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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2004

 

OR

 

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

 

For the transition period from                      to                     

 

Commission File Number 000-31293

 

EQUINIX, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   77-0487526
(State of incorporation)   (I.R.S. Employer Identification No.)

 

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

(Address of principal executive offices, including ZIP code)

 

(650) 513-7000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) Yes x No ¨ and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.

 

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

 

The number of shares outstanding of the Registrant’s Common Stock as of March 31, 2004 was 18,108,032.

 



EQUINIX, INC.

 

INDEX

 

     Page
No.


Part I. Financial Information

Item 1.

  

Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003

   3
    

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and 2003

   4
    

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003

   5
    

Notes to Condensed Consolidated Financial Statements

   6

Item 2.

  

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

   23
    

Other Factors Affecting Operating Results

   34

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   42

Item 4.

  

Controls and Procedures

   43

Part II. Other Information

Item 1.

  

Legal Proceedings

   44

Item 2.

  

Changes in Securities and Use of Proceeds

   44

Item 3.

  

Defaults Upon Senior Securities

   44

Item 4.

  

Submission of Matters to a Vote of Security Holders

   45

Item 5.

  

Other Information

   45

Item 6.

  

Exhibits and Reports on Form 8-K

   46

Signatures

   52

 

2


PART I. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

EQUINIX, INC.

Condensed Consolidated Balance Sheets

(in thousands)

 

     March 31,
2004


   

December 31,

2003


 
     (unaudited)  
Assets                 

Current assets:

                

Cash and cash equivalents

   $ 68,843     $ 60,428  

Short-term investments

     19,795       12,543  

Accounts receivable, net

     10,079       10,178  

Prepaids and other current assets

     2,168       3,139  
    


 


Total current assets

     100,885       86,288  

Property and equipment, net

     334,295       343,554  

Goodwill

     21,412       21,228  

Debt issuance costs, net

     3,625       5,954  

Other assets

     6,956       7,508  
    


 


Total assets

   $ 467,173     $ 464,532  
    


 


Liabilities and Stockholders’ Equity                 

Current liabilities:

                

Accounts payable and accrued expenses

   $ 18,416     $ 18,880  

Accrued interest payable

     2,254       1,114  

Current portion of debt facilities and capital lease obligations

     —         2,689  

Current portion of credit facility

     —         12,000  

Other current liabilities

     3,701       3,843  
    


 


Total current liabilities

     24,371       38,526  

Debt facilities and capital lease obligations, less current portion

     —         723  

Credit facility, less current portion

     —         22,281  

Senior notes

     —         29,220  

Convertible secured notes

     30,218       31,683  

Convertible subordinated debentures

     86,250       —    

Deferred rent and other liabilities

     23,411       22,022  
    


 


Total liabilities

     164,250       144,455  
    


 


Stockholders’ equity:

                

Preferred stock

     2       2  

Common stock

     18       15  

Additional paid-in capital

     768,058       755,698  

Deferred stock-based compensation

     (661 )     (1,032 )

Accumulated other comprehensive income

     1,452       1,198  

Accumulated deficit

     (465,946 )     (435,804 )
    


 


Total stockholders’ equity

     302,923       320,077  
    


 


Total liabilities and stockholders’ equity

   $ 467,173     $ 464,532  
    


 


 

See accompanying notes to condensed consolidated financial statements.

 

3


EQUINIX, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

 

     Three months ended
March 31,


 
     2004

    2003

 
     (unaudited)  

Revenues

   $ 36,820     $ 25,435  
    


 


Costs and operating expenses:

                

Cost of revenues

     33,785       30,619  

Sales and marketing

     4,642       4,703  

General and administrative

     8,242       10,924  
    


 


Total costs and operating expenses

     46,669       46,246  
    


 


Loss from operations

     (9,849 )     (20,811 )

Interest income

     242       70  

Interest expense

     (4,130 )     (4,812 )

Loss on debt extinguishment and conversion

     (16,211 )     —    
    


 


Net loss before income taxes

     (29,948 )     (25,553 )

Income taxes

     (194 )     —    
    


 


Net loss

   $ (30,142 )   $ (25,553 )
    


 


Net loss per share:

                

Basic and diluted

   $ (2.00 )   $ (3.00 )
    


 


Weighted average shares

     15,104       8,512  
    


 


 

See accompanying notes to condensed consolidated financial statements.

 

4


EQUINIX, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

    

Three months ended

March 31,


 
     2004

    2003

 
     (unaudited)  

Cash flows from operating activities:

                

Net loss

   $ (30,142 )   $ (25,553 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

                

Depreciation and accretion

     14,315       16,254  

Amortization of intangible assets

     514       525  

Amortization of deferred stock-based compensation

     677       958  

Non-cash interest expense

     2,615       2,086  

Allowance for doubtful accounts

     70       154  

Deferred rent

     1,639       833  

Loss on disposal of assets

     2       —    

Loss on debt extinguishment and conversion

     16,211       —    

Changes in operating assets and liabilities:

                

Accounts receivable

     29       (1,677 )

Prepaids and other current assets

     971       2,538  

Other assets

     46       172  

Accounts payable and accrued expenses

     190       (2,642 )

Accrued restructuring charges

     (458 )     (7,919 )

Accrued merger and financing costs

     —         (3,768 )

Accrued interest payable

     (36 )     (990 )

Other current liabilities

     (142 )     (366 )

Other liabilities

     (20 )     (163 )
    


 


Net cash provided by (used in) operating activities

     6,481       (19,558 )
    


 


Cash flows from investing activities:

                

Purchase of short-term investments

     (17,744 )     —    

Sales of short-term investments

     2,001       —    

Maturities of short-term investments

     8,500       —    

Purchases of property and equipment

     (4,908 )     (346 )

Accrued property and equipment

     (196 )     —    

Sale of restricted cash and short-term investments

     —         1,989  
    


 


Net cash provided by (used in) investing activities

     (12,347 )     1,643  
    


 


Cash flows from financing activities:

                

Proceeds from exercise of warrants, stock options and employee stock purchase plan

     2,060       159  

Proceeds from convertible subordinated debentures

     86,250       —    

Repayment of debt facilities and capital lease obligations

     (3,527 )     (2,518 )

Repayment of credit facility

     (34,281 )     —    

Repayment of senior notes

     (30,475 )     —    

Debt issuance costs

     (3,222 )     —    

Debt extinguishment costs

     (2,505 )     —    
    


 


Net cash provided by (used in) financing activities

     14,300       (2,359 )
    


 


Effect of foreign currency exchange rates on cash and cash equivalents

     (19 )     36  

Net increase (decrease) in cash and cash equivalents

     8,415       (20,238 )

Cash and cash equivalents at beginning of period

     60,428       41,216  
    


 


Cash and cash equivalents at end of period

   $ 68,843     $ 20,978  
    


 


Supplemental cash flow information:

                

Cash paid for interest

   $ 1,579     $ 3,793  
    


 


 

See accompanying notes to condensed consolidated financial statements.

 

5


EQUINIX, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Basis of Presentation and Significant Accounting Policies

 

The accompanying unaudited condensed consolidated financial statements have been prepared by Equinix, Inc. (“Equinix” or the “Company”) and reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to present fairly the financial position and the results of operations for the interim periods presented. The balance sheet at December 31, 2003 has been derived from audited financial statements at that date. The financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission (“SEC”), but omit certain information and footnote disclosure necessary to present the statements in accordance with generally accepted accounting principles. For further information, refer to the Consolidated Financial Statements and Notes thereto included in Equinix’s Form 10-K as filed with the SEC on March 5, 2004. Results for the interim periods are not necessarily indicative of results for the entire fiscal year.

 

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

 

In February 2004, the Company sold $86.3 million in aggregate principal of 2.5% Convertible Subordinated Debentures due 2024 to qualified institutional buyers. The Company used the net proceeds from this offering to repay all amounts outstanding under the Credit Facility, the Heller Loan Amendment, the VLL Loan Amendment and the Senior Notes during February and March 2004. All remaining proceeds will be used for general corporate purposes. In addition, in March 2004, holders of the Company’s $10.0 million in Convertible Secured Notes issued in connection with the Crosslink Financing, converted the $10.0 million of principal into 2.5 million shares of the Company’s common stock. The Company refers to this transaction as the “Crosslink Conversion”. As a result of the extinguishment of debt associated with the Credit Facility, Heller Loan Amendment, VLL Loan Amendment and the Senior Notes, as well as the Crosslink Conversion, the Company recognized a loss on debt extinguishment and conversion totaling $16.2 million (see Note 8).

 

As of March 31, 2004, the Company had $88.6 million of cash, cash equivalents and short-term investments. The Company believes that this cash, coupled with anticipated cash flows generated from operations, will be sufficient to meet the Company’s capital expenditure, working capital, debt service and corporate overhead requirements to meet the Company’s currently identified business objectives.

 

6


EQUINIX, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Revenue Recognition and Allowance for Doubtful Accounts

 

Equinix derives more than 90% of its revenues from recurring revenue streams, consisting primarily of (1) colocation services, such as from the licensing of cabinet space and power; (2) interconnection services, such as cross connects and Gigabit Ethernet ports and (3) managed infrastructure services, such as Equinix Direct, bandwidth and other e-business services such as mail service and managed platform solutions. The remainder of the Company’s revenues are from non-recurring revenue streams, such as from the recognized portion of deferred installation revenues, professional services, contract settlements and equipment sales. Revenues from recurring revenue streams are billed monthly and recognized ratably over the term of the contract, generally one to three years. Fees for the provision of e-business services are recognized progressively as the services are rendered in accordance with the contract terms, except where the future costs cannot be estimated reliably, in which case fees are recognized upon the completion of services. Non-recurring installation fees, although generally paid in a lump sum upon installation, are deferred and recognized ratably over the term of the related contract. Professional service fees are recognized in the period in which the services were provided and represent the culmination of the earnings process. Revenue from bandwidth and equipment is recognized on a gross basis in accordance with EITF Abstract No. 99-19, “Recording Revenue as a Principal versus Net as an Agent”, primarily because the Company acts as the principal in the transaction, takes title to products and services and bears inventory and credit risk. Revenue from contract settlements is recognized on a cash basis when no remaining performance obligations exist to the extent that the revenue has not previously been recognized.

 

The Company generally guarantees certain service levels, such as uptime, as outlined in individual customer contracts. To the extent that these service levels are not achieved, the Company reduces revenue for any credits given to the customer as a result. The Company generally has the ability to determine such service level credits prior to the associated revenue being recognized, and historically, these credits have not been significant.

 

Revenue is recognized only when the service has been provided and when there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection of the receivable is reasonably assured. It is customary business practice to obtain a signed master sales agreement and sales order prior to recognizing revenue in an arrangement. The Company assesses collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company generally does not request collateral from its customers. If the Company determines that collection of a fee is not reasonably assured, the Company defers the fee and recognizes revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash. In addition, Equinix also maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments for those customers that the Company had expected to collect the revenues. If the financial condition of Equinix’s customers were to deteriorate or if they become insolvent, resulting in an impairment of their ability to make payments, allowances for doubtful accounts may be required. Management specifically analyzes accounts receivable and analyzes current economic news and trends, historical bad debts, customer concentrations, customer credit-worthiness and changes in customer payment terms when evaluating revenue recognition and the adequacy of the Company’s reserves.

 

7


EQUINIX, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Net Loss per Share

 

The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share,” and SEC Staff Accounting Bulletin (“SAB”) No. 98. Under the provisions of SFAS No. 128 and SAB No. 98 basic and diluted net loss per share are computed using the weighted average number of common shares outstanding. Options, warrants and preferred stock were not included in the computation of diluted net loss per share because the effect would be anti-dilutive.

 

The following table sets forth the computation of basic and diluted net loss per share for the periods presented (in thousands, except per share amounts) (unaudited):

 

     Three months ended
March 31,


 
     2004

    2003

 

Numerator:

                

Net loss

   $ (30,142 )   $ (25,553 )
    


 


Denominator:

                

Weighted average shares

     15,104       8,517  

Weighted average unvested shares subject to repurchase

     —         (5 )
    


 


Total weighted average shares

     15,104       8,512  
    


 


Net loss per share:

                

Basic and diluted

   $ (2.00 )   $ (3.00 )
    


 


 

The following table sets forth potential shares of common stock that are not included in the diluted net loss per share calculation above because to do so would be anti-dilutive for the periods indicated (unaudited):

 

     March 31,

     2004

   2003

Series A preferred stock

   1,868,667    1,868,667

Series A preferred stock warrant

   965,674    965,674

Shares reserved for conversion of convertible secured notes

   3,660,765    2,785,205

Shares reserved for conversion of convertible subordinated debentures

   2,183,548    —  

Common stock warrants

   237,179    250,836

Common stock options

   4,406,678    3,231,870

Common stock subject to repurchase

   28    3,671

 

8


EQUINIX, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce tax assets to the amounts expected to be realized.

 

The Company is currently in a net deferred tax asset position, which has been fully reserved. The Company will continue to provide a valuation allowance for the net deferred tax asset until it becomes more likely than not that the net deferred tax asset will be realizable. For the three months ended March 31, 2004, the Company recorded a tax provision of $194,000, which is primarily attributable to federal alternative minimum tax. No income tax provision was recorded for the three months ended March 31, 2003. The Company expects to be in an alternative minimum tax position throughout the current taxable year. Although the Company recorded this tax provision for the three months ended March 31, 2004 for book purposes, it is not a cash liability due to sufficient stock option deductions, which can be taken for tax return purposes. The Company has recorded this income tax provision within accounts payable and accrued expenses on the accompanying balance sheet as of March 31, 2004, along with other taxes, such as personal and real property taxes (see Footnote 6).

 

Stock-Based Compensation

 

The Company accounts for its stock-based compensation plans in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation.” As permitted under SFAS No. 123, the Company uses the intrinsic value-based method of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” to account for its employee stock-based compensation plans. Under APB Opinion No. 25, compensation expense is based on the difference, if any, on the date of grant, between the fair value of the Company’s shares and the exercise price of the option.

 

Unearned deferred compensation resulting from employee option grants is amortized on an accelerated basis over the vesting period of the individual options, in accordance with FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans” (“FASB Interpretation No. 28”).

 

Primarily as a result of employee stock options being granted at exercise prices below fair market value prior to the Company’s initial public offering (“IPO”) in August 2000, the Company recorded a deferred stock-based compensation charge on its balance sheet of $54,537,000 in 2000, which is being amortized over the four-year vesting life of these individual stock options net of the reversal of any previously recorded accelerated stock-based compensation expense due to the forfeitures of those stock options prior to vesting. In addition, in September 2003, the Compensation Committee of the Board of Directors awarded a stock option grant to the Company’s chief executive officer at a 15% discount to the then fair market value of the Company’s common stock on the date of grant and, as a result, recorded a $1,093,000 deferred stock-based compensation charge, which is amortized over the three-year vesting period of this grant. As of March 31, 2004, there was a combined total of $661,000 of deferred stock-based compensation remaining to be amortized as a result of these option grants. The Company expects stock-based compensation expense related to these specific option grants to impact its results of operations through 2006.

 

9


EQUINIX, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table presents, by operating expense, the Company’s amortization of stock-based compensation expense (in thousands):

 

     Three months ended
March 31,


     2004

   2003

Cost of revenues

   $ 20    $ 40

Sales and marketing

     30      113

General and administrative

     627      805
    

  

     $ 677    $ 958
    

  

 

The Company has adopted the disclosure requirements of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – An Amendment of SFAS No. 123”. The following table presents what the net loss and net loss per share would have been had the Company adopted SFAS No. 123 (in thousands, except per share data):

 

     Three months ended
March 31,


 
     2004

    2003

 

Net loss as reported

   $ (30,142 )   $ (25,553 )

Stock-based compensation expense included in net loss

     677       958  

Stock-based compensation expense if SFAS No. 123 had been adopted

     (4,052 )     (3,425 )
    


 


Pro forma net loss

   $ (33,517 )   $ (28,020 )
    


 


Basic and diluted net loss per share:

                

As reported

   $ (2.00 )   $ (3.00 )

Pro forma

     (2.22 )     (3.29 )

 

The Company’s fair value calculations for employee grants were made using the Black-Scholes option pricing model with the following weighted average assumptions:

 

     Three months ended
March 31,


 
     2004

    2003

 

Dividend yield

   0 %   0 %

Expected volatility

   100 %   135 %

Risk-free interest rate

   2.80 %   3.75 %

Expected life (in years)

   3.50     3.50  

 

The Company’s fair value calculations for employee’s stock purchase rights under the employee stock purchase plan were made using the Black-Scholes option pricing model with weighted average assumptions consistent with those used for employee grants as indicated above; however, the assumption for expected life (in years) used for the employee stock purchase plan was 2 years for all periods presented.

 

10


EQUINIX, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Goodwill and Other Intangible Assets

 

Goodwill and other intangible assets, net, consisted of the following as of March 31, 2004 and December 31, 2003 (in thousands):

 

    

March 31,

2004


   

December 31,

2003


 
     (unaudited)        

Goodwill

   $ 21,412     $ 21,228  
    


 


Other intangibles:

                

Intangible asset - customer contracts

     4,009       3,927  

Intangible asset - tradename

     309       300  

Intangible asset - workforce

     160       160  
    


 


       4,478       4,387  

Accumulated amortization

     (2,701 )     (2,106 )
    


 


       1,778       2,281  
    


 


     $ 23,190     $ 23,509  
    


 


 

Other intangible assets, net, are included in other assets on the accompanying balances sheets as of March 31, 2004 and December 31, 2003.

 

For the three months ended March 31, 2004 and 2003, the Company recorded amortization expense of $514,000 and $525,000, respectively. The Company expects to record the following amortization expense during the next five years (in thousands):

 

Year ending:

      

2004

   $  2,057

2005

     60

2006

     60

2007

     60

2008

     55
    

Total

   $  2,292
    

 

11


EQUINIX, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

2. Santa Clara IBX Acquisition

 

In December 2003, the Company closed a definitive agreement to sublease an already constructed data center in Santa Clara, California, and acquire certain related assets from Sprint Communications Company, L.P. (“Sprint”). The 160,000 square foot data center became the Company’s 14th IBX hub, expanding its global footprint to over 1.2 million square feet in eleven markets. The Company refers to this transaction as the Santa Clara IBX acquisition (the “Santa Clara IBX Acquisition”).

 

As a result of the Santa Clara IBX Acquisition, the Company recorded the following assets and liabilities as of December 1, 2003 (in thousands):

 

Property and equipment

   $  3,980

Intangible asset - customer contracts

     300

Intangible asset - workforce

     160
    

Total assets acquired

   $ 4,440
    

Use tax payable

   $ 317

Asset retirement obligation

     63

Unfavorable lease obligation

     4,060
    

Total liabilities acquired

   $  4,440
    

 

The sublease with Sprint, which expires in 2014, has payment terms which based on the findings of an independent valuation appraisal were at a premium to prevailing market rates for similar properties at the time of the Santa Clara IBX Acquisition. As a result, the Company recorded an unfavorable lease liability of $4,060,000, which will be amortized into rent expense over the term of this sublease. In addition, the Company recorded both a use tax and asset retirement obligation liability in connection with this property.

 

Pursuant to the terms of the sublease agreement with Sprint, the Company obtained title to certain fixed assets contained within this IBX hub, which had a total deemed fair value of $3,980,000. Concurrent with the negotiations with Sprint to sublease the property and take over the operations of this IBX hub, the Company also negotiated with the various customers already located within this IBX hub and entered into new contracts with the key customers. The Company also hired a number of Sprint employees that were working within this IBX hub. The customer contracts intangible asset has a useful life of five years, the term of the primary key customer contract, and the workforce intangible asset has a useful life of one year.

 

3. Related Party Transactions

 

The majority of the Company’s Asia-Pacific revenues are generated in Singapore and a significant portion of the business in Singapore is transacted with entities affiliated with STT Communications, which is the Company’s single largest stockholder. For the three months ended March 31, 2004, revenues recognized with related parties, primarily entities affiliated with STT Communications, were $1,222,000 and as of March 31, 2004, accounts receivable with these related parties was $992,000. For the three months ended March 31, 2004, costs and services procured with related parties, primarily entities affiliated with STT Communications, were $466,000 and as of March 31, 2004, accounts payable with these related parties was $347,000. For the three months ended March 31, 2003, revenues recognized with entities affiliated with STT Communications were $1,540,000 and as of March 31, 2003, accounts receivable with entities affiliated with STT Communications was $1,131,000. For the three months ended March 31, 2003, costs and services procured with entities affiliated with STT Communications were $121,000 and as of March 31, 2003, accounts payable with entities affiliated with STT Communications was $534,000.

 

12


EQUINIX, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

4. Accounts Receivable

 

Accounts receivables, net, consisted of the following (in thousands):

 

    

March 31,

2004


   

December 31,

2003


 
     (unaudited)        

Accounts receivable

   $ 19,849     $ 19,164  

Unearned revenue

     (9,386 )     (8,671 )

Allowance for doubtful accounts

     (384 )     (315 )
    


 


     $ 10,079     $ 10,178  
    


 


 

Unearned revenue consists of pre-billing for services that have not yet been provided, but which have been billed to customers in advance in accordance with the terms of their contract. Accordingly, the Company invoices its customers at the end of a calendar month for services to be provided the following month.

 

5. Property and Equipment

 

Property and equipment consisted of the following (in thousands):

 

    

March 31,

2004


   

December 31,

2003


 
     (unaudited)        

Leasehold improvements

   $ 385,797     $ 383,574  

IBX plant and machinery

     65,085       64,557  

Computer equipment and software

     19,513       18,875  

IBX equipment

     41,726       40,023  

Furniture and fixtures

     1,995       1,979  
    


 


       514,116       509,008  

Less accumulated depreciation

     (179,821 )     (165,454 )
    


 


     $ 334,295     $ 343,554  
    


 


 

Included within leasehold improvements is the value attributed to the earned portion of several warrants issued to certain fiber carriers and our contractor totaling $9,883,000 at both March 31, 2004 and December 31, 2003. Amortization of such warrants is included in depreciation expense.

 

13


EQUINIX, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

6. Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consisted of the following (in thousands):

 

     March 31,
2004


   December 31,
2003


     (unaudited)     

Accounts payable

   $ 3,870    $ 3,833

Accrued compensation and benefits

     3,939      3,655

Accrued taxes

     2,989      2,539

Accrued property and equipment

     2,258      2,454

Accrued utility and security

     1,432      2,017

Accrued professional fees

     1,360      1,281

Accrued repairs and maintenance

     703      634

Accrued restructuring charges

     370      828

Accrued other

     1,495      1,639
    

  

     $ 18,416    $ 18,880
    

  

 

7. Deferred Rent and Other Liabilities

 

Deferred rent and other liabilities consisted of the following (in thousands):

 

     March 31,
2004


   December 31,
2003


     (unaudited)     

Deferred rent

   $ 21,520    $ 19,889

Other liabilities

     1,891      2,133
    

  

     $ 23,411    $ 22,022
    

  

 

The Company leases its IBX hubs and certain equipment under noncancelable operating lease agreements expiring through 2020. The centers’ lease agreements typically provide for base rental rates that increase at defined intervals during the term of the lease. In addition, the Company had negotiated rent expense abatement periods in some IBX hubs to better match the phased build-out of certain of its centers. The Company accounts for such abatements and increasing base rentals using the straight-line method over the life of the lease. The difference between the straight-line expense and the cash payment is recorded as deferred rent.

 

14


EQUINIX, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

8. Debt Facilities

 

Convertible Subordinated Debentures

 

In February 2004, the Company issued $86,250,000 principal amount of 2.5% Convertible Subordinated Debentures due February 15, 2024 (the “Convertible Subordinated Debentures”). Interest is payable semi-annually, in arrears, on February 15 and August 15 of each year, beginning August 15, 2004.

 

The Convertible Subordinated Debentures are governed by the Indenture dated February 11, 2004, between the Company, as issuer, and U.S. Bank National Association, as trustee (the “Indenture”). The Indenture does not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by the Company. The Convertible Subordinated Debentures are unsecured and rank junior in right of payment to the Company’s existing or future senior debt.

 

The Convertible Subordinated Debentures are convertible into shares of the Company’s common stock. Each $1,000 principal amount of Convertible Subordinated Debentures are convertible into 25.3165 shares of the Company’s common stock. This represents an initial conversion price of approximately $39.50 per share of common stock. As of March 31, 2004, the Convertible Subordinated Debentures were convertible into 2,183,548 shares of the Company’s common stock. Holders of the Convertible Subordinated Debentures may convert their individual debentures into shares of the Company’s common stock only under any of the following circumstances:

 

  during any calendar quarter after the quarter ending June 30, 2004 (and only during such calendar quarter) if the sale price of the Company’s common stock, for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous calendar quarter, is greater than or equal to 120% of the conversion price per share of our common stock, or approximately $47.40 per share;

 

  subject to certain exceptions, during the five business-day period after any five consecutive trading-day period in which the trading price per Convertible Subordinated Debenture for each day of that period was less than 98% of the product of the sale price of the Company’s common stock and the conversion rate on each such day;

 

  if the Convertible Subordinated Debentures have been called for redemption; or

 

  upon the occurrence of certain specified corporate transactions described in the Indenture, such as a consolidation, merger or binding share exchange in which the Company’s common stock would be converted into cash or property other than securities.

 

The conversion rates may be adjusted upon the occurrence of certain events including for any cash dividend, but they will not be adjusted for accrued and unpaid interest. Holders of the Convertible Subordinated Debentures will not receive any cash payment representing accrued and unpaid interest upon conversion of a debenture. Instead, interest will be deemed cancelled, extinguished and forfeited upon conversion. Convertible Subordinated Debentures called for redemption may be surrendered for conversion prior to the close of business on the business day immediately preceding the redemption date.

 

The Company may redeem all or a portion of the Convertible Subordinated Debentures at any time after February 15, 2009 at a redemption price equal to 100% of the principal amount of the Convertible Subordinated Debentures, plus accrued and unpaid interest, if any, to but excluding the date of redemption.

 

15


EQUINIX, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Holders of the Convertible Subordinated Debentures have the right to require us to purchase all or a portion of the Convertible Subordinated Debentures on February 15, 2009, February 15, 2014 and February 15, 2019, each of which is referred to as a purchase date. In addition, upon a fundamental change of the Company, as defined in the Indenture, each holder of the Convertible Subordinated Debentures may require us to repurchase some or all of the Convertible Subordinated Debentures at a purchase price equal to 100% of the principal amount plus accrued and unpaid interest.

 

The Company has considered the guidance in EITF Abstract No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, and has determined that the Convertible Subordinated Debentures do not contain a beneficial conversion feature as the fair value of the Company’s common stock on the date of issuance, was less than the stock conversion ratio outlined in the agreement. The Convertible Subordinated Debentures contain two embedded derivatives, a bond parity clause and a contingent interest provision. The embedded derivatives had a zero fair value as of March 31, 2004. The Company will be remeasuring the embedded derivatives each reporting period, as applicable. Changes in fair value will be reported in the statement of operations.

 

The costs related to the Convertible Subordinated Debentures were capitalized and are being amortized to interest expense using the effective interest method, over the life of the Convertible Subordinated Debentures. Debt issuance costs related to the Convertible Subordinated Debentures, net of amortization, were $3,200,000 as of March 31, 2004.

 

Credit Facility

 

In February 2004, with the proceeds from the Convertible Subordinated Debentures, the Company repaid all amounts outstanding under the Credit Facility, including $34,281,000 of principal plus accrued and unpaid interest, and terminated the Credit Facility. As a result, the Company recognized a loss on debt extinguishment on this transaction of $4,405,000, comprised of the write-off of unamortized debt issuance costs totaling $4,282,000 and other transaction fees of $123,000. Refer to Loss on Debt Extinguishment and Conversion below.

 

Heller Loan Amendment

 

In February 2004, with the proceeds from the Convertible Subordinated Debentures, the Company repaid all amounts outstanding under the Heller Loan Amendment, including $2,177,000 of principal plus accrued and unpaid interest, and terminated the Heller Loan Amendment. As a result, the Company recognized a loss on debt extinguishment on this transaction of $267,000, comprised of the write-off of unamortized debt issuance costs and debt discount totaling $87,000 and other transaction fees of $180,000. Refer to Loss on Debt Extinguishment and Conversion below.

 

VLL Loan Amendment

 

In March 2004, with the proceeds from the Convertible Subordinated Debentures, the Company repaid all amounts outstanding under the VLL Loan Amendment, including $749,000 of principal plus accrued and unpaid interest, and terminated the VLL Loan Amendment. As a result, the Company recognized a loss on debt extinguishment on this transaction of $170,000, comprised of the write-off of unamortized debt issuance costs and debt discount totaling $74,000 and other transaction fees of $96,000. Refer to Loss on Debt Extinguishment and Conversion below.

 

16


EQUINIX, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Senior Notes

 

In March 2004, with the proceeds from the Convertible Subordinated Debentures, the Company redeemed all amounts outstanding under the Senior Notes, including $30,475,000 of principal plus accrued and unpaid interest, and terminated the Senior Notes. The redemption price of the Senior Notes was equal to 106.5% of their principal, which resulted in an additional cash premium paid of $1,981,000 (the “Senior Note Cash Premium”). As a result, the Company recognized a loss on debt extinguishment on this transaction of $3,759,000, comprised of the Senior Note Cash Premium, the write-off of unamortized debt issuance costs and debt discount totaling $1,653,000 and other transaction fees of $125,000. Refer to Loss on Debt Extinguishment and Conversion below.

 

Crosslink Conversion

 

In March 2004, holders of the Company’s Convertible Secured Notes issued in connection with the Crosslink Financing, converted the $10,000,000 of principal into 2,500,000 shares of the Company’s common stock. The Company refers to this transaction as the “Crosslink Conversion”. As a result of the Crosslink Conversion, the Company recognized a loss on debt conversion on this transaction of $7,610,000, representing the write-off of unamortized debt discount. Refer to Loss on Debt Extinguishment and Conversion below.

 

Loss on Debt Extinguishment and Conversion

 

As a result of the extinguishment of debt associated with the Credit Facility, Heller Loan Amendment, VLL Loan Amendment and the Senior Notes, as well as the Crosslink Conversion, the Company recognized a total loss on debt extinguishment and conversion totaling $16,211,000 as summarized below (in thousands):

 

     Credit facility

   Heller loan
amendment


   VLL loan
amendment


   Senior
notes


   Crosslink
conversion


   Total

Write-off of debt issuance costs and discounts

   $ 4,282    $ 87    $ 74    $ 1,653    $ 7,610    $ 13,706

Senior note cash premium

     —        —        —        1,981      —        1,981

Other transaction costs

     123      180      96      125      —        524
    

  

  

  

  

  

     $ 4,405    $ 267    $ 170    $ 3,759    $ 7,610    $ 16,211
    

  

  

  

  

  

 

Maturities

 

Combined aggregate maturities for the Company’s Convertible Secured Notes and Convertible Subordinated Debentures as of March 31, 2004 are as follows (in thousands) (unaudited):

 

    

Convertible

secured
notes


   

Convertible

subordinated

debentures


   Total

 

2004

   $ —       $ —      $ —    

2005

     —         —        —    

2006

     —         —        —    

2007

     33,598       —        33,598  

2008 and thereafter

     —         86,250      86,250  
    


 

  


       33,598       86,250      119,848  

Less amount representing unamortized discount

     (3,380 )     —        (3,380 )
    


 

  


     $ 30,218     $ 86,250    $ 116,468  
    


 

  


 

17


EQUINIX, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

9. Stockholders’ Equity

 

On January 1, 2004, pursuant to the provisions of the Company’s stock plans, the number of common shares in reserve automatically increased by 905,066 shares for the 2000 Equity Incentive Plan, 301,689 shares for the Employee Stock Purchase Plan and 50,000 shares for the 2000 Director Stock Option Plan.

 

During the quarter ended March 31, 2004, the Compensation Committee of the Board of Directors granted options to certain employees, including all officers of the Company, to purchase 1,262,000 shares of common stock at a weighted average exercise price of $28.95 per share under the Company’s stock plans.

 

10. Commitments and Contingencies

 

During the quarter ended September 30, 2001, putative shareholder class action lawsuits were filed against the Company, certain of its officers and directors, and several investment banks that were underwriters of the Company’s initial public offering. The cases were filed in the United States District Court for the Southern District of New York, purportedly on behalf of investors who purchased the Company’s stock between August 10, 2000 and December 6, 2000. The suits allege that the underwriter defendants agreed to allocate stock in the Company’s initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases in the aftermarket at pre-determined prices. The plaintiffs allege that the prospectus for the Company’s initial public offering was false and misleading and in violation of the securities laws because it did not disclose these arrangements. It is possible that additional similar complaints may also be filed. In July 2003, a Special Litigation Committee of the Equinix Board of Directors agreed to participate in a settlement with the plaintiffs that is anticipated to include most of the approximately 300 defendants in similar actions. This settlement agreement is subject to court approval and sufficient participation by all defendants in similar actions. Such settlement includes without limitation a guarantee of payments to the plaintiffs in the lawsuits, assignment of certain claims against the underwriters in the Company’s IPO to the plaintiffs, and a dismissal of all claims against Equinix and related individuals. Other than legal fees incurred to date, the Company expects that all expenses of settlement, if any, will be paid by the Company’s insurance carriers. Until such settlement is finalized, the Company and its officers and directors intend to continue to defend the actions vigorously. The Company believes it has adequate legal defenses and believes that the ultimate outcome of these actions will not have a material effect on the Company’s consolidated financial position, results of operations or cash flows, although there can be no assurance as to the outcome of such litigation. Furthermore, no range of loss can be estimated at this time.

 

The Company estimates exposure on certain liabilities, such as property taxes, based on the best information available at the time of determination. With respect to real and personal property taxes, the Company records what it can reasonably estimate based on prior payment history, current landlord estimates or estimates based on current or changing fixed asset values in each specific municipality, as applicable. However, there are circumstances beyond the Company’s control whereby the underlying value of the property or basis for which the tax is calculated on the property may change, such as a landlord selling the underlying property of one of the Company’s IBX hub leases or a municipality changing the assessment value in a jurisdiction and, as a result, the Company’s property tax obligations may vary from period to period. Based upon the most current facts and circumstances, the Company makes the necessary property tax accruals for each of its reporting periods. However, revisions in the Company’s estimates of the potential or actual liability could materially impact the financial position, results of operations or cash flows of the Company.

 

From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. In the opinion of management, there are no pending claims of which the outcome is expected to result in a material adverse effect in the financial position, results of operations or cash flows of the Company.

 

18


EQUINIX, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

11. Comprehensive Loss

 

The components of comprehensive loss are as follows (in thousands) (unaudited):

 

     Three months ended
March 31,


 
     2004

    2003

 

Net loss

   $ (30,142 )   $ (25,553 )

Unrealized gain on available for sale securities

     14       —    

Foreign currency translation gain (loss)

     240       (646 )
    


 


Comprehensive loss

   $ (29,888 )   $ (26,199 )
    


 


 

There were no significant tax effects on comprehensive loss for the three months ended March 31, 2004 and 2003.

 

12. Segment Information

 

The Company and its subsidiaries are principally engaged in the design, build-out and operation of neutral IBX hubs. All revenues result from the operation of these IBX hubs. The Company’s chief operating decision-maker evaluates performance, makes operating decisions and allocates resources based on financial data consistent with the presentation in the accompanying consolidated financial statements.

 

The Company’s geographic statement of operations disclosures are as follows (in thousands) (unaudited):

 

     Three months ended
March 31,


 
     2004

    2003

 

Revenues:

                

United States

   $ 32,021     $ 21,280  

Asia-Pacific

     4,799       4,155  
    


 


     $ 36,820     $ 25,435  
    


 


Cost of revenues:

                

United States

   $ 29,438     $ 25,265  

Asia-Pacific

     4,347       5,354  
    


 


     $ 33,785     $ 30,619  
    


 


Income (loss) from operations:

                

United States

   $ (7,402 )   $ (16,604 )

Asia-Pacific

     (2,447 )     (4,207 )
    


 


     $ (9,849 )   $ (20,811 )
    


 


 

19


EQUINIX, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The Company’s long-lived assets are located in the following geographic areas (in thousands) (unaudited)

 

     March 31,
2004


   December 31,
2003


United States

   $ 332,804    $ 343,419

Asia-Pacific

     34,288      34,825
    

  

     $ 367,092    $ 378,244
    

  

 

The Company’s goodwill totaling $21,412,000 and $21,228,000 as of March 31, 2004 and December 31, 2003, respectively, is part of the Company’s Singapore reporting unit, which is reported within the Asia-Pacific segment.

 

Revenue information on a services basis is as follows (in thousands) (unaudited)

 

     Three months ended
March 31,


     2004

   2003

Colocation

   $ 24,806    $ 17,517

Interconnection

     6,937      3,902

Managed infrastructure

     2,740      2,684
    

  

Recurring revenues

     34,483      24,103

Non-recurring revenues

     2,337      1,332
    

  

     $ 36,820    $ 25,435
    

  

 

Revenue from one customer accounted for 13% of the Company’s revenues for the three months ended March 31, 2004. Revenue from this same customer accounted for 17% of the Company’s revenues for the three months ended March 31, 2003. No other single customer accounted for more than 10% of the Company’s revenues for the three months ended March 31, 2004 and 2003. Accounts receivables from the customer mentioned above accounted for 11% of the Company’s gross accounts receivables as of March 31, 2004. Accounts receivables from this same customer also accounted for 18% of the Company’s gross accounts receivables as of March 31, 2003. No other single customer accounted for more than 10% of the Company’s gross accounts receivables as of March 31, 2004 and 2003.

 

13. Recent Accounting Pronouncements

 

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. In December 2003, the FASB released a revised version of FIN 46 clarifying certain aspects of FIN 46 and providing certain entities with exemptions from the requirements of FIN 46. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after March 15, 2004. The adoption of FIN 46 did not have a material impact on the Company’s results of operations, financial position or cash flows.

 

20


EQUINIX, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the Derivatives Implementation Group (“DIG”) process that effectively required amendments to SFAS No. 133, and decisions made in connection with other FASB projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative and characteristics of a derivative that contains financing components. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company adopted the provisions of SFAS No. 149 during the third quarter of 2003. The adoption of this statement has not had a material impact on the Company’s results of operations, financial position or cash flows.

 

In May 2003, the FASB issued SFAS No. 150, ”Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. In November 2003, the FASB issued FASB Staff Position No. FASB 150-3 which deferred the measurement provisions of SFAS No. 150 indefinitely for certain mandatorily redeemable non-controlling interests that were issued before November 5, 2003. The FASB plans to reconsider implementation issues and, perhaps, classification or measurement guidance for those non-controlling interests during the deferral period. In 2003, the Company applied certain disclosure requirements of SFAS No. 150. To date, the impact of the effective provisions of SFAS No. 150 have not had a material impact on the Company’s results of operations, financial position or cash flows. While the effective date of certain elements of SFAS No. 150 have been deferred, the adoption of SFAS No. 150 when finalized is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

In December 2003, the SEC issued Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”), which codifies, revises and rescinds certain sections of SAB No. 101, “Revenue Recognition,” in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB 104 did not have a material effect on the Company’s results of operations, financial position or cash flows.

 

In March 2004, the FASB approved EITF Issue 03-6 “Participating Securities and the Two-Class Method under FAS 128”. EITF Issue 03-6 supersedes the guidance in Topic No. D-95, “Effect of Participating Convertible Securities on the Computation of Basic Earnings per Share”, and requires the use of the two-class method of participating securities. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In addition, EITF Issue 03-6 addresses other forms of participating securities, including options, warrants, forwards and other contracts to issue an entity’s common stock, with the exception of stock-based compensation (unvested options and restricted stock) subject to the provisions of Opinion No. 25 and FASB No. 123. EITF Issue 03-6 is effective for reporting periods beginning after March 31, 2004 and should be applied by restating previously reported earnings per share. The Company is currently in the process of evaluating the impact that the adoption of EITF Issue 03-6 will have on its financial position and results of operations.

 

21


EQUINIX, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

14. Subsequent Events

 

In April 2004, the Company announced that it had entered into a long-term operating lease to expand its IBX footprint with the addition of a new 95,000 square foot data center in the Washington, D.C. metro area. The center is adjacent to the Company’s existing Washington D.C. metro area IBX. The addition of the center expands the global Equinix footprint to over 1.3 million square feet. Equinix currently intends to begin placing customers in the center beginning November 1, 2004. This new operating lease will add an additional $65.0 million in rent expense through 2019. The Company’s minimum future operating lease payments for each of the next five fiscal years, including this new Washington, D.C. metro area operating lease, are summarized as follows (in thousands):

 

Year ending:

      

2004

   $ 29,047

2005

     34,813

2006

     35,724

2007

     36,232

2008

     35,804

Thereafter

     250,710
    

Total

   $ 422,330
    

 

22


Item 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends” and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Other Factors Affecting Operating Results” and “Liquidity and Capital Resources” below. All forward-looking statements in this document are based on information available to us as of the date hereof and we assume no obligation to update any such forward-looking statements.

 

Overview

 

Equinix provides network neutral colocation, interconnection and managed services to enterprises, content companies and systems integrators and the world’s largest networks. Through our 14 IBX hubs in the U.S. and Asia-Pacific, customers can directly interconnect with each other for critical traffic exchange requirements. As of March 31, 2004, we had IBX hubs totaling an aggregate of more than 1.2 million gross square feet in the Washington, D.C., New York, Dallas, Chicago, Los Angeles, Honolulu and Silicon Valley areas in the United States and Hong Kong, Singapore, Sydney and Tokyo in the Asia-Pacific region.

 

In our IBX hubs, customers can directly interconnect with each other for critical traffic exchange requirements. Direct interconnection to our aggregation of networks, which serve more than 90% of the world’s Internet routes, allows our customers to increase performance while significantly reducing costs. Based on our network neutral model and the quality of our IBX hubs, we believe we have established a critical mass of customers, comprised of networks, content providers and other enterprise companies. As more customers locate in our IBX hubs, it benefits their suppliers and business partners to do so as well to gain the full economic and performance benefits of direct interconnection. These partners, in turn, pull in their business partners, creating a “network effect” of customer adoption. Our interconnection services enable scalable, reliable and cost-effective interconnection and traffic exchange thus lowering overall cost and increasing flexibility.

 

This critical mass of customers and the resulting network effect, combined with our improved financial position gained through the completion of a series of financing transactions has resulted in an acceleration of new customer growth and related revenue bookings. Both our existing and new customers continue to gain confidence in our financial stability, which helps make their decision to move their core infrastructure into our IBX hubs easier. While we had generated negative operating cashflow in each annual period since inception, commencing the quarter ended September 30, 2003 we started to generate positive operating cash flow. During this quarter, our recurring revenues grew to a level sufficient to meet our operating cash requirements related to our predominantly fixed cost structure. We considered this quarter to be the inflection point in our business model whereby our revenues were sufficient on an ongoing basis to meet all our operating costs and working capital requirements. Given a large component of our cost of revenues are fixed in nature, we anticipate any growth in revenues from our existing IBX hubs will have a significant incremental flow through to gross profit. As a result of reaching this point in our operating history, we expect to generate cash from our operations during 2004 and expect these operating cash flows to also be sufficient to meet our cash requirements to fund our capital expenditures.

 

Historically, our market has been served by large telecommunications carriers who have bundled their telecommunication products and services with their colocation offerings. During 2003, a number of these telecommunication carriers reduced their colocation footprint as they exited under-performing markets. In addition, one major telecommunications company, Sprint, announced their plans to exit the colocation and hosting market altogether to focus on their core service offerings, while another telecommunications

 

23


company, Cable & Wireless Plc, sold their U.S. assets to another telecommunications company, Savvis Communications Corp, in a bankruptcy auction. Each of these colocation providers owns and operates a network. We do not operate a network, yet have greater than 190 networks operating out of our IBX hubs. As a result, we are able to offer our customers a substantial choice of networks given our network neutrality allowing our customers to choose from numerous network service providers thereby eliminating a single point of failure. We believe this is a distinct advantage we have over our telecommunications company competitors, especially when the telecommunications industry is experiencing so many business challenges and changes as evidenced by the numerous bankruptcies and consolidations within this industry during the past several years. Furthermore, for those customers who do require a fully managed solution that these telecommunications companies typically provide, certain of our other customers, such as IBM and EDS, can provide such a solution within our network rich IBX hubs.

 

Strategically, we will continue to look at attractive opportunities to grow our market share and selectively improve our footprint and service streams, such as our recent acquisition of the Sprint property in Santa Clara and our recent expansion in the Washington, D.C. metro area (refer to “Recent Developments” below). However, we will continue to be very selective with any similar opportunity. As was the case with these two recent expansions in the Silicon Valley and Washington, D.C. area markets, the criteria will be quality of the design, access to networks, capacity availability in current market location, amount of incremental investment required by us in the targeted property, lead-time to breakeven and in-place customers. Like our two recent expansions, the right combination of these factors may be quite attractive for us. Dependent on the particular deal, these acquisitions may require additional capital expenditures in order to bring these centers up to Equinix standards.

 

Recent Developments

 

On February 11, 2004, we sold $75.0 million in aggregate principal of 2.5% convertible subordinated debentures due 2024 to qualified institutional buyers. Subsequently, on February 18, 2004, we sold an additional $11.25 million of our debentures to the initial purchasers of these debentures. We refer to this transaction as the “convertible debenture offering”. We used the net proceeds from the convertible debenture offering to repay all amounts outstanding under our credit facility and two of our other debt facilities. In addition, we used the proceeds received to redeem our 13% senior notes, which had a total of $30.5 million of principal outstanding. The effective date of the redemption was March 12, 2004. The redemption price for the senior notes was equal to 106.5% of their principal amount plus accrued and unpaid interest to the redemption date. Lastly, all remaining proceeds from the convertible debenture offering will be used for general corporate purposes.

 

On March 26, 2004, holders of our 10% $10.0 million convertible secured notes issued in connection with the Crosslink financing, converted the $10.0 million of principal into 2.5 million shares of our common stock. We refer to this transaction as the “Crosslink conversion”.

 

We recorded a significant loss on debt extinguishment and conversion totaling $16.2 million during the quarter ended March 31, 2004, primarily related to the non-cash write-off of debt issuance costs and discounts in connection with the various debt repayments, redemptions and conversions of the underlying debt facilities extinguished or converted, as well as the cash premium that we paid on our 13% senior notes.

 

On April 22, 2004, we announced that we had entered into a long-term operating lease to expand our IBX footprint with the addition of a new 95,000 square foot data center in the Washington, D.C. metro area. The center is adjacent to our existing Washington D.C. metro area IBX. The addition of the center expands our global footprint to over 1.3 million square feet. We currently intend to begin placing customers in this center beginning November 1, 2004, concurrent with when we begin making rent payments on this property.

 

Critical Accounting Policies and Estimates

 

Equinix’s financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities,

 

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sales and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Critical accounting policies for Equinix include revenue recognition and allowance for doubtful accounts, accounting for income taxes, estimated and contingent liabilities, accounting for property and equipment and impairment of long-lived assets, which are discussed in more detail under the caption “Critical Accounting Policies and Estimates” in the Company’s 2003 Annual Report on Form 10-K.

 

Results of Operations

 

Three Months Ended March 31, 2004 and 2003

 

Revenues. Our revenues for the three months ended March 31, 2004 and 2003 were split between the following revenue classifications (dollars in thousands):

 

     Three months ended March 31,

 
     2004

   %

    2003

   %

 

Recurring revenues

   $ 34,483    94 %   $ 24,103    95 %
    

        

      

Non-recurring revenues:

                          

Installation and professional services

     1,643    4 %     1,250    5 %

Other

     694    2 %     82    0 %
    

        

      
       2,337    6 %     1,332    5 %
    

        

      

Total revenues

   $ 36,820    100 %   $ 25,435    100 %
    

        

      

 

Our revenues for the three months ended March 31, 2004 and 2003 were geographically comprised of the following (dollars in thousands):

 

     Three months ended March 31,

 
     2004

   %

    2003

   %

 

U.S. revenues

   $ 32,021    87 %   $ 21,280    84 %

Asia-Pacific revenues

     4,799    13 %     4,155    16 %
    

        

      

Total revenues

   $ 36,820    100 %   $ 25,435    100 %
    

        

      

 

We recognized revenues of $36.8 million for the three months ended March 31, 2004, as compared to revenues of $25.4 million for the three months ended March 31, 2003, a 45% increase. We segment our business geographically between the U.S. and Asia-Pacific as further discussed below.

 

Our business is based on a recurring revenue model comprised of colocation, interconnection and managed infrastructure services. We consider these services as recurring as once a customer has been installed in one of our IBX hubs they are billed on a fixed and recurring basis each month for the duration of their contract, which is generally one to three years in length. Our recurring revenues are a significant component of our total revenues comprising 94% of our total revenues for the three months ended March 31, 2004, as compared to 95% in the prior period. Historically, greater than half of our customers order new services each quarter and approximately half of our new orders each quarter are from our already installed customer base.

 

Our non-recurring revenues are primarily comprised of installation services related to a customer’s initial deployment and, professional services that we perform. These services are considered to be non-recurring as they are billed typically once and only upon completion of the installation or professional services work performed. The non-recurring revenues are typically billed on the first invoice distributed to the customer. Installation and professional services revenues increased 31% period over period, primarily due to strong existing and new customer growth during the year. As a percent of total revenues, we expect non-recurring revenues to represent approximately 5% of total revenues in each period. Other non-recurring revenues are comprised primarily of customer settlements, which represent fees paid to us by customers who wish to terminate their contracts with us.

 

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In addition to reviewing recurring versus non-recurring revenues, we look at two other primary metrics when we analyze our revenues: 1) customer count and 2) weighted average percentage utilization. Our customer count increased to 776 as of March 31, 2004 versus 600 as of March 31, 2003, an increase of 29%. Our weighted average utilization rate represents the percentage of our cabinet space billing versus total cabinet space available. Our weighted average utilization rate grew by 12% to 41% as of March 31, 2004 from 29% as of March 31, 2003. Although we have substantial capacity for growth, our utilization rates vary from market to market among our 14 worldwide IBX hubs. We continue to monitor the available capacity in each of our selected markets. To the extent we have limited capacity available in a given market, it may limit our ability for growth in that market. Therefore, consistent with our acquisition of Sprint’s Santa Clara property in December 2003 and our expansion into the Washington, D.C. metro area market in April 2004, we will continue to review our available space in our other operating markets.

 

U.S. Revenues. We recognized U.S. revenues of $32.0 million for the three months ended March 31, 2004 as compared to $21.3 million for the three months ended March 31, 2003. U.S. revenues consisted of recurring revenues of $30.3 million and $20.3 million, respectively, for the three months ended March 31, 2004 and 2003, a 49% increase. U.S. recurring revenues consist primarily of colocation and interconnection services plus a nominal amount of managed infrastructure services. U.S. recurring revenues for the three months ended March 31, 2004 included revenue generated from the recently acquired Santa Clara IBX hub. Excluding revenue from this acquired U.S. IBX hub, the period over period growth in recurring revenues of 44% was primarily the result of an increase in orders from both our existing customers and new customer growth acquired during the period as reflected in the growth in our customer count and utilization rate as discussed above. In addition, consistent with the growth in our customer base, our interconnection revenues have grown as our customers continue to expand their interconnection activity with each other. As of March 31, 2004, U.S. interconnection revenue represented 22% of total U.S. recurring revenue as compared to 19% in the prior period. We expect our U.S. recurring revenues to continue to grow and remain our most significant source of revenue for the foreseeable future.

 

In addition, U.S. revenues consisted of non-recurring revenues of $1.7 million and $1.0 million, respectively, for the three months ended March 31, 2004 and 2003. Non-recurring revenues are primarily related to the recognized portion of deferred installation, professional services and settlement fees associated with certain contract terminations. Included in U.S. non-recurring revenues are settlement fees of $414,000 and $82,000, respectively, for the three months ended March 31, 2004 and 2003. Excluding any settlement fees that we may recognize in the future, we expect our U.S. non-recurring revenues to remain relatively flat or grow only moderately in the foreseeable future.

 

Asia-Pacific Revenues. We recognized Asia-Pacific revenues of $4.8 million for the three months ended March 31, 2004 as compared to $4.2 million for the three months ended March 31, 2003. Asia-Pacific revenues consisted of recurring revenues of $4.2 million and $3.8 million, respectively, for the three months ended March 31, 2004 and 2003, consisting primarily of colocation and managed infrastructure services. In addition, Asia-Pacific revenues consisted of non-recurring revenues of $582,000 and $340,000, respectively, for the three months ended March 31, 2004 and 2003. Asia-Pacific non-recurring revenues included $280,000 of contract settlement revenue for the three months ended March 31, 2004. Asia-Pacific revenues are generated from Singapore, Tokyo, Hong Kong and Sydney with Singapore representing approximately 56% and 79%, respectively, of the regional revenues for the three months ended March 31, 2004 and 2003. Our Asia-Pacific revenues are similar to the revenues that we generate from our U.S. IBX hubs; however, our Singapore IBX hub has additional managed infrastructure service revenue, such as mail service and managed platform solutions, which we do not currently offer in any other IBX hub location. The growth in our Asia-Pacific revenues is primarily the result of an increase in the customer base in this region during the past year, particularly in Tokyo and Sydney; however, within this growth is a decrease in low-margin bandwidth revenue in Singapore. We expect our Asia-Pacific revenues to remain relatively flat during the first half of 2004 as this churn of our low-margin bandwidth revenue in Singapore is absorbed. However, excluding this expected drop in bandwidth revenue, we would otherwise expect our Asia-Pacific revenues to begin to grow over the course of the year.

 

Cost of Revenues. Cost of revenues were $33.8 million for the three months ended March 31, 2004 versus $30.6 million for the three months ended March 31, 2003, a 10% increase. The largest cost components of our cost of revenues are depreciation, rental payments related to our leased IBX hubs, utility costs including bandwidth, IBX employees’ salaries and benefits, consumable supplies and equipment and

 

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security services. A substantial majority of our cost of revenues are fixed in nature and do not vary significantly from period to period. However, there are certain costs, which are considered variable in nature, including utilities and consumable supplies, that are directly related to growth of services in our existing and new customer base. Given a large component of our cost of revenues are fixed in nature, we anticipate any growth in revenues will have a significant incremental flow through to gross profit.

 

U.S. Cost of Revenues. U.S. cost of revenues were $29.4 million for the three months ended March 31, 2004 as compared to $25.3 million for the three months ended March 31, 2003. U.S. cost of revenues included $12.7 million and $12.4 million, respectively, of (i) depreciation expense, (ii) stock-based compensation expense, (iii) accretion expense associated with our asset retirement obligation relating to our various leaseholds and (iv) amortization expense associated with an intangible asset associated with our Santa Clara IBX hub for the three months ended March 31, 2004 and 2003. Included in the U.S. cost of revenues for the three months ended March 31, 2004, were the operating costs associated with the Santa Clara IBX hub acquired on December 1, 2003. Excluding depreciation, stock-based compensation, accretion expense, amortization expense and the costs of operating the Santa Clara U.S. IBX hub, U.S. cost of revenues increased period over period to $14.9 million for the three months ended March 31, 2004 from $12.9 million for the three months ended March 31, 2003, a 15% increase. This increase is primarily the result of higher property taxes for certain IBX hubs and increasing utility costs in line with increasing customer installations and revenues attributed to this customer growth. We continue to anticipate that our cost of revenues will increase in the foreseeable future as the occupancy levels in our U.S. IBX hubs increase, however as a percent of revenues, we anticipate our cost of revenues will continue to decline.

 

Asia-Pacific Cost of Revenues. Asia-Pacific cost of revenues were $4.3 million for the three months ended March 31, 2004 as compared to $5.4 million for the three months ended March 31, 2003. Asia-Pacific cost of revenues included $858,000 and $1.2 million, respectively, of depreciation expense for the three months ended March 31, 2004 and 2003. Excluding depreciation, Asia-Pacific cost of revenues decreased period over period to $3.5 million for the three months ended March 31, 2004 from $4.1 million for the three months ended March 31, 2003, a 15% decrease. This decrease is primarily the result of (i) a decrease in bandwidth costs in Singapore associated with a corresponding decrease in low-margin bandwidth revenue in this location and (ii) a decrease in operating costs in Singapore as a result of the asset sale of one of our two IBX hubs in Singapore that occurred during the fourth quarter of 2003, which left us with just one primary IBX hub in Singapore. Our Asia-Pacific costs of revenues are generated in Singapore, Tokyo, Hong Kong and Sydney. There are several managed IT infrastructure service revenue streams unique to our Singapore IBX hub, such as mail service and managed platform solutions, that are more labor intensive than our service offerings in the United States. As a result, our Singapore IBX hub has a greater number of employees than any of our other IBX hubs, and therefore, a greater labor cost relative to our other IBX hubs in the United States or other Asia-Pacific locations. We anticipate that our Asia-Pacific cost of revenues will experience moderate growth in the foreseeable future consistent with our anticipated growth in revenues over the course of the year.

 

Sales and Marketing. Sales and marketing expenses decreased to $4.6 million for the three months ended March 31, 2004 from $4.7 million for the three months ended March 31, 2003.

 

U.S. Sales and Marketing Expenses. U.S. sales and marketing expenses increased to $3.4 million for the three months ended March 31, 2004 as compared to $3.3 million for the three months ended March 31, 2004. Included in U.S. sales and marketing expenses were $45,000 and $113,000, respectively, of (i) stock-based compensation expense for the three months ended March 31, 2004 and 2003 and (ii) amortization expense associated with an intangible asset in connection with our Santa Clara IBX hub for the three months ended March 31, 2004. Excluding stock-based compensation and amortization expense, U.S. sales and marketing expenses remained relatively flat at $3.4 million and $3.2 million, respectively, for the three months ended March 31, 2004 and 2003. Sales and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel, sales commissions, marketing programs, public relations, promotional materials and travel. We expect to see a nominal increase in U.S. sales and marketing spending in the future, although as a percent of revenues, we anticipate a decline in sales and marketing spending.

 

Asia-Pacific Sales and Marketing Expenses. Asia-Pacific sales and marketing expenses decreased to $1.2 million for the three months ended March 31, 2004 as compared to $1.4 million for the three months

 

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ended March 31, 2003. Included in Asia-Pacific sales and marketing expenses were $459,000 and $525,000, respectively, of amortization expense associated with several intangible assets associated with our Singapore operations for the three months ended March 31, 2004 and 2003. Excluding amortization expense, Asia-Pacific sales and marketing expenses decreased moderately to $795,000 during the three months ended March 31, 2004 down from $859,000 in the prior period. Our Asia-Pacific sales and marketing expenses consist of the same type of costs that we incur in our U.S. operations, namely compensation and related costs for sales and marketing personnel, sales commissions, marketing programs, public relations, promotional materials and travel. Our Asia-Pacific sales and marketing expenses are generated in Singapore, Tokyo, Hong Kong and Sydney. We expect that our Asia-Pacific sales and marketing expenses will remain relatively flat in the foreseeable future; however, amortization expense in connection with the Singaporean intangible assets will be completed at the end of 2004.

 

General and Administrative. General and administrative expenses decreased to $8.2 million for the three months ended March 31, 2004 from $10.9 million for the three months ended March 31, 2003.

 

U.S. General and Administrative Expenses. U.S. general and administrative expenses decreased to $6.6 million for the three months ended March 31, 2004 as compared to $9.3 million for the three months ended March 31, 2003. Included in U.S. general and administrative expenses were $1.3 million and $3.4 million, respectively, of (i) depreciation expense and (ii) stock-based compensation expense for the three months ended March 31, 2004 and 2003. Excluding depreciation and stock-based compensation expense, U.S. general and administrative expenses decreased to $5.3 million for the three months ended March 31, 2004, as compared to $5.9 million for the prior period, an 11% decrease. This decrease is primarily attributable to cost savings associated with the shutdown of an office in Honolulu that was completed in June 2003. General and administrative expenses, excluding depreciation and stock-based compensation, consist primarily of salaries and related expenses, accounting, legal and administrative expenses, professional service fees and other general corporate expenses such as our corporate headquarter office lease. We expect to see a nominal increase in general and administrative spending in the future, although as a percent of revenues, we anticipate a decline in general and administrative spending.

 

Asia-Pacific General and Administrative Expenses. Asia-Pacific general and administrative expenses remained flat at $1.6 million for the three months ended March 31, 2004 and 2003. Included in Asia-Pacific general and administrative expenses were $117,000 and $156,000, respectively, of depreciation expense for the three months ended March 31, 2004 and 2003. Our Asia-Pacific general and administrative expenses consist of the same type of costs that we incur in our U.S. operations, namely salaries and related expenses, accounting, legal and administrative expenses, professional service fees and other general corporate expenses. Our Asia-Pacific general and administrative expenses are generated in Singapore, Tokyo, Hong Kong and Sydney. Our Asia-Pacific headquarter office is located in Singapore. Most of the corporate overhead support functions that we have in the U.S. also reside in our Singapore office in order to support our Asia-Pacific operations. In addition, we have separate corporate office locations in Tokyo and Hong Kong. We expect that our Asia-Pacific general and administrative expenses will remain relatively flat or experience only moderate growth for the foreseeable future.

 

Interest Income. Interest income increased to $242,000 from $70,000 for the three months ended March 31, 2004 and 2003, respectively. Interest income increased due to higher average cash, cash equivalent and short-term investment balances held in interest-bearing accounts during these periods.

 

Interest Expense. Interest expense decreased to $4.1 million from $4.8 million for the three months ended March 31, 2004 and 2003, respectively. The decrease in interest expense was primarily attributable to the reduction in the principal balance outstanding on our credit facility during 2003. These interest expense savings were partially offset by additional non-cash interest expense associated with the $10.0 million 10% convertible secured notes issued on June 5, 2003 as a result of the Crosslink financing. However, during the quarter ended March 31, 2004, with the proceeds from the convertible debenture offering, we fully paid off the remaining credit facility and two other debt facilities, as well as fully redeemed the remaining 13% senior notes that were outstanding. In addition, in March 2004, the $10.0 million 10% convertible secured notes issued in connection with the Crosslink financing were converted to 2.5 million shares of our common stock. As a result of the these various repayments, redemption and conversion of our older debt facilities, which have been replaced with our $86.3 million 2.5% convertible subordinated debentures, our interest expense commencing with the second quarter of 2004 will be significantly reduced.

 

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Loss on Debt Extinguishment and Conversion. During the three months ended March 31, 2004, with the proceeds from the convertible debenture offering, we fully paid off the remaining credit facility and two other debt facilities, as well as fully redeemed the remaining 13% senior notes that were outstanding at a premium of 106.5%. In addition, in March 2004, the 10% $10.0 million convertible secured notes issued in connection with the Crosslink financing were converted to 2.5 million shares of our common stock. As a result of the these various repayments, redemption and conversion of our older debt facilities, we recorded a loss on debt extinguishment and conversion of $16.2 million, comprised primarily of the write-off of the various debt issuance costs and discounts associated with these various debt facilities totaling $13.7 million, as well as the premium paid to the holders of our 13% senior notes required to redeem these early and other cash transaction costs totaling $2.5 million. There was no such debt extinguishment or conversion activity during the three months ended March 31, 2003.

 

Income Taxes. A full valuation allowance is recorded against our deferred tax assets as management cannot conclude, based on available objective evidence, when it is more likely than not that the gross value of its deferred tax assets will be realized. However, for the three months ended March 31, 2004, we recorded $194,000 of income tax expense representing alternative minimum tax that we expect we will have to pay. We have previously not incurred any significant income tax expense since inception.

 

Liquidity and Capital Resources

 

Since inception, we have financed our operations and capital requirements primarily through the issuance of various debt and equity instruments, for aggregate gross proceeds of $1.1 billion. As of March 31, 2004, our total indebtedness was comprised solely of convertible debt totaling $119.8 million as outlined below.

 

During February 2004, we sold $86.25 million in aggregate principal of 2.5% convertible subordinated debentures due 2024 to qualified institutional buyers. We used the net proceeds from this offering to repay all amounts outstanding under our non-convertible debt as outlined below. All remaining proceeds will be used for general corporate purposes. We refer to this transaction as the “convertible debenture offering”. During March 2004, holders of our 10% $10.0 million convertible secured notes issued in connection with the Crosslink financing, converted the $10.0 million of principal into 2.5 million shares of our common stock. We refer to this transaction as the “Crosslink conversion”. We recorded a significant loss on debt extinguishment and conversion totaling $16.2 million during the quarter ended March 31, 2004, primarily related to the non-cash write-off of debt issuance costs and discounts in connection with the various debt repayments, redemptions and conversions of the underlying debt facilities extinguished or converted, as well as the cash premium that we paid on our 13% senior notes.

 

As of March 31, 2004, our principal source of liquidity was our $88.6 million of cash, cash equivalents and short-term investments. We believe that this cash, coupled with our anticipated cash flows generated from operations, will be sufficient to meet our capital expenditure, working capital, debt service and corporate overhead requirements to meet the Company’s currently identified business objectives.

 

While we had generated negative operating cashflow in each annual period since inception, commencing the quarter ended September 30, 2003 we started to generate positive operating cash flow. During this quarter, our recurring revenues grew to a level sufficient to meet our operating cash requirements related to our predominantly fixed cost structure. We considered this quarter to be the inflection point in our business model whereby our revenues were sufficient on an ongoing basis to meet all our operating costs and working capital requirements. As a result of reaching this point in our operating history, we expect to generate cash from our operations during 2004 and expect these operating cash flows to be sufficient to meet our cash requirements to fund our capital expenditures. Given our limited operating history, we may not achieve our desired levels of profitability. See “Other Factors Affecting Operating Results.”

 

Uses of Cash

 

Net cash provided by our operating activities was $6.5 million for the three months ended March 31, 2004. Net cash used in our operating activities was $19.6 million for the three months ended March 31,

 

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2003. As described above, we have now reached and are moving beyond the inflection point in our business model whereby our revenues are now sufficient to cover our operating expenses and we are now generating cash from our operations. In prior periods, we used cash primarily to fund our net loss, including cash interest payments on our senior notes and credit facility, although the majority of the operating cash flows used during the three months ended March 31, 2003 related to the liquidation of accrued obligations at December 31, 2002 attributed to accrued merger and financing transactions and restructuring activities. In addition, we have experienced particularly strong collections of our accounts receivables during the quarter ended March 31, 2004, which was reflected in our days sales outstanding (DSO), which dropped from 39 days for the quarter ended March 31, 2003 to less than 30 days for the quarter ended March 31, 2004. In the future, we expect our DSO to remain at the 30 to 35 day level. As described above, we expect that we will continue to generate cash from our operating activities throughout 2004 and beyond.

 

Net cash used in investing activities was $12.3 million for the three months ended March 31, 2004. Net cash provided by investing activities was $1.6 million for the three months ended March 31, 2003. Net cash used in investing activities during the three months ended March 31, 2004 was primarily to fund capital expenditures to bring our recently acquired IBX hub in Santa Clara to Equinix standards and to support our growing customer base, as well as the net purchase of short-term investments. Net cash provided by investing activities during the three months ended March 31, 2003 was primarily the result of the release of restricted cash to fund a cash interest payment on our senior notes in January 2003, offset by a nominal amount of capital expenditures. For 2004, we anticipate that our cash used in investing activities, excluding the purchase and sale of short-term investments, will be attributed to the funding of our capital expenditures.

 

Net cash generated by financing activities was $14.3 million for the three months ended March 31, 2004. Net cash used by financing activities was $2.4 million for the three months ended March 31, 2003. Net cash generated by financing activities for the three months ended March 31, 2004, was primarily the result of the $86.25 million in gross proceeds from our convertible debenture offering, offset by $70.8 million in payments on our credit facility, senior notes and other debt facilities and capital lease obligations, as well as debt extinguishment costs associated with paying down these facilities. Cash used in financing activities for the three months ended March 31, 2003 was primarily attributable to the scheduled monthly payments of our debt facilities and capital lease obligations.

 

Debt Obligations – Non-Convertible Debt

 

As of March 31, 2004, we no longer had any indebtedness from non-convertible debt. Prior to this, our non-convertible debt was comprised of our senior notes, credit facility, and other debt facilities and capital lease obligations as follows:

 

Senior Notes. In December 1999, we issued $200.0 million aggregate principal amount of 13% senior notes due 2007. During 2002, we retired $169.5 million of the senior notes in exchange for approximately 2.4 million shares of common stock and approximately $21.3 million of cash. As of December 31, 2003, a total of $30.5 million of senior note principal remained outstanding, which was presented, net of unamortized discount, on our balance sheet at $29.2 million. In March 2004, with the net proceeds from our convertible debenture offering, we exercised our right to redeem all of our senior notes. The redemption price for the senior notes was equal to 106.5% of their principal amount plus accrued and unpaid interest to the redemption date. As a result, we recognized a loss on debt extinguishment on this transaction of $3.8 million, comprised of the 6.5% premium that we paid to redeem the senior notes, the write-off of debt issuance costs and debt discount and other transaction fees.

 

Credit Facility. In December 2000, we entered into the credit facility with a syndicate of lenders under which, subject to our compliance with a number of financial ratios and covenants, we were permitted to borrow up to $150.0 million, which was fully drawn down during 2001. This facility was amended at various times during 2001, 2002 and 2003. As of December 31, 2003, a total of $34.3 million of principal remained outstanding under the credit facility. In February 2004, with the net proceeds from our convertible debenture offering, we repaid all amounts outstanding under our credit facility and terminated the credit facility. As a result, we recognized a loss on debt extinguishment on this transaction of $4.4 million, comprised primarily of the write-off of debt issuance costs as well as some other transaction fees.

 

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Other Debt Facilities and Capital Lease Obligations. In August 1999, we entered into a loan agreement with Venture Lending and Leasing in the amount of $10.0 million and fully drew down on this amount. This loan agreement bore interest at 8.5% and was repayable over 42 months in equal monthly payments with a final interest payment equal to 15% of the advance amounts due on maturity. As of December 31, 2003, principal of $847,000 remained outstanding. In March 2004, with the net proceeds from our convertible debenture offering, we paid off this other debt facility in full. As a result, we recognized a loss on debt extinguishment on this transaction of $0.2 million, comprised of the write-off of debt issuance costs and discount as well as some other transaction fees.

 

In June 2001, we entered into a loan agreement with Heller Financial Leasing in the amount of $5.0 million and fully drew down on this amount. This loan agreement bore interest at 13.0% and was repayable over 36 months. As of December 31, 2003, principal of $2.5 million remained outstanding. In February 2004, with the net proceeds from our convertible debenture offering, we paid off this other debt facility in full. As a result, we recognized a loss on debt extinguishment on this transaction of $0.2 million, comprised of the write-off of debt issuance costs and discount as well as some other transaction fees.

 

In December 2002, in conjunction with our merger with Pihana, we acquired multiple capital leases with Orix. The original amount financed was approximately $3.5 million. These capital lease arrangements bore interest at an average rate of 6.4% per annum and were repayable over 30 months. As of December 31, 2003, principal of $201,000 remained outstanding. These capital leases were fully paid down by March 31, 2004.

 

Debt Obligations – Convertible Debt

 

Convertible Secured Notes. In December 2002, in conjunction with the combination, STT Communications made a $30.0 million strategic investment in the company in the form of a 14% convertible secured note due November 2007. The interest on the convertible secured note is payable in kind in the form of additional convertible secured notes, which we refer to as “PIK notes”. During 2003, we issued $3.6 million in PIK notes. The convertible secured note and PIK notes issued to STT Communications are convertible into our preferred and common stock at a price of $9.18 per underlying share, which represents 3.7 million shares as of March 31, 2004, and are convertible anytime at the option of STT Communications. After December 31, 2004 and through December 31, 2005, we may convert 95% of the STT Communications’ convertible secured notes and after December 31, 2005, we may convert 100% of these convertible secured notes upon certain conditions, including if the closing price of our common stock exceeds $32.12 per share for thirty consecutive trading days.

 

In June 2003, entities affiliated with Crosslink Capital made a $10.0 million strategic investment in the company in the form of 10% convertible secured notes due November 2007. The interest on the convertible secured notes was payable in kind in the form of additional convertible secured notes commencing on the second anniversary of the closing of this transaction. In March 2004, the holders of these notes converted them into 2.5 million shares of our common stock. As a result, we recognized a loss on debt conversion on this transaction of $7.6 million, comprised primarily of the write-off of debt discount.

 

As of March 31, 2004, a total of $33.6 million of convertible secured notes were outstanding, which is presented, net of unamortized discount, on our balance sheet at $30.2 million. All interest expense associated with our convertible secured notes, including the amortization of the unamortized discount of $3.4 million, represents non-cash interest expense in our statements of operation and cash flow as no cash is expended for this interest.

 

Convertible Subordinated Debentures. During February 2004, we sold $86.25 million in aggregate principal of 2.5% convertible subordinated debentures due 2024 to qualified institutional buyers. We used the net proceeds from this offering to repay all amounts outstanding under our credit facility and two of our other debt facilities, as well as fully redeemed our remaining 13% senior notes. All remaining proceeds will be used for general corporate purposes The interest on the convertible subordinated debentures is payable semi-annually every February and August commencing August 2004. Unlike our convertible secured notes, the interest on our convertible subordinated debentures will be payable in cash. Our convertible subordinated debentures will be convertible into 2.2 million shares of our common stock.

 

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Holders of the convertible subordinated debentures may require us to purchase all or a portion of their debentures on February 15, 2009, February 15, 2014 and February 15, 2019, in each case at a price equal to 100% of the principal amount of the debentures plus any accrued and unpaid interest. In addition, holders of the convertible subordinated debentures may convert their debentures into shares of our common stock upon certain defined circumstances, including during any calendar quarter after the quarter ending June 30, 2004 if the closing price of our common stock exceeds $47.40 per share for twenty consecutive trading days. We may redeem all or a portion of the debentures at any time after February 15, 2009 at a redemption price equal to 100% of the principal amount of the debentures plus any accrued and unpaid interest.

 

Debt Maturities and Operating Lease Commitments

 

We lease our IBX hubs and certain equipment under non-cancelable operating lease agreements expiring through 2020. The following represents the minimum future operating lease payments for these commitments, as well as the combined aggregate maturities for all of our debt as of March 31, 2004 (in thousands):

 

     Convertible
secured
notes


   Convertible
subordinated
debentures


   Operating
leases


   Total

2004

   $ —      $ —      $ 21,332    $ 21,332

2005

     —        —        31,173      31,173

2006

     —        —        31,991      31,991

2007

     33,598      —        32,406      66,004

2008

     —        —        31,882      31,882

2009 and thereafter

     —        86,250      201,402      319,534
    

  

  

  

     $ 33,598    $ 86,250    $ 350,186    $ 470,034
    

  

  

  

 

With respect to the operating lease for one of our New York metropolitan area IBXs, our landlord has the right to increase our rentable space on December 31, 2004 when the lease for the current tenant’s portion of the aggregate property lease expires. As a result, commencing fiscal 2005, our total rent expense associated with this IBX hub could double. This increase in our operating lease commitments is reflected in the table presented above. We are currently working with this landlord, as well as the current tenant of that space, and expect to minimize this additional cost to us; however, there can be no assurances that we will be successful in reducing this commitment.

 

On April 22, 2004, we announced that we had entered into a long-term operating lease to expand our IBX footprint with the addition of a new 95,000 square foot data center in the Washington, D.C. metro area. The center is adjacent to our existing Washington D.C. metro area IBX. The addition of the center expands our global footprint to over 1.3 million square feet. We currently intend to begin placing customers in this center beginning November 1, 2004. This new operating lease will add an additional $65.0 million in rent expense through 2019, which is not reflected in the table above.

 

We expect to spend approximately $5.0 million during the remainder of 2004 to bring our recently announced Washington, D.C. metro area IBX expansion space to Equinix standards. In addition, we expect to spend an additional $5.0 to $7.0 million on this expansion space during 2005 in order to meet anticipated customer demand.

 

Strategically, we will continue to look at attractive opportunities to grow our market share and selectively improve our footprint and service streams, such as our recent acquisition of the Sprint property in Santa Clara and our recently announced expansion in the Washington, D.C. metro area market. However, we will continue to be very selective with any similar opportunity. As was the case with these two recent expansions in the Silicon Valley and Washington, D.C. area markets, the criteria will be quality of the design, access to networks, capacity availability in current market location, amount of incremental investment required by us in the targeted property, lead-time to breakeven and in-place customers. Like these two recent expansions, the right combination of these factors may be quite attractive for us. Dependent on the particular deal, these acquisitions may require additional capital expenditures in order to bring these centers up to Equinix standards.

 

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Recent Accounting Pronouncements

 

In January 2003, the FASB issued FASB Interpretation No. 46, or FIN 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. In December 2003, the FASB released a revised version of FIN 46 clarifying certain aspects of FIN 46 and providing certain entities with exemptions from the requirements of FIN 46. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after March 15, 2004. The adoption of Fin 46 did not have a material impact on our results of operations, financial position or cash flows.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the Derivatives Implementation Group, or DIG, process that effectively required amendments to SFAS No. 133, and decisions made in connection with other FASB projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative and characteristics of a derivative that contains financing components. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. We adopted the provisions of SFAS No. 149 during the third quarter of 2003. The adoption of this statement has not had a material impact on our results of operations, financial position or cash flows.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. In November 2003, the FASB issued FASB Staff Position No. FASB 150-3 which deferred the measurement provisions of SFAS No. 150 indefinitely for certain mandatorily redeemable non-controlling interests that were issued before November 5, 2003. The FASB plans to reconsider implementation issues and, perhaps, classification or measurement guidance for those non-controlling interests during the deferral period. In 2003, we applied certain disclosure requirements of SFAS No. 150. To date, the impact of the effective provisions of SFAS No. 150 have not had a material impact on our results of operations, financial position or cash flows. While the effective date of certain elements of SFAS No. 150 have been deferred, the adoption of SFAS No. 150 when finalized is not expected to have a material impact on our financial position, results of operations or cash flows.

 

In December 2003, the SEC issued Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”), which codifies, revises and rescinds certain sections of SAB No. 101, “Revenue Recognition,” in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB 104 did not have a material effect on our results of operations, financial position or cash flows.

 

In March 2004, the FASB approved EITF Issue 03-6 “Participating Securities and the Two-Class Method under FAS 128”. EITF Issue 03-6 supersedes the guidance in Topic No. D-95, “Effect of Participating Convertible Securities on the Computation of Basic Earnings per Share”, and requires the use of the two-class method of participating securities. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In addition, EITF Issue 03-6 addresses other forms of participating securities, including options, warrants, forwards and other contracts to issue an entity’s common stock, with the exception of stock-based compensation (unvested

 

33


options and restricted stock) subject to the provisions of Opinion No. 25 and FASB No. 123. EITF Issue 03-6 is effective for reporting periods beginning after March 31, 2004 and should be applied by restating previously reported earnings per share. We are currently in the process of evaluating the impact that the adoption of EITF Issue 03-6 will have on our financial position and results of operations.

 

Other Factors Affecting Operating Results

 

In addition to the other information in this report, the following risk factors should be considered carefully in evaluating our business and us:

 

Risks Related to Our Business

 

We have a limited operating history and we face challenges typically experienced by early-stage companies.

 

We were founded in June 1998 and did not recognize any revenue until November 1999. In October 2002, we entered into agreements to consummate a series of related acquisition and financing transactions. These transactions closed on December 31, 2002. Under the terms of these agreements, we combined our business with two similar businesses, that of i-STT Pte Ltd, or i-STT, and Pihana Pacific, Inc., or Pihana. We refer to this transaction as the combination. i-STT was founded in January 2000 and did not recognize any revenue until May 2000. Pihana was founded in June 1999 and did not recognize any revenue until June 2000. We expect that we will encounter challenges and difficulties frequently experienced by early-stage companies in new and rapidly evolving international markets, such as our ability to generate cash flow, hire, train and retain sufficient operational and technical talent, and implement our plan with minimal delays. We may not successfully address any or all of these challenges and our failure to do so would seriously harm our business plan and operating results, and affect our ability to raise additional funds.

 

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

 

We have incurred losses since inception and incurred losses of approximately $21.6 million for 2002 (this includes the benefit of a gain on debt extinguishment of $114.2 million), i-STT has incurred losses since inception and incurred losses of approximately $8.0 million for 2002 and Pihana has incurred losses since inception and incurred losses of approximately $148.5 million (this includes restructuring and impairment charges of $113.3 million) for the same period. For the year ended December 31, 2003, the combined company incurred additional losses of $84.2 million and for the three months ended March 31, 2004, the combined company incurred additional losses of $30.1 million. Until the quarter ended September 30, 2003, the combined company did not generate cash from operations. There can be no guarantee that the combined company will become profitable and the combined company may continue to incur additional losses. Even if we achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase profitability on a quarterly or annual basis.

 

We expect our operating results to fluctuate.

 

We have experienced fluctuations in our results of operations on a quarterly and annual basis. The fluctuation in our operating results may cause the market price of our common stock to decline. We expect to experience significant fluctuations in our operating results in the foreseeable future due to a variety of factors, including:

 

  acquisition of additional IBX hubs;

 

  demand for space and services at our IBX hubs;

 

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

 

34


  the provision of customer discounts and credits;

 

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

 

  competition in the markets;

 

  conditions related to international operations;

 

  the operating costs attributable to our real and personal property tax obligations related to our IBX hubs;

 

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

 

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

 

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

 

Our inability to use our tax net operating losses will cause us to pay taxes at an earlier date and in greater amounts which may harm our operating results.

 

We believe that our ability to use our tax net operating losses, or NOLs, in any taxable year is subject to limitation under Section 382 of the Code as a result of the significant change in the ownership of our stock that resulted from the combination. We expect that almost all of our NOLs accrued prior to December 31, 2002 will expire unused as a result of this limitation. In addition to the limitations on NOL carryforward utilization described above, we believe that Section 382 of the Code will also significantly limit our ability to use the depreciation and amortization on our assets, as well as certain losses on the sale of our assets, to the extent that such depreciation, amortization and losses reflect unrealized depreciation that was inherent in such assets as of the date of the combination. These limitations will cause us to pay taxes at an earlier date and in greater amounts than would occur absent such limitations.

 

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

 

In 2002, our sales outside North America represented less than 1% of our revenues, i-STT’s sales outside North America represented approximately 100% of its revenues and Pihana’s sales outside North America represented approximately 45% of its revenues. For the year ended December 31, 2003, the combined company recognized 15% of its revenues outside North America. For the three months ended March 31, 2004, the combined company recognized 13% of its revenues outside North America. We anticipate that, for the foreseeable future, approximately 15% of the combined company’s revenues will be derived from sources outside North America. Our management team is comprised primarily of Equinix executives before the combination, some of whom have had limited or no experience overseeing international operations.

 

To date, the neutrality of the Equinix IBX hubs and the variety of networks available to our customers has often been a competitive advantage for us. In certain of our recently acquired IBX hubs, in Singapore in

 

35


particular, the limited number of carriers available diminishes that advantage. As a result, we may need to adapt our key revenue-generating services and pricing to be competitive in that market.

 

We may experience gains and losses resulting from fluctuations in foreign currency exchange rates. To date, the majority of Equinix’s revenues and costs have been denominated in U.S. dollars, the majority of i-STT’s revenues and costs have been denominated in Singapore dollars and the majority of Pihana’s revenues and costs have been denominated in U.S. dollars, Japanese yen and Australia, Hong Kong and Singapore dollars. Although the combined company may undertake foreign exchange hedging transactions to reduce foreign currency transaction exposure, it does not currently intend to eliminate all foreign currency transaction exposure. Where our prices are denominated in U.S. dollars, our sales could be adversely affected by declines in foreign currencies relative to the U.S. dollar, thereby making our products more expensive in local currencies. Our international operations are generally subject to a number of additional risks, including:

 

  costs of customizing IBX hubs for foreign countries;

 

  protectionist laws and business practices favoring local competition;

 

  greater difficulty or delay in accounts receivable collection;

 

  difficulties in staffing and managing foreign operations;

 

  political and economic instability;

 

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

 

  compliance with governmental regulation with which we have little experience.

 

We may make acquisitions, which pose integration and other risks that could harm our business.

 

We may seek to acquire additional IBX centers, complementary businesses, products, services and technologies. As a result of these acquisitions, we may be required to incur additional debt and expenditures and issue additional shares of our stock to pay for the acquired business, product, service or technology, which will dilute our existing stockholders’ ownership interest and may delay, or prevent, our profitability. These acquisitions may also expose us to risks such as:

 

  the possibility that we may not be able to successfully integrate acquired businesses or achieve the level of quality in such businesses to which our customers are accustomed;

 

  the possibility that senior management may be required to spend considerable time negotiating agreements and integrating acquired businesses; and

 

  the possible loss or reduction in value of acquired businesses.

 

On October 27, 2003, we announced that we signed an agreement to sublease Sprint’s E|Solutions Internet Center in Santa Clara and acquire certain related assets. Such sublease went into effect on December 1, 2003. In negotiating this transaction we were only able to conduct limited due diligence and received limited representations and warranties. If the subleased facility and acquired assets are not in the condition we believe them to be in, we may be required to incur substantial additional costs to repair the acquired facility and related assets. If incurred, these costs could materially adversely affect our business, financial condition and results of operations.

 

We cannot assure you that we would successfully overcome these risks or any other problems encountered with these acquisitions.

 

36


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

 

As of March 31, 2004, STT Communications owned approximately 16.4% of our outstanding voting stock. In addition, STT Communications is not prohibited from buying shares of our stock in public or private transactions. Because of the diffuse ownership of our stock, STT Communications has significant influence over matters requiring our stockholder approval. Following the expiration on December 31, 2004 of restrictions on STT Communications preventing it from converting its convertible secured notes and warrants into voting stock, STT Communications may own more than 40% of our voting stock. As a result, STT Communications will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could prevent or delay a third party from acquiring or merging with us. STT also has a right of first offer which entitles them to participate in an offering of our equity securities, or securities convertible into our equity securities, to maintain their ownership percentage prior to such offering.

 

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

 

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

 

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

 

In the past, a substantial portion of i-STT’s financing, as well as its revenues, has been derived from its affiliates, including STT Communications. We continue to have contractual and other business relationships and may engage in material transactions with affiliates of STT Communications. Circumstances may arise in which the interests of STT Communications’ affiliates may conflict with the interests of our other stockholders. In addition, Singapore Technologies Pte Ltd, an affiliate of STT Communications, makes investments in various companies; it has invested in the past, and may invest in the future, in entities that compete with us. In the context of negotiating commercial arrangements with affiliates, conflicts of interest have arisen in the past and may arise, in this or other contexts, in the future. We cannot assure you that any conflicts of interest will be resolved in our favor.

 

37


A significant number of shares of our capital stock have been issued during 2002 and 2003 and may be sold in the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

 

We issued a large number of shares of our capital stock to the former Pihana stockholders, STT Communications, and holders of our senior notes in connection with the combination, financing and senior note exchange, to Crosslink Capital, Inc. and its affiliates (collectively, “Crosslink”) in connection with Crosslink’s purchase of our Series A-2 Convertible Secured Notes, and to the public and STT Communications in connection with our recent follow-on equity offering. The shares of common stock issued in the senior note exchange are currently freely tradeable. The shares of common stock issued in connection with the combination have been registered for resale as of June 30, 2003 and the shares of common stock issued upon exercise of the warrants issued in connection with the Crosslink financing have been registered for resale as of September 22, 2003. The shares sold to the public and STT Communications in connection with our recent follow-on equity offering are freely tradeable by the public, subject, in the case of STT Communications, to compliance with Rule 144 resale restrictions applicable to affiliates. Subject to the restrictions described in our proxy statement dated December 12, 2002, the convertible secured notes and warrants issued in connection with the financing are immediately convertible or exercisable into shares of common stock and the underlying shares of common stock may be registered for resale. The 2,500,000 shares of common stock issued upon conversion of the convertible secured notes issued in the Crosslink financing are in the process of being registered for resale on an S-3 originally filed with the Securities and Exchange Commission on April 22, 2004. Sales of a substantial number of shares of our common stock by these parties within any narrow period of time could cause our stock price to fall. In addition, the issuance of the additional shares of our common stock as a result of these transactions will reduce our earnings per share, if any. This dilution could reduce the market price of our common stock unless and until we achieve revenue growth or cost savings and other business economies sufficient to offset the effect of this issuance. We cannot assure you that we will achieve revenue growth, cost savings or other business economies.

 

A significant number of our shares may be sold into the public market if STT Communications defaults on its credit facility which could cause the market price of our common stock to drop significantly.

 

As of March 31, 2004, STT Communications held 2,970,414 shares of our common stock and held securities convertible into 6,495,106 additional shares of our common stock. STT Communications has pledged to its lenders its ownership interest in the majority of its secured notes and warrants purchased in the financing and its common and preferred stock issued in the combination as collateral for its secured credit facility. If STT Communications defaults on its credit facility, the stock, warrants and secured notes owned by STT Communications could be transferred to its lenders or sold to third parties. In the event of default, the new owner of the secured notes and warrants could convert them into our common stock and sell them, along with the common stock, into the public market. Sales of a substantial number of shares of our common stock by these parties within any narrow period of time could cause our stock price to fall. In addition, the issuance of the additional shares of our common stock as a result of these transactions will reduce our earnings per share, if any.

 

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

 

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

 

We are not a telecommunications carrier, and as such we rely on third parties to provide our customers with carrier services. We rely primarily on revenue opportunities from the telecommunications carriers’ customers to encourage them to invest the capital and operating resources required to build facilities from their locations to our IBX hubs. Carriers will likely evaluate the revenue opportunity of an IBX hub based on the assumption that the environment will be highly competitive. We cannot assure you that

 

38


any carrier will elect to offer its services within our IBX hubs or that once a carrier has decided to provide Internet connectivity to our IBX hubs that it will continue to do so for any period of time.

 

The construction required to connect multiple carrier facilities to our IBX hubs is complex and involves factors outside of our control, including regulatory processes and the availability of construction resources. If the establishment of highly diverse Internet connectivity to our IBX hubs does not occur or is materially delayed or is discontinued, our operating results and cash flow will be adversely affected. Further, many carriers are experiencing business difficulties. As a result, some carriers may be forced to terminate connectivity within our IBX hubs.

 

Any failure of our physical infrastructure or services could lead to significant costs and disruptions that could reduce our revenue and harm our business reputation and financial results.

 

Our business depends on providing customers with highly reliable service. We must protect customers’ IBX infrastructure and customers’ equipment located in our IBX hubs. We have recently acquired two IBX hubs not built by us. If these recently acquired IBX hubs and acquired assets are not in the condition we believe them to be in, we may be required to incur substantial additional costs to repair the acquired facilities. The services we provide in each of our IBX hubs are subject to failure resulting from numerous factors, including:

 

  human error;

 

  physical or electronic security breaches;

 

  fire, earthquake, flood and other natural disasters;

 

  water damage;

 

  power loss;

 

  sabotage and vandalism; and

 

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

 

Problems at one or more of our IBX hubs, whether or not within our control, could result in service interruptions or significant equipment damage. We have service level commitment obligations to certain of our customers. As a result, service interruptions or significant equipment damage in our IBX hubs could result in service level commitments to these customers. In the past, a limited number of our customers have experienced temporary losses of power and failure of our services levels on products such as bandwidth connectivity. If we incur significant financial commitments to our customers in connection with a loss of power, or our failure to meet other service level commitment obligations, our liability insurance may not be adequate to cover those expenses. In addition, any loss of services, equipment damage or inability to meet our service level commitment obligations, particularly in the early stage of our development, could reduce the confidence of our customers and could consequently impair our ability to obtain and retain customers, which would adversely affect both our ability to generate revenues and our operating results.

 

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

 

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

 

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

 

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

 

Our IBX hubs are susceptible to regional costs of power, electrical power shortages, planned or unplanned power outages caused by these shortages such as those that occurred in California during 2001 and in the Northeast in 2003, and limitations, especially internationally, of adequate power resources. The overall power shortage in California has increased the cost of energy, which we may not be able to pass on to our customers. We attempt to limit exposure to system downtime by using backup generators and power supplies. Power outages, which last beyond our backup and alternative power arrangements, could harm our customers and our business.

 

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

 

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

 

IBM accounts for a significant portion of our revenues, and the loss of IBM as a customer could significantly harm our business, financial condition and results of operations.

 

For the three months ended March 31, 2004, IBM accounted for 13% of our revenue and as of March 31, 2004 accounted for 11% of our accounts receivable. For the three months ended March 31, 2003, IBM accounted for 17% of our revenue and as of March 31, 2003 accounted for 18% of our accounts receivable. We expect that IBM will continue to account for a significant portion of our revenue for the foreseeable future, although we expect revenues received from IBM to decline as a percentage of our total revenues as we add new customers in our IBX hubs. If we lose IBM as a customer, our business, financial condition and results of operations could be adversely affected.

 

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

 

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

 

Because of their greater financial resources, some of our competitors have the ability to adopt aggressive pricing policies, especially if they have been able to restructure their debt or other obligations. As a result, in the future, we may suffer from pricing pressure that would adversely affect our ability to generate revenues and adversely affect our operating results. In addition, these competitors could offer colocation on neutral terms, and may start doing so in the same metropolitan areas where we have IBX hubs. Some of these competitors may also provide our target customers with additional benefits, including bundled communication services, and may do so in a manner that is more attractive to our potential customers than obtaining space in our IBX hubs. We believe our neutrality provides us with an advantage

 

40


over these competitors. However, if these competitors were able to adopt aggressive pricing policies together with offering colocation space, our ability to generate revenues would be materially adversely affected.

 

We may also face competition from persons seeking to replicate our IBX concept by building new centers or converting existing centers that some of our competitors are in the process of divesting. Competitors may operate more successfully or form alliances to acquire significant market share. Furthermore, enterprises that have already invested substantial resources in peering arrangements may be reluctant or slow to adopt our approach that may replace, limit or compete with their existing systems. In addition, other companies may be able to attract the same potential customers that we are targeting. Once customers are located in competitors’ facilities, it will be extremely difficult to convince them to relocate to our IBX hubs.

 

Because we depend on the development and growth of a balanced customer base, failure to attract and retain this base of customers could harm our business and operating results.

 

Our ability to maximize revenues depends on our ability to develop and grow a balanced customer base, consisting of a variety of companies, including network service providers, site and performance management companies, and enterprise and content companies. The more balanced the customer base within each IBX hub, the better we will be able to generate significant interconnection revenues, which in turn increases our overall revenues. Our ability to attract customers to our IBX hubs will depend on a variety of factors, including the presence of multiple carriers, the mix of products and services offered by us, the overall mix of customers, the IBX hub’s operating reliability and security and our ability to effectively market our services. In addition, some of our customers are and will continue to be Internet companies that face many competitive pressures and that may not ultimately be successful. If these customers do not succeed, they will not continue to use the IBX hubs. This may be disruptive to our business and may adversely affect our business, financial condition and results of operations.

 

Increases in property taxes could adversely affect our business, financial condition and results of operations.

 

Our IBX hubs are subject to state and local real property taxes. The state and local real property taxes on our IBX hubs may increase as property tax rates change and as the value of the properties are assessed or reassessed by taxing authorities. Many state and local governments are facing budget deficits, which may cause them to increase assessments or taxes. If property taxes increase, our business, financial condition and operating results could be adversely affected.

 

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

 

A customer’s decision to license cabinet space in one of our IBX hubs and to purchase additional services typically involves a significant commitment of resources. In addition, some customers will be reluctant to commit to locating in our IBX hubs until they are confident that the IBX hub has adequate carrier connections. As a result, we have a long sales cycle. Delays due to the length our sales cycle may materially adversely affect our business, financial condition and results of operations.

 

We are subject to securities class action litigation, which may harm our business and results of operations.

 

In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. During the quarter ended September 30, 2001, putative shareholder class action lawsuits were filed against us, a number of our officers and directors, and several investment banks that were underwriters of our initial public offering. The suits allege that the underwriter defendants agreed to allocate stock in our initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for our initial public offering was false and misleading and in violation of the securities laws because it did not disclose these arrangements. In July 2003, a special litigation committee of our board of directors agreed to

 

41


participate in a settlement with the plaintiffs. The settlement agreement is subject to court approval and sufficient participation by defendants in similar actions. If the proposed settlement is not approved by the court or a sufficient number of defendants do not participate in the settlement, the defense of this litigation may increase our expenses and divert management’s attention and resources. An adverse outcome in this litigation could seriously harm our business and results of operations. In addition, we may, in the future, be subject to other securities class action or similar litigation.

 

Risks Related to Our Industry

 

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

 

Acceptance and use of the Internet may not continue to develop at historical rates and a sufficiently broad base of consumers may not adopt or continue to use the Internet and other online services as a medium of commerce. Demand for Internet services and products are subject to a high level of uncertainty and are subject to significant pricing pressure, especially in Asia-Pacific. As a result, we cannot be certain that a viable market for our IBX hubs will materialize. If the market for our IBX hubs grows more slowly than we currently anticipate, our revenues will not grow and our operating results will suffer.

 

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

 

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

 

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

 

The September 11, 2001 terrorist attacks in the U.S., the ensuing declaration of war on terrorism and the continued threat of terrorist activity and other acts of war or hostility appear to be having an adverse effect on business, financial and general economic conditions internationally. These effects may, in turn, increase our costs due to the need to provide enhanced security, which would have a material adverse effect on our business and results of operations. These circumstances may also adversely affect our ability to attract and retain customers, our ability to raise capital and the operation and maintenance of our IBX hubs.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Market Risk

 

The following discussion about market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We may be exposed to market risks related to changes in interest rates and foreign currency exchange rates and to a lesser extent we are exposed to fluctuations in the prices of certain commodities, primarily electricity.

 

In the past, we have employed foreign currency forward exchange contracts for the purpose of hedging certain specifically identified net currency exposures. The use of these financial instruments was

 

42


intended to mitigate some of the risks associated with fluctuations in currency exchange rates, but does not eliminate such risks. We may decide to employ such contracts again in the future. We do not use financial instruments for trading or speculative purposes.

 

Interest Rate Risk

 

Our exposure to market risk resulting from changes in interest rates relates primarily to our investment portfolio. Our interest income is impacted by changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. Due to the short-term nature of our investments, we do not believe that we are subject to any material market risk exposure. An immediate 10% increase or decrease in current interest rates would not have a material effect on the fair market value of our investment portfolio. We would not expect our operating results or cash flows to be significantly affected by a sudden change in market interest rates in our investment portfolio.

 

An immediate 10% increase or decrease in current interest rates would furthermore not have a material impact to our debt obligations due to the fixed nature of our long-term debt obligations. The fair market value of our long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. These interest rate changes may affect the fair market value of the fixed interest rate debt but does not impact our earnings or cash flows.

 

The fair market value of our convertible subordinated debentures is based on quoted market prices. The estimated fair value of our convertible subordinated debentures as of March 31, 2004 approximated cost at approximately $86.3 million.

 

Foreign Currency Risk

 

Prior to December 31, 2002, all of our recognized revenue had been denominated in U.S. dollars, generated mostly from customers in the U.S., and our exposure to foreign currency exchange rate fluctuations had been minimal. However, commencing in fiscal 2003, as a result of the combination, approximately 15% of our revenues and approximately 18% of our costs were in the Asia-Pacific region, and a large portion of those revenues and costs were denominated in a currency other than the U.S. dollar, primarily the Singapore dollar, Japanese yen and Hong Kong and Australian dollars. As a result, our operating results and cash flows will be impacted due to currency fluctuations relative to the U.S. dollar. Going forward, we continue to expect that approximately 15% of our revenues and costs will continue to be generated and incurred in the Asia-Pacific region in currencies other than the U.S. dollar, similar to 2003.

 

Furthermore, to the extent that our international sales are denominated in U.S. dollars, an increase in the value of the U.S. dollar relative to foreign currencies could make our services less competitive in the international markets. Although we will continue to monitor our exposure to currency fluctuations, and when appropriate, may use financial hedging techniques in the future to minimize the effect of these fluctuations, there can be no assurance that exchange rate fluctuations will not adversely affect our financial results in the future.

 

Commodity Price Risk

 

Certain operating costs incurred by us are subject to price fluctuations caused by the volatility of underlying commodity prices. The commodities most likely to have an impact on our results of operations in the event of significant price changes are electricity and supplies and equipment used in our IBX hubs. We are closely monitoring the cost of electricity, particularly in California. We do not employ forward contracts or other financial instruments to hedge commodity price risk.

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and

 

43


procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

 

(b) Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

On July 30, 2001 and August 8, 2001, putative shareholder class action lawsuits were filed against us, certain of our officers and directors, and several investment banks that were underwriters of our initial public offering. The cases were filed in the United States District Court for the Southern District of New York, purportedly on behalf of investors who purchased our stock between August 10, 2000 and December 6, 2000. The suits allege that the underwriter defendants agreed to allocate stock in our initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases in the aftermarket at pre-determined prices. The plaintiffs allege that the prospectus for our initial public offering was false and misleading and in violation of the securities laws because it did not disclose these arrangements. It is possible that additional similar complaints may also be filed. In July 2003, a Special Litigation Committee of the Equinix Board of Directors agreed to participate in a settlement with the plaintiffs that are anticipated to include most of the approximately 300 defendants in similar actions. This settlement agreement is subject to court approval and sufficient participation by all defendants in similar actions. Such settlement includes without limitation a guarantee of payments to the plaintiffs in the lawsuits, assignment of certain claims against the underwriters in our IPO to the plaintiffs, and a dismissal of all claims against Equinix and related individuals. Other than legal fees incurred to date, Equinix expects that all expenses of settlement, if any, will be paid by our insurance carriers. Until such settlement is finalized, we and our officers and directors intend to continue to defend the actions vigorously.

 

Item 2. Changes in Securities and Use of Proceeds.

 

(a) Modification of Constituent Instruments.

 

None.

 

(b) Change in Rights.

 

None.

 

(c) Issuance of Securities.

 

None.

 

(d) Use of Proceeds.

 

The effective date of the Company’s registration statement for our initial public offering, filed on Form S-1 under the Securities Act of 1933, as amended (Commission File No. 333-93749), was August 10, 2000. There has been no change to the disclosure contained in the Company’s report on Form 10-Q for the quarter ended September 30, 2000 regarding the use of proceeds generated by the Company’s initial public offering of its common stock.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

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Item 4. Submission of Matters to a Vote of Security Holders.

 

None.

 

Item 5. Other Information.

 

None.

 

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Item 6. Exhibits and Reports on Form 8-K.

 

(a) Exhibits.

 

Exhibit

Number


   

Description of Document


2.1 (8)   Combination Agreement, dated as of October 2, 2002, by and among Equinix, Inc., Eagle Panther Acquisition Corp., Eagle Jaguar Acquisition Corp., i-STT Pte Ltd, STT Communications Ltd., Pihana Pacific, Inc. and Jane Dietze, as representative of the stockholders of Pihana Pacific, Inc.
3.1 (10)   Amended and Restated Certificate of Incorporation of the Registrant, as amended to date.
3.2 (10)   Certificate of Designation of Series A and Series A-1 Convertible Preferred Stock.
3.3 (9)   Bylaws of the Registrant.
3.4 (13)   Certificate of Amendment of the Bylaws of the Registrant.
4.1     Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2 (2)   Form of Registrant’s Common Stock certificate.
4.10 (9)   Registration Rights Agreement (See Exhibit 10.75).
4.11     Indenture (see Exhibit 10.99).
4.12     Registration Rights Agreement (see Exhibit 10.100).
10.2 (1)   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).
10.5 (1)   Form of Indemnification Agreement between the Registrant and each of its officers and directors.
10.8 (1)   The Registrant’s 1998 Stock Option Plan.
10.9  (1)+   Lease Agreement with Carlyle-Core Chicago LLC, dated as of September 1, 1999.
10.10  (1)+   Lease Agreement with Market Halsey Urban Renewal, LLC, dated as of May 3, 1999.
10.11  (1)+   Lease Agreement with Laing Beaumeade, dated as of November 18, 1998.
10.12  (1)+   Lease Agreement with Rose Ventures II, Inc., dated as of June 10, 1999.
10.13  (1)+   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  (1)+   First Amendment to Lease Agreement with TrizecHahn Centers, Inc. (dba TrizecHahn Beaumeade Corporate Management), dated as of October 28, 1999.
10.15  (1)+   Lease Agreement with Nexcomm Asset Acquisition I, L.P., dated as of January 21, 2000.
10.16  (1)+   Lease Agreement with TrizecHahn Centers, Inc. (dba TrizecHahn Beaumeade Corporate Management), dated as of December 15, 1999.

 

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Exhibit

Number


   

Description of Document


10.20  (1)+   Agreement between Equinix, Inc. and WorldCom, Inc., dated November 16, 1999.
10.21 (1)   Customer Agreement between Equinix, Inc. and WorldCom, Inc., dated November 16, 1999.
10.23 (1)   Purchase Agreement between International Business Machines Corporation and Equinix, Inc. dated May 23, 2000.
10.24 (2)   2000 Equity Incentive Plan.
10.25 (2)   2000 Director Option Plan.
10.26 (2)   2000 Employee Stock Purchase Plan.
10.27 (2)   Ground Lease by and between iStar San Jose, LLC and Equinix, Inc., dated June 21, 2000.
10.28  (3)+   Lease Agreement with TrizecHahn Beaumeade Technology Center LLC, dated as of July 1, 2000.
10.29  (3)+   Lease Agreement with TrizecHahn Beaumeade Technology Center LLC, dated as of May 1, 2000.
10.30  (3)+   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  (3)+   Lease Agreement with Burlington Associates III Limited Partnership, dated as of July 24, 2000.
10.42  (4)+   First Amendment to Deed of Lease with TrizecHahn Beaumeade Technology Center LLC, dated as of March 22, 2001.
10.43  (4)+   First Lease Amendment Agreement with Market Halsey Urban Renewal, LLC, dated as of May 23, 2001.
10.44  (4)+   First Amendment to Lease with Nexcomm Asset Acquisition I, L.P., dated as of April 18, 2000.
10.45  (4)+   Amendment to Lease Agreement with Burlington Realty Associates III Limited Partnership, dated as of December 18, 2000.
10.46 (5)   First Modification to Ground Lease by and between iStar San Jose, LLC and Equinix, Inc., dated as of September 26, 2001.
10.48 (5)   2001 Supplemental Stock Plan.
10.53 (6)   Second Modification to Ground Lease by and between iStar San Jose, LLC and Equinix, Inc., dated as of May 20, 2002.
10.54  (6)+   Amended and Restated Master Service Agreement by and between International Business Machines Corporation and Equinix, Inc., dated as of May 1, 2002.

 

47


Exhibit

Number


   

Description of Document


10.56  (7)+   Second Amendment to Lease Agreement with Burlington Realty Associates III Limited Partnership, dated as of October 1, 2002.
10.58 (7)   Form of Severance Agreement entered into by the Company and each of the Company’s executive officers.
10.60 (9)   Governance Agreement by and among Equinix, Inc., STT Communications Ltd., i-STT Communications Ltd., STT Investments Pte Ltd and the Pihana Pacific stockholder named therein, dated as of December 31, 2002.
10.61 (9)   Tenancy Agreement over units #06-01, #06-05, #06-06, #06-07 and #06-08 of Block 20 Ayer Rajah Crescent, Singapore 139964.
10.62 (9)   Tenancy Agreement over units #05-05, #05-06, #05-07 and #05-08 of Block 20 Ayer Rajah Crescent, Singapore 139964.
10.63 (9)   Tenancy Agreement over units #03-01 and #03-02 of Block 28 Ayer Rajah Crescent, Singapore 139959.
10.64 (9)   Tenancy Agreement over units #05-01, #05-02, #05-03 and #05-04 of Block 20 Ayer Rajah Crescent, Singapore 139964.
10.65 (9)   Tenancy Agreement over units #03-05, #03-06, #03-07 and #03-08 of Block 20 Ayer Rajah Crescent, Singapore 139964.
10.69 (9)   Lease Agreement with Downtown Properties, LLC dated April 10, 2000, as amended.
10.70 (9)   Lease Agreement with Comfort Development Limited dated November 10, 2000.
10.71 (9)   Lease Agreement with PacEast Telecom Corporation dated June 15, 2000, as amended.
10.72 (9)   Lease Agreement Lend Lease Real Estate Investments Limited dated October 20, 2000.
10.73 (9)   Lease Agreement with AIPA Properties, LLC dated November 1, 1999, as amended.
10.74 (9)   Third Modification to Ground Lease by and between iStar San Jose, LLC and Equinix, Inc., dated as of September 30, 2002.
10.75 (9)   Registration Rights Agreement by and among Equinix and the Initial Purchasers, dated as of December 31, 2002.
10.76 (9)   Securities Purchase Agreement by and among Equinix, the Guarantors and the Purchasers, dated as of October 2, 2002.
10.77 (9)   Series A-1 Convertible Secured Note Due 2007 issued to i-STT Investments Pte Ltd on December 31, 2002.
10.78 (9)   Preferred Stock Warrant issued to i-STT Investments Pte Ltd on December 31, 2002.
10.79 (9)   Change in Control Warrant issued to i-STT Investments Pte Ltd on December 31, 2002.

 

48


Exhibit

Number


  

Description of Document


10.83(11)    Securities Purchase and Admission Agreement, dated April 29, 2003, among Equinix, certain of Equinix’s subsidiaries, i-STT Investments Pte Ltd, STT Communications Ltd and affiliates of Crosslink Capital.
10.84(12)    Sublease by and between Electronics for Imaging as Landlord and Equinix Operating Co., Inc. as Tenant dated February 12, 2003.
10.90(13)    Expatriate Agreement with Philip Koen, President and Chief Operating Officer of the Company, dated as of June 24, 2003.
10.92(14)    Renewal of Tenancy Agreements over units #06-01, #06-05/08, #05-05/08, #03-05/08 & #05-01/04 of Block 20 Ayer Rajah Crescent, Singapore 139964.
10.94(15)    Fourth Modification to Ground Lease by and between iStar San Jose, LLC and Equinix, Inc., dated as of November 21, 2003.
10.95 (15)+    Sublease Agreement between Sprint Communications Company, L.P. and Equinix Operating Co., Inc. dated October 24, 2003.
10.96(15)    Tenancy Agreement over units #03-01, #03-02, #03-03, #03-04 of Block 20 Ayer Rajah Crescent, Singapore 139964.
10.97(15)    Lease Agreement with JMA Robinson Redevelopment, LLC, as successor in interest to Carrier Central L.A., Inc., dated as of November 30, 2003.
10.98    Purchase Agreement between Equinix, Inc. and Citigroup Global Markets Inc. as representative of the initial purchasers named therein dated February 5, 2004.
10.99    Indenture among Equinix, Inc. and U.S. Bank National Association as Trustee dated February 11, 2004.
10.100    Registration Rights Agreement between Equinix, Inc. and Citigroup Global Markets Inc. as representative of the initial purchasers named therein dated February 11, 2004.
10.101    First Amendment to Lease Agreement dated September 1, 1999, between Lakeside Purchaser L.L.C. as successor in interest to Carlyle-Core Chicago, LLC and Equinix Operating Co., Inc.
16.1(1)    Letter regarding change in certifying accountant.
21.1(9)    Subsidiaries of Equinix.
31.1    Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(1) 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).

 

49


(2) 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).

 

(3) 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.

 

(4) 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.

 

(5) 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.

 

(6) Incorporated herein by reference to the exhibit of the same number in the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.

 

(7) Incorporated herein by reference to the exhibit of the same number in the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.

 

(8) Incorporated herein by reference to Annex A of Equinix’s Definitive Proxy Statement filed with the Commission December 12, 2002.

 

(9) Incorporated herein by reference to the exhibit of the same number in the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002.

 

(10) Incorporated herein by reference to the exhibit of the same number in the Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2002.

 

(11) Incorporated herein by reference to exhibit 10.1 in the Registrant’s filing on Form 8-K on May 1, 2003.

 

(12) 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 March 31, 2003.

 

(13) 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, 2003.

 

(14) 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, 2003.

 

(15) 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, 2003.

 

+ Confidential treatment has been requested for certain portions which are omitted in the copy of the exhibit electronically filed with the Securities and Exchange Commission. The omitted information has been filed separately with the Securities and Exchange Commission pursuant to Equinix’s application for confidential treatment.

 

(b) Reports on Form 8-K.

 

On January 13, 2004, the Company filed a Current Report on Form 8-K to file certain non-GAAP information that the Company had presented in a live webcast held on January 9, 2004. The Company attached a reconciliation of EBITDA to GAAP as required by Regulation G.

 

On January 22, 2004, the Company filed a Current Report on Form 8-K to announce that the stock selling plans that the Company’s executive officers had entered into for asset diversification purposes in accordance with SEC Rule 10b5-1, would automatically resume on January 22, 2004, following a contractual lock-up period with the Company’s underwriters in connection with the Company’s public stock offering on November 18, 2003.

 

On February 4, 2004, the Company filed a Current Report on Form 8-K to file the Company’s press release from February 4, 2004, in which the Company reported its 2003 fourth quarter and year-end results.

 

On February 4, 2004, the Company filed a Current Report on Form 8-K to announce that it intends to offer $75 million aggregate principal amount of Convertible Subordinated Debentures due 2024 (the “Debentures”) to be offered pursuant to Rule 144A under the Securities Act of 1933, as amended, and Regulation S thereunder.

 

50


On February 6, 2004, the Company filed a Current Report on Form 8-K to announce that it agreed to sell the Debentures previously announced on February 4, 2004 in a press release dated February 5, 2004.

 

On February 20, 2004, the Company filed a Current Report on Form 8-K to announce that it sold an additional $11.25 million of Debentures to the initial purchasers of the Debentures previously announced on February 5, 2004. The Company further announced that it used the proceeds from the Debentures to repay its Credit Facility.

 

51


EQUINIX, INC.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

       

EQUINIX, INC.

Date: May 6, 2004

      By:   /s/ RENEE F. LANAM
             
               

Chief Financial Officer and Secretary

(Principal Financial Officer)

 

 
/s/ KEITH D. TAYLOR

Vice President, Finance

(Principal Accounting Officer)

 

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