Equinix
Annual Report 2003

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 10-K xx ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 OR ¨¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 000-31293 EQUINIX, INC.(Exact name of registrant as specified in its charter) Delaware 77-0487526(State of incorporation) (IRS Employer Identification No.) 301 Velocity Way, Fifth Floor, Foster City, California 94404(Address of principal executive offices, including ZIP code) (650) 513-7000(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. x Yes ¨ No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, tothe best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. ¨ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). ¨ Yes x No The aggregate market value of the voting and non-voting common stock held by non-affiliates computed by reference to the price at which the commonstock was last sold, or the average bid and asked price of such common stock, as of the last business day of the registrant’s most recently completed secondfiscal quarter was approximately $71.3 million. As of February 29, 2004, a total of 15,507,068 shares of the registrant’s common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part III—Portions of the registrant’s definitive Proxy Statement to be issued in conjunction with the registrant’s 2004 Annual Meeting of Stockholders,which is expected to be filed not later than 120 days after the registrant’s fiscal year ended December 31, 2003. Except as expressly incorporated by reference,the registrant’s Proxy Statement shall not be deemed to be a part of this report on Form 10-K. Table of ContentsEQUINIX, INC. FORM 10-K DECEMBER 31, 2003 TABLE OF CONTENTS Item Page No. PART I 1. Business 32. Properties 113. Legal Proceedings 114. Submission of Matters to a Vote of Security Holders 11 PART II 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 126. Selected Financial Data 147. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15 Risk Factors 337A. Quantitative and Qualitative Disclosures About Market Risk 428. Financial Statements and Supplementary Data 449. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 449A. Controls and Procedures 44 PART III 10. Directors and Executive Officers of the Registrant 4511. Executive Compensation 4512. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 4513. Certain Relationships and Related Transactions 4514. Principal Accountant Fees and Services 45 PART IV 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 46 Signatures 51 2Table of ContentsPART I ITEM 1. BUSINESS The words “Equinix”, “we”, “our”, “ours”, “us” and the “Company” refer to Equinix, Inc. All statements in this discussion that are nothistorical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including statementsregarding Equinix’s “expectations”, “beliefs”, “hopes”, “intentions”, “strategies” or the like. Such statements are based on management’s currentexpectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in theforward-looking statements. Equinix cautions investors that there can be no assurance that actual results or business conditions will not differmaterially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, the riskfactors discussed in this Annual Report on Form 10-K. Equinix expressly disclaims any obligation or undertaking to release publicly any updates orrevisions to any forward-looking statements contained herein to reflect any change in Equinix’s expectations with regard thereto or any change inevents, conditions, or circumstances on which any such statements are based. Overview Equinix provides network neutral colocation, interconnection and managed services to enterprises, content companies, systems integrators and theworld’s largest networks. Through our 14 Internet Business Exchange hubs, or IBX hubs, in the U.S. and Asia customers can directly interconnect with eachother for critical traffic exchange requirements. Direct interconnection to our aggregation of networks, which serve more than 90% of the world’s Internetroutes, 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. This critical mass and the resulting “network effect,” combined with our improved financialposition gained through the completion of a series of financing transactions over the past 15 months, has allowed us to accelerate new customer growth andbookings. As a result of our fixed cost model, we believe this continued growth will drive higher incremental margins and increasing cash returns. Our network neutral business model is a key differentiator for Equinix in the market. Because we do not operate a network, we are able to offer directinterconnection to the largest aggregation of bandwidth providers and Internet service providers. The world’s top tier Internet service providers, and numerousaccess networks, second tier providers and international carriers such AT&T, British Telecom, Cable & Wireless, Level 3, MCI, NTT, SBC, SingTel,Sprint and Qwest are all currently located at our IBX hubs. Access to such a wide variety of networks has attracted 8 of the top 10 Internet properties andnumerous other customers, including Amazon.com, Electronic Arts, Electronic Data Systems, Fujitsu, Gannett, Google, Hallmark, IBM, MSN, Sony,Ticketmaster, Washington Post and Yahoo!. Our products and services are comprised of three types: Colocation, Interconnection, and Managed IT Infrastructure services. • Colocation services include cabinets, power, operations space and storage space for our customers’ colocation needs. • Interconnection services allow customers to trade network traffic with each other simply and easily. • Managed IT infrastructure services allow our customers to leverage our significant telecommunication expertise, maximize the benefits of our IBXhubs and optimize their infrastructure and resources. This market has historically been served by large telecommunications carriers who have bundled their telecommunications services with their colocationofferings. In mid-2003 two major telecommunications companies announced their plans to exit the U.S. market in order to focus on their core offerings. Themajority of the assets from these companies have been sold to managed service providers and we believe we will continue to benefit from gaining customerswho are displaced or choose to leave these providers because we offer access to a 3Table of Contentsworld-class choice of carriers and service providers. In December 2003, Equinix acquired a new IBX in Santa Clara, California, which will provide additionaloptions to our customers in the Silicon Valley market. Strategically, Equinix will continue to look at attractive opportunities to grow our market share andselectively improve our footprint and service streams. Recent Developments Follow-on Equity Offering. On November 21, 2003, we sold 5,524,780 shares of our common stock at a purchase price of $20.00 per share whichresulted in gross proceeds to the Company of $110,495,600 before deducting offering expenses and underwriting fees. Convertible Subordinated Debenture Offering. On February 11, 2004, we sold $75.0 million in aggregate principal of 2.5% convertiblesubordinated debentures due 2024 to qualified institutional buyers. Subsequently, on February 18, 2004, we sold an additional $11.25 million of ourdebentures to the initial purchasers of these debentures. We used the net proceeds from this offering to repay all amounts outstanding under our credit facilityand two of our other debt facilities. In addition, we intend to use the proceeds received to redeem our 13% senior notes. We have exercised our right to redeem allof our 13% senior notes, which have a total of $30.5 million of principal outstanding and have sent a notice of redemption to the trustee. The effective date ofthe redemption is expected to be March 12, 2004. Lastly, all remaining proceeds will be used for general corporate purposes. Industry Background The Internet is a collection of numerous independent networks interconnected with each other to form a network of networks. Users on differentnetworks are able to communicate with each other through interconnection between these networks. For example, when a user of the Internet sends an email toanother user, assuming that each person uses a different network provider, the email must pass from one network to the other in order to get to the finaldestination. In order to accommodate the rapid growth of Internet traffic, an organized approach for network interconnection was needed. The exchange of trafficbetween these networks became known as peering. Peering is when networks trade traffic at relatively equal amounts and set up agreements to trade traffic forfree. At first, government and non-profit organizations established places where these networks could exchange traffic, or peer, with each other—these pointswere known as network access points, or NAPs. Over time, many NAPs became a natural extension of carrier services and were run by such companies asMFS (now a part of MCI), Sprint, Ameritech and Pacific Bell (both now known as SBC). Ultimately, these NAPs were unable to scale with the growth of the Internet and the lack of “neutrality” by the carrier owners of these NAPs created aconflict of interest with the participants. This created a market need for network neutral interconnection points that could accommodate the rapidly growingneed to increase performance for enterprise and consumer users of the Internet, especially with the rise of important content providers such as Microsoft,Yahoo!, America Online and others. In addition, the providers, as well as a growing number of enterprises required a more secure, reliable solution for directconnection to a variety of telecommunications networks as the importance of their Internet operations continued to grow. To accommodate Internet traffic growth, the largest of these networks left the NAPs and began trading traffic by placing private circuits between eachother. Peering which once occurred at the NAP locations were moved to these private circuits. Over the years, these circuits became expensive to expand andcould not be built fast enough to accommodate the growth in traffic. This led to a need by the large carriers to find a more efficient way to trade traffic or peer.Customers have chosen Equinix for their peering operations because they are now able to reach all of the networks they peer with all in one location, withsimple direct connections. Their ability to peer across the room, instead of across a metro area has increased the scalability of their operations while decreasingcost by upwards of 50%. 4Table of ContentsOur IBX hubs are the next-generation interconnection points. They are designed to handle the scalability issues that exist between both large and smallnetworks, as well as the interconnection between the emerging companies who have become critical to the Internet. We have been successful in uniting the majorcompanies that make up the Internet infrastructure including AT&T, Cable & Wireless, Level 3, MCI, Qwest and Sprint. These companies, which constitutethe world’s largest top Internet service providers, together with most of the major broadband networks, including America Online, Comcast Corporation, CoxCommunications, MSN and SBC, second tier backbones such as Global Crossing, Verio and WilTel, top international telecommunications carriers,including Bell Canada, British Telecom, Deutsche Telecom, France Telecom, Japan Telecom, KDDI, SingTel, StarHub, Telia and Telstra, and almost everyfiber, sonet, Ethernet and competitive local exchange company, including Looking Glass Networks and OnFiber Communications, and incumbent localexchange company, including SBC and Verizon, are our customers and use us to interconnect with each other and their customers. Additionally, we providean important industry leadership role in the area of exchange points and are consistently looked to as an industry expert and key influence in this subjectmatter. Content providers and enterprises can now control their own network performance and destiny by choosing the various service providers they wish towork with and by establishing direct connections for this connectivity. For our customers, this represents significant cost savings and increased performance. Our Solution Our IBX hubs provide the environment and services to meet the networking and IT operations challenges facing enterprises, networks and Internetbusinesses today. As a result, we are able to provide the following key benefits to our customers: Quality. Our IBX centers provide customers with a secure, high quality solution for their colocation needs. Enterprise and content companies havedemanding requirements for data center uptime, security, power backup and other important attributes. We have designed our centers and processes to exceedthe requirements for the most important financial institutions, government agencies and key enterprise brands such as Amazon.com, Hallmark, Macromedia,Sony and Ticketmaster. We have a track record of 99.9999% uptime and are continually testing and refining processes to ensure that we will continue toprovide the stability and quality that customers expect. Performance. Because we provide direct access to the providers that serve more than 90% of the world’s Internet networks and users, customers canquickly, efficiently, cost-effectively and reliably exchange traffic with their network services providers for higher performance operations. Access to the morethan 170 networks ensures high-quality interconnection. With the mass of networks present, global enterprises are increasingly looking at ways to providenetwork diversity and increase performance of their operations, and are utilizing our IBX hubs to ensure their IT infrastructures are operating at theinterconnection hub of the Internet. By using multiple networks, customers are able to insure their operations in the event that one of their network serviceproviders has a service interruption or restructuring in the business. The network service providers and geographic diversity we offer provides customers withthe flexibility to enable the highest performing Internet operations. Improved Economics. Our U.S. services such as Equinix GigE Exchange and Equinix Internet Core Exchange facilitate peering and dramaticallyreduce costs for critical transit, peering and traffic exchange operations by eliminating the costs of private peering or local loops. Networks such as Comcast,British Telecom and SBC and content providers such as Electronic Arts, Google, MSN and Yahoo! can save between 20% to 40% of bandwidth costs throughthe traffic exchange services we offer. In addition, in both the U.S. and Asia-Pacific, content companies and enterprises can save significant bandwidth costsbecause the number of networks housed within Equinix competing for the traffic of these companies results in lower prices while increasing performance. Access to International Markets. We offer our network, content and enterprise customers a one-stop solution for their outsourced IT infrastructureneeds in the U.S. and Asia-Pacific. This is especially important for U.S. enterprises who want to expand into Asia-Pacific, where the myriad of complexitiesfor doing business in each country remains challenging. We offer a consistent standard of quality, a single contract and a single point of support for all ourlocations throughout the U.S. and Asia-Pacific. 5Table of ContentsOur Strategy Our objective is to become the premier hub for critical Internet players, enterprises and government agencies to locate their Internet operations in order togain maximum benefits from the choice of networks and partners in the most simple and efficient manner. Key components of our strategy include thefollowing: Continue to Build upon our Critical Mass of Network Providers and Content Companies, and Grow our Position within Enterprise andGovernment. We have assembled a critical mass of premier network providers and content companies and have become one of the core hubs of the Internet.This critical mass is a key selling point since content companies want to connect with a diverse set of networks to provide the best connectivity to their end-customers, and network companies want to sell bandwidth to content customers and interconnect with other networks in the most efficient manner available.Currently, we have over 170 unique networks, including all of the top tier networks, allowing our customers to directly interconnect with providers that servemore than 90% of global Internet routes. We have a growing mass of key players in the enterprise sector, such as GE, Gannett, Goldman Sachs and others.Similarly, we have experienced increasing success in the government sector within defense and security. We expect these sectors to contribute to our growth in2004 and beyond. Leverage the Network Effect. As networks, content providers and other enterprises locate in our IBX hubs, it benefits their suppliers and businesspartners 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 exchangethus lowering overall cost and increasing flexibility. The ability to directly interconnect with a wide variety of companies is a key differentiator for Equinix inthe market. Promote our IBX Hubs as the Highest Performance Points on the Internet. Our premier IBX hubs offer state of the art design and security, 24hour / 365 days a year customer service, and high quality power and back-up redundancy with 99.9999% uptime. Underscoring our customer satisfaction,our embedded customer base has consistently provided 50% of our growth in a given quarter. Provide New Products and Services within our IBX Hubs. We will continue to offer additional products and services that are most valuable to ourcustomers as they manage their Internet and network businesses and, specifically, as they attempt to effectively utilize multiple networks. For example, weoffer an automated service to allow customers to easily choose and provision multiple networks with a simple easy to use portal. Customers Our customers include carriers and other bandwidth providers, internet service providers, enterprises, content providers and system integrators. Weoffer each customer a choice of business partners and solutions based on their colocation, interconnection and managed IT service needs. As of December 31,2003, we had 712 customers. Typical customers in each category include the following: Carriers/Networks Content Providers EnterpriseAT&T Amazon.com AppleBritish Telecom Electronic Arts DeutscheBoerseCable & Wireless Google ElectronicDataSystemsLevel 3 Hallmark Fidelity InvestmentsMCI MSN FujitsuNTT Sony GannettQwest Ticketmaster GoldmanSachsSBC Washington Post IBMSprint Yahoo! Macromedia 6Table of ContentsCustomers typically sign renewable contracts of one or more years in length. Our single largest customer, IBM, represented approximately 15%, 20%and 15% of total revenues for the years ended December 31, 2003, 2002 and 2001, respectively. No other single customer accounted for more than 10% ofrevenues during this time. Products and Services Our products and services are comprised of three types: Colocation, Interconnection and Managed IT Infrastructure services. Colocation Services Our IBX hubs provide our customers with secure, reliable and fault-tolerant environments that are necessary for optimum Internet commerceinterconnection. Our IBX hubs include multiple layers of physical security, scalable cabinet space availability, on-site trained staff 24 hours per day, 365days per year, dedicated areas for customer care and equipment staging, redundant AC/DC power systems and multiple other redundant, fault-tolerantinfrastructure systems. Some specifications or services provided may differ in our Asia-Pacific locations in order to properly meet the local needs of customersin those locations. Within our IBX hubs, customers can place their equipment and interconnect with a choice of networks or other business partners. We also providecustomized solutions for customers looking to package our IBX space as part of their complex solutions. Our colocation products and services include: Cabinets. Our customers have several choices for colocating their networking and server equipment. They can place the equipment in one of ourshared or private cages or customize their space. As a customer’s colocation requirements increase, they can expand within their original cage or upgrade into acage that meets their expanded requirements. Cabinets are priced with an initial installation fee and an ongoing recurring monthly charge. Power. We offer both AC and DC power circuits at various amperages and phases customized to a customer’s individual power requirements. Poweris becoming an element of increasing importance in customers’ colocation decisions. IBXflex. This service allows customers to deploy mission-critical operations personnel and equipment on-site at our IBX hubs. Because of the closeproximity to their end-users, IBXflex customers can offer a faster response and quicker troubleshooting solution than those available in traditional colocationfacilities. This space can also be used as a secure disaster recovery point for customers’ business and operations personnel. This service is priced with aninitial installation fee and an ongoing recurring monthly charge. Interconnection Services Our interconnection services enable scalable, reliable and cost-effective interconnection and traffic exchange between all Equinix customers. Theseinterconnection services are either on a one-to-one basis with direct cross connects or one-to-many through one of our peering services. In peering, we provide animportant industry leadership role by acting as the relationship broker between parties who would like to interconnect within our IBX hubs. Our staff has heldsignificant positions in the leading industry groups such as the North American Network Operators’ Group, or NANOG, and the Internet Engineering TaskForce, or IETF, and bring a tremendous amount of knowledge to this area. Our staff have published industry-recognized white papers and strategy documentsin the areas of peering and interconnection, many of which are used by leading institutions worldwide in furthering the education and promotion of thisimportant network arena. To showcase these efforts, we hold peering forums which are now widely recognized as a very influential forum for the world’s toppeering experts. We will continue to develop additional services in the area of traffic exchange that will allow our 7Table of Contentscustomers to leverage the critical mass of networks now available in our IBX hubs. The current exchange services are comprised of the following: Physical Cross-Connect/Direct Interconnections. Customers needing to directly and privately connect to another IBX customer can do so throughsingle or multi-mode fiber. These cross connections are the physical link between customers and can be implemented within 24 hours of request. Cross-connect services are priced with an initial installation fee and an ongoing monthly recurring charge. Equinix Internet Core Exchange. This interconnection service enables direct peering interconnections between major backbone networks andproviders. Equinix Internet Core Exchange is a pre-provisioned interconnection package that enables major backbones to connect their networks directly in acentralized, neutral environment for peering and transit. The service includes pre-provisioned interconnections, premium service levels and specializedcustomer service features to support the quality and support levels required by the largest Internet providers in the world. Internet Core Exchange services arepriced with an initial installation fee and an ongoing monthly recurring charge. Equinix GigE Exchange. Customers may choose to connect to our exchange central switching fabric rather than purchase a direct physical crossconnection. With a connection to this switch, a customer can aggregate multiple interconnects over one physical connection instead of purchasing individualphysical cross connects. The GigE Exchange service is offered as a bundled service that includes a cabinet, power, cross connects and port charges. Theservice is priced by IBX with an initial installation fee and an ongoing monthly recurring charge. Individual IBX prices scale upward based on the number ofparticipants on the exchange service. Internet Connectivity Services. Customers who are installing equipment in our IBX hubs generally require IP connectivity or bandwidth services.Although it is often more beneficial for customers to go directly to the carriers, we will offer customers the ability to contract for these services through us fromany of the major bandwidth providers. Customers who require a single bill and a single point of support for all of their services contract through Equinix fortheir bandwidth needs. We provide these services on a retail basis through each individual carrier and customer and do not aggregate this traffic or run anetwork. Internet Connectivity Services are priced with an initial installation fee and an ongoing monthly recurring charge based on the amount of bandwidthcommitted or used. Managed IT Infrastructure Services With the continued growth in Internet use, networks, service providers, enterprises and content providers are challenged to deliver fast and reliableservice, while lowering costs. With over 170 ISPs and carriers located in our IBX hubs, we leverage the value of network choice with our set of multi-networkmanagement and other outsourced IT services. Professional Services. Our IBX hubs are staffed with Internet and telecommunications specialists who are on-site and available 24 hours per day,365 days per year. These professionals are trained to perform installations of customer equipment and cabling. Professional services are custom-priceddepending on customer requirements. “Smart Hands” Services. Our customers can take advantage of our professional “Smart Hands” service, which gives customers access to our IBXstaff for a variety of tasks, when their own staff is not on site. These tasks may include equipment rebooting, power cycling, card swapping, and performingemergency equipment replacement. Services are available on-demand or by customer contract and are priced on an hourly basis. Equinix Direct. Equinix Direct is a managed multihoming service that allows customers to easily provision and manage multiple networkconnections over a single interface. Customers can choose branded networks on a monthly basis with no minimums or long-term commitments. This serviceis priced with an initial install fee and ongoing monthly recurring charges. 8Table of ContentsEquinix Mail Service. Equinix’s enterprise messaging service is a complete outsourced solution, primarily based mainly on the Lotus Notes andMicrosoft Exchange platform, which customers entrust the operation and support of their messaging applications. This service is currently only available inour Singapore location and the service is priced with an initial installation fee and an ongoing monthly recurring charge. Managed Platform Solutions. Managed Platform Solutions delivers pre-qualified, pre-installed, pre-hardened and fully managed systems platformsupon which customers can host their co-located applications. These platforms are available in different configuration to meet the needs of the customer. Eachconfiguration includes the server(s), operating system, network connectivity, and system administration management as well as options for database andnetwork administration. This service is only available in the Equinix Singapore location and the service is priced with an initial installation fee and an ongoingmonthly recurring charge. Sales and Marketing Sales. We use a direct sales force and channel marketing program to market our services to network, content provider, enterprise, government andInternet infrastructure businesses. We organize our sales force by customer segments as well as by establishing a sales presence in diverse geographic regions,which enables efficient servicing of the customer base from a network of regional offices. In addition to our worldwide headquarters located in Silicon Valley,we have established an Asian-Pacific regional headquarters in Singapore. Our U.S. sales offices are located in New York; Reston, Virginia; Los Angeles;Honolulu; Dallas; Chicago and Silicon Valley. Our Asia-Pacific sales offices are located in Hong Kong, Tokyo, Singapore and Sydney. Our sales team works closely with each customer to foster the natural network effect of our IBX model, resulting in access to a wider potential customerbase via our existing customers. As a result of the IBX interconnection model, IBX hub participants encourage their customers, suppliers and businesspartners to come into the IBX hubs. These customers, suppliers and business partners, in turn, encourage their business partners to locate in IBX hubsresulting in additional customer growth. This network effect significantly reduces our new customer acquisition costs. In addition, large network providers ormanaged service providers may refer customers to Equinix as a part of their total customer solution. Marketing. To support our sales effort and to actively promote our brand in the U.S. and Asia-Pacific, we conduct comprehensive marketingprograms. Our marketing strategies include an active public relations campaign and on-going customer communications programs. Our marketing efforts arefocused on major business and trade publications, online media outlets, industry events and sponsored activities. Our staff holds leadership positions in keynetworking organizations and we participate in a variety of Internet, computer and financial industry conferences and place our officers and employees inkeynote speaking engagements at these conferences. In addition to these activities, we build recognition through sponsoring or leading industry technicalforums and participating in Internet industry standard-setting bodies. We continue to develop and host the industry’s most successful educational forumsfocused on peering technologies and peering practices for ISPs and content providers. Competition Our current and potential competition includes: • Internet data centers operated by established U.S. and Asia-Pacific communications carriers such as AT&T, Level 3, NTT, SAVVIS andSingTel. Unlike the major network providers, who constructed data centers primarily to help sell bandwidth, we have aggregated multiplenetworks in one location, providing superior diversity, pricing and performance. Telecommunications companies’ data centers only provide onechoice of carrier and generally require capacity minimums as part of their pricing structures. Locating in our IBX hubs provides access to top tiernetworks and allows customers to negotiate the best prices with a number of carriers resulting in better economics and redundancy. There have beentwo recent announcements that two major carriers who currently operate data centers are 9Table of Contents exiting the U.S. market. The disposition of these assets has been completed with SAVVIS operating the majority of these assets. Because theseoperators are not network neutral, we believe we have an advantage in gaining the business of those customers displaced from these carriers becauseaccess to their networks are also available in our IBX hubs. • U.S. Network access points such as Switch and Data/Palo Alto Internet Exchange and carrier operated NAPs. NAPs, generally operated bycarriers, are typically older facilities and lack the incentive to upgrade the infrastructure in order to scale with traffic growth. In contrast, we providestate-of-the-art, secure facilities and geographic diversity with round the clock support and a full range of network and content provider offerings. • Vertically integrated web site hosting, colocation and ISP companies such as AboveNet, Digex/MCI and SAVVIS. Most managed serviceproviders require that customers purchase their entire network and managed services directly from them. We are a network and service provideraggregator and allow customers the ability to contract directly with the networks and web-hosting partner best for their business. By locating in oneof our IBX centers, hosting companies add more value to our business proposition by bringing in more partners and customers and thus creating anetwork effect. Unlike other providers whose core businesses are bandwidth or managed services, we focus on neutral hubs for networks, content providers,enterprises and government. As a result, we are free of the channel conflict common at other hosting/colocation companies. We compete based on the quality ofour facilities, our ability to provide a one-stop solution in our U.S. and Asia-Pacific locations, the superior performance and diversity of our network neutralstrategy and the economic benefits of the aggregation of top networks and Internet businesses under one roof. Specifically, we have established relationshipswith a number of leading hosting companies such as IBM (our largest customer) and EDS. We expect to continue to benefit from several industry trendsincluding the consolidation of supply in the colocation market, the need for contracting with multiple networks due to the uncertainty in thetelecommunications market and the continued growth of the large and stable systems integrators. Employees As of December 31, 2003, we had 431 employees. We had 289 employees based in the U.S. and 142 employees based in Asia-Pacific. Of our U.S.employees, we had 178 based at our corporate headquarters in Foster City, California and our regional sales offices. Of those employees, 73 were inengineering and operations, 61 were in sales and marketing and 44 were in management and finance. We had 111 employees based at our IBX hubs inWashington, D.C.; New York, New York; Dallas, Texas; Chicago, Illinois; Los Angeles, California; Honolulu, Hawaii and the Silicon Valley area. Of ourAsia-Pacific employees, we had 86 at our Asia-Pacific headquarters in Singapore and our other regional offices. Of those employees, 19 were in engineeringand operations, 27 were in sales and marketing and 40 were in management and finance. We had 56 employees based at our IBX hubs in Singapore, Tokyo,Hong Kong and Sydney. Available Information We were incorporated in Delaware in June 1998. We are required to file reports under the Exchange Act with the SEC. You may read and copy ourmaterials on file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information regardingthe SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website at http://www.sec.gov that containsreports, proxy and information statements and other information. You may also obtain copies of our annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K by visiting theinvestor relations page on our website, www.equinix.com. Information contained on our website is not part of this annual report on Form 10-K. 10Table of ContentsITEM 2. PROPERTIES Our executive offices are located in Foster City, California, and we also have sales offices in several cities throughout the United States. Our Asia-Pacificheadquarter office is located in Singapore and we also have some office space in Tokyo, Japan and Hong Kong, China. We have entered into leases for IBXhubs in Ashburn, Virginia; Newark and Secaucus, New Jersey; San Jose, Santa Clara and Los Angeles, California; Chicago, Illinois; Dallas, Texas;Honolulu, Hawaii; Tokyo, Japan; Hong Kong, China; Sydney, Australia and Singapore. We also hold a ground leasehold interest in certain unimproved realproperty in San Jose, California, consisting of approximately 40 acres. ITEM 3. LEGAL PROCEEDINGS On July 30, 2001 and August 8, 2001, putative shareholder class action lawsuits were filed against us, certain of our officers and directors, and severalinvestment banks that were underwriters of our initial public offering. The cases were filed in the United States District Court for the Southern District of NewYork, purportedly on behalf of investors who purchased our stock between August 10, 2000 and December 6, 2000. The suits allege that the underwriterdefendants agreed to allocate stock in our initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements bythose investors to make additional purchases in the aftermarket at pre-determined prices. The plaintiffs allege that the prospectus for our initial public offeringwas false and misleading and in violation of the securities laws because it did not disclose these arrangements. It is possible that additional similar complaintsmay 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 areanticipated to include most of the approximately 300 defendants in similar actions. This settlement agreement is subject to court approval and sufficientparticipation 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. Otherthan legal fees incurred to date, Equinix expects that all expenses of settlement, if any, will be paid by our insurance carriers. Until such settlement isfinalized, we and our officers and directors intend to continue to defend the actions vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None during the fourth quarter of 2003. 11Table of ContentsPART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES Our common stock is traded on the Nasdaq National Market System under the symbol of EQIX. Our common stock began trading in August 2000.The following table sets forth on a per share basis the low and high closing prices of our common stock as reported by the Nasdaq National Market during thelast two years. On December 31, 2002, we completed a 32 for 1 reverse stock split of our common stock in order to comply with Nasdaq initial listingrequirements. The per share information presented below reflects this reverse stock split. Low HighFiscal 2003: Fourth Fiscal Quarter $17.04 $28.25Third Fiscal Quarter 8.03 23.37Second Fiscal Quarter 2.90 10.40First Fiscal Quarter 2.95 7.70Fiscal 2002: Fourth Fiscal Quarter $5.70 $11.52Third Fiscal Quarter 6.72 18.56Second Fiscal Quarter 10.24 36.80First Fiscal Quarter 33.92 108.16 As of December 31, 2003, we had issued 15,084,425 shares of our common stock held by approximately 456 registered holders. We have never declared or paid any cash dividends on our common stock and we do not anticipate paying cash dividends in the foreseeable future. Inaddition, we are prohibited from paying cash dividends under covenants contained in our current credit agreements. We currently intend to retain our earnings,if any, for future growth. Future dividends on our common stock, if any, will be at the discretion of our board of directors and will depend on, among otherthings, our operations, capital requirements and surplus, general financial condition, contractual restrictions and such other factors as our board of directorsmay deem relevant. The effective date of the Registration Statement for our initial public offering, filed on Form S-1 under the Securities Act of 1933 (File No. 333-93749),was August 10, 2000. The class of securities registered was common stock. There has been no change to the disclosure contained in the Company’s report onForm 10-Q for the quarter ended September 30, 2000 regarding the use of proceeds generated by the Company’s initial public offering of its common stock. During the quarter ended December 31, 2003, we issued and sold the following securities: 1. On November 21, 2003, we sold 5,524,780 shares of our common stock at a purchase price of $20.00 per share in a public offering, whichresulted in gross proceeds to us of $110,495,600 before deducting offering expenses and underwriting fees of $6,052,900. Citigroup GlobalMarkets, Inc. and SG Cowen Securities Corporation acted as the Company’s principal underwriters. 12Table of ContentsEquity Compensation Plan Information The following table provides information as of December 31, 2003 with respect to the shares of the Company’s common stock that may be issuableunder the Company’s existing equity compensation plans. The following information is as of December 31, 2003: (a) (b) (c) Plan category Number of securitiesto be issued uponexercise ofoutstanding optionsand rights Weighted-averageexercise price ofoutstandingoptions and rights Number of securitiesremaining availablefor future issuanceunder equitycompensation plans(excluding securitiesreflected in column (a)) Equity compensation plans approved by security holders* 3,345,823 $17.67 866,768**Equity compensation plans not approved by security holders 62,115 $12.17 1,390,977 Totals 3,407,938 $17.56 2,257,745 * On each January 1, beginning in 2001, the number of shares reserved for issuance under the following equity compensation plans will be automaticallyincreased as follows: the 2000 Equity Incentive Plan will be automatically increased by the lesser of 6% of the then outstanding shares of common stockor 6 million shares; the 2000 Director Option Plan will be automatically increased by 50,000 shares of common stock; and the Employee StockPurchase Plan will be automatically increased by the lesser of 2% of the then outstanding shares of common stock of 600,000 shares.** Includes 13,301 shares from the Employee Stock Purchase Plan. The following equity compensation plan of the Company that was in effect as of December 31, 2003 was adopted without the approval of theCompany’s security holders: The Equinix 2001 Supplemental Stock Plan was adopted by the board of directors effective September 26, 2001. The Company has reserved1,493,961 shares of common stock for issuance under the 2001 Supplemental Stock Plan. Nonstatutory options and restricted stock awards may be grantedunder the 2001 Supplemental Stock Plan to employees of the Company (or any parent or subsidiary corporation) who are neither officers nor Board membersat the time of grant or to consultants. All option grants will have an exercise price per share equal to not less than 85% of the fair market value per share ofcommon stock on the grant date. Each option will vest in installments over the optionee’s period of service with the Company. The purchase price for newlyissued restricted shares awarded under the 2001 Supplemental Stock Plan may be paid in cash, by promissory note or by the rendering of past or futureservices. As of December 31, 2003, options covering 62,115 shares of common stock were outstanding under the 2001 Supplemental Stock Plan, 1,390,977shares remained available for future option grants, and options covering 40,869 shares had been exercised. The options will vest on an accelerated basis in theevent the Company is acquired and those options are not assumed or replaced by the acquiring entity. An option or award will become fully exercisable or fullyvested if the holder’s employment or service is involuntarily terminated within 18 months following the acquisition. The Board may amend or terminate the2001 Supplemental Stock Plan at any time. The 2001 Supplemental Stock Plan will continue in effect indefinitely unless the board decides to terminate theplan earlier. 13Table of ContentsITEM 6. SELECTED FINANCIAL DATA The following statement of operations data for the five years ended December 31, 2003 and the balance sheet data as of December 31, 2003, 2002, 2001,2000 and 1999 have been derived from our audited consolidated financial statements and the related notes to the financial statements. Our historical results arenot necessarily indicative of the results to be expected for future periods. The following selected consolidated financial data for the three years ended December31, 2003 and as of December 31, 2003 and 2002, should be read in conjunction with our consolidated financial statements and the related notes to theconsolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in thisAnnual Report on Form 10-K. Years ended December 31, 2003 2002 2001 2000 1999 (dollars in thousands, except per share data) Statement of Operations Data: Revenues $117,942 $77,188 $63,414 $13,016 $37 Costs and operating expenses: Cost of revenues 128,121 104,073 94,889 43,401 3,268 Sales and marketing 19,483 15,247 16,935 20,139 3,949 General and administrative 34,293 30,659 58,286 56,585 12,603 Restructuring charges — 28,885 48,565 — — Total costs and operating expenses 181,897 178,864 218,675 120,125 19,820 Loss from operations (63,955) (101,676) (155,261) (107,109) (19,783)Interest income 296 998 10,656 16,430 2,138 Interest expense (20,512) (35,098) (43,810) (29,111) (3,146)Gain on debt extinguishment — 114,158 — — — Net loss $(84,171) $(21,618) $(188,415) $(119,790) $(20,791) Net loss per share: Basic and diluted $(8.76) $(7.23) $(76.62) $(111.23) $(159.93) Weighted average shares 9,604 2,990 2,459 1,077 130 As of December 31, 2003 2002 2001 2000 1999 (dollars in thousands) Balance Sheet Data: Cash, cash equivalents and short-term investments $72,971 $41,216 $87,721 $207,210 $222,974 Accounts receivable, net 10,178 9,152 6,909 4,925 178 Restricted cash and short-term investments 1,835 4,407 28,044 36,855 38,609 Property and equipment, net 343,554 390,048 325,226 315,380 28,444 Construction in progress — — 103,691 94,894 18,312 Total assets 464,532 492,003 575,054 683,485 319,946 Debt facilities and capital lease obligations, excluding currentportion 723 3,633 6,344 6,506 8,808 Credit facility, excluding current portion 22,281 89,529 105,000 — — Senior notes 29,220 28,908 187,882 185,908 183,955 Convertible secured notes 31,683 25,354 — — — Redeemable convertible preferred stock — — — — 97,227 Total stockholders’ equity 320,077 284,194 203,521 375,116 8,472 Other Financial Data: Net cash used in operating activities (17,266) (27,509) (68,854) (68,073) (9,908)Net cash used in investing activities (15,620) (7,528) (153,014) (302,158) (86,270)Net cash provided by financing activities 52,288 16,294 107,799 339,847 295,178 14Table of ContentsITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following commentary should be read in conjunction with the financial statements and related notes contained elsewhere in the AnnualReport on Form 10-K. The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Actof 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations thatinvolve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-lookingstatements. For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends” and similar expressions are intended to identifyforward-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 “Liquidity and Capital Resources”and “Risk Factors” below. All forward-looking statements in this document are based on information available to us as of the date hereof and weassume 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 theworld’s largest networks. Through our 14 IBX hubs in the U.S. and Asia, customers can directly interconnect with each other for critical traffic exchangerequirements. As of December 31, 2003, we had IBX hubs totaling an aggregate of more than 1.2 million gross square feet in the Washington, D.C., NewYork, 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 aggregationof 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 wellto gain the full economic and performance benefits of direct interconnection. These partners, in turn, pull in their business partners, creating a “networkeffect” of customer adoption. Our interconnection services enable scalable, reliable and cost-effective interconnection and traffic exchange thus lowering overallcost and increasing flexibility. This critical mass of customers and the resulting network effect, combined with our improved financial position gained through the completion of aseries of financing transactions at the end of 2002, our follow-on equity offering in November 2003 and our convertible debenture offering in February 2004(refer to “Recent Developments” below), has resulted in an acceleration of new customer growth and related revenue bookings. Both our existing and newcustomers continue to gain confidence in our financial stability, which helps make their decision easier to move their core infrastructure into our IBX hubs.While we had generated negative operating cashflow in each annual period since inception, commencing the quarter ended September 30, 2003 we started togenerate positive operating cash flow. During this quarter, our recurring revenues grew to a level sufficient to meet our operating cash requirements related toour predominantly fixed cost structure. We considered this quarter to be the inflection point in our business model whereby our revenues were sufficient on anongoing basis to meet all our operating costs and working capital requirements. Given a large component of our cost of revenues are fixed in nature, weanticipate any growth in revenues will have a significant incremental flow through to gross profit in the 70 – 90% range. As a result of reaching this point inour 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 cashrequirements to fund our capital expenditures. Historically, our market has been served by large telecommunications carriers who have bundled their telecommunication products and services withtheir colocation offerings. During 2003, a number of these 15Table of Contentstelecommunication 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 telecommunicationscompany, 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 170 networks operating out of our IBXhubs. As a result, we are able to offer our customers a substantial choice of networks given our network neutrality allowing our customers to choose fromnumerous network service providers thereby eliminating a single point of failure. We believe this is a distinct advantage we have over our telecommunicationscompany competitors, especially when the telecommunications industry is experiencing so many business challenges and changes as evidenced by thenumerous bankruptcies and consolidations within this industry during the past several years. Furthermore, for those customers who do require a fullymanaged solution that these telecommunications companies typically provide, certain of our other customers, such as IBM and EDS, can provide such asolution 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 (refer to “Recent Developments” below). However, we will continue to be very selectivewith any similar opportunity. As was the case with the Sprint property, the criteria will be quality of the design, access to networks, capacity availability incurrent market location, amount of incremental investment in the targeted property, lead-time to breakeven and in-place customers. Like the Sprint property,the right combination of these factors may be quite attractive for us. Dependent on the particular deal, these acquisitions may require additional capitalexpenditures in order to bring these centers up to Equinix standards. Recent Developments On November 21, 2003, we sold 5.5 million shares of our common stock at a purchase price of $20.00 per share, which resulted in net proceeds to theCompany of $104.4 million. We refer to this transaction as the “follow-on equity offering.” In addition, in conjunction with our follow-on equity offering, wereceived consent from our senior lenders to amend the terms of our credit facility and permanently repaid $55.2 million of the then outstanding principalbalance of $90.5 million. On December 1, 2003, we closed a definitive agreement to sublease Sprint’s E|Solutions Internet Center in Santa Clara, California, and acquire certainrelated assets. The 160,000 square foot data center became our 14th IBX hub, expanding our global footprint to over 1.2 million square feet in eleven markets.Sprint’s Santa Clara center provides a physical infrastructure that is consistent with our industry leading standards, and currently hosts some of the topInternet companies. Consistent with our model of network-neutrality, we will offer a choice of networks in the new center. On February 11, 2004, we sold $75.0 million in aggregate principal of 2.5% convertible subordinated debentures due 2024 to qualified institutionalbuyers. Subsequently, on February 18, 2004, we sold an additional $11.25 million of our debentures to the initial purchasers of these debentures. We used orintend to use the net proceeds from this offering to repay all amounts outstanding under our credit facility and two of our other debt facilities. In addition, weintend to use the proceeds received to redeem our 13% senior notes. We have exercised our right to redeem all of its 13% senior notes, which have a total of$30.5 million of principal outstanding and have sent a notice of redemption to the trustee. The effective date of the redemption is expected to be March 12,2004. The redemption price for the senior notes will be equal to 106.5% of their principal amount plus accrued and unpaid interest to the redemption date.Lastly, all remaining proceeds will be used for general corporate purposes. We expect to record a significant loss on debt extinguishment during the quarterended March 31, 2004, primarily related to the non-cash write-off of debt issuance costs and discounts in connection with these various debt repayments andredemptions, as well as the cash premium that we will pay on our 13% senior notes. We refer to this transaction as the “convertible debenture offering”. 16Table of ContentsThe Combination, Financing, Senior Note Exchange and Crosslink Financing In October 2002, we entered into agreements to consummate a series of related acquisition and financing transactions. These transactions closed onDecember 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, andPihana Pacific, Inc., or Pihana. i-STT’s business was based in Singapore, with operations in Singapore and a joint venture in Thailand. Pihana’s businesswas based in Hawaii, with operations in Honolulu, Los Angeles, Hong Kong, Singapore, Tokyo and Sydney. In connection with the acquisition of i-STT andPihana, we issued approximately 3.5 million shares of our common stock and approximately 1.9 million shares of our Series A preferred stock. We refer tothis transaction as the “combination.” In conjunction with the combination, we issued to i-STT’s former parent company, STT Communications Ltd., orSTT Communications, a $30.0 million convertible secured note in exchange for cash. We refer to this transaction as the “financing.” In connection with the combination and financing, we amended the terms of the indenture governing our senior notes and extinguished $116.8 million ofour senior notes in exchange for a combination of 1.9 million shares of our common stock and $15.2 million of cash. We refer to this transaction as the“senior note exchange.” Because we extinguished the debt in the senior note exchange at a significant discount, we recognized a substantial gain on debtextinguishment during the fourth quarter of 2002. Furthermore, in conjunction with the combination, financing and senior note exchange, we amended our credit facility, and on December 31, 2002, wecompleted a 32 for 1 reverse stock split of our common stock in order to comply with Nasdaq initial listing requirements. Unless otherwise noted, all shareand per share amounts in this prospectus supplement have been adjusted to give effect to the reverse stock split. In April 2003, Equinix and certain of our subsidiaries and STT Communications entered into agreements with various entities affiliated with CrosslinkCapital for a $10.0 million cash investment in Equinix in the form of additional convertible secured notes. This transaction closed in June 2003. We refer tothis transaction as the “Crosslink financing.” Critical Accounting Policies and Estimates The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses duringthe reporting period. On an on-going basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historicalexperience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgmentsabout the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates underdifferent assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparationof its consolidated financial statements: • 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. Revenue Recognition and Allowance for Doubtful Accounts. We derive more than 90% of our revenues from recurring revenue streams,consisting primarily of (i) colocation services, such as the licensing of cabinet 17Table of Contentsspace, power and bandwidth; (ii) interconnection services, such as cross connects and Gigabit Ethernet Ports; and (iii) managed infrastructure services, suchas Equinix Direct and various other e-business services such as mail service and managed platform solutions. The remainder of our revenues are from non-recurring revenue streams, such as from the recognized portion of deferred installation, 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 theprovision of e-business services are recognized progressively as the services are rendered in accordance with the contract terms, except where the future costscannot be reliably estimated, in which case fees are recognized upon the completion of services. Non-recurring installation fees are deferred and recognizedratably over the term of the related contract. Professional service fees are recognized in the period in which the services were provided and represent theculmination of the earnings process. Revenue from bandwidth and equipment is recognized on a gross basis in accordance with Emerging Issues Task Force,or EITF, Abstract No. 99-19, “Recording Revenue as a Principal versus Net as an Agent”, primarily because we act as the principal in the transaction, taketitle to products and services and bear inventory and credit risk. Revenue from contract settlements is recognized on a cash basis when no remainingperformance obligations exist. In some cases, we guarantee certain service levels, such as uptime, as outlined in individual customer contracts. To the extent that these service levels arenot achieved, we reduce revenue for any credits given to the customer as a result. We generally have the ability to determine such service level credits prior tothe associated revenue being recognized, and historically, these credits have not been significant. Revenue is recognized only when the service is provided and when there is persuasive evidence of an arrangement, the fee is fixed or determinable andcollection of the receivable is reasonably assured. It is customary business practice to obtain a signed master sales agreement and sales order prior torecognizing revenue in an arrangement. We assess the probability of collection based on a number of factors, including past transaction history with thecustomer and the credit-worthiness of the customer. We generally do not request collateral from our customers. If we determine that collection of a fee is notreasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash. Inaddition, we also maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required paymentsfor those customers that we had expected to collect the revenues. If the financial condition of our customers were to deteriorate or if they become insolvent,resulting in an impairment of their ability to make payments, allowances for doubtful accounts may be required. Management specifically analyzes accountsreceivable and current economic news and trends, historical bad debts, customer concentrations, customer credit-worthiness and changes in customerpayment terms when evaluating revenue recognition and the adequacy of our reserves. Our customer base has historically been composed of businesses throughout the U.S. Commencing in fiscal year 2003, our revenues include revenuesfrom our newly-acquired Asia-Pacific operations. For the year ended December 31, 2003 our revenues were split approximately 85% in the U.S. and 15% inAsia-Pacific. We perform ongoing credit evaluations of our customers. As of December 31, 2003, one customer, IBM, accounted for 15% of annual revenuesand 11% of accounts receivable. As of December 31, 2002, this same customer accounted for 20% of annual revenues and 15% of accounts receivable. Noother single customer accounted for greater than 10% of accounts receivable or annual revenues for the periods presented. Accounting for Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognizedfor the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective taxbases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxableincome 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 intax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred taxassets to the amounts that are expected more likely than not to be realized. 18Table of ContentsWe currently have provided for a full valuation allowance against our net deferred tax assets and our net operating losses. We have considered futuretaxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. Based on the available objectiveevidence, management does not believe that the net deferred tax assets will be fully realizable. Should we determine that we would be able to realize our deferredtax assets in the foreseeable future, a reversed adjustment to the valuation allowance would increase income in the period such determination is made. Estimated and Contingent Liabilities. Management estimates exposure on certain liabilities and contingent liabilities, such as property taxes andlitigation, based on the best information available at the time of determination. With respect to real and personal property taxes, management records what itcan reasonably estimate based on prior payment history, current landlord estimates or estimates based on current or changing fixed asset values in eachspecific municipality, as applicable. However, there are circumstances beyond our control whereby the underlying value of the property or basis for which thetax is calculated on said property may change, such as a landlord selling the underlying property of one of our IBX hub leases or a municipality changing theassessment value in a jurisdiction and, as a result, our property tax obligations may vary from period to period. Based upon the most current facts andcircumstances, we make the necessary property tax accruals for each of our reporting periods. However, revisions in our estimates of the potential or actualliability could materially impact our results of operation and financial position. For litigation claims, when management can reasonably estimate the range of loss and when an unfavorable outcome is probable, a contingent liability isrecorded. For current legal proceedings, management believes that it has adequate legal defenses and that the ultimate outcome of these actions will not have amaterial effect on the Company’s financial position, results of operations and cashflows. Furthermore, because of the uncertainties as to the outcome of theseproceedings and since no range of loss can be estimated at this time, management has determined that no accrual is needed. As additional information becomesavailable, we will assess the potential liability related to our pending litigation and revise our estimates. Revisions in our estimates of the potential liabilitycould materially impact our results of operation and financial position. Accounting for Property and Equipment. Property and equipment are stated at original cost, or in the case of IBX hubs that we acquire, at fairvalue at the time of acquisition. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, generally two tofive years for non-IBX hub equipment and seven to ten years for IBX hub equipment. Leasehold improvements and assets acquired under capital lease areamortized over the shorter of the lease term or the estimated useful life of the asset or improvement. Should management determine that the actual useful lives of our property and equipment placed into service is less than originally anticipated, or if anyof our property and equipment was deemed to have incurred an impairment, additional depreciation, or an impairment charge would be required, which woulddecrease net income in the period such determination was made. Conversely, should management determine that the actual useful lives of its property andequipment placed into service was greater than originally anticipated, less depreciation may be required, which would increase net income in the period suchdetermination was made. Impairment of Long-Lived Assets. We account for the impairment of long-lived assets in accordance with Statement of Financial AccountingStandard, or SFAS, No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, or in the case of goodwill, in accordance with SFAS No.142, “Goodwill and Other Intangible Assets”. We evaluate the carrying value of our long-lived assets, consisting primarily of our IBX hubs and goodwill,whenever certain events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable or at least on an annual basisduring the fourth quarter for goodwill. Such events or circumstances include, but are not limited to, a prolonged industry downturn, a significant decline inour market value or significant reductions in projected future cash flows. Significant judgments and assumptions are required in the forecast of future operating results used in the preparation of the estimated future cash flows,including profit margins, long-term forecasts of the amounts and 19Table of Contentstiming of overall market growth and our percentage of that market, groupings of assets, discount rates and terminal growth rates. In addition, significantestimates and assumptions are required in the determination of the fair value of our tangible long-lived assets, including replacement cost, economicobsolescence, and the value that could be realized in orderly liquidation. Changes in these estimates could have a material adverse effect on the assessment ofour long-lived assets, thereby requiring us to write down the assets. Our net long-lived assets as of December 31, 2003 and December 31, 2002, includedproperty and equipment of $343.6 million and $390.0 million, respectively, and goodwill and other identifiable intangible assets of $23.5 million and $25.0million, respectively. Results of Operations Years Ended December 31, 2003 and 2002 Revenues. Our revenues for the year ended December 31, 2003 and 2002 were split between the following revenue classifications (dollars inthousands): Year ended December 31, 2003 % 2002 % Recurring revenues $109,957 93% $65,319 85% Non-recurring revenues: Installation and professional services 6,221 5% 4,056 5%Other 1,764 2% 7,813 10% 7,985 7% 11,869 15% Total revenues $117,942 100% $77,188 100% Our revenues for the year ended December 31, 2003 and 2002 were geographically comprised of the following (dollars in thousands): Year ended December 31, 2003 % 2002 % U.S. revenues $99,669 85% $77,188 100%Asia-Pacific revenues 18,273 15% — 0% Total revenues $117,942 100% $77,188 100% We recognized revenues of $117.9 million for the year ended December 31, 2003, as compared to revenues of $77.2 million for the year ended December31, 2002, a 53% increase. Included in revenues for the year ended December 31, 2003, are the results of the two companies that we acquired on December 31,2002, i-STT and Pihana, totaling $23.4 million. 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 theseservices 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 oftheir contract, which is generally one to three years in length. Our recurring revenues are a significant component of our total revenues comprising 93% of ourtotal revenues for the year ended December 31, 2003, an increase from the 85% level in the prior year. To review our revenue recognition policies for ourrecurring revenue streams, refer to “Critical Accounting Policies and Estimates” above. Our non-recurring revenues are primarily comprised of installation services related to a customer’s initial deployment and, professional services that weperform. These services are considered to be non-recurring as they are billed typically once and only upon completion of the installation or professionalservices work performed. 20Table of ContentsThe non-recurring revenues are typically billed on the first invoice distributed to the customer. Installation and professional services revenues increased 53%year over year, primarily due to strong existing and new customer growth during the year. As a percent of total revenues, we expect non-recurring revenues torepresent approximately 5% of total revenues in each year. Other non-recurring revenues include equipment resales and customer settlements. This non-recurring revenue line decreased significantly from the prior year as (i) we are no longer pursuing equipment resales due to their poor margin characteristicsand (ii) the number of customer right-sizings and settlements decreased substantially during 2003. To review our revenue recognition policies for our non-recurring revenue streams, refer to “Critical Accounting Policies and Estimates” above. In addition to reviewing recurring versus non-recurring revenues, we look at two other primary metrics when we analyze our revenues: 1) customer countand 2) percentage utilization. Our customer count increased to 712 as of December 31, 2003 versus 568 as of December 31, 2002, an increase of 25%. Ourutilization rate represents the percentage of our cabinet space billing versus total cabinet space available. Our utilization rate as of December 31, 2003 was 37%versus 29% as of December 31, 2002, an increase of 28%, including our Asia-Pacific operations for both periods. Although we have substantial capacity forgrowth, our utilization rates vary from market to market among our 14 worldwide IBX hubs. We continue to monitor the available capacity in each of ourselected markets. To the extent we have limited capacity available in a given market, it may limit our ability for growth in that market. Therefore, consistentwith our acquisition of the Sprint’s Santa Clara property in December 2003, we will continue to review our available space in our other operating markets. U.S. Revenues. We recognized U.S. revenues of $99.7 million for the year ended December 31, 2003 as compared to $77.2 million for the year endedDecember 31, 2002. U.S. revenues consisted of recurring revenues of $93.6 million and $65.3 million, respectively, for the year ended December 31, 2003and 2002, a 43% increase. U.S. recurring revenues consist primarily of colocation and interconnection services plus a nominal amount of managedinfrastructure services. U.S. recurring revenues for the year ended December 31, 2003 includes $5.1 million of revenues generated from the two U.S. IBXhubs acquired from Pihana on December 31, 2002 located in Los Angeles and Honolulu. Excluding revenues from these acquired U.S. IBX hubs, the periodover period growth in recurring revenues of 60% was primarily the result of an increase in orders from both our existing customers and new customer growthacquired during the year as reflected in the growth in our customer count and utilization rate as discussed above. In addition, consistent with the growth in ourcustomer base, our interconnection revenues have grown as our customers continue to expand their interconnection activity with each other. As of December 31,2003, U.S. interconnection revenue represented 21% of total U.S. recurring revenue as compared to 9% in the prior year. We expect our U.S. recurringrevenues 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 $6.1 million and $11.9 million, respectively, for the year ended December 31, 2003and 2002. Non-recurring revenues are primarily related to the recognized portion of deferred installation, professional services, settlement fees associated withcertain contract terminations and equipment resales. The period over period decrease in U.S. non-recurring revenues was primarily the result of $2.9 millionof equipment resale revenue and $4.9 million in settlement fees from customers to terminate their contract recognized during the year ended December 31, 2002.There were no equipment resale transactions during the year ended December 31, 2003; however, we received $1.2 million of settlement fees during the yearended December 31, 2003, primarily as a result of bankruptcy related payments from both Worldcom and Excite@home. Excluding any settlement fees thatwe may recognize in the future, we expect our U.S. non-recurring revenues to remain relatively flat or grow moderately in the foreseeable future. Asia-Pacific Revenues. As a result of the combination that closed on December 31, 2002, which resulted in the acquisition of four Asia-Pacific IBXhubs, we recognized $18.2 million of revenues in Asia-Pacific during the year ended December 31, 2003. Prior to the combination we generated no revenuesfrom outside of the United States. Asia-Pacific revenues consisted of recurring revenues of $16.3 million, primarily from colocation and managedinfrastructure services, and non-recurring revenues of $1.9 million for the year ended December 31, 2003, which includes settlement fees of $584,000,primarily from one customer that terminated its contract. Asia- Pacific revenues are generated from Singapore, Tokyo, Hong Kong and Sydney with Singaporerepresenting 21Table of Contentsapproximately 77% of the regional revenues. Our Asia-Pacific revenues are similar to the revenues that we generate from our U.S. IBX hubs; however, ourSingapore IBX hub has additional managed infrastructure service revenue, such as mail service and managed platform solutions, which we do not currentlyoffer in any other IBX hub location. We expect our Asia-Pacific revenues to decrease slightly during the first half of 2004 as we expect some churn on our low-margin bandwidth revenue in Singapore. However, excluding this expected drop in bandwidth revenue, we would otherwise expect our Asia-Pacific revenues tobegin to grow over the course of the year. Cost of Revenues. Cost of revenues were $128.1 million for the year ended December 31, 2003 versus $104.1 million for the year ended December31, 2002, a 23% increase. Included in cost of revenues for the year ended December 31, 2003 are the results of the two companies that we acquired onDecember 31, 2002, i-STT and Pihana, a cumulative total of $24.7 million. The largest cost components of our cost of revenues are depreciation, rentalpayments related to our leased IBX hubs, utility costs including bandwidth, IBX employees’ salaries and benefits, consumable supplies and equipment andsecurity services. A substantial majority of our cost of revenues are fixed in nature and do not vary significantly from period to period. However, there arecertain costs, which are considered variable in nature including utilities and consumable supplies that are directly related to growth of services in our existingand 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 significantincremental flow through to gross profit in the 70 – 90% range. U.S. Cost of Revenues. U.S. cost of revenues were $107.5 million for the year ended December 31, 2003 as compared to $104.1 million for the yearended December 31, 2002, a 3.2% increase. U.S. cost of revenues included $49.9 million and $47.8 million, respectively, of depreciation expense and$59,000 and $266,000, respectively, of stock-based compensation expense for the year ended December 31, 2003 and 2002. During the year ended December31, 2003, we also recorded $562,000 of accretion expense associated with our asset retirement obligation relating to our various leaseholds, which consistprimarily of our IBX hub operating leases, as required under FASB No. 143 that was adopted in 2003. Furthermore, U.S. cost of revenues included the costsassociated with the $2.9 million of equipment resale revenue that we recorded for the year ended December 31, 2002, which was approximately $2.8 million.We recorded no equipment resale revenue for the year ended December 31, 2003. Included in the U.S. cost of revenues for the year ended December 31, 2003,were the operating costs associated with (i) the Los Angeles and Honolulu IBX hubs acquired from Pihana in the combination on December 31, 2002, whichtotaled $4.1 million ($3.5 million excluding depreciation) and (ii) the Santa Clara IBX hub acquired on December 1, 2003, which totaled $597,000.Excluding depreciation, stock-based compensation, accretion expense, the costs of equipment resales and the costs of operating the acquired U.S. IBX hubs,U.S. cash cost of revenues decreased period over period to $52.8 million for the year ended December 31, 2003 from $53.1 million for the year endedDecember 31, 2002, a 1% decrease. This decrease is primarily the result of reduced costs associated with the San Jose ground lease of $3.6 million as a resultof the option that we exercised in September 2002 to return approximately one-half of the land commencing in October 2002 (refer to ‘Restructuring Charges”below); however, this decrease is partially offset by an increase in operating costs associated with certain of our IBX hubs as a result of (a) higher propertytaxes for certain IBX hubs and (b) increasing utility costs in line with increasing customer installations and revenues attributed to this customer growth. Wecontinue 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 apercent of revenues, we anticipate our cost of revenues will continue to decline. Asia-Pacific Cost of Revenues. As a result of the combination that closed on December 31, 2002, which resulted in the acquisition of four Asia-Pacific IBX hubs, we incurred an additional $20.6 million in cost of revenues from our Asia-Pacific IBX hub operations during the year ended December 31,2003. Included in this number is $4.4 million of depreciation expense. Excluding depreciation expense, our acquired cost of revenues totaled $16.2 million forAsia-Pacific. Our Asia-Pacific cost of revenues consist of the same type of costs that we incur in our U.S. IBX hub operations, namely rental payments forour leased IBX hubs, utility costs, site employees’ salaries and benefits, consumable supplies and equipment and security services. Our Asia-Pacific 22Table of Contentscosts of revenues are generated in Singapore, Tokyo, Hong Kong and Sydney. There are several managed IT infrastructure service revenue streams unique toour Singapore IBX hub, such as mail service and managed platform solutions, that are more labor intensive than our service offerings in the United States. Asa 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 IBXhubs in the United States or other Asia-Pacific locations. We anticipate that our Asia-Pacific cost of revenues will experience a small decrease during the firsthalf of 2004 as a result of the expected drop in low-margin bandwidth revenue as discussed above. However, excluding this, we would otherwise expect to seemoderate growth in Asia-Pacific cost of revenues in the foreseeable future consistent with our anticipated growth in revenues over the course of the year. Sales and Marketing. Sales and marketing expenses increased to $19.5 million for the year ended December 31, 2003 from $15.2 million for theyear ended December 31, 2002. Included in sales and marketing expenses for the year ended December 31, 2003, are the results of the two companies that weacquired on December 31, 2002, i-STT and Pihana, totaling $6.9 million. U.S. Sales and Marketing Expenses. U.S. sales and marketing expenses decreased to $12.5 million for the year ended December 31, 2003 ascompared to $15.2 million for the year ended December 31, 2002. Included in U.S. sales and marketing expenses were $294,000 and $952,000, respectively,of stock-based compensation expense for the year ended December 31, 2003 and 2002. During the year ended December 31, 2002, we recorded $2.3 million inbad debt expense. The amount of bad debt expense that we recorded in the prior period, which was significantly larger than what we typically incur, wasprimarily the result of write-offs or full reserves of aged receivables associated with several customers, including Teleglobe, which had filed for bankruptcyunder Chapter 11 of the U.S. Bankruptcy Code last year. Excluding stock-based compensation and bad debt expense, U.S. sales and marketing expensesincreased to $12.4 million from $12.0 million, respectively, for the year ended December 31, 2003 and 2002, a 3% increase. Sales and marketing expensesconsist primarily of compensation and related costs for sales and marketing personnel, sales commissions, marketing programs, public relations,promotional materials and travel. Excluding stock-based compensation and bad debt expense, the nominal increase in sales and marketing expenses year overyear is primarily related to the incremental sales and marketing efforts associated with the two U.S. IBX hubs acquired in the combination as of December 31,2002 in Los Angeles and Honolulu, as well as an overall increase in sales compensation due to increased revenues. We expect to see a nominal increase in salesand 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. As a result of the combination that closed on December 31, 2002, we incurred an additional $6.9million of sales and marketing expenses, comprised of $4.8 million in cash sales and marketing expenses from our Asia-Pacific operations during the yearended December 31, 2003, and $2.1 million of amortization expense. Our Asia-Pacific sales and marketing expenses consist of the same type of costs that weincur in our U.S. operations, namely compensation and related costs for sales and marketing personnel, sales commissions, marketing programs, publicrelations, promotional materials and travel. Our Asia-Pacific sales and marketing expenses are generated in Singapore, Tokyo, Hong Kong and Sydney. Weexpect that our Asia-Pacific sales and marketing expenses will remain relatively flat in the foreseeable future. As a result of the combination that closed onDecember 31, 2002, we acquired several intangible assets that we amortize, namely the use of a trade-name and certain customer contracts in Singapore valuedat approximately $300,000 and $3.6 million, respectively. The trade-name intangible asset was being amortized over one year ending December 31, 2003 andthe customer contract intangible asset is being amortized over two years, ending December 31, 2004. As a result, we incurred a total of $2.1 million ofamortization expense during the year ended December 31, 2003. General and Administrative. General and administrative expenses increased to $34.3 million for the year ended December 31, 2003 from $30.7million for the year ended December 31, 2002. Included in general and administrative expenses for the year ended December 31, 2003, are the results of the twocompanies that we acquired on December 31, 2002, i-STT and Pihana, totaling $7.5 million. 23Table of ContentsU.S. General and Administrative Expenses. U.S. general and administrative expenses decreased to $28.3 million for the year ended December 31,2003 as compared to $30.7 million for the year ended December 31, 2002. Included in U.S. general and administrative expenses were $5.3 million and $6.2million, respectively, of depreciation expense and $2.6 million and $5.7 million, respectively, of stock-based compensation expense for the year endedDecember 31, 2003 and 2002. In addition, U.S. general and administrative expenses for the year ended December 31, 2003, included $1.5 million of costsassociated with a corporate headquarter office acquired from Pihana on December 31, 2002 located in Honolulu. This office was closed as of June 30, 2003.Excluding depreciation, stock-based compensation expense and the costs of the acquired Honolulu office, U.S. general and administrative expenses remainedrelatively flat at $18.9 million for the year ended December 31, 2003, as compared to $18.8 million for the year ended December 31, 2002. General andadministrative expenses, excluding depreciation and stock-based compensation, consist primarily of salaries and related expenses, accounting, legal andadministrative expenses, professional service fees and other general corporate expenses such as our corporate headquarter office lease. We expect to see anominal increase in general and administrative spending in the future, although as a percent of revenues, we anticipate a decline in general and administrativespending. Asia-Pacific General and Administrative Expenses. As a result of the combination that closed on December 31, 2002, we incurred an additional$6.0 million in general and administrative expenses from our newly-acquired Asia-Pacific operations. Our Asia-Pacific general and administrative expenses,which included $497,000 of depreciation expense, 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 administrativeexpenses are generated in Singapore, Tokyo, Hong Kong and Sydney. Our Asia-Pacific headquarter office is located in Singapore. Most of the corporateoverhead 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 haveseparate corporate office locations in Tokyo and Hong Kong. We expect that our Asia-Pacific general and administrative expenses will remain relatively flat orexperience only moderate growth for the foreseeable future. Restructuring Charges. We did not incur any restructuring charges during the year ended December 31, 2003. During the year ended December 31,2002, we recorded restructuring charges of $28.9 million. The restructuring charges consisted of (a) a $5.0 million option fee paid in May 2002 related to theamendment of our approximately 80 acre ground lease in San Jose, California from which we subsequently elected to exercise the option to permanently exclude40 acres commencing October 1, 2002; (b) a partial write-off of two letters of credit totaling $19.0 million associated with the exercise in September 2002 of ouroption to permanently terminate approximately one-half of our lease obligations under the San Jose ground lease (c) a write-off of property and equipment of$2.6 million, primarily leasehold improvements and some equipment, located in two unnecessary U.S. IBX expansion and headquarter office space operatingleaseholds we had decided to exit and that do not currently provide any ongoing benefit and (d) write-offs or accruals of certain U.S. or European exit costs andseverance charges. Interest Income. Interest income decreased to $296,000 from $998,000 for the year ended December 31, 2003 and 2002, respectively. Interest incomedecreased due to lower average cash, cash equivalent and short-term investment balances held in interest-bearing accounts and lower interest rates received onthose invested balances. Interest Expense. Interest expense decreased to $20.5 million from $35.1 million for the year ended December 31, 2003 and 2002, respectively. Thesignificant decrease in interest expense was primarily attributable to the retirement of $169.5 million of our 13% senior notes during 2002. In addition, wereduced the interest expense attributed to our credit facility as a result of a reduction in the principal balance outstanding and a reduction in the interest rates.However, these interest expense savings were partially offset by the approximately $7.3 million of non-cash interest expense associated with the $30.0 million14% convertible secured note issued on December 31, 2002 as a result of the financing, and the $10.0 million 10% convertible 24Table of Contentssecured notes issued on June 5, 2003 as a result of the Crosslink financing. We recorded a substantial debt discount equal to the $10.0 million of principal inconnection with the Crosslink financing, primarily as a result of the beneficial conversion feature associated with these convertible secured notes, which isbeing amortized to interest expense over the term of the Crosslink financing. This is a primary contributor to our increased non-cash interest expense from theprior period. Gain on Debt Extinguishment. During the year ended December 31, 2002, we retired approximately $169.5 million of senior notes in exchange forapproximately 2.4 million shares of common stock and $17.7 million of cash. As a result, we recognized a $114.2 million net gain on debt extinguishmentduring 2002, after deducting transaction costs, interest waived and allocation of unamortized debt issuance costs and debt discount. Although we madepayments on our various debt facilities during 2003, we extinguished no senior notes or other debt during the year ended December 31, 2003. Income Taxes. A full valuation allowance is recorded against our deferred tax assets as management cannot conclude, based on available objectiveevidence, when it is more likely than not that the gross value of its deferred tax assets will be realized. Years Ended December 31, 2002 and 2001 Revenues. We recognized revenues of $77.2 million for the year ended December 31, 2002, as compared to revenues of $63.4 million for the yearended December 31, 2001. Revenues consisted of recurring revenues of $65.3 million and $57.6 million, respectively, for the year ended December 31, 2002and 2001, primarily from the leasing of cabinet space, power and cross connects. Non-recurring revenues were $11.9 million and $5.8 million, respectively,for the year ended December 31, 2002 and 2001, primarily related to the recognized portion of deferred installation revenue and custom service revenues andsettlement fees associated with certain customer right-sizing or contract terminations. Settlement fees recognized during the year ended December 31, 2002totaled approximately $4.5 million, including a $2.8 million one-time settlement with Qwest received in the third quarter of 2002, and approximately$562,000 for the corresponding period in 2001. Installation and service fees are recognized ratably over the term of the contract. Custom service revenues arerecognized upon completion of the services. Settlement fees are recognized upon contract termination. In February and March 2002, we entered into equipmentreseller agreements with two related party companies. Included within the $11.9 million of non-recurring revenues for the year ended December 31, 2002, were$2.9 million of equipment resales resulting from these two equipment reseller agreements. There were no equipment resales in the year ended December 31,2001. Excluding equipment resales, we recognized revenues of $74.2 million for the year ended December 31, 2002 as compared to revenues of $63.4 millionfor the year ended December 31, 2001, a 17% increase. The period over period growth in revenues was primarily the result of an increase in orders from existing customers and growth in our customer basefrom 218 customers as of December 31, 2001 to 303 customers as of December 31, 2002 on a pre-combination basis and settlement fees associated with certaincustomer right-sizing or contract terminations. However, this growth in our customer base was partially offset by a number of our larger customers reducingthe size of their contractual commitments to us. We refer to this effort as the “right-sizing” of our larger customer contracts. During late 2001 and throughout2002, we proactively worked with certain of our larger customers to right-size their contractual commitments to help them better react to a slowdown incustomer demand as a result of weaker economic conditions. Although these right-sizing efforts often result in a reduction in the number of cabinets thesecustomers are obligated to pay for, many of these right-sizing efforts have resulted in the customer extending the term for the remaining cabinets. As a result,although the short-term recurring revenues from such customers are reduced, the overall contract value at times remains intact and the relationship with thecustomer is preserved, if not improved. As of December 31, 2002, we had successfully completed the right-sizing of most of our customers that had more than100 cabinets booked, a booking level that represents our larger customers. These right-sizing efforts were, throughout 2002, netted out against our newcustomer cabinet bookings, limiting our overall revenue growth during this period. 25Table of ContentsCommencing in fiscal 2003, our revenues included revenues from our newly-acquired Asia-Pacific operations. We expect that revenues commencing in2003 will be split approximately 85% in the U.S. and 15% in Asia-Pacific. Cost of Revenues. Cost of revenues increased to $104.1 million for the year ended December 31, 2002 from $94.9 million for the year endedDecember 31, 2001. These amounts included $47.8 million and $40.0 million, respectively, of depreciation expense and $266,000 and $426,000,respectively, of stock-based compensation expense. In addition to depreciation and stock-based compensation, cost of revenues consists primarily of rentalpayments for our leased IBX hubs, site employees’ salaries and benefits, utility costs, power and redundancy system engineering support services and relatedcosts and security services. Furthermore, cost of revenues for the year ended December 31, 2002 included the costs associated with $2.9 million in equipmentsales we recorded, which was approximately $2.8 million. Excluding depreciation, stock-based compensation expense and the costs of equipment sales, costof revenues decreased slightly period over period to $53.1 million for the year ended December 31, 2002 from $54.4 million for the year ended December 31,2001, a 2% decrease. Cost of revenues for the year ended December 31, 2001 included $5.0 million in costs related to our European expansion plans. Due to the restructuringcharge that we recorded in the third quarter of 2001, these costs were not in our cash cost of revenues for the year ended December 31, 2002; however, thesesavings were partially offset by the additional costs incurred of $3.7 million from (a) our newest and largest IBX hub opened during the first quarter of 2002in the New York metropolitan area and (b) the costs associated with the ramp-up of our existing IBX hubs. In September 2002, we exercised an option toreduce the monthly operating costs under the San Jose ground lease by approximately one-half commencing October 2002, which resulted in savings ofapproximately $1.1 million as compared to the prior year. We anticipate that the costs associated with the continued ramp-up of our IBX hubs and theadditional costs associated with some of our new services, such as bandwidth, will continue to increase in the foreseeable future; however, the cost savingsresulting from the elimination of approximately half of the San Jose ground lease costs, which commenced in October 2002, should offset most of theseincreases for the foreseeable future in the U.S. However, commencing in fiscal 2003, our cost of revenues included the cost of revenues associated with ourAsia-Pacific operations. Sales and Marketing. Sales and marketing expenses decreased to $15.2 million for the year ended December 31, 2002 from $16.9 million for theyear ended December 31, 2001. These amounts included $952,000 and $2.8 million, respectively, of stock-based compensation expense. In addition, werecorded $2.3 million in bad debt expense for the year ended December 31, 2002, as compared to $477,000 recorded in the prior year. This substantial increasein bad debt expense was primarily the result of full provisions against aged receivables associated with two customers, Teleglobe and WorldCom, both ofwhich filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in 2002. Excluding stock-based compensation and bad debt expense,cash sales and marketing costs decreased to $12.0 million for the year ended December 31, 2002 from $13.6 million for the year ended December 31, 2001, a12% decrease. Cash sales and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel, sales commissions,marketing programs, public relations, promotional materials and travel. The decrease in sales and marketing expenses is the result of several cost savinginitiatives that we undertook, including staff reductions of approximately 25% during 2001 that resulted in approximately $2.6 million in annual savings insales and marketing costs and an overall decrease in discretionary spending. We continue to closely monitor our spending in all areas as a result of the currentmarket conditions. However, commencing in fiscal 2003, our sales and marketing expenses included the sales and marketing expenses associated with ourAsia-Pacific operations. General and Administrative. General and administrative expenses decreased to $30.7 million for the year ended December 31, 2002 from $58.3million for the year ended December 31, 2001. These amounts included $5.7 million and $15.8 million, respectively, of stock-based compensation expenseand $6.2 million and $9.6 million, respectively, of depreciation expense, resulting in $14.1 million or 43% decrease in period over period cash spending.Cash general and administrative expenses consist primarily of salaries and related expenses, accounting, legal and administrative expenses, professionalservice fees and other general corporate expenses. 26Table of ContentsThe significant decrease in general and administrative expenses was primarily the result of several cost saving initiatives that we undertook, including staffreductions of approximately 25% during 2001 that resulted in approximately $4.9 million in annual savings in general and administrative costs and an overalldecrease in discretionary spending. We continue to closely monitor our spending as a result of the current market conditions. However, commencing in fiscal2003, our general and administrative expenses included the general and administrative expenses associated with our Asia-Pacific operations. Restructuring Charges. During the year ended December 31, 2002, we recorded restructuring charges of $28.9 million. The restructuring chargesconsisted of (a) a $5.0 million option fee paid in May 2002 related to the amendment of our approximately 80 acre ground lease in San Jose, California fromwhich we subsequently elected to exercise the option to permanently exclude 40 acres commencing October 1, 2002; (b) a write-off of property and equipmentof $2.6 million, primarily leasehold improvements and some equipment, located in two unnecessary U.S. IBX expansion and headquarter office spaceoperating leaseholds we had decided to exit and that do not currently provide any ongoing benefit; (c) a write-off of one U.S. letters of credit totaling $250,000related to one U.S. operating leasehold we had committed to exit; (d) an accrual of $1.0 million related to the remaining estimated European exit costs; (e) anaccrual of $925,000 in severance charges related to a less than 10% reduction in workforce in an effort to reduce the cost structure of our corporateheadquarter function that will result in approximately $2.8 million in annual savings; (f) an accrual of $115,000 related to additional U.S. leasehold exit costsand (g) a partial write-off of two letters of credit totaling $19.0 million associated with the exercise in September 2002 of our option to permanently terminateapproximately one-half of our lease obligations under the San Jose ground lease. During the quarter ended September 30, 2001, the Company took a restructuring charge of $48.6 million consisting of $45.3 million related to a revisedEuropean services strategy, $2.0 million for certain anticipated excess U.S. leasehold exit costs and $1.3 million related to a reduction in workforce, primarilyin selling, general and administrative functions at the Company’s headquarters. During third quarter 2001, the Company decided to partner with anotherInternet exchange company in Europe rather than build and operate its own centers outside of the U.S. As a result, the Company i) recorded a write-down of itsEuropean construction in progress assets to their net realizable value and recorded a charge totaling $29.3 million, ii) accrued certain leasehold exit costs for itsEuropean leasehold interests in the amount of $6.4 million, iii) wrote-off its European letters of credit that secured the European leasehold interests in theamount of $8.6 million and iv) accrued various legal, storage and other costs totaling $1.0 million to facilitate this change in strategy. In addition, theCompany incurred a $2.0 million restructuring charge for leasehold exit costs associated with certain excess U.S. leases and a $1.3 million restructuringcharge related to an approximate 15% reduction in workforce in an effort to streamline and reduce the cost structure of the Company’s headquarter function. As of December 31, 2002, a total restructuring reserve of $1.7 million remained outstanding for all of the above accrued but unpaid restructuringcharges. We began to realize the cost savings benefits resulting from the partial San Jose ground lease termination in cost of revenues during October 2002. Interest Income. Interest income decreased to $998,000 from $10.7 million for the year ended December 31, 2002 and 2001, respectively. Interestincome decreased due to lower cash, cash equivalent and short-term investment balances held in interest bearing accounts and lower interest rates received onthose invested balances. Interest Expense. Interest expense decreased to $35.1 million from $43.8 million for the year ended December 31, 2002 and 2001, respectively. Thedecrease in interest expense was attributable to the retirement of $52.8 million of our 13% senior notes during the first half of 2002 and to the decline in boththe principal due and the interest rates associated with our credit facility. Gain on Debt Extinguishment. During the first half of 2002, we retired $52.8 million of our senior notes in exchange for approximately 500,000shares of our common stock and approximately $2.5 million of cash. On 27Table of ContentsDecember 31, 2002, we retired an additional $116.8 million of our senior notes in exchange for approximately 1.9 million shares of our common stock andapproximately $15.2 million of cash. As a result of these transactions, we recognized a $114.2 million net gain on debt extinguishment during 2002, afterdeducting transaction costs, interest waived and allocation of unamortized debt issuance costs and debt discount. Although we made payments on our variousdebt facilities during 2001, we extinguished no senior notes or other debt during the year ended December 31, 2001. Liquidity and Capital Resources Since inception, we have financed our operations and capital requirements primarily through the issuance of senior notes, the private sale of preferredstock, our initial and follow-on public stock offerings, our credit facility, our convertible secured notes, our combination with i-STT and Pihana, whichbrought additional cash into the combined company, and various types of debt facilities and capital lease obligations, for aggregate gross proceeds of $1.0billion. As of December 31, 2003, our total indebtedness from our non-convertible debt was $68.3 million and our total indebtedness from our convertible debtwas $43.6 million as outlined below. On February 11, 2004, we sold $75.0 million in aggregate principal of 2.5% convertible subordinated debentures due 2024 to qualified institutionalbuyers. Subsequently, on February 18, 2004, we sold an additional $11.25 million of our debentures to the initial purchasers of these debentures. We used orintend to use the net proceeds from this offering to repay all amounts outstanding under our credit facility and two of our other debt facilities. In addition, weintend to use the proceeds received to redeem our 13% senior notes. We have exercised our right to redeem all of its 13% senior notes, which have a total of$30.5 million of principal outstanding and have sent a notice of redemption to the trustee. The effective date of the redemption is expected to be March 12,2004. The redemption price for the senior notes will be equal to 106.5% of their principal amount plus accrued and unpaid interest to the redemption date.Lastly, all remaining proceeds will be used for general corporate purposes. We expect to record a significant loss on debt extinguishment during the quarterended March 31, 2004, primarily related to the non-cash write-off of debt issuance costs and discounts in connection with these various debt repayments andredemptions, as well as the cash premium we will pay on our 13% senior notes. We refer to this transaction as the “convertible debenture offering”. As of December 31, 2003, our principal source of liquidity was our $73.0 million of cash, cash equivalents and short-term investments. We believe thatthis cash, coupled with the proceeds from the convertible debenture offering and our anticipated cash flows generated from operations, will be sufficient tomeet our capital expenditure, working capital, debt service, including repayments and redemptions of our non-convertible debt as planned, and corporateoverhead requirements for at least the next 12 months. While we had generated negative operating cashflow in each annual period since inception, commencing the quarter ended September 30, 2003 we startedto generate positive operating cash flow. During this quarter, our recurring revenues grew to a level sufficient to meet our operating cash requirements related toour predominantly fixed cost structure. We considered this quarter to be the inflection point in our business model whereby our revenues were sufficient on anongoing 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 generatecash 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 “Risk Factors.” Uses of Cash Net cash used in our operating activities was $17.3 million, $27.5 million and $68.9 million for the years ended December 31, 2003, 2002 and 2001,respectively. We used cash during these periods 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 in 2003 related to the liquidation of accrued obligations at December 31, 2002 28Table of Contentsattributed to the combination and financing transactions and restructuring activities. Our net cash used in operations has decreased each year as our revenueshave grown. As described above, we expect that we will generate cash from our operating activities in 2004. Net cash used in investing activities was $15.6 million, $7.5 million and $153.0 million for the years ended December 31, 2003, 2002 and 2001,respectively. Net cash used in investing activities in during the year ended December 31, 2003 was primarily to fund capital expenditures to support ourgrowing customer base and the purchase of short-term investments. Net cash used in investing activities during the year ended December 31, 2002 wasprimarily attributable to the liquidation of accrued construction costs for the New York metropolitan area IBX hub, which opened during the first quarter of2002, partially offset by the sale of short-term investments. Net cash used in investing activities during the year ended December 31, 2001 was primarilyattributable to the construction of our IBX hubs and the purchase of restricted cash and short-term investments. The amount of cash used in investingactivities has decreased substantially since 2001 as we have substantially completed our current IBX hub rollout plan. For 2004, we anticipate that our cashused 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 $52.3 million, $16.9 million and $107.8 million for the years ended December 31, 2003, 2002 and2001, respectively. Net cash generated by financing activities during the year ended December 31, 2003 was primarily the result of the $104.4 million inproceeds from our follow-on equity offering and $10.0 million in proceeds from the Crosslink financing, partially offset by $57.2 million in payments on ourcredit facility and $6.1 million in payments on our various other debt facilities and capital lease obligations. Net cash generated by financing activities duringthe year ended December 31, 2002 was primarily attributable to the cash acquired in the acquisitions of i-STT and Pihana and proceeds from our $30.0million convertible secured notes, offset by payments of $17.7 million used to retire approximately $169.5 million of our senior notes and the costsassociated with the exchange of the senior notes and repayments under our credit facility of $13.5 million. Net cash generated by financing activities duringthe year ended December 31, 2001 was primarily attributable to the net $105.0 million draw down under our credit facility. Debt Obligations—Non-Convertible Debt As of December 31, 2003, our total indebtedness from non-convertible debt was $68.3 million, comprised of our senior notes, credit facility, and otherdebt 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 ofDecember 31, 2003, a total of $30.5 million of senior note principal remained outstanding, which is presented, net of unamortized discount, on our balancesheet at $29.2 million. In February 2004, with the net proceeds from our convertible debenture offering, we have exercised our right to redeem all of our seniornotes. A notice has been sent to the trustee and the effective date of the redemption of our senior notes is expected to be March 12, 2004. The redemption pricefor the senior notes will be equal to 106.5% of their principal amount plus accrued and unpaid interest to the redemption date. Credit Facility. In December 2000, we entered into the credit facility with a syndicate of lenders under which, subject to our compliance with anumber of financial ratios and covenants, we were permitted to borrow up to $150.0 million, which was fully drawn down during 2001. This facility wasamended at various times during 2001 and 2002. In connection with the follow-on equity offering in November 2003, we entered into a further amendment tothe credit facility and permanently repaid $55.2 million of the then outstanding principal balance of $90.5 million. As of December 31, 2003, a total of $34.3million of principal remained outstanding under the credit facility. In February 2004, with the net proceeds from our convertible debenture offering, we repaidall amounts outstanding under our credit facility and terminated the credit facility. 29Table of ContentsOther Debt Facilities and Capital Lease Obligations. In August 1999, we entered into a loan agreement with Venture Lending and Leasing in theamount of $10.0 million and fully drew down on this amount. This loan agreement bears interest at 8.5% and was repayable over 42 months in equal monthlypayments with a final interest payment equal to 15% of the advance amounts due on maturity. In October 2002, we amended the loan agreement to securecertain short-term cash deferment benefits. Under the terms of this amendment, we extended the maturity of the loan by 24 months and amortized theremaining principal balance and related balloon interest payment over this amended period ending March 1, 2005. In exchange, the Company issued newwarrants and re-priced the original warrants. As of December 31, 2003, principal of $847,000 remained outstanding. In March 2004, with the net proceedsfrom our convertible debenture offering, we will pay off this other debt facility in full. 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. Thisloan agreement bears interest at 13.0% and is repayable over 36 months. In August 2002, we amended this loan to secure certain short-term cash deferments.Under the amended terms of this loan agreement, we extended the maturity of the loan by nine months. Commencing September 2002, we began to benefit fromthe reduction in monthly payments over the following 14 months thereby deferring approximately $1.2 million of principal payments. Commencing November2003, the deferred principal payments will be repaid over the remaining 17 months of the loan ending March 2005. 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. In December 2002, in conjunction with our merger with Pihana, we acquired multiple capital leases with Orix. The original amount financed wasapproximately $3.5 million. These capital lease arrangements bear interest at an average rate of 6.4% per annum and are repayable over 30 months. As ofDecember 31, 2003, principal of $201,000 remained outstanding. These capital leases will be fully paid down by March 31, 2004. As of December 31, 2003, a total of $3.5 million of our other debt facilities and capital lease obligations were outstanding, which is presented, net ofunamortized discount, on our balance sheet at $3.4 million. Debt Obligations—Convertible Debt Convertible Secured Notes. In December 2002, in conjunction with the combination, STT Communications made a $30.0 million strategicinvestment 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 kindin 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 convertiblesecured 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 December 31, 2003, and are convertible anytime at the option of STT Communications. After December 31, 2004and through December 31, 2005, we may convert 95% of the STT Communications’ convertible secured notes and after December 31, 2005, we may convert100% of these convertible secured notes upon certain conditions, including if the closing price of our common stock exceeds $32.12 per share for thirtyconsecutive 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 securednotes due November 2007. The interest on the convertible secured notes is payable in kind in the form of additional convertible secured notes commencing onthe second anniversary of the closing of this transaction. As of December 31, 2003, the convertible secured notes issued to the entities affiliated with Crosslinkwere convertible into 2.5 million shares of our common stock, and are convertible anytime at the option of Crosslink Capital. Following the secondanniversary of the closing of the Crosslink financing, 100% of the Crosslink convertible secured notes will automatically convert upon certain conditions,including if the closing price of our common stock exceeds $15.66 per share for thirty consecutive trading days. We recorded a substantial debt discountequal to the $10.0 million of principal in connection with the Crosslink financing, primarily as a result of the beneficial conversion feature associated withthese convertible secured notes, which is being amortized to interest expense over the term of the Crosslink financing. 30Table of ContentsAs of December 31, 2003, a total of $43.6 million of convertible secured notes were outstanding, which is presented, net of unamortized discount, onour balance sheet at $31.7 million. All interest expense associated with our convertible secured notes, including the amortization of the unamortized discount of$11.9 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. On February 11, 2004, we sold $75.0 million in aggregate principal of 2.5% convertible subordinateddebentures due 2024 to qualified institutional buyers. Subsequently, on February 18, 2004, we sold an additional $11.25 million of our debentures to theinitial purchasers of these debentures. We used the net proceeds from this offering to repay all amounts outstanding under our credit facility and two of ourother debt facilities. In addition, we intend to use additional proceeds received to redeem our 13% senior notes. We have exercised our right to redeem all of its13% senior notes, which have a total of $30.5 million of principal outstanding and have sent a notice of redemption to the trustee. The effective date of theredemption is expected to be March 12, 2004. Lastly, all remaining proceeds will be used for general corporate purposes The interest on the convertiblesubordinated debentures is payable semi-annually every February and August commencing August 2004. Unlike our convertible secured notes, the interest onour convertible subordinated debentures will be payable in cash. Our convertible subordinated debentures will be convertible into 2.2 million shares of ourcommon stock. 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. Inaddition, holders of the convertible subordinated debentures may convert their debentures into shares of our common stock upon certain definedcircumstances, including during any calendar quarter after the quarter ending June 30, 2004 if the closing price of our common stock exceeds $47.40 per sharefor 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 theminimum future operating lease payments for these commitments, as well as the combined aggregate maturities for all of our debt as of December 31, 2003 (inthousands): Debt facilities &capital leaseobligations Creditfacility Seniornotes Convertiblesecurednotes Operatingleases Total2004 $2,798 $12,000 $— $— $28,339 $43,1372005 729 12,000 — — 31,072 43,8012006 — 10,281 — — 31,900 42,1812007 — — 30,475 43,598 32,330 106,4032008 and thereafter — — — — 232,943 232,943 $3,527 $34,281 $30,475 $43,598 $356,584 $468,465 31Table of ContentsIf the Company had completed the convertible subordinated debenture offering during 2003 instead of February 2004, and had used the proceeds fromthis offering to repay all amounts outstanding under our credit facility and two of our other debt facilities, as well as redeemed all remaining senior notes, asintended, the obligations presented above would have been as follows on a pro forma basis as of December 31, 2003 (in thousands): Debt facilities &capital leaseobligations Convertiblesecured notes Convertiblesubordinateddebentures Operatingleases Total2004 $201 $— $— $28,339 $28,5402005 — — — 31,072 31,0722006 — — — 31,900 31,9002007 — 43,598 — 32,330 75,9282008 and thereafter — — 86,250 232,943 319,193 $201 $43,598 $86,250 $356,584 $486,633 As of December 31, 2003, we had capital expenditure commitments of approximately $1.0 million related to a small expansion of our Singapore IBXhub, which we expect to fund during the first half of 2004. In addition, we expect to spend approximately $3.0 to $5.0 million to bring our recently-acquiredSanta Clara IBX hub to Equinix standards during the first half of 2004. 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 onDecember 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 rentexpense associated with this IBX hub could double. This increase in our operating lease commitments is reflected in the tables presented above. We arecurrently 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 noassurances that we will be successful in reducing this commitment. 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. However, we will continue to be very selective with any similar opportunity. As was thecase with the Sprint property, the criteria will be quality of the design, access to networks, capacity availability in current market location, amount ofincremental investment in the targeted property, lead-time to breakeven and in-place customers. Like the Sprint property, the right combination of these factorsmay be quite attractive for us. Dependent on the particular deal, these acquisitions may require additional capital expenditures in order to bring these centers upto Equinix standards. 32Table of ContentsRISK FACTORS In addition to the other information in this report, the following risk factors should be considered carefully in evaluating our business and us: Risks Related to Our Business We have a limited operating history 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 aseries of related acquisition and financing transactions. These transactions closed on December 31, 2002. Under the terms of these agreements, we combinedour 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 thecombination. 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 recognizeany revenue until June 2000. We expect that we will encounter challenges and difficulties frequently experienced by early-stage companies in new and rapidlyevolving international markets, such as our ability to generate cash flow, hire, train and retain sufficient operational and technical talent, and implement ourplan 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 planand 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 futureand will not be profitable until the combined company reverses this trend. For the year ended December 31, 2003, the combined company incurred losses of $84.2 million. Until the quarter ended September 30, 2003, thecombined company did not generate cash from operations. There can be no guarantee that the combined company will become profitable and the combinedcompany may continue to incur additional losses. Even if the combined company achieves profitability, given the competitive and evolving nature of theindustry in which it operates, the combined company may not be able to sustain or increase profitability on a quarterly or annual basis. We expect our operating results to fluctuate. Equinix has experienced fluctuations in its results of operations on a quarterly and annual basis. The fluctuation in our operating results may cause themarket price of our common stock to decline. We expect to experience significant fluctuations in our operating results in the foreseeable future due to a varietyof 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; • 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; 33Table of Contents • potential impairment charges on our long-lived assets including property and equipment and goodwill if certain of our IBX hub markets do not meetperformance expectations; • the timing and magnitude of operating expenses, capital expenditures and expenses related to the expansion of sales, marketing, operations andacquisitions, 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 offering memorandum, could have a material adverse effect on our business,results of operations, and financial condition. Although the combined company has experienced growth in revenues in recent quarters, this growth rate is notnecessarily indicative of future operating results. It is possible that the combined company may never generate net income on a quarterly or annual basis. Inaddition, a relatively large portion of our expenses are fixed in the short-term, particularly with respect to lease and personnel expenses, depreciation andamortization, and interest expenses. Therefore, our results of operations are particularly sensitive to fluctuations in revenues. As such, comparisons to priorreporting periods should not be relied upon as indications of the combined company’s future performance. In addition, our operating results in one or morefuture quarters may fail to meet the expectations of securities analysts or investors. If this occurs, we could experience an immediate and significant decline inthe 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 ouroperating 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 aresult 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 toDecember 31, 2002 will expire unused as a result of this limitation. In addition to the limitations on NOL carryforward utilization described above, we believethat 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 saleof 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 thecombination. 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 operationswould be harmed. In 2002, our sales outside North America represented less than 1% of our revenues, i-STT’s sales outside North America represented approximately100% of its revenues and Pihana’s sales outside North America represented approximately 45% of its revenues. For the year ended December 31, 2003, thecombined company recognized 15% of its revenues outside North America. We anticipate that, for the foreseeable future, approximately 15% of the combinedcompany’s revenues will be derived from sources outside North America. Our management team is comprised primarily of Equinix executives before thecombination, 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. Incertain of our recently acquired IBX hubs, in Singapore in particular, the limited number of carriers available diminishes that advantage. As a result, we mayneed 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 costshave 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’srevenues and costs have been denominated in U.S. dollars, Japanese yen and Australian, Hong Kong and Singapore dollars. Although 34Table of Contentsthe combined company may undertake foreign exchange hedging transactions to reduce foreign currency transaction exposure, it does not currently intend toeliminate all foreign currency transaction exposure. Where our prices are denominated in U.S. dollars, our sales could be adversely affected by declines inforeign currencies relative to the U.S. dollar, thereby making our products more expensive in local currencies. Our international operations are generally subjectto 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, wemay be required to incur additional debt and expenditures and issue additional shares of our stock to pay for the acquired business, product, service ortechnology, which will dilute existing stockholders’ ownership interest in the combined company and may delay, or prevent, our profitability. Theseacquisitions 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 ourcustomers 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 certainrelated assets. Such sublease went into effect on December 1, 2003. In negotiating this transaction we were only able to conduct limited due diligence andreceived limited representations and warranties. If the subleased facility and acquired assets are not in the condition we believe them to be in, we may berequired to incur substantial additional costs to repair the acquired facility and related assets. If incurred, these costs could materially adversely affect ourbusiness, 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. STT Communications holds a substantial portion of our stock and has significant influence over matters requiring stockholder consent. As of December 31, 2003, STT Communications owned approximately 28.5% of our outstanding voting stock. In addition, STT Communications isnot prohibited from buying shares of our stock in public or private transactions. Because of the diffuse ownership of our stock, STT Communications hassignificant influence over matters requiring our stockholder approval. Following the expiration on December 31, 2004 of restrictions on STT Communicationspreventing it from converting its convertible secured notes and warrants into more than 40% of our voting stock, STT Communications may own more than40% of our voting stock. As a result, STT 35Table of ContentsCommunications will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval ofsignificant corporate transactions, which could prevent or delay a third party from acquiring or merging with us. STT also has a right of first offer whichentitles them to participate in an offering of our equity securities, or securities convertible into our equity securities, to maintain their ownership percentageprior 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 effortsto 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 capitalstock or debt securities (or the capital stock received upon conversion of the debt securities) received by STT Communications in connection with theconsummation 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 STTCommunications would generally constitute “United States real property interests” at such point in time that the fair market value of the “United States realproperty 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) ourinterests in real property located outside the U.S., and (c) any other assets held by us which are used or held for use in our trade or business. Given that wecurrently own significant amounts of “United States real property interests,” we may be limited with respect to the business opportunities we may pursue,particularly if the business opportunities would increase the amounts of “United States real property interests” owned by us or decrease the amount of otherassets owned by us. In addition, pursuant to the FIRPTA covenant we may be forced to take commercially reasonable proactive steps to ensure our compliancewith the FIRPTA covenant, including, but not limited to, (a) a sale-leaseback transaction with respect to all real property interests, or (b) the formation of aholding company organized under the laws of the Republic of Singapore which would issue shares of its capital stock in exchange for all of our outstandingstock (this reorganization would require the submission of that transaction to our stockholders for their approval and the consummation of that exchange). Wewill only be required to take these actions if such actions are commercially reasonable for Equinix or 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, the parent company of STT Communications, makes investments in various companies; it has invested in the past, andmay invest in the future, in entities that compete with us. In the context of negotiating commercial arrangements with affiliates, conflicts of interest have arisenin 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. 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 inconnection with the combination, financing and senior note exchange, to Crosslink Capital in connection with the Crosslink financing and to the public andSTT Communications in connection with our recent follow-on equity offering. The shares of common stock issued in the senior note exchange are currentlyfreely tradeable. The shares of common stock issued in connection with 36Table of Contentsthe 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 connectionwith the Crosslink financing have been registered for resale as of September 22, 2003. The shares sold to the public and STT Communications in connectionwith our recent follow-on equity offering are freely tradeable by the public, subject, in the case of STT Communications, to compliance with Rule 144 resalerestrictions applicable to affiliates. Subject to the restrictions described in our proxy statement dated December 12, 2002, the convertible secured notes andwarrants issued in connection with the financing and the Crosslink financing are immediately convertible or exercisable into shares of common stock and theunderlying shares of common stock may be registered for resale. Sales of a substantial number of shares of our common stock by these parties within anynarrow 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 thesetransactions will reduce our earnings per share, if any. This dilution could reduce the market price of our common stock unless and until we achieve revenuegrowth 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 causethe market price of our common stock to drop significantly. STT Communications currently holds our common stock or holds securities convertible into shares of our common stock totaling 8,565,520 shares.STT Communications has pledged to its lenders its ownership interest in the majority of its secured notes and warrants purchased in the financing and itscommon and preferred stock issued in the combination as collateral for its secured credit facility. If STT Communications defaults on its credit facility, thestock, 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 newowner 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. Inaddition, 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, ouroperating 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 thatthe 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 onrevenue opportunities from the telecommunications carriers’ customers to encourage them to invest the capital and operating resources required to buildfacilities from their locations to our IBX hubs. Carriers will likely evaluate the revenue opportunity of an IBX hub based on the assumption that theenvironment will be highly competitive. We cannot assure you that any carrier will elect to offer its services within our IBX hubs or that once a carrier hasdecided 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, includingregulatory processes and the availability of construction resources. If the establishment of highly diverse Internet connectivity to our IBX hubs does not occuror is materially delayed or is discontinued, our operating results and cash flow will be adversely affected. Further, many carriers are experiencing businessdifficulties. As a result, some carriers may be forced to terminate connectivity within our IBX hubs. 37Table of ContentsAny failure of our physical infrastructure or services could lead to significant costs and disruptions that could reduce our revenue and harm ourbusiness reputation and financial results. Our business depends on providing customers with highly reliable service. We must protect customers’ IBX infrastructure and customers’ equipmentlocated in our IBX hubs. The services we provide are subject to failure resulting from numerous factors, including: • human error; • physical or electronic security breaches; • fire, earthquake, flood and other natural disasters; • water damage; • power loss; • sabotage and vandalism; and • failure of business partners who provide the combined company’s resale products. Problems at one or more of our IBX hubs, whether or not within our control, could result in service interruptions or significant equipment damage. Wehave service level commitment obligations to certain of our customers. As a result, service interruptions or significant equipment damage in our IBX hubscould result in service level commitments to these customers. In the past, a limited number of our customers have experienced temporary losses of power andfailure of our services levels on products such as bandwidth connectivity. If we incur significant financial commitments to our customers in connection with aloss of power, or our failure to meet other service level commitment obligations, our liability insurance may not be adequate to cover those expenses. Inaddition, any loss of services, equipment damage or inability to meet our service level commitment obligations, particularly in the early stage of ourdevelopment, could reduce the confidence of our customers and could consequently impair our ability to obtain and retain customers, which would adverselyaffect 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 experiencedifficulties 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 orour customers. Efforts to alleviate problems caused by computer viruses or other inappropriate uses or security breaches may lead to interruptions, delays orcessation of our managed services. There is no known prevention or defense against denial of service attacks. During a prolonged denial of service attack, Internet service will not beavailable for several hours, thus impacting hosted customers’ on-line business transactions. Affected customers might file claims against us under suchcircumstances. Our business could be harmed by prolonged electrical power outages or shortages, increased costs of energy or general availability of electricalresources. Our IBX hubs are susceptible to regional costs of power, electrical power shortages, planned or unplanned power outages caused by these shortages suchas those that occurred in California during 2001 and in the Northeast in 2003, and limitations, especially internationally, of adequate power resources. Theoverall power shortage in California has increased the cost of energy, which we may not be able to pass on to our customers. 38Table of ContentsWe attempt to limit exposure to system downtime by using backup generators and power supplies. Power outages, which last beyond our backup andalternative 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 serviceswhich may have a negative impact on our operating results. In order to provide resale services such as bandwidth, managed services, backup and recovery services and other network management services, wewill contract with third party service providers. These services require us to enter into fixed term contracts for services with third party suppliers of productsand 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 termof the underlying contracts. The payment of these obligations without a corresponding payment from customers will reduce our financial resources and mayhave 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, financialcondition and results of operations. For the year ended December 31, 2003, IBM accounted for 15% of our revenue and as of December 31, 2003 accounted for 11% of our accountsreceivable. For the year ended December 31, 2002, IBM accounted for 20% of our revenue and as of December 31, 2002 accounted for 15% of our accountsreceivable. We expect that IBM will continue to account for a significant portion of our revenue for the foreseeable future, although we expect revenues receivedfrom 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, financialcondition 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 fortelecommunications companies, web hosting companies and other colocation providers. In addition to competing with neutral colocation providers, we mustcompete with traditional colocation providers, including local phone companies, long distance phone companies, Internet service providers and web hostingfacilities. Likewise, with respect to our other products and services, including managed services, bandwidth services and security services, we must competewith 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 beenable 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 togenerate revenues and adversely affect our operating results. In addition, these competitors could offer colocation on neutral terms, and may start doing so inthe same metropolitan areas where we have IBX hubs. Some of these competitors may also provide our target customers with additional benefits, includingbundled communication services, and may do so in a manner that is more attractive to our potential customers than obtaining space in our IBX hubs. Webelieve our neutrality provides us with an advantage over these competitors. However, if these competitors were able to adopt aggressive pricing policies togetherwith 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 ourcompetitors 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 orcompete with their existing systems. In addition, other companies may be able to attract 39Table of Contentsthe same potential customers that we are targeting. Once customers are located in competitors’ facilities, it will be extremely difficult to convince them torelocate 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 harmour 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, includingnetwork service providers, site and performance management companies, and enterprise and content companies. The more balanced the customer base withineach IBX hub, the better we will be able to generate significant interconnection revenues, which in turn increases our overall revenues. Our ability to attractcustomers 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, theoverall mix of customers, the IBX hub’s operating reliability and security and our ability to effectively market our services. In addition, some of our customersare and will continue to be Internet companies that face many competitive pressures and that may not ultimately be successful. If these customers do notsucceed, they will not continue to use the IBX hubs. This may be disruptive to our business and may adversely affect our business, financial condition andresults 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 taxrates 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 adverselyaffected. Our products and services have a long sales cycle that may materially adversely affect our business, financial condition and results ofoperations. A customer’s decision to license cabinet space in one of our IBX hubs and to purchase additional services typically involves a significant commitmentof resources and will be influenced by, among other things, the customer’s confidence in our financial strength. In addition, some customers will be reluctantto 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, andseveral investment banks that were underwriters of our initial public offering. The suits allege that the underwriter defendants agreed to allocate stock in ourinitial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additionalpurchases in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for our initial public offering was false and misleading and inviolation of the securities laws because it did not disclose these arrangements. In July 2003, a special litigation committee of our board of directors agreed toparticipate in a settlement with the plaintiffs. The settlement agreement is subject to court approval and sufficient participation by defendants in similaractions. 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 thislitigation may increase our expenses and divert management’s attention and resources. An adverse outcome in this litigation could seriously harm our businessand results of operations. In addition, we may, in the future, be subject to other securities class action or similar litigation. 40Table of ContentsRisks 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 continueto 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 andare 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. Ifthe market for our IBX hubs grows more slowly than we currently anticipate, our revenues will not grow as expected 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, andelectronic 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 foreigncountries 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 internationalregulatory issues and substantial resources may be required to comply with regulations or bring any non-compliant business practices into compliance withsuch regulations. In addition, the development of the market for online commerce and the displacement of traditional telephony service by the Internet andrelated communications services may prompt an increased call for more stringent consumer protection laws or other regulation both in the U.S. and abroadthat 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 andresults 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 otheracts of war or hostility appear to be having an adverse effect on business, financial and general economic conditions internationally. These effects may, inturn, 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 ourIBX hubs. Recent Accounting Pronouncements In November 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” orEITF 00-21. EITF 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/orrights to use assets. The provisions of EITF 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We adopted theprovisions of EITF 00-21 during the third quarter of 2003. The adoption of this statement has not had a material impact on our results of operations, financialposition or cash flows. 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 havethe characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additionalsubordinated 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 41Table of Contentsreleased a revised version of FIN 46 clarifying certain aspects of FIN 46 and providing certain entities with exemptions from the requirements of FIN 46. Forvariable 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 endingafter 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. 149amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activitiesunder SFAS No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the Derivatives Implementation Group, or DIG, process thateffectively required amendments to SFAS No. 133, and decisions made in connection with other FASB projects dealing with financial instruments and inconnection with implementation issues raised in relation to the application of the definition of a derivative and characteristics of a derivative that containsfinancing 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 adoptedthe 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 withcharacteristics 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 somecircumstances) because that financial instrument embodies an obligation of the issuer. In November 2003, the FASB issued FASB Staff Position No. FASB150-3 which deferred the measurement provisions of SFAS No. 150 indefinitely for certain mandatorily redeemable non-controlling interests that were issuedbefore 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 effectiveprovisions 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 certainelements 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 financialposition, results of operations or cash flows. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk The following discussion about market risk disclosures involves forward-looking statements. Actual results could differ materially from those projectedin 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 lesserextent 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 currencyexposures. The use of these financial instruments was intended to mitigate some of the risks associated with fluctuations in currency exchange rates, but doesnot 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 bychanges in the general level of U.S. interest rates, particularly since 42Table of Contentsthe 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 anymaterial 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 ourinvestment portfolio. We would not expect our operating results or cash flows to be significantly affected by a sudden change in market interest rates in ourinvestment 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 fixednature of our long-term debt obligations, except for the interest expense associated with our credit facility, which bears interest at floating rates, plus applicablemargins, based on either the prime rate or LIBOR. As of December 31, 2003, the credit facility had an effective interest rate of 5.96%. Our credit facility wasfully paid off in February 2004 with the proceeds from the convertible debenture offering. The fair market value of our long-term fixed interest rate debt issubject 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. Theseinterest rate changes may affect the fair market value of the fixed interest rate debt but does not impact our earnings or cash flows. The fair market value of our senior notes is based on quoted market prices. The estimated fair value of our senior notes as of December 31, 2003 wasapproximately $24.4 million. Our senior notes will be fully redeemed in March 2004 with the proceeds from the convertible debenture offering. 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 ourexposure to foreign currency exchange rate fluctuations had been minimal. However, commencing in fiscal 2003, as a result of the combination, approximately15% 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 ina currency other than the U.S. dollar, primarily the Singapore dollar, Japanese yen and Hong Kong and Australian dollars. As a result, our operating resultsand 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 ourrevenues 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 foreigncurrencies 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 exchangerate 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 mostlikely 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 hedgecommodity price risk. 43Table of ContentsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by this Item 8 are listed in Item 15(a)(1) and begin at page F-1 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There is no disclosure to report pursuant to Item 9. ITEM 9A. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and our Chief Financial Officer, after evaluating theeffectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures are effective based on theirevaluation 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 inconnection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that havematerially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 44Table of ContentsPART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Identification of Directors. Information concerning the directors of Equinix is set forth under the heading “Election of Directors” in the EquinixProxy Statement for the 2004 Annual Meeting of Stockholders and is incorporated herein by reference. (b) Identification of Executive Officers. Information concerning executive officers of Equinix is set forth under the caption “Other Executive Officers”in the Equinix Proxy Statement for the 2004 Annual Meeting of Stockholders and is incorporated herein by reference. (c) Audit Committee Financial Expert. Information concerning Equinix’s audit committee financial expert is set forth under the heading “Report of theAudit Committee of the Board of Directors” in the Equinix Proxy Statement for the 2004 Annual Meeting of Stockholders and is incorporated herein byreference. (d) Identification of the Audit Committee. Information concerning the audit committee of Equinix is set forth under the heading “Report of the AuditCommittee of the Board of Directors” in the Equinix Proxy Statement for the 2004 Annual Meeting of Stockholders and is incorporated herein by reference. (e) Section 16(a) Beneficial Ownership Reporting Compliance. Information concerning compliance with beneficial ownership reporting requirements isset forth under the caption “Compliance with Section 16(a) of the Exchange Act” in the Equinix Proxy Statement for the 2004 Annual Meeting of Stockholdersand is incorporated herein by reference. (f) Code of Ethics. Information concerning the Equinix Code of Ethics and Business Conduct is set forth under the caption “Code of Ethics andBusiness Conduct” in the Equinix Proxy Statement for the 2004 Annual Meeting of Stockholders and is incorporated herein by reference. The Code of Ethicsand Business Conduct can also be found on our website, www.equinix.com. ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation is set forth under the headings “Executive Compensation and Related Information”, and “Report of theCompensation Committee of the Board of Directors” in the Equinix Proxy Statement for the 2004 Annual Meeting of Stockholders and is incorporated hereinby reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information concerning shares of Equinix equity securities beneficially owned by certain beneficial owners and by management is set forth under theheading “Security Ownership of Certain Beneficial Owners and Management” in the Equinix Proxy Statement for the 2004 Annual Meeting of Stockholdersand is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions is set forth under the heading “Certain Relationships and Related Transactions” inthe Equinix Proxy Statement for the 2004 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information concerning fees and services of the Company’s principal accountants is set forth under the heading “Report of the Audit Committee of theBoard of Directors” in the Equinix Proxy Statement for the 2004 Annual Meeting of Stockholders and is incorporated herein by reference. 45Table of ContentsPART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements: Report of Independent Auditors F-1Consolidated Balance Sheets F-2Consolidated Statements of Operations F-3Consolidated Statements of Stockholders’ Equity and Other Comprehensive Loss F-4Consolidated Statements of Cash Flows F-5Notes to Consolidated Financial Statements. F-6 (a)(2) All schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (a)(3) Exhibits: ExhibitNumber Description of Document2.1(8) Combination Agreement, dated as of October 2, 2002, by and among Equinix, Inc., Eagle Panther Acquisition Corp., Eagle JaguarAcquisition Corp., i-STT Pte Ltd, STT Communications Ltd., Pihana Pacific, Inc. and Jane Dietze, as representative of thestockholders 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.4.6(1) Common Stock Registration Rights Agreement (See Exhibit 10.3).4.9(1) Amended and Restated Investors’ Rights Agreement (See Exhibit 10.6).4.10(9) Registration Rights Agreement (See Exhibit 10.75).10.1(1) Indenture, dated as of December 1, 1999, by and among the Registrant and State Street Bank and Trust Company of California,N.A. (as trustee).10.2(1) Warrant Agreement, dated as of December 1, 1999, by and among the Registrant and State Street Bank and Trust Company ofCalifornia, N.A. (as warrant agent).10.3(1) Common Stock Registration Rights Agreement, dated as of December 1, 1999, by and among the Registrant, Benchmark CapitalPartners II, L.P., Cisco Systems, Inc., Microsoft Corporation, ePartners, Albert M. Avery, IV and Jay S. Adelson (as investors),and the Initial Purchasers.10.5(1) Form of Indemnification Agreement between the Registrant and each of its officers and directors.10.6(1) Amended and Restated Investors’ Rights Agreement, dated as of May 8, 2000, by and between the Registrant, the Series APurchasers, the Series B Purchasers, the Series C Purchasers and members of the Registrant’s management.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. 46Table of ContentsExhibitNumber Description of Document10.12(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 August8, 1999.10.14(1)+ First Amendment to Lease Agreement with TrizecHahn Centers, Inc. (dba TrizecHahn Beaumeade Corporate Management), datedas 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 15,1999.10.20(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 August24, 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, 2002.10.56(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.10.59(9) Second Amended and Restated Credit and Guaranty Agreement, dated as of December 31, 2002. 47Table of ContentsExhibitNumber Description of Document10.60(9) Governance Agreement by and among Equinix, Inc., STT Communications Ltd., i-STT Communications Ltd., STTInvestments 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, 2002.10.80(13) Series A Cash Trigger Warrant issued to i-STT Investments Pte Ltd on June 5, 2003.10.81(13) Series B Cash Trigger Warrant issued to i-STT Investments Pte Ltd on June 5, 2003.10.82(9) First Supplemental Indenture between Equinix and State Street Bank and Trust Company of California, N.A., as Trustee, datedas of December 28, 2002.10.83(11) Securities Purchase and Admission Agreement, dated April 29, 2003, among Equinix, certain of Equinix’s subsidiaries, i-STTInvestments 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 12,2003.10.85(13) Form of Series A-2 Convertible Secured Note Due 2007 issued to entities affiliated with Crosslink Ventures on June 5, 2003.10.87(13) Form of Series A-2 Change in Control Warrant issued to entities affiliated with Crosslink Ventures on June 5, 2003 48Table of ContentsExhibitNumber Description of Document10.88(13) Form of Series A Cash Trigger Warrant issued to entities affiliated with Crosslink Ventures on June 5, 2003.10.89(13) Form of Series B Cash Trigger Warrant issued to entities affiliated with Crosslink Ventures on June 5, 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 RajahCrescent, Singapore 139964.10.93 Amendment to Second Amended and Restated Credit and Guaranty Agreement, dated as of November 18, 2003.10.94 Fourth Modification to Ground Lease by and between iStar San Jose, LLC and Equinix, Inc., dated as of November 21, 2003.10.95+ Sublease Agreement between Sprint Communications Company, L.P. and Equinix Operating Co., Inc. dated October 24, 2003.10.96 Tenancy Agreement over units #03-01, #03-02, #03-03, #03-04 of Block 20 Ayer Rajah Crescent, Singapore 139964.10.97 Lease Agreement with JMA Robinson Redevelopment, LLC, as successor in interest to Carrier Central L.A., Inc., dated as ofNovember 30, 2003.16.1(1) Letter regarding change in certifying accountant.21.1(9) Subsidiaries of Equinix.23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.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).(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 September30, 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 September30, 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 September30, 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. 49Table of Contents(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 September30, 2003.+ Confidential treatment has been requested for certain portions which are omitted in the copy of the exhibit electronically filed with the Securities andExchange Commission. The omitted information has been filed separately with the Securities and Exchange Commission pursuant to Equinix’sapplication for confidential treatment. (b) Reports on Form 8-K. On October 27, 2003, the Company filed a Current Report on Form 8-K to file the Company’s press release from October 27, 2003, in which theCompany reported its 2003 third quarter results. On October 28, 2003, the Company filed a Current Report on Form 8-K to file an excerpt from the Company’s conference call held on October 27,2003, in which it announced its financial results for the quarter ended September 30, 2003 and reported its EBITDA for that period. The Companyattached a reconciliation of EBITDA to GAAP as required by Regulation G. On November 7, 2003, the Company filed a Current Report on Form 8-K to file certain non-GAAP information that the Company had disclosedin meetings held on November 7, 2003. The Company attached a reconciliation of these non-GAAP metrics to GAAP as required by Regulation G. On November 18, 2003, the Company filed a Current Report on Form 8-K to file the Company’s press release from November 18, 2003, inwhich the Company announced the pricing of its follow-on equity offering and filed as an exhibit the Underwriting Agreement, dated November 17,2003, between the Company and Citigroup Global Markets, Inc. and SG Cowen Securities Corporation, as the representatives of the underwritersnamed therein. On November 20, 2003, the Company filed a Current Report on Form 8-K to announce that it had completed the follow-on equity offering. (c) Exhibits. See (a)(3) above. (d) Financial Statement Schedule. See (a)(2) above. 50Table of ContentsSIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this Report to be signed on itsbehalf by the undersigned, thereunto duly authorized. EQUINIX, INC.(Registrant) By /s/ PETER F. VAN CAMP Peter F. Van Camp Chief Executive Officer March 5, 2004 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Peter F. Van Camp orRenee F. Lanam, or either of them, each with the power of substitution, their attorney-in-fact, to sign any amendments to this Form 10-K (including post-effective amendments), and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission,hereby ratifying and confirming all that each of said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. Signature Title Date/s/ PETER F. VAN CAMP Peter F. Van Camp Chief Executive Officer and Director (PrincipalExecutive Officer) March 5, 2004/s/ RENEE F. LANAM Renee F. Lanam Chief Financial Officer and Secretary (PrincipalFinancial Officer) March 5, 2004/s/ KEITH D. TAYLOR Keith D. Taylor Vice President, Finance(Principal Accounting Officer) March 5, 2004/s/ LEE THENG KIAT Lee Theng Kiat Chairman of the Board March 5, 2004/s/ STEVEN POY ENG Steven Poy Eng Director March 5, 2004/s/ GARY HROMADKO Gary Hromadko Director March 5, 2004/s/ SCOTT KRIENS Scott Kriens Director March 5, 2004/s/ JEAN F.H.P. MANDEVILLE Jean F.H.P. Mandeville Director March 5, 2004 51Table of ContentsSignature Title Date/s/ ANDREW S. RACHLEFF Andrew S. Rachleff Director March 5, 2004/s/ DENNIS RANEY Dennis Raney Director March 5, 2004/s/ MICHELANGELO VOLPI Michelangelo Volpi Director March 5, 2004 52Table of ContentsReport of Independent Auditors To Board of Directors andStockholders of Equinix, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) on page 46 present fairly, in all material respects,the financial position of Equinix, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each ofthe three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. Thesefinancial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based onour audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, whichrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles usedand significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion. PricewaterhouseCoopers LLP San Jose, CaliforniaMarch 5, 2004 F-1Table of ContentsEQUINIX, INC. CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data) December 31, 2003 2002 Assets Current assets: Cash and cash equivalents $60,428 $41,216 Short-term investments 12,543 — Accounts receivable, net of allowance for doubtful accounts of $315 and $397 10,178 9,152 Current portion of restricted cash — 1,981 Prepaids and other current assets 3,139 11,146 Total current assets 86,288 63,495 Property and equipment, net 343,554 390,048 Restricted cash, less current portion 1,835 2,426 Goodwill 21,228 21,081 Debt issuance costs, net 5,954 7,250 Other assets 5,673 7,703 Total assets $464,532 $492,003 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable and accrued expenses $18,052 $20,347 Accrued restructuring charges 828 11,528 Accrued interest payable 1,114 2,311 Current portion of debt facilities and capital lease obligations 2,689 5,591 Current portion of credit facility 12,000 1,981 Other current liabilities 3,843 4,413 Total current liabilities 38,526 46,171 Debt facilities and capital lease obligations, less current portion 723 3,633 Credit facility, less current portion 22,281 89,529 Senior notes 29,220 28,908 Convertible secured notes 31,683 25,354 Deferred rent and other liabilities 22,022 14,214 Total liabilities 144,455 207,809 Commitments and contingencies (Note 11) Stockholders’ equity: Preferred stock, $0.001 par value per share; 100,000,000 shares authorized in 2003 and 2002; 1,868,667shares issued and outstanding in 2003 and 2002; liquidation value of $18,298 as of December 31, 2003 and2002 2 2 Common stock, $0.001 par value per share; 300,000,000 shares authorized in 2003 and 2002; 15,084,425 and8,448,683 shares issued and outstanding in 2003 and 2002 15 8 Additional paid-in capital 755,698 638,065 Deferred stock-based compensation (1,032) (2,865)Accumulated other comprehensive income 1,198 617 Accumulated deficit (435,804) (351,633) Total stockholders’ equity 320,077 284,194 Total liabilities and stockholders’ equity $464,532 $492,003 See accompanying notes to consolidated financial statements. F-2Table of ContentsEQUINIX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share data) Year ended December 31, 2003 2002 2001 Revenues $117,942 $77,188 $63,414 Costs and operating expenses: Cost of revenues 128,121 104,073 94,889 Sales and marketing 19,483 15,247 16,935 General and administrative 34,293 30,659 58,286 Restructuring charges — 28,885 48,565 Total costs and operating expenses 181,897 178,864 218,675 Loss from operations (63,955) (101,676) (155,261)Interest income 296 998 10,656 Interest expense (20,512) (35,098) (43,810)Gain on debt extinguishment — 114,158 — Net loss $(84,171) $(21,618) $(188,415) Net loss per share: Basic and diluted $(8.76) $(7.23) $(76.62) Weighted average shares 9,604 2,990 2,459 See accompanying notes to consolidated financial statements. F-3Table of ContentsEQUINIX, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND OTHER COMPREHENSIVE INCOME (LOSS)FOR THE THREE YEARS ENDED DECEMBER 31, 2003(in thousands, except share data ) Preferred stock Common stock Additionalpaid-in capital Deferredstock-basedcompensation Accumulated othercomprehensiveincome (loss) Accumulateddeficit Totalstockholders’equity Shares Amount Shares Amount Balances as of December 31, 2000 — $ — 2,405,376 $2 $553,145 $(38,350) $1,919 $(141,600) $375,116 Issuance of common stock upon exercise of commonstock options — — 15,534 — 435 — — — 435 Issuance of common stock upon exercise of commonstock warrants — — 72,882 — — — — — — Issuance of common stock under employee stock purchaseplan — — 16,427 1 1,483 — — — 1,484 Repurchase of unvested common stock — — (7,807) — (18) — — — (18)Issuance/revaluation of common stock warrants — — — — (2,341) — — — (2,341)Deferred stock-based compensation, net of forfeitures — — — — (8,284) 8,284 — — — Amortization of stock-based compensation — — — — — 19,044 — — 19,044 Comprehensive income (loss): Net loss — — — — — — — (188,415) (188,415)Foreign currency translation loss — — — — — — (1,873) — (1,873)Unrealized gain on short-term investments — — — — — — 89 — 89 Net comprehensive loss — — — — — — (1,784) (188,415) (190,199) Balances as of December 31, 2001 — — 2,502,412 3 544,420 (11,022) 135 (330,015) 203,521 Issuance of common stock upon exercise of commonstock options — — 12,965 — 112 — — — 112 Issuance of common stock upon exercise of commonstock warrants — — 58,551 — 11 — — — 11 Issuance of common stock under employee stock purchaseplan — — 16,689 — 415 — — — 415 Issuance of common stock upon exchange of senior notes — — 2,357,001 2 30,831 — — — 30,833 Issuance of common and preferred stock upon acquisitionof i-STT 1,868,667 2 1,084,686 1 31,184 — — — 31,187 Issuance of common stock upon acquisition of Pihana — — 2,416,379 2 25,515 — — — 25,517 Issuance/revaluation of common and preferred stockwarrants — — — — 6,856 — — — 6,856 Deferred stock-based compensation, net of forfeitures — — — — (1,279) 1,279 — — — Amortization of stock-based compensation — — — — — 6,878 — — 6,878 Comprehensive income (loss): Net loss — — — — — — — (21,618) (21,618)Foreign currency translation gain — — — — — — 498 — 498 Unrealized loss on short-term investments — — — — — — (16) — (16) Net comprehensive income (loss) — — — — — — 482 (21,618) (21,136) Balances as of December 31, 2002 1,868,667 2 8,448,683 8 638,065 (2,865) 617 (351,633) 284,194 Issuance of common stock upon exercise of commonstock options — — 383,198 — 1,541 — — — 1,541 Issuance of common stock upon exercise of commonstock warrants — — 536,457 1 10 — — — 11 Issuance of common stock under employee stock purchaseplan — — 191,307 — 569 — — — 569 Issuance of common stock from follow-on equity offering — — 5,524,780 6 104,437 — — — 104,443 Issuance/revaluation of common stock warrants and valueof beneficial conversion feature in connection withCrosslink financing — — — — 10,004 — — — 10,004 Deferred stock-based compensation, net of forfeitures — — — — 1,072 (1,072) — — — Amortization of stock-based compensation — — — — — 2,905 — — 2,905 Comprehensive income (loss): Net loss — — — — — — — (84,171) (84,171)Foreign currency translation gain — — — — — — 577 — 577 Unrealized gain on short-term investments — — — — — — 4 — 4 Net comprehensive income (loss) — — — — — — 581 (84,171) (83,590) Balances as of December 31, 2003 1,868,667 $2 15,084,425 $15 $755,698 $(1,032) $1,198 $(435,804) $320,077 See accompanying notes to consolidated financial statements. F-4Table of ContentsEQUINIX, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year ended December 31, 2003 2002 2001 Cash flows from operating activities: Net loss $(84,171) $(21,618) $(188,415)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and accretion 60,642 54,082 49,645 Amortization of stock-based compensation 2,905 6,878 19,044 Amortization of intangible assets 2,106 — — Amortization of debt-related issuance costs and discounts 5,574 4,179 4,294 Non-cash interest on convertible secured notes 4,693 — — Amortization of deferred rent 3,174 1,798 2,901 Allowance for doubtful accounts — 2,329 521 Loss on disposal of assets 186 11 — Gain on debt extinguishment — (114,158) — Restructuring charges — 28,885 48,565 Changes in operating assets and liabilities: Accounts receivable (662) (2,511) (2,505)Prepaids and other current assets 6,885 4,290 2,001 Other assets 379 2,604 (1,657)Accounts payable and accrued expenses (6,567) 11,126 (2,742)Accrued restructuring charges (11,350) (9,279) (2,088)Other current liabilities (497) 2,374 161 Other liabilities (563) 1,501 1,421 Net cash used in operating activities (17,266) (27,509) (68,854) Cash flows from investing activities: Purchase of short-term investments (12,539) (14,662) (168,411)Sales and maturities of short-term investments — 43,536 172,047 Purchases of property and equipment (7,750) (6,508) (57,791)Additions to construction in progress — — (44,343)Accrued construction costs and property and equipment 2,454 (28,708) (54,693)Purchase of restricted cash and short-term investments (50) (5,090) (25,020)Sale of restricted cash and short-term investments 2,265 3,904 25,197 Net cash used in investing activities (15,620) (7,528) (153,014) Cash flows from financing activities: Proceeds from issuance of common stock 106,564 537 1,918 Proceeds from convertible secured notes 10,000 30,000 — Acquisition of cash from i-STT and Pihana, less acquisition costs — 29,180 — Proceeds from issuance of debt facilities and capital lease obligations — — 8,004 Repayment of debt facilities and capital lease obligations (6,074) (6,118) (5,559)Proceeds from credit facility — — 150,000 Repayment of credit facility (57,229) (13,490) (45,000)Repayment of senior notes and debt extinguishment costs — (21,291) — Repurchase of common stock — — (18)Debt issuance costs (973) (1,894) (1,546) Net cash provided by financing activities 52,288 16,924 107,799 Effect of foreign currency exchange rates on cash and cash equivalents (190) 498 (1,873)Net increase (decrease) in cash and cash equivalents 19,212 (17,615) (115,942)Cash and cash equivalents at beginning of year 41,216 58,831 174,773 Cash and cash equivalents at end of year $60,428 $41,216 $58,831 Supplemental disclosure of cash flow information: Cash paid for taxes $20 $39 $18 Cash paid for interest $13,548 $19,948 $38,103 See accompanying notes to consolidated financial statements. F-5Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Business and Summary of Significant Accounting Policies Nature of Business Equinix, Inc. (“Equinix” or the “Company”) was incorporated in Delaware on June 22, 1998. Equinix designs, builds, and operates Internet BusinessExchange (“IBX”) hubs where Internet businesses place their equipment and their network facilities in order to interconnect with each other to improve Internetperformance. The Company’s IBX hubs and Internet exchange services enable network service providers, enterprises, content providers, managed serviceproviders and other Internet infrastructure companies to directly connect with each other for increased performance. In October 2002, the Company entered into agreements to consummate a series of related acquisition and financing transactions. These transactionsclosed on December 31, 2002 and, as such, the consolidated balance sheet as of that date includes the net assets acquired. Under the terms of theseagreements, the Company combined its business with two similar businesses, which are predominantly based in the Asia-Pacific region, through theacquisition of i-STT Pte Ltd (“i-STT”) and Pihana Pacific, Inc. (“Pihana”) by issuing approximately 3.5 million shares of Equinix common stock andapproximately 1.9 million shares of Equinix preferred stock. The Company refers to this transaction as the combination (the “Combination”) (see Note 2). Inconjunction with the Combination, the Company issued to i-STT’s former parent company, STT Communications Ltd. (“STT Communications”), a $30.0million convertible secured note in exchange for cash. The Company refers to this transaction as the financing (the “Financing”) (see Note 8). In connection with the Combination and Financing, the Company completed the Senior Note Exchange, whereby the Company amended the terms of theIndenture governing the Senior Notes and extinguished $116.8 million of Senior Notes in exchange for a combination of common stock and cash. Thisresulted in the recognition of a substantial gain on debt extinguishment during the fourth quarter of 2002 (see Note 6). In November 2003, the Company sold 5.5 million shares of its common stock at a purchase price of $20.00 per share, which resulted in net proceeds tothe Company of $104.4 million. The Company refers to this transaction as the follow-on equity offering (the “Follow-on Equity Offering”) (see Note 9). Inaddition, in conjunction with the Follow-on Equity Offering, the Company received consent from its senior lenders to amend the terms of its Credit Facilityand permanently repaid $55.2 million of the then outstanding principal balance of $90.5 million (see Note 7). In February 2004, the Company sold $86.3 million in aggregate principal of 2.5% convertible subordinated debentures due 2024 to qualifiedinstitutional buyers. The Company used the net proceeds from this offering to repay all amounts outstanding under the Credit Facility, the VLL LoanAmendment and the Heller Loan Amendment (see Note 5). In addition, the Company intends to use additional proceeds received to redeem all remaining SeniorNotes. The Company has exercised its right to redeem all of the Senior Notes, which have a total of $30.5 million of principal outstanding as of December 31,2003 (reported as $29.2 million on the balance sheet), and has sent a notice of redemption to the trustee. The effective date of the redemption is expected to beMarch 12, 2004. All remaining proceeds will be used for general corporate purposes. The Company refers to this transaction as the convertible debentureoffering (the “Convertible Debenture Offering”) (see Note 15). As of December 31, 2003, the Company had $73.0 million of cash, cash equivalents and short-term investments. The Company believes that this cash,coupled with the remaining proceeds from the Convertible Debenture Offering and anticipated cash flows generated from operations, will be sufficient to meetthe Company’s capital expenditure, working capital, debt service and corporate overhead requirements for at least the next 12 months. F-6Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Stock Split In December 2002, the Company effected a thirty-two-for-one reverse stock split effective December 31, 2002 whereby one share of common stock wasexchanged for every thirty-two shares of common stock then outstanding. All share and per share amounts in these financial statements have been retroactivelyadjusted to give effect to the stock split. Basis of Presentation The accompanying consolidated financial statements include the accounts of Equinix and its subsidiaries. All significant intercompany accounts andtransactions have been eliminated in consolidation. Consolidation The Company follows the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 94, “Consolidation of All Majority-OwnedSubsidiaries” and Emerging Issues Task Force (“EITF”) Abstract No. 96-16, “Investor’s Accounting for an Investee When the Investor Has a Majority of theVoting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights”. As a result, all majority-owned subsidiaries areconsolidated unless the Company does not have control. Evidence of such a lack of effective control includes the Company’s inability to direct or cause thedirection of the management and policies of a person, whether through the ownership of voting shares, by contract, or otherwise. As a result of the Combination, the Company acquired a 60% interest in i-STT Nation Limited, an IBX hub operation in Thailand. However, as aresult of certain substantive participating rights granted to minority shareholders, i-STT Nation Limited was not considered a controlled subsidiary andaccordingly, it was not consolidated. Accordingly, the Company accounted for i-STT Nation Limited as an equity investment using the equity method ofaccounting. Under the preliminary purchase price allocation, the Company attributed no value to this investment as i-STT Nation Limited was in the earlystages of operations and was not able to generate positive operating cashflow for the foreseeable future. During the year ended December 31, 2003, the Companymade the decision to wind-down i-STT Nation Limited, entered into a wind-down agreement and liquidated this subsidiary. The costs of wind-down wereaccounted for as a purchase price adjustment (see Note 2). Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management tomake estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of theconsolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from theseestimates. Cash, Cash Equivalents and Short-Term Investments The Company considers all highly liquid instruments with an original maturity from the date of purchase of three months or less to be cash equivalents.Cash equivalents consist of money market mutual funds and certificates of deposit with financial institutions with maturities up to 90 days. Short-terminvestments generally consist of certificates of deposits with maturities of between 90 and 180 days and highly liquid debt and equity securities ofcorporations, municipalities and the U.S. government. Short-term investments are classified as “available-for-sale” and are carried at fair value based onquoted market prices with unrealized gains and losses reported in stockholders’ equity as a component of comprehensive income. The cost of securities sold isbased on the specific identification method. F-7Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Restricted Cash Restricted cash as of December 31, 2003, consisted of $1,346,000, which was used as collateral to support the issuance of four standby letters of creditin lieu of deposits under certain lease agreements with various expiry dates through 2015 and 3,800,000 Hong Kong dollars (approximately $489,000 astranslated using effective exchange rates at December 31, 2003) reserved for placement into an escrow account with a third party as required by a customeragreement in Hong Kong, whereby the customer would be able to draw upon the amount in the case of Equinix’s insolvency, as defined in the agreement (the“Hong Kong Customer Escrow Account”). As of December 31, 2003 and through the date of this filing, the Hong Kong Customer Escrow Account has not yetbeen funded. Restricted cash as of December 31, 2002, consisted of $1,981,000 deposited with an escrow agent to pay the current interest payment on the SeniorNotes (see Note 6), which was paid in January 2003; $1,939,000, which was used as collateral to support the issuance of six standby letters of credit in lieuof deposits under certain lease agreements with various expiry dates through 2015; and 3,800,000 Hong Kong dollars (approximately $487,000 as translatedusing effective exchange rates at December 31, 2002) in connection with the Hong Kong Customer Escrow Account. During the year ended December 31, 2002,the Company recorded several restructuring charges as part of its effort to exit or amend several unnecessary U.S. IBX expansion and headquarter office spaceleases. Part of this restructuring charge included the write-off of $250,000 for a letter of credit related to one of these U.S. leaseholds (see Note 14). In addition,part of this restructuring charge reflected the write-off of $19,010,000 for letters of credit related to the exercise of the Company’s option to elect to permanentlyexclude approximately 40 acres from the San Jose Ground Lease. The remaining $5,990,000 in letters of credit associated with the San Jose Ground Lease wasreclassified as prepaid rent (see Note 11). Financial Instruments and Concentration of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash, cash equivalents and short-terminvestments to the extent these exceed federal insurance limits and accounts receivable. Risks associated with cash, cash equivalents and short-terminvestments are mitigated by the Company’s investment policy, which limits the Company’s investing to only those marketable securities rated at least A-1 orP-1 investment grade, as determined by independent credit rating agencies. The Company’s customer base has historically been composed primarily of businesses throughout the United States; however, on December 31, 2002,as a result of the Combination (see Note 2), the Company acquired the accounts receivable balances of i-STT and Pihana, and commencing in fiscal 2003, theCompany’s revenues include revenues from these newly-acquired Asia-Pacific operations. The Company performs ongoing credit evaluations of its customers.As of December 31, 2003, one customer, IBM, accounted for 15% of revenues for that year and 11% of accounts receivable. As of December 31, 2002, onecustomer, IBM, accounted for 20% of revenues for that year and 15% of accounts receivables. As of December 31, 2001, one customer, IBM, accounted for15% of revenues for that year and another customer, SiteSmith, accounted for 10% of accounts receivables. No other single customer accounted for greaterthan 10% of accounts receivables or revenues for the periods presented. Property and Equipment Property and equipment are stated at original cost. Depreciation is computed using the straight-line method over the estimated useful lives of therespective assets, generally two to five years for non-IBX hub equipment and two to ten years for IBX hub equipment. Leasehold improvements and assetsacquired under capital lease are amortized over the shorter of the lease term or the estimated useful life of the asset or improvement, which is generally ten tofifteen years for the leasehold improvements. F-8Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Asset Retirement Costs In June 2001, the FASB approved SFAS No. 143. SFAS No. 143 establishes accounting standards for recognition and measurement of a liability for anasset retirement obligation and the associated asset retirement cost. The fair value of a liability for an asset retirement obligation is to be recognized in the periodin which it is incurred if a reasonable estimate of fair value can be made. The associated retirement costs are capitalized and included as part of the carryingvalue of the long-lived asset and amortized over the useful life of the asset. Subsequent to the initial measurement, the Company is accreting the liability inrelation to the asset retirement obligation over time and the accretion expense is being recorded as a cost of revenue. SFAS No. 143 was effective for theCompany beginning on January 1, 2003 and the adoption of SFAS No. 143 did not have a material impact on the Company’s financial statements. Construction in Progress Construction in progress includes direct and indirect expenditures for the construction of IBX hubs and is stated at original cost. The Company hascontracted out substantially all of the construction of the IBX hubs to independent contractors under construction contracts. Construction in progress includescertain costs incurred under a construction contract including project management services, site identification and evaluation services, engineering andschematic design services, design development and construction services and other construction-related fees and services. In addition, the Company hascapitalized certain interest costs during the construction phase. Once an IBX hub becomes operational, these capitalized costs are transferred to property andequipment and are depreciated at the appropriate rate consistent with the estimated useful life of the underlying asset. Interest incurred is capitalized in accordance with SFAS No. 34, Capitalization of Interest Costs. There was no interest capitalized during the yearsended December 31, 2003 and 2002. Total interest cost incurred and total interest capitalized during the year ended December 31, 2001, was $45,350,000 and$1,540,000, respectively. During the quarter ended March 31, 2002, the Company completed construction on its seventh and largest IBX hub, which is located in the New Yorkmetropolitan area, and placed it into service. The Company currently has no IBX hubs under construction. Goodwill and Other Intangible Assets In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which is effectivefor fiscal years beginning after December 15, 2001. SFAS No. 142 provides, among other things, that goodwill should not be amortized after its initialrecognition in financial statements. In addition, the standard includes provisions for testing for impairment of existing goodwill and other intangibles. As ofJanuary 1, 2002, the Company adopted SFAS No. 142 and recorded goodwill as part of the Combination, which closed on December 31, 2002 (see Note 2). Inlieu of amortization, the Company is required to perform an impairment review of its goodwill balance on at least on an annual basis, which the Companyperforms during the fourth quarter, and upon the initial adoption of SFAS No. 142. This impairment review involves a two-step process as follows: Step 1—The Company compares the fair value of its reporting units to the carrying value, including goodwill of each of those units. For each reportingunit where the carrying value, including goodwill, exceeds the unit’s fair value, the Company moves on to step 2. If a unit’s fair value exceeds thecarrying value, no further work is performed and no impairment charge is necessary. Step 2—The Company performs an allocation of the fair value of the reporting unit to its identifiable tangible and non-goodwill intangible assets andliabilities. This derives an implied fair value for the reporting unit’s goodwill. The Company then compares the implied fair value of the reporting unit’s F-9Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill is greater than the implied fairvalue of its goodwill, an impairment charge would be recognized for the excess. During the three months ended December 31, 2003, the Company performed its annual test for goodwill impairment as required by SFAS No. 142.Equinix currently operates in one reportable segment, but has determined that it operates in a number of reporting units for the purposes of SFAS No. 142. TheCompany completed its evaluation with the assistance of a third party consultant and concluded that goodwill was not impaired as the fair value of itsSingapore reporting unit exceeded the carrying value of this reporting unit, including goodwill. The primary methods used to determine the fair values forSFAS No. 142 impairment purposes were the discounted cash flow and market methods. The assumptions supporting the discounted cash flow method,including the discount rate, which was assumed to be 17%, were determined using the Company’s best estimates as of the date of the impairment review. Goodwill and other intangible assets, net, consisted of the following as of December 31 (in thousands): 2003 2002Goodwill $21,228 $21,081 Other intangibles: Intangible asset—customer contracts 3,927 3,600Intangible asset—tradename 300 300Intangible asset—workforce 160 — 4,387 3,900Accumulated amortization (2,106) — 2,281 3,900 $23,509 $24,981 Other identifiable intangible assets, comprised of customer contracts, tradename and workforce, are carried at cost, less accumulated amortization, andwere acquired as a result of the Combination (see Note 2) and the Santa Clara IBX Acquisition (see Note 3). No amortization was recognized in fiscal 2002 asthe Combination was consummated on December 31, 2002 and the Santa Clara IBX Acquisition was consummated on December 1, 2003. Beginning in fiscal2003, the Company began amortizing these other identifiable intangibles on a straight-line basis over their estimated useful lives, which are two years forcustomer contracts acquired in the Combination and five years for customer contracts acquired in the Santa Clara IBX Acquisition and one year for bothtradename and workforce. Other intangible assets, net, are included in other assets on the accompanying balances sheets as of December 31, 2003 and 2002. For the year ended December 31, 2003, the Company recorded $2,106,000 of amortization expense associated with its other intangible assets. Prior to2003, the Company had not recorded amortization expense. The Company expects to record the following amortization expense during the next five years (inthousands): Year ending: 2004 $2,0462005 602006 602007 602008 55 Total $2,281 F-10Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Fair Value of Financial Instruments The carrying value amounts of the Company’s financial instruments, which include cash equivalents, short-term investments, accounts receivable,accounts payable, accrued expenses and long-term obligations approximate their fair value due to either the short-term maturity or the prevailing interest rates ofthe related instruments. The fair value of the Company’s Senior Notes is based on quoted market prices. The estimated fair value of the Senior Notes wasapproximately $24.4 million and $4.6 million as of December 31, 2003 and 2002, respectively. During fiscal 2002, the Company retired approximately$169.5 million of Senior Notes (see Note 6). In February 2004, the Company exercised its right to redeem all of the Senior Notes, which have a total of $30.5million of principal outstanding as of December 31, 2003, and have sent a notice of redemption to the trustee. The effective date of the redemption is expected tobe March 12, 2004. The redemption price for the Senior Notes will be equal to 106.5% of their principal amount plus accrued and unpaid interest to theredemption date (see Note 15). Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of The Company accounts for impairment of long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which the Company adopted in fiscal 2002. SFAS No. 144 establishes a uniform accounting model for long-lived assets to be disposed of.SFAS No. 144 also requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to estimatedundiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, animpairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. During the quarter ended June 30,2002, the Company wrote-down the value of some property and equipment, primarily leasehold improvements and some equipment, located in twounnecessary U.S. IBX expansion and headquarter office space operating leaseholds that the Company decided to exit and that do not currently provide anyongoing benefit (see Note 14). In light of a number of factors, including the continued difficulty in the economy and the Company’s significant losses to date, an impairmentassessment was undertaken of the Company’s IBX hubs as of December 31, 2002. This assessment involved an assessment of the future net cash flowsgenerated by each IBX hub over their respectful useful lives and comparing this against the carrying value of that IBX hub. The revenue and cost assumptionsused in this analysis were based on numerous factors, including the current revenue and cost performance of each IBX hub, historical growth rates, theremaining space to fill each IBX hub to full capacity relative to the market demand in each of the individual geographic markets of each IBX hub, expectedinflation rates and any other available economic indicators and factors that the Company believed were relevant. This analysis showed that the total of theundiscounted future cash flows was greater than the carrying amount of the assets, and accordingly, no impairment was deemed to have occurred. Significantjudgments and assumptions were required in the forecast of future operating results used in the preparation of the estimated future cash flows, including profitmargins, customer growth and the timing of overall market growth and the Company’s percentage of that market. The Company reviewed this analysis as ofDecember 31, 2003, and noted that the Company had generally performed better in all significant aspects compared to the projections used in the prior yearand that no impairment indicators or triggering events were present. As a result, no further impairment analysis was performed; however, if future results donot match these estimates, revised future forecasts could result in a material adverse effect on the assessment of the Company’s long-lived assets, therebyrequiring the Company to write down the assets. Prior to adoption of SFAS No. 144, the Company accounted for long-lived assets in accordance with SFAS No. 121, “Accounting for Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed of.” F-11Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) During the quarter ended September 30, 2001, the Company wrote-down the value of its European construction in progress to its net realizable value as part ofa larger restructuring charge in conjunction with a revised European services strategy (see Note 14). Revenue Recognition Equinix derives more than 90% of its revenues from recurring revenue streams, consisting primarily of (1) colocation services, such as from thelicensing of cabinet space, power and bandwidth; (2) interconnection services, such as cross connects and Gigabit Ethernet ports and (3) managedinfrastructure services, such as Equinix Direct and other e-business services such as mail service and managed platform solutions. The remainder of theCompany’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 thecontract terms, except where the future costs cannot be estimated reliably, in which case fees are recognized upon the completion of services. Non-recurringinstallation fees are deferred and recognized ratably over the term of the related contract. Professional service fees are recognized in the period in which theservices were provided and represent the culmination of the earnings process. Revenue from bandwidth and equipment is recognized on a gross basis inaccordance with EITF Abstract No. 99-19, “Recording Revenue as a Principal versus Net as an Agent”, primarily because the Company acts as the principalin the transaction, takes title to products and services and bears inventory and credit risk. Revenue from contract settlements is recognized on a cash basiswhen 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 servicelevels are not achieved, the Company reduces revenue for any credits given to the customer as a result. The Company generally has the ability to determinesuch 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 determinableand collection of the receivable is reasonably assured. It is customary business practice to obtain a signed master sales agreement and sales order prior torecognizing revenue in an arrangement. The Company assesses collection based on a number of factors, including past transaction history with the customerand the credit-worthiness of the customer. The Company does not request collateral from our customers. If the Company determines that collection of a fee isnot reasonably assured, the Company defers the fee and recognizes revenue at the time collection becomes reasonably assured, which is generally upon receiptof cash. In addition, Equinix also maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to makerequired payments for those customers that the Company had expected to collect the revenues. If the financial condition of Equinix’s customers were todeteriorate 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. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequencesattributable to differences between financial statement carrying F-12Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities aremeasured 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. Valuationallowances are established when necessary to reduce tax assets to the amounts expected to be realized. Stock-Based Compensation The Company accounts for its stock-based compensation plans in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation.” Aspermitted under SFAS No. 123, the Company uses the intrinsic value-based method of Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees,” to account for its employee stock-based compensation plans. Under APB Opinion No. 25, compensation expense is based onthe difference, if any, on the date of grant, between the fair value of the Company’s shares and the exercise price of the option. The Company accounts for stock-based compensation arrangements with nonemployees in accordance with the Emerging Issues Task Force (“EITF”)Abstract No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods orServices.” Accordingly, unvested options and warrants held by nonemployees are subject to revaluation at each balance sheet date based on the then currentfair market value. Unearned deferred compensation resulting from employee and nonemployee option grants is amortized on an accelerated basis over the vesting period ofthe individual options, in accordance with FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or AwardPlans” (“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 beingamortized over the four-year vesting life of these individual stock options net of the reversal of any previously recorded accelerated stock-based compensationexpense due to the forfeitures of those stock options prior to vesting. In addition, in September 2003, the Compensation Committee of the Board of Directorsawarded 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 thedate of grant and, as a result, recorded a $1,093,000 deferred stock-based compensation charge, which will be amortized over the three-year vesting period ofthis grant. As of December 31, 2003, there was $1,032,000 of deferred stock-based compensation remaining to be amortized as a result of these option grants.The Company expects stock-based compensation expense to impact its results of operations through 2006. The following table presents, by operating expense, the Company’s amortization of stock-based compensation expense (in thousands): 2003 2002 2001Cost of revenues $59 $266 $426Sales and marketing 294 952 2,830General and administrative 2,552 5,660 15,788 $2,905 $6,878 $19,044 F-13Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 SFASNo. 123 (in thousands, except per share data): 2003 2002 2001 Net loss as reported $(84,171) $(21,618) $(188,415)Stock-based compensation expense included in net loss 2,818 6,859 18,993 Stock-based compensation expense if SFAS No.123 had been adopted (10,238) (12,866) (27,574) Pro forma net loss $(91,591) $(27,625) $(196,996) Basic and diluted net loss per share: As reported $(8.76) $(7.23) $(76.62)Pro forma (9.54) (9.24) (80.11) The Company’s fair value calculations for employee grants were made using the Black-Scholes option pricing model with the following weighted averageassumptions for the years ended December 31: 2003 2002 2001 Dividend yield 0% 0% 0%Expected volatility 110% 135% 80%Risk-free interest rate 2.24% 3.75% 3.94%Expected life (in years) 3.50 3.50 3.04 The Company’s fair value calculations for employee’s stock purchase rights under the Purchase Plan (see Note 9) were made using the Black-Scholesoption pricing model with weighted average assumptions consistent with those used for employee grants as indicated above; however, the assumption forexpected life (in years) used for the Purchase Plan was 2 years for all periods presented. Comprehensive Income Comprehensive income (loss) is defined as the change in equity of a company during a period from transactions and other events and circumstancesexcluding transactions resulting from investments by owners and distributions to owners. The primary difference between net income (loss) andcomprehensive income (loss) for Equinix results from foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities. The financial position of foreign subsidiaries is translated using the exchange rates in effect at the end of the period, while income and expense items aretranslated at average rates of exchange during the period. Gains or losses from translation of foreign operations where the local currency is the functionalcurrency are included as other comprehensive income or loss. The net gains and losses resulting from foreign currency transactions are recorded in net income(loss) in the period incurred and were not significant for any of the periods presented. Certain inter-company balances are designated as long term.Accordingly, exchange gains and losses associated with these long-term inter-company balances are recorded as a component of other comprehensive income(loss), along with translation adjustments. F-14Table of ContentsEQUINIX, INC. NOTES TO 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 ofcommon shares outstanding. Options, warrants and preferred stock were not included in the computation of diluted net loss per share because the effect wouldbe anti-dilutive. The following table sets forth the computation of basic and diluted net loss per share for the years ended December 31 (in thousands, except per shareamounts). 2003 2002 2001 Numerator: Net loss $(84,171) $(21,618) $(188,415) Denominator: Weighted average shares 9,606 3,015 2,547 Weighted average unvested shares subject to repurchase (2) (25) (88) Total weighted average shares 9,604 2,990 2,459 Net loss per share: Basic and diluted $(8.76) $(7.23) $(76.62) 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 sowould be anti-dilutive for December 31: 2003 2002 2001Series 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 6,160,765 2,785,205 —Common stock warrants 245,835 269,586 65,831Common stock options 3,407,938 725,821 653,160Common stock subject to repurchase 150 6,986 50,333 Derivatives and Hedging Activities The Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, at the beginning of its fiscal year2001. The standard requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fairvalue through the statement of operations. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will eitherbe offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings, or recognized in other comprehensive income(loss) until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings.As of December 31, 2003, the Company had not entered into any derivative or hedging activities. Recent Accounting Pronouncements In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21provides guidance on how to account for arrangements that F-15Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF 00-21 apply to revenue arrangementsentered into in fiscal periods beginning after June 15, 2003. The Company adopted the provisions of EITF 00-21 during the third quarter of 2003. Theadoption of this statement has not had a material impact on the Company’s results of operations, financial position or cash flows. 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 havethe characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additionalsubordinated 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 exemptionsfrom 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 thefirst 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. In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activitiesunder SFAS No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the Derivatives Implementation Group (“DIG”) process thateffectively required amendments to SFAS No. 133, and decisions made in connection with other FASB projects dealing with financial instruments and inconnection with implementation issues raised in relation to the application of the definition of a derivative and characteristics of a derivative that containsfinancing 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. TheCompany 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 theCompany’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 withcharacteristics 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 somecircumstances) because that financial instrument embodies an obligation of the issuer. In November 2003, the FASB issued FASB Staff Position No. FASB150-3 which deferred the measurement provisions of SFAS No. 150 indefinitely for certain mandatorily redeemable non-controlling interests that were issuedbefore 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 theeffective provisions of SFAS No. 150 have not had a material impact on the Company’s results of operations, financial position or cash flows. While theeffective 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 impacton the Company’s financial position, results of operations or cash flows. F-16Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 2. The Combination Acquisition of i-STT On December 31, 2002, a wholly-owned subsidiary of the Company acquired all issued and oustanding shares of i-STT from STT Communications(the “i-STT Acquisiton”). i-STT is a similar business to that of Equinix with IBX hub operations in Singapore and Thailand. The entire purchase price of$34,365,000 was comprised of (i) 1,868,667 shares of the Company’s Series A preferred stock and 1,084,686 shares of the Company’s common stock,with a total value of $31,187,000 and (ii) total cash consideration and direct transaction costs of $3,178,000. The fair value of the Company’s stock issued was determined using the five-trading-day average price of the Company’s common stock surroundingthe date the transaction was announced in October 2002. The Company determined that the fair value of the Series A preferred stock and the common stockwas the same because the material rights, preferences and privileges of Series A preferred stock and the common stock were virtually identical (see Note 9). The initial purchase price, including direct merger costs, was allocated to the net tangible and intangible assets acquired and liabilities assumed basedon their estimated fair value at the date of acquisition. The Company retained the services of an independent valuation expert to assist with the determination ofthe fair value of the intangible assets. Included in the net liabilities assumed as of December 31, 2002, was an accrual of $400,000 representing the estimatedcosts to exit from an undeveloped IBX hub leasehold interest in Shanghai, China. The Company completed the exit of this lease during the second quarter of2003. During the quarter ended March 31, 2003, the Company recorded an adjustment to increase the goodwill acquired in the i-STT Acquisition by $650,000as a result of the decision to wind-down the joint venture in Thailand, i-STT Nation Limited. The Company estimated that its share of the costs to shut downthe joint venture would not exceed $650,000. The Company completed these wind-down efforts during the second half of 2003. The costs of both exiting theShanghai leasehold and winding down the joint venture in Thailand were less than expected, and as a result, the Company recorded an adjustment to reducethe remaining accruals for these efforts totaling $446,000, which decreased the goodwill balance acquired in the i-STT Acquisition. Over the course of 2003,the Company recorded several adjustments to the provisional purchase price allocation following the resolution of certain contingencies, including theShanghai lease termination and Thailand wind-down activities discussed above, totaling $348,000, which decreased the goodwill balance acquired in the i-STT Acquisition. The fair value of the assets and liabilities assumed, inclusive of all purchase price adjustments, is summarized as follows (in thousands): Cash and cash equivalents $1,699 Accounts receivable 1,673 Other current assets 197 Property and equipment 10,455 Intangible asset—customer contracts 3,600 Intangible asset—tradename 300 Intangible asset—goodwill 20,733 Other assets 550 Total assets acquired 39,207 Accounts payable and accrued expenses (4,048)Accrued restructuring charges (604)Other current liabilities (190) Net assets acquired $34,365 F-17Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Company accounted for the i-STT Acquisition using the purchase method. The customer contracts intangible asset has a useful life of two years,the typical term of a customer contract, and the tradename intangible asset had a useful life of one year, the contractual period under the CombinationAgreement. Acquisition of Pihana On December 31, 2002, a wholly-owned subsidiary of the Company merged with and into Pihana (the “Pihana Acquisiton”). Pihana is a similarbusiness to that of Equinix with IBX hub operations in Singapore; Tokyo, Japan; Sydney, Australia; Hong Kong, China, as well as Los Angeles andHonolulu in the U.S. The entire purchase price of $28,376,000 was comprised of (i) 2,416,379 shares of the Company’s common stock, with a total valueof $25,517,000, (ii) total cash consideration and direct transaction costs of $2,683,000 and (iii) the value of Pihana shareholder warrants assumed in thePihana Acquisition of $176,000 (the “Pihana Shareholder Warrants”). The fair market value of the Company’s stock issued was determined using the five-trading-day average price of the Company’s common stock surrounding the date the transaction was announced in October 2002. The fair value of the PihanaShareholder Warrants, which represent the right to purchase 133,442 shares of the Company’s common stock at an exercise price of $191.81 per share, wasdetermined using the Black-Scholes option-pricing model and the following assumptions: fair market value per share of $5.70, dividened yield of 0%,expected volatility of 135%, risk-free interest rate of 4% and a contractual life of approximately 3 years. The initial purchase price, including direct merger costs, was allocated to assets acquired and liabilities assumed based on their estimated fair value atthe date of acquisition. Included in the net liabilities assumed as of December 31, 2002, were total restructuring charges of $9,470,000, which relatedprimarily to the exit of the undeveloped portion of the Pihana Los Angeles IBX hub leasehold, severance related to an approximate 30% reduction in workforce,including several officers of Pihana and some transaction-related professional fees. A substantial portion of these costs were paid during 2003. Prior toDecember 31, 2002, Pihana sold their Korean IBX hub operations, which was excluded from the Pihana Acquisition, terminated or amended several operatingleaseholds and recorded a substantial impairment charge against the value of their property and equipment assumed in the Pihana Acquisition. During thefourth quarter of 2003, the Company recorded several adjustments to the provisional purchase price allocation following the resolution of certain contingenciestotaling $1,184,000, which increased the property and equipment balance assumed in the Pihana Acquisition. The fair value of the assets and liabilitiesassumed, inclusive of all purchase price adjustments, is summarized as follows (in thousands): Cash and cash equivalents $33,341 Accounts receivable 754 Other current assets 651 Property and equipment 6,875 Restricted cash 927 Other assets 2,329 Total assets acquired 44,877 Accounts payable and accrued expenses (3,294)Accrued restructuring charges and transaction fees (9,693)Other current liabilities (42)Capital lease obligations (1,536)Other liabilities (1,936) Net assets acquired $28,376 The Company accounted for the Pihana Acquisition using the purchase method. F-18Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Acquired Restructuring Accruals As a result of the Combination, the Company acquired several accruals related to restructuring activities from both i-STT and Pihana, which werecommenced in 2002, but the majority of which were not completed until 2003. A summary of the changes in accrued restructuring charge from December 31,2002 to December 31, 2003 is outlined as follows (in thousands): Acquiredrestructuringaccruals as ofDecember 31,2002 Purchasepriceadjustments Cashpayments Acquiredrestructuringaccruals as ofDecember 31,2003Workforce reduction and related costs $5,712 $— $(5,494) $218Lease exit and office shutdown costs 1,735 (314) (1,031) 390Other professional fees 2,423 — (2,423) —Thailand joint venture wind-down — 518 (518) — $9,870 $204 $(9,466) $608 During the first quarter of 2003, the Company recorded a liability of $650,000 as a result of the decision to wind-down the joint venture in Thailand, i-STT Nation Limited, which was recorded as an adjustment to the goodwill acquired in the i-STT Acquisition. The Company completed this effort during thesecond half of 2003. During the fourth quarter of 2003, the Company recorded several purchase price adjustments, which had a total impact to the acquiredrestructuring accruals totaling $446,000, primarily related to the joint venture wind-down effort in Thailand as well as the efforts to exit from a leasehold inShanghai, China, as the actual costs to complete these activities were less than anticipated. One of these adjustments resulted in reducing the $650,000 accrualthat the Company had recorded during the quarter ended March 31, 2003, for Thailand joint venture wind-down costs, to $518,000. The net impact of allpurchase accounting adjustments to the acquired restructuring accruals for the year ended December 31, 2003, was $204,000. The remaining activities will be paid during 2004. Unaudited Pro Forma Consolidated Combined Results The operating results of i-STT and Pihana included in the Company’s consolidated statements of operations and cash flows commencing on December31, 2002 were immaterial to the consolidated results of the Company. The following unaudited pro forma financial information presents the consolidatedresults of the Company as if the i-STT Acquisition and Pihana Acquisition had occurred as of January 1, 2001, and includes adjustments to exclude theKorean operations not acquired in the Pihana Acquisition. This pro forma financial information does not necessarily reflect the results of operations as theywould have been if the Company had acquired these entities as of January 1, 2001. Unaudited pro forma consolidated results of operations for the years endedDecember 31, 2002 and 2001 are as follows (in thousands, except per share data): 2002 2001 Revenues $93,150 $75,581 Net loss (69,351) (250,029)Basis and diluted net loss per share (10.68) (41.95) These unaudited pro forma results do not include the effects of the the Senior Note Exchange (see Note 6) or Financing (see Note 8). F-19Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 3. 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 acquirecertain 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 $3,980Intangible asset—customer contracts 300Intangible asset—workforce 160 Total assets acquired $4,440 Use tax payable $317Asset retirement obligation 63Unfavorable 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 apremium to prevailing market rates for similar properties at the time of the Santa Clara IBX Acquisition. As a result, the Company recorded an unfavorablelease 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 andasset 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, whichhad 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 IBXhub, the Company also negotiated with the various customers already located within this IBX hub and entered into new contracts with the key customers. TheCompany also hired a number of Sprint employees that were working within this IBX hub. The customer contracts intangible asset has a useful life of fiveyears, the term of the primary key customer contract, and the workforce intangible asset has a useful life of one year. 4. Balance Sheet Components Cash, Cash Equivalents and Short-term Investments Cash, cash equivalents and short-term investments consisted of the following as of December 31 (in thousands): 2003 2002 Money market $9,254 $41,216 U.S. government and agency obligations 4,043 — Corporate bonds 22,615 — Auction rate securities 33,559 — Other securities 3,500 — Total available-for-sale securities 72,971 41,216 Less amounts classified as cash and cash equivalents (60,428) (41,216) Total market value of short-term investments $12,543 $— F-20Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The original maturities of all short-term investments were less than one year as of December 31, 2003. The Company had no short-term investments asof December 31, 2002. As of December 31, 2003 and 2002, unrealized gains and losses were a gain of $4,000 as of December 31, 2003 and zero as ofDecember 31, 2002. As of December 31, 2003 and 2002, cash equivalents included investments in other securities with various contractual maturity dates thatdo not exceed 90 days. Gross realized gains and losses from the sale of securities classified as available-for-sale were not material for the years ended December31, 2003, 2002 and 2001. For the purpose of determining gross realized gains and losses, the cost of securities is based upon specific identification. Accounts Receivable Accounts receivable, net, consists of the following as of December 31 (in thousands): 2003 2002 Accounts receivable $19,164 $16,017 Unearned revenue (8,671) (6,468)Allowance for doubtful accounts (315) (397) $10,178 $9,152 Unearned revenue consists of pre-billing for services that have not yet been provided, but which have been billed to customers ahead of time inaccordance with the terms of their contract. Accordingly, the Company invoices its customers at the end of a calendar month for services to be provided thefollowing month. Additions to the allowance for doubtful accounts were approximately zero, $2,329,000 and $521,000 for the years ended December 31, 2003, 2002 and2001, respectively. Charges against the allowance were approximately $82,000, $2,313,000, and $748,000 for the years ended December 31, 2003, 2002 and2001, respectively. Prepaids and Other Current Assets Prepaids and other current assets consist of the following as of December 31 (in thousands): 2003 2002Prepaid rent $— $4,913Prepaid insurance 1,076 1,507Prepaid other 906 1,142Taxes receivable 948 2,391Other current assets 209 1,193 $3,139 $11,146 Prepaid rent as of December 31, 2002, represented the fair value of lease costs for the San Jose Ground Lease for the 12-month period ending December31, 2003 (see Note 11). F-21Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Property and Equipment Property and equipment is comprised of the following as of December 31 (in thousands): 2003 2002 Leasehold improvements $383,574 $384,334 IBX plant and machinery 64,557 61,761 Computer equipment and software 18,875 17,580 IBX equipment 40,023 33,677 Furniture and fixtures 1,979 2,522 509,008 499,716 Less accumulated depreciation (165,454) (109,826) $343,554 $390,048 Leasehold improvements, certain computer equipment, software and furniture and fixtures recorded under capital leases aggregated zero and$5,779,000 as of December 31, 2003 and 2002, respectively. Amortization on the assets recorded under capital leases was included in depreciation expense. InJune 2003, the Company entered into an early termination agreement with Comdisco and settled its remaining capital lease obligations with Comdisco andobtained title to all leased assets under the original agreement (see Note 5). Included within leasehold improvements is the value attributed to the earned portion of several warrants issued to certain fiber carriers and theCompany’s contractor totaling $9,883,000 at both December 31, 2003 and December 31, 2002. Amortization of such warrants is included in depreciationexpense. During the quarter ended March 31, 2003, the Company moved into its new corporate headquarter office in Foster City, California, from MountainView, California, and as a result, disposed of approximately $4,569,000 of fully depreciated property and equipment, primarily leasehold improvements andfurniture and fixtures. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consisted of the following as of December 31 (in thousands): 2003 2002Accounts payable $3,833 $7,243Accrued merger and financing costs — 4,488Accrued compensation and benefits 3,655 2,548Accrued taxes 2,539 690Accrued property and equipment 2,454 1,304Accrued utility and security 2,017 771Accrued professional fees 1,281 1,046Accrued other 2,273 2,257 $18,052 $20,347 Accrued merger and financing costs as of December 31, 2002, represented costs associated with the Combination (see Note 2), Financing (see Note 8)and Senior Note Exchange (see Note 6) and have been fully paid during 2003. F-22Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Deferred Rent and Other Liabilities Deferred rent and other liabilities consists of the following as of December 31 (in thousands): 2003 2002Deferred rent $19,889 $13,420Other liabilities 2,133 794 $22,022 $14,214 The Company leases its IBX hubs and certain equipment under noncancelable operating lease agreements expiring through 2020. The centers’ leaseagreements typically provide for base rental rates that increase at defined intervals during the term of the lease. In addition, the Company has negotiated rentexpense abatement periods to better match the phased build-out of its centers. The Company accounts for such abatements and increasing base rentals usingthe 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. 5. Debt Facilities and Capital Lease Obligations Debt facilities and capital lease obligations consisted of the following as of December 31 (in thousands): 2003 2002 Comdisco Master Lease Agreement and Addendum (net of unamortized discount of zero and $31 as ofDecember 31, 2003 and 2002, respectively) $— $1,820 VLL Loan Amendment (net of unamortized discount of $112 and $336 as of December 31, 2003 and 2002,respectively) 735 1,004 Heller Loan Amendment (net of unamortized discount of $3 and $9 as of December 31, 2003 and 2002,respectively) 2,476 3,233 Wells Fargo Loan — 1,631 Orix Equipment Leases 201 1,536 3,412 9,224 Less current portion (2,689) (5,591) $723 $3,633 Comdisco Master Lease Agreement and Addendum In May 1999, the Company entered into a Master Lease Agreement with Comdisco (the “Comdisco Master Lease Agreement”). Under the terms of theComdisco Master Lease Agreement, the Company sold equipment to Comdisco, which it then leased back. The amount of financing to be provided was up to$1,000,000, and this amount was fully drawn down during 1999 and 2000. Repayments were made monthly over 42 months with a final balloon interestpayment equal to 15% of the balance amount due at maturity. Interest accrued at 7.5% per annum. The Comdisco Master Lease Agreement had an effectiveinterest rate of 14.6% per annum. In June 2003, the Company entered into an early termination agreement with Comdisco (the “Comdisco Early Termination Agreement”). Pursuant to theterms of the Comdisco Early Termination Agreement, upon receiving the proceeds from the Crosslink Financing (see below), the Company paid Comdisco$1,867,000 in full satisfaction of all amounts owed to Comdisco, including the $1,851,000 in principal recorded within both the current and non-currentportions of debt facilities and capital lease obligations on the Company’s accompanying balance sheet as of December 31, 2002. As part of the Comdisco EarlyTermination Agreement, the Company obtained title to all leased assets under the original Comdisco Master Lease Agreement and Addendum. F-23Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Venture Leasing Loan Agreement and VLL Loan Amendment In August 1999, the Company entered into a Loan Agreement with Venture Lending & Leasing II, Inc. and other lenders (“VLL” and the “VentureLeasing Loan Agreement”). The Venture Leasing Loan Agreement provided financing for equipment and tenant improvements at the Newark, New Jersey IBXhub and a secured term loan facility for general working capital purposes. The amount of financing provided was up to $10,000,000, which was allowed to beused to finance up to 85% of the projected cost of tenant improvements and equipment for the Newark IBX hub. The full $10,000,000 was fully drawnduring 1999. Notes issued beared interest at a rate of 8.5% per annum and were repayable in 42 monthly installments plus a final balloon interest paymentequal to 15% of the original advance amount due at maturity and are collateralized by the assets of the Newark, New Jersey IBX. The Venture Leasing LoanAgreement had an effective interest rate of 14.7% per annum. In connection with the Venture Leasing Loan Agreement, the Company granted VLL warrants to purchase 9,375 shares of the Company’s commonstock at $96.00 per share (the “VLL Warrants”). These warrants were immediately exercisable and expired on June 30, 2006. The fair value of the warrantusing the Black-Scholes option pricing model with the following assumptions: deemed fair market value per share of $153.60, dividend yield 0%, expectedvolatility of 80%, risk-free interest rate of 5.0% and a contractual life of seven years, was $1,174,000. Such amount was recorded as a discount to theapplicable debt, and is being amortized to interest expense, using the effective interest method, over the life of the agreement. In October 2002, the Company amended the Venture Leasing Loan Agreement to secure certain short-term cash deferment benefits (the “VLL LoanAmendment”). Under the original terms of the Venture Leasing Loan Agreement, the Company borrowed $10,000,000 which was repayable over 42 months at8.5% per annum plus a 15% balloon interest payment calculated on the original advance amount. Under the terms of the VLL Loan Amendment, theCompany extended the maturity of the loan by 24 months. Commencing January 1, 2003, the Company re-amortized the remaining principal balance andrelated balloon interest payment over the amended 27-month period ending March 1, 2005. The VLL Loan Amendment has an effective interest rate ofapproximately 14.7% per annum. As of December 31, 2003, $847,000 was outstanding under the VLL Loan Amendment. In connection with the VLL Loan Amendment, the Company granted VLL warrants to purchase 32,187 shares of the Company’s common stock at$0.32 per share (the “VLL Loan Amendment Warrants”) and repriced the original remaining VLL Warrants, issued in August 1999, to have an exercise priceof $0.32 versus the original $96.00 per share (the “Amended and Restated Original VLL Warrants”). Both the VLL Loan Amendment Warrants and theAmended and Restated Original VLL Warrants are immediately exercisable and the VLL Loan Amendment Warrants expire on October 11, 2007 and theAmended and Restated Original VLL Warrants expire on the original expiration date of June 30, 2006. The fair value of the VLL Loan Amendment Warrantsusing the Black-Scholes option-pricing model was approximately $220,000 with the following assumptions: fair market value per share of $7.04, dividendyield of 0%, expected volatility of 100%, risk-free interest rate of 4.0% and a contractual life of five years. Such amount was recorded as a discount to theapplicable debt based upon the guidance of APB Opinion No. 14 and will be amortized to interest expense, using the effective interest method, over theremaining life of the VLL Loan Amendment. Following the modification of the Amended and Restated Original VLL Warrants, an additional charge ofapproximately $45,000 was recorded as an additional debt discount representing the difference between the fair value of the modified option determined inaccordance with the provisions of SFAS No. 123 and the value of the old warrants immediately before its terms were modified. In March 2004, with the proceeds from the Convertible Debenture Offering, the Company will pay off all amounts outstanding under the VLL LoanAmendment (see Note 15). F-24Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Heller Loan and Heller Loan Amendment In June 2001, the Company obtained a $5,000,000 loan from Heller Financial Leasing, Inc. (the “Heller Loan”), which was fully drawn down at thattime. Repayments on the Heller Loan were made over 36 months and interest accrued at 13.0% per annum. The Heller Loan is secured by certain equipmentlocated in the New York metropolitan area IBX hub. In connection with the Heller Loan, the Company granted Heller Financial Leasing, Inc. a warrant to purchase 1,171 shares of the Company’s commonstock at $128.00 per share (the “Heller Warrant”). This warrant is immediately exercisable and expires in five years from the date of grant. The fair value ofthe warrant using the Black-Scholes option pricing model was $18,000 with the following assumptions: fair market value per share of $36.16, dividend yieldof 0%, expected volatility of 80%, risk-free interest rate of 5% and a contractual life of five years. Such amount was recorded as a discount to the applicableloan amount, and is being amortized to interest expense using the effective interest method, over the life of the loan. In August 2002, the Company amended the Heller Loan to secure certain short-term cash deferment benefits (the “Heller Loan Amendment”). Under theterms of the Heller Loan Amendment, the Company extended the maturity of the loan by nine months. Commencing September 2002, the Company began tobenefit from the reduction in monthly payments over the following 14 months thereby deferring approximately $1,200,000 of principal payments.Commencing November 2003, the deferred principal payments began to be repaid over the remaining 17 months of the loan ending March 2005. The HellerLoan Amendment has an effective interest rate of approximately 16.5% per annum. As of December 31, 2003, $2,479,000 was outstanding under the HellerLoan Amendment. In February 2004, with the proceeds from the Convertible Debenture Offering, the Company paid off all amounts outstanding under the Heller LoanAmendment (see Note 15). Wells Fargo Loan In March 2001, the Company obtained a $3,004,000 loan from Wells Fargo Equipment Finance, Inc. (“Wells Fargo” and the “Wells Fargo Loan”), andthis amount was fully drawn down at that time. Repayments on the Wells Fargo Loan were made over 36 months and interest accrued at 13.15% per annum.The Wells Fargo Loan was secured by certain equipment located in the New York metropolitan area IBX hub. The Wells Fargo Loan required the Company tomaintain a minimum cash balance at all times. As of June 30, 2002, the Company was not in compliance with this requirement. The Company did not obtaina waiver for this requirement and the bank rejected a discounted settlement offer. Wells Fargo filed a lawsuit against the Company seeking to force theCompany to obtain a letter of credit in the full amount of the outstanding balance of the Wells Fargo Loan. As a result, the Company reflected the full amountoutstanding under this facility totaling $1,631,000 as a current obligation on the accompanying balance sheet as of December 31, 2002. In January 2003, the Company entered into a settlement agreement with Wells Fargo in connection with a lawsuit related to the Wells Fargo Loan (the“Wells Fargo Settlement”). In compliance with the terms of the Wells Fargo Settlement, in February 2003, the Company paid Wells Fargo $1,703,000 in fullsatisfaction of all amounts owed to Wells Fargo, including $1,631,000 in principal. As part of the Wells Fargo Settlement, the lawsuit was dismissed and theWells Fargo Loan terminated. Orix Equipment Leases In December 2002, as a result of the Pihana Acquisition (see Note 2), the Company acquired multiple capital leases in multiple currencies for variousnewly acquired subsidiaries of the Company in the U.S. and F-25Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Asia-Pacific covered under a Master Lease Agreement with Sun Microsystems, Inc., which was subsequently assigned to Orix USA Corporation (the “OrixEquipment Leases”). The original amount financed under these capital leases was approximately $3,503,000 (as translated using effective exchange rates atDecember 31, 2002). These capital lease arrangements bear interest at an average rate of 6.4% per annum and are repayable over 30 months. As of December31, 2003, $201,000 was outstanding under the Orix Equipment Leases (as translated using effective exchange rates at December 31, 2003). Maturities Combined aggregate maturities for debt facilities and future minimum capital lease obligations as of December 31, 2003 are as follows (in thousands): Debtfacilities Capitalleaseobligations Total 2004 $2,597 $201 $2,798 2005 729 — 729 3,326 201 3,527 Less amount representing unamortized discount (115) — (115) 3,211 201 3,412 Less current portion (2,488) (201) (2,689) $723 $— $723 In February and March 2004, with the net proceeds from the Convertible Debenture Offering, the Company paid off all amounts outstanding under debtfacilities, comprised of the VLL Loan Amendment and the Heller Loan Amendment (see Note 15). 6. Senior Notes On December 1, 1999, the Company issued 200,000 units, each consisting of a $1,000 principal amount 13% Senior Note due 2007 (the “SeniorNotes”) and one warrant to purchase 0.527578 shares (for an aggregate of 105,515 shares) of common stock for $0.2144 per share (the “Senior NoteWarrants”), for aggregate net proceeds of $193,400,000, net of offering expenses. Of the $200,000,000 gross proceeds, $16,207,000 was allocated toadditional paid-in capital for the deemed fair value of the Senior Note Warrants and recorded as a discount to the Senior Notes. The discount on the SeniorNotes is being amortized to interest expense, using the effective interest method, over the life of the debt. The Senior Notes have an effective interest rate of14.1% per annum. The fair value attributed to the Senior Note Warrants was consistent with the Company’s treatment of its other common stock transactionsprior to the issuance of the Senior Notes. The fair value was based on recent equity transactions by the Company at the time. Interest is payable semi-annually, in arrears, on June 1 and December 1 of each year. The notes are unsecured, senior obligations of the Company andare effectively subordinated to all existing and future indebtedness of the Company, whether or not secured. The Senior Notes are governed by the Indenture dated December 1, 1999, between the Company, as issuer, and State Street Bank and Trust Companyof California, N.A., as trustee (the “Indenture”). Subject to certain exceptions, the Indenture restricts, among other things, the Company’s ability to incuradditional indebtedness and the use of proceeds therefrom, pay dividends, incur certain liens to secure indebtedness or engage in merger transactions. F-26Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) During the first half of 2002, the Company retired $52,751,000 of Senior Notes plus forgiveness of $785,000 of accrued and unpaid interest thereon inexchange for 499,565 shares of the Company’s common stock, valued at $18,351,000 based on the actual exchange dates of the Senior Notes and$2,511,000 of cash. The Company wrote-off a proportionate amount of unamortized debt issuance costs and debt discount associated with these Senior Notestotaling $1,293,000 and $3,093,000, respectively. The Company incurred debt extinguishment costs totaling approximately $1,100,000 in connection with theretirement of these Senior Notes and recognized a gain on these transactions of $27,188,000. In December 2002, the Company, in connection with, and as a condition to closing the Combination (see Note 2) and Financing (see Note 8), initiated anexchange offer to substantially reduce the amount of Senior Notes then outstanding in order to improve the Company’s existing capital structure and reduce theamount of outstanding debt of the Company (the “Senior Note Exchange”). The Senior Note Exchange was contingent on both the Combination and Financingclosing, all of which were subject to stockholder vote. The Combination, Financing and Senior Note Exchange closed on December 31, 2002, and theCompany retired an additional $116,774,000 of Senior Notes plus forgiveness of $8,855,000 of accrued and unpaid interest thereon in exchange for1,857,436 shares of the Company’s common stock, valued at $12,482,000 based on the actual exchange date of the Senior Notes and $15,181,000 of cash.The Company wrote-off a proportionate amount of unamortized debt issuance costs and debt discount associated with these Senior Notes totaling $2,492,000and $6,004,000, respectively. The Company incurred debt extinguishment costs totaling approximately $2,500,000 in connection with the retirement of theseSenior Notes and recognized a gain on these transactions of $86,970,000. In conjunction with the Combination, Financing and Senior Note Exchange, theCompany amended the Indenture in order to allow the Combination and Financing to occur. As of December 31, 2003, the Company had a total of $30,475,000 Senior Notes remaining outstanding, which are presented net of remaining discountas $29,220,000 on the accompanying balance sheet. The costs related to the issuance of the Senior Notes were capitalized and are being amortized to interest expense using the effective interest method, overthe life of the Senior Notes. Debt issuance costs, net of amortization and write-offs associated with debt retirement, were $519,000 and $650,000 as ofDecember 31, 2003 and 2002, respectively. In February 2004, with the proceeds from the Convertible Debenture Offering, the Company has exercised its right to redeem all of the Senior Notes andhas sent a notice of redemption to the trustee. The effective date of the redemption is expected to be March 12, 2004 (see Note 15). 7. Credit Facility On December 20, 2000, the Company and a newly created, wholly-owned subsidiary of the Company, entered into a $150,000,000 Credit Facility (the“Credit Facility”) with a syndicate of lenders. The Credit Facility consisted of the following: • Term loan facility in the amount of $50,000,000. The outstanding term loan amount was required to be paid in quarterly installments beginning inMarch 2003 and ending in December 2005. The Company drew this down in January 2001. • Delayed draw term loan facility in the amount of $75,000,000. The Company was required to borrow the entire facility on or before December 20,2001. The outstanding delayed draw term loan amount was required to be paid in quarterly installments beginning in March 2003 and ending inDecember 2005. The Company drew this down in March 2001. • Revolving credit facility in an amount up to $25,000,000. The outstanding revolving credit facility was required to be paid in full on or beforeDecember 15, 2005. The Company drew this down in June 2001. F-27Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Credit Facility had a number of covenants, which included achieving certain minimum revenue targets and limiting cumulative EBITDA lossesand maximum capital spending limits among others. As of September 30, 2001, the Company was not in compliance with one of these covenants. However,the syndicate of lenders provided a forbearance and, in October 2001, the Company successfully completed the renegotiation of the Credit Facility andamended certain of the financial covenants to reflect the prevailing economic environment as part of the Amended and Restated Credit Facility (the “Amendedand Restated Credit Facility”). As required under this amendment, the Company repaid $50,000,000 of the $150,000,000 Credit Facility outstanding as ofSeptember 30, 2001, of which $25,000,000 represented a permanent reduction. As such, the Amended and Restated Credit Facility provided a total of$125,000,000 of debt financing and consisted of the following: • Term loan facility, redesignated as tranche A, in the amount of $100,000,000, which represented the remaining $100,000,000 outstanding afterrepayment of the $50,000,000 in October 2001. • Term loan facility, redesignated as tranche B, in the amount of $25,000,000, of which $5,000,000 was immediately drawn with the remaining$20,000,000 available for future draw. The remaining $20,000,000 was only available for drawdown commencing September 30, 2002 and only ifthe Company remained in full compliance with all covenants as outlined in the Amended and Restated Credit Facility, and met an additionalEBITDA test. The ability to draw on the remaining $20,000,000 expired on December 31, 2002. As of June 30, 2002, the Company was not in compliance with certain provisions, including the revenue covenant, of the Amended and Restated CreditFacility. As a result, in August 2002, the Company further amended the Amended and Restated Credit Facility (the “First Amendment to the Amended andRestated Credit Facility”). The most significant terms and conditions of the First Amendment to the Amended and Restated Credit Facility were as follows: • The Company was granted a full waiver for the covenants that were not in compliance as of June 30, 2002. In addition, the amendment reset theminimum revenue and cash balance and maximum EBITDA loss covenants through September 30, 2002. • The Company agreed to repay $5,000,000 of the then outstanding balance of $105,000,000 as of June 30, 2002, which was designated as a trancheB term loan. This amount was repaid in August 2002. In addition, the remaining $20,000,000 available for borrowing under the Amended andRestated Credit Facility, also designated as a tranche B term loan, was permanently eliminated. As a result, the First Amendment to the Amendedand Restated Credit Facility reduced the credit facility to a $100,000,000 credit facility, which was designated a tranche A term loan, and whichremained fully outstanding as of September 30, 2002. • The Company must convert at least $100,000,000 of Senior Notes into common stock or convertible debt on or before November 8, 2002. As ofSeptember 30, 2002, a total of $147,249,000 of Senior Note principal remained outstanding. In November 2002, the lenders agreed to waive certain conditions of the First Amendment to the Amended and Restated Credit Facility (the “November2002 Waiver”). The most significant terms and conditions of the November 2002 Waiver were as follows: • The Company was granted a waiver to reset the minimum revenue and maximum EBITDA loss covenants through December 31, 2002 and theminimum cash balance covenant through March 31, 2003. • The Company was granted a waiver, subject to certain conditions, of an event of default created by a minimum cash covenant default and apayment default, if any, in existence pursuant to the Wells Fargo Loan (see Note 5). F-28Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) • The Company was granted a waiver of the covenant requiring the Company to convert $100,000,000 of Senior Notes by November 8, 2002. • The Company was granted a waiver, subject to certain conditions, of a default or an event of default created by a failure by the Company to makethe interest payment due on the Senior Notes in December 2002. The November 2002 Waiver expired upon the earlier of the closing of the Second Amendment to the Amended and Restated Credit Facility, thetermination of the Combination, or December 31, 2002, provided that if the sole reason the Combination has not closed by that date is as a result of pendingregulatory and related approvals, the date may be extended for up to three successive 30-day periods, but such date shall not be extended past March 31, 2003. On December 31, 2002, the Company closed the Combination (see Note 2), Financing (see Note 8) and Senior Note Exchange (see Note 6), and inconjunction, the Company further amended the First Amendment to the Amended and Restated Credit Facility (the “Second Amendment to the Amended andRestated Credit Facility”). The most significant terms and conditions of the Second Amendment to the Amended and Restated Credit Facility were as follows: • the Company was granted a full waiver of previous covenant breaches and was granted consent to use cash in connection with the Senior NoteExchange (see Note 6); • future revenue and EBITDA covenants were eliminated and the remaining minimum cash balance and maximum capital expenditure covenants andother ratios were reset consistent with the expected future performance of the combined company for the remaining term of the loan; • the Company permanently repaid $8,490,000 of the then currently outstanding $100,000,000 balance, bringing the total amount owed under thisfacility to $91,510,000 as of December 31, 2002; and • the amortization schedule for the remaining amount owed under this facility was amended such that the minimum amortization due in 2003-2004was significantly reduced. In November 2003, in connection with the Follow-on Equity Offering (see Note 9), the Company received consent from its senior lenders to amend theterms of Second Amendment to the Amended and Restated Credit Facility (the “Third Amendment to the Amended and Restated Credit Facility”). The mostsignificant terms and conditions of the Third Amendment to the Amended and Restated Credit Facility are as follows: • the Company permanently repaid $55.2 million of the then currently outstanding principal balance of $90.5 million; • the banks agreed to amend the cash sweep provision, which was to commence on March 31, 2004 and would have required the Company to paydown its principal balance in an amount equal to 50% of any cash on the Company’s balance sheet in excess of $20.0 million. This provision wasamended such that it will not commence until March 31, 2005 and will only be triggered on cash amounts in excess of $25.0 million; and • the banks agreed to extend the term of the Third Amendment to the Amended and Restated Credit Facility from December 2005 to December 2006.In addition, the banks amended the amortization schedule. Loans under the Third Amendment to the Amended and Restated Credit Facility bear interest at floating rates, plus applicable margins, based on eitherthe prime rate or LIBOR. Interest rates on the First Amendment to the Amended and Restated Credit Facility were increased by 0.50% and the frequency ofinterest payments had F-29Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) been amended to monthly from quarterly, and such modifications remain in effect under the terms of the Third Amendment to the Amended and RestatedCredit Facility. As of December 31, 2003, the Company’s total indebtedness under the Third Amendment to the Amended and Restated Credit Facility was$34,281,000 and had an effective interest rate of 5.96%. Borrowings under the Third Amendment to the Amended and Restated Credit Facility are collateralized by a first priority lien against substantially all ofthe Company’s assets. The costs related to the issuance of the Credit Facility were capitalized and are being amortized to interest expense using the effective interest method, overthe life of the Credit Facility. As a result of amending and restating the Credit Facility multiple times from 2001 to 2003, the Company incurred additionallender fees, which have been added to debt issuance costs and are being amortized to interest expense using the effective interest method over the remaining lifeof the Third Amendment to the Amended and Restated Credit Facility. The Company applied EITF 96-19, “Debtor’s Accounting for a SubstantiveModification and Exchange of Debt Instruments”, and concluded that the amendments to the Credit Facility were not substantive. Total debt issuance costs,net of amortization, were $4,451, 000 and $5,757,000 as of December 31, 2003 and 2002, respectively. Repayment of principal under the Third Amendment to the Amended and Restated Credit Facility is summarized as follows as of December 31, 2003 (inthousands): Year ending: 2004 $12,0002005 12,0002006 10,281 Total $34,281 In February 2004, with the proceeds from the Convertible Debenture Offering, the Company paid off all amounts outstanding under the ThirdAmendment to the Amended and Restated Credit Facility (see Note 15). 8. Convertible Secured Notes The Financing In conjunction with the Combination (see Note 2), STT Communications made a $30,000,000 strategic investment in the Company (the “Financing”) inthe form of a convertible secured note (the “Convertible Secured Note”), convertible into shares of preferred stock, with a detachable warrant for the furtherissuance of 965,674 shares of preferred stock (the “Convertible Secured Note Warrant”). The Convertible Secured Note bears non-cash interest at a rate of14% per annum, payable semi-annually in arrears on May 1 and November 1, and have an initial term through November 2007. Interest on the ConvertibleSecured Note will be payable in kind in the form of additional convertible secured notes having a principal amount equal to the amount of interest then duehaving terms which are identical to the terms of the Convertible Secured Note (the “PIK Notes”). The Convertible Secured Note Warrant was valued at $4,646,000, which was recorded as a discount to the debt principal. The fair value of theConvertible Secured Note Warrant was calculated under the provisions of APB 14 and determined using the Black-Scholes option-pricing model under thefollowing assumptions: contractual life of five years, risk-free interest rate of 4%, expected volatility of 135% and no expected dividend yield. The Companyhas considered the guidance in EITF Abstract No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios”, and has determined that the Convertible Secured Note does not contain a beneficial conversion feature as the fair value of F-30Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) the Company’s common stock on the date of issuance, was less than the stock conversion ratio outlined in the agreement. The allocated value to theConvertible Secured Note Warrant of $4,646,000 will be amortized using the effective interest rate method to interest expense over the five-year term of theConvertible Secured Note. The Convertible Secured Note is secured by (i) a first priority security interest in i-STT’s assets and Pihana’s Singapore assets and by a pledge of thestock of i-STT’s subsidiaries and (ii) by a second priority security interest in all of the collateral securing the Company’s obligations under the Credit Facility,as amended. The Convertible Secured Note is guaranteed by all of the Company’s existing subsidiaries and by all of the Company’s future domesticsubsidiaries. The Convertible Secured Note, the Convertible Secured Note Warrant and any outstanding PIK Notes can be converted into shares of the Company’sSeries A or Series A-1 preferred stock at a price of $9.1779 per underlying share at any time at the option of STT Communications (the “Conversion Price”).The Conversion Price will be adjusted to mitigate or prevent dilution, dividends are declared, or the Company issues, or contracts to issue, shares of theCompany’s common stock at a price per share below the Conversion Price. After December 31, 2004 and through December 31, 2005, the Company mayconvert 95% of the Convertible Secured Note and after December 31, 2005, the Company may convert 100% of the Convertible Secured Note, if: • the closing price of the Company’s common stock exceeds $32.1235 for thirty consecutive trading days; • the average daily trading volume of the Company’s common stock during that thirty day trading window exceeds 17,188; and • the Company has caused a registration statement to become effective under the Securities Act which provides for the resale by the noteholders of theshares of the Company’s common stock issued or issuable upon conversion. The Company must offer to purchase the Convertible Secured Note and any outstanding PIK Notes together with any accrued and unpaid interest if theCompany experiences a change of control, as defined. In addition, in connection with the Financing, the Company issued a warrant to STT Communications,which will become exercisable if the Company does experience a change of control (the “Change in Control Warrant”). The Change of Control Warrant, whichhas an exercise price of $0.01 per share and a contractual life of five years, is contingently exercisable for shares of the Company’s common stock with a totalcurrent market value of up to 20% of: • the $30,000,000 principal amount of the Convertible Secured Note, plus • the principal amount of any issued and outstanding PIK Notes, minus • the principal amount of any portion of the Convertible Secured Note which has been converted into shares of the Company’s capital stock or repaidin cash, plus • accrued and unpaid interest on any then outstanding portion of the Convertible Secured Note. Furthermore, the Company, in order to provide a mechanism to allow STT Communications to ensure the Company’s compliance with covenants underthe Second Amendment to the Amended and Restated Credit Facility, as amended (see Note 7), issued two additional warrants to STT Communications inconjunction with the Financing. These two additional warrants, comprised of the Series A Cash Trigger Warrant and the Series B Cash Trigger Warrant(collectively, the “Cash Trigger Warrants”), were contingently exercisable if the Company (i) did not have sufficient funds to pay, and failed to pay when due,any principal, interest, fee or other amount due under the Second Amendment to the Amended and Restated Credit Facility, as amended, or (ii) breached theCompany’s obligations to maintain certain minimum cash balances under the terms of the Second Amendment to F-31Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) the Amended and Restated Credit Facility, as amended. The Cash Trigger Warrants, which were to have a contractual life for as long as the Company had anyremaining amounts due under the Second Amendment to the Amended and Restated Credit Facility, as amended, would have had an exercise price and beexercisable for shares of the Company’s common stock valued at up to $30,000,000 as follows: • The Series A Cash Trigger Warrant would have had a value of $10,000,000, with an exercise price per share which was the lesser of (i) $9.792 or(ii) 90% of the then current market value of shares of the Company’s common stock. The $9.792 exercise price of the Series A Cash TriggerWarrant would have been adjusted to mitigate or prevent dilution if fundamental changes occured to the Company’s common stock, dividends weredeclared, or the Company issued, or contracted to issue, shares of the Company’s common stock at a price per share below $9.792. • The Series B Cash Trigger Warrant would have had a value of $20,000,000, with an exercise price per share equal to 90% of the then currentmarket value of shares of the Company’s common stock. The holder of the Cash Trigger Warrants, STT Communications, had no obligation to exercise such warrants. If the Cash Trigger Warrants wereexercised based on the inability to pay any principal, interest or fees due under the Second Amendment to the Amended and Restated Credit Facility, asamended, the Cash Trigger Warrants would have been exercisable for not less than $5,000,000 and not more than $5,000,000 plus the amount of the missedpayment. If the Cash Trigger Warrants were exercised on the inability of the Company to maintain certain minimum cash balances under the terms of theSecond Amendment to the Amended and Restated Credit Facility, as amended, the Cash Trigger Warrants would have been exercisable for not less than$5,000,000 and not more than $5,000,000 plus any shortfall in the Company’s minimum cash balance requirement. The Company applied EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments”, and EITF 96-18, “Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, and concluded that neither acommitment date, or a measurement date, had occurred when the Financing was closed as of December 31, 2002 in relation to the Change in Control Warrantand the Cash Trigger Warrants. As a result, the Change in Control Warrant and the Cash Trigger Warrants have been treated, and will continue to be treated,as unissued for accounting purposes until such time as the events that trigger the right to the issuance of shares of the Company’s stock as outlined in thesewarrants have occurred, if ever. As a result of the Company fully paying off the Credit Facility in February 2004 (see Note 15), the Cash Trigger Warrants are no longer exercisable andare deemed canceled. During 2003, the Company issued the first two PIK Notes on May 1 and November 1, 2003, to STT Communications totaling $3,598,000. The termsof the PIK Notes are identical to the terms of the Convertible Secured Note issued on December 31, 2002. The PIK Notes are due December 2007. As ofDecember 31, 2003, the Company had a total of $33,598,000 of principal outstanding for the Convertible Secured Note and the PIK Notes issued to STTCommunications (collectively, the “STT Convertible Secured Notes”), which are presented net of remaining discount as $29,968,000 on the accompanyingbalance sheet as of December 31, 2003. The STT Convertible Secured Notes are convertible into 3,660,765 shares of the Company’s preferred and common stock as of December 31, 2003. The costs related to the Financing were capitalized and are being amortized to interest expense using the effective interest method, over the life of theConvertible Secured Note. Debt issuance costs, net of amortization, were $455,000 and $617,000 as of December 31, 2003 and 2002, respectively. F-32Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Crosslink Financing In April 2003, the Company and certain of its subsidiaries, along with STT Communications and its affiliate, entered into a Securities Purchase andAdmission Agreement with various entities affiliated with Crosslink Capital (“Crosslink”) for a $10,000,000 investment in the Company by Crosslink in theform of convertible secured notes (the “Crosslink Convertible Secured Notes”), convertible into shares of the Company’s common stock, with detachablewarrants for the further issuance of 500,000 shares of common stock (the “Crosslink Convertible Secured Note Warrants”) (collectively, the “CrosslinkFinancing”). This transaction closed in June 2003 and the Crosslink Convertible Secured Note Warrants were also fully exercised in June 2003. The CrosslinkConvertible Secured Notes bear non-cash interest at a rate of 10% per annum, commencing on the second anniversary of the closing of the CrosslinkFinancing, payable semi-annually in arrears on May 1 and November 1, and have an initial term through November 2007. Interest on the CrosslinkConvertible Secured Notes will be payable in kind in the form of additional convertible secured notes having a principal amount equal to the amount of interestthen due having terms which are similar to the terms of the Crosslink Convertible Secured Notes (the “Crosslink PIK Notes”). The Crosslink Convertible Secured Notes are convertible into shares of the Company’s common stock at a price of $4.00 per underlying share at anytime at the option of the holders. The Crosslink PIK Notes will be convertible into shares of the Company’s common stock at a price of $4.84 per underlyingshare at any time at the option of the holders. Such conversion prices will be adjusted to mitigate or prevent dilution, dividends are declared on the Company’scommon stock or the Company issues, or contracts to issue, shares of the Company’s common stock at a price per share below $4.84 per share. FollowingJune 2005, 100% of the Crosslink Convertible Secured Notes will automatically convert if: • the average closing price of the Company’s common stock exceeds $15.66 for thirty consecutive trading days; • the average daily trading volume of the Company’s common stock during that thirty day trading window exceeds 17,188; and • the Company has not received an election not to convert the Crosslink Convertible Secured Notes within five days of receiving notice from theCompany that the closing price and volume requirements discussed above have been met. If Crosslink elects not to convert the Crosslink Convertible Secured Notes within such five-day period, the Crosslink Convertible Secured Notes andany Crosslink PIK Notes will no longer be convertible into shares of the Company’s common stock. The Company must offer to purchase the CrosslinkConvertible Secured Notes and any outstanding Crosslink PIK Notes together with any accrued and unpaid interest if the Company experiences a change ofcontrol, as defined. Furthermore, the Company has issued to Crosslink, Change in Control Warrants and Cash Trigger Warrants similar to those issued toSTT Communications in connection with the Financing. The Crosslink Convertible Secured Note Warrants were valued at $2,796,000, which was recorded as a discount to the debt principal. The fair valueof the Crosslink Convertible Secured Note Warrants was calculated under the provisions of APB Opinion No. 14 and determined using the Black-Scholesoption-pricing model under the following assumptions: contractual life of five years, risk-free interest rate of 4%, expected volatility of 135% and no expecteddividend yield. The Company has considered the guidance of EITF Abstract No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,”and has determined that the Crosslink Convertible Secured Notes do contain a beneficial conversion feature. The beneficial conversion feature was valued at$7,204,000 (the “Crosslink Beneficial Conversion Feature”), and is also reflected as a discount to the debt principal. The combined values of both theCrosslink Convertible Secured Note Warrants and the Crosslink F-33Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Beneficial Conversion Feature, totaling $10,000,000, are being amortized using the effective interest rate method to interest expense over the term of theCrosslink Convertible Secured Notes. The Crosslink Convertible Secured Notes share with the Company’s Convertible Secured Note issued on December 31, 2002, in connection with theFinancing, a second priority security interest in all of the collateral securing the Company’s obligations under the Second Amendment to the Amended andRestated Credit Facility, as amended, which excludes the i-STT assets and Pihana’s Singapore assets that the Company acquired in the Combination (see Note2). The Crosslink Convertible Secured Notes are guaranteed by all of the Company’s existing subsidiaries and by all of the Company’s future domesticsubsidiaries. As of December 31, 2003, the Crosslink Convertible Secured Notes are presented net of remaining discount as $1,715,000 on the accompanyingbalance sheet as of December 31, 2003. The Crosslink Convertible Secured Notes are convertible into 2,500,000 shares of the Company’s common stock as of December 31, 2003. The costs related to the Crosslink Financing were capitalized and are being amortized to interest expense using the effective interest rate method over thelife of the Crosslink Convertible Secured Notes. Debt issuance costs, net of amortization, were $435,000 as of December 31, 2003. The Convertible Secured Note and PIK Notes issued in connection with the Financing, the Crosslink Convertible Secured Notes and the Crosslink PIKNotes are collectively referred to herein as the “Convertible Secured Notes”. 9. Stockholders’ Equity In December 2002, the Company amended and restated its Certificate of Incorporation to change the authorized share capital to 300,000,000 shares ofcommon stock and 100,000,000 shares of preferred stock, of which 25,000,000 has been designated Series A, 25,000,000 has been designated as Series A-1and 50,000,000 is undesignated. Preferred Stock On December 31, 2002, as a result of the i-STT Acquisition (see Note 2), the Company issued 1,868,667 shares of Series A preferred stock to STTCommunications. As of December 31, 2003, this preferred stock had a total liquidation value of $18,298,000. The rights, preferences and privileges of the Series A and Series A-1 preferred stock are as follows: Voting Rights. Holders of Series A preferred stock are entitled to one vote for each share of common stock into which such preferred stock could thenbe converted. Except as otherwise provided by the Delaware General Corporation Law, Series A-1 preferred stock shall have no voting rights. Until the earlierof either December 31, 2004 or the date on which less than 100 shares of the Company’s Series A preferred stock remain outstanding, the holders of shares ofSeries A preferred stock will be entitled to elect a number of directors at any election of directors, as follows: • three directors for so long as the holders of Series A preferred stock collectively beneficially own at least 30% of the Company’s outstanding votingstock; • two directors for so long as the holders of Series A preferred stock collectively beneficially own at least 15% of the Company’s outstanding votingstock; F-34Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) • one director for so long as the holders of Series A preferred stock collectively beneficially own at least 100 shares of the Company’s outstandingvoting stock; and • no directors at such time as the holders of Series A preferred stock collectively beneficially own less than 100 of the Company’s outstanding votingstock. Dividend Rights. Holders of Series A preferred stock and Series A-1 preferred stock are entitled to receive an amount equal to any dividend paid on theCompany’s common stock as may be declared from time to time by the Company’s board of directors. Liquidation Rights. In the event of the Company’s liquidation, dissolution or winding up, the Company’s assets available for distribution tostockholders will be distributed to holders of common stock, Series A preferred stock and Series A-1 preferred stock on a pro rata basis, based on the numberof shares of common stock held by each assuming full conversion of Series A preferred stock and Series A-1 preferred stock, until holders of Series Apreferred stock and Series A-1 preferred stock have received $9.792 per share of Series A preferred stock and Series A-1 preferred stock, plus the amount ofany declared but unpaid dividends for each share of Series A preferred stock and Series A-1 preferred stock. Thereafter, any remaining available assets fordistribution to stockholders will be distributed among the holders of the Company’s common stock pro rata based on the number of shares of common stockheld by each. Redemption Rights. Beginning after December 31, 2009, the Company may at any time it may lawfully do so, at the option of the Company’s boardof directors, redeem some or all of the Series A preferred stock or Series A-1 preferred stock, on a pro rata basis, at a price in cash per share equal to thenumber of shares of the Company’s common stock into which such share may then be converted multiplied by the average closing sale price of theCompany’s common stock on The Nasdaq National Market (or any trading system on which the Company’s common stock may then trade) over the 30consecutive trading day period ending five trading days prior to the date of redemption. There are no sinking fund provisions applicable to the Company’sSeries A preferred stock or Series A-1 preferred stock. Conversion and Other Rights. The Company’s Series A preferred stock is convertible at any time into shares of common stock on a one-for-onebasis. The Company’s Series A-1 preferred stock is convertible into Series A preferred stock or shares of common stock on a one-for-one basis as long as theconversion of the Series A-1 preferred stock will not cause STT Communications to hold more than 40% of outstanding voting stock. Notwithstanding thislimitation, and except for limitations imposed by the HSR Antitrust Improvements Act of 1976, as amended (the “HSR Act”),, the Company’s Series A-1preferred stock is convertible into Series A preferred stock or common stock in the following circumstances: • STT Communications makes a fully financed tender offer for all of the Company’s outstanding stock and at least 50% of the outstanding sharesnot held by STT Communications are tendered; • the Company commences bankruptcy or reorganization proceedings; • a third party obtains a 15% interest in the Company; • the Company agrees to sell a 15% or greater interest in the Company to a third party; • the Company sells all or substantially all of its assets, or enters into an agreement to sell all or substantially all of its assets; • a third party commences a bona fide, fully financed tender offer; • STT Communications’ nominees are not elected to our board of directors despite STT Communications voting in favor of such nominees; F-35Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) • the Company breaches certain material agreements with STT Communications contained in the Financing or Combination agreements (see Notes 2and 8); • STT Communications’ interest in the Company falls below 10%; or • the Cash Trigger Warrants are exercised (see Note 8). In addition, the Company may force all but 100 shares of the Company’s Series A preferred stock and all shares of Series A-1 preferred stock (subjectto the conversion restrictions described above) to convert into shares of the Company’s common stock after the Company reports four consecutive quarters ofnet income. The Company’s Series A and Series A-1 preferred stock have no preemptive or other subscription rights. Common Stock On November 21, 2003, the Company sold 5,524,780 shares of common stock at a purchase price of $20.00 per share, which resulted in net proceedsto the Company of $104.4 million. We refer to this transaction as the follow-on equity offering (the “Follow-on Equity Offering). Upon the exercise of certain unvested stock options, the Company issued to employees common stock which is subject to repurchase by the Companyat the original exercise price of the stock option. This right lapses over the vesting period. As of December 31, 2003 and 2002, there were 150 and 6,986shares, respectively, subject to repurchase. As of December 31, 2003, the Company has reserved the following shares of authorized but unissued shares of common stock for future issuance: Conversion of convertible secured notes 6,160,765Conversion of issued and outstanding preferred stock 1,868,667Conversion of preferred stock warrant 965,674Common stock warrants 265,615Common stock options 5,652,382Common stock purchase plan 13,301 14,926,404 Stock Purchase Plan In May 2000, the Company adopted the Employee Stock Purchase Plan (the “Purchase Plan”) under which 31,250 shares were reserved for issuancethereafter. On each January 1, the number of shares in reserve will automatically increase by 2% of the total number of shares of common stock outstanding atthat time, or, if less, by 600,000 shares. The Purchase Plan permits purchases of common stock via payroll deductions. The maximum payroll deduction is15% of the employee’s cash compensation. Purchases of the common stock will occur on February 1 and August 1 of each year. The price of each sharepurchased will be 85% of the lower of: • The fair market value per share of common stock on the date immediately before the first day of the applicable offering period (which lasts 24months); or • The fair market value per share of common stock on the purchase date. The value of the shares purchased in any calendar year may not exceed $25,000. F-36Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) For the year ended December 31, 2003, 191,307 shares were issued under the Purchase Plan at a weighted average purchase price of $2.98 per share.For the year ended December 31, 2002, 16,689 shares were issued under the Purchase Plan at a weighted average purchase price of $24.84 per share. For theyear ended December 31, 2001, 16,427 shares were issued under the Purchase Plan at a weighted average purchase price of $89.85 per share. Stock Option Plans In September 1998, the Company adopted the 1998 Stock Plan. In May 2000, the Company adopted the 2000 Equity Incentive Plan and 2000 DirectorStock Option Plan; and in September 2001, the Company adopted the 2001 Supplemental Stock Plan (collectively, the “Plans”) under which nonstatutorystock options and restricted stock may be granted to employees, outside directors, consultants, and incentive stock options may be granted to employees.Accordingly, the Company reserved a total of 5,708,326 shares of the Company’s common stock for issuance upon the grant of restricted stock or exercise ofoptions granted in accordance with the Plans. On each January 1, commencing with the year 2001, the number of shares in reserve will automatically increaseby 6% of the total number of shares of common stock that are outstanding at that time or, if less, by 6,000,000 shares for the 2000 Equity Incentive Plan andby 50,000 shares for the 2000 Director Stock Option Plan. Options granted under the Plans generally expire 10 years following the date of grant and are subjectto limitations on transfer. The Plans are administered by the Board of Directors. The Plans provide for the granting of incentive stock options at not less than 100% of the fair market value of the underlying stock at the grant date.Nonstatutory options may be granted at not less than 85% of the fair market value of the underlying stock at the date of grant. Option grants under the Plans are subject to various vesting provisions, all of which are contingent upon the continuous service of the optionee and maynot impose vesting criterion more restrictive than 20% per year. Stock options may be exercised at anytime subsequent to grant. Stock obtained throughexercise of unvested options is subject to repurchase at the original purchase price. The Company’s repurchase right decreases as the shares vest under theoriginal option terms. Options granted to stockholders who own greater than 10% of the outstanding stock must have vesting periods not to exceed five years and must beissued at prices not less than 110% of the fair market value of the stock on the date of grant as determined by the Board of Directors. F-37Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) A summary of the Plans is as follows: Sharesavailablefor grant Numberof shares Weighted-averageexercise price pershareBalances, December 31, 2000 1,888,588 281,756 $150.99Additional shares authorized 2,394,356 — —Options granted (497,700) 497,700 44.20Options exercised — (15,534) 28.03Options forfeited 110,762 (110,762) 138.31Shares repurchased 7,807 — 2.28 Balances, December 31, 2001 3,903,813 653,160 74.26Additional shares authorized 934,651 — —Options granted (147,244) 147,244 26.75Options exercised — (12,965) 8.67Options forfeited 61,618 (61,618) 77.66 Balances, December 31, 2002 4,752,838 725,821 65.51Additional shares authorized 556,921 — —Options granted (3,275,295) 3,275,295 5.52Options exercised — (383,198) 4.02Options forfeited 209,980 (209,980) 20.08 Balances, December 31, 2003 2,244,444 3,407,938 17.56 The following table summarizes information about stock options outstanding as of December 31, 2003: Outstanding ExercisableRange of exercise prices Numberof shares Weighted-averageremainingcontractual life Weighted-averageexercise price Numberof shares Weighted-averageexercise price$ 2.13 to $ 3.00 187,144 9.02 $2.95 42,109 $2.77$ 3.19 to $ 3.39 2,064,931 9.18 3.25 438,318 3.25$ 4.02 to $ 5.70 17,995 9.19 5.19 1,750 5.70$ 7.36 to $ 10.24 49,206 9.38 8.58 6,319 8.96$ 12.16 to $ 18.00 534,690 9.15 15.96 186,718 13.07$ 18.61 to $ 27.84 132,481 9.31 22.26 18,051 22.30$ 28.48 to $ 41.60 154,595 7.61 29.79 90,087 30.01$ 43.20 to $ 76.00 41,121 7.39 54.59 26,688 54.69$ 85.33 to $128.00 83,772 6.86 115.90 65,374 116.56$140.00 to $208.00 104,018 6.41 146.06 92,223 145.74$224.00 to $384.00 37,985 6.54 232.97 32,336 232.29 3,407,938 8.91 17.56 999,973 37.19 The weighted-average remaining contractual life of options outstanding at December 31, 2003 and December 31, 2002 was 8.91 years and 8.32 years,respectively. The weighted-average exercise price of options outstanding at December 31, 2003 and December 31, 2002 was $17.56 and $65.51, respectively. F-38Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Stock-Based Compensation Employees The Company uses the intrinsic-value method prescribed in APB No. 25 in accounting for its stock-based compensation arrangements with employees.Stock-based compensation expense is recognized for employee stock option grants in those instances in which the deemed fair value of the underlying commonstock was subsequently determined to be greater than the exercise price of the stock options at the date of grant. In September 2003, the CompensationCommittee of the Board of Directors awarded a stock option grant to the Company’s chief executive officer to purchase 350,000 shares of the Company’scommon stock at an exercise price of $17.70, a 15% discount to the then fair market value of the Company’s common stock on the date of grant. Thisresulted in the Company recording a new deferred stock-based compensation charge of $1,093,000, which will be amortized to stock-based compensationexpense over the three-year vesting life of this grant. In total, the Company recorded deferred stock-based compensation, net of forfeitures, related to employeesof $983,000 for the year ended December 31, 2003. A total of $2,818,000, $6,859,000 and $18,993,000 has been amortized to stock-based compensationexpense for the years ended December 31, 2003, 2002 and 2001, respectively, on an accelerated basis over the vesting period of the individual options, inaccordance with FASB Interpretation No. 28. Non-Employees The Company uses the fair value method to value options granted to non-employees. In connection with its grant of options to non-employees, theCompany has recognized an increase in deferred stock-based compensation of $89,000 for the year ended December 31, 2003. However, the Companyrecognized reductions in deferred stock-based compensation of $118,000 and $164,000 for the years ended December 31, 2002 and 2001, respectively, due toa reduction in the fair value of the Company’s stock during these periods. A total of $87,000, $19,000 and $51,000 has been amortized to stock-basedcompensation expense for the years ended December 31, 2003, 2002, and 2001, respectively. There was one non-employee stock option grant during 2003. The Company’s calculations for non-employee grants were made using the Black-Scholes option-pricing model with the following weighted averageassumptions for the years ended December 31: 2003 2002 2001 Dividend yield 0% 0% 0%Expected volatility 110% 135% 80%Risk-free interest rate 4.62% 4.00% 5.14%Expected life (in years) 10.00 10.00 10.00 Warrants In November 1999, the Company entered into a definitive agreement with WorldCom, whereby WorldCom agreed to install high-bandwidth localconnectivity services to the Company’s first seven IBX hubs by a pre-determined date in exchange for a warrant to purchase 21,094 shares of common stockof the Company at $21.33 per share (the “WorldCom Warrant”). The WorldCom Warrant was immediately exercisable and expired five years from the date ofgrant. The WorldCom Warrant was initially valued at $2,969,000 using the Black-Scholes option-pricing model and had been recorded initially toconstruction in progress until installation was complete. The following assumptions were used in determining the fair value of the warrant: deemed fair marketvalue per share of $153.60, dividend yield of 0%, expected volatility of 80%, risk-free interest rate of 5.5% and a contractual life of 5 years. In June 2000, theagreement with Worldcom was amended (see below). F-39Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) In January 2000, the Company entered into an operating lease agreement for its new corporate headquarters facility in Mountain View, California. Inconnection with the lease agreement, the Company granted the lessor a warrant to purchase up to 1,034 shares of the Company’s common stock at $192.00per share (the “Headquarter Warrant”). The warrant expires 10 years from the date of grant. The warrant was valued at $186,000 using the Black-Scholesoption pricing model and was recorded as additional rent expense during the Company’s lease term at that location (the Company terminated this lease andmoved its headquarters to Foster City in March 2003). The following assumptions were used in determining the fair value of the warrant: deemed fair value pershare of $209.60, dividend yield of 0%, expected volatility of 80%, risk-free interest rate of 6.0% and a contractual life of 10 years. In April 2000, the Company entered into a definitive agreement with a fiber carrier whereby the fiber carrier agreed to install high-bandwidth localconnectivity services to a number of the Company’s IBX hubs in exchange for colocation space and related benefits in such IBX hubs. In connection with thisagreement, the Company granted the fiber carrier a warrant to purchase up to 16,875 shares of the Company’s common stock at $128.00 per share (the“Fiber Warrant”). The warrant was immediately exercisable and expires five years from date of grant. A total of 4,375 shares were immediately vested and theremaining 12,500 shares are subject to repurchase at the original exercise price if certain performance commitments are not completed by a pre-determined date.The fiber carrier is not obligated to install high-bandwidth local connectivity services and, apart from forfeiting the relevant number of shares and colocationspace, will not be penalized for not installing. The warrant was initially valued at $5,372,000 using the Black-Scholes option-pricing model and had beenrecorded initially to construction in progress until installation was completed. The following assumptions were used in determining the fair value of thewarrant: deemed fair market value per share of $378.24, dividend yield of 0%, expected volatility of 80%, risk-free interest rate of 6.56% and a contractuallife of 5 years. Under the applicable guidelines in EITF 96-18, the underlying shares of common stock associated with these warrants subject to repurchaseare revalued at each balance sheet date to reflect their current fair value until the performance commitment is complete. As of December 31, 2003, a total of1,562 shares remain unearned. As the Company has no plans to construct any additional IBX hubs in the foreseeable future, the value of these unearnedshares is reflected in other assets on the accompanying balance sheets totaling $7,000 and $5,000 as of December 31, 2003 and 2002, respectively. In June 2000, the Company entered into a memorandum of understanding with COLT Telecommunications (“Colt”) whereby Colt agreed to install high-bandwidth local connectivity services to a number of the Company’s European IBX hubs in exchange for colocation space and related benefits in such IBXhubs. In connection with this agreement, the Company granted Colt a warrant to purchase up to 7,813 shares of the Company’s common stock at $170.67per share (the “Colt Warrant”). The warrant was immediately exercisable and expires five years from the date of grant. The shares are subject to repurchase atthe original exercise price if certain performance commitments are not completed by a pre-determined date. Colt is not obligated to install high-bandwidth localconnectivity services and, apart from forfeiting the relevant number of shares and colocation space, will not be penalized for not installing. The warrant wasinitially valued at $2,795,000 using the Black-Scholes option-pricing model and was initially recorded to construction in progress. The followingassumptions were used in determining the fair value of the warrants: deemed fair market value per share of $434.56, dividend yield of 0%, expected volatilityof 80%, risk-free interest rate of 6.23% and a contractual life of 5 years. Under the applicable guidelines in EITF 96-18, the underlying shares of commonstock associated with this warrant subject to repurchase are revalued at each balance sheet date to reflect their current fair value until the performancecommitment is complete. As of December 31, 2003, the Colt Warrant remains unearned as a result of the Company’s revised European services strategy (seeNote 14). As a result, the value of these unearned shares is now reflected in other assets on the accompanying balance sheet totaling $27,000 and $25,000 asof December 31, 2003 and 2002, respectively. F-40Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) In June 2000, the Company entered into a strategic agreement with WorldCom and UUNET, an affiliate of WorldCom (the “UUNET StrategicAgreement”), which amended, superseded and restated the definitive agreement entered into with WorldCom in November 1999 and the related WorldComWarrant. Under the UUNET Strategic Agreement, WorldCom agreed to install high-bandwidth local connectivity services and UUNET agreed to providehigh-speed data entrance facilities to a number of the Company’s IBX hubs in exchange for colocation services and related benefits in such IBX hubs. Inconnection with this strategic agreement, the Company granted WorldCom Venture Fund a warrant (the “WorldCom Venture Fund Warrant”) to purchase up to20,313 shares of Company’s common stock at $170.67 per share and all but 1,172 of the shares under the earlier WorldCom Warrant were immediatelyvested under the UUNET Strategic Agreement. As of January 31, 2002, all shares under the earlier Worldcom Warrant had been fully earned. The WorldComVenture Fund Warrant was immediately exercisable and expired five years from the date of grant. The warrant was subject to repurchase at the original exerciseprice if certain performance commitments are not completed by a pre-determined date. WorldCom and UUNET were not obligated to install high-bandwidthlocal connectivity services and provide high-speed data entrance facilities, respectively, and, apart from forfeiting the relevant number of shares and colocationspace, were not to be penalized for not performing. The warrant was initially valued at $7,255,000 using the Black-Scholes option-pricing model and hadbeen recorded initially to construction in progress until installation was complete. The following assumptions were used in determining the fair value of thewarrant: deemed fair market value per share of $434.56, dividend yield of 0%, expected volatility of 80%, risk-free interest rate of 6.23% and a contractuallife of 5 years. In September 2001, the Worldcom Venture Fund Warrant was amended (see below). In September 2001, the Company amended and restated the Worldcom Venture Fund Warrant, issued in June 2000, and reduced the total number ofshares available to purchase to 9,219 shares of the Company’s common stock at $170.56 per share, which had been previously earned. In return forproviding services to the New York metropolitan area IBX hub, the Company issued two new warrants to the Worldcom Venture Fund. The first new warrantwas to purchase 11,094 shares of the Company’s common stock at $0.01 per share, of which 4,688 shares were immediately vested and exercisable (the“Second Worldcom Venture Fund Warrant”). The second new warrant was to purchase 7,656 shares of the Company’s common stock at $0.01 per share (the“Third Worldcom Venture Fund Warrant”). All Worldcom Venture Fund warrants expire five years from the date of grant. The Company has accounted forthese warrants in accordance with the guidance in EITF 96-18 and EITF Abstracts Topic D-90. The unearned portion of the Second Worldcom Venture FundWarrant and the Third Worldcom Venture Fund Warrant would be fully earned and exercisable at such time as Worldcom provides services, as defined in thewarrant agreements, to the New York metropolitan area IBX hub. The unearned portion of the Second Worldcom Venture Fund Warrant and the ThirdWorldcom Venture Fund Warrant were subject to a reduction in shares if there were Worldcom-caused delays in providing Worldcom service by the openingdate of the New York metropolitan area IBX hub. Consistent with the guidance of EITF 96-18 and EITF Abstracts Topic D-90, these warrants were treated asunissued for accounting purposes until the future services are received from the fiber carrier. The earned portion of the Second Worldcom Venture FundWarrant, however, was valued in September 2001 at $56,000 using the Black-Scholes option-pricing model and had been recorded initially to construction inprogress until installation was complete. The following assumptions were used in determining the fair value of the earned portion of this warrant: fair marketvalue per share of $12.16, dividend yield of 0%, expected volatility of 80%, risk-free interest rate of 6.00% and a contractual life of 5 years. In January 2002, Worldcom completed their installation of fiber in the Company’s New York metropolitan area IBX hub, and the Company valued theunearned portion of the Second Worldcom Venture Fund Warrant and the Third Worldcom Venture Fund Warrant, representing 6,406 and 7,656 shares ofthe Company’s common stock, respectively. The Second Worldcom Venture Fund Warrant and the Third Worldcom Venture Fund Warrant were valued at$1,040,000 using the Black-Scholes option-pricing model and have been recorded to property and equipment as a leasehold improvement. The followingassumptions were used in determining the F-41Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) fair value of these warrants: fair market value per share of $2.32, dividend yield of 0%, expected volatility of 80%, risk-free interest rate of 4.00% and acontractual life of five years. In addition, the Company has issued several warrants in connection with its debt facilities and capital lease obligations (see Note 5), the Senior Notes(see Note 6), two European lease terminations (see Note 11) and the Pihana Acquisition (see Note 2). The Company has the following common stock warrants outstanding as of December 31, 2003: Underlyingsharesoutstanding ExercisepriceCommon stock warrants: Amended and Restated Original VLL Warrants 7,406 $0.32VLL Loan Amendment Warrants 28,844 0.32Senior Note Warrants 19,780 0.21WorldCom Warrant 21,094 21.33Headquarter Warrant 1,034 192.00Fiber Warrant 16,875 128.00Colt Warrant 7,813 170.67Worldcom Venture Fund Warrant 9,219 170.56Second Worldcom Venture Fund Warrant 11,094 0.32Third Worldcom Venture Fund Warrant 7,656 0.32Heller Warrant 1,172 128.00Pihana Shareholder Warrants 133,442 191.81Other warrant 186 160.00 265,615 In addition to the above common stock warrants outstanding as of December 31, 2003, the Company also has several additional warrants issued inconnection with the Financing and Crosslink Financing, which are comprised of the Convertible Secured Note Warrant, the Change in Control Warrants andthe Cash Trigger Warrants (see Note 8). The Change in Control Warrants are contingently issuable. The Cash Trigger Warrants were contingently issuableand expired unexercised in February 2004 in conjunction with the Company’s repayment of the Credit Facility (see Note 15). 10. Income Taxes Income or loss before income taxes is attributable to the following geographic locations for the years ended December 31 (in thousands): 2003 2002 2001 United States $(68,807) $(21,013) $(136,900)Foreign (15,364) (605) (51,515) Loss before income taxes $(84,171) $(21,618) $(188,415) No provision for federal income taxes was recorded from inception through December 31, 2003 as the Company incurred net operating losses (“NOL”)during this period. State tax expense not based on income is included in loss from operations and the aggregated amount is immaterial for the years ended December 31,2003, 2002 and 2001. F-42Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The fiscal 2003, 2002 and 2001 income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 35% to pre-taxincome as a result of the following for the years ended December 31 (in thousands): 2003 2002 2001 Federal tax at statutory rate $(29,460) $(7,566) $(65,945)State taxes — — — Domestic NOL not benefitted 21,798 7,302 47,857 Foreign NOL not benefitted 4,707 211 18,030 Meals and entertainment 28 53 46 Non-cash interest expense 2,666 — — Other 261 — 12 Total tax expense $— $— $— The types of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities are set out below as ofDecember 31 (in thousands): 2003 2002 Deferred tax assets: Depreciation and amortization $35,957 $(4,246)Reserves 3,131 36,352 Charitable contributions 4 — Deferred compensation 9,179 — Credits 114 211 Capitalized start-up costs 706 317 Net operating losses 18,184 542 Gross deferred tax assets 67,275 33,176 Valuation allowance (67,275) (33,176) Total deferred tax assets $— $— The Company’s accounting for deferred taxes under SFAS No. 109 involves the evaluation of a number of factors concerning the realizability of theCompany’s deferred tax assets. To support the Company’s conclusion that a 100% valuation allowance was required, the Company primarily considered suchfactors as the Company’s history of operating losses, the nature of the Company’s deferred tax assets and the absence of taxable income in prior carrybackyears. Although the Company’s operating plans assume taxable and operating income in future periods, the Company’s evaluation of all the available evidencein assessing the realizability of the deferred tax assets indicates that such plans are not considered sufficient to overcome the available negative evidence. Federal and State tax laws, including California tax law, impose substantial restrictions on the utilization of net operating loss and credit carryforwardsin the event of an “ownership change” for tax purposes, as defined in Section 382 of the Internal Revenue Code. The Company conducted an analysis todetermine whether an ownership change had occurred due to the significant stock transactions in each of the reporting years disclosed. The analysis indicatedthat an ownership change occurred during the fiscal year 2002, which resulted in an annual limitation of approximately $60,000, for the net operating losscarryforwards generated prior to 2003 and therefore, the Company has substantially reduced its federal and state net operating loss carryforwards for theperiod prior to 2003 to approximately $1.2 million. Additionally, Section 382 of the Internal Revenue Code limits the Company’s ability to utilize the taxdeductions associated with its depreciable assets as of the end of F-43Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) the 2002 year to offset the taxable income in future years, due to the existence of a Net Unrealized Built-In Loss (“NUBIL”) at the time of the change in control.Such a limitation will be effective for a five-year period subsequent to the change in control through 2007. The Company expects to pay a limited amount of tax for fiscal years 2004 and 2005. The tax costs will be primarily limited to alternative minimumtaxes as the Company anticipates utilizing its net operating loss carryforwards and expects to have significant tax deductions attributable to stock optionsexercised in the years. The Company has net operating loss carryforwards for U.S. income tax purposes of approximately $36.9 million available to reduce future incomesubject to income taxes. The U.S. net operating loss carryforwards will begin to expire, if not utilized, in the year 2023. In addition, the Company hadapproximately $20.5 million of net operating loss carryforwards available to reduce future taxable income for state income tax purposes. The majority of thestate net operating loss carryforwards will begin to expire, if not utilized, in the year 2013. 11. Commitments and Contingencies San Jose Ground Lease In May 2000, the Company entered into a purchase agreement regarding approximately 80 acres of real property in San Jose, California. In June 2000,before closing on this property, the Company assigned its interest in the purchase agreement to a buyer and on the same date, this buyer purchased theproperty and entered into a 20-year lease with the Company for the property (the “San Jose Ground Lease”). Under the terms of the San Jose Ground Lease, theCompany has the option to extend the lease for an additional 60 years, for a total lease term of 80 years. In addition, the Company has the option to purchasethe property from the buyer on certain designated dates in the future. In September 2001, the Company amended the San Jose Ground Lease (the “First SanJose Ground Lease Amendment”). Previously, the Company posted a letter of credit in the amount of $10,000,000 and was required to increase the letter ofcredit by $25,000,000 to an aggregate of $35,000,000 if the Company did not meet certain development and financing milestones. Pursuant to the terms of theFirst San Jose Ground Lease Amendment, the aggregate obligation was reduced by $10,000,000 to $25,000,000 provided the Company agreed to post anadditional letter of credit totaling $15,000,000 prior to September 30, 2001. In addition, the operating lease commitments, for the 12-month period endingSeptember 2002, were reduced by $3,000,000 provided the Company prepaid a full year of lease payments. The benefit of this reduction was amortized to rentexpense over the full term of the lease. The additional letter of credit was funded prior to September 30, 2001 and the rent pre-payment was funded subsequentto September 30, 2001. These letter of credit security deposits were to be reduced on a pro rata basis based on the status of construction activity on thisproperty. In May 2002, the Company further amended the San Jose Ground Lease to provide the Company the option to reduce its obligation under this leasearrangement by up to approximately one-half (the “Second San Jose Ground Lease Amendment”). Pursuant to the terms of the Second San Jose Ground LeaseAmendment, for a one-time fee of $5,000,000, which was recorded as a restructuring charge (see Note 14), the Company had a one-year option, effective July1, 2002, to elect to exclude from this lease anywhere from 20 to 40 acres of the unimproved real property. In September 2002, the Company exercised the optionit had purchased in May 2002 and reduced its obligation under the San Jose Ground Lease by approximately one-half and entered into a further amendment ofthe San Jose Ground Lease (the “Third San Jose Ground Lease Amendment”), which became effective upon the closing of the Combination (see Note 2) andFinancing (see Note 8). Pursuant to the terms of the Third San Jose Ground Lease Amendment, in connection with the exercise of the $5,000,000 option, thelandlord was permitted to unconditionally draw down on the $25,000,000 in letters of credit. A portion of these letters of credit, totaling approximately$5,990,000, was recorded as prepaid rent expense representing fair value of the lease costs for the 15-month period from October 1, 2002 to December 31,2003. The prepaid rent represented the total payments that would have otherwise been paid during this period for the remaining one-half of the lease. F-44Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Company amortized this prepaid rent expense ratably over the 15-month period. The remaining balance, approximately $19,010,000, was written off andrecorded as a restructuring charge as the Company was unable to recognize any future economic benefit attributed to the remaining balance of the letters ofcredit (see Note 14). Operating Lease Terminations and Amendments In February 2002, the Company entered into a termination agreement for its operating leasehold in Amsterdam, The Netherlands (the “TerminationAgreement”). As stipulated in the Termination Agreement, the Company will surrender two previously-posted letters of credit totaling approximately$4,814,000, which the Company had already fully written-off in conjunction with the restructuring charge that the Company recorded during the third quarterof 2001 (see Note 14). The first letter of credit was surrendered in March 2002 and the second letter of credit was surrendered in August 2002. The costsassociated with terminating this leasehold were consistent with those that the Company estimated during the third quarter of 2001. In February 2002, the Company entered into an agreement to surrender for its operating leasehold in London, England that was declared effective inMarch 2002 (the “Agreement to Surrender”). As stipulated in the Agreement to Surrender, the Company surrendered a previously-posted letter of credit totalingapproximately $822,000, which the Company had already fully written-off in conjunction with the restructuring charge that the Company recorded during thethird quarter of 2001 (see Note 14) and issued a warrant to purchase 18,750 shares of the Company’s common stock at $0.32 per share to the Company’slandlord (the “UK Warrant”). The UK Warrant was valued at $702,000 using the Black-Scholes option-pricing model and has been recorded as an offset toaccrued restructuring charges. The following assumptions were used in determining the fair value of the earned portion of this warrant: fair market value pershare of $37.76, dividend yield of 0%, expected volatility of 80%, risk-free interest rate of 4.00% and a contractual life of one year. The costs associated withterminating this leasehold were consistent with those that the Company estimated during the third quarter of 2001. In March 2003, this warrant was exercisedwith cash. In April 2002, the Company entered into an agreement to exit its operating leasehold in Frankfurt, Germany (the “Lease Exit Agreement”). As stipulatedin the Lease Exit Agreement, the Company surrendered a previously-posted letter of credit totaling approximately $1,076,000, which the Company had alreadyfully written-off in conjunction with the restructuring charge that the Company recorded during the third quarter of 2001 (see Note 14). As also stipulated inthe Lease Exit Agreement, the Company additionally agreed to (1) pay rent through May 2002, (2) pay cash settlement fees totaling approximately $1,845,000and (3) issued a warrant to purchase 35,938 shares of the Company’s common stock at $0.32 per share to the Company’s landlord in Frankfurt (the“Frankfurt Warrant”). The Frankfurt Warrant was valued at $725,000 using the Black-Scholes option-pricing model and has been recorded as an offset toaccrued restructuring charges. The following assumptions were used in determining the fair value of the earned portion of this warrant: fair market value pershare of $20.48, dividend yield of 0%, expected volatility of 80%, risk-free interest rate of 4.00% and a contractual life of one year. In May 2002, this warrantwas exercised with cash. In July 2002, the Company finalized its agreement to exit one of its excess U.S. operating leaseholds in Mountain View, California, adjacent to theCompany’s headquarters (the “Excess Headquarter Lease Termination”). As stipulated in the Excess Headquarter Lease Termination, the Company agreed topay rent through July 2002 and to waive any rights to any remaining personal property on the premises beyond a specified date. During the quarter ended June30, 2002, the Company wrote-off all property and equipment located in this excess office space, primarily leasehold improvements and some furniture andfixtures, totaling $1,552,000. This was included in the restructuring charges recorded during 2002 (see Note 14). F-45Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) In October 2002, the Company amended the lease for its headquarters in Mountain View, California (the “First Amendment to HQ Lease”). Pursuant tothe First Amendment to HQ Lease, the Company was granted the option to terminate the leasehold in exchange for a termination fee of $924,000. TheCompany paid this fee and exercised this option in October 2002. Provided the Company complies with the terms of the First Amendment to HQ Lease,including the timely payment of its lease obligations for six months, the Company will be permitted to terminate the lease without further penalty and will beentitled to a discharge fee equal to $924,000 at the time the premises are vacated. In March 2003, the Company terminated this lease, received the discharge feeand moved into new headquarter facilities in Foster City, California. In October 2002, the Company amended its lease for its Secaucus IBX hub (the “Second Amendment to the Secaucus IBX Lease”). Pursuant to theterms of the Second Amendment to the Secaucus IBX Lease, commencing October 1, 2002 and expiring March 31, 2004, a portion of the base rent otherwisedue for the period will be deferred until January 2005. Commencing January 1, 2005, the portion of the base rent deferred, plus interest calculated thereon,will be repaid to the Secaucus landlord in 36 equal payments ending December 1, 2007. Furthermore, with respect to this operating lease, the landlord has theright to expand the Company’s rentable space by approximately half at such time as the current tenant of that portion of the property’s lease expires, which ison December 31, 2004. As a result, commencing fiscal 2005, the Company expects that its total rent expense associated with this IBX hub could double. TheCompany is currently working with this landlord, as well as the current tenant of that space, and expects to minimize this additional cost to the Company;however, there can be no assurances that the Company will be successful in reducing this commitment. In October 2003, a wholly-owned subsidiary of the Company entered into an asset sale agreement with an affiliated company of STT Communications(the “Buyer”), which is also a current customer of Equinix, in which (a) the Company exited from its IBX hub lease in Singapore that the Company acquiredin the Pihana Acquisition (the “Pihana Singapore IBX Hub”) effective September 30, 2003, (b) the Buyer has entered into a new lease agreement directly withthe landlord for the Pihana Singapore IBX Hub, (c) the Company sold the related assets located in and transferred certain agreements related to the operationsof the Pihana Singapore IBX Hub to the Buyer for one Singapore dollar, (d) the Company contemporaneously entered into a separate colocation agreement for asmaller portion of space in the Pihana Singapore IBX Hub for 60 months in which the Company will be the customer of the Buyer and (e) the Buyer hasagreed to procure additional IBX hub services in the Company’s other Singapore IBX hub that it acquired in the i-STT Acquisition (the “Singapore Asset SaleAgreement”). As a result of the Singapore Asset Sale Agreement, the Company surrendered several deposits related to the Pihana Singapore IBX Hub; however,this loss was offset by the write-off of the associated deferred rent and asset retirement obligation liabilities associated with the Pihana Singapore IBX Hubresulting in a nominal loss on asset sale of $18,000. As a result of this transaction, the Company has only one primary IBX hub in Singapore (the oneacquired in the i-STT Acquisition) rather than two. Operating Lease Commitments The Company leases its IBX hubs and certain equipment under noncancelable operating lease agreements expiring through 2020. The centers’ leaseagreements typically provide for base rental rates that increase at defined intervals during the term of the lease. In addition, the Company has negotiated rentexpense abatement periods to better match the phased build-out of its centers. The Company accounts for such abatements and increasing base rentals usingthe 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. F-46Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Minimum future operating lease payments as of December 31, 2003 are summarized as follows (in thousands): Year ending: 2004 $28,3392005 31,0722006 31,9002007 32,3302008 31,806Thereafter 201,137 Total $356,584 Total rent expense was approximately $28,646,000, $25,193,000 and $27,150,000 for the years ended December 31, 2003, 2002 and 2001,respectively. Deferred rent, primarily included in deferred rent and other liabilities on the accompanying balance sheets, was $20,283,000 and $13,420,000 asof December 31, 2003 and 2002, respectively. Capital Expenditures In September 2003, a wholly-owned subsidiary of the Company entered into a new customer contract which required expansion of the Singapore IBXhub acquired in the i-STT Acquisition (the “Singapore Customer Contract”). The Singapore Customer Contract requires that this incremental space beavailable for service by the end of February 2004, otherwise the Company will be required to pay damages of 2,000 Singapore dollars per day up to amaximum of 60 days or 120,000 Singapore dollars (approximately $71,000 as translated using effective exchange rates at December 31, 2003) to thiscustomer. In order for the Company to meet the requirements of the Singapore Customer Contract, it will need to spend approximately $3.5 million in capitalexpenditures to prepare a new floor of the Singapore IBX hub for this customer. As of December 31, 2003, the Company had incurred approximately $2.5million of capital expenditures related to this project and incurred an additional $1.0 million during January 2004. This project was completed in January2004. As a result of the Santa Clara IBX Acquisition (see Note 3), the Company expects to spend approximately $3.0 to $5.0 million in capital expenditures tobring this recently-acquired IBX hub to Equinix standards during the first half of 2004. Legal Actions During the quarter ended September 30, 2001, putative shareholder class action lawsuits were filed against the Company, certain of its officers anddirectors, and several investment banks that were underwriters of the Company’s initial public offering. The cases were filed in the United States DistrictCourt for the Southern District of New York, purportedly on behalf of investors who purchased the Company’s stock between August 10, 2000 and December6, 2000. The suits allege that the underwriter defendants agreed to allocate stock in the Company’s initial public offering to certain investors in exchange forexcessive and undisclosed commissions and agreements by those investors to make additional purchases in the aftermarket at pre-determined prices. Theplaintiffs 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 notdisclose these arrangements. It is possible that additional similar complaints may also be filed. In July 2003, a Special Litigation Committee of the EquinixBoard of Directors agreed to participate in a settlement with the plaintiffs that is anticipated to include most of the approximately 300 defendants in similaractions. This settlement agreement is subject to court approval and F-47Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) sufficient participation by all defendants in similar actions. Such settlement includes without limitation a guarantee of payments to the plaintiffs in thelawsuits, assignment of certain claims against the underwriters in the Company’s IPO to the plaintiffs, and a dismissal of all claims against Equinix andrelated individuals. Other than legal fees incurred to date, the Company expects that all expenses of settlement, if any, will be paid by the Company’sinsurance carriers. Until such settlement is finalized, the Company and its officers and directors intend to continue to defend the actions vigorously. TheCompany believes it has adequate legal defenses and believes that the ultimate outcome of these actions will not have a material effect on the Company’sconsolidated financial position, results of operations or cash flows, although there can be no assurance as to the outcome of such litigation. Furthermore, norange of loss can be estimated at this time. Under the Wells Fargo Loan (see Note 5), the Company was required to maintain a minimum cash balance at all times. As of June 30, 2002, theCompany was not in compliance with this requirement. Wells Fargo filed a lawsuit against the company seeking to force the Company to obtain a letter ofcredit in the full amount of the outstanding balance of the Wells Fargo loan. In February 2003, as part of a settlement agreement with Wells Fargo, theCompany made a payment to Wells Fargo of approximately $1.7 million in full satisfaction of all amounts owed to Wells Fargo under this loan agreement. Aspart of the same agreement, the lawsuit has been dismissed and the loan agreement has been terminated. Estimated and Contingent Liabilities The Company estimates exposure on certain liabilities, such as property taxes, based on the best information available at the time of determination. Withrespect to real and personal property taxes, the Company records what it can reasonably estimate based on prior payment history, current landlord estimates orestimates based on current or changing fixed asset values in each specific municipality, as applicable. However, there are circumstances beyond theCompany’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 landlordselling 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, theCompany’s property tax obligations may vary from period to period. Based upon the most current facts and circumstances, the Company makes thenecessary property tax accruals for each of its reporting periods. However, revisions in the Company’s estimates of the potential or actual liability couldmaterially 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 accruescontingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. In the opinion ofmanagement, there are no pending claims of which the outcome is expected to result in a material adverse effect in the financial position, results of operationsor cash flows of the Company. Employment Agreements The Company has agreed to indemnify an officer of the Company for any claims brought by his former employer under an employment and non-compete agreement the officer had with this employer. As of December 31, 2003, no claims had been made by the former employer. In August 2002, the Company entered into severance agreements with certain of its executive officers. Under the terms of the agreements, the officers areentitled to one year’s salary, bonus and certain healthcare benefits in the event of an involuntary termination for reasons other than cause. F-48Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Employee Benefit Plan The Company has a 401(k) Plan that allows eligible employees to contribute up to 15% of their compensation, limited to $12,000 in 2003. Employeecontributions and earnings thereon vest immediately. Although the Company may make discretionary contributions to the 401(k) Plan, no contributions haveever been made as of December 31, 2003. Guarantor Arrangements In November 2002, the FASB issued FIN No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guaranteesof Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34 (“FIN 45”). FIN 45requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. FIN 45also requires additional disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees ithas issued. The accounting requirements for the initial recognition of guarantees are applicable on a prospective basis for guarantees issued or modified afterDecember 31, 2002. The disclosure requirements are effective for all guarantees outstanding, regardless of when they were issued or modified, during the firstquarter of fiscal 2003. The following is a summary of the agreements that the Company has determined are within the scope of FIN 45. As permitted under Delaware law, the Company has agreements whereby the Company indemnifies its officers and directors for certain events oroccurrences while the officer or director is, or was serving, at the Company’s request in such capacity. The term of the indemnification period is for theofficer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnificationagreements is unlimited; however, the Company has a director and officer insurance policy that limits the Company’s exposure and enables the Company torecover a portion of any future amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of theseindemnification agreements is minimal. The majority of these indemnification agreements were grandfathered under the provisions of FIN 45 as they were ineffect prior to December 31, 2002. Accordingly, the Company has no significant liabilities recorded for these agreements as of December 31, 2003. The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Companyindemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’sbusiness partners or customers, in connection with any U.S. patent, or any copyright or other intellectual property infringement claim by any third party withrespect to the Company’s services. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. Themaximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, theCompany has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes theestimated fair value of these agreements is minimal. The majority of these indemnification agreements were grandfathered under the provisions of FIN 45 asthey were in effect prior to December 31, 2002. Accordingly, the Company has no significant liabilities recorded for these agreements as of December 31, 2003. The Company enters into arrangements with its business partners, whereby the business partner agrees to provide services as a subcontractor for theCompany’s implementations. The Company may, at its discretion and in the ordinary course of business, subcontract the performance of any of its services.Accordingly, the Company enters into standard indemnification agreements with its customers, whereby the Company indemnifies them for other acts, suchas personal property damage, of its subcontractors. The maximum potential amount of future F-49Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has general and umbrellainsurance policies that enable the Company to recover a portion of any amounts paid. The Company has never incurred costs to defend lawsuits or settleclaims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. The majority ofthese arrangements were grandfathered under the provisions of FIN 45 as they were in effect prior to December 31, 2002. Accordingly, the Company has nosignificant liabilities recorded for these agreements as of December 31, 2003. The Company has service level commitment obligations to certain of its customers. As a result, service interruptions or significant equipment damage inthe Company’s IBX hubs, whether or not within our control, could result in service level commitments to these customers. The Company’s liability insurancemay not be adequate to cover those expenses. In addition, any loss of services, equipment damage or inability to meet the Company’s service level commitmentobligations, particularly in the early stage of the Company’s development, could reduce the confidence of the Company’s customers and could consequentlyimpair the Company’s ability to obtain and retain customers, which would adversely affect both the Company’s ability to generate revenues and theCompany’s operating results. Historically, these service level credits have not been significant. Accordingly, the Company has no significant liabilities forthese agreements as of December 31, 2003. Under the terms of the Combination Agreement, the Company was contractually obligated to use the Company’s reasonable best efforts to obtain therelease of STT Communications from a bank guarantee associated with i-STT’s unconsolidated Thailand joint venture, i-STT Nation Limited. Such effortsincluded i-STT assuming such guarantee if it was commercially reasonable to do so. This guarantee was for 60% of a Thai baht 260,000,000 bank loan(approximately $6,188,000 as translated using effective exchange rates at June 30, 2003), of which Thai baht 58,300,000 was outstanding as of June 30, 2003(approximately $1,388,000 as translated using effective exchange rates at June 30, 2003) (the “Thai Bank Loan”). In July 2003, the Company, STTCommunications and their Thailand joint venture partner, Nation Digital Media Ltd. (“Nation Digital”), entered into an agreement to wind-down i-STTNation Limited (the “Thailand Joint Venture Wind-Down Agreement”). Under the terms of the Thailand Joint Venture Wind-Down Agreement, Nation Digitalobtained title to all assets of i-STT Nation Limited; STT Communications agreed to assume 100% of the Thai Bank Loan; and STT Communications andthe Company agreed to fund the wind-down costs of i-STT Nation Limited. As of December 31, 2003, the Thai Bank Loan was repaid in full by STTCommunications and the Company has funded its portion of wind-down costs, and the wind-down effort was completed as of December 31, 2003 (see Note2). Under the terms of the Combination Agreement, the Company is contractually obligated to use commercially reasonable efforts to ensure that at all timesfrom and after the closing of the Combination, until such time as neither STT Communications nor its affiliates hold the Company’s capital stock or debtsecurities (or the capital stock received upon conversion of the debt securities) received by STT Communications in connection with the Combination, thatnone of the Company’s capital stock issued to STT Communications is constituted as “United States real property interests” within the meaning of Section897(c) of the Internal Revenue Code of 1986. Under Section 897(c) of the Code, the Company’s capital stock issued to STT Communications wouldgenerally constitute “United States real property interests” at such point in time that the fair market value of the “United States real property interests” ownedby the Company equals or exceeds 50% of the sum of the aggregate fair market values of (a) the Company’s “United States real property interests,” (b) theCompany’s interests in real property located outside the U.S., and (c) any other assets held by the Company which are used or held for use in the Company’strade or business. The Company refers to this provision in the Combination Agreement as the FIRPTA covenant. Pursuant to the FIRPTA covenant, theCompany may be forced to take commercially reasonable proactive steps to ensure the Company’s compliance with the FIRPTA covenant, including, but notlimited to, (a) a sale-leaseback transaction with respect to all real property interests, F-50Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 forall of the Company’s outstanding stock (this reorganization would require the submission of that transaction to the Company’s stockholders for their approvaland the consummation of that exchange). Currently, the Company is in compliance with the FIRPTA covenant. This arrangement was grandfathered under theprovisions of FIN 45 as it was in effect prior to December 31, 2002. Accordingly, the Company has no liabilities recorded related to non-compliance with theFIRPTA covenant as of December 31, 2003. When as part of an acquisition the Company acquires all of the stock or all of the assets and liabilities of a company, the Company assumes theliability for certain events or occurrences that took place prior to the date of acquisition. The maximum potential amount of future payments the Companycould be required to make for such obligations is undeterminable at this time. The only acquisitions that the Company has made to date in which it acquiredall the stock or all of the assets and liabilities of a company was in connection with the Combination. All of these obligations were grandfathered under theprovisions of FIN No. 45 as they were in effect prior to December 31, 2002. Accordingly, the Company has no liabilities recorded for these liabilities as ofDecember 31, 2003. 12. Related Party Transactions Officer Loans Through December 31, 2001 the Company advanced $3,562,000 to five officers of the Company, including a loan to the Company’s chief executiveofficer totaling $1,512,000. All such officer loans were evidenced by promissory notes. The proceeds of these loans were used to fund the purchase ofpersonal residences for officers who had relocated from out of state to work for the Company. The loans were due at various dates through 2006, but weresubject to certain events of acceleration and were secured by a second deed of trust on the officers’ residences. The loans were non-interest bearing. In October2001, one of these loans totaling $150,000 was repaid in full in conjunction with an officer leaving the Company. In January 2002, the Board of Directors forgave $874,000 of the chief executive officer’s employee loan totaling $1,512,000 in exchange for the chiefexecutive officer waiving his right to any bonuses earned and expensed in 2001. The remaining amount due under the loan of $638,000 was repaid to theCompany in full in February 2002. Furthermore, the Company negotiated with two other executive officers of the Company to repay their loans in full totaling$1,000,000. In exchange, the Company agreed to pay a portion of the interest on the officer’s mortgage for their principal residence for a 24-month period. Oneof these loans totaling $750,000 was repaid in full in February 2002 and the second loan totaling $250,000 was repaid in full in March 2002. In September 2002, the Company negotiated with a non-executive officer of the Company for early repayment of the last remaining officer loan totaling$900,000. A portion of the loan was forgiven to compensate the employee for related out-of-pocket costs of sale of the residence. The remaining amount, totaling$700,000, due under the loan was repaid to the Company in October 2002. No officer or employee loans existed as of December 31, 2003 or 2002. Transactions with Affiliates of STT Communications As a result of the Combination, the Company acquired operations in Asia-Pacific. The majority of the Company’s Asia-Pacific revenues are generated inSingapore and a significant portion of the business in Singapore is transacted with entities affiliated with STT Communications, which is the Company’ssingle largest F-51Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) stockholder. For the year ended December 31, 2003, revenues recognized with entities affiliated with STT Communications were $6,946,000, and as ofDecember 31, 2003, accounts receivable with entities affiliated with STT Communications was $1,393,000. For the year ended December 31, 2003, costs andservices procured with entities affiliated with STT Communications were $481,000, and as of December 31, 2003, accounts payable with entities affiliatedwith STT Communications was $139,000. Furthermore, during 2003, the Company entered into an agreement with STT Communications to wind-down theCompany’s Thailand joint venture (see Note 11). In October 2003, the Company entered into an asset sale agreement with an affiliate of STT Communications(see Note 11). Other Revenue Transactions In February and March 2002, the Company entered into two agreements to resell equipment with related party companies. Both related party companieshave executive officers that serve on the Company’s Board of Directors, and one of the related party company executive officers also serves on the board ofdirectors of such company. In addition, one of the companies was also a 5% or greater stockholder in the Company as of that date. Revenue recognized during2002 from such equipment reseller agreements totaled approximately $2,936,000. For the year ended December 31, 2001, Loudcloud, Inc. (“Loudcloud”) was the Company’s second largest customer. Revenues from Loudcloudamounted to $5,105,000, which represented 8% of the Company’s total revenues for fiscal 2001. Andrew S. Rachleff, one of the Company’s directors, is aco-founder and general partner of Benchmark Capital. Benchmark Capital was a greater than 5% stockholder of Loudcloud, and Mr. Rachleff served on theBoard of Directors of Loudcloud at the time. Subsequent to December 31, 2001, Loudcloud changed its name to Opsware, Inc. and sold its Equinix-relatedoperations to Electronic Data Systems (“EDS”). As a result, Equinix now contracts its services to EDS. 13. Segment Information The Company and its subsidiaries are principally engaged in the design, build-out and operation of neutral IBX hubs. All revenues result from theoperation of these IBX hubs. The Company’s chief operating decision-maker evaluates performance, makes operating decisions and allocates resources basedon financial data consistent with the presentation in the accompanying consolidated financial statements. Due to the Combination (see Note 2), the Company acquired operations in Asia-Pacific effective December 31, 2002. As a result, the Company’sconsolidated balance sheets as of December 31, 2003 and 2002, includes certain assets based in Asia-Pacific. In addition, commencing in fiscal 2003, theCompany’s consolidated statement of operations includes revenues and expenses from Asia-Pacific. In September 2001, the Company recorded a restructuringcharge, primarily related to the Company’s revised European strategy, and as a result, wrote-off all of the Company’s European long-lived assets and beganthe process of winding down its development stage European operations (see Note 14). F-52Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Company’s geographic statement of operations disclosures are as follows for the years ended December 31 (in thousands): 2003 2002 2001 Total revenues: United States $99,669 $77,188 $63,414 Asia-Pacific 18,273 — — $117,942 $77,188 $63,414 Cost of revenues: United States $107,477 $104,355 $89,908 Asia-Pacific 20,644 — — Europe — (282) 4,981 $128,121 $104,073 $94,889 Loss from operations: United States $(48,621) $(101,014) $(103,118)Asia-Pacific (15,334) — — Europe — (662) (52,143) $(63,955) $(101,676) $(155,261) The Company’s long-lived assets are located in the following geographic areas as of December 31 (in thousands): 2003 2002United States $343,419 $389,369Asia-Pacific 34,825 39,139 $378,244 $428,508 The Company’s goodwill totaling $21,228,000 and $21,081,000 as of December 31, 2003 and 2002, respectively, is part of the Company’s Singaporereporting unit, which is reported within the Asia-Pacific segment. 14. Restructuring Charges 2001 Restructuring Charge During the quarter ended September 30, 2001, the Company revised its European services strategy through the development of new partnerships withother leading international Internet exchange partners rather than build and operate its own European IBX hubs. In addition, the Company initiated efforts toexit certain leaseholds relating to certain excess U.S. operating leases. Also, in September 2001, the Company implemented an approximate 15% reduction inworkforce, primarily in headquarter positions, in an effort to reduce operating costs, which resulted in approximately $5.6 million in annual savings. As aresult, the Company took a total restructuring charge of $48,565,000 primarily related to the write-down of European construction in progress assets to theirnet realizable value, the write-off of several European letters of credit related to various European operating leases, the accrual of estimated European and U.S.leasehold exit costs and the severance accrual related to the reduction in workforce. The remaining European assets as of December 31, 2001, totaling$2,234,000, represented assets purchased during pre-construction activities that were held for resale and sold F-53Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) during 2002. As of December 31, 2001, the Company had successfully surrendered one of the European leases. The Company completed the exit of theremaining European leases and one of the U.S. leases during 2002 (see Note 11). The collective costs of these European exit activities, primarily the exit of theGerman leasehold and an additional loss incurred on the sale of the European assets held for resale, exceeded the amount estimated by management during thethird quarter of 2001. As a result, the Company recorded an additional restructuring charge during the second quarter of 2002 (see 2002 Restructuring Chargesbelow). The reduction in workforce was substantially completed during the fourth quarter of 2001. A summary of the movement in the 2001 restructuring charge accrual for the year ended December 31, 2003 is outlined as follows (in thousands): Accruedrestructuringcharge as ofDecember 31,2002 Non-cashcharges Cashpayments Accruedrestructuringcharge as ofDecember 31,2003U.S. lease exit costs $810 $— $(768) $42 $810 $— $(768) $42 The remaining activities will be paid during 2004. A summary of the movement in the 2001 restructuring charge accrual for the year ended December 31, 2002 is outlined as follows (in thousands): Accruedrestructuringcharge as ofDecember 31,2001 Non-cashcharges Cashpayments Accruedrestructuringcharge as ofDecember 31,2002European exit costs $4,606 (2,492) (2,114) $—U.S. lease exit costs 1,512 — (702) 810Workforce reduction 272 — (272) — $6,390 $(2,492) $(3,088) $810 A summary of the 2001 restructuring charge through December 31, 2001 is outlined as follows (in thousands): Total 2001restructuringcharge Non-cashcharges Cashpayments Accruedrestructuringcharge as ofDecember 31,2001Write-down of European construction in progress $29,260 $(29,260) $— $—Write-off of European letters of credit 8,634 (8,634) — —European exit costs 7,421 (2,059) (756) 4,606U.S. lease exit costs 2,000 — (488) 1,512Workforce reduction 1,250 (134) (844) 272 $48,565 $(40,087) $(2,088) $6,390 F-54Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 2002 Restructuring Charges During the quarter ended June 30, 2002, the Company took a second restructuring charge to reflect the Company’s ongoing efforts to exit or amendseveral unnecessary U.S. IBX expansion and headquarter office space operating leaseholds and to complete the Company’s European exit activities. Inaddition, in May 2002, the Company implemented a reduction in workforce of less than 10%, primarily in headquarter positions, in an effort to reduceoperating costs. As a result, the Company took a total restructuring charge of $9,950,000, primarily related to the Second San Jose Ground Lease option fee of$5,000,000 (see Note 11); the write-off of property and equipment, primarily leasehold improvements and some equipment, located in two unnecessary U.S.IBX expansion and headquarter office space operating leaseholds that the Company decided to exit and that do not currently provide any ongoing benefit; thewrite-off of two U.S. letters of credit related to one U.S. operating leasehold from which the Company has committed to exit; an accrual for the remainingestimated European exit costs and additional U.S. leasehold exit costs and the severance accrual related to the reduction in workforce. The Company continuesto work on an exit plan for the excess U.S. operating lease and expects to complete the exit of this U.S. operating lease during 2004. Should it take longer tonegotiate the exit of the remaining U.S. lease or the lease settlement amounts exceed the amounts estimated by management, the actual U.S. lease exit cost couldexceed the amount estimated and additional restructuring charges may be required. The reduction in workforce was substantially completed during the secondquarter of 2002. During the quarter ended September 30, 2002, the Company recorded an additional restructuring charge as a result of the Third San Jose Ground LeaseAmendment (see Note 11). As a result, the Company released its letters of credit relating to the San Jose Ground Lease and recorded a restructuring charge of$19,010,000. During the fourth quarter ended December 31, 2002, the Company recorded an additional restructuring charge as a result of a small reduction inworkforce in headquarter positions offset by the reversal of the previous write-down of one of the letters of credit recorded in conjunction with the secondquarter 2002 restructuring charge noted above. Based on further negotiation with the landlord, both parties agreed that the letter of credit will be left intact. Thereduction in workforce was substantially completed in January 2003. The reductions in workforce undertaken in the second and fourth quarters of 2002, which represented a less than 10% reduction in workforce primarilyin the Company’s headquarter functions, resulted in approximately $2.8 million of annual savings. A summary of the movement in the 2002 restructuring charges accrual from December 31, 2002 to December 31, 2003 is outlined as follows (inthousands): Accruedrestructuringcharge as ofDecember 31,2002 Non-cashcharges Cashpayments Accruedrestructuringcharge as ofDecember 31,2003Additional lease exit costs $392 $— $(214) $178Workforce reductions 456 — (456) — $848 $— $(640) $178 The remaining activities will be paid during 2004. F-55Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) A summary of the 2002 restructuring charges through December 31, 2002 is outlined as follows (in thousands): Total 2002restructuringcharges Non-cashcharges Cashpayments Accruedrestructuringcharge as ofDecember 31,2002San Jose ground lease option fee $5,000 $— $(5,000) $—Write-off of U.S. property and equipment 2,585 (2,585) — —Additional lease exit costs 1,115 — (723) 392Write-off of two U.S. letters of credit 750 (750) — —Workforce reduction 500 — (469) 31 Second quarter subtotal 9,950 (3,335) (6,192) 423 Write-off of San Jose ground lease letters of credit 19,010 (19,010) — — Third quarter subtotal 19,010 (19,010) — — Workforce reduction 425 — — 425Write-up of one U.S. letter of credit (500) 500 — — Fourth quarter subtotal (75) 500 — 425 $28,885 $(21,845) $(6,192) $848 Acquired Restructuring Charges As a result of the Combination, the Company acquired several accruals related to restructuring activities from both i-STT and Pihana, which werecommenced in 2002. As of December 31, 2003, a total of $608,000 remains accrued for these restructuring activities, which will be paid in 2004 (see Note 2). 15. Subsequent Events On January 1, 2004, pursuant to the provisions of the Company’s stock plans (see Note 9), the number of common shares in reserve automaticallyincreased 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 2000Director Stock Option Plan. On February 11, 2004, the Company sold $75,000,000 in aggregate principal of 2.5% convertible subordinated debentures due 2024 to qualifiedinstitutional buyers. Subsequently, on February 18, 2004, the Company sold an additional $11,250,000 of these debentures to the initial purchasers of thedebentures, which brought total gross proceeds from this offering to $86,250,000. The Company used or intends to use the net proceeds from this offering torepay all amounts outstanding under the Credit Facility (see Note 6), the VLL Loan Amendment and the Heller Loan Amendment (see Note 5). In addition, theCompany intends to use additional proceeds received to redeem all remaining Senior Notes (see Note 7). The Company has exercised its right to redeem all ofthe Senior Notes, which have a total of $30.5 million of principal outstanding as of December 31, 2003, and has sent a notice of redemption to the trustee. Theeffective date of the redemption is expected to be March 12, 2004. The redemption price for the Senior Notes will be equal to 106.5% of their principal amountplus accrued and unpaid interest to the redemption date. All remaining proceeds will be used for general corporate purposes. The Company expects to record asignificant loss on debt extinguishment during the quarter ended March 31, 2004, primarily related to the non-cash write-off of debt issuance costs anddiscounts in connection with these various debt repayments and redemptions, as well as the cash premium we F-56Table of ContentsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) will pay on our Senior Notes. The Company refers to this transaction as the convertible debenture offering (the “Convertible Debenture Offering”). In February 2004, the Compensation Committee of the Board of Directors granted options to certain employees, including all officers of the Company, topurchase 995,000 shares of common stock at a weighted average exercise price of $28.56 per share under the Plans (see Note 9). F-57Table of ContentsEQUINIX, INC. CONSOLIDATED STATEMENTS OF OPERATIONSQUARTERLY FINANCIAL INFORMATION (Unaudited) The Company believes that period-to-period comparisons of its financial results should not be relied upon as an indication of future performance. TheCompany’s revenues and results of operations have been subject to significant fluctuations, particularly on a quarterly basis, and the Company’s revenuesand results of operations could fluctuate significantly quarter-to-quarter and year-to-year. Significant quarterly fluctuations in revenues will cause significantfluctuations in our cash flows and the cash and cash equivalents and accounts receivable accounts on the Company’s balance sheet. Causes of suchfluctuations may include the volume and timing of new orders and renewals, the sales cycle for our services, the introduction of new services, changes inservice prices and pricing models, trends in the Internet infrastructure industry, general economic conditions, extraordinary events such as acquisitions orlitigation and the occurrence of unexpected events. The unaudited quarterly financial information presented below has been prepared by the Company and reflects all adjustments, consisting only ofnormal recurring adjustments, which in the opinion of management are necessary to present fairly the financial position and results of operations for theinterim periods presented. The following table presents selected quarterly information for fiscal 2003, 2002 and 2001: Firstquarter Secondquarter Thirdquarter Fourthquarter (in thousands, except per share data) 2003: Revenues $25,435 $28,434 $30,919 $33,154 Net loss (25,553) (21,203) (19,718) (17,697)Basic and diluted net loss per share (3.00) (2.44) (2.12) (1.49)2002: Revenues $20,158 $18,040 $20,187 $18,803 Net income (loss) (13,694) (24,557) (44,088) 60,721 Basic net income (loss) per share (5.16) (7.94) (14.04) 19.14 Diluted net income (loss) per share (5.16) (7.94) (14.04) 18.12 2001: Revenues $12,613 $16,157 $17,178 $17,466 Net loss (41,537) (37,857) (81,574) (27,447)Basic and diluted net loss per share (17.40) (15.52) (33.01) (10.90) F-58Table of ContentsINDEX TO EXHIBITS ExhibitNumber Description of Document2.1(8) Combination Agreement, dated as of October 2, 2002, by and among Equinix, Inc., Eagle Panther Acquisition Corp., Eagle JaguarAcquisition Corp., i-STT Pte Ltd, STT Communications Ltd., Pihana Pacific, Inc. and Jane Dietze, as representative of thestockholders 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.4.6(1) Common Stock Registration Rights Agreement (See Exhibit 10.3).4.9(1) Amended and Restated Investors’ Rights Agreement (See Exhibit 10.6).4.10(9) Registration Rights Agreement (See Exhibit 10.75).10.1(1) Indenture, dated as of December 1, 1999, by and among the Registrant and State Street Bank and Trust Company of California, N.A. (as trustee).10.2(1) Warrant Agreement, dated as of December 1, 1999, by and among the Registrant and State Street Bank and Trust Company ofCalifornia, N.A. (as warrant agent).10.3(1) Common Stock Registration Rights Agreement, dated as of December 1, 1999, by and among the Registrant, Benchmark Capital Partners II, L.P.,Cisco Systems, Inc., Microsoft Corporation, ePartners, Albert M. Avery, IV and Jay S. Adelson (as investors), and the Initial Purchasers.10.5(1) Form of Indemnification Agreement between the Registrant and each of its officers and directors.10.6(1) Amended and Restated Investors’ Rights Agreement, dated as of May 8, 2000, by and between the Registrant, the Series A Purchasers,the Series B Purchasers, the Series C Purchasers and members of the Registrant’s management.10.8(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 ofOctober 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, 1999.10.20(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.Table of ContentsExhibitNumber Description of Document10.25(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 August24, 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 ofMay 1, 2002.10.56(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.10.59(9) Second Amended and Restated Credit and Guaranty Agreement, dated as of December 31, 2002.10.60(9) Governance Agreement by and among Equinix, Inc., STT Communications Ltd., i-STT Communications Ltd., STTInvestments 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, Singapore139964.10.62(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.Table of ContentsExhibitNumber Description of Document10.72(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, 2002.10.80(13) Series A Cash Trigger Warrant issued to i-STT Investments Pte Ltd on June 5, 2003.10.81(13) Series B Cash Trigger Warrant issued to i-STT Investments Pte Ltd on June 5, 2003.10.82(9) First Supplemental Indenture between Equinix and State Street Bank and Trust Company of California, N.A., as Trustee, dated as of December28, 2002.10.83(11) Securities Purchase and Admission Agreement, dated April 29, 2003, among Equinix, certain of Equinix’s subsidiaries, i-STTInvestments 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, 2003.10.85(13) Form of Series A-2 Convertible Secured Note Due 2007 issued to entities affiliated with Crosslink Ventures on June 5, 2003.10.87(13) Form of Series A-2 Change in Control Warrant issued to entities affiliated with Crosslink Ventures on June 5, 200310.88(13) Form of Series A Cash Trigger Warrant issued to entities affiliated with Crosslink Ventures on June 5, 2003.10.89(13) Form of Series B Cash Trigger Warrant issued to entities affiliated with Crosslink Ventures on June 5, 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 RajahCrescent, Singapore 139964.10.93 Amendment to Second Amended and Restated Credit and Guaranty Agreement, dated as of November 18, 2003.10.94 Fourth Modification to Ground Lease by and between iStar San Jose, LLC and Equinix, Inc., dated as of November 21, 2003.10.95+ Sublease Agreement between Sprint Communications Company, L.P. and Equinix Operating Co., Inc. dated October 24, 2003.10.96 Tenancy Agreement over units #03-01, #03-02, #03-03, #03-04 of Block 20 Ayer Rajah Crescent, Singapore 139964.10.97 Lease Agreement with JMA Robinson Redevelopment, LLC, as successor in interest to Carrier Central L.A., Inc., dated as ofNovember 30, 2003.16.1(1) Letter regarding change in certifying accountant.Table of ContentsExhibitNumber Description of Document21.1(9) Subsidiaries of Equinix.23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.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).(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 September30, 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 September30, 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 September30, 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 September30, 2003.+ Confidential treatment has been requested for certain portions which are omitted in the copy of the exhibit electronically filed with the Securities andExchange Commission. The omitted information has been filed separately with the Securities and Exchange Commission pursuant to Equinix’sapplication for confidential treatment.Exhibit 10.93 EQUINIX OPERATING CO., INC.EQUINIX, INC. SECOND AMENDMENT TO SECOND AMENDEDAND RESTATED CREDIT AND GUARANTY AGREEMENT This SECOND AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AND GUARANTY AGREEMENT (this “SecondAmendment”) is dated as of November 18, 2003 and entered into by and among EQUINIX OPERATING CO., INC., a Delaware corporation, as theBorrower (“OpCo”), EQUINIX, INC., a Delaware corporation, as a Guarantor (“the Company”), and CERTAIN SUBSIDIARIES OF THECOMPANY, as Guarantors, the Lenders party hereto from time to time, SALOMON SMITH BARNEY INC. (“SSB”), as Lead Arranger (in suchcapacity, the “Lead Arranger”), and Book Runner (in such capacity, the “Book Runner”), CITICORP USA, INC. (“Citicorp”), as AdministrativeAgent (together with its permitted successors and assigns in such capacity, “Administrative Agent”) and as Collateral Agent (as successor to CIT LendingServices Corporation and together with its permitted successors and assigns in such capacity, “Collateral Agent”), and is made with reference to that certainSecond Amended and Restated Credit and Guaranty Agreement dated as of December 31, 2002 by and among OpCo, the Company, Guarantors, the Lenders,SSB and Citicorp (as amended through the date hereof, the “Credit Agreement”). Capitalized terms used herein without definition shall have the samemeanings herein as set forth in the Credit Agreement. RECITALS WHEREAS, the Company proposes consummating a secondary public offering (the “Secondary Offering”) the proceeds of which shall be used (i) toprepay the Loans in an amount equal to the greater of $25,000,000 or 50% of the gross proceeds of the Secondary Offering; and (ii) to the extent of any excess,for other general corporate purposes of the Company and its Subsidiaries, including, without limitation, capital expenditures; WHEREAS, in connection with the Secondary Offering, the Company and OpCo desire that the Lenders amend certain of the terms and provisions ofthe Credit Agreement as set forth below; and WHEREAS, subject to certain conditions, the Lenders are willing to agree to make certain amendments to the Credit Agreement. NOW, THEREFORE, in consideration of the promises and the agreements, provisions and covenants herein contained, the parties hereto agree asfollows:Section 1. AMENDMENTS TO CREDIT AGREEMENT Subject to the terms and conditions set forth herein and in reliance on the representations and warranties of OpCo and the Company herein contained,the parties hereto agree as follows: (i) Section 1.1 of the Credit Agreement is hereby amended by amending the definitions of “Aggregate Excess Cash”, “Interest Period”, “MaturityDate” and “Restricted Junior Payment” in their entirety to read as follows: “Aggregate Excess Cash” means the aggregate consolidated amount of Cash and Cash Equivalents in excess of $25,000,000 as listed on theconsolidated balance sheet of the Company and its Subsidiaries as at the end of any Fiscal Quarter. “Interest Period” means, in connection with a Eurodollar Rate Loan, an interest period of one, two, three or six months, as selected by theBorrower in the applicable Conversion/Continuation Notice, (i) initially, commencing on the Conversion/Continuation Date thereof, as the case may be;and (ii) thereafter, commencing on the day on which the immediately preceding Interest Period expires; provided, (a) if an Interest Period would otherwiseexpire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day unless no further Business Day occursin such month, in which case such Interest Period shall expire on the immediately preceding Business Day; (b) any Interest Period that begins on the lastBusiness Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such InterestPeriod) shall, subject to clause (c), of this definition, end on the last Business Day of a calendar month; and (c) no Interest Period with respect to anyportion of any Term Loans shall extend beyond the Maturity Date. “Maturity Date” means the earlier of (i) December 31, 2006, (ii) the date the Obligations are paid in full pursuant to any prepayment made inaccordance with Sections 2.11, 2.12 or 2.13, and (iii) the date on which the Loans shall become due and payable, whether by acceleration or otherwise. “Restricted Junior Payment” means (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of stock ofthe Company or OpCo now or hereafter outstanding, except a dividend payable solely in shares of that class of stock to the holders of that class; (ii) anyredemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of stockof the Company now or hereafter outstanding except to the extent payable in exchange for shares of Capital Stock of the Company, (iii) any paymentmade to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock of the Company orOpCo now or hereafter 2outstanding except to the extent paid with shares of Capital Stock of the Company or OpCo or warrants, options or other rights to acquire any suchshares, (iv) any payment or prepayment of principal of, premium, if any, or interest on, or redemption, purchase, retirement, defeasance (including in-substance or legal defeasance), sinking fund or similar payment with respect to, the Convertible Notes, (v) any payment or prepayment of principal of,premium, if any, or interest on, or redemption, purchase, retirement, defeasance (including in-substance or legal defeasance), sinking fund or similarpayment with respect to, the Senior Notes, and any Permitted Equipment Financing; provided that Restricted Junior Payments shall not include (w) theissuance of the Warrants on the Second Amendment Effective Date, or the exercise of Warrants from and after the Second Amendment Effective Date inaccordance with the terms and conditions thereof, (x) the conversion of the Convertible Notes for Qualifying Equity of the Company, or the conversionof any such Qualifying Equity, made after the Second Amendment Effective Date in accordance with the terms and conditions of the Convertible NoteDocuments, (y) the acquisition by STT of common stock and series A preferred equity of the Company pursuant to STT’s exercise of the STTAdditional Equity Option and (z) the retirement of Senior Notes pursuant to an exchange of Senior Notes for Qualifying Equity of the Company whichdoes not involve or require any cash payment or pledge of any assets of the Company or its Subsidiaries (other than the payment of reasonable fees andexpenses to professionals for services rendered in connection therewith). (ii) Section 1.1 of the Credit Agreement is hereby further amended by deleting the definition of “Deferral Amount” in its entirety. 3(iii) Section 2.10 of the Credit Agreement is hereby amended by deleting such section in its entirety and replacing it with the following: “Scheduled Term Loan Installments. The principal amounts of the Term Loans shall be repaid in the aggregate amounts set forth below(each, a “Term Loan Installment”) on the corresponding date set forth below (each, a “Term Loan Installment Date”): Term LoanInstallment Dates Term LoanInstallmentsDecember 1, 2003 $990,437.50March 31, 2004 $2,500,000.00June 30, 2004 $3,500,000.00September 30, 2004 $2,500,000.00December 31, 2004 $3,500,000.00March 31, 2005 $2,500,000.00June 30, 2005 $3,500,000.00September 30, 2005 $2,500,000.00December 31, 2005 $3,500,000.00March 31, 2006 $4,632,171.88June 30, 2006 $5,632,171.88September 30, 2006 $4,632,171.88December 31, 2006 $5,632,171.88 Notwithstanding the foregoing, (i) such Term Loan Installments shall be reduced in connection with any voluntary or mandatory prepayments of theLoans, in accordance with Sections 2.11, 2.12 and 2.13, as applicable; and (ii) the Loans, together with all other amounts owed hereunder with respectthereto, shall, in any event, be paid in full no later than the Maturity Date.” (iv) Section 2.12 of the Credit Agreement is hereby amended by deleting Section 2.12(c) in its entirety and replacing it with the following: “(c) Aggregate Excess Cash. In the event that there shall be Aggregate Excess Cash for any Fiscal Quarter, commencing with the Fiscal Quarterending March 31, 2005, the Borrower shall, no later than forty-five (45) days after the end of such Fiscal Quarter, prepay the Loans as set forth inSection 2.13 in an aggregate amount equal to 50% of such Aggregate Excess Cash.” (v) Section 2.12 of the Credit Agreement is hereby further amended by deleting Section 2.12(d) in its entirety and replacing it with the following: “(d) Issuance of Equity Securities. If Company or any of its Subsidiaries shall receive any Cash proceeds from the issuance of any Capital Stockof, Company or any of its Subsidiaries in connection with the registration statement filed by the Company with the Securities and ExchangeCommission on October 15, 2003, then Borrower shall prepay the Loans as set forth in Section 2.13 in an aggregate amount equal to fifty percent (50%)of the gross proceeds of such issuance of Capital Stock.” (vi) Section 2.12 of the Credit Agreement is hereby further amended by deleting Sections 2.12(e), 2.12(f) and 2.12(g) in their entirety andreplacing them with the following: “(e) [Reserved]. 4(f) [Reserved]. (g) [Reserved].” (vii) Section 2.13 of the Credit Agreement is hereby amended by deleting Section 2.13(b) in its entirety and replacing it with the following: “(b) Application of Mandatory Prepayments by Type of Loans. (i) Any amount required to be prepaid pursuant to Section 2.12(a) through 2.12(c)shall be applied to prepay outstanding Loans on a pro rata basis (in accordance with the respective outstanding principal amounts thereof), (ii) anyamount required to be prepaid pursuant to Section 2.12(h) and Section 2.12(i) shall be applied to prepay outstanding Loans in inverse order of maturity,commencing with the payment due on December 31, 2006, and (iii) any amount required to be prepaid pursuant to Section 2.12(d) shall be applied toprepay Term Loan Installments as follows: first, to prepay Term Loan Installments due in 2006 on a pro rata basis, second, to the extent of any excess,to prepay Term Loan Installments due in 2005 on a pro rata basis, and third, to the extent of any excess to prepay Term Loan Installments due in 2004,on a pro rata basis.” (viii) Section 6.6 of the Credit Agreement is hereby amended by (i) deleting Schedule 6.6 in its entirety; and (ii) deleting Section 6.6 in its entiretyand replacing it with the following: “6.6 Stage 1 Financial Covenants. Minimum Cash and Cash Equivalents. During Stage 1, Company shall not permit aggregate Cash andCash Equivalents of Company and its Subsidiaries as of the last day of each calendar month to be less than $15,000,000; provided, that for purposes ofcalculating the covenant set forth in this Section 6.6, all amounts of Cash and Cash Equivalents held by the Singapore Subsidiaries shall be deducted fromsuch calculation.” (ix) Section 6.7 of the Credit Agreement is hereby amended by deleting Schedules 6.7(a), 6.7(b), 6.7(c) and 6.7(d) in their entirety and replacingthem with the corresponding schedules attached as Annex A to the Second Amendment. (x) Section 6.7 of the Credit Agreement is hereby further amended by (i) deleting Schedule 6.7(e) in its entirety; and (ii) deleting Section 6.7(e) inits entirety and replacing it with the following: “(e) Minimum Cash and Cash Equivalents. During Stage 2, Company shall not permit aggregate Cash and Cash Equivalents of Company andits Subsidiaries as of the last day of each calendar month to be less than $15,000,000; provided, that for purposes of calculating the covenant set forth in thisSection 6.7(e), all amounts of Cash and Cash Equivalents held by the Singapore Subsidiaries shall be deducted from such calculation.” 5(xi) Section 6.8 of the Credit Agreement is hereby amended by deleting Schedules 6.8(a) and 6.8(b) in their entirety and replacing them with thecorresponding schedule attached as Annex A to the Second Amendment. (xii) Section 6.8(b) of the Credit Agreement is hereby further amended by adding the following paragraph at the conclusion thereof as follows: “Notwithstanding any of the foregoing to the contrary, with respect to the fourth Fiscal Quarter of 2003, the Singapore Subsidiaries may make or incuradditional capital expenditures in excess of the amount allocated for such Fiscal Quarter in Schedule 6.8(b) provided, that (i) any additional capitalexpenditures in excess of the amount allocated for the fourth Fiscal Quarter of 2003 shall be deducted from the amount of capital expenditures allocated tothe Singapore Subsidiaries for the first Fiscal Quarter of 2004, as set forth on Schedule 6.8(b); and (ii) the aggregate amount of all such additionalcapital expenditures in excess of the amount allocated for the fourth Fiscal Quarter of 2003 shall, in any event, not exceed $500,000.” Section 2. REPRESENTATIONS AND WARRANTIES In order to induce Lenders to enter into this Second Amendment, OpCo and the Company hereby represent and warrant that, after giving effect to thisSecond Amendment: (a) as of the date hereof, there exists no Event of Default or Default under the Credit Agreement; (b) all representations and warranties contained in the Credit Agreement and the other Credit Documents are true and correct in all material respectson and as of the date hereof except to the extent such representations and warranties specifically relate to an earlier date, in which case they weretrue and correct in all material respects on and as of such earlier date; and (c) as of the date hereof, OpCo and the Company have performed all agreements to be performed on their part as set forth in the Credit Agreement. Section 3. CONDITIONS TO EFFECTIVENESS This Second Amendment shall become effective only upon the satisfaction of all of the following conditions precedent (the date of satisfaction of suchconditions being referred to herein as the “Second Amendment Effective Date”): (i) Execution. OpCo, the Company, the Credit Support Parties (as defined below), the Lenders and Agents shall have executed this Second Amendment. 6(ii) Secondary Offering and Prepayment. The Company shall have received the gross proceeds of the Secondary Offering and the AdministrativeAgent shall have received for distribution to all of the Lenders (in accordance with each Lender’s Pro Rata Share) a voluntary prepayment of the Loans in anamount equal to the greater of $25,000,000 or 50% of the gross proceeds of the Secondary Offering. Such voluntary prepayment shall be applied by theAdministrative Agent in the manner necessary to achieve the amortization table in Section 2.10, as amended hereby. (iii) Representations and Warranties. The representations and warranties contained in Section 2 of this Second Amendment shall be true and correctin all material respects on and as of the Second Amendment Effective Date to the same extent as though made on and as of that date, except to the extent suchrepresentations and warranties specifically relate to an earlier date, in which case they were true and correct in all material respects on and as of such earlierdate. (iv) No Event of Default. As of the Second Amendment Effective Date, no event shall have occurred and be continuing that would constitute an Eventof Default or a Default. (v) Fees. The Administrative Agent and Lenders shall have received all fees and other amounts due and payable pursuant to any Credit Document on orprior to the Second Amendment Effective Date, including, (i) the reasonable fees and expenses of Skadden, Arps, Slate, Meagher & Flom LLP, (ii) thereasonable fees and expenses of Ernst & Young Corporate Finance LLC, (iii) the reasonable fees and expenses of each of the following foreign law firms: (A)Freehills, (B) Simmons & Simmons and (C) Stamford Law Corporation, and (iv) to the extent invoiced, reimbursement or other payment of all reasonableout-of-pocket expenses required to be reimbursed or paid by the Company hereunder or under any other Credit Document. Section 4. COUNTERPARTS This Second Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of whichwhen so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signaturepages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the samedocument. Section 5. ACKNOWLEDGMENT AND CONSENT Each of the Company and the Guarantors have (i) guaranteed the Obligations and (ii) created Liens in favor of Lenders on certain Collateral to securetheir obligations 7under the Credit Agreement and the Collateral Documents. Each of the Company and the Guarantors are collectively referred to herein as the “Credit SupportParties”, and the Credit Agreement and the Collateral Documents are collectively referred to herein as the “Credit Support Documents”. Each Credit Support Party hereby acknowledges that it has reviewed the terms and provisions of the Credit Agreement and this Second Amendment andconsents to the amendment of the Credit Agreement effected pursuant to this Second Amendment. Each Credit Support Party hereby confirms that each CreditSupport Document to which it is a party or otherwise bound and all Collateral encumbered thereby will continue to guarantee or secure, as the case may be, tothe fullest extent possible in accordance with the Credit Support Documents the payment and performance of all “Obligations” under each of the CreditSupport Documents, as the case may be (in each case as such terms are defined in the applicable Credit Support Document), including without limitation thepayment and performance of all such “Obligations” under each of the Credit Support Documents, as the case may be, in respect of the Obligations of theCompany now or hereafter existing under or in respect of the Credit Agreement, as amended hereby and hereby pledges and assigns to the Collateral Agent, andgrants to the Collateral Agent a continuing lien on and security interest in and to all Collateral as collateral security for the prompt payment and performance infull when due of the “Obligations” under each of the Credit Support Documents to which it is a party (whether at stated maturity, by acceleration or otherwise). Each Credit Support Party acknowledges and agrees that any of the Credit Support Documents to which it is a party or otherwise bound shall continuein full force and effect and that all of its obligations thereunder shall be valid and enforceable and shall not be impaired or limited by the execution oreffectiveness of this Second Amendment. Each Credit Support Party represents and warrants that all representations and warranties contained in the CreditAgreement, this Second Amendment and the Credit Support Documents to which it is a party or otherwise bound are true and correct in all material respectson and as of the Second Amendment Effective Date to the same extent as though made on and as of that date, except to the extent such representations andwarranties specifically relate to an earlier date, in which case they were true and correct in all material respects on and as of such earlier date. Each Credit Support Party acknowledges and agrees that (i) notwithstanding the conditions to effectiveness set forth in this Second Amendment, suchCredit Support Party is not required by the terms of the Credit Agreement or any other Credit Document to consent to the amendments to the Credit Agreementeffected pursuant to this Second Amendment and (ii) nothing in the Credit Agreement, this Second Amendment or any other Credit Document shall be deemedto require the consent of such Credit Support Party to any future amendments to the Credit Agreement. 8Section 6. MISCELLANEOUS (i) Reference to and Effect on the Credit Agreement and the other Credit Documents. (a) On and after the Second Amendment Effective Date, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof”,“herein” or words of like import referring to the Credit Agreement, and each reference in the other Credit Documents to the “Credit Agreement”, “thereunder”,“thereof” or words of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended by this SecondAmendment. (b) Except as specifically amended by this Second Amendment, the Credit Agreement and the other Credit Documents shall remain in full forceand effect and are hereby ratified and confirmed. (c) The execution, delivery and performance of this Second Amendment shall not, except as expressly provided herein, constitute a waiver of anyprovision of, or operate as a waiver of any right, power or remedy of any Agent or Lender under, the Credit Agreement or any of the other Credit Documents. (ii) Headings. Section and Subsection headings in this Second Amendment are included herein for convenience of reference only and shall not constitutea part of this Second Amendment for any other purpose or be given any substantive effect. (iii) Limited Waiver. Subject to the terms and conditions set forth herein and in reliance on the representations and warranties of OpCo and the Companyherein contained, each of the Lenders party hereto waives, to the extent necessary, the terms and provisions of Section 3.1(b) of the Pledge & SecurityAgreement with respect to the Company’s failure to notify the Collateral Agent of the name change for the following Subsidiaries: (i) Equinix Asia HQ Pte Ltd(now Equinix Asia Pacific Pte Ltd); (ii) Pihana Pacific, Inc. (now Equinix Pacific, Inc.); (iii) Pihana Pacific Business Recovery, Inc. (now Equinix PacificBusiness Recovery, Inc.); (iv) Pihana Pacific Australia Pty Limited (now Equinix Australia Pty Limited); (v) Pihana Pacific Japan KK (now Equinix JapanKK); and (vi) Pihana Pacific Hong Kong Limited (now Equinix Hong Kong Limited). The waiver set forth above shall be limited precisely as written andrelate solely to the waiver of the provisions of the Pledge & Security Agreement in the manner and to the extent described above, and nothing in this SecondAmendment shall be deemed to (a) constitute a waiver of compliance by OpCo or Company with respect to any other term, provision or condition of the CreditAgreement, the Pledge & Security Agreement or any other instrument or agreement referred to therein; or (b) prejudice any right or remedy that any Agent orany Lender may now have (except to the extent such right or remedy was based upon existing defaults that will not exist after giving effect to this SecondAmendment) or may have in the future under or in connection with the Credit Agreement, the Pledge & Security Agreement or any other instrument oragreement referred to therein. Except as expressly set forth herein, the terms, provisions and 9conditions of the Credit Agreement, the Pledge & Security Agreement and the other Credit Documents shall remain in full force and effect and in all otherrespects are hereby ratified and confirmed. Section 7. GOVERNING LAW THIS SECOND AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNEDBY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK(INCLUDING SECTION 5-1401 AND SECTION 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK)WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF. Section 8. GENERAL RELEASE In consideration of the Agent’s and Lenders’ execution of this Second Amendment, each Credit Party unconditionally and irrevocably acquits and fullyand forever releases and discharges each Lender, and Agent and all their respective affiliates, partners, subsidiaries, officers, employees, agents, attorneys,principals, directors and shareholders of such Persons, and their respective heirs, legal representatives, successors and assigns (collectively, the “Releasees”)from any and all claims, demands, causes of action, obligations, remedies, suits, damages and liabilities of any nature whatsoever, whether now known,suspected or claimed, whether arising under common law, in equity or under statute, which such Credit Party ever had or now has against any of theReleasees and which may have arisen at any time prior to the date hereof and which were in any manner related to the Credit Agreement, this SecondAmendment, any other Credit Document now or hereafter in existence or related documents, instruments or agreements or the enforcement or attempted orthreatened enforcement by any of the Releasees of any of their respective rights, remedies or recourse related thereto (collectively, the “Released Claims”).Each Credit Party covenants and agrees never to commence, voluntarily aid in any way, prosecute or cause to be commenced or prosecuted against any of theReleasees any action or other proceeding based upon any of the Released Claims. Notwithstanding the foregoing, in no event shall the foregoing be interpreted,construed or otherwise deemed as an admission or suggestion by the Agents and Lenders of any wrong doing or liability owed to the Company, any CreditParty or any other Person. For the avoidance of doubt, this Section 8 shall extend and apply to any Agent under the Credit Agreement with respect to any timeperiod prior to their resignation. [Remainder of page intentionally left blank] 10IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto dulyauthorized as of the date written above. EQUINIX, INC.By: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial OfficerEQUINIX OPERATING CO., INC.By: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial OfficerEQUINIX EUROPE, INC.By: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial OfficerEQUINIX – DC, INC.By: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial OfficerEQUINIX CAYMAN ISLANDSHOLDINGSBy: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial Officer S-1EQUINIX DUTCH HOLDINGS N.V.By: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial OfficerEQUINIX NETHERLANDS B.V.By: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial OfficerEQUINIX FRANCE SARLBy: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial OfficerEQUINIX GERMANY GMBHBy: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial OfficerEQUINIX UK LIMITEDBy: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial OfficerEQUINIX ASIA PACIFIC PTE LTDBy: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial Officer S-2EQUINIX PACIFIC, INC.By: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial OfficerEQUINIX BUSINESS RECOVERY,INC.By: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial OfficerPIHANA PACIFIC BUSINESSRECOVERY HONG KONG LIMITEDBy: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial OfficerEQUINIX AUSTRALIA PTY LIMITEDBy: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial OfficerEQUINIX JAPAN KKBy: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial OfficerEQUINIX HONG KONG LIMITEDBy: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial Officer S-3EAGLE ACQUISITION CORP 2ABy: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial OfficerEAGLE ACQUISITION CORP 1ABy: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial OfficerEAGLE ACQUISITION CORP 1BBy: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial Officer S-4AGENT: SALOMON SMITH BARNEY INC.Lead Arranger and Book Runner By: /s/ Randolph I. Thornton Name: Randolph I. Thornton Title: Managing Director S-5CITICORP USA, INC.as Administrative Agent, Collateral Agentand a LenderBy: /s/ Michael C. Becker Name: Michael C. Becker Title: Director S-6CIT LENDING SERVICES CORPORATIONas a LenderBy: /s/ Steven K. Reedy Name: Steven K. Reedy Title: Vice President S-7LENDERS: GENERAL ELECTRIC CAPITALCORPORATIONas a LenderBy: /s/ Bhupesh Gupta Name: Bhupesh Gupta Title: Manager, Operations S-8BANK OF TOKYO-MITSUBISHI TRUST THECOMPANY,as a LenderBy: /s/ Tod Angus Name: Tod Angus Title: Authorized Signatory S-9THE BANK OF NOVA SCOTIA,as a LenderBy: /s/ Stephen C. Levi Name: Stephen C. Levi Title: Director S-10JPMORGAN CHASE BANK, (formerly knownas THE CHASE MANHATTAN BANK),as a LenderBy: /s/ John P. McDonagh Name: John P. McDonagh Title: Managing Director S-11COMERICA BANK, successor by merger toComerica Bank-Californiaas a LenderBy: /s/ Kenneth W. LeDeit Name: Kenneth W. LeDeit Title: FVP – Western Division S-12ISTAR FINANCIAL INC.as a LenderBy: /s/ Jay S. Sugarman Name: Jay S. Sugarman Title: Chairman & CEO S-13Exhibit 10.94 FOURTH MODIFICATION TO GROUND LEASE THIS FOURTH MODIFICATION TO GROUND LEASE (this “Modification”) is made as of November 21, 2003 by and between iSTAR SAN JOSE, LLC, aDelaware limited liability company (“Lessor”), and EQUINIX, INC., a Delaware corporation (“Lessee”). R E C I T A L S A. Lessor and Lessee entered into that certain Ground Lease dated as of June 21, 2000 (the “Original Lease”), as amended by that certain FirstModification to Ground Lease dated as of September 26, 2001, that certain Second Modification to Ground Lease dated as of March 20, 2002 (the “SecondAmendment”), that certain letter agreement dated September 24, 2002 (the “Letter Agreement”), and that certain Third Modification to Ground Lease datedas of September 30, 2002 (the “Third Amendment”) (collectively, the “Lease”), which Lease covers approximately 39.223 acres of unimproved real property,located in the City of San Jose, County of Santa Clara, State of California, as more particularly described in the Lease. Capitalized terms used but not definedherein shall have the meanings set forth in the Lease. B. Concurrently with the execution of the Original Lease, Lessor and Lessee executed a Memorandum of Lease and Purchase Option, dated as ofJune 21, 2000 (the “Original Memorandum”), which Original Memorandum was recorded on June 21, 2000, as Document No. 15286834 in the OfficialRecords of Santa Clara County, California (the “Official Records”). The Original Memorandum was amended and restated by that certain Amended andRestated Memorandum of Lease and Purchase Option dated as of October 1, 2001 and recorded on , 2001 as Document No. in theOfficial Records. C. Lessee has requested that Lessor modify Section 4.1(b) of the Lease, and to make such other modifications to the Lease as are set forth herein. D. Lessor is willing to agree to such changes to the Lease on the terms and conditions set forth herein. A G R E E M E N T NOW THEREFORE, in consideration of the agreements of Lessor and Lessee herein contained and other valuable consideration, the receipt and adequacyof which are hereby acknowledged, Lessor and Lessee hereby agree to modify the Lease as follows: 1. RENT MODIFICATION Notwithstanding anything to the Contrary in the Lease, Section 4.1(b) of the Lease shall be deleted in its entirety and replaced with the following: “(b) Notwithstanding anything to the contrary set forth herein: (1) Lessor acknowledges that Lessee has prepaid all Annual Base Rent owing for the period from October 1, 2002 through December 31, 2003 andLessee shall have no further obligation for Annual Base Rent due hereunder for such period. 1(2) During the period from January 1, 2004 through June 30, 2004, Lessee shall only be obligated to pay on a current basis one-half of themonthly Annual Base Rent specified pursuant to Section 4.1(a) above (representing a monthly payment of $199,665.30), and during the period from July 1,2004 through December 31, 2004 Lessee shall only be obligated to pay on a current basis three-quarters of the monthly Annual Base Rent specified pursuant toSection 4.1(a) above (representing a monthly payment of $299,497.96). Any portion of the Annual Base Rent that is not paid on a current basis pursuant tothe provisions of this Section 2.(b)(2) shall be deferred, shall be referred to herein as “Deferred Annual Base Rent” and shall be paid as provided in Sections2.(b)(3) and (4) below. (3) For each quarter of 2005 (e.g. January-March (“Q1”), April-June (“Q2”), July-September (“Q3”) and October-December (“Q4”)), Lessee shallpay to Lessor within thirty (30) days after the end of such quarter an additional sum (the “Cash Flow Reimbursement”) equal to the lesser of (x) thecumulative accrued but unpaid amount of Deferred Annual Base Rent, and (y) an amount equal to 15% of Lessee’s Aggregate Excess Cash, as defined below,for the applicable quarter. The Cash Flow Reimbursement shall be considered part of the Annual Base Rent for the purposes of this Lease. Aggregate ExcessCash for each applicable quarter shall mean the aggregate amount of “Cash” and “Cash Equivalents” in excess of $20,000,000 as set forth in the certified,consolidated financial statements of Lessee and its “Restricted Subsidiaries,” as defined in the Credit Agreement described below, that Lessee is required toprovide under the Credit Agreement. “Credit Agreement” shall mean that certain Second Amendment to Second Amended and Restated Credit and GuarantyAgreement dated as of November 18, 2003, between Lessee, Equinix Operating Co., Inc., and the Senior Lenders parties thereto. (4) Notwithstanding anything to the contrary in this subparagraph (b), each monthly payment of the Annual Base Rent beginning with themonthly payment of Annual Base Rent due on October 21, 2005 through the monthly payment due on June 20, 2015 shall be increased by the quotientobtained by dividing the unpaid Deferred Annual Base Rent as of December 31, 2004 by one hundred and sixteen (116).” 2. REPRESENTATIONS, WARRANTIES AND COVENANTS Lessee hereby represents, warrants and covenants to Lessor as follows: (a) Lessee is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware, and is duly qualified totransact business in the State of California. 2(b) Lessee has taken all necessary action to authorize the execution, delivery and performance of this Modification. This Modification constitutesthe legal, valid and binding obligation of Lessee. (c) Lessee has the right, power, legal capacity and authority to enter into and perform its obligations under this Modification, and no approval orconsent of any Person is required in connection with Lessee’s execution and performance of this Modification that has not been obtained. The execution andperformance of this Modification will not result in or constitute any default or event that would be, or with notice or lapse of time or both would be, a default,breach or violation of the organizational instruments governing Lessee or any agreement or any deed restriction or order or decree of any court or othergovernmental authority to which Lessee is a party or to which it is subject. (d) Lessee is the sole owner and holder of the leasehold estate and leasehold interest created by the Lease, and Lessee has not made or agreed tomake any assignment, sublease, transfer, conveyance, encumbrance, or other disposition of the Lease, Lessee’s leasehold estate or any other right, title orinterest under or arising by virtue of the Lease, except for that letter of offer dated October 28, 2003 from Kristine Mostofizadeh to Adonna J. Amoroso and V.Susan Cox of the San Jose Police Department, a copy of which has been delivered to Lessor. (e) Lessee has not (i) made a general assignment for the benefit of creditors, (ii) filed any voluntary petition in bankruptcy or suffered the filing ofan involuntary petition by its creditors, (iii) suffered the appointment of a receiver to take possession of all or substantially all of its assets, (iv) suffered theattachment or other judicial seizure of all or substantially all of its assets, (v) admitted in writing its inability to pay its debts as they become due, or (vi) madean offer of settlement, extension or composition to its creditors generally (each, a “Bankruptcy Event”). (f) At the time of the execution of this Agreement, Lessee is generally paying its debts as they become due, and the aggregate value of Lessee’sassets at fair value exceeds the aggregate value of Lessee’s liabilities. Lessee shall take all actions necessary to ensure that each of the representations, warranties and covenants contained in this Paragraph 2 remain true andcorrect in all material respects at all times during the period between the date of this Modification and the expiration of the Term and any holdover period. 3. BROKERS Lessor and Lessee each represents and warrants to the other that neither it nor its officers or agents nor anyone acting on its behalf has dealt with any realestate broker in the negotiating or making of this Modification, and each party agrees to indemnify and hold harmless the other from any claim or claims, andcosts and expenses, including 3attorneys’ fees, incurred by the indemnified party in conjunction with any such claim or claims of any other broker or brokers to a commission in connectionwith this Modification as a result of the actions of the indemnifying party. 4. MISCELLANEOUS A. In the event of any inconsistencies between the terms of this Modification and the Lease, the terms of this Modification shall prevail. ThisModification shall bind and inure to the benefit of Lessor and Lessee and their respective legal representatives and successors and assigns. B. This Modification may be executed in counterparts each of which counterparts when taken together shall constitute one and the same agreement. C. Except as set forth in this Modification, all terms and conditions of the Lease shall remain in full force and effect. D. This Modification, with exhibits, is a fully-integrated agreement which, together with the Lease, contains all of the parties’ representations,warranties, agreements and understandings with respect to the subject matter hereof. 4IN WITNESS WHEREOF, Lessor and Lessee have executed this Modification as of the date first above written. LESSOR:iSTAR SAN JOSE, LLC,a Delaware limited liability companyBy: TriNet Corporate Realty Trust, Inc., a Maryland corporation, Its: Sole Member By: /s/ Jay Sugarman Name: Jay Sugarman Title: Chief Executive OfficerLESSEE:EQUINIX, INC.,a Delaware corporation By: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial OfficerExhibit 10.95 SUBLEASE AGREEMENT THIS SUBLEASE AGREEMENT (“Sublease”) is made and entered into as of the 24th day of October 2003, by and between SPRINTCOMMUNICATIONS COMPANY, L.P., a Delaware limited partnership (“Sublandlord”), and EQUINIX OPERATING CO., INC., a Delaware corporation(“Subtenant”). RECITALS A. Duane Raymond, LLC, a California limited liability company (“Master Landlord”), has leased to Sublandlord the space in and around the building(the “Building”) situated on the real property commonly known and numbered as 1350 Duane Avenue, Santa Clara, California, such space being moreparticularly described in Exhibit A attached hereto and incorporated herein by this reference (the “Premises”), pursuant to that certain Lease made and enteredinto as of November 30, 2000 by Master Landlord and Sublandlord as amended by First Amendment dated as of March 15, 2001 (collectively, the “MasterLease”). B. A true, correct and complete copy of the Master Lease is attached hereto as Exhibit B and incorporated herein by this reference. C. Subtenant desires to sublet from Sublandlord, and Sublandlord has agreed to sublet to Subtenant, all of the Premises consisting of 160,000 squarefeet of space (the “Subleased Premises”). D. All undefined, capitalized terms used in this Sublease have the meanings ascribed to such terms in the Master Lease. NOW THEREFORE, for valuable consideration and on the terms and conditions set forth herein, Sublandlord and Subtenant hereby agree as follows: 1. Subleased Premises. Sublandlord hereby leases to Subtenant, and Subtenant hereby leases from Sublandlord, the Subleased Premises, together withthe right to use the Common Area (including, but not limited to, Tenant’s Allocated Parking Stalls within the Project), the Parking Area and the Exterior Area)provided by Master Landlord to Sublandlord pursuant to the terms of the Master Lease. The Subleased Premises shall include all tenant improvements,alterations, conduits and equipment installed therein by Sublandlord. In addition, Sublandlord hereby assigns to Subtenant for the duration of the Term (ashereinafter defined) of this Sublease, all rights that Sublandlord has pursuant to the Master Lease in connection with the occupancy, use or enjoyment of theSubleased Premises and agrees that (subject to Sublandlord’s rights pursuant to the MSA and the Conduits Agreement (each term as defined below)) suchrights shall be exercisable exclusively by Subtenant while the Sublease is in effect. Such rights shall include, but not be limited to, the following: all rightsSublandlord has pursuant to Section 2.1 [Demise of Premises] of the Master Lease; all signage rights Sublandlord has pursuant to Section 4.3 [Signs] of theMaster Lease, all parking rights that Sublandlord has pursuant to Section 4.4 [Parking] of the Master Lease, all rights Sublandlord has pursuant to Section14.1(D) of the Master Lease (i.e., to permit Customers to enter upon and occupy the Premises for purposes of installing, repairing, replacing, operating andmaintaining their customerequipment); all rights Sublandlord has pursuant to the following provisions of the Lease Rider to the Master Lease: Paragraph 3 [Roof Rights]; Paragraph 4[Exterior Area]; Paragraph 5 [Fiber and Electrical Conduit Rights of Way]; Paragraph 6 [Emergency Generators and Fuel Storage Tanks]; Paragraph 7[HVAC]; Paragraph 8 [Life Safety Systems]; Paragraph 10 [Leasehold Mortgage]; Paragraph 11 [Telephone Service]; and Paragraph 17 [Sprinkler].Sublandlord warrants that (a) subject to obtaining the consent of Master Landlord as provided in Section 5, Sublandlord has the full power, authority andlegal right to sublease the Subleased Premises to Subtenant, (b) Subtenant will have the right quietly to enjoy the Subleased Premises subject to (i) the MasterLease, (ii) the terms of this Sublease, and (iii) any other interest to which the Master Lease is subject according to its terms, and (c) the Subleased Premiseswill be in the same condition on the Commencement Date (as defined herein) as on the date hereof, normal wear and tear excepted. 2. Accompanying Agreements. 2.1 Employee Covenants Agreement. Sublandlord and Subtenant are simultaneously entering into a certain Employee Covenants Agreement,which is incorporated herein by reference, pursuant to which the parties agree to take certain actions and provide certain information beginning on the datehereof with respect to employees of Sublandlord at the Internet Data Center at the Subleased Premises to facilitate Subtenant making offers of employment tosuch employees, to be effective as of December 1, 2003 (the “Closing Date”). 2.2 Master Service Agreement. The parties’ relationship with respect to Sublandlord’s point of presence into the Subleased Premises (the “Point ofPresence”) to provide IP transport shall be governed by that certain Master Service Agreement (“MSA”) dated October 26, 2001. 2.3 Conduits Agreement. Sublandlord and Subtenant are simultaneously entering into a certain Agreement to License Conduits (“ConduitsAgreement”). 3. Certain Actions with Respect to Customer Contracts; Transition Services. 3.1 Certain Actions with Respect to Customer Contracts. During the first two years of this Sublease, Sublandlord and Subtenant will cooperate inany mutually agreeable, reasonable and lawful arrangements and use commercially reasonable efforts to cause each customer (each, a “Customer”) ofSublandlord at the Subleased Premises having a contract (a “Customer Contracts”) with Sublandlord to procure Collocation Services (as defined below) at thePremises, to agree to terminate its Customer Contract with Sublandlord as of the Closing Date and enter into new agreements for Collocation Services withSubtenant, and in each case, following the execution of a new agreement, Sublandlord will retain the right to receive all IP transport revenue under theCustomer Contracts with Sublandlord in connection with the provision of Collocation Services by Subtenant to the Customer following the Closing Date.Subtenant agrees not to offer IP transport services to such Customer, either on its own behalf or on behalf of any other “Person” (defined below) other thanSublandlord, as part of or during the negotiations for new contracts contemplated by this provision, provided however, that following the Closing Date,Subtenant shall be entitled to respond to requests from Customers who wish to contact alternative providers for IP transport services. Notwithstanding theforegoing, if any 2Customer refuses to enter into a new agreement with Subtenant or if the terms of any Customer Contracts require Sublandlord to deliver a termination notice tothe applicable Customer between the date of this Sublease and the Closing Date, Sublandlord will terminate the applicable Customer Contracts, subject toSection 3(ii) below (each a “Termination Services Customer Contract”). 3.2 Transition Services. Except as provided in this Section 3(ii), neither Subtenant nor Sublandlord will provide any transition services at theSubleased Premises following the Closing Date. Following the Closing Date, Sublandlord will continue to provide Collocation Services at the SubleasedPremises to each Customer under a Termination Services Customer Contract until the sooner of (a) the expiration of the applicable termination period under theTermination Services Customer Contract (the “Termination Services Period”); or (b) March 31, 2004; provided, however, that during the TerminationServices Period, Sublandlord will pay to Subtenant the amount billed to the customer by Sublandlord for power and space at the Subleased Premises underthe terms of the applicable Termination Services Customer Contract during the Termination Services Period from the Closing Date until the expiration of theapplicable Termination Services Customer Contract. For purposes of this Sublease, “Collocation Services” means services provided to a Customer that enable a Customer to install and operate telecommunicationsequipment in a data center, including provision of the space, power and network connections necessary to operate the equipment. “Person” means anyindividual, partnership, joint venture, corporation, trust, limited liability company, unincorporated organization, a government or any department or agencythereof, or other entity. 4. Master Lease. 4.1 Relationship of Sublease to Master Lease. Subtenant acknowledges that this Sublease is subject and subordinate to the Master Lease and to allthe terms, covenants and conditions contained therein. To the extent that the Master Lease is also subject and subordinate to such instruments, this Sublease isalso subject and subordinate to all ground and underlying leases and all mortgages which might now or hereafter affect such leases, the leasehold estate orestates thereby created or the real property of which the Subleased Premises form a part, and to any and all renewals, modifications, consolidations,replacements and extensions thereof. Subtenant covenants and agrees that (a) during the Term (as hereinafter defined) of this Sublease, Subtenant will performand observe all of the terms, covenants, conditions and agreements of the Master Lease to be performed by Sublandlord (including, without limitation, theproviding of estoppel certificates and subordination agreements in accordance with the Master Lease, if applicable) to the extent that the same are not modifiedor amended by this Sublease, (b) Subtenant shall not do, suffer or permit anything to be done which would constitute a default under the Master Lease ormight cause the Master Lease to be canceled, terminated or forfeited, and (c) Subtenant will, in accordance with Section 9 below, and subject to the limitationstherein, indemnify and hold harmless Sublandlord and Master Landlord from and against all claims, liabilities, losses and damages of any kind thatSublandlord or Master Landlord may incur to the extent they are by reason of, resulting from or arising out of a failure by Subtenant to comply with theprovisions of this Sublease and/or the Master Lease, including, without limitation, subsections (a) and (b) of this paragraph. Notwithstanding the foregoing,Subtenant shall have no obligation to cure any default of Sublandlord under the Master Lease (except to the extent such default is caused by Subtenant’sdefault hereunder).4.2 Utilization of Master Lease Provisions as Part of Sublease. (a) Except as the terms and conditions set forth in this Sublease modify or contradict the terms and conditions of the Master Lease or anyexhibits or attachments thereto, all of the terms and conditions contained in the Master Lease are hereby made a part of this Sublease and are deemed toconstitute a portion of the agreement between Sublandlord and Subtenant concerning the leasing of the Subleased Premises; provided, however, that to theextent any of the terms and provisions of the Master Lease are inappropriate or inapplicable to this Sublease, such terms and provisions shall not be made apart hereof and in the event of any inconsistency between the Master Lease and this Sublease, as between Sublandlord and Subtenant, the provisions of thisSublease shall take precedence over any conflicting provisions of the Master Lease. Without limiting the generality of the foregoing, the parties agree that thefollowing provisions of the Master Lease shall not be applicable to this Sublease: Sections 1.2 (except with respect to Master Landlord’s address), 2.2, 2.3,2.4, 2.5, 2.6, 7.2.E., 7.2.H., Article 3, Sections 9.2, 10.2, 10.3, 10.4, 11.2, 12.1, 15.7 (except with respect to providing notice to Master Landlord), 15.11,Paragraphs 1, 2, 12 and 15 of the Lease Rider and Exhibits B and E. Where references are made in the Master Lease to the “Premises”, the same shall bedeemed to refer to the Subleased Premises hereunder; where references are made in the Master Lease to the “Commencement Date,” the same shall be deemed torefer to the Commencement Date hereunder; where references are made to the Master Lease to “Base Monthly Rent”, the same shall be deemed to refer toMonthly Base Rent hereunder; where references are made under the Master Lease to “Additional Rent”, the same shall be deemed to refer to Additional Renthereunder; and where references are made in the Master Lease to “this Lease” the same shall be deemed to refer to this Sublease. (b) It is understood by Subtenant that the services, repairs and alterations referred to herein to be furnished in accordance with theprovisions of the Master Lease will in fact be furnished by Master Landlord and not by Sublandlord. Sublandlord shall not be liable to Subtenant nor shallSubtenant’s obligations hereunder be impaired or the performance thereof excused because of any failure or delay on Master Landlord’s part in furnishing anysuch service or in making any of such repairs or alterations unless and to the extent that Sublandlord reasonably agrees that Sublandlord’s performance ofsuch obligations is excused pursuant to the terms of the Master Lease. Notwithstanding the foregoing, to the extent any default by Master Landlord results in awaiver or deferral of the performance of any of Sublandlord’s obligations under the Master Lease, the same obligations of Subtenant hereunder shall besimilarly waived or deferred, as applicable, but all other obligations of Subtenant shall remain in full force and effect. Sublandlord agrees that if MasterLandlord fails to provide any thing or service which Master Landlord is required to provide pursuant to the terms of the Master Lease, or otherwise defaultsthereunder, Sublandlord will, upon the written request of Subtenant and at Subtenant’s cost and expense (except to the extent that such costs and expenses arereimbursed by Master Landlord to Sublandlord), provide such assistance as Subtenant may reasonably request, including without limitation, making aclaim and/or demand on Master Landlord in the name of Sublandlord, to effect a cure of such default by Master Landlord or otherwise. Likewise, ifSublandlord defaults under the Master Lease, Subtenant shall have theright (subject to any applicable notice and cure provisions in the Master Lease and in this Sublease and subject to the consent of Master Landlord being firsthad and obtained), but not the obligation, to cure any such default, on behalf of Sublandlord and at Sublandlord’s cost and expense, including, withoutlimitation, offsetting any costs and expenses incurred by Subtenant against Monthly Base Rent and Additional Rent payable hereunder (provided thatSubtenant may not exercise the foregoing right of offset if Sublandlord has notified Subtenant that Sublandlord is disputing such alleged default in good faithand Master Landlord has not availed itself of any of its remedies under the Master Lease which would impair the continued existence of this Sublease). It isfurther understood by Subtenant that its rights with respect to the repair and restoration of the Subleased Premises or the Building, its rights as to the use andapplication of insurance proceeds and condemnation proceeds, its rights to rent abatement and its right to terminate this Sublease in the event of damage to orcondemnation of all or any part of the Subleased Premises or the Building are all subject to the prior rights, if any, of Master Landlord. All expenses incurredby Master Landlord in connection with the Landlord Consent (as defined herein) shall be paid one-half by each party hereto. (c) It is further understood by Subtenant that Sublandlord will not be obligated to comply with Master Landlord’s responsibilitiespursuant to Section 4.2 of the Master Lease relating to “Compliance with Law”, and Section 11.1 relating to “Landlord’s Duty to Restore” and Paragraph 16of the Lease Rider relating to “Adjacent Property Rights.” In addition, notwithstanding anything herein to the contrary, only Master Landlord exclusively, notSublandlord, shall have the rights of “Landlord” pursuant to the following provisions of the Master Lease as incorporated herein: Sections 4.3, 4.4, 4.5, 5.2(provided, however, such alterations and improvements shall not materially impair Sublandlord’s Point of Presence and conduits pursuant to Sections 2.2and 2.3 hereof, and Subtenant shall provide notice to Sublandlord in each case in which notice is provided to Master Landlord pursuant to Section 5.2 of theMaster Lease), 6.3, 7.2(D), 7.2(G), Article 8, 11.2, 11.3, 12.1 and 12.5. Notwithstanding anything to the contrary contained in this Sublease, the partiesagree and acknowledge that any right to terminate the leasehold interest by Subtenant shall only be with respect to the Sublease and not the Master Lease, andSublandlord shall retain the retain the right to terminate the Master Lease pursuant to the terms thereof. Any attempt by Subtenant to terminate the Master Leaseshall be null and void. 4.3 Master Lease in Full Force and Effect. Sublandlord represents, covenants and agrees that: (i) a true, correct and complete copy of the MasterLease is attached hereto as Exhibit B and there exist no other agreements between Master Landlord and Sublandlord governing the use or occupancy of theSubleased Premises; (ii) the Master Lease is in full force and effect and has not been amended, supplemented or otherwise changed; (iii) to the best ofSublandlord’s knowledge, Sublandlord is not in default under the Master Lease (and no set of circumstances exists which, with the passage of time or givingof notice, would constitute a default thereunder); (iv) Sublandlord has paid and performed all obligations required to be paid or performed by Sublandlordunder the Master Lease through the date the Sublease term commences; (v) Sublandlord has no knowledge of any default by Master Landlord under theMaster Lease; (vi) the term of the Master Lease expires on September 30, 2014; and (vii) and the provisions of the Master Lease will not be waived, modified,amended or surrendered by Sublandlord in any manner so as to prevent or adversely affect the use by Subtenant of the Subleased Premises in accordance withthe terms of this Sublease, nor as to impose any greaterobligations on Subtenant than are imposed on Subtenant under this Sublease, or provide to Subtenant any lesser rights than are provided to Subtenant underthis Sublease, without the prior written consent of Subtenant in each instance. 5. Effectiveness of Sublease. This Sublease shall be effective on the Closing Date except for the following provisions of this Sublease, which shallbecome effective as of the date of this Sublease: Sections 3, 15, 19, 20, 21, 22, 23, 24 and 25. The parties hereto acknowledge that one of the conditions tothe closing is that Master Landlord must provide its written consent to this Sublease pursuant to the Landlord Consent. Sublandlord agrees to usecommercially reasonable efforts to obtain the consent of Master Landlord. If the Closing Date is not on or before December 1, 2003 (or such later date as theparties may mutually agree), this Sublease will be deemed to be null and void and neither party will have any liability or obligation to the other partyhereunder. 6. Term, Possession and Condition of Subleased Premises. 6.1 Term. The term (the “Term”) of this Sublease is for the period which commences on the Closing Date (the “Commencement Date”), andexpires on September 29, 2014, unless sooner terminated pursuant to the terms of this Sublease. 6.2 Possession. Possession of the Subleased Premises will be delivered to Subtenant on the Commencement Date. 6.3 Condition of Subleased Premises. Subtenant acknowledges and agrees that (i) it has inspected the Subleased Premises to the extent that itdeems necessary prior to the execution of this Sublease, (ii) it accepts the Subleased Premises in “AS-IS WHERE IS” condition and (iii) neither Sublandlordnor Master Landlord shall have any obligation with respect to alterations, repairs or refurbishment of the Subleased Premises, except as may otherwise bespecifically set forth in this Sublease. In the event that any improvements or alterations are permitted by Master Landlord, the removal thereof upon thetermination of this Sublease will be the responsibility of Subtenant, all in accordance with the Master Lease. Subtenant also hereby assumes and agrees toperform any and all obligations of Sublandlord under the Master Lease with respect to (i) the removal of personal property, equipment, trade fixtures andleasehold improvements from the Subleased Premises, and (ii) the surrender of the Subleased Premises at the expiration of the Term of this Sublease in thecondition required by the Master Lease irrespective of whether or not such items were placed upon or installed in the Subleased Premises by or at the directionof Subtenant or Sublandlord. Notwithstanding anything to the contrary contained herein, Subtenant’s obligations with respect to the removal of TenantImprovements and Tenant Alterations from and the restoration of the Subleased Premises or the Building as required under the Master Lease shall be governedby the provisions of the Consent of Master Landlord attached hereto as Exhibit C and incorporated herein by this reference (the “Landlord Consent”), ifSubtenant and Master Landlord enter into the New Lease (as defined in the Landlord Consent). The provisions of this Section 6.3 shall survive thetermination or expiration of this Sublease.7. Rent. 7.1 Rent. Subtenant shall pay to Sublandlord as “Monthly Base Rent” the following amounts: (i) during the first two (2) years of the Term, anamount equal to [*] payable by Sublandlord under the Master Lease; and (ii) thereafter, for the remainder of the Term, Subtenant shall pay to Sublandlord,[*] payable by Sublandlord under the Master Lease. Notwithstanding the immediately previous sentence or anything to the contrary contained herein, (x) if aSubtenant Default occurs during the first 2-years of the Term, the Monthly Base Rent payable by Subtenant shall increase to [*]; and (y) if a SubtenantDefault occurs after the initial two years of the Term, Subtenant shall, within thirty (30) days of Sublandlord’s written demand, pay to Sublandlord anamount equal to [*] multiplied by the number of days elapsed from the Commencement Date until the date on which Subtenant’s Default occurred, but not toexceed a total of [*], as well as all unpaid and accrued rental amounts. The foregoing sentence shall not limit and the Sublandlord shall have available to it allother non-monetary remedies available to it pursuant to Section 13.2 of the Master Lease. As used herein, “Subtenant Default” shall mean a default bySubtenant hereunder that continues beyond any applicable grace, notice and cure periods. Subtenant agrees to commence paying an amount equal to [*] inadvance for the first month of the Term on the Commencement Date and to make rent payments thereafter on the first day of each month during the remainingTerm of this Sublease. All rental amounts hereunder for any partial month will be prorated on the basis of the actual number of days elapsed. Except asexpressly permitted in this Sublease, all rental amounts hereunder shall be payable to Sublandlord without notice, demand, deduction, offset or abatement inlawful money of the United States of America at P.O. Box 219061, Kansas City, MO 64121-9061 or to such other person or at such other address asSublandlord may designate in writing. If any Monthly Base Rent or Additional Rent is not received by Sublandlord from Subtenant within five (5) days of thelater of (i) when due or (ii) after written notice to Subtenant that the same has not been received by Sublandlord (provided such notice for late payment has notpreviously been given in the preceding twelve months), then Subtenant shall immediately pay to Sublandlord a late charge equal to the lesser of any penalties,default interest charges or other similar costs computed based on the delinquent amount actually incurred by Sublandlord under the Master Lease by reason ofSubtenant’s late payment or [*] percent ([*]%) of such delinquent rent, as liquidated damages for Subtenant’s failure to make timely payment. If any rentremains delinquent for a period in excess of thirty (30) days then, in addition to such late charge, Subtenant shall pay to Sublandlord interest on any rent thatis not paid when due at the Agreed Interest Rate following the date such amount became due until paid. This paragraph shall not be deemed to grant Subtenantan extension of time within which to pay rent or prevent Sublandlord from exercising any other right or remedy. 7.2 Other Charges. Subtenant shall pay all sales and uses taxes levied or assessed against all rent payments due under this Sublease (if any)simultaneously with each payment required hereunder. Subtenant shall pay directly to Sublandlord all of those costs, expenses, additional rent and all otheramounts (defined as “Additional Rent” in the Master Lease) payable to Master Landlord under the Master Lease, including, but not limited to, those * CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIESAND EXCHANGE COMMISSION.amounts payable under Sections 3.2 and 8.1 of the Master Lease. Notwithstanding anything to the contrary contained in this Sublease, Subtenant shall not beresponsible for any charges, costs, expenses or similar items (“Charges”) deemed to be Additional Rent if and to the extent said Charges are incurred as a resultof Sublandlord in its role as Tenant under Master Lease breaching its representations, warranties and covenants thereunder (including, without limitation,damages claimed by Master Landlord, indemnification obligations owed to Master Landlord, enforcement fees owed to Master Landlord and costs ofdischarging mechanic’s liens arising through Sublandlord) which have not been assumed by Subtenant hereunder. In addition, Additional Rent shall notinclude premiums for insurance policies required to be maintained by Sublandlord (in its capacity as tenant under the Master Lease) pursuant to the MasterLease, and Excess rent required to be paid by Sublandlord pursuant to Article 14 of the Master Lease. Subtenant agrees to pay any and all such AdditionalRent in estimated equal monthly installments or as may otherwise be required under the terms of the Master Lease. During the Term, Master Landlord may bepermitted to adjust the amounts of such installments payable under the Master Lease. In such event, Sublandlord may adjust the amount of the installmentsdue hereunder and, at the end of each calendar year during the Term, an adjustment will be made to compensate for any overage or shortfall with respect to themonthly estimated installments paid versus the actual real estate taxes, insurance, common area maintenance costs, management fees and the like owed, asand when provided in the Master Lease. To the extent Master Landlord has not agreed to do so pursuant to the Landlord’s Consent, Sublandlord shallpromptly forward to Subtenant any statements received from Master Landlord relating to the payment of Common Operating Expenses and annualreconciliations thereof. If Subtenant so requests, Sublandlord shall, at no cost or expense to Sublandlord, exercise the right to contest Real Property Taxes pursuant to Section8.3 of the Master Lease. If Subtenant so requests, Sublandlord shall cause an audit of Master Landlord’s books and records as permitted and in the mannerprovided for under Section 8.1 of the Master Lease. Any and all costs incurred by Sublandlord shall be borne by Subtenant and shall be consideredAdditional Rent. To the extent Master Landlord is not ultimately required to bear the costs of such audit in accordance with the Master Lease, the costs of suchaudit shall be borne by Subtenant, but in no event shall be Sublandlord be liable for such costs. Regardless of whether Subtenant elects to cause an audit ofMaster Landlord’s books and records, if Sublandlord’s payments toward Common Operating Expenses exceed the total payments made by Subtenant,Subtenant shall pay Sublandlord the deficiency within thirty (30) days of the date of Sublandlord’s statement. If the total payments by Subtenant, asdetermined pursuant to the audit, exceed the total actual amount of Additional Rent owed by Subtenant, Subtenant’s excess payment shall be refunded toSubtenant within thirty (30) days of the date of Sublandlord’s statement, and if not refunded within thirty (30) days, may be offset by Subtenant against thenext installment of Monthly Base Rent and Additional Rent payable hereunder. For any partial calendar year at the commencement or termination of thisSublease, Subtenant’s Additional Rent for such year shall be prorated for the number of days this Sublease is in effect during such year. Notwithstanding thetermination of this Sublease, within thirty (30) business days after Subtenant’s receipt of Sublandlord’s statement regarding Additional Rent in the calendaryear in which this Sublease terminates, Subtenant shall pay to Sublandlord or shall receive from Sublandlord, as the case may be, an amount equal to thedifference between the actual amount of Additional Rent (as prorated) and the amount previously paid by Subtenant toward Additional Rent.7.3 Survival. Subtenant’s obligation to pay all rental amounts hereunder and to remove alterations and improvements (except as provided inSection 4.2(ii) hereof), as well as any other obligation of Subtenant hereunder which is not fully satisfied at the termination of this Sublease, will survive thetermination of this Sublease. Sublandlord’s obligation to refund to Subtenant any overpayments of Additional Rent shall also survive the termination of thisSublease. 8. Use. The Subleased Premises may be used and occupied during the Term of this Sublease only for those purposes for which the Premises may beused and occupied by Sublandlord pursuant to the terms of the Master Lease. Subtenant must, at Subtenant’s expense, comply promptly with all applicablestatutes, ordinances, rules, regulations, orders, restrictions of record and requirements in effect during the Term or any part of the Term hereof regulating theuse by Subtenant of the Subleased Premises. 9. Indemnity. Subtenant hereby indemnifies and agrees to hold Sublandlord and Master Landlord harmless from and against any and all claims,liabilities or losses incurred by Sublandlord or Master Landlord arising out of any breach by Subtenant of any of the terms of, or its representations containedin, this Sublease, for bodily injury to or death of any person or damage to any property arising out of Subtenant’s use of the Subleased Premises or from theconduct of Subtenant’s business, or from any activity, work or thing done, permitted or suffered by Subtenant in or about the Subleased Premises or theBuilding, except: (a) claims and liabilities occasioned in whole or in part by the grossly negligent acts or omissions of the indemnified party, its agents oremployees; and (b) claims or liabilities for property damage addressed in Section 10 of this Sublease entitled “Mutual Waiver of Claims”. Sublandlord hereby indemnifies and agrees to hold Subtenant and Master Landlord harmless from and against any and all claims, liabilities or lossesincurred by Subtenant or Master Landlord arising out of any breach by Sublandlord of any of the terms of, or its representations contained in, this Subleaseor any terms of the Master Lease for which Sublandlord has retained responsibility pursuant to the terms and provisions of this Sublease, and for bodilyinjury to or death of any person or damage to any property arising out of Sublandlord’s Point of Presence at the Subleased Premises or from the conduct ofSublandlord’s business related thereto, or from any activity, work or thing done, permitted or suffered by Sublandlord in or about the Subleased Premises orthe Building pursuant to the MSA, except: (c) claims and liabilities occasioned in whole or in part by the grossly negligent acts or omissions of the indemnified party, its agents oremployees; and (d) claims or liabilities for property damage addressed in Paragraph 10 of this Sublease entitled “Mutual Waiver of Claims”. In addition, Sublandlord hereby indemnifies and agrees to hold Subtenant harmless from and against all claims, liabilities or losses suffered bySubtenant as a result of the “Release” (as defined below) with respect to the Project. For purposes of this Sublease, a Releases is that certain incident reported tothe California Office of Emergency Services on May 31, 2002, and assigned spill number 05/31/2002 02-2920 (also known by the Santa Clara Water Boardas case number SCVWDID #06S1W27K01f, LOP).The foregoing indemnities include all reasonable costs, attorneys’ fees and expenses incurred in the defense of any such claim or any action orproceeding brought thereon. 10. Mutual Waiver of Claims. Sublandlord and Subtenant do each hereby release and relieve the other and Master Landlord, and waive their entire claimof recovery against the other party and/or Master Landlord for loss or damage to property arising out of or incident to fire, lightning or any other perilsnormally included in an “all-risks” property insurance policy when such property constitutes the Subleased Premises or the Building or is in, on or about theSubleased Premises, the Building or the land on which the Building is situated, whether or not such loss or damage is due to the negligence of Sublandlord,Subtenant or Master Landlord, their agents, employees, guests, licensees, invitees or contractors, to the extent such loss or damage is covered by suchinsurance. 11. Default. The notice and grace period provisions contained in the Master Lease shall apply to any default by Subtenant hereunder. If Subtenantdefaults in the payment of any rental amounts hereunder or any other sum required to be paid hereunder by Subtenant, or in the performance of any of itsother obligations under this Sublease or the Master Lease beyond any applicable notice or grace period Sublandlord shall have the same rights and remediesagainst Subtenant as Master Landlord has against Sublandlord in the event of Sublandlord’s default under the Master Lease; provided, however, that anydamages recoverable by Sublandlord shall be computed based on the Monthly Base Rent and Additional Rent payable under this Sublease Such rights andremedies shall be cumulative with all other rights and remedies which Sublandlord may otherwise have under applicable law. 12. Transfer of Subleased Premises. 12.1 Neither this Sublease nor the Term and estate hereby granted, or any part hereof or thereof, may be assigned, mortgaged, pledged,encumbered or sublet without first obtaining the express written consent of: (i) Sublandlord, such consent not to be unreasonably withheld; and (ii) MasterLandlord, which consent shall be granted or denied in accordance with the provisions of the Master Lease. 12.2 Any request for Sublandlord’s or Master Landlord’s consent to a proposed assignment or subletting of the Subleased Premises or anyportion thereof shall be in writing (hereinafter referred to as “Subtenant’s Notice”) and shall set forth the proposed subtenant’s or assignee’s name, address,nature or character of business, and then current financial statements of the proposed subtenant or assignee, and the terms and conditions of the proposedsubletting. Any consent to subletting or assignment which may be given by Sublandlord shall not constitute a waiver by Sublandlord of the provisions of thisSection 12, or a release of Subtenant from the full performance by it of the covenants on the part of Subtenant herein contained. Any violation of any provisionof this Sublease by any subtenant shall be deemed a violation of such provision by Subtenant.12.3 Any subletting or assignment permitted hereunder shall, with respect to the use of the Subleased Premises, be subject to and shall not violatethe restrictive provisions of this Sublease and the provisions of the Master Lease. 12.4 If, for any proposed assignment or sublease, Subtenant receives rent or other consideration, either initially or over the term of the assignmentor sublease, in excess of the rent called for hereunder or, in case of the sublease of a portion of the Subleased Premises, in excess of such rent fairly attributableto such portion, after appropriate adjustments to ensure that all other payments called for hereunder are taken into account, Subtenant shall pay toSublandlord, as additional rent hereunder, all of the profit realized by Subtenant promptly after its receipt. Such profit shall be calculated after deducting fromgross rentals all costs incurred by Subtenant in connection with such transaction, including real estate commissions, legal fees, concessions, tenantimprovement allowances, advertising costs, and the like. To the extent that Master Landlord successfully asserts a claim to collect any portion of such profits,they shall be paid equally by Subtenant and Sublandlord from their respective shares of such profit. 12.5 Notwithstanding anything herein to the contrary, Sublandlord’s consent shall not be required hereunder for any agreements with Customersfor which Master Landlord’s consent is not required pursuant to Section 14.1D of the Master Lease. In addition, Sublandlord shall not be entitled to share inany of Subtenant’s profits, rents or income derived in connection with any Customer’s use of the Subleased Premises. 13. Insurance. Subtenant agrees to maintain during the Term hereof at least the minimum insurance described in Section 9.1 of the Master Lease.Sublandlord and Master Landlord must be named as an additional insured on the commercial general liability insurance coverage. A certificate evidencingsuch insurance coverages shall be delivered to Sublandlord and Master Landlord on or before the first to occur of the Commencement Date or the date whenSubtenant shall enter into possession of the Subleased Premises. Each of Sublandlord and Subtenant shall cause its insurance carriers to waive all rights ofsubrogation against the other party hereto to the extent of Sublandlord’s and Subtenant’s undertakings set forth in Section 10 of this Sublease.Notwithstanding anything to the contrary contained herein or in the Master Lease, Subtenant shall be exclusively entitled to all insurance proceeds arisingunder any fire and property damage insurance policies maintained by Subtenant on Subtenant’s personal property, equipment and trade fixtures. 14. Sublandlord’s Options Pursuant to the Master Lease. Sublandlord and Subtenant agree that all options that Sublandlord has pursuant to the MasterLease, i.e., Sublandlord’s Option to Extend pursuant to Paragraph 2 of the Lease Rider to the Master Lease and Sublandlord’s Right of First Offer to Purchasepursuant to Paragraph 15 of the Sublease shall be subordinate to Subtenant’s obligation and option to enter into the New Lease with Master Landlord asprovided in the Landlord Consent. Sublandlord also agrees that while this Sublease remains in effect, Sublandlord shall neither have the right to nor exerciseany such option without the prior written consent of Subtenant, which consent may be granted or withheld in Subtenant’s sole and absolute discretion. 15. Notices. Except as otherwise provided in the Master Lease with respect to notices to Master Landlord or as hereinafter provided as to notices ofdefault by Sublandlord andSubtenant, any notice required or permitted to be given hereunder shall be in writing and shall be effective only (a) three (3) days after deposit in a sealedenvelope in the United States mail, postage prepaid, by registered or certified mail, return receipt requested, addressed to the recipient at the address set forthbelow, (b) the next business day following deposit with an overnight courier service, with next day delivery charges prepaid, or (c) upon receipt if delivered byfacsimile transmission. Notices to Subtenant shall be addressed to Equinix Operating Co., Inc., 301 Velocity Way, 5th Floor, Foster City, CA 94404,Attention: Director of Real Estate, Facsimile No. (650) 513-7909, with a copy to Equinix Operating Co., Inc., 301 Velocity Way, 5th Floor, Foster City, CA94404, Attention: General Counsel, Facsimile No. (650) 513-7909, and notices to Sublandlord shall be addressed to Sprint Communications Company, L.P.,6200 Sprint Parkway, KSOPHF 0302-3B679, Overland Park, KS 66251, Attention: Legal-Corporate Transactions, Facsimile No. (913) 794-0144, withcopy to Sprint Communications Company, L.P., 6450 Sprint Parkway, KSOPHN 0314-3A671, Overland Park, KS 66251, Attention: Real Estate Attorney,Facsimile No. (913) 315-0708. Anything hereinbefore to the contrary notwithstanding, notices of default may only be sent by certified or registered mailpursuant to (a), above. 16. Broker’s Commissions. Sublandlord and Subtenant each hereby represents and warrants to the other and to Master Landlord that neither partyentered into any agreement with any broker, agent, finder or other party for the payment of a broker’s or agent’s commission, finder’s fee or like compensationpayable in connection with Sublandlord and Subtenant entering into this Sublease. Sublandlord and Subtenant each hereby agrees to indemnify and hold theother and Master Landlord harmless from and against any and all claims, demands, damages, losses or causes of action related to or arising out of any suchagreement entered into by the indemnifying party for the payment of any such commission, fee or like compensation. 17. Security Interest. Sublandlord hereby waives any security interest pursuant to the Uniform Commercial Code of the State of California or otherCalifornia law that Sublandlord may have in all of the personal property, equipment and trade fixtures used or to be used by Subtenant in connection with itsuse and operation of the Subleased Premises. 18. Personal Property. Sublandlord and Subtenant are simultaneously entering into a certain Bill of Sale and Conveyance Agreement (the “Bill of Sale”),which will become effective on the Closing Date, pursuant to which Sublandlord will transfer to Subtenant certain items of tangible personal property, asprovided in the Bill of Sale. Any sales taxes associated with the transfer of such personal property will be paid for as provided in the Bill of Sale. 19. Casualty and Eminent Domain. In the event of a fire or other casualty affecting the Subleased Premises, or of a taking of all or a part of theSubleased Premises under the power of eminent domain, Sublandlord shall not exercise any rights which it may have permitting it to terminate or continuewith the Master Lease as a result of a casualty or condemnation without first obtaining the prior written consent of Subtenant. If Subtenant fails to respond tosuch written request by Sublandlord to Subtenant within ten (10) days, then consent will be deemed to have been given. If the Master Lease imposes on MasterLandlord, the obligation to repair or restore leasehold improvements or alterations, Subtenant shall permit Master Landlord to enter the Subleased Premises toperform the same. Subtenant shall have the right to terminate the Sublease as a result of a casualty or condemnation to the extent Sublandlord has the right toterminate the Master Lease as a result of such event. To the extent Sublandlord is entitled to an abatement of its obligation to pay rent pursuant to the MasterLease as a result of the occurrence of a casualty or condemnation, Subtenant shall also be entitled to an abatement of Monthly Base Rent and Additional Rentwith respect to the Subleased Premises. Notwithstanding anything herein to the contrary, if the Master Lease is validly terminated by Master Landlordfollowing a casualty or condemnation, this Sublease shall also terminate. 20. Entire Agreement. This Sublease, including the terms of the Master Lease which are incorporated herein by reference, contains the entire agreementbetween the parties concerning the subject matter hereof and supersedes all prior and contemporaneous agreements, understandings, terms, warranties andrepresentations, whether oral or written, made by the parties concerning the matters covered by this Sublease. 21. Confidentiality. Subtenant and Sublandlord shall each maintain as confidential any and all non-public material obtained about the other and thetransactions contemplated hereby, and shall not, except as required by law or governmental regulation applicable to Sublandlord or Subtenant, disclose suchinformation to any third party. Notwithstanding the foregoing, Subtenant and Sublandlord shall have the right to disclose such information to their respectivelenders or their employees and agents and such other persons whose assistance is required in carrying out the terms of this letter provided that all such personsare told that such information is confidential and agree (in writing for any third party consultants) to keep such information confidential. Subtenant andSublandlord shall each have the right to publicize the consummation of this Sublease (other than the monetary terms) in whatever manner each deemsappropriate; provided, however, that any press release or other public disclosure regarding the transactions contemplated herein, and the wording of same,must be approved in advance by both parties. Notwithstanding anything herein or in any other written or oral understanding or agreement to which the partieshereto are parties or by which they are bound, either party (or its representative, agents or employees) may (i) consult any tax advisor regarding the taxtreatment and tax structure of the transaction contemplated by this Sublease and (ii) may at any time disclose to any person, without limitation of any kind,the tax treatment and tax structure of such transaction and all materials of any kind (including opinions or other tax analyses) that are provided relating tosuch tax treatment or tax structure. The provisions of this paragraph shall survive the termination of this Sublease. 22. Severability. The illegality, invalidity or unenforceability of any term, condition or provision of this Sublease shall in no way impair or invalidateany other term, condition or provision of this Sublease, and all such other terms, conditions and provisions shall remain in full force and effect. 23. Attorneys’ Fees. If any party hereunder brings an action to enforce the terms or to declare rights hereunder, the prevailing party in any such action,on trial or appeal, shall be entitled to recover its actual attorneys’ fees and costs of suit from the non-prevailing party. 24. Successors and Assigns. This Sublease shall be binding upon the parties hereto and upon their respective successors and assigns.25. Governing Law. This Sublease will be governed by the law of the State of California, without regard to its choice of law rules. 26. Authority to Sign. Each party hereby represents and warrants to the other that the person or entity signing this Sublease on behalf of such party isduly authorized to execute and deliver this Sublease and to legally bind the party on whose behalf this Sublease is signed to all of the terms, covenants andconditions contained in this Sublease. [Remainder of page intentionally left blank]IN WITNESS WHEREOF, the parties have executed this Sublease as of the day and year first above written. SUBLANDLORD:SPRINT COMMUNICATIONS COMPANY, L.P.By: /s/ Robert J. DellingerName: Robert J. DellingerTitle: EVP & CFOSUBTENANT:EQUINIX OPERATING CO., INC.By: /s/ Renee F. LanamName: Renee F. LanamTitle: CFOExhibit 10.96 Please quote our reference when replyingOur Ref : JTC(L) 7329/30 JTC CorporationThe JTC Summit8 Jurong Town Hall Road Singapore 609434 telephone: (65) 560 0056facsimile: (65) 565 5301website: www.jtc.gov.sg EQUlNIX SINGAPORE PTE. LTD.51 CUPPAGE ROAD#10-11/17Singapore (229469) BY LOCAL URGENT MAIL (Attention: LEE YOONG KIN): Dear Sirs, OFFER OF TENANCY FOR FLATTED FACTORY SPACE 1. We are pleased to offer a tenancy of the Premises subject to the following covenants, terms and conditions in this letter and in the annexedMemorandum of Tenancy (“the Offer”): 1.01 Location: Pte Lot A0037000, Blk 20 (“the Building”) Unit #03-01 /02 /03 /04, AYER RAJAH CRESCENT AYER RAJAH INDUSTRIAL ESTATESINGAPORE 139964 (“the Premises”) as delineated and edged in red on the plan attached to the Offer. 1.02 Term of Tenancy: 3 years (“the Term’”) with effect from 1 December 2003 (“the Commencement Date”). 1.03 Tenancy Agreement: Upon due acceptance of the Offer in accordance with clause 2 of this letter, you shall have entered into a tenancy agreement with us (“theTenancy”) and will be bound by the covenants, terms and conditions thereof. In the event of any inconsistency or conflict between any covenant, term or condition of this letter and the Memorandum of Tenancy, therelevant covenant, term or condition in this letter shall prevail. 1.04 Area: Approximately 1,450.30 square metres (subject to survey). 1.05 Rent and Service Charge: (a)Discounted rate of $16.38 per sq metre per month for so long as the Tenant shall occupy by way of tenancy an aggregatefloor area of 9449.7 square metres in the Building or in the various flatted factories belonging to the Landlord, and (b)Normal rate of $18.00 in the event that the said aggregate floor area occupied is at any time reduced to below 9449.7 squaremetres (when the discount shall be totally withdrawn) with effect from the date of reduction in the said aggregate floor, (“Rent”) to be paid without demand and in advance without deduction on the 1st day of each month of the year (i.e. 1st ofJanuary, February, March, etc.). The next payment shall be made on 01 January 2004. Service charge: $4.50 per square metre per month, (“Service Charge”) as charges for services rendered by us, payable without demand onthe same date and in the same manner as the Rent, subject to our revision from time to time. 1.05(a) Air-conditioning Charge: $0.008 per square metre per hour as charges for air-conditioning utility rendered by us, payable without demand on the samedate and in the same manner as the Rent, subject to our revision from time to time in the same manner as the Service Charge. 1.06 Security Deposit/Banker’s Guarantee: You will at the time of acceptance of the Offer be required to place with us a deposit equivalent to 3 months’ Rent (at thediscounted rate payable in the third year of the Term) and Service Charge PLUS the Air-conditioning Charge (“SecurityDeposit”) as security against any breach of the covenants, terms and conditions in the Tenancy. The Security Deposit may be in the form of cash and/or acceptable Banker’s Guarantee in the form attached (effective from 1October 2003 to 28 February 2007) and/or such other form of security as we may in our absolute discretion permit or accept.The Security Deposit must be maintained at the same sum throughout the Term and shall be repayable to you without interestor returned, to you for cancellation, after the termination of the Term (by expiry or otherwise) or expiry of the Banker’sGuarantee, as the case may be, subject to appropriate deductions or payment to us for damages or other sums due under theTenancy. If the Rent at the discounted rate is increased to the normal rate or Service Charge is increased or any deductions are madefrom the Security Deposit, you are to immediately pay the amount of such increase or make good the deductions so that theSecurity Deposit shall at all times be equal to 3 months’ Rent and Service Charge PLUS the Air-conditioning Charge. 1.07 Mode of Payment: Except for the payment to be made with your letter of acceptance pursuant to paragraph 2 of this letter, which payment shallbe by non-cash mode (eg cashier’s order, cheque etc}, during the Term, you shall pay Rent, Service Charge and GST byInterbank GIRO or any other mode to be determined by us [Note: Accordingly, you are to provide us with the duly completed GIRO authorization form enclosed herewith. However, pending finalisation for the GIRO arrangement, you shall pay Rent, Service Charge and GST as they fall due bycheque]. 1.08 Permitted Use: (a)Subject to clause 1.12 of this letter, you shall commence full operations within four (4) months of theCommencement Date for the purpose to provide internet data centre hostings for telecommunication, internet andapplication service providers only and for no other purpose whatsoever (“the Authorised Use”). (b)Thereafter, you shall maintain full and continuous operations and use and occupy the whole of the Premises for theAuthorised Use. 1.09 Approvals The Tenancy is subject to approvals being obtained from the relevant government, and statutory authorities. 1.10 Possession of Premises: (a)Keys to the Premises will be given to you two months prior to the Commencement Date subject to due acceptance ofthe Offer (Possession Date”). (b)From the Possession Date until the Commencement Date, you shall be deemed a licensee upon the same terms, andconditions in the Tenancy. (c)if you proceed with the Tenancy after the Commencement Date, the licence fee payable from the Possession Date tothe Commencement Date shall be waived (“Rent-Free Period”). Should you fail to so proceed, you shall: (i)remove everything installed by you; (ii)reinstate the Premises to its original state and condition; and (iii)pay us a sum equal to the prevailing market rent payable for the period from the Possession Date up to thedate the installations are removed and reinstatement completed to our satisfaction, without prejudice to any other rights and remedies we may have against you under the Tenancy or at law. 1.11 Preparation and Submission of Plans: (a)No alteration, addition, improvement, erection, installation or interference to or in the Premises or the fixtures andfittings therein is permitted without Building Control Unit [BCU (JTC Corporation)] prior written consent. Yourattention is drawn to clauses 2.10 to 2.19 and 2.34 of the Memorandum of Tenancy. (b)You will be required to prepare and submit floor layout plans of your factory in accordance with the terms of thetenancy and the ‘Guide’ attached. It is important that you should proceed with the preparation and submission ofthe plans in accordance with the procedures set out in the said ‘Guide’. (c)Should there be alteration of existing automatic fire alarm and sprinkler system installation, alteration plans shall besubmitted to Building Control Unit [BCU(JTC Corporation)] for approval on fire safety aspects. All fire alarm &sprinkler system plans must be signed by a relevant Professional Engineer, registered with the ProfessionalEngineers Board of Singapore. (d)Upon due acceptance of the Offer, a copy of the floor and elevation plans (transparencies) will be issued to you toassist in the preparation of the plans required herein. (e)No work shall commence until the plans have been approved by Building Control Unit [BCU(JTC Corporation)]. (f)Kindly note that at present URA requires you to use and occupy at least sixty per cent (60%) of the gross floor areaof the Premises for industrial activities and ancillary warehousing activities; and you may use and occupy theremaining gross floor area, if any, for offices, showrooms, neutral areas or communal facilities and such other usesas may be approved in writing by us and the relevant governmental and statutory authorities. Nonetheless, asprovided in paragraph 1.08, you shall ensure that the Premises: i)are used primarily for the industrial activities stipulated in the authorised use approved by us; and ii)are not used or occupied for the purposes of offices, showrooms, storage, warehousing, industrial activitiesunrelated to such authorised use or for any other use unless approved in writing by us and the relevantgovernmental and statutory authorities. 1.12 Final inspection: You shall ensure that final inspection by us of all installations is carried out and our approval of the same is obtained before anyoperations in the Premises may be commenced. 1.13 Special Conditions: (1)Normal (Ground & Non-ground) Floor Premises You shall comply and ensure compliance with the following restrictions: (a)maximum loading capacity of the goods lifts in the Building; and (b)maximum floor loading capacity of 12.5 kiloNewtons per square metre of the Premises on the 3rd storey ofthe Building PROVIDED THAT any such permitted load shall be evenly distributed. We shall not be liable for any loss or damage that you may suffer from any subsidence or cracking of theground floor slabs and aprons of the Building. (2)You shall comply and ensure compliance with all notices, rules, and regulations relating to the use of the Carpark (as definedin the Memorandum of Tenancy} including but not limited to: (i)parking or placing of container, vehicles, trailers or other carriages; and (ii)parking charges. (3)You are to connect the mechanical ventilation system in the Premises to the switchboard installed by you, subject to clauses2.12, 2.13 and 2.14 of the Memorandum of Tenancy. (4)Option for renewal of tenancy: (a)You may within 3 months before the expiry of the Term make a written request to us for a further term of tenancy. (b)We may grant you a further term of tenancy of the Premises upon mutual terms to be agreed between you and ussubject to the following: (i)there shall be no breach of your obligations at the time you make your request for a further term; (ii)our determination of revised rent, having regard to the market rent of the Premises at the time of granting thefurther term, shall be final; (iii)we shall have absolute discretion to determine such covenants, terms and conditions, but excluding acovenant for renewal of tenancy; and (iv)there shall not be any breach of your obligations at the expiry of the Term. (5)Third Party Rights: A person who is not a party to the Tenancy shall have no right under the Contracts (Rights of Third Parties) Act (as amendedor revised from time to time) to enforce any of its covenant, term or condition. 2. Mode of Acceptance: The Offer shall lapse if we do not receive the following by 30 September 2003: - Duly signed letter of acceptance (in duplicate) of all the covenants, terms and conditions in the Tenancy in the form enclosed at the Appendix.(Please date as required in the Appendix) - Payment of the sum set out in clause 4. - Duly completed GIRO authorization form. 3. Please note that payments made prior to your giving us the other items listed above may be cleared by and credited by us upon receipt. However, if thesaid other items are not forthcoming from you within the time stipulated herein, the Offer shall lapse and there shall be no contract between you and usarising hereunder. Any payments received shall then be refunded to you without interest and you shall have no claim of whatsoever nature against us.4. The total amount payable is as follows: Amount +4%GSTRent at $16.38 psm per month on 1,450.3 sqm for the period 1 April 2004 to 30 April 2004 $23,755.91 $950.24Less:1.5% Off-budget Property Tax Rebate (valid from 01/07/2003 to 31/12/2003) $ 0.000.00 0.00Service Charge at $4.50 psm per month on 1,450.30 sqm for the period 1 December 2003 to 31 December2003 $6,526.35 $261.05Air-conditioning charges at $0.008 per square metre per hour on 1,450.30 sqm for the period 1 December2003 to 31 December 2003 computed on 23-working day basis. $2,668.55 $106.74* See, Notes below Total Rent Payable (inclusive of Service Charge and air-conditioning charge) $32,950.82 $1,318.03Deposit equivalent to three months’ rent (at the discounted rate payable in the third year of the Term) andservice charge PLUS 3 months’ air-conditioning charge [or Banker’s Guarantee provided in accordance withsub-paragraph 1.06 above) $98,852.45 Less:Deposit equivalent to two (2) month’s rent (at the discounted rate payable in the third year of the Term) andservice charge PLUS one month’s air-conditioning charge (Off-budget Measure) $65,901.63 $32,950.82 Stamp fee payable on Letter of Acceptance which will be stamped by JTC Corporation on your behalf Note : If the Letter is not returned to us within 14 days of the date of the Letter, you will have to pay penaltyon the stamp duty which is imposed by Stamp Duty Office at IRAS. $2,656.00 $1,318.03Sub-Total Payable $68,557.63 Add: GST @ 4% $1,318.03 Total Payable inclusive of GST $69,875.66 Notes: 1. This is for the 1st month air-con utility charge based on an average of 23 working days (230 hours) only as part of the deposit. (Mon – Fri 8 a.m. to 6p.m.) (Sat- 8 a.m. to 1 p.m.) 2. Subsequent air-con utility charges for standard and/or non-standard charges will be computed by the Lease Management Officer of the CustomerService Department/South Zone. 5. Rent-Free Period: As the Commencement Date will not be deferred, we advise you to accept the Offer as soon as possible and to collect the keys to the Premises on thescheduled date in order to maximize the Rent-Free Period referred to in clause 1.10(c) of this letter. 6. Variation to the Tenancy This letter and the Memorandum of Tenancy constitute the full terms and conditions governing the Offer and no terms or representation or otherwise,whether express or implied, shall form part of the Offer other than what is contained herein. Any variation, modification, amendment, deletion,addition or otherwise of the covenants, terms and conditions of the Offer shall not be enforceable unless agreed by both parties and reduced in writingby us. 7. Season Parking: Season parking tickets for car parking lots within the Estate can be purchased from the JTC Zone Office serving the Estate (Contact no. of the SouthZone Office is:1800-66654628). Please note that the number of season parking ticket(s) that can be purchased by you will depend on eligibility rulesset out by us. 8. Application of Approvals, Utilities etc. Upon your acceptance of the covenants, terms and conditions of the Offer, you are advised to proceed expeditiously as follows: 8.01 Preliminary Clearance: Comply with the requirements of the Chief Engineer (Central Building Plan Unit), Pollution Control Department and/or other departmentspursuant to your application/s for preliminary clearance. (Please note that we have referred your application to the relevant department/s). 8.02 Discharge of Trade Effluence: Completed the attached Application for Permission to Discharge Trade Effluent into Public Sewer and return the application form direct to theHead, Pollution Control Department, Ministry of Environment, Environment Building, 40 Scotts Road, Singapore 228231 (Telephone No.67327733). 8.03 Electricity: Engage a registered electrical consultant or competent contractor to submit three sets of electrical single-line diagrams to and in accordance withthe requirements of our Property Support Department (PSD), Customer Services Group, JTC East Zone Office for endorsement before anapplication is made to the Power Supply Pte Ltd to open an account for electricity connection. Please contact our Properly Support Department(PSD) at BIk 25 Kallang Avenue #05-01 Kallang Basin Industrial Estate Singapore 339416 direct for their requirements. 8.04 Water: Submit four copies of sketch plans, prepared by a licensed plumber, showing the section and layout of the plumbing, to our Building ControlUnit [BCU (JTC Corporation)] for approval prior to the issue of a letter to Water Conservation Department, Public Utilities Board to assistyou in your application for a water sub-meter. 8.05 Telephone: Apply direct to Singapore Telecommunications Ltd for all connections. 8.06 Automatic Fire Alarm System (Incorporating Heat Detector) Engage a registered electrical consultant/professional engineer to submit two sets of fire alarm drawings, indicating the exiting fixtures if any,the proposed modifications of the fire alarm and the layout of machinery, etc to and in accordance with the requirements of our BuildingControl Unit; [BCU (JTC Corporation)]. Please contact our Building Control Unit [BCU (JTC Corporation)] at The JTC Summit, One-StopCentre (1st level) 8 Jurong, Town Hall Road Singapore 609434 direct for further requirements. 8.07 Factory Inspectorate Complete and return direct to Chief Inspector of Factories the attached form, “Particulars to be submitted by occupiers or intending Occupiersof Factories”. Yours faithfully /s/ Vanessa Loh Vanessa LOHINDUSTRIAL DEVELOPMENT (HIGH-RISE) DEPARTMENTINDUSTRIAL PARKS DEVELOPMENT GROUPJTC CORPORATIONDID : 68833423FAX : 68855899EMAIL: vanessaloh@jtc.gov.sgENCS:EQUINIX LETTERHEAD 29TH September 2003 INDUSTRIAL DEVELOPMENT BY HAND(HIGH-RISE) DEPARTMENT JTC Corporation The JTC Summit 8 Jurong Town Hall Road Singapore 609434 Attn: Vanessa Loh ACCEPTANCE OF OFFER OF TENANCY FOR THE PREMISES AT UNIT #03-01/02/03/04 BLK 20 AYER RAJAH CRESCENT AYER RAJAHCRESCENT AYER RAJAH INSTRUSTRIAL ESTATE SIGAPORE 139964 We refer to your letter of offer dated 19th September 2003 for the Tenancy and hereby confirm our acceptance of all the covenants, terms and conditions of theOffer. We are currently opting to pay by GIRO, thus we enclosed herewith a cheque for the amount S$69,875.66 (inclusive of 1 months’ security deposit) asconfirmation of acceptance. /s/ Lee Yoong KinName of authorized signatory: Lee Yoong KinDesignation: Managing Director for and on behalf of : EQUINIX SINGAPORE PTE LTD in the presence of: /s/ Tan Aye See Name of Witness: Tan Aye SeeNRIC No: S1548786J Equinix Singapore Pte Ltd20 Ayer Rajah Crescent #05-05/08 * Singapore * 139964phone: 65 6723 8888 fax: 65 6820 2001 website: www.equinix.comExhibit 10.97 SECOND AMENDMENT TO LEASE This SECOND AMENDMENT TO LEASE (“Amendment”) is made and entered into as of the 30th day of November, 2003 (the “Effective Date”)by and between JMA Robinson Redevelopment, LLC, a Delaware limited liability company (“Landlord”), and EQUINIX, INC., a Delaware corporation (“Tenant”). R E C I T A L S : A. 600 SEVENTH STREET ASSOCIATES, INC., a California corporation (“Associates”) and Tenant entered into that certain TelecommunicationsOffice Lease (the “Original Lease”) dated August 8, 1999, pursuant to which Associates leased to Tenant, and Tenant leased from Associates, certain space(the “Premises”) consisting of (i) approximately 67,000 rentable square feet of space located on the sixth (6th) floor, (ii) approximately 65,000 rentable squarefeet of space located on the seventh (7th) floor, and (iii) approximately 2,000 rentable square feet of space located on the roof, of that certain Building located at600 West Seventh Street, Los Angeles, California 90014. B. Associates and Tenant subsequently amended the Original Lease pursuant to that certain letter agreement dated August 24, 2000 (the “FirstAmendment”). The Original Lease and the First Amendment shall sometimes collectively herein be referred to as the “Lease”. C. Landlord has succeeded to the interest of Associates and its successor, Carrier Center LA, Inc. (“CCLA”), as the “landlord” under the Lease. D. Landlord and Tenant now desire to amend the Lease in certain respects, including to alter the manner in which the Landlord can recapture unusedelectrical capacity for the Premises, all as more provided below. NOW, THEREFORE, in consideration of the foregoing Recitals and the mutual covenants contained herein, and for other good and valuableconsideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Capitalized Terms. Except as otherwise expressly provided herein to the contrary, all capitalized terms used in this Amendment shall have the samemeanings given such terms in the Lease. 2. Recapture of Unused Amperage. The last sentence of Section 6.1.2 of the Original Lease is hereby deleted in its entirety and replaced along with newsubsections 6.1.2.1 through 6.1.2.3 with the following: “Commencing on January 1, 2005 (the “New Vesting Date”), in the event Landlord reasonably determines in good faith that another tenant of theBuilding may need electrical capacity and Landlord does not otherwise have such electrical capacity available for use in the Building, Landlord shallhave the right (the “Landlord Amp Recapture Right”), to meter and test Tenant’s connected peak amperage load used at the Premises for possiblerecapture pursuant to the terms set forth in Subsections 6.1.2.1 through 6.1.2.3 below. Landlord shall provide Tenant thirty (30) days advance writtennotice of its exercise of the Landlord Amp Recapture Right (the “Electrical Testing Notice”).6.1.2.1 In the event that over a fifteen (15) day period immediately following the thirty (30) day advance notice period for the Electrical TestingNotice, Landlord’s metering and testing procedures demonstrate that Tenant is not utilizing on a daily average business day basis all of the ampsinitially reserved by Tenant in Section 6.1.2, Landlord may reclaim up to seventy-five percent (75%) of any amperage Landlord reasonably determinesthrough such process is being unused by Tenant. 6.1.2.2 Notwithstanding the foregoing, Tenant shall have the right to extend the New Vesting Date for a period of eighteen (18) months in the eventTenant recommences and diligently pursues new plans for the construction of the seventh (7th) floor component of the Premises pursuant to therequirements of Article VIII below; provided that if Tenant stops or suspends such seventh floor construction plans for more than sixty (60) days due toreasons other than force majeure, Landlord Amp Recapture Right shall immediately vest and Tenant should be subject to the metering and recaptureprocess described in the preceding sentence. 6.1.2.3 At any time prior to Landlord’s recapture of any unused amperage, Tenant shall have the right to extend the New Vesting Date for a periodof eighteen (18) months by paying to Landlord, within twenty (20) days of completion of Landlord’s fifteen (15) day testing period, an amount equal toseventy five dollars ($75.00) multiplied by the number of amps Landlord has the right to recapture pursuant to this Section 6.1.2.” 3. Representations and Warranties. a. Landlord Representations. Landlord hereby represents and warrants to Tenant that to the best of Landlord’s knowledge Tenant is not in defaultof any of its obligations under the Lease as of the Effective Date. b. Tenant Representations. Tenant hereby represents and warrants to Landlord that to the best of Tenant’s knowledge Landlord is not in default ofany of its obligations under the Lease as of the Effective Date. 4) Attorneys’ Fees. Should any dispute arise among the parties hereto or the legal representatives, successors and assigns concerning any provision ofthis Amendment or the rights and duties of any person in relation thereto, the party prevailing in such dispute shall be entitled, in addition to such other reliefthat may be granted, to recover reasonable attorneys’ fees and legal costs in connection with such dispute. 5) Counterparts. This Amendment may be executed in any number of original counterparts. Any such counterpart, when executed, shall constitute anoriginal of this Amendment, and all such counterparts together shall constitute one and the same Amendment. 6) No Further Modification. Except as set forth in this Amendment, all of the terms and provisions of the Lease shall remain unmodified and in fullforce and effect. -2-IN WITNESS WHEREOF, this Amendment has been entered into as of the day and year first above written. “Landlord”JMA ROBINSON REDEVELOPMENT, LLC, aDelaware limited liability companyBy: JMA Robinson Investors, LLC, a Delaware limitedliability company; Its: Sole Member By: JMA Wired, LLC, a Delaware limited liabilitycompany; Its: Managing Member By: /s/ Arthur Chapman Name: Arthur Chapman Title: Member“Tenant”:EQUINIX, INC., a Delaware corporationBy: /s/ Renee F. Lanam Name: Renee F. Lanam Title: Chief Financial Officer -3-Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-85202, 333-71870, 333-45280 and 333-104078) andForm S-3 (Nos. 333-104077 and 333-109697) of Equinix, Inc. of our report dated March 5, 2004 relating to the financial statements, which appears in thisForm 10-K. /s/ PricewaterhouseCoopers LLP San Jose, CaliforniaMarch 5, 2004Exhibit 31.1 CERTIFICATION PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Peter F. Van Camp, certify that: 1. I have reviewed this annual report on Form 10-K of Equinix, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrantand have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’sinternal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. Dated: March 5, 2004 /s/ PETER F. VAN CAMPPeter F. Van CampChief Executive OfficerExhibit 31.2 CERTIFICATION PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Renee F. Lanam, certify that: 1. I have reviewed this annual report on Form 10-K of Equinix, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrantand have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’sinternal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. Dated: March 5, 2004 /s/ RENEE F. LANAMRenee F. LanamChief Financial OfficerExhibit 32.1 CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Equinix, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2003 as filed with the Securities andExchange Commission on the date hereof (the “Report”), I, Peter F. Van Camp, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ PETER F. VAN CAMPPeter F. Van CampChief Executive OfficerMarch 5, 2004Exhibit 32.2 CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Equinix, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2003 as filed with the Securities andExchange Commission on the date hereof (the “Report”), I, Renée F. Lanam, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350,as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ RENEE F. LANAMRenée F. LanamChief Financial OfficerMarch 5, 2004

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