0.0067WorldCom Warrant........................................... 675,000 0.67Headquarter Warrant........................................ 33,100 6.00Fiber Warrant.............................................. 540,000 4.00Colt Warrant............................................... 250,000 5.33Worldcom Venture Fund Warrant.............................. 295,000 5.33Second Worldcom Venture Fund Warrant....................... 355,000 0.01Third Worldcom Venture Fund Warrant........................ 245,000 0.01Heller Warrant............................................. 37,500 4.00Other warrants............................................. 50,000 0.01Other warrant.............................................. 6,000 5.00 --------- 4,512,381 =========7. Income Taxes No provision for federal income taxes was recorded from inception throughDecember 31, 2001 as the Company incurred net operating losses during theperiod. State tax expense is included in general and administrative expenses andaggregated less than $16,000 for each of the years in the three year periodended December 31, 2001. Based on the available objective evidence, the Company believes it is morelikely than not that the net deferred tax assets will not be fully realizable.Accordingly, the Company has provided a full valuation allowance against itsnet deferred tax assets as of December 31, 2001. F-28 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Deferred tax assets (liabilities) as of December 31 consists of thefollowing (in thousands): December 31, ------------------ 2001 2000 -------- -------- Deferred tax assets: Depreciation and amortization........................... $ (2,767) $ (3,857) Reserves................................................ 4,840 3,660 Credits................................................. 120 -- Capitalized start-up costs.............................. 5,206 4,855 Net operating losses.................................... 74,577 31,614 Restructuring charges................................... 3,023 -- -------- -------- 84,998 36,272 -------- --------Deferred tax liability..................................... -- -- -------- -------- -- -- -------- --------Gross deferred tax asset................................... 84,998 36,272Valuation allowance........................................ (84,998) (36,272) -------- -------- Net deferred tax asset.................................. $ -- $ -- ======== ======== As of December 31, 2001, the Company has a net operating loss carryforwardof approximately $203.6 million for federal and approximately $91.7 million forstate tax purposes. If not utilized, these carryforwards will begin to expirestate tax purposes. If not utilized, these carryforwards will begin to expirebeginning in 2010 for federal and 2003 for state tax purposes. The Company has research credit carryforwards of approximately $76,000 and$67,000 for federal and state income tax purposes, respectively. If notutilized, the federal carryforward will expire in various amounts beginning in2010. The California credit can be carried forward indefinitely. The Tax Reform Act of 1986 limits the use of net operating loss and taxcredit carryforwards in certain situations where changes occur in the stockownership of a company. In the event the Company has had a change in ownership,utilization of the carryforwards could be restricted.8. Commitments and Contingencies Unimproved Property In May 2000, the Company entered into a purchase agreement regardingapproximately 79 acres of real property in San Jose, California. In June 2000,before closing on this property, the Company assigned its interest in thepurchase agreement to iStar San Jose, LLC ("iStar"). On the same date, iStarpurchased this property and entered into a 20-year lease with the Company forthe property (the "iStar Lease"). Under the terms of the iStar Lease, theCompany has the option to extend the lease for an additional 60 years, for atotal lease term of 80 years. In addition, the Company has the option topurchase the property from iStar on certain designated dates in the future. InSeptember 2001, the Company amended the iStar Lease. Previously, the Companyposted a letter of credit in the amount of $10,000,000 and was required toincrease the letter of credit by $25,000,000 to an aggregate of $35,000,000 ifthe Company did not meet certain development and financing milestones. TheCompany successfully re-negotiated the letter of credit provision in the iStarLease whereby the aggregate obligation was reduced by $10,000,000 to$25,000,000 provided the Company agreed to post an additional letter of credittotaling $15,000,000 prior to September 30, 2001. In addition, the operatinglease commitments, for the 12-month period ending September 2002, were reducedby $3,000,000 provided the Company prepaid a full year F-29 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)of lease payments. The benefit of this reduction will be amortized to rentexpense over the full term of the lease. The additional letter of credit wasfunded prior to September 30, 2001 and the rent pre-payment was fundedsubsequent to September 30, 2001. These letter of credit security depositsshall be reduced on a pro rata basis based on the status of constructionactivity on this property. The Company is currently working with the city ofSan Jose and county of Santa Clara to prepare this land for future development.As a result, the Company will be assessed increased property taxes related tothe improvement of this land commencing in 2004. Operating Lease Commitments The Company leases its IBX hubs and certain equipment under noncancelableoperating lease agreements expiring through 2025. The centers' lease agreementstypically provide for base rental rates that increase at defined intervalsduring the term of the lease. In addition, the Company has negotiated rentexpense abatement periods to better match the phased build-out of its centers.The Company accounts for such abatements and increasing base rentals using thestraight-line method over the life of the lease. The difference between thestraight-line expense and the cash payment is recorded as deferred rent. Minimum future operating lease payments, including the iStar Lease notedabove, as of December 31, 2001 are summarized as follows (in thousands): Year ending: 2002......................................................... $ 23,780 2003......................................................... 31,170 2004......................................................... 31,443 2005......................................................... 31,889 2006......................................................... 34,219 Thereafter................................................... 425,650 -------- Total.................................................... $578,151 ======== During the quarter ended September 30, 2001, the Company recorded arestructuring charge, primarily as a result of its revised European strategy(see Note 11). Part of this restructuring charge included the costs associatedwith exiting out of several operating leases in Europe and the U.S. As ofDecember 31, 2001, three European operating leases and two U.S. operatingleases remain as obligations. The total cost of the three European and two U.S.operating leases for which the Company is pursuing lease terminations isapproximately $146.5 million of potential savings out of the total $578.2million of the minimum future operating lease payments indicated above. TheCompany expects to successfully complete the exit of these remaining leasesduring 2002 (see Note 12). Total rent expense was approximately $27,150,000, $16,157,000 and $1,739,000for the years ended December 31, 2001, 2000 and 1999, respectively. Deferredrent included in other liabilities was $9,691,000 and $3,793,000 as of December31, 2001 and 2000, respectively. Legal Actions During the quarter ended September 30, 2001, putative shareholder classaction lawsuits were filed against the Company, certain of its officers anddirectors, and several investment banks that were underwriters of the Company'sinitial public offering. The suits allege that the underwriter defendantsagreed to allocate stock in the Company's initial public offering to certaininvestors in exchange for excessive and undisclosed commissions and agreementsby those investors to make additional purchases in the aftermarket atpre-determined prices. F-30 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)Plaintiffs allege that the prospectus for the Company's initial public offeringwas false and misleading and in violation of the securities laws because it didnot disclose these arrangements. The Company and its officers and directorsintend to defend the action vigorously. The Company believes that more than onehundred other companies have been named in nearly identical lawsuits that havebeen filed by some of the same plaintiffs' law firms. The Company believes ithas adequate legal defenses and believes that the ultimate outcome of theseactions will not have a material effect on the Company's consolidated financialposition, results of operations or cash flows, although there can be noassurance as to the outcome of such litigation. From time to time, the Company may have certain contingent liabilities thatarise in the ordinary course of its business activities. The Company accruescontingent liabilities when it is probable that future expenditures will bemade and such expenditures can be reasonably estimated. In the opinion ofmanagement, there are no pending claims of which the outcome is expected toresult in a material adverse effect in the financial position, results ofoperations or cash flows of the Company. Employment Agreement The Company has agreed to indemnify an officer of the Company for any claimsbrought by his former employer under an employment and non-compete agreementthe officer had with this employer. Employee Benefit Plan The Company has a 401(k) Plan that allows eligible employees to contributeup to 15% of their compensation, limited to $10,500 in 2001. Employeecontributions and earnings thereon vest immediately. Although the Company maymake discretionary contributions to the 401(k) Plan, none have ever been madeas of December 31, 2001.9. Related Party Transactions Through December 31, 2000, the Company advanced an aggregate of $1,150,000to three officers of the Company. During 2001, the Company advanced anadditional $2,412,000 to two officers of the Company, including a loan to theCompany's chief executive officer totaling $1,512,000. All such employee loansare evidenced by promissory notes. The proceeds of these loans were used tofund the purchase of personal residences. The loans are due at various datesthrough 2006, but are subject to certain events of acceleration and are securedby a second deed of trust on the officers' residences. The loans arenon-interest bearing. In October 2001, one of these loans totaling $150,000 wasrepaid in full in conjunction with an officer leaving the Company. These loansare presented in other assets on the accompanying consolidated balance sheetsas of December 31, 2001 and 2000. Subsequent to December 31, 2001, several ofthese loans were settled (see Note 12). In March 1999, the Company entered into an equipment lease facility with apreferred stockholder under which the Company leased $137,000 of equipment fora 24-month term.10. Segment Information The Company and its subsidiaries are principally engaged in the design,build-out and operation of neutral IBX hubs. All revenues result from theoperation of these IBX hubs. Accordingly, the Company considers itself tooperate in a single segment for purposes of disclosure under SFAS No. 131. TheCompany's chief operating decision-maker evaluates performance, makes operatingdecisions and allocates resources based on financial data consistent with thepresentation in the accompanying consolidated financial statements. F-31 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During the quarter ended September 30, 2001, the Company recorded arestructuring charge as part of its revised European services strategy. A totalof $45,315,000 of the restructuring charge related to the write-off of certainEuropean assets to their net realizable value (see Note 11). As of December 31,2001, all of the Company's operations and assets were based in the UnitedStates with the exception of $2,234,000 of the Company's net identifiableassets based in Europe and $51,515,000 of the Company's total net loss wasattributable to the development and restructuring of its European operationsfor the year ended December 31, 2001. As of December 31, 2000, all of theCompany's operations and assets were based in the United States with theexception of $24,459,000 of the Company's identifiable assets based in Europeand $429,000 of the Company's total net loss was attibutable to the developmentof its European operations. As of December 31, 1999, all of the Company'soperations and assets were based in the United States.11. Restructuring Charge During the quarter ended September 30, 2001, the Company revised itsEuropean services strategy through the development of new partnerships withother leading international Internet exchange partners rather than build andoperate its own European IBX hubs. In addition, the Company initiated effortsto exit certain leaseholds relating to certain excess U.S. operating leases.Also, in September 2001, the Company implemented an approximate 15% reductionin workforce, primarily in headquarter positions, in an effort to reduceoperating costs. As a result, the Company took a total restructuring charge of$48,565,000 primarily related to the write-down of European construction inprogress assets to their net realizable value, the write-off of severalEuropean letters of credit related to various European operating leases, theaccrual of estimated European and U.S. leasehold exit costs and the severanceaccrual related to the reduction in workforce. The remaining European assets asof December 31, 2001, totaling $2,234,000, represents assets purchased duringpre-construction activities that are now held for resale. As of December 31,2001, the Company has successfully surrendered one of the European leases. TheCompany expects to successfully complete the exit of the remaining leasesduring 2002 (see Note 12). Should it take longer to negotiate the exit of theremaining leases or the lease settlement amounts exceed the amounts estimatedby management, the actual lease exit costs could exceed the amount estimatedand additional restructuring charges may be required. The reduction inworkforce was substantially completed during the fourth quarter of 2001. A summary of the restructuring charge is outlined as follows (in thousands): Accrued restructuring Total charge as of restructuring Non-cash Cash December 31, charge charges payments 2001 ------------- -------- -------- ------------- Write-down of European construction in progress............................. $29,260 $(29,260) $ -- $ --Write-off of European letters of credit 8,634 (8,634) -- --European lease exit costs.............. 6,368 (2,059) (675) 3,634European legal fees and other charges.. 1,053 -- (81) 972U.S. lease exit costs.................. 2,000 -- (488) 1,512Workforce reduction.................... 1,250 (134) (844) 272 ------- -------- ------- ------ $48,565 $(40,087) $(2,088) $6,390 ======= ======== ======= ======12. Subsequent Events On January 1, 2002, pursuant to the provisions of the Company's stock plans(see Note 6), the number of common shares in reserve automatically increased by4,805,045 shares for the 2000 Equity Incentive Plan, 600,000 shares for theEmployee Stock Purchase Plan and 50,000 shares for the 2000 Director StockOption Plan. F-32 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In January 2002, the Board of Directors forgave $874,000 of the chiefexecutive officer's employee loan (see Note 9) totaling $1,512,000 in exchangefor the chief executive officer waiving his right to any bonuses earned andexpensed in 2001. The remaining amount due under the loan of $638,000 wasrepaid to the Company in full in February 2002. Furthermore, the Companynegotiated with two other executive officers of the Company to repay theirloans in full totaling $1,000,000 in exchange for the Company paying theinterest on their mortgage for their principal residence for a 24-month period.One of these loans totaling $750,000 was repaid in full in February 2002 andthe second loan totaling $250,000 is scheduled to be repaid in full in March2002. In February 2002, the Company entered into a termination agreement for itsoperating leasehold in Amsterdam, The Netherlands (the "TerminationAgreement"). As stipulated in the Termination Agreement, the Company willsurrender two previously-posted letters of credit totaling approximately$4,814,000, which the Company had already fully written-off in conjunction withthe restructuring charge that the Company recorded during the third quarter of2001 (see Note 11). The first letter of credit was surrendered in March 2002and the second letter of credit will be surrendered once the landlord submits abudget to the Company for the costs associated with retrofitting the propertyfor future subletting. The costs associated with terminating this leasehold areconsistent with those that the Company estimated during the third quarter of2001. In February and March 2002, the Company retired $24,950,000 of Senior Notes(see Note 4) in exchange for 9,313,408 shares of the Company's common stock.The total number of shares outstanding upon completion of the exchange isapproximately 90.2 million shares. The Company is currently evaluating theaccounting for this transaction. In March 2002, the Company entered into arrangements with numerous vendorsto resell equipment and bandwidth. The Company began to offer such offering inan effort to offer its customers a more fully-integrated services solution.Under the terms of the reseller agreements, the Company will sell the vendor'sservices or products to its customers and the Company will contract with thevendor to provide the related services or products. To date, two reselleragreements have been signed with companies associated with individuals whoserve on the Company's Board of Directors. The Company plans to recognizerevenue from such arrangements on a gross basis in accordance with EmergingIssue Task Force Issue No. 99-19, Recording Revenue as a Principal versus Netas an Agent. The Company acts as the principal in the transaction as theCompany's customer services agreement identifies the Company as the partyresponsible for the fulfillment of product/ services to the Company's customersand has full pricing discretion. In the case of products sold under sucharrangements, the Company takes title to the products and bears the inventoryrisk as the Company has made minimum purchase commitments for equipment tovarious vendors. The Company has credit risk, as it is responsible forcollecting the sales price from a customer, but must pay the amount owed to itssuppliers after the suppliers perform, regardless of whether the sales price isfully collected. In addition, the Company will often determine the requiredequipment configuration and recommend bandwidth providers from numerouspotential suppliers. F-33 EQUINIX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS QUARTERLY FINANCIAL INFORMATION (Unaudited) The Company believes that period-to-period comparisons of its financialresults should not be relied upon as an indication of future performance. TheCompany's revenues and results of operations have been subject to significantfluctuations, particularly on a quarterly basis, and the Company's revenues andresults of operations could fluctuate significantly quarter-to-quarter andyear-to-year. Significant quarterly fluctuations in revenues will causesignificant fluctuations in our cash flows and the cash and cash equivalentsand accounts receivable accounts on the Company's balance sheet. Causes of suchfluctuations may include the volume and timing of new orders and renewals, thesales cycle for our services, the introduction of new services, changes inservice prices and pricing models, trends in the Internet infrastructureindustry, general economic conditions (such as the recent economic slowdown),extraordinary events such as acquisitions or litigation and the occurrence ofunexpected events. The unaudited quarterly financial information presented below has beenprepared by the Company and reflects all adjustments, consisting only of normalrecurring adjustments, which in the opinion of management are necessary topresent fairly the financial position and results of operations for the interimperiods presented. The following table presents selected quarterly information for fiscal 2001,2000 and 1999: First Second Third Fourth quarter quarter quarter quarter -------- -------- -------- -------- (in thousands, except per share data) 2001:Revenues.................................... $ 12,613 $ 16,157 $ 17,178 $ 17,466Net loss.................................... (41,537) (37,857) (81,574)(a) (27,447)Basic and diluted net loss per share........ (0.54) (0.48) (1.03) (0.34)2000:Revenues.................................... $ 136 $ 892 $ 3,933 $ 8,055Net loss.................................... (18,009) (26,811) (32,085) (42,885)Basic and diluted net loss per share........ (2.40) (2.62) (0.70) (0.57)1999:Revenues.................................... $ -- $ -- $ -- $ 37Net loss.................................... (1,345) (3,120) (6,288) (10,038)Basic and diluted net loss per share........ (0.74) (1.90) (1.45) (2.11)--------(a) Includes a $48.6 million restructuring charge primarily related to the Company's revised European strategy. F-34 INDEX TO EXHIBITS Exhibit Number Description of Document ------- ----------------------- 3.1** Amended and Restated Certificate of Incorporation of the Registrant, as amended to date. 3.2* Bylaws of the Registrant. 4.1 Reference is made to Exhibits 3.1 and 3.2. 4.2** Form of Registrant's Common Stock certificate. 4.6* Common Stock Registration Rights Agreement (See Exhibit 10.3). 4.9* Amended and Restated Investors' Rights Agreement (See Exhibit 10.6). 10.1* Indenture, dated as of December 1, 1999, by and among the Registrant and State Street Bank and Trust Company of California, N.A. (as trustee). 10.2* Warrant Agreement, dated as of December 1, 1999, by and among the Registrant and State Street Bank and Trust Company of California, N.A. (as warrant agent). 10.3* Common Stock Registration Rights Agreement, dated as of December 1, 1999, by and among the Registrant, Benchmark Capital Partners II, L.P., Cisco Systems, Inc., Microsoft Corporation, ePartners, Albert M. Avery, IV and Jay S. Adelson (as investors), and the Initial Purchasers. 10.4* Registration Rights Agreement, dated as of December 1, 1999, by and among the Registrant and the Initial Purchasers. 10.5* Form of Indemnification Agreement between the Registrant and each of its officers and directors. 10.6* Amended and Restated Investors' Rights Agreement, dated as of May 8, 2000, by and between the Registrant, the Series A Purchasers, the Series B Purchasers, the Series C Purchasers and members of the Registrant's management. 10.8* The Registrant's 1998 Stock Option Plan. 10.9*+ Lease Agreement with Carlyle-Core Chicago LLC, dated as of September 1, 1999. 10.10*+ Lease Agreement with Market Halsey Urban Renewal, LLC, dated as of May 3, 1999. 10.11*+ Lease Agreement with Laing Beaumeade, dated as of November 18, 1998. 10.12*+ Lease Agreement with Rose Ventures II, Inc., dated as of June 10, 1999. 10.13*+ Lease Agreement with Carrier Central LA, Inc., as successor in interest to 600 Seventh Street Associates, Inc., dated as of August 8, 1999. 10.14*+ First Amendment to Lease Agreement with TrizecHahn Centers, Inc. (dba TrizecHahn Beaumeade Corporate Management), dated as of October 28, 1999. 10.15*+ Lease Agreement with Nexcomm Asset Acquisition I, L.P., dated as of January 21, 2000. 10.16*+ Lease Agreement with TrizecHahn Centers, Inc. (dba TrizecHahn Beaumeade Corporate Management), dated as of December 15, 1999. 10.17* Lease Agreement with ARE-2425/2400/2450 Garcia Bayshore LLC, dated as of January 28, 2000. 10.19*+ Master Agreement for Program Management, Site Identification and Evaluation, Engineering and Construction Services between Equinix, Inc. and Bechtel Corporation, dated November 3, 1999. 10.20*+ Agreement between Equinix, Inc. and WorldCom, Inc., dated November 16, 1999. 10.21* Customer Agreement between Equinix, Inc. and WorldCom, Inc., dated November 16, 1999. 10.22*+ Lease Agreement with GIP Airport B.V., dated as of April 28, 2000. Exhibit Number Description of Document ------- ----------------------- 10.23* Purchase Agreement between International Business Machines Corporation and Equinix, Inc. dated May 23, 2000.10.24** 2000 Equity Incentive Plan.10.25** 2000 Director Option Plan.10.26** 2000 Employee Stock Purchase Plan.10.27** Ground Lease by and between iStar San Jose, LLC and Equinix, Inc., dated June 21, 2000.10.28***+ Lease Agreement with TrizecHahn Beaumeade Technology Center LLC, dated as of July 1, 2000.10.29***+ Lease Agreement with TrizecHahn Beaumeade Technology Center LLC, dated as of May 1, 2000.10.30***+ Lease Agreement with Carrier Central LA, Inc., as successor in interest to 600 Seventh Street Associates, Inc., dated as of August 24, 2000.10.31***+ Lease Agreement with Burlington Associates III Limited Partnership, dated as of July 24, 2000.10.32***+ Lease Agreement with Naxos Schmirdelwerk Mainkur GmbH and A.A.A. Aktiengesellschaft Allgemeine Anlageverwaltung vorm. Seilwolff AG von 1890, dated as of August 7, 2000.10.33***+ Lease Agreement with Quattrocento Limited, dated as of June 1, 2000.10.34*** Lease Agreement with ARE-2425/2400/2450 Garcia Bayshore, LLC, dated as of March 20, 2000.10.35*** First Supplement to the Lease Agreement with Naxos Schmirdelwerk Mainkur GmbH and A.A.A. Aktiengesellschaft Allgemeine Anlageverwaltung vorm. Seilwolff AG von 1890, dated as of October 11, 2000.10.37****+ Lease Agreement with Quattrocentro Limited, dated as of June 9, 2000.10.38****+ Lease Agreement with Compagnie des Entrepots et Magasins Generaux de Paris, dated as of July 18, 2000.10.39****+ Second Supplement to the Lease Agreement with Naxos Schmirdelwerk Mainkur GmbH and A.A.A. Aktiengesellschaft Allgemeine Anlageverwaltung vorm. Seilwolff AG von 1890, dated as of December 22, 2000.10.40**** Third Supplement to the Lease Agreement with Naxos Schmirdelwerk Mainkur GmbH and A.A.A. Aktiengesellschaft Allgemeine Anlageverwaltung vorm. Seilwolff AG von 1890, dated as of March 8, 2001.10.41*****+ Fourth Supplement to the Lease Agreement with Naxos Schmirdelwerk Mainkur GmbH and A.A.A. Aktiengesellschaft Allgemeine Anlageverwaltung vorm. Seilwolff AG von 1890, acting in partnership under the name Naxos-Union Grundstucksverwaltungsgesellschaft GbR, dated as of July 3, 2001.10.42*****+ First Amendment to Deed of Lease with TrizecHahn Beaumeade Technology Center LLC, dated as of March 22, 2001.10.43*****+ First Lease Amendment Agreement with Market Halsey Urban Renewal, LLC, dated as of May 23, 2001.10.44*****+ First Amendment to Lease with Nexcomm Asset Acquisition I, L.P., dated as of April 18, 2000.10.45*****+ Amendment to Lease Agreement with Burlington Realty Associates III Limited Partnership, dated as of December 18, 2000.10.46****** First Modification to Ground Lease by and between iStar San Jose, LLC and Equinix, Inc., dated as of September 26, 2001. Exhibit Number Description of Document ------- ----------------------- 10.47****** Amended and Restated Credit and Guaranty Agreement, dated as of September 30, 2001.10.48****** 2001 Supplemental Stock Plan.10.49 Deed Terminating a Commercial Lease with Compagnie des Entrepots et Magasins Generaux de Paris, dated as of September 7, 2001.16.1* Letter regarding change in certifying accountant.21.1**** Subsidiaries of Equinix.24.1 Power of Attorney (see page 40).-------- * Incorporated herein by reference to the exhibit of the same number in the Registrant's Registration Statement on Form S-4 (Commission File No. 333-93749). ** Incorporated herein by reference to the exhibit of the same number in the Registrant's Registration Statement in Form S-1 (Commission File No. 333-39752). *** Incorporated herein by reference to the exhibit of the same number in the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. **** Incorporated herein by reference to the exhibit of the same number in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000. ***** Incorporated herein by reference to the exhibit of the same number in the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.****** Incorporated herein by reference to the exhibit of the same number in the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.+ Confidential treatment has been requested for certain portions which are omitted in the copy of the exhibit electronically filed with the Securities and Exchange Commission. The omitted information has been filed separately with the Securities and Exchange Commission pursuant to Equinix's application for confidential treatment. EXHIBIT 10.49 Translation for information purposes only ------------------------------------------------------------------------------------------------------------------------- DEED TERMINATING A COMMERCIAL LEASE--------------------------------------------------------------------------------BETWEENCOMPAGNIE DES ENTREPOTS ET MAGASINS GENERAUX DE PARIS, a societe anonyme havinga share capital of 12,047,375.06 euros, with its registered office atSaint-Denis la Plaine (Seine Saint-Denis) 50, avenue du President Wilson,registered with the Registre du Commerce et des Societes de Bobigny (BobignyCommercial and Corporate Registry) under number B 582 074 944,Represented by Mr. Bruno KAHAN, Directeur General Adjoint (Deputy ManagingDirector), domiciled in the registered office, Hereinafter referred to as the "Lessor," OF THE ONE HAND,ANDEQUINIX INC., an American company having its registered office at 2450 BAYSHOREPARKWAY, Mountain View, California 94043 (the United States), and registered inthe State of Delaware,Represented by Mr. Chris Birdsong, duly authorized for the purposes hereofpursuant to a power of attorney attached hereto, Hereinafter referred to as the "Lessee", OF THE OTHER HAND,Hereinafter collectively referred to as the "Parties" or the "Party" 1WHEREAS:Pursuant to a private deed dated July 28th, 2000, registered on August 3rd,2000, the Compagnie des Entrepots et Magasins Generaux de Paris (EMGP) granted acommercial lease to Equinix Inc. (EQUINIX) over the entire building 137 locatedParc des Portes de Paris, 50, Avenue du President Wilson in Saint-Denis laPlaine (Seine Saint-Denis), as well as a strip of bare fenced-off land along thenorth side of said building for a term of 12 consecutive and complete years,with 6 fixed years starting at the latest on April 1st, 2001 (the "Lease").Pursuant to the Lease, the Lessee is only entitled to terminate the Lease at theend of the second triennial period by giving to the Lessor a 6 months' priornotice by extra-judicial deed (acte extra-judiciaire).The parties have come together in order to determine, for conciliation purposes,the way the Lease should be treated.As EQUINIX wanted to early terminate this Lease and as the LESSOR accepted undercertain conditions certified by EQUINIX, the parties have agreed to formalisetheir agreement in this deed.NOW, THEREFORE, THE PARTIES HAVE AGREED AS FOLLOWS:CLAUSE 1: TERMINATIONBy way of exception to the "term" clause under the Lease, the Parties mutuallyagree to terminate the Lease, related to all premises rented by the Lessee,located Parc des Portes de Paris, 50, Avenue du President Wilson in Saint-Denisla Plaine (Seine Saint-Denis), which is comprised of the entire building 137 anda strip of bare fenced-off land along the north side of building 137 having anapproximate area of 15,545 sq. m., upon the LESSEE express request.CLAUSE 2: EFFECTIVE DATESubject to the collection by the LESSOR of all the amounts set forth in clauses4, 5 and 7 below, the termination shall be effective as of September 30th, 2001.The LESSOR will take over the premises as they are on the execution date hereof.The LESSEE states that it never moved into the premises and that it neveroccupied them. The premises are free of any occupation, material and goods. Italso states that it made no works that may generate the reconditioning of suchpremises.The LESSOR will be responsible for the opening of the premises and for thechanging of the locks in order to recover their free disposal on the agreeddate.CLAUSE 3: DEPOSITBy express agreement between the Parties, the LESSOR shall not return thedeposit, which 2amounts to FF 3,831,842.50 (exclusive of taxes), paid by the LESSEE, as providedfor in clause 21 of the General Terms and Conditions of the Lease.CLAUSE 4: INDEMNITY FOR LOSS OF RENTConsidering the period in use of 6 months to rent the premises again, the Lesseeshall pay the Lessor, as an indemnity for loss of rent, charges and accessories,the sum of FF 9,582,250.30, corresponding to 6 months of rent (inclusive oftaxes) including charges and accessories (inclusive of taxes).This sum shall be paid by transfer that the LESSEE shall solicit to its bank andjustify thereof to the LESSOR, at the latest on September 10th, 2001.CLAUSE 5: COMPENSATORY INDEMNITYThe LESSEE shall pay, as an indemnity for any future or current damage sufferedby the LESSOR under this deed, the amount of FF 2,392,000.00 (inclusive oftaxes).This sum shall be paid by transfer that the LESSEE shall solicit to its bank andjustify thereof to the LESSOR, at the latest on September 10th, 2001.ARTICLE 6: RETURN OF THE BANK GUARANTEEPursuant to clause 9.1 of the Lease, the LESSEE has provided the LESSOR with abank guarantee N(degree)2.00004608C from the SOCIETE GENERALE, which warrants,to the LESSOR, the payment of any amounts whatsoever, that may be due by theLESSEE under any conditions of the Lease, up to FF 9,582,250,30.The LESSOR shall return this bank guarantee to the LESSEE, upon the collectionof any amounts due by the LESSEE under this deed.CLAUSE 7 - PAYMENT OF THE AMOUNTS DUE TO DATEThe Lessee shall pay to the LESSOR the entire rent (VAT and charges included)that corresponds to the period between July 1st, 2001 and September 30th, 2001,that is to say the sum of FF 4,791,125.19.This sum shall be paid by transfer that the LESSEE shall solicit to its bank andjustify thereof to the LESSOR, at the latest on September 10th, 2001.CLAUSE 8 - NOTICESThis out-of-court termination shall be notified by to LESSEE to the potentialcreditors who may benefit from a pledge or a lien on the goodwill, according tosection 14 of Law dated March 17th, 1909. 3This termination will only be final one month after the notice sent to suchcreditors, if any.Clause 9 - LIABILITYThe LESSEE shall not be liable towards the LESSOR or any other person for thedamages occurred in the rented premises and caused to third parties, due to suchpremises between July 28th, 2000 and September 30th, 2001.The LESSOR represents in addition that it will renounce any claim for liabilityagainst the LESSEE and that it shall not claim any indemnity from the LESSEE forany similar future damage.CLAUSE 10 - REPRESENTATIONThe LESSEE, as representative of its corporate officers, represents that:o the company is not in a situation of suspension of payment, judicial recovery or winding-up, or the object of a procedure for provisional interruption of proceedings.o nothing may prevent the above mentioned termination.CLAUSE 11 - COSTSThe Parties shall respectively bear their costs, duties and fees.Executed in La Plaine Saint Denis,On September 7th, 2001In two originals.LA COMPAGNIE DES ENTREPOTS EQUINIXET MAGASINS GENERAUX DE PARIS 4

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