Equinix
Annual Report 2004

Plain-text annual report

Table of ContentsIndex to Financial StatementsUNITED 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, 2004 OR ¨¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 000-31293 EQUINIX, INC.(Exact name of registrant as specified in its charter) Delaware 77-0487526(State of incorporation) (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). x Yes ¨ 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 $518.2 million. As of February 28, 2005, a total of 23,445,362 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 2005 Annual Meeting of Stockholders,which is expected to be filed not later than 120 days after the registrant’s fiscal year ended December 31, 2004. 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 ContentsIndex to Financial StatementsEQUINIX, INC. FORM 10-K DECEMBER 31, 2004 TABLE OF CONTENTS Item Page No. PART I 1. Business 32. Properties 123. Legal Proceedings 124. Submission of Matters to a Vote of Security Holders 13 PART II 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 146. Selected Financial Data 167. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17 Risk Factors 437A. Quantitative and Qualitative Disclosures About Market Risk 548. Financial Statements and Supplementary Data 559. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 569A. Controls and Procedures 569B. Other Information 56 PART III 10. Directors and Executive Officers of the Registrant 5711. Executive Compensation 5712. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 5713. Certain Relationships and Related Transactions 5714. Principal Accountant Fees and Services 57 PART IV 15. Exhibits and Financial Statement Schedules 58 Signatures 63 2Table of ContentsIndex to Financial StatementsPART 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 15 Internet Business Exchange centers, or IBX centers, in the U.S. and Asia customers can directly interconnect witheach other 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 IBXcenters, we believe we have established a critical mass of customers. Our differentiated business model, the critical mass and the resulting “network effect,”combined with our strong financial position, has allowed us to continue to accelerate new customer growth and strong bookings from our existing customers;and, given we have a largely fixed cost model related to our existing IBX centers, we believe this customer and booking growth will continue to drive highmargins and 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, SAVVIS, SBC,SingTel, Sprint and Qwest are all currently located at our IBX centers. Access to such a wide variety of networks has attracted all of the top 10 Internetproperties and major E-commerce companies including Amazon.com, Disney, Electronic Arts, MSN, Ticketmaster and Yahoo!. In 2004, Equinix alsoexperienced significant growth from enterprise companies and government agencies and now has a strong client base from these sectors including EDS,Fujitsu, Gannett, The Gap, General Electric, Goldman Sachs, IBM, Sony, Wal-Mart, Washington Mutual, and Washington Post. We offer three types of products and services: Colocation, Interconnection, and Managed IT Infrastructure services. • Colocation services consist primarily of cabinets and power for our customers’ colocation needs. • Interconnection services allow customers to trade network traffic with each other directly and simply. • Managed IT infrastructure services allow our customers to leverage our significant telecommunication expertise, maximize the benefits of our IBXcenters 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 ContentsIndex to Financial Statementsworld-class choice of carriers and service providers. In addition, because many of the exiting competitors networks are already present in Equinix, we havebecome a natural channel partner for these networks as they continue to experience demand from their customers for quality colocation. In order to serve this increased demand for our services, we have acquired two additional data centers during 2004 in our key markets in the SiliconValley and Washington, D.C. areas. Strategically, Equinix will continue to look at financially attractive opportunities to grow our market share and selectivelyimprove our footprint and service streams. Recent Developments In April 2004, we entered into a long-term lease for a 95,000 square foot data center in the Washington, D.C. metro area. This data center is adjacent tothe Company’s existing Washington D.C. metro area IBX. This lease includes the leasing of all of the IBX plant and machinery equipment located in thebuilding. Both the building and equipment components of this lease are being accounted for as a capital lease. We took possession of this property during thefourth quarter of 2004, and as a result, recorded property and equipment assets, as well as a capital lease obligation, totaling $35.3 million. Payments underthis lease, which commenced in November 2004, will be made through 2019 at an effective interest rate of 8.50% per annum. We intend to place customers inthis center in 2005. In December 2004, we entered into a long-term lease for a 103,000 square foot data center in the Silicon Valley area. This data center is close to ourexisting IBX centers in the Silicon Valley, and expands the global Equinix footprint to approximately 1.4 million square feet. This new lease will add anadditional $34.2 million in cumulative monthly lease payments through 2020, commencing February 2005. We will take possession of this property duringthe first quarter of 2005. We currently intend to place customers in this data center in 2005. Concurrent with the signing of this lease, we also purchased theassets located in this data center and entered into an agreement to interconnect all three of our Silicon Valley IBX centers to each other through redundant darkfiber links. This will allow our customers to have access to all the networks and customers in each of the three Silicon Valley IBXs. We are currentlyevaluating the accounting treatment for this lease, and related agreements, and will have this evaluation completed in March 2005. In December 2004, in light of the availability of fully built-out data centers in select markets at costs significantly below those costs we would incur inbuilding out new space, we made the decision to exit leases for excess space adjacent to one of our New York metro area IBXs, as well as space on the floorabove our original Los Angeles IBX. As a result of our decision to exit these spaces, we recorded a restructuring charge totaling $17.7 million, which representsthe present value of our estimated future cash payments, net of any estimated subrental income and expense, through the remainder of these lease terms, aswell as the write-off of all remaining property and equipment attributed to the excess space on the floor above our Los Angeles IBX. We entered into a two-yearsublease agreement for the excess space in the New York metro area and are currently evaluating opportunities related to our excess space in Los Angeles. In December 2004, we entered into a $25.0 million line of credit arrangement with Silicon Valley Bank that matures in December 2006. This facility is a$25.0 million revolving line of credit which, at our election, up to $10.0 million may be converted into a 24-month term loan, repayable in eight quarterlyinstallments. We refer to this transaction as the “Silicon Valley Bank credit line.” Borrowings under the Silicon Valley Bank credit line bear interest at floatinginterest rates, plus applicable margins, based either on the prime rate or LIBOR. As of December 31, 2004, the Silicon Valley Bank credit line had an interestrate of 4.40% per annum; however, through the date of filing of this report on Form 10-K, we have not drawn down any amounts from this line of credit. TheSilicon Valley Bank credit line also features sublimits, which allows us to issue letters of credit, enter into foreign exchange forward contracts and makeadvances for cash management services. Our utilization under any of these sublimits would have the effect of reducing the amount available for borrowingunder the Silicon Valley Bank credit line during the period that such sublimits remain utilized and outstanding. As of December 31, 2004, we had utilized$3.2 million under the letters of credit sublimit with the issuance of three 4Table of ContentsIndex to Financial Statementsletters of credit and, as a result, reduced the amount of borrowings available to us from $25.0 million to $21.8 million. The Silicon Valley Bank credit line issecured by substantially all of our domestic assets and contains numerous covenants, including financial covenants, such as maintaining minimum cashbalance levels and meeting minimum quarterly revenue targets, which we are in full compliance of. The Silicon Valley Bank credit line provides us withadditional liquidity and financing flexibility. In January 2005, we converted 95% of the outstanding convertible secured notes and accrued and unpaid interest, held by STT Communications Ltd.,into 4.1 million shares of our preferred stock, which was subsequently converted into 4.1 million shares of our common stock in February 2005. Theremaining 5% of the convertible secured notes, totaling $1.9 million, that remain outstanding will be eligible for conversion by Equinix in early 2006 intoapproximately 250,000 shares (including anticipated interest expense to be incurred during 2005 and early 2006), provided that the closing price of ourcommon stock exceeds $32.12 per share for thirty consecutive trading days. 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 in one location, with simpledirect connections. Their ability to peer across the room, instead of across a metro area has increased the scalability of their operations while decreasing cost byupwards of 70%. Our IBX centers 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, Level 3, MCI, Qwest, SAVVIS and Sprint. These companies, which constitute theworld’s top Internet service providers, together with most of the major 5Table of ContentsIndex to Financial Statementsbroadband networks, including America Online, Comcast Corporation, Cox Communications, MSN and SBC, second tier backbones such as GlobalCrossing, 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 every fiber, sonet, Ethernet and competitive local exchange companies, includingLooking Glass Networks and OnFiber Communications, and incumbent local exchange company, including BellSouth, SBC and Verizon, are our customersand use us to interconnect with each other and their customers. Additionally, we provide an important industry leadership role in the area of exchange pointsand are consistently looked to as an industry expert and key influencer in this subject matter. 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 flexibility tomove among providers. Our Solution Our IBX centers 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, The Gap, GoldmanSachs, Macromedia, Sony and Ticketmaster. We have a track record of 99.999% uptime and are continually testing and refining processes to ensure that wewill continue to provide 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 routes and users, customers canquickly, efficiently, cost-effectively and reliably exchange traffic with their network services providers for higher performance operations. Access to the morethan 200 networks ensures high-quality direct interconnection. With the mass of networks present, global enterprises are increasingly looking at ways toprovide network diversity and increase performance of their operations, and are utilizing our IBX centers 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 services such as Equinix GigE Exchange and Equinix Internet Core Exchange facilitate peering and dramatically reducecosts for critical transit, peering and traffic exchange operations by eliminating the costs of private peering or local loops. Networks such as Cox, BritishTelecom, China Telecom and SBC and content providers such as Electronic Arts, Google, MSN and Yahoo! can save between 20% to 70% of bandwidthcosts through the traffic exchange services we offer. In addition, content companies and enterprises can save significant bandwidth costs because the numberof 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. 6Table of ContentsIndex to Financial StatementsOur 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 200 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 The Gap, GE, Gannett, Goldman Sachs,IBM, Sony Corporation, Washington Mutual and others. Similarly, we have experienced increasing success in the government sector within defense andsecurity. We expect these sectors be a key growth driver in 2005 and beyond. Leverage the Network Effect. As networks, content providers and other enterprises locate in our IBX centers, 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 Centers as the Highest Performance Points on the Internet. Our premier IBX centers offer state of the art design and security, 24hour / 365 days a year customer service, and high quality power and back-up redundancy with 99.999% uptime. Underscoring our customer satisfactionover the past year, our embedded customer base has consistently provided approximately 75% of our growth in a given quarter. Provide New Products and Services within our IBX Centers. 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 31,2004, we had 950 customers worldwide. Typical customers in each category include the following: Carriers/Networks Content Providers EnterpriseAT&T Amazon.com AppleCable & Wireless AOL Deutsche BoerseComcast Electronic Arts Electronic Data SystemsLevel 3 Google Fidelity InvestmentsMCI MSN FujitsuNTT Sony GannettSAVVIS Ticketmaster The GapSBC Wal-Mart Goldman SachsSprint Washington Post IBMVerizon Yahoo! Washington Mutual 7Table of ContentsIndex to Financial StatementsCustomers typically sign renewable contracts of one or more years in length. Our single largest customer, IBM, represented approximately 13%, 15%and 20% of total revenues for the years ended December 31, 2004, 2003 and 2002, 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 centers provide our customers with secure, reliable and fault-tolerant environments that are necessary for optimum Internet commerceinterconnection. Our IBX centers 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 centers, 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 centers. 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 centers. Our staff holdssignificant 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 published industry-recognized white papers and strategy documents inthe areas of peering and interconnection, many of which are used by leading institutions worldwide in furthering the education and promotion of this importantnetwork arena. To showcase these efforts, we hold peering forums which are now widely recognized as a very influential forum for the world’s top peeringexperts. We will continue to develop additional services in the area of traffic exchange that will allow our customers to 8Table of ContentsIndex to Financial Statementsleverage the critical mass of networks now available in our IBX centers. 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 GigE Exchange via a central switching fabric rather than purchase a directphysical cross connection. With a connection to this switch, a customer can aggregate multiple interconnects over one physical connection instead ofpurchasing individual physical cross connects. The GigE Exchange service is offered as a bundled service that includes a cabinet, power, cross connects andport charges. The service is priced by IBX with an initial installation fee and an ongoing monthly recurring charge. Individual IBX prices scale upward basedon the number of participants on the exchange service. Internet Connectivity Services. Customers who are installing equipment in our IBX centers generally require IP connectivity or bandwidth services.Although many large customers prefer to contract directly with carriers, we will offer customers the ability to contract for these services through us from anyof the major bandwidth providers. This service, which is primarily provided in Asia, is targeted to customers who require a single bill and a single point ofsupport for all of their services contract through Equinix for their bandwidth needs. Internet Connectivity Services are priced with an initial installation fee andan ongoing monthly recurring charge based on the amount of bandwidth committed. 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 200 ISPs and carriers located in our IBX centers, we leverage the value of network choice with our set of multi-network management and other outsourced IT services. Professional Services. Our IBX centers 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 multi-homing 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. 9Table of ContentsIndex to Financial StatementsEquinix 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 type 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; Boston; Reston, Virginia; LosAngeles; Honolulu; 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 center participants encourage their customers, suppliers and businesspartners to come into the IBX centers. These customers, suppliers and business partners, in turn, encourage their business partners to locate in IBX centersresulting 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. In 2004, Equinix established a channel sales program to take advantage of the many networks that were exiting the colocation business to focus on theircore competencies. These channel partners are primarily large telecommunications providers whose networks are already installed in Equinix IBX centers andwho have customers that require high quality colocation, in addition to their network services. 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 10Table of ContentsIndex to Financial Statements centers primarily to help sell bandwidth, we have aggregated multiple networks in one location, providing superior diversity, pricing andperformance. Telecommunications companies’ data centers generally only provide one choice of carrier and generally require capacity minimums aspart of their pricing structures. Locating in our IBX centers provides access to top tier networks and allows customers to negotiate the best priceswith a number of carriers resulting in better economics and redundancy. In 2003 and 2004, two major carriers who had built and operated their owndata centers exited the U.S. colocation market. The disposition of these assets has been completed with various owners assuming the assets,including SAVVIS. Because these operators are not network neutral, we believe we have an advantage in gaining the business of those customersdisplaced from these carriers because access to their networks are also available in our IBX centers. • 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 enhancinga network 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, enterprise customers’ growth in outsourcing and the continued growth of the large and stable systems integrators. Employees As of December 31, 2004, we had 468 employees. We had 315 employees based in the U.S. and 153 employees based in Asia-Pacific. Of our U.S.employees, we had 192 based at our corporate headquarters in Foster City, California and our regional sales offices. Of those employees, 77 were inengineering and operations, 66 were in sales and marketing and 49 were in management and finance. We had 123 employees based at our IBX centers inChicago, Illinois; Dallas, Texas; Honolulu, Hawaii; Los Angeles and Silicon Valley, California; New York, New York; and the Washington, D.C. area. Ofour Asia-Pacific employees, we had 98 at our Asia-Pacific headquarters in Singapore and our other regional offices. Of those employees, 31 were in engineeringand operations, 26 were in sales and marketing and 41 were in management and finance. We had 55 employees based at our IBX centers in Hong Kong,Singapore, Sydney, and Tokyo. 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. 11Table of ContentsIndex to Financial StatementsYou 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. ITEM 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 Hong Kong and Tokyo, Japan. We have entered into leases for IBX centers inAshburn, Virginia; Chicago, Illinois; Dallas, Texas; Honolulu, Hawaii; Los Angeles, San Jose and Santa Clara, California; Newark and Secaucus, NewJersey; Hong Kong; Singapore; Sydney, Australia and Tokyo, Japan. We also hold a ground leasehold interest in certain unimproved real property in SanJose, 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 (the“Individual Defendants”), and several investment banks that were underwriters of our 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 our stock between August 10, 2000 and December 6, 2000. Inaddition, similar lawsuits were filed against approximately 300 other issuers and related parties. The purported class action alleges violations of Sections 11and 15 of the Securities Act of 1933 (the “1933 Act”) and Sections 10(b), Rule 10b-5 and 20(a) of the Securities Exchange Act of 1934 (the “1934 Act”)against the Company and Individual Defendants. The plaintiffs have since dismissed the Individual Defendants without prejudice. The suits allege that theunderwriter defendants agreed to allocate stock in our initial public offering to certain investors in exchange for excessive and undisclosed commissions andagreements by those investors to make additional purchases in the aftermarket at pre-determined prices. The plaintiffs allege that the prospectus for our initialpublic offering was false and misleading and in violation of the securities laws because it did not disclose these arrangements. The action seeks damages in anunspecified amount. On February 19, 2003, the Court dismissed the Section 10(b) claim against the Company, but denied the motion to dismiss the Section11 claim. In July 2003, a Special Litigation Committee of the Equinix Board of Directors approved a settlement agreement and related agreements which set forththe terms of a settlement between the Company, the Individual Defendants, the plaintiff class and the vast majority of the other approximately 300 issuerdefendants and the individual defendants currently or formerly associated with those companies. Among other provisions, the settlement provides for a releaseof the Company and the individual defendants and the Company’s agreeing to assign away, not assert, or release certain potential claims the Company mayhave against its underwriters. The settlement agreement also provides a guaranteed recovery of $1 billion to plaintiffs for the cases relating to all of theapproximately 300 issuers. To the extent that the underwriter defendants settle all of the cases for at least $1 billion, no payment will be required under theissuers’ settlement agreement. To the extent that the underwriter defendants settle for less than $1 billion, the issuers are required to make up the difference. Itis anticipated that any potential financial obligation of Equinix to plaintiffs pursuant to the settlement, currently such claims are expected to be less than $3.4million, will be covered by existing insurance and we do not expect that the settlement will involve any payment by the Company. The Company has noinformation as to whether there are any material limitations on the expected recovery by other issuer defendants of any potential financial obligation to plaintiffsfrom their own insurance carriers. The settlement agreement has been submitted to the Court for approval. The underwriter defendants have filed objections tothe settlement agreement. As approval by the Court cannot be assured, the Company is unable at this time to determine whether the outcome of the litigationwould have a material impact on its results of operations, financial condition or cash flows. On October 13, 2004, the Court certified a Section 11 class in four of the six cases that were the subject of class certification motions and determinedthat the class period for Section 11 claims is the period between the 12Table of ContentsIndex to Financial StatementsIPO and the date that unregistered shares entered the market. The Court noted that its decision on those cases is intended to provide strong guidance to allparties regarding class certification in the remaining cases. Plaintiffs have not yet moved to certify a class in the Equinix case. Until the settlement is finalizedand approved by the Court, or in the event such settlement is not approved, we and our officers and directors intend to continue to defend the actionsvigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None during the fourth quarter of 2004. 13Table of ContentsIndex to Financial StatementsPART II ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIES Our common stock is traded on the Nasdaq National Market System under the symbol EQIX. Our common stock began trading in August 2000. Thefollowing 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 the lasttwo years. Low HighFiscal 2004: Fourth Fiscal Quarter $31.44 $43.10Third Fiscal Quarter 26.59 33.52Second Fiscal Quarter 27.86 35.84First Fiscal Quarter 26.49 36.87Fiscal 2003: Fourth Fiscal Quarter $17.04 $28.25Third Fiscal Quarter 8.03 23.37Second Fiscal Quarter 2.90 10.40First Fiscal Quarter 2.95 7.70 As of December 31, 2004, we had issued 18,999,468 shares of our common stock held by approximately 458 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. Wecurrently 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 ofdirectors and will depend on, among other things, our operations, capital requirements and surplus, general financial condition, contractual restrictions andsuch other factors as our board of directors may 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, 2004, we did not issue or sell any new securities. 14Table of ContentsIndex to Financial StatementsEquity Compensation Plan Information The following table provides information as of December 31, 2004 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, 2004: (a) (b) (c) Plan category Number of securitiesto be issued uponexercise ofoutstanding optionsand rights Weighted-averageexerciseprice ofoutstandingoptions andrights Number of securitiesremaining availablefor future issuanceunder equitycompensation plans(excluding securitiesreflected in column (a)) Equity compensation plans approved by security holders* 3,766,662 $25.55 876,719**Equity compensation plans not approved by security holders 35,132 $12.16 1,390,982 Totals 3,801,794 $25.42 2,267,701 * 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; the Employee Stock PurchasePlan will be automatically increased by the lesser of 2% of the then outstanding shares of common stock or 600,000 shares; and, beginning in 2005, the2004 Employee Stock Purchase Plan will be automatically increased by the lesser of 2% of the then outstanding shares of common stock or 500,000shares . The Employee Stock Purchase Plan was succeeded by the 2004 Employee Stock Purchase Plan and after January 1, 2005, no additional shareswill be added to the Employee Stock Purchase Plan.** Includes 353 shares from the Employee Stock Purchase Plan and 500,000 shares from the 2004 Employee Stock Purchase Plan. The following equity compensation plan of the Company that was in effect as of December 31, 2004 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, 2004, options covering 35,132 shares of common stock were outstanding under the 2001 Supplemental Stock Plan, 1,390,982shares remained available for future option grants, and options covering 67,847 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. 15Table of ContentsIndex to Financial StatementsITEM 6. SELECTED FINANCIAL DATA The following statement of operations data for the five years ended December 31, 2004 and the balance sheet data as of December 31, 2004, 2003, 2002,2001 and 2000 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, 2004 and as of December 31, 2004 and 2003, 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, 2004 2003 2002 2001 2000 (dollars in thousands, except per share data) Statement of Operations Data: Revenues $163,671 $117,942 $77,188 $63,414 $13,016 Costs and operating expenses: Cost of revenues 136,950 128,121 104,073 94,889 43,401 Sales and marketing 18,604 19,483 15,247 16,935 20,139 General and administrative 32,494 34,293 30,659 58,286 56,585 Restructuring charges 17,685 — 28,885 48,565 — Total costs and operating expenses 205,733 181,897 178,864 218,675 120,125 Loss from operations (42,062) (63,955) (101,676) (155,261) (107,109)Interest income 1,291 296 998 10,656 16,430 Interest expense (11,496) (20,512) (35,098) (43,810) (29,111)Gain (loss) on debt extinguishment and conversion (16,211) — 114,158 — — Income taxes (153) — — — — Net loss $(68,631) $(84,171) $(21,618) $(188,415) $(119,790) Net loss per share: Basic and diluted $(3.87) $(8.76) $(7.23) $(76.62) $(111.23) Weighted average shares 17,719 9,604 2,990 2,459 1,077 As of December 31, 2004 2003 2002 2001 2000 (dollars in thousands) Balance Sheet Data: Cash, cash equivalents and short-term and long-term investments $108,092 $72,971 $41,216 $87,721 $207,210 Accounts receivable, net 11,919 10,178 9,152 6,909 4,925 Restricted cash and short-term investments 84 1,835 4,407 28,044 36,855 Property and equipment, net 343,361 343,554 390,048 325,226 315,380 Construction in progress — — — 103,691 94,894 Total assets 501,798 464,532 492,003 575,054 683,485 Debt facilities and capital lease obligations, excluding current portion 34,529 723 3,633 6,344 6,506 Credit facility, excluding current portion — 22,281 89,529 105,000 — Senior notes — 29,220 28,908 187,882 185,908 Convertible secured notes 35,824 31,683 25,354 — — Convertible subordinated debentures 86,250 — — — — Total stockholders’ equity 273,706 320,077 284,194 203,521 375,116 Other Financial Data: Net cash provided by (used in) operating activities 36,912 (17,266) (27,509) (68,854) (68,073)Net cash used in investing activities (56,865) (49,179) (7,528) (153,014) (302,158)Net cash provided by financing activities 19,239 52,288 16,924 107,799 339,847 16Table of ContentsIndex to Financial StatementsITEM 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 15 IBX centers in the U.S. and Asia-Pacific, customers can directly interconnect with each other for critical trafficexchange requirements. As of December 31, 2004, we had IBX centers totaling an aggregate of approximately 1.4 million gross square feet in the Chicago,Dallas, Honolulu, Los Angeles, New York, Silicon Valley and Washington, D.C. areas in the United States and Hong Kong, Singapore, Sydney and Tokyoin the Asia-Pacific region. In our IBX centers, customers can directly interconnect with each other for critical traffic exchange requirements. Direct interconnection to ouraggregation of networks, which serve more than 90% of the world’s Internet routes, allows our customers to increase performance while significantly reducingcosts. Based on our network neutral model and the quality of our IBX centers, we believe we have established a critical mass of customers comprised ofnetworks, content providers and other enterprise companies. As more customers locate in our IBX centers, it benefits their suppliers and business partners todo so as well to gain the full economic and performance benefits of direct interconnection. These partners, in turn, pull in their business partners, creating a“network effect” of customer adoption. Our interconnection services enable scalable, reliable and cost-effective interconnection and traffic exchange thuslowering overall cost and increasing flexibility. This critical mass of customers and the resulting network effect, combined with our improved financial position achieved through the completion of aseries of financing transactions has resulted in an acceleration of new customer growth and related revenue bookings. Our current financial stability andfocused business model have been important factors in this acceleration, both from new and existing customers. While we had generated negative operatingcashflow in each annual period since inception through the quarter ended June 30, 2003, commencing the quarter ended September 30, 2003 we started togenerate positive operating cash flow. During this quarter, our revenues grew to a level sufficient to meet our operating cash requirements for our predominantlyfixed cost structure related to our existing IBX centers. We considered this quarter to be the inflection point in our business model whereby our revenues weresufficient, on an ongoing basis, to meet all our operating costs and working capital requirements. Given a large component of our cost of revenues related toour existing IBX centers are fixed in nature, we anticipate any growth in revenues will have a significant incremental flow-through to gross profit. Sincereaching this point in our operating history, we have consistently generated operating cashflows for the past six quarters and we continue to expect to generateoperating cash flows in 2005 and beyond at levels sufficient to meet our cash requirements to fund our capital expenditures, debt service and corporateoverhead requirements. 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 17Table of ContentsIndex to Financial Statementstelecommunication 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 in order 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 own or operate a network, yet have greater than 200 networks operating out of ourIBX centers. As a result, we are able to offer our customers a substantial choice of networks given our network neutrality thereby allowing our customers tochoose from numerous network service providers. We believe this is a distinct and sustainable competitive advantage, especially when the telecommunicationsindustry is experiencing many business challenges and changes as evidenced by the numerous bankruptcies and consolidations within this industry duringthe past several years. Furthermore, for those customers who do require a more fully managed solution, certain of our other customers, such as IBM andEDS, can provide such a solution within our network rich IBX centers. 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 acquisition of the Sprint property in Santa Clara in December 2003 and our 2004 expansions in the Washington, D.C. and Silicon Valley areamarkets (see Recent Developments below). However, we will continue to be very selective with any similar opportunity. As was the case with these recentexpansions in the Silicon Valley and Washington, D.C. area markets, the criteria will be quality of the design, access to networks, capacity availability incurrent market location, amount of incremental investment required by us in the targeted property, lead-time to breakeven and in-place customers. Like ourrecent expansions, the right combination of these factors may be attractive for us. Dependent on the particular deal, these acquisitions may require upfrontcash payments and additional capital expenditures in order to bring these centers up to Equinix standards. Recent Developments During February 2004, we sold $86.3 million in aggregate principal of 2.5% convertible subordinated debentures due 2024 to qualified institutionalbuyers. We refer to this transaction as the “convertible debenture offering.” We used the net proceeds from the convertible debenture offering primarily to repayall amounts outstanding under our credit facility and two of our other debt facilities. In addition, we used the proceeds received to redeem our 13% senior notes,which had a total of $30.5 million of principal outstanding. The effective date of the redemption was March 12, 2004. The redemption price for the seniornotes was equal to 106.5% of their principal amount plus accrued and unpaid interest to the redemption date. On March 26, 2004, holders of our 10% $10.0 million convertible secured notes issued in connection with the Crosslink financing, converted the $10.0million of principal into 2.5 million shares of our common stock. We refer to this transaction as the “Crosslink conversion.” We recorded a significant loss on debt extinguishment and conversion totaling $16.2 million during the quarter ended March 31, 2004, primarily relatedto the non-cash write-off of debt issuance costs and discounts in connection with the various debt repayments, redemptions and conversions of the underlyingdebt facilities extinguished or converted, as well as the cash premium that we paid on our 13% senior notes. In April 2004, we entered into a long-term lease for a 95,000 square foot data center in the Washington, D.C. metro area. This data center is adjacent tothe Company’s existing Washington D.C. metro area IBX. This lease includes the leasing of all of the IBX plant and machinery equipment located in thebuilding. Both the building and equipment components of this lease are being accounted for as a capital lease. We took possession of this property during thefourth quarter of 2004, and as a result, recorded property and equipment assets, as well as a capital lease obligation, totaling $35.3 million. Payments underthis lease, which commenced in November 2004, will be made through 2019 at an effective interest rate of 8.50% per annum. We intend to place customers inthis center in 2005. 18Table of ContentsIndex to Financial StatementsIn December 2004, we entered into a long-term lease for a 103,000 square foot data center in the Silicon Valley area. This data center is close to ourexisting IBX centers in the Silicon Valley, and expands the global Equinix footprint to approximately 1.4 million square feet. This new lease will add anadditional $34.2 million in cumulative monthly lease payments through 2020, commencing February 2005. We will take possession of this property duringthe first quarter of 2005. We currently intend to place customers in this data center in 2005. Concurrent with the signing of this lease, we also purchased theassets located in this data center and entered into an agreement to interconnect all three of our Silicon Valley IBX centers to each other through redundant darkfiber links managed by us. This will allow our customers to have access to all the networks and customers in each of the three Silicon Valley IBXs. We arecurrently evaluating the accounting treatment for this lease, and related agreements, and will have this evaluation completed in March 2005. In December 2004, in light of the availability of fully built-out data centers in select markets at costs significantly below those costs we would incur inbuilding out new space, we made the decision to exit leases for excess space adjacent to one of our New York metro area IBXs, as well as space on the floorabove our original Los Angeles IBX. As a result of our decision to exit these spaces, we recorded a restructuring charge totaling $17.7 million, which representsthe present value of our estimated future cash payments, net of any estimated subrental income and expense, through the remainder of these lease terms, aswell as the write-off of all remaining property and equipment attributed to the excess space on the floor above our Los Angeles IBX. We entered into a two-yearsublease agreement for the excess space in the New York metro area and are currently evaluating opportunities related to our excess space in Los Angeles. In December 2004, we entered into a $25.0 million line of credit arrangement with Silicon Valley Bank that matures in December 2006. This facility is a$25.0 million revolving line of credit which, at our election, up to $10.0 million may be converted into a 24-month term loan, repayable in eight quarterlyinstallments. We refer to this transaction as the “Silicon Valley Bank credit line.” Borrowings under the Silicon Valley Bank credit line bear interest at floatinginterest rates, plus applicable margins, based either on the prime rate or LIBOR. As of December 31, 2004, the Silicon Valley Bank credit line had an interestrate of 4.40% per annum; however, through the date of filing of this report on Form 10-K, we have not drawn down any amounts from this line of credit. TheSilicon Valley Bank credit line also features sublimits, which allows us to issue letters of credit, enter into foreign exchange forward contracts and makeadvances for cash management services. Our utilization under any of these sublimits would have the effect of reducing the amount available for borrowingunder the Silicon Valley Bank credit line during the period that such sublimits remain utilized and outstanding. As of December 31, 2004, we had utilized$3.2 million under the letters of credit sublimit with the issuance of three letters of credit and, as a result, reduced the amount of borrowings available to usfrom $25.0 million to $21.8 million. The Silicon Valley Bank credit line is secured by substantially all of our domestic assets and contains numerouscovenants, including financial covenants, such as maintaining minimum cash balance levels and meeting minimum quarterly revenue targets, which we arein full compliance of. The Silicon Valley Bank credit line provides us with additional liquidity and financing flexibility. In January 2005, we converted 95% of the outstanding convertible secured notes and accrued and unpaid interest, held by STT Communications Ltd.,into 4.1 million shares of our preferred stock, which was subsequently converted into 4.1 million shares of our common stock in February 2005. Theremaining 5% of the convertible secured notes, totaling $1.9 million, that remain outstanding will be eligible for conversion by Equinix in early 2006 intoapproximately 250,000 shares (including anticipated interest expense to be incurred during 2005 and early 2006), provided that the closing price of ourcommon stock exceeds $32.12 per share for thirty consecutive trading days. We refer to this transaction as the “STT convertible secured notes conversion.” The 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 19Table of ContentsIndex to Financial StatementsPihana. i-STT’s business was based in Singapore, with operations in Singapore and a joint venture in Thailand. Pihana’s business was based in Hawaii,with operations in Honolulu, Los Angeles, Hong Kong, Singapore, Sydney and Tokyo. In connection with the acquisition of i-STT and Pihana, we issuedapproximately 3.5 million shares of our common stock and approximately 1.9 million shares of our Series A preferred stock. We refer to this transaction asthe “combination.” In conjunction with the combination, we issued to i-STT’s former parent company, STT Communications Ltd., or STTCommunications, 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 Form 10-K 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; • Impairment of long-lived assets, including goodwill; • Accounting for leases and IBX acquisitions; • Accounting for restructuring charges; and • Accounting for stock-based compensation. Revenue Recognition and Allowance for Doubtful Accounts. We derive more than 90% of our revenues from recurring revenue streams,consisting primarily of (1) colocation services, such as from the licensing of 20Table of ContentsIndex to Financial Statementscabinet space and power; (2) interconnection services, such as cross connects and Gigabit Ethernet ports and (3) managed infrastructure services, such asEquinix Direct, bandwidth and 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 revenues, professional services, contract settlements and equipmentsales. 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 estimated reliably, in which case fees are recognized upon the completion of services. Non-recurring installation fees, although generally paid in alump sum upon installation, are deferred and recognized ratably over the term of the related contract or expected customer relationship. Professional service feesare recognized in the period in which the services were provided and represent the culmination of the earnings process as long as they meet the criteria forseparate recognition under EITF Abstract No. 00-21, “Revenue Arrangements with Multiple Deliverables.” Revenue from bandwidth and equipment isrecognized on a gross basis in accordance with EITF Abstract No. 99-19, “Recording Revenue as a Principal versus Net as an Agent”, primarily because weact as the principal in the transaction, take title to products and services and bear inventory and credit risk. To the extent we do not meet the criteria for grossbasis accounting for bandwidth and equipment revenue, we record the revenue on a net basis. 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. We occasionally 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 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. We assess collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. We generally do not request collateral from our customers, although in certain cases we obtain a security interest in a customer’sequipment placed in our IBX centers or obtain a deposit. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognizerevenue at the time collection becomes reasonably assured, which is generally upon receipt of cash. In addition, we also maintain an allowance for doubtfulaccounts for estimated losses resulting from the inability of our customers to make required payments for those customers that we had expected to collect therevenues. If the financial condition of our customers were to deteriorate or if they become insolvent, resulting in an impairment of their ability to makepayments, allowances for doubtful accounts may be required. Management specifically analyzes accounts receivable and current economic news and trends,historical bad debts, customer concentrations, customer credit-worthiness and changes in customer payment terms when evaluating revenue recognition andthe adequacy of our reserves. A specific bad debt reserve of up to the full amount of a particular invoice value is provided for certain problematic customerbalances. A general reserve is established for all other accounts based on the age of the invoices. Delinquent account balances are written-off after managementhas determined that the likelihood of collection is not probable. Our customer base has historically been composed of businesses throughout the U.S. Commencing in the 2003 fiscal year our revenues includedrevenues from our newly-acquired Asia-Pacific operations. For the year ended December 31, 2003 our revenues were split approximately 85% in the U.S. and15% in Asia-Pacific. For the year ended December 31, 2004 our revenues were split approximately 87% in the U.S. and 13% in Asia-Pacific. We performongoing credit evaluations of our customers. As of December 31, 2004, one customer, IBM, accounted for 13% of annual revenues and 12% of accountsreceivable. As of December 31, 2003, this same customer accounted for 15% of annual revenues and 11% of accounts receivable. As of December 31, 2002,this same customer accounted for 20% of annual revenues. No other single customer accounted for greater than 10% of accounts receivable or annual revenuesfor the periods presented. 21Table of ContentsIndex to Financial StatementsAccounting for Income Taxes. Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets andliabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets andliabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year inwhich 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 inincome in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that areexpected more likely than not to be realized in the future. The assessment of whether or not a valuation allowance is required often requires significantjudgment including the forecast of future taxable income and the evaluation of tax planning strategies in each of the jurisdictions in which we operate. We alsoaccount for any income tax contingencies in accordance with SFAS No. 5, “Accounting for Contingencies.” We currently have provided for a full valuation allowance against our net deferred tax assets. We have considered the positive and negative evidencesaffecting the assessment of a full valuation allowance. Based on the available objective evidence, management does not believe it is more likely than not that thenet deferred tax assets will be realizable in the future. Should we determine that we would be able to realize our deferred tax assets in the foreseeable future, areversed adjustment to the valuation allowance would benefit net income in the period such determination is made. In preparing the consolidated financial statement, we are required to estimate our income taxes in each of the jurisdictions in which we operate. Thedetermination of income taxes also involves estimating the impact of additional taxes resulting from tax examinations and uncertainties in the application ofcomplex tax laws and regulations. Accruals for tax contingencies require management to estimate the actual outcome of any such audits and the impact ofuncertainties. Actual results could vary from these estimates. 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 center leases or a municipality changingthe assessment 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 cash flows. 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 centers 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 equipment and seven to twelve years for IBX equipment. Leasehold improvements and assets acquired under capital lease are amortizedover the shorter of the lease term or the estimated useful life of the asset or improvement. 22Table of ContentsIndex to Financial StatementsShould 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, Including Goodwill. We account for the impairment of long-lived assets in accordance with Statement ofFinancial Accounting Standard, or SFAS, No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, or in the case of goodwill, inaccordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” We evaluate the carrying value of our long-lived assets, consisting primarily of ourIBX centers and goodwill, whenever certain events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable or atleast on an annual basis during the fourth quarter for goodwill. Such events or circumstances include, but are not limited to, a prolonged industry downturn,a significant decline in our market value or significant reductions in projected future cash flows. We currently operate in one reportable segment; however ourgoodwill is attributed solely to our Singapore reporting unit. Significant judgments and assumptions are required in the forecast of future operating results used in the preparation of the estimated future cash flows,including profit margins, long-term forecasts of the amounts and timing of overall market growth and our percentage of that market, groupings of assets,discount rates and terminal growth rates. In addition, significant estimates and assumptions are required in the determination of the fair value of our tangiblelong-lived assets, including replacement cost, economic obsolescence, and the value that could be realized in orderly liquidation. Changes in these estimatescould have a material adverse effect on the assessment of our long-lived assets, thereby requiring us to write down the assets. Our net long-lived assets as ofDecember 31, 2004 and December 31, 2003, included property and equipment of $343.4 million and $343.6 million, respectively, and goodwill and otheridentifiable intangible assets of $22.3 million and $23.5 million, respectively. Accounting for Leases and IBX acquisitions. We currently have 15 IBX centers in the U.S. and Asia-Pacific. Our current strategy has been toenter into long-term leases for our IBX centers rather than to purchase and own these properties. The majority of our IBX centers are accounted for as operatingleases; however, in April 2004, we entered into a long-term lease for a 95,000 square foot data center in the Washington, D.C. metro area. This lease, whichincludes the leasing of all of the IBX plant and machinery equipment located in the building, is a capital lease. We account for leases in accordance with SFASNo. 13, “Accounting for Leases.” Although we do not have title to any of the leased assets contained in our new Washington, D.C. metro area IBX, this leasequalified for capital lease treatment as a result of the present value of the minimum lease payments equaling or exceeding 90% of the fair value of the leasedproperty. Our analysis of this lease required significant judgment and estimates in order to assess the fair value of the leased property and determine ourincremental borrowing rate given no implicit rate was defined within the lease to allow us to calculate the present value of the minimum lease payments. Inaddition, as this lease contained land, building and equipment elements, we had to separate the individual elements and analyze each element separately. While our first seven IBX centers were designed and built by us, in light of the availability of fully built-out data centers in select markets at costssignificantly below the cost we would incur in building out new space, we have altered our business strategy to acquire fully built-out data centers rather thanbuild out our own data centers in order to meet our IBX expansion needs. Each individual IBX expansion transaction, while still in the form of a long-termlease, is unique. For example, with respect to the Santa Clara IBX acquisition in December 2003, rather than enter into a long-term lease for both the buildingand data center plant and equipment like the Washington, D.C. metro area IBX transaction mentioned above, we leased only the building in Santa Clara andpurchased the data center property and equipment located in the building. Yet, the building lease had payment terms which were at a premium to prevailingmarket rates for similar properties at the time of signing the lease. As a result, we recorded an unfavorable lease liability, which is being amortized into rentexpense over the term 23Table of ContentsIndex to Financial Statementsof the lease. Also, given that the Santa Clara data center was an operating data center, unlike the vacant Washington, D.C. metro area data center, we wererequired to negotiate with various customers located in the data center and enter into new contracts with these customers. In addition, we hired a number of theemployees that were already working in this data center. As a result, we recorded several intangible assets. In summary, each individual data center expansion will require a significant amount of judgment and management estimates in order to properly addressthe accounting treatment. Accounting for Restructuring Charges. We have recorded restructuring charges in three of the past five years as we modified our business strategyin light of changing economic circumstances. Most recently, in December 2004, in light of the availability of fully built-out data centers in select markets atcosts significantly below those costs we would incur in building out new space, we made the decision to exit leases for excess space adjacent to one of our NewYork metro area IBXs, as well as space on the floor above our original Los Angeles IBX. As a result of our decision to exit these spaces, we recorded arestructuring charge totaling $17.7 million, which represents the present value of our estimated future cash payments, net of any estimated subrental incomeand expense, through the remainder of these lease terms, as well as the write-off of all remaining property and equipment attributed to the excess space on thefloor above our Los Angeles IBX. We entered into a two-year sublease agreement for the excess space in the New York metro area and are currently evaluatingopportunities related to our excess space in Los Angeles. We account for such activities in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Under theprovisions of SFAS No. 146, we had to estimate the future cash payments required to exit these two leases, net of any estimated sub-rental income andexpense, through the remainder of these lease terms and then determine the present value of such future cash flows to record the appropriate restructuringcharge. In future periods, we will record accretion expense to accrete our accrued restructuring liability up to an amount equal to the total estimated future cashpayments necessary to complete the exit of these leases. This restructuring activity required a significant amount of judgment and management estimates inorder to determine a reasonable scenario of future net cash flows required to exit these leases, as well as to determine the appropriate discount rate to calculatethe present value of the future net cash flows. Should the actual lease exit costs differ from our estimates, we may be required to adjust our restructuringcharges associated with these two leases, which would impact net income in the period such determination was made. In addition, in the future, circumstancesmay change which would require us to record additional restructuring charges, which would require similar levels of judgment and management estimates inorder to determine the appropriate restructuring charge to record. Accounting for Stock-Based Compensation. We account for stock-based compensation plans in accordance with SFAS No. 123, “Accounting forStock-Based Compensation.” As permitted under SFAS No. 123, we use the intrinsic value-based method of Accounting Principles Board (“APB”) OpinionNo. 25, “Accounting for Stock Issued to Employees,” to account for our employee stock-based compensation plans. Under APB Opinion No. 25,compensation expense is based on the difference, if any, on the date of grant, between the fair value of our shares and the exercise price of the option. Unearneddeferred compensation resulting from employee option grants is amortized on an accelerated basis over the vesting period of the individual options, inaccordance with FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.” We have alsoadopted the disclosure requirements of SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of SFASNo. 123.” 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 was amortizedover the four-year vesting life of these individual stock options net of the reversal of any previously recorded accelerated stock-based compensation expense dueto the forfeitures of those stock options prior to vesting. The amortization of the 24Table of ContentsIndex to Financial Statementsdeferred stock-based compensation related to these pre-IPO stock options ended in August 2004. Subsequent to our IPO, since we generally only grant stockoptions at fair value on the date of grant, we currently do not have any significant deferred stock-based compensation remaining to be amortized. As ofDecember 31, 2004, deferred stock-based compensation on our balance sheet totaled $260,000, and for the years ended December 31, 2004, 2003 and 2002, werecognized stock-based compensation expense of $1,467,000, $2,905,000 and $6,878,000. Had the Company recognized stock-based compensation underthe fair value provisions of SFAS No. 123, the Company would have recognized stock-based compensation expense of $20,756,000, $10,238,000 and$12,866,000 for the years ended December 31, 2004, 2003 and 2002, respectively, using the Black-Scholes option-pricing model with assumptionsappropriate to this three-year period. For further detailed information on how we calculated these pro forma stock-based compensation charges, see Note 1 ofour “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K below. In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) revises SFAS No. 123, “Accounting for Stock-Based Compensation” and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation, such asemployee stock purchase plans and restricted stock awards. In addition, SFAS No. 123(R) supercedes Accounting Principles Board Opinion (APB) No. 25,“Accounting for Stock Issued to Employees” and amends SFAS No. 95, “Statement of Cash Flows.” Under the provisions of SFAS No. 123(R), stock-basedcompensation awards must meet certain criteria in order for the award to qualify for equity classification. An award that does not meet those criteria will beclassified as a liability and will need to be re-measured each period. SFAS No. 123(R) retains the requirements on accounting for the income tax effects ofstock-based compensation contained in SFAS no. 123; however, it changes how excess tax benefits will be presented in the statement of cash flows. SFAS No.123(R) is effective for reporting periods beginning after June 15, 2005. Senior management is currently considering the financial accounting, income tax andinternal control implications of SFAS No. 123(R). The adoption of SFAS No. 123(R) is expected to have a significant impact on our financial position andresults of operations. Results of Operations Years Ended December 31, 2004 and 2003 Revenues. Our revenues for the years ended December 31, 2004 and 2003 were split between the following revenue classifications (dollars inthousands): Year ended December 31, 2004 % 2003 % Recurring revenues $154,432 94% $109,957 93% Non-recurring revenues: Installation and professional services 8,350 5% 6,221 5%Other 889 1% 1,764 2% 9,239 6% 7,985 7% Total revenues $163,671 100% $117,942 100% Our revenues for the years ended December 31, 2004 and 2003 were geographically comprised of the following (dollars in thousands): Year ended December 31, 2004 % 2003 % U.S. revenues $141,598 87% $99,669 85%Asia-Pacific revenues 22,073 13% 18,273 15% Total revenues $163,671 100% $117,942 100% 25Table of ContentsIndex to Financial StatementsWe recognized revenues of $163.7 million for the year ended December 31, 2004 as compared to revenues of $117.9 million for the year endedDecember 31, 2003, a 39% increase. We segment our business geographically between the U.S. and Asia-Pacific as further discussed below. Our business is based on a recurring revenue model comprised of colocation, interconnection and managed infrastructure services. We consider theseservices recurring as once a customer has been installed in one of our IBX centers 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 94% of ourtotal revenues for the year ended December 31, 2004 as compared to 93% in the prior year. Historically, greater than half of our customers order new serviceseach quarter and greater than half of our new orders come from our already installed customer base each quarter. 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. The non-recurring revenues are typically billed on the first invoice distributed to the customer. Installation and professional servicesrevenues increased 34% period over period, primarily due to strong existing and new customer growth during the year. As a percent of total revenues, we expectnon-recurring revenues to represent approximately 5% of total revenues in each period. Other non-recurring revenues are comprised primarily of customersettlements, which represent fees paid to us by customers who wish to terminate their contracts with us prior to their expiration. 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) weighted-average percentage utilization. Our customer count increased to 950 as of December 31, 2004 versus 712 as of December 31, 2003, anincrease of 33%. Our weighted-average utilization rate represents the percentage of our cabinet space billing versus total cabinet space available. Our weighted-average utilization rate grew to 45% as of December 31, 2004 from 35% as of December 31, 2003. Although we have substantial capacity for growth, ourutilization rates vary from market to market among our 15 worldwide IBX centers. We continue to monitor the available capacity in each of our selectedmarkets. To the extent we have limited capacity available in a given market, it may limit our ability for growth in that market. Therefore, consistent with ourlease of Sprint’s Santa Clara property in December 2003 and our expansion into the Washington, D.C. metro area market in April 2004 and further expansioninto the Silicon Valley market in December 2004, we continually review available space in our other operating markets. U.S. Revenues. We recognized U.S. revenues of $141.6 million for the year ended December 31, 2004 as compared to $99.7 million for the yearended December 31, 2003. U.S. revenues consisted of recurring revenues of $134.3 million and $93.6 million, respectively, for the year ended December 31,2004 and 2003, 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, 2004 included revenue generated from the recently acquired Santa Clara IBXcenter. Excluding revenue from this acquired U.S. IBX hub, the period over period growth in recurring revenues was primarily the result of an increase inorders from both our existing customers and new customer growth acquired during the period as reflected in the growth in our customer count and weighted-average utilization rate as discussed above. As noted above, historically, greater than half of our new orders come from our already installed customer baseeach period. We expect our U.S. recurring revenues to continue to grow and remain our most significant source of revenue for the foreseeable future. In addition, U.S. revenues consisted of non-recurring revenues of $7.3 million and $6.1 million, respectively, for the year ended December 31, 2004and 2003. Non-recurring revenues are primarily related to the recognized portion of deferred installation, professional services and settlement fees associatedwith certain contract terminations. Included in U.S. non-recurring revenues are settlement fees of $609,000 and $1.2 million, respectively, for the year endedDecember 31, 2004 and 2003. The $609,000 in settlement fees for the year ended 26Table of ContentsIndex to Financial StatementsDecember 31, 2004 primarily represented a bankruptcy court-mandated payment from Excite@Home. The $1.2 million in settlement fees for the year endedDecember 31, 2003 primarily represented bankruptcy court-mandated 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 increase moderately in the foreseeable future as we continue to expand ourcustomer base and recognize deferred non-recurring revenue attributed to certain custom projects for the U.S. government. Asia-Pacific Revenues. We recognized Asia-Pacific revenues of $22.1 million for the year ended December 31, 2004 as compared to $18.2 million forthe year ended December 31, 2003. Asia-Pacific revenues consisted of recurring revenues of $20.2 million and $16.3 million, respectively, for the year endedDecember 31, 2004 and 2003, consisting primarily of colocation and managed infrastructure services. In addition, Asia-Pacific revenues consisted of non-recurring revenues of $1.9 million for both years ended December 31, 2004 and 2003. Asia-Pacific non-recurring revenues included $280,000 and $584,000,respectively, of contract settlement revenue for the year ended December 31, 2004 and 2003. Asia-Pacific revenues are generated from Hong Kong, Singapore,Sydney and Tokyo with Singapore representing approximately 52% and 77%, respectively, of the regional revenues for the year ended December 31, 2004 and2003. Our Asia-Pacific colocation revenues are similar to the revenues that we generate from our U.S. IBX centers; however, our Singapore IBX center hasadditional managed infrastructure service revenue, such as mail service and managed platform solutions, which we do not currently offer in any other IBXcenter location. The growth in our Asia-Pacific revenues is primarily the result of an increase in the customer base in this region during the past year,particularly in Tokyo and Sydney; however, this revenue growth was partially offset by a decrease in low-margin bandwidth revenue in Singapore ofapproximately $3.1 million. We expect our Asia-Pacific revenues to grow over the foreseeable future. Cost of Revenues. Cost of revenues were $136.9 million for the year ended December 31, 2004 as compared to $128.1 million for the year endedDecember 31, 2003, a 7% increase. The largest cost components of our cost of revenues are depreciation, rental payments related to our leased IBX centers,utility costs including electricity and bandwidth, IBX employees’ salaries and benefits, supplies and equipment and security services. A substantial majorityof our cost of revenues are fixed in nature and do not vary significantly from period to period. However, there are certain costs, which are considered variablein nature, including utilities and supplies, that are directly related to growth of services for our existing and new customer base. Given a large component ofour cost of revenues are fixed in nature, we anticipate any growth in revenues will have a significant incremental flow-through to gross profit; however, powerand cooling requirements are growing on a per server basis. As a result, customers are consuming an increasing amount of power per cabinet. This, combinedwith the fact that we do not currently control the amount of draw our customers take from installed circuits, means that our utility costs are expected toincrease in the future, and we may not be successful in raising power revenues to a sufficient level to offset such expected increases in utility costs. Wecontinue to monitor power draw and rates in each of our IBX centers. U.S. Cost of Revenues. U.S. cost of revenues were $118.3 million for the year ended December 31, 2004 as compared to $107.5 million for the yearended December 31, 2003. U.S. cost of revenues included $50.1 million of depreciation expense, $35,000 of stock-based compensation expense, $355,000 ofaccretion expense associated with our asset retirement obligations relating to our various leaseholds and $147,000 of amortization expense associated with anintangible asset related to our Santa Clara IBX center for the year ended December 31, 2004. U.S. cost of revenues included $49.9 million of depreciationexpense, $59,000 of stock-based compensation expense, $562,000 of accretion expense associated with our asset retirement obligations relating to our variousleaseholds and $13,000 of amortization expense associated with an intangible asset related to our Santa Clara IBX center for the year ended December 31, 2003.Excluding depreciation, stock-based compensation, accretion expense and amortization expense, U.S. cost of revenues increased period over period to $67.7million for the year ended December 31, 2004 from $56.9 million for the year ended December 31, 2003, a 19% increase. This increase is primarily the resultof the operating costs associated with the Santa Clara IBX center acquired on December 1, 2003, as well as increasing utility costs in our IBX centers,excluding the newly- 27Table of ContentsIndex to Financial Statementsacquired Santa Clara IBX, of $4.1 million in line with increasing customer installations and revenues attributed to this customer growth and $1.2 million ofhigher compensation costs in our IBX centers, excluding the newly-acquired Santa Clara IBX, including general salary increases and bonuses for our IBXstaff. We continue to anticipate that our cost of revenues will increase in the foreseeable future as the occupancy levels in our U.S. IBX centers increase,however as a percent of revenues, we anticipate our cost of revenues will continue to decline. Asia-Pacific Cost of Revenues. Asia-Pacific cost of revenues were $18.6 million for the year ended December 31, 2004 as compared to $20.6 millionfor the year ended December 31, 2003. Asia-Pacific cost of revenues included $3.7 million of depreciation expense and $194,000 of non-cash rent expenseassociated with the value attributed to warrants issued to our landlord in connection with a lease amendment for our Hong Kong IBX center for the year endedDecember 31, 2004. Asia-Pacific cost of revenues included $4.4 million of depreciation expense for the year ended December 31, 2003. Excluding depreciationand non-cash rent expense, Asia-Pacific cost of revenues decreased period over period to $14.7 million for the year ended December 31, 2004 from $16.2million for the year ended December 31, 2003, a 9% decrease. This decrease is primarily the result of (i) a decrease in bandwidth costs in Singapore associatedwith a corresponding decrease in low-margin bandwidth revenue in this location of approximately $2.4 million, (ii) a decrease in operating costs in Singaporeas a result of the asset sale of one of our two IBX centers in Singapore that occurred during the fourth quarter of 2003 of $804,000 and (iii) the renegotiationand reduction of our Hong Kong and Tokyo lease costs, resulting in rent savings of approximately $538,000. These decreases are partially offset by some costincreases in line with increasing customer installations and revenues attributed to our customer growth in this region, including increasing utility costs in ourAsia-Pacific IBX centers of $649,000. Our Asia-Pacific costs of revenues are generated in Hong Kong, Singapore, Sydney and Tokyo. There are severalmanaged IT infrastructure service revenue streams unique to our Singapore IBX hub, such as mail service and managed platform solutions, that are morelabor intensive than our service offerings in the United States. As a result, our Singapore IBX center has a greater number of employees than any of our otherIBX centers, and therefore, a greater labor cost relative to our other IBX centers in the United States or other Asia-Pacific locations. We anticipate that our Asia-Pacific cost of revenues will experience moderate growth in the foreseeable future consistent with our anticipated growth in revenues in this region. Sales and Marketing. Sales and marketing expenses decreased to $18.6 million for the year ended December 31, 2004 from $19.4 million for theyear ended December 31, 2003. U.S. Sales and Marketing Expenses. U.S. sales and marketing expenses increased to $13.8 million for the year ended December 31, 2004 from$12.5 million for the year ended December 31, 2003. Included in U.S. sales and marketing expenses were $119,000 and $299,000, respectively, of stock-based compensation expense and amortization expense associated with an intangible asset in connection with our Santa Clara IBX center for the years endedDecember 31, 2004 and 2003. Excluding stock-based compensation and amortization expense, U.S. sales and marketing expenses increased to $13.7 millionfor the year ended December 31, 2004 as compared to $12.2 million for the year ended December 31, 2003, a 12% 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. This increase is primarily due to increased compensation costs of $1.1 million, primarily as a result of growth in ourrevenue bookings and an increase in the number of sales and marketing headcount. Going forward, we expect U.S. sales and marketing spending to increaseat a measured rate but will decrease as a percent of revenues. Asia-Pacific Sales and Marketing Expenses. Asia-Pacific sales and marketing expenses decreased to $4.8 million for the year ended December 31,2004 as compared to $6.9 million for the year ended December 31, 2003. Included in Asia-Pacific sales and marketing expenses were $1.8 million and $2.1million, respectively, of amortization expense associated with several intangible assets associated with our Singapore operations for the years ended December31, 2004 and 2003. Excluding amortization expense, Asia-Pacific sales and marketing expenses decreased to $3.0 million during the year ended December 31,2004 down from $4.8 million in the prior year, primarily as a result of headcount and overall compensation cost reductions in the Singapore region last 28Table of ContentsIndex to Financial Statementsyear of approximately 14% and a decrease in overall discretionary spending due in large part to synergistic savings as a result of the combination that closedon December 31, 2002. Our Asia-Pacific sales and marketing expenses consist of the same type of costs that we incur in our U.S. operations, namelycompensation and related costs for sales and marketing personnel, sales commissions, marketing programs, public relations, promotional materials andtravel. Our Asia-Pacific sales and marketing expenses are generated in Hong Kong, Singapore, Sydney and Tokyo. We expect that our Asia-Pacific sales andmarketing expenses excluding amortization of intangible assets will remain relatively flat in the foreseeable future; however, as a result of the intangible assetsin Singapore having now been fully amortized during December 2004, total Asia-Pacific sales and marketing expenses will decrease further commencing in2005. General and Administrative. General and administrative expenses decreased to $32.5 million for the year ended December 31, 2004 from $34.3million for the year ended December 31, 2003. U.S. General and Administrative Expenses. U.S. general and administrative expenses decreased to $25.9 million for the year ended December 31,2004 as compared to $28.3 million for the year ended December 31, 2003. Included in U.S. general and administrative expenses for the year ended December31, 2004, were $1.8 million and $1.4 million of depreciation expense and stock-based compensation expense, respectively. Included in U.S. general andadministrative expenses for the year ended December 31, 2003, were $5.3 million and $2.6 million of depreciation expense and stock-based compensationexpense, respectively. Depreciation and stock-based compensation expense decreased period over period as certain headquarter-based assets became fullydepreciated during the year, and certain stock-based compensation costs became fully amortized. Excluding depreciation and stock-based compensationexpense, U.S. general and administrative expenses increased to $22.7 million for the year ended December 31, 2004, as compared to $20.4 million for the prioryear, an 11% increase. This increase is primarily due to higher professional service fees and other legal-related costs and expenses of $1.8 million, including$733,000 of external costs attributed to our Sarbanes-Oxley compliance initiatives. We continue to incur additional costs related to our Sarbanes-Oxleycompliance initiative and this initiative will continue to impose additional costs on Equinix as a public company, both in the form of outside professionalservice fees for auditors and other advisors, and internal costs related to various devoted teams throughout the organization. We also have higher overallcompensation costs of $1.9 million related to annual salary merit increases and corporate bonus programs, as well as an increase in the number of new hiresover the past year. In addition, during 2004, we incurred a net charge of $190,000 related to the liquidation of certain legacy subsidiaries in Europe and we donot expect this cost to recur (we initially recorded a charge of $512,000 in the third quarter, which was offset by a reduction in the charge of $322,000 in thefourth quarter as a result of a favorable settlement reached in December 2004). These increases in costs are partially offset by some savings related to theshutdown of the Pihana corporate office in Honolulu that was completed in June 2003, and the relocation of the corporate headquarter office from MountainView to Foster City in March 2003 totaling $1.9 million. General and administrative expenses, excluding depreciation and stock-based compensation, consistprimarily of salaries and related expenses, accounting, legal and administrative expenses, professional service fees and other general corporate expenses suchas our corporate headquarter office lease. Going forward we expect to see U.S. general and administrative spending increase nominally in absolute dollars, butdecrease as a percent of revenues. Asia-Pacific General and Administrative Expenses. Asia-Pacific general and administrative expenses increased to $6.6 million for the year endedDecember 31, 2004 as compared to $6.0 million for the year ended December 31, 2003. Included in Asia-Pacific general and administrative expenses were$366,000 and $497,000, respectively, of depreciation expense for the year ended December 31, 2004 and 2003. Excluding depreciation, Asia-Pacific generaland administrative expenses increased to $6.2 million for the year ended December 31, 2004, as compared to $5.5 million for the prior year, a 13% increase.This increase is primarily related to an increase in professional service fees of $141,000 related to our Sarbanes-Oxley compliance initiative in Singapore andhigher compensation costs of $450,000 as a result of annual merit increases and corporate bonus programs. Our Asia-Pacific general and administrativeexpenses consist of the same type of costs that we incur in our U.S. operations, namely salaries and related expenses, accounting, legal and administrativeexpenses, 29Table of ContentsIndex to Financial Statementsprofessional service fees and other general corporate expenses. Our Asia-Pacific general and administrative expenses are generated in Hong Kong, Singapore,Sydney and Tokyo. Our Asia-Pacific headquarter office is located in Singapore. Most of the corporate overhead support functions that we have in the U.S.also reside in our Singapore office in order to support our Asia-Pacific operations. In addition, we have separate office locations in Hong Kong and Tokyo. Weexpect our Asia-Pacific general and administrative expenses will remain relatively flat or experience only moderate growth for the foreseeable future. Restructuring Charges. During the year ended December 31, 2004, we recorded restructuring charges of $17.7 million. In light of the availability offully built-out data centers in select markets at costs significantly below those costs we would incur in building out new space, we made the decision inDecember 2004 to exit leases for excess space adjacent to one of our New York metro area IBXs, as well as space on the floor above our original Los AngelesIBX. The restructuring charges consisted of (i) a $13.9 million charge representing the present value of our estimated future cash payments, net of anyestimated subrental income and expense, through the remainder of these lease terms; and (ii) a write-off of property and equipment of $3.8 million,representing the write-off of all remaining property and equipment attributed to the excess space on the floor above our Los Angeles IBX. We entered into a two-year sublease agreement for the excess space in the New York metro area and are currently evaluating opportunities related to our excess space in Los Angeles.We expect that as a result of these restructuring charges, we will realize annual savings in cost of revenues commencing in 2005 of approximately $1.8 million.As of December 31, 2004, we had total accrued restructuring charges of $14.8 million recorded as liabilities on our balance sheet related to these excess leasespaces. For further detailed information on our restructuring charges, see Note 17 of our “Notes to Consolidated Financial Statements” in Item 8 of this Form10-K below. We did not incur any restructuring charges during the year ended December 31, 2003. Interest Income. Interest income increased to $1.3 million from $296,000 for the years ended December 31, 2004 and 2003, respectively. Interestincome increased due to higher average cash, cash equivalent and short-term and long-term investment balances held in interest-bearing accounts during theseperiods, as well as to increased yields on those balances. Interest Expense. Interest expense decreased to $11.5 million from $20.5 million for the years ended December 31, 2004 and 2003, respectively. Thedecrease in interest expense was primarily attributable to the reduction in the principal balance outstanding on our credit facility during 2003 and 2004. Theseinterest expense savings were partially offset by additional non-cash interest expense associated with the $10.0 million 10% convertible secured notes issued onJune 5, 2003 as a result of the Crosslink financing. However, during the quarter ended March 31, 2004, with the proceeds from the convertible debentureoffering, we fully paid off the remaining credit facility and two other debt facilities, as well as fully redeemed the remaining 13% senior notes that wereoutstanding. In addition, in March 2004, the $10.0 million 10% convertible secured notes issued in connection with the Crosslink financing were converted to2.5 million shares of our common stock. As a result of these various repayments, redemption and conversion of our older debt facilities, which have beenreplaced with our $86.3 million 2.5% convertible subordinated debentures, our interest expense commencing with the second quarter of 2004 was significantlyreduced. Absent additional financings, we expect that our interest expense will continue to decrease in 2005 as a result of the conversion in January 2005 of theSTT convertible secured notes, bearing non-cash interest at 14%. This interest savings, however, will be partially offset by additional interest expenseattributed to our $35.3 million capital lease, which bears interest at 8.5%, related to our new data center in the Washington D.C. metro area. Loss on Debt Extinguishment and Conversion. In February 2004, with the proceeds from the convertible debenture offering, we fully paid off theremaining credit facility and two other debt facilities, as well as fully redeemed the remaining 13% senior notes that were outstanding at a premium of 106.5%through March 2004. In addition, in March 2004, the 10% $10.0 million convertible secured notes issued in connection with the Crosslink 30Table of ContentsIndex to Financial Statementsfinancing, which contained a beneficial conversion feature, were converted to 2.5 million shares of our common stock. As a result of these variousrepayments, redemption and conversion of our older debt facilities, we recorded a loss on debt extinguishment and conversion of $16.2 million, comprisedprimarily of the write-off of the various debt issuance costs and discounts associated with these various debt facilities totaling $13.7 million, as well as thepremium paid to the holders of our 13% senior notes required to redeem these early and other cash transaction costs totaling $2.5 million. There was no suchdebt extinguishment or conversion activity 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. However, for the year ended December 31, 2004, werecorded $153,000 of income tax expense, primarily representing income taxes related to our international subsidiaries. We have previously not incurred anysignificant income tax expense since inception and we do not expect to incur any significant income tax expense during 2005 and 2006. 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 centers they are billed on a fixed and recurring basis each month for the durationof their contract, which is generally one to three years in length. Our recurring revenues are a significant component of our total revenues comprising 93% ofour total 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. 31Table of ContentsIndex to Financial StatementsOur 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. The non-recurring revenues are typically billed on the first invoice distributed to the customer. Installation and professional servicesrevenues increased 53% year over year, primarily due to strong existing and new customer growth during the year. As a percent of total revenues, we expectnon-recurring revenues to represent approximately 5% of total revenues in each year. Other non-recurring revenues include equipment resales and customersettlements. This non-recurring revenue line decreased significantly from the prior year as (i) we are no longer pursuing equipment resales due a change inproduct strategy and (ii) the number of customer right-sizings and settlements decreased substantially during 2003. To review our revenue recognition policiesfor 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 15 worldwide IBX centers. 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. IBXcenters acquired from Pihana on December 31, 2002 located in Los Angeles and Honolulu. Excluding revenues from these acquired U.S. IBX centers, theperiod over period growth in recurring revenues of 60% was primarily the result of an increase in orders from both our existing customers and new customergrowth acquired during the year as reflected in the growth in our customer count and utilization rate as discussed above. In addition, consistent with thegrowth in our customer base, our interconnection revenues have grown as our customers continue to expand their interconnection activity with each other. As ofDecember 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.recurring revenues to continue to grow and remain our most significant source of revenue for the foreseeable future. In addition, U.S. revenues consisted of non-recurring revenues of $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 IBXcenters, 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 32Table of ContentsIndex to Financial Statementsthe United States. Asia-Pacific revenues consisted of recurring revenues of $16.3 million, primarily from colocation and managed infrastructure services, andnon-recurring revenues of $1.9 million for the year ended December 31, 2003, which includes settlement fees of $584,000, primarily from one customer thatterminated its contract. Asia-Pacific revenues are generated from Singapore, Tokyo, Hong Kong and Sydney with Singapore representing approximately 77%of the regional revenues. Our Asia-Pacific revenues are similar to the revenues that we generate from our U.S. IBX centers; however, our Singapore IBX centerhas additional managed infrastructure service revenue, such as mail service and managed platform solutions, which we do not currently offer in any otherIBX center location. We expect our Asia-Pacific revenues to decrease slightly during the first half of 2004 as we expect some churn on our low-marginbandwidth revenue in Singapore. However, excluding this expected drop in bandwidth revenue, we would otherwise expect our Asia-Pacific revenues to begin togrow 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 centers, 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 center 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 centers 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 center 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 centers,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 centers as a result of (a) higher propertytaxes for certain IBX centers 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 centers 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 centers, we incurred an additional $20.6 million in cost of 33Table of ContentsIndex to Financial Statementsrevenues from our Asia-Pacific IBX center operations during the year ended December 31, 2003. Included in this number is $4.4 million of depreciationexpense. Excluding depreciation expense, our acquired cost of revenues totaled $16.2 million for Asia-Pacific. Our Asia-Pacific cost of revenues consist of thesame type of costs that we incur in our U.S. IBX center operations, namely rental payments for our leased IBX centers, utility costs, site employees’ salariesand benefits, consumable supplies and equipment and security services. Our Asia-Pacific costs of revenues are generated in Singapore, Tokyo, Hong Kongand Sydney. There are several managed IT infrastructure service revenue streams unique to our Singapore IBX hub, such as mail service and managedplatform solutions, that are more labor intensive than our service offerings in the United States. As a result, our Singapore IBX center has a greater number ofemployees than any of our other IBX centers, and therefore, a greater labor cost relative to our other IBX centers in the United States or other Asia-Pacificlocations. We anticipate that our Asia-Pacific cost of revenues will experience a small decrease during the first half of 2004 as a result of the expected drop inlow-margin bandwidth revenue as discussed above. However, excluding this, we would otherwise expect to see moderate growth in Asia-Pacific cost ofrevenues 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 centers acquired in the combination as of December31, 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 insales and marketing spending in the future, although as a percent of revenues, we anticipate a decline in sales and marketing spending. Asia-Pacific Sales and Marketing Expenses. 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. 34Table of ContentsIndex to Financial StatementsGeneral 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. U.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 35Table of ContentsIndex to Financial Statementsattributable to the retirement of $169.5 million of our 13% senior notes during 2002. In addition, we reduced the interest expense attributed to our credit facilityas a result of a reduction in the principal balance outstanding and a reduction in the interest rates. However, these interest expense savings were partially offsetby the approximately $7.3 million of non-cash interest expense associated with the $30.0 million 14% convertible secured note issued on December 31, 2002 asa result of the financing, and the $10.0 million 10% convertible secured notes issued on June 5, 2003 as a result of the Crosslink financing. We recorded asubstantial debt discount equal to the $10.0 million of principal in connection with the Crosslink financing, primarily as a result of the beneficial conversionfeature associated with these convertible secured notes, which is being amortized to interest expense over the term of the Crosslink financing. This is a primarycontributor to our increased non-cash interest expense from the prior 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. Liquidity and Capital Resources Since inception, we have financed our operations and capital requirements primarily through the issuance of various debt and equity instruments, foraggregate gross proceeds of $1.1 billion. As of December 31, 2004, our total indebtedness was comprised of non-convertible debt totaling $35.2 million fromour Washington D.C. metro area IBX capital lease and convertible debt totaling $124.7 million from our convertible secured notes and convertiblesubordinated debentures as outlined below. During February 2004, we sold $86.3 million in aggregate principal of 2.5% convertible subordinated debentures due 2024 to qualified institutionalbuyers. We used the net proceeds from this offering primarily to repay all amounts outstanding under our previously outstanding non-convertible debt asoutlined below. We refer to this transaction as the “convertible debenture offering.” During March 2004, holders of our 10% $10.0 million convertible securednotes issued in connection with the Crosslink financing, converted the $10.0 million of principal into 2.5 million shares of our common stock. We refer tothis transaction as the “Crosslink conversion.” We recorded a significant loss on debt extinguishment and conversion totaling $16.2 million during the quarterended March 31, 2004, primarily related to the non-cash write-off of debt issuance costs and discounts in connection with the various debt repayments,redemptions and conversions of the underlying debt facilities extinguished or converted, as well as the cash premium that we paid on our 13% senior notes. As of December 31, 2004, our principal source of liquidity was our $108.1 million of cash, cash equivalents and short-term and long-term investments.We believe that this cash, coupled with our anticipated cash flows generated from operations, will be sufficient to meet our capital expenditure, debt serviceand corporate overhead requirements to meet our currently identified business objectives. In addition, in December 2004, as a result of the Silicon Valley Bankcredit line, as further described below, we have $21.8 million of additional liquidity available to us in the event we need additional cash to pursue attractivestrategic opportunities that may become available in the future. While we had generated negative operating cashflow in each annual period since inception through 2003, commencing the quarter ended September 30,2003 we started to generate positive operating cash flow. During that quarter, our revenues grew to a level sufficient to meet our operating cash requirementsrelated to our predominantly fixed cost structure related to our existing IBX centers. We considered that quarter to be the 36Table of ContentsIndex to Financial Statementsinflection point in our business model whereby our revenues were sufficient on an ongoing basis to meet all our operating costs and working capitalrequirements. As a result of reaching this point in our operating history, we have generated cash from our operations during 2004 and expect this generation ofoperating cash flows to continue in 2005 and beyond and to be in an amount sufficient to meet our cash requirements to fund our capital expenditures, debtservice and corporate overhead requirements (excluding the purchase, sale and maturities of our short-term and long-term investments). However, given ourlimited operating history, we may not achieve our desired levels of profitability in the future. See “Other Factors Affecting Operating Results.” Uses of Cash Net cash provided by our operating activities was $36.9 million for the year ended December 31, 2004. Net cash used in our operating activities was$17.3 million and $27.5 million for the years ended December 31, 2003 and 2002, respectively. As described above, we have now reached and are movingbeyond the inflection point in our business model whereby our revenues are sufficient to cover our operating expenses and we are now generating cash from ouroperations. In prior periods, we used cash primarily to fund our net loss, including cash interest payments on our senior notes and credit facility, although themajority of the operating cash flows used during the years ended December 31, 2003 and 2002 related to the liquidation of accrued obligations, such asaccrued restructuring activities, including merger and financing costs during 2003. In addition, we continue to experience strong collections of our accountsreceivables. As described above, we expect that we will continue to generate cash from our operating activities throughout 2005 and beyond. Net cash used in investing activities was $56.9 million, $49.2 million and $7.5 million for the years ended December 31, 2004, 2003 and 2002,respectively. Net cash used in investing activities during the year ended December 31, 2004 was primarily for the net purchase of short-term and long-terminvestments, as well as to fund capital expenditures to bring our recently acquired IBX centers in the Silicon Valley and Washington DC metro areas toEquinix standards and to support our growing customer base. Net cash used in investing activities during the year ended December 31, 2003 was primarilythe result of the purchase of short-term investments and some nominal amount of capital expenditures, partially offset by the release of restricted cash to funda cash interest payment on our senior notes in January 2003. Net cash used in investing activities during the year ended December 31, 2002 was primarilyattributable to the liquidation of accrued construction costs for the New York metropolitan area IBX hub, which opened during the first quarter of 2002,partially offset by the sale of short-term investments. For 2005, we anticipate that our cash used in investing activities, excluding the purchases, sales andmaturities of short-term and long-term investments, will primarily fund our capital expenditures. Net cash generated by financing activities was $19.2 million, $52.3 million and $16.9 million for the years ended December 31, 2004, 2003 and 2002,respectively. Net cash generated by financing activities for the year ended December 31, 2004, was primarily the result of the $86.3 million in gross proceedsfrom our convertible debenture offering, offset by $70.8 million in payments on our credit facility, senior notes and other debt facilities and capital leaseobligations, as well as debt extinguishment costs associated with paying down these facilities and $7.3 million in proceeds from our various employee stockplans. Net cash provided by financing activities during the year ended December 31, 2003 was primarily the result of the $104.4 million in net proceeds of ourfollow-on equity offering and $10.0 million in proceeds from the Crosslink financing, partially offset by $57.2 million in payments on our credit facility and$6.1 million in payments on our various other debt facilities and capital lease obligations. Net cash generated by financing activities during the year endedDecember 31, 2002 was primarily attributable to the cash acquired in the acquisitions of i-STT and Pihana and proceeds from our $30.0 million convertiblesecured notes, offset by payments of $17.7 million used to retire approximately $169.5 million of our senior notes and the costs associated with the exchangeof the senior notes and repayments under our credit facility of $13.5 million. Debt Obligations—Non-Convertible Debt As of December 31, 2004, our only indebtedness from non-convertible debt related to a capital lease associated with our new IBX center in theWashington D.C. metro area totaling $35.2 million. In addition, in 37Table of ContentsIndex to Financial StatementsDecember 2004, as a result of the Silicon Valley Bank credit line, as further described below, we have $21.8 million of additional liquidity available to us inthe event we need additional cash to pursue attractive strategic opportunities that may become available in the future. Prior to this, our non-convertible debt wascomprised of our senior notes, credit facility, and other debt facilities and capital lease obligations as follows: Senior Notes. In December 1999, we issued $200.0 million aggregate principal amount of 13% senior notes due 2007. During 2002, we retired$169.5 million of the senior notes in exchange for approximately 2.4 million shares of common stock and approximately $21.3 million of cash. As ofDecember 31, 2003, a total of $30.5 million of senior note principal remained outstanding, which was presented, net of unamortized discount, on our balancesheet at $29.2 million. In March 2004, with the net proceeds from our convertible debenture offering, we exercised our right to redeem all of our senior notes.The redemption price for the senior notes was equal to 106.5% of their principal amount, plus accrued and unpaid interest, to the redemption date. As a result,we recognized a loss on debt extinguishment on this transaction of $3.8 million, comprised of the 6.5% premium that we paid to redeem the senior notes, thewrite-off of debt issuance costs and debt discount and other transaction fees. Credit Facility. In December 2000, we entered into the credit facility with a syndicate of lenders under which, subject to our compliance with 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, 2002 and 2003. As of December 31, 2003, a total of $34.3 million of principal remained outstanding under the creditfacility. In February 2004, with the net proceeds from our convertible debenture offering, we repaid all amounts outstanding under our credit facility andterminated the credit facility. As a result, we recognized a loss on debt extinguishment on this transaction of $4.4 million, comprised primarily of the write-offof debt issuance costs as well as some other transaction fees. Other 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 bore 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. As of December 31, 2003, principal of $847,000 remainedoutstanding. In March 2004, with the net proceeds from our convertible debenture offering, we paid off this other debt facility in full. As a result, werecognized a loss on debt extinguishment on this transaction of $0.2 million, comprised of the write-off of debt issuance costs and discount as well as someother transaction fees. In June 2001, we entered into a loan agreement with Heller Financial Leasing in the amount of $5.0 million and fully drew down on this amount. Thisloan agreement bore interest at 13.0% and was repayable over 36 months. As of December 31, 2003, principal of $2.5 million remained outstanding. InFebruary 2004, with the net proceeds from our convertible debenture offering, we paid off this other debt facility in full. As a result, we recognized a loss ondebt extinguishment on this transaction of $0.2 million, comprised of the write-off of debt issuance costs and discount as well as some other transaction fees. In December 2002, in conjunction with our merger with Pihana, we acquired multiple capital leases with Orix. The original amount financed wasapproximately $3.5 million. These capital lease arrangements bore interest at an average rate of 6.4% per annum and were repayable over 30 months. As ofDecember 31, 2003, principal of $201,000 remained outstanding. These capital leases were fully paid down by March 31, 2004. Washington D.C. Metro Area IBX Capital Lease. In April 2004, we entered into a long-term lease for a 95,000 square foot data center in theWashington, D.C. metro area. The center is adjacent to the Company’s existing Washington D.C. metro area IBX. This lease, which includes the leasing of allof the IBX plant and machinery equipment located in the building, is a capital lease. We took possession of this property during the fourth quarter of 2004,and as a result, recorded property and equipment assets, as well as a capital lease obligation, totaling $35.3 million. Payments under this lease, whichcommenced in November 2004, will be 38Table of ContentsIndex to Financial Statementsmade monthly through 2019 at an effective interest rate of 8.50% per annum. As of December 31, 2004, principal of $35.2 remained outstanding. Silicon Valley Bank Credit Line. In December 2004, we entered into a $25.0 million line of credit arrangement with Silicon Valley Bank thatmatures in December 2006. This facility is a $25.0 million revolving line of credit which, at our election, up to $10.0 million may be converted into a 24-month term loan, repayable in eight quarterly installments. We refer to this transaction as the “Silicon Valley Bank credit line.” Borrowings under the SiliconValley Bank credit line bear interest at floating interest rates, plus applicable margins, based either on the prime rate or LIBOR. As of December 31, 2004, theSilicon Valley Bank credit line had an interest rate of 4.40% per annum; however, through the date of filing of this report on Form 10-K, we have not drawndown any amounts from this line of credit. The Silicon Valley Bank credit line also features sublimits, which allows us to issue letters of credit, enter intoforeign exchange forward contracts and make advances for cash management services. Our utilization under any of these sublimits would have the effect ofreducing the amount available for borrowing under the Silicon Valley Bank credit line during the period that such sublimits remain utilized and outstanding.As of December 31, 2004, we had utilized $3.2 million under the letters of credit sublimit with the issuance of three letters of credit and, as a result, reducedthe amount of borrowings available to us from $25.0 million to $21.8 million. The Silicon Valley Bank credit line is secured by substantially all of ourdomestic assets and contains numerous covenants, including financial covenants, such as maintaining minimum cash balance levels and meeting minimumquarterly revenue targets, which we are in full compliance of. The Silicon Valley Bank credit line provides us with additional liquidity and financingflexibility in the future. 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 and through December 31, 2004, we have issued $8.5million in PIK notes. The convertible secured note and PIK notes issued to STT Communications are convertible into our preferred and common stock at aprice of $9.18 per underlying share, and are convertible anytime at the option of STT Communications. Upon certain conditions, including if the closingprice of our common stock exceeds $32.12 per share for thirty consecutive trading days, we had the option of converting the convertible secured notesbeginning in 2005. In January 2005, we exercised this right and converted 95% of the outstanding convertible secured notes and accrued and unpaid interest,held by STT Communications, into 4.1 million shares of our preferred stock, which was subsequently converted into 4.1 million shares of our commonstock in February 2005. The remaining 5% of the convertible secured notes, totaling $1.9 million, that remain outstanding will be eligible for conversion byEquinix in early 2006 into approximately 250,000 shares (including anticipated interest expense to be incurred during 2005 and early 2006), provided that theclosing price of our common stock exceeds $32.12 per share for thirty consecutive trading days. We refer to this transaction as the “STT convertible securednotes conversion.” 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, which contained a beneficial conversion feature. The interest on the convertible secured notes was payable in kind in the form ofadditional convertible secured notes commencing on the second anniversary of the closing of this transaction. In March 2004, the holders of these notesconverted them into 2.5 million shares of our common stock. As a result, we recognized a loss on debt conversion on this transaction of $7.6 million,comprised primarily of the write-off of debt discount due to the beneficial conversion feature. As of December 31, 2004, a total of $38.5 million of convertible secured notes were outstanding, which is presented, net of unamortized discount, onour balance sheet at $35.8 million. In addition, as of December 31, 2004, we had debt issuance costs related to our convertible secured notes of $336,000remaining to be amortized. All interest expense associated with our convertible secured notes, including the amortization of the unamortized discount of $2.7million and our unamortized debt issuance costs, represent non-cash interest expense in our 39Table of ContentsIndex to Financial Statementsstatements of operation and cash flow as no cash is expended for this interest. In January 2005, as a result of the STT convertible secured note conversion,95% of the outstanding convertible secured notes, plus accrued interest and unamortized discount and debt issuance costs, was converted into stockholders’equity. Convertible Subordinated Debentures. During February 2004, we sold $86.3 million in aggregate principal of 2.5% convertible subordinateddebentures due 2024 to qualified institutional buyers. We used the net proceeds from this offering primarily to repay all amounts outstanding under our creditfacility and two of our other debt facilities, as well as fully redeemed our remaining 13% senior notes. The interest on the convertible subordinated debenturesis payable semi-annually every February and August, which commenced August 2004. Unlike our convertible secured notes, the interest on our convertiblesubordinated debentures is payable in cash. Our convertible subordinated debentures are convertible into 2.2 million shares of our common 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 if the closing price of our common stock is greater than or equal to 120% of $39.50 per share of ourcommon stock, or approximately $47.40 per share, for twenty consecutive trading days during the period of thirty consecutive trading days ending on the lastday of the previous calendar quarter. 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, Lease and Other Contractual Commitments We lease our IBX centers and certain equipment under non-cancelable lease agreements expiring through 2020. The following represents our debtmaturities, lease and other commitments as of December 31, 2004 (in thousands): Convertiblesecurednotes (1) Convertiblesubordinateddebentures CapitalLease OperatingLeasesCoveredUnderAccruedRestructuringCharges OperatingLeases (2) OtherContractualCommitments(2) Total 2005 $— $— $3,642 $2,433 $28,638 $1,674 $36,387 2006 — — 3,733 2,766 30,689 — 37,188 2007 38,466 — 3,826 3,216 30,410 — 75,918 2008 — — 3,922 3,262 29,856 — 37,040 2009 — 86,250 4,020 3,309 29,715 — 123,294 2010 and thereafter — — 45,287 19,964 177,945 — 243,196 38,466 86,250 64,430 34,950 327,253 1,674 553,023 Less amount representing interest — — (29,226) — — — (29,226)Less amount representing estimatedsubrental income and expense — — — (15,978) — — (15,978)Less amount representing accretion — — — (4,222) — — (4,222) $38,466 $86,250 $35,204 $14,750 $327,253 $1,674 $503,597 (1) In January 2005, 95% of our outstanding convertible secured notes were converted into stockholders’ equity.(2) Represents off-balance sheet arrangements. 40Table of ContentsIndex to Financial StatementsIn December 2004, we entered into a long-term lease for a 103,000 square foot data center in the Silicon Valley area. This data center is close to ourexisting IBX centers in the Silicon Valley, and expands the global Equinix footprint to approximately 1.4 million square feet. This new lease will add anadditional $34.2 million in cumulative monthly lease payments through 2020, commencing February 2005. We will take possession of this property duringthe first quarter of 2005. We currently intend to place customers in this data center in 2005. Concurrent with the signing of this lease, we also agreed topurchase the assets located in this data center and entered into an agreement to interconnect all three of our Silicon Valley IBX centers to each other throughredundant dark fiber links. This will allow our customers to have access to all the networks and customers in each of the three Silicon Valley IBXs. While wehave not yet concluded that this lease is an operating lease, for purposes of reflecting our full contractual commitments in the table presented above, this leaseis presented within the future operating lease costs presented above. As of December 31, 2004, as a result of the Silicon Valley IBX acquisition described above and the associated agreements, we are obligated to pay$924,000 for the assets located in the data center, which we expect to pay in March 2005 when the Company takes possession of this property. In addition, asof December 31, 2004, we are also obligated to pay $750,000 upon completion of the installation of the redundant dark fiber links currently being installed,which needs to be paid no later than May 1, 2005. These obligations are reflected in the table above under other contractual commitments. In connection with three of our IBX operating leases, we have entered into three irrevocable letters of credit with Silicon Valley Bank. These letters ofcredit were provided in lieu of cash deposits under the letters of credit sublimit provision in connection with the Silicon Valley Bank credit line. The letters ofcredit total $3.2 million, are collateralized by the Silicon Valley Bank credit line and automatically renew in successive one-year periods until the final leaseexpiration dates. If the landlords for any of these three IBX operating leases decide to draw down on these letters of credit, we will be required to fund theseletters of credit. This contingent commitment is not reflected in the table above. In December 2004, in light of the availability of fully built-out data centers in select markets at costs significantly below those costs we would incur inbuilding out new space, we made the decision to exit leases for excess space adjacent to one of our New York metro area IBXs, as well as space on the floorabove our original Los Angeles IBX. As a result of our decision to exit these spaces, we recorded a restructuring charge totaling $17.7 million, which representsthe present value of our estimated future cash payments, net of any estimated subrental income and expense, through the remainder of these lease terms, aswell as the write-off of all remaining property and equipment attributed to the partial build-out of the excess space on the floor above our Los Angeles IBX. Wehave already sublet the excess space in the New York metro area and are currently evaluating opportunities to either sublet the excess space in Los Angeles orterminate this lease altogether. As of December 31, 2004, we had a total restructuring charge accrual of $14.8 million associated with these two leases for excessspace on our balance sheet. These obligations are reflected in the table above under operating leases covered under accrued restructuring charges. As a result of our recent IBX expansions in the Silicon Valley and Washington D.C. metro areas, we anticipate that we will incur capital expenditures inexcess of what we would otherwise spend had we not acquired these new IBXs. Although we are not contractually obligated to do so, we expect to incuradditional capital expenditures in these two markets during 2005 of approximately $10.0 to $12.0 million in order to bring these new IBXs up to Equinixstandards. This non-contractual capital expenditure spending is not reflected in the table above. Strategically, we will continue to look at attractive opportunities to grow our market share and selectively improve our footprint and service streams,such as our recent acquisition of the Sprint property in Santa Clara and our recently announced expansions in the Washington, D.C. and Silicon Valley metroarea markets. However, we will continue to be very selective with any similar opportunity. As was the case with these recent expansions in the Silicon Valleyand Washington, D.C. area markets, the criteria will be quality of the design, 41Table of ContentsIndex to Financial Statementsaccess to networks, capacity availability in current market location, amount of incremental investment required by us in the targeted property, lead-time tobreakeven and in-place customers. Like these recent expansions, the right combination of these factors may be quite attractive for us. Dependent on theparticular deal, these acquisitions may require upfront cash payments and additional capital expenditures in order to bring these centers up to Equinixstandards. 42Table of ContentsIndex to Financial StatementsRISK 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 incurred substantial losses in the past and may continue to incur additional losses in the future. Although Equinix has generated cash from operations since the quarter ended September 30, 2003, for the years ended December 31, 2004 and 2003, thecompany incurred net losses of $68.6 million and $84.2 million, respectively. In light of new rules regarding the expensing of stock-based compensation, wedo not expect to become net income positive for at least one to two more years. In addition, if we acquire or build-out additional IBX centers, we will haveadditional depreciation and amortization expenses that will negatively impact our ability to achieve and sustain positive net income. There can be no guaranteethat we will become profitable and the company may continue to incur additional losses. Even if we achieve profitability, given the competitive and evolvingnature of the industry in which we operate, we may not be able to sustain or increase profitability on a quarterly or annual basis. We expect our operating results to fluctuate. We have experienced fluctuations in our results of operations on a quarterly and annual basis. The fluctuation in our operating results may cause 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 centers; • demand for space and services at our IBX centers; • 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 timing and magnitude of operating expenses, including taxes, capital expenditures and expenses related to the expansion of sales, marketing,operations and acquisitions, if any, of complementary businesses and assets; and • the cost and availability of adequate public utilities, including power. Any of the foregoing factors, or other factors discussed elsewhere in this report, could have a material adverse effect on our business, results ofoperations, and financial condition. Although the company has experienced growth in revenues in recent quarters, this growth rate is not necessarily indicativeof future operating results. It is possible that the company may never generate net income on a quarterly or annual basis. In addition, a relatively large portionof our expenses are fixed in the short-term, particularly with respect to lease and personnel expenses, depreciation and amortization, and interest expenses.Therefore, our results of operations are particularly sensitive to fluctuations in revenues. As such, comparisons to prior reporting periods should not be reliedupon as indications of the company’s future performance. In addition, our operating results in one or more future quarters may fail to meet the expectations ofsecurities analysts or investors. If this occurs, we could experience an immediate and significant decline in the trading price of our stock. 43Table of ContentsIndex to Financial StatementsIf the market price of our stock continues to be highly volatile, the value of an investment in our common stock may decline. Within the last 12 months, our common stock has traded between $26.50 and $46.39 per share. The market price of the shares of our common stockhas been and may continue to be highly volatile. In January 2005, 95% of STT Communications’ outstanding convertible secured notes and associatedinterest were converted into shares of our non-voting Series A-1 preferred stock. In February 2005, STT Communications elected to convert all of the shares ofSeries A-1 preferred stock into 4.1 million shares of our common stock. Sales of a substantial number of shares of our common stock within a narrow periodof time could cause our stock price to fall. Announcements may also have a significant impact on the market price of our common stock. Theseannouncements may include: • our operating results; • new issuances of equity, debt or convertible debt; • developments in our relationships with corporate customers; • changes in regulatory policy or interpretation; • changes in the ratings of our stock by securities analysts; • market conditions for telecommunications stocks in general; and • general economic and market conditions. The stock market has from time to time experienced extreme price and volume fluctuations, which have particularly affected the market prices foremerging telecommunications companies, and which have often been unrelated to their operating performance. These broad market fluctuations may adverselyaffect the market price of our common stock. In addition, sales of substantial amounts of our common stock in the public market could lower the marketprice of our common 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 pre-2003 tax net operating losses, or NOLs, in any taxable year is subject to limitation under Section 382 of theUnited States Internal Revenue Code of 1986, as amended, (the “Code”) as a result of the significant change in the ownership of our stock that resulted fromthe combination. We expect that a significant portion of our NOLs accrued prior to December 31, 2002 will expire unused as a result of this limitation. Inaddition to the limitations on NOL carryforward utilization described above, we believe that Section 382 of the Code will also significantly limit our ability touse the depreciation and amortization on our assets, as well as certain losses on the sale of our assets, to the extent that such depreciation, amortization andlosses reflect unrealized depreciation that was inherent in such assets as of the date of the combination. These limitations will cause us to pay taxes at an earlierdate and in greater amounts than would occur absent such limitations. While we believe that we currently have adequate internal control procedures in place, we are still exposed to potential risks from recentlegislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002. In the course of our ongoing evaluation of our internal controls over financing reporting, we have identified areas requiring improvement and are in theprocess of designing enhanced processes and controls to address the issues identified during our evaluation. We cannot be certain that our efforts will beeffective or sufficient for us, or our auditors, to issue unqualified reports in the future. It may be difficult to design and implement effective financial controls for combined operations and differences in existing controls of any acquiredbusinesses may result in weaknesses that require remediation when the financial controls and reporting are combined. 44Table of ContentsIndex to Financial StatementsOur ability to manage our operations and growth will require us to improve our operational, financial and management controls, as well as our internalreporting systems and controls. We may not be able to implement improvements to our internal reporting systems and controls in an efficient and timelymanner and may discover deficiencies in existing systems and controls. If we cannot effectively manage international operations, our revenues may not increase and our business and results of operations would beharmed. In 2002, our sales outside North America represented less than 1% of our revenues. For the year ended December 31, 2003, the combined companyrecognized 15% of its revenues outside North America. For the year ended December 31, 2004, the combined company recognized 13% of its revenues outsideNorth America. We anticipate that, for the foreseeable future, approximately 15% of the combined company’s revenues will be derived from sources outsideNorth America. To date, the neutrality of the Equinix IBX centers and the variety of networks available to our customers has often been a competitive advantage for us.In certain of our acquired IBX centers, in Singapore in particular, the limited number of carriers available diminishes that advantage. As a result, we may needto 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; however, the majority of revenues and costs in our international operations are denominated in Singapore dollars,Japanese yen and Australia and Hong Kong dollars. Although the combined company may undertake foreign exchange hedging transactions to reduce foreigncurrency transaction exposure, it does not currently intend to eliminate all foreign currency transaction exposure. Where our prices are denominated in U.S.dollars, our sales could be adversely affected by declines in foreign currencies relative to the U.S. dollar, thereby making our products more expensive in localcurrencies. Our international operations are generally subject to a number of additional risks, including: • costs of customizing IBX centers 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 have acquired several new IBX centers recently, and we may seek to acquire additional IBX centers, complementary businesses, products, servicesand technologies. As a result of these acquisitions, we may be required to incur additional debt and expenditures and issue additional shares of our stock topay for the acquired business, product, service or technology, which will dilute our existing stockholders’ ownership interest and may delay, or prevent, ourprofitability. These acquisitions may also expose us to risks such as: • the possibility that we may not be able to successfully integrate acquired businesses or achieve the level of quality in such businesses to which ourcustomers are accustomed; • the possibility that additional capital expenditures may be required; • the possibility that senior management may be required to spend considerable time negotiating agreements and integrating acquired businesses; 45Table of ContentsIndex to Financial Statements • the possible loss or reduction in value of acquired businesses; • the possibility that our customers may not accept either the existing equipment infrastructure or the “look-and-feel” of a new or different IBX center; • the possibility that carriers may find it cost-prohibitive or impractical to bring fiber and networks into a new IBX center; and • the possibility of preexisting undisclosed liabilities regarding the property or IBX center, including but not limited to environmental or asbestosliability, of which our insurance may be insufficient or for which we may be unable to secure insurance coverage; 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, 2004, STT Communications owned approximately 23% of our outstanding voting stock. In addition, STT Communications is notprohibited 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. In January 2005, 95% of STT Communications’ outstanding convertible secured notesand associated interest were converted into shares of our non-voting Series A-1 preferred stock. In February 2005, STT Communications elected to convert allof the shares of Series A-1 preferred stock into 4.1 million shares of our common stock, which caused STT Communications to own approximately 36% ofour outstanding voting stock. As a result, STT Communications is able to exercise significant control over all matters requiring stockholder approval,including the election of directors and approval of significant corporate transactions, which could prevent or delay a third party from acquiring or mergingwith us. STT also has a right of first offer, which entitles them to participate in an offering of our equity securities, or securities convertible into our equitysecurities, to maintain their ownership percentage prior to such offering. Our business could be harmed by prolonged electrical power outages or shortages, increased costs of energy or general availability of electricalresources. Our IBX centers are susceptible to regional costs of power, electrical power shortages, planned or unplanned power outages caused by these shortagessuch as those that occurred in California during 2001 and in the Northeast in 2003 or natural disasters such as the hurricanes in the Southeast in 2004, andlimitations, especially internationally, of adequate power resources. The overall power shortage in California has increased the cost of energy, which we maynot be able to pass on to our customers. We attempt to limit exposure to system downtime by using backup generators and power supplies. Power outages,which last beyond our backup and alternative power arrangements, could harm our customers and our business. In addition, power and cooling requirements are growing on a per server basis. As a result, customers are consuming an increasing amount of power percabinet. This, combined with the fact that we generally do not control the amount of draw our customers take from installed circuits, means that we could facepower limitations in our centers. This could have a negative impact on the available utilization capacity of a given center, which could have a negative impacton our financial performance, operating results and cash flows. Increases in property taxes could adversely affect our business, financial condition and results of operations. Our IBX centers are subject to state and local real property taxes. The state and local real property taxes on our IBX centers may increase as property taxrates change and as the value of the properties are assessed or 46Table of ContentsIndex to Financial Statementsreassessed by taxing authorities. Many state and local governments are facing budget deficits, which may cause them to increase assessments or taxes. Ifproperty taxes increase, our business, financial condition and operating results could be adversely affected. 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. Currently, thefair market value of our “United States real property interests” is significantly below the 50% threshold. However, in order to assure compliance with theFIRPTA covenant, we may be limited with respect to the business opportunities we may pursue, particularly if the business opportunities would increase theamounts of “United States real property interests” owned by us or decrease the amount of other assets owned by us. In addition, we may take proactive stepsto avoid our capital stock being deemed “United States real property interest”, including, but not limited to, (a) a sale-leaseback transaction with respect tosome or all of our real property interests, or (b) the formation of a holding company organized under the laws of the Republic of Singapore which would issueshares of its capital stock in exchange for all of our outstanding stock (this reorganization would require the submission of that transaction to our stockholdersfor their approval and the consummation of that exchange). We will take these actions only if such actions are commercially reasonable for Equinix and ourstockholders. 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,entities affiliated with STT Communications make investments in various companies; they have invested in the past, and may invest in the future, in entitiesthat compete with us. In the context of negotiating commercial arrangements with affiliates, conflicts of interest have arisen in the past and may arise, in this orother 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, 2003 and 2004 and may be sold in the market in the nearfuture. 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, Inc. and its affiliates (collectively, “Crosslink”) in connectionwith Crosslink’s purchase of our Series A-2 Convertible Secured Notes, and to the public and STT Communications in connection with our follow-on equityoffering in late 2003. The shares of common stock issued in the senior note exchange are currently freely tradeable. The shares of common stock issued inconnection with the combination have been 47Table of ContentsIndex to Financial Statementsregistered for resale as of June 30, 2003, the shares of common stock issued upon exercise of the warrants issued in connection with the Crosslink financinghave been registered for resale as of September 22, 2003 and the shares of common stock issued upon conversion of the convertible secured notes issued in theCrosslink financing have been registered for resale as of July 30, 2004. The shares sold to the public and STT Communications in connection with ourfollow-on equity offering in November 2003 are freely tradeable by the public, subject, in the case of STT Communications, to compliance with Rule 144resale restrictions applicable to affiliates. In February 2004, we issued $86,250,000 of 2.5% Convertible Subordinated Debentures due 2024. Thesedebentures are convertible into 2,183,548 shares of our common stock. Holders of these debentures may convert their debentures into shares of our commonstock during any calendar quarter if the sale price of our common stock is greater than or equal to 120% of the conversion price per share of our commonstock for 20 out of any 30 consecutive trading days or if the trading price of our debentures falls below specified prices. All of these shares are eligible forresale pursuant to a registration statement that became effective on July 30, 2004. In January 2005, 95% of STT Communications’ outstanding convertiblesecured notes and associated interest were converted into shares of our non-voting Series A-1 preferred stock. In February 2005, STT Communications electedto convert all of the shares of Series A-1 preferred stock into 4.1 million shares of our common stock. The shares of common stock are eligible for resalepursuant to a registration statement that became effective on December 22, 2004. Sales of a substantial number of shares of our common stock by these partieswithin any narrow period of time could cause our stock price to fall. In addition, the issuance of the additional shares of our common stock as a result of 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. As of December 31, 2004, STT Communications held 2,970,414 shares of our common stock and held securities convertible into 7,025,534 additionalshares of our common stock. STT Communications has pledged to its lenders its ownership interest in the majority of its secured notes and warrantspurchased in the financing and its common and preferred stock issued in the combination as collateral for its secured credit facility. If STT Communicationsdefaults on its credit facility, the stock, warrants and secured notes owned by STT Communications could be transferred to its lenders or sold to third parties.In the event of default, the new owner of the secured notes, stock and warrants could convert them into our common stock and sell them, along with thecommon 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 couldcause our stock price to fall. In addition, the issuance of the additional shares of our common stock as a result of these transactions will reduce our earningsper share, if any. We depend on a number of third parties to provide Internet connectivity to our IBX centers; if connectivity is interrupted or terminated, ouroperating results and cash flow could be materially adversely affected. The presence of diverse telecommunications carriers’ fiber networks in our IBX centers 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 centers. Carriers will likely evaluate the revenue opportunity of an IBX center 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 centers or that once a carrier hasdecided to provide Internet connectivity to our IBX centers that it will continue to do so for any period of time. 48Table of ContentsIndex to Financial StatementsThe construction required to connect multiple carrier facilities to our IBX centers 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 centers 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 or announcing consolidations. As a result, some carriers may be forced to downsize or terminate connectivity within our IBX centers. Any 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 centers. We have recently acquired long-term leases to three IBX centers not built by us. If these recently leased IBX centers and theirinfrastructure assets are not in the condition we believe them to be in, we may be required to incur substantial additional costs to repair or upgrade thefacilities. The services we provide in each of our IBX centers, whether recently acquired or not, 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 centers, 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 centerscould result in difficulty maintaining service level commitments to these customers. In the past, a limited number of our customers have experienced temporarylosses of power and failure of our services levels on products such as bandwidth connectivity. If we incur significant financial commitments to our customersin connection with a loss of power, or our failure to meet other service level commitment obligations, our liability insurance may not be adequate to cover thoseexpenses. In addition, any loss of services, equipment damage or inability to meet our service level commitment obligations, particularly in the early stage ofour development, could reduce the confidence of our customers and could consequently impair our ability to obtain and retain customers, which wouldadversely affect both our ability to generate revenues and our operating results. Furthermore, we are dependent upon Internet service providers, telecommunications carriers and other website operators in the U.S., Asia and elsewhere,some of which may have experienced significant system failures and electrical outages in the past. Users of our services may in the future 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. 49Table of ContentsIndex to Financial StatementsThere is no known prevention or defense against denial of service attacks. During a prolonged denial of service attack, Internet service may not beavailable for several hours, thus impacting hosted customers’ on-line business transactions. Affected customers might file claims against us under suchcircumstances. Our property and liability insurance may not be adequate to cover these customer claims. We resell products and services of third parties that may require us to pay for such services even if our customers fail to pay us for the services,which may have a negative impact on our operating results. In order to provide resale services such as bandwidth, managed services and other network management services, we will contract with third partyservice providers. These services require us to enter into fixed term contracts for services with third party suppliers of products and services. If we experiencethe loss of a customer who has purchased a resale product, we will remain obligated to continue to pay our suppliers for the term of the underlying contracts.The payment of these obligations without a corresponding payment from customers will reduce our financial resources and may have a material adverse affecton 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 years ended December 31, 2004, 2003 and 2002, IBM accounted for 13%, 15% and 20%, respectively, of our revenue. We expect that IBM willcontinue to account for a significant portion of our revenue for the foreseeable future, although we expect revenues received from IBM to decline as a percentageof our total revenues as we add new customers in our IBX centers. Although the term of our IBM contract runs through 2009, IBM currently has the right toreduce its commitment to us pursuant to the terms and requirements of its customer agreement. 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 centers 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 centers. 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 centers. 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. We may experience competition from our landlords in this regard. Rather than leasing available space in ourbuildings to large single 50Table of ContentsIndex to Financial Statementstenants, they may decide to convert the space instead to smaller square foot units designed for multi-tenant colocation use. Landlords may enjoy a cost effectiveadvantage in providing similar services as our IBXs, and this could also reduce the amount of space available to us for expansion in the future. Competitorsmay operate more successfully or form alliances to acquire significant market share. Furthermore, enterprises that have already invested substantial resourcesin outsourcing arrangements may be reluctant or slow to adopt our approach that may replace, limit or compete with their existing systems. In addition, othercompanies may be able to attract the same potential customers that we are targeting. Once customers are located in competitors’ facilities, it may be extremelydifficult to convince them to relocate to our IBX centers. Our success in retaining key employees and discouraging them from moving to a competitor is an important factor in our ability to remain competitive.As is common in our industry, our employees are typically compensated through grants of stock options in addition to their regular salaries. We occasionallygrant new stock options to employees as an incentive to remain with the company. To the extent we are unable to adequately maintain these stock optionincentives and should employees decide to leave the company, this may be disruptive to our business and may adversely affect our business, financialcondition and results of operations. 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 centers will depend on a variety of factors, including the presence of multiple carriers, the mix of products and services offered by us,the overall mix of customers, the IBX hub’s operating reliability and security and our ability to effectively market our services. In addition, some of ourcustomers are and will continue to be Internet companies that face many competitive pressures and that may not ultimately be successful. If these customers donot succeed, they will not continue to use the IBX centers. This may be disruptive to our business and may adversely affect our business, financial conditionand results of operations. 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 centers and to purchase additional services typically involves a significant commitmentof resources. In addition, some customers will be reluctant to commit to locating in our IBX centers until they are confident that the IBX center has adequatecarrier connections. As a result, we have a long sales cycle. Delays due to the length our sales cycle may materially adversely affect our business, financialcondition 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 51Table of ContentsIndex to Financial Statementsproposed settlement is not approved by the court or a sufficient number of defendants do not participate in the settlement, the defense of this litigation maycontinue and therefore increase our expenses and divert management’s attention and resources. An adverse outcome in this litigation could seriously harm ourbusiness and results of operations. In addition, we may, in the future, be subject to other securities class action or similar litigation. Risks Related to Our Industry If the 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 centers will materialize.If the market for our IBX centers grows more slowly than we currently anticipate, our revenues may not grow and our operating results could 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 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. Industry consolidation may have a negative impact on our business model. The telecommunications industry is currently undergoing a consolidation. As customers combine businesses, they may require less colocation space,and there may be fewer networks available to choose from. Given the competitive and evolving nature of this industry, further consolidation of our customersand/or our competitors may present a risk to our network neutral business model and have a negative impact on our revenues. 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 centers. We may not have adequate property and liability insurance to cover such catastrophic events or attacks. 52Table of ContentsIndex to Financial StatementsRecent Accounting Pronouncements In January 2003, the FASB issued FASB Interpretation No. 46, or FIN 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No.51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not 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 our results of operations, financialposition 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 FASB 150-3which deferred the measurement provisions of SFAS No. 150 indefinitely for certain mandatorily redeemable non-controlling interests that were issued beforeNovember 5, 2003. The FASB plans to reconsider implementation issues and, perhaps, classification or measurement guidance for those non-controllinginterests during the deferral period. In 2003, we applied certain disclosure requirements of SFAS No. 150. To date, the impact of the effective provisions ofSFAS No. 150 have not had a material impact on our results of operations, financial position or cash flows. While the effective date of certain elements ofSFAS No. 150 have been deferred, the adoption of SFAS No. 150 when finalized is not expected to have a material impact on our financial position, results ofoperations or cash flows. In March 2004, the FASB approved EITF Issue 03-6 “Participating Securities and the Two-Class Method under FAS 128.” EITF Issue 03-6 supersedesthe guidance in Topic No. D-95, “Effect of Participating Convertible Securities on the Computation of Basic Earnings per Share”, and requires the use of thetwo-class method of participating securities. The two-class method is an earnings allocation formula that determines earnings per share for each class ofcommon stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In addition,EITF Issue 03-6 addresses other forms of participating securities, including options, warrants, forwards and other contracts to issue an entity’s commonstock, with the exception of stock-based compensation (unvested options and restricted stock) subject to the provisions of APB Opinion No. 25 and FASBNo. 123. EITF Issue 03-6 is effective for reporting periods beginning after March 31, 2004 and should be applied by restating previously reported earnings pershare. We adopted the provisions of EITF Issue 03-6 during the second quarter of 2004. The adoption of EITF Issue 03-6 did not have a material effect on ourbasic and diluted net loss per share data at this time. In June 2004, the FASB issued EITF Issue 03-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITFIssue 03-1 establishes a common approach to evaluating other-than-temporary impairment to investments in an effort to reduce the ambiguity in impairmentmethodology found in APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” and FASB No. 115, “Accounting forCertain Investments in Debt and Equity Securities”, which has resulted in inconsistent application. In September 2004, the FASB issued FASB Staff PositionEITF Issue 03-1-1, which deferred the effective date for the measurement and recognition guidance clarified in EITF Issue 03-1 indefinitely; however, thedisclosure requirements remain effective for fiscal years ending after June 15, 2004. While the effective date for certain elements of EITF Issue 03-1 have beendeferred, the adoption of EITF Issue 03-1 when finalized in its current form is not expected to have a material impact on our financial position, results ofoperations or cash flows. 53Table of ContentsIndex to Financial StatementsIn November 2004, the FASB approved EITF Issue 04-8 “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share.” EITFIssue 04-8 addresses when contingently convertible instruments should be included in diluted earnings per share. For purposes of EITF Issue 04-8,contingently convertible instruments are instruments that have embedded conversion features that are contingently convertible or exercisable based on (a) amarket price trigger or (b) multiple contingencies if one of the contingencies is a market price trigger and the instrument can be converted or share settled basedon meeting the specified market condition. EITF Issue 04-8 is effective for reporting periods beginning after December 15, 2004 and should be applied byrestating previously reported earnings per share data. We adopted the provisions of EITF Issue 04-8 during the fourth quarter of 2004. The adoption of EITFIssue 04-8 did not have a material effect on our diluted net loss per share data at this time. In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) revises SFAS No. 123, “Accounting for Stock-Based Compensation” and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation, such asemployee stock purchase plans and restricted stock awards. In addition, SFAS No. 123(R) supercedes Accounting Principles Board Opinion (APB) No. 25,“Accounting for Stock Issued to Employees” and amends SFAS No. 95, “Statement of Cash Flows.” Under the provisions of SFAS No. 123(R), stock-basedcompensation awards must meet certain criteria in order for the award to qualify for equity classification. An award that does not meet those criteria will beclassified as a liability and be remeasured each period. SFAS No. 123(R) retains the requirements on accounting for the income tax effects of stock-basedcompensation contained in SFAS No. 123; however, it changes how excess tax benefits will be presented in the statement of cash flows. SFAS No. 123(R) iseffective for reporting periods beginning after June 15, 2005. Senior management is currently considering the financial accounting, income tax and internalcontrol implications of SFAS No. 123(R). The adoption of SFAS No. 123(R) is expected to have a significant impact on our financial position and results ofoperations. In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29.” SFAS No. 153addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value measurement for nonmonetary exchanges of similarproductive assets contained in APB Opinion No. 29 and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153specifies that a nonmonetary exchange has commercial substance if the future cash flows of an entity are expected to change significantly as a result of theexchange. SFAS No. 153 is effective for fiscal periods beginning after June 15, 2005. As the provisions of SFAS No. 153 are to be applied prospectively, theadoption of SFAS No. 153 will not have an impact on our historical financial statements; however, we will assess the impact of the adoption of thispronouncement on any future nonmonetary transactions that we enter into, if any. 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. 54Table of ContentsIndex to Financial StatementsInterest Rate Risk The Company’s exposure to market risk resulting from changes in interest rates relates primarily to our investment portfolio. All of our cash equivalentsand marketable securities are designated as available-for-sale and are therefore recorded at fair market value on our balance sheet with the unrealized gains orlosses reported as a separate component of other comprehensive income. The fair market value of our marketable securities could be adversely impacted due toa rise in interest rates, but we do not believe such impact would be material. Securities with longer maturities are subject to a greater interest rate risk than thosewith shorter maturities and at December 31, 2004 our portfolio maturity was relatively short. If current interest rates were to increase or decrease by 10%, thefair market value of our investment portfolio could increase or decrease by $120,000. 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 obligation. However, the interest expense associated with our $25.0 million revolving credit line, which bears interest at floatingrates, plus applicable margins, based on either the prime rate or LIBOR could be affected. As of December 31, 2004, the $25.0 million revolving credit linehad an effective interest rate of 4.40%; however, through the date of filing of this report on Form 10-K, no drawings are outstanding under this line of credit.The fair market value of our long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair market value of fixed interest rate debt willincrease as interest rates fall and decrease as interest rates rise. These interest rate changes may affect the fair market value of the fixed interest rate debt butdoes not impact our earnings or cash flows. The fair market value of our convertible subordinated debentures is based on quoted market prices. The estimated fair value of our convertiblesubordinated debentures as of December 31, 2004 was approximately $106.2 million. Foreign Currency Risk Prior to December 31, 2002, all of our recognized revenue had been denominated in U.S. dollars, generated mostly from customers in the U.S., and 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 IBXcenters. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by this Item 8 are listed in Item 15(a)(1) and begin at page F-1 of this Report. 55Table of ContentsIndex to Financial StatementsITEM 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 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, weconducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities ExchangeAct of 1934, as amended (the Exchange Act). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of the end of the period covered by this annual report. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in ExchangeAct Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections ofany evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conductedan evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control overfinancial reporting was effective as of December 31, 2004. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein on page F-1 of this AnnualReport on Form 10-K. ITEM 9B. OTHER INFORMATION There is no disclosure to report pursuant to Item 9B. 56Table of ContentsIndex to Financial StatementsPART 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 2005 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 2005 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 2005 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 2005 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 2005 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 2005 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 2005 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 2005 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 2005 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 2005 Annual Meeting of Stockholders and is incorporated herein by reference. 57Table of ContentsIndex to Financial StatementsPART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1) Financial Statements: Report of Independent Registered Public Accounting Firm F-1Consolidated Balance Sheets F-3Consolidated Statements of Operations F-4Consolidated Statements of Stockholders’ Equity and Other Comprehensive Loss F-5Consolidated Statements of Cash Flows F-6Notes to Consolidated Financial Statements. F-7 (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 Document 2.1(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. 4.10(9) Registration Rights Agreement (See Exhibit 10.75). 4.11 Indenture (see Exhibit 10.99). 4.12 Registration Rights Agreement (see Exhibit 10.100).10.2(1) Warrant Agreement, dated as of December 1, 1999, by and among the Registrant and State Street Bank and Trust Company ofCalifornia, N.A. (as warrant agent).10.5(1) Form of Indemnification Agreement between the Registrant and each of its officers and directors.10.8(1) The Registrant’s 1998 Stock Option Plan.10.9(1)+ Lease Agreement with Carlyle-Core Chicago LLC, dated as of September 1, 1999.10.10(1)+ Lease Agreement with Market Halsey Urban Renewal, LLC, dated as of May 3, 1999.10.11(1)+ Lease Agreement with Laing Beaumeade, dated as of November 18, 1998.10.12(1)+ Lease Agreement with Rose Ventures II, Inc., dated as of June 10, 1999.10.13(1)+ Lease Agreement with Carrier Central LA, Inc., as successor in interest to 600 Seventh Street Associates, Inc., dated as of August 8, 1999.10.14(1)+ First Amendment to Lease Agreement with TrizecHahn Centers, Inc. (dba TrizecHahn Beaumeade Corporate Management), dated as of October28, 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. 58Table of ContentsIndex to Financial StatementsExhibitNumber Description of Document10.23(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.10.60(9) Governance Agreement by and among Equinix, Inc., STT Communications Ltd., i-STT Communications Ltd., STT InvestmentsPte 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. 59Table of ContentsIndex to Financial StatementsExhibitNumber Description of Document10.69(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, 2002.10.83(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, 2003.10.90(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 139964.10.94(15) Fourth Modification to Ground Lease by and between iStar San Jose, LLC and Equinix, Inc., dated as of November 21, 2003.10.95(15)+ Sublease Agreement between Sprint Communications Company, L.P. and Equinix Operating Co., Inc. dated October 24, 2003.10.96(15) Tenancy Agreement over units #03-01, #03-02, #03-03, #03-04 of Block 20 Ayer Rajah Crescent, Singapore 139964.10.97(15) Lease Agreement with JMA Robinson Redevelopment, LLC, as successor in interest to Carrier Central L.A., Inc., dated as ofNovember 30, 2003.10.99(16) Indenture among Equinix, Inc. and U.S. Bank National Association as Trustee dated February 11, 2004.10.101(16) First Amendment to Lease Agreement dated September 1, 1999, between Lakeside Purchaser L.L.C. as successor in interest toCarlyle-Core Chicago, LLC and Equinix Operating Co., Inc.10.102(17) Supplemental Lease Agreement with Comfort Development Limited dated May 18, 2004.10.103(18)+ Lease Agreement dated April 21, 2004 between Eden Ventures LLC and Equinix, Inc.10.104(18) Lease Amendment Agreement dated June 17, 2004 between Equinix Japan KK and Mitsubishi Electric Information NetworkCorporation.10.105(18) Equinix, Inc. 2004 International Employee Stock Purchase Plan effective as of June 3, 2004. 60Table of ContentsIndex to Financial StatementsExhibitNumber Description of Document10.106(18) Equinix, Inc. Employee Stock Purchase Plan effective as of June 3, 2004.10.107 First Amendment to Sublease Agreement dated June 21, 2004 between Equinix Operating Co. Inc. and Sprint CommunicationsCompany L.P.10.108 Omnibus Amendment Agreement dated November 24, 2004 between Equinix, Inc. and i-STT Investments Pte Ltd.10.109+ Assignment and Assumption of Lease and First Amendment to Lease dated December 6, 2004, between Equinix Operating Company, Inc., AbovenetCommunications, Inc., and Brokaw Interests; and Lease dated December 29, 1999 between Abovenet Communications, Inc., and BrokawInterests.10.110+ Loan and Security Agreement dated December 6, 2004 between Equinix, Inc. and Silicon Valley Bank10.111 Sublease dated January 1, 2005 between Equinix, Inc, and At Last Sportswear, Inc./ Sharp Eye, Inc.10.112 Conversion Agreement dated January 10, 2005 between Equinix, Inc. and i-STT Investments Pte Ltd.10.113 First Amendment to Lease dated January 18, 2005 between Eden Ventures LLC and Equinix, Inc.10.114 Notice to Convert Series A-1 Preferred Stock into Common Stock, dated February 1, 2005 by i-STT Investments Pte Ltd.16.1(1) Letter regarding change in certifying accountant.17.1(19) Resignation Letter of Jean Mandeville dated February 4, 200521.1(9) Subsidiaries of Equinix.23.1 Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.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. 61Table of ContentsIndex to Financial Statements(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.(15) Incorporated herein by reference to the exhibit of the same number in the Registrant’s Annual Report on Form 10-K for the year ended December 31,2003.(16) 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 31,2004.(17) Incorporated herein by reference to the exhibit of the same number in the Registrant’s Registration Statement in Form S-3 (Commission File No. 333-116322).(18) 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 30,2004.(19) Incorporated herein by reference to exhibit 99.2 in the Registrant’s Current Report on Form 8-K filed on February 9, 2005.+ 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) Exhibits. See (a)(3) above. (c) Financial Statement Schedule. See (a)(2) above. 62Table of ContentsIndex to Financial StatementsSIGNATURES 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)March 10, 2005 By /s/ PETER F. VAN CAMP Peter F. Van Camp Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Peter F. Van Camp 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 10, 2005/s/ RENEE F. LANAM Renee F. Lanam Chief Financial Officer and Secretary(Principal Financial Officer) March 10, 2005/s/ KEITH D. TAYLOR Keith D. Taylor Vice President, Finance(Principal Accounting Officer) March 10, 2005/s/ LEE THENG KIAT Lee Theng Kiat Chairman of the Board March 10, 2005/s/ STEVEN POY ENG Steven Poy Eng Director March 10, 2005/s/ GARY HROMADKO Gary Hromadko Director March 10, 2005/s/ SCOTT KRIENS Scott Kriens Director March 10, 2005 63Table of ContentsIndex to Financial StatementsSignature Title Date/s/ ANDREW S. RACHLEFF Andrew S. Rachleff Director March 10, 2005/s/ DENNIS RANEY Dennis Raney Director March 10, 2005/s/ MICHELANGELO VOLPI Michelangelo Volpi Director March 10, 2005 64Table of ContentsIndex to Financial StatementsINDEX TO EXHIBITS ExhibitNumber Description of Document 2.1(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. 4.10(9) Registration Rights Agreement (See Exhibit 10.75). 4.11 Indenture (see Exhibit 10.99). 4.12 Registration Rights Agreement (see Exhibit 10.100).10.2(1) Warrant Agreement, dated as of December 1, 1999, by and among the Registrant and State Street Bank and Trust Company ofCalifornia, N.A. (as warrant agent).10.5(1) Form of Indemnification Agreement between the Registrant and each of its officers and directors.10.8(1) The Registrant’s 1998 Stock Option Plan.10.9(1)+ Lease Agreement with Carlyle-Core Chicago LLC, dated as of September 1, 1999.10.10(1)+ Lease Agreement with Market Halsey Urban Renewal, LLC, dated as of May 3, 1999.10.11(1)+ Lease Agreement with Laing Beaumeade, dated as of November 18, 1998.10.12(1)+ Lease Agreement with Rose Ventures II, Inc., dated as of June 10, 1999.10.13(1)+ Lease Agreement with Carrier Central LA, Inc., as successor in interest to 600 Seventh Street Associates, Inc., dated as of August 8, 1999.10.14(1)+ First Amendment to Lease Agreement with TrizecHahn Centers, Inc. (dba TrizecHahn Beaumeade Corporate Management), dated as of October28, 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 15,1999.10.23(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.Table of ContentsIndex to Financial StatementsExhibitNumber Description of Document10.43(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.10.60(9) Governance Agreement by and among Equinix, Inc., STT Communications Ltd., i-STT Communications Ltd., STT InvestmentsPte 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.Table of ContentsIndex to Financial StatementsExhibitNumber Description of Document10.79(9) Change in Control Warrant issued to i-STT Investments Pte Ltd on December 31, 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, 2003.10.90(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 139964.10.94(15) Fourth Modification to Ground Lease by and between iStar San Jose, LLC and Equinix, Inc., dated as of November 21, 2003.10.95(15)+ Sublease Agreement between Sprint Communications Company, L.P. and Equinix Operating Co., Inc. dated October 24, 2003.10.96(15) Tenancy Agreement over units #03-01, #03-02, #03-03, #03-04 of Block 20 Ayer Rajah Crescent, Singapore 139964.10.97(15) Lease Agreement with JMA Robinson Redevelopment, LLC, as successor in interest to Carrier Central L.A., Inc., dated as ofNovember 30, 2003.10.99(16) Indenture among Equinix, Inc. and U.S. Bank National Association as Trustee dated February 11, 2004.10.101(16) First Amendment to Lease Agreement dated September 1, 1999, between Lakeside Purchaser L.L.C. as successor in interest toCarlyle-Core Chicago, LLC and Equinix Operating Co., Inc.10.102(17) Supplemental Lease Agreement with Comfort Development Limited dated May 18, 2004.10.103(18)+ Lease Agreement dated April 21, 2004 between Eden Ventures LLC and Equinix, Inc.10.104(18) Lease Amendment Agreement dated June 17, 2004 between Equinix Japan KK and Mitsubishi Electric Information NetworkCorporation.10.105(18) Equinix, Inc. 2004 International Employee Stock Purchase Plan effective as of June 3, 2004.10.106(18) Equinix, Inc. Employee Stock Purchase Plan effective as of June 3, 2004.10.107 First Amendment to Sublease Agreement dated June 21, 2004 between Equinix Operating Co. Inc. and Sprint CommunicationsCompany L.P.10.108 Omnibus Amendment Agreement dated November 24, 2004 between Equinix, Inc. and i-STT Investments Pte Ltd.10.109+ Assignment and Assumption of Lease and First Amendment to Lease dated December 6, 2004, between Equinix OperatingCompany, Inc., Abovenet Communications, Inc., and Brokaw Interests; and Lease dated December 29, 1999 betweenAbovenet Communications, Inc., and Brokaw Interests.10.110+ Loan and Security Agreement dated December 6, 2004 between Equinix, Inc. and Silicon Valley Bank10.111 Sublease dated January 1, 2005 between Equinix, Inc, and At Last Sportswear, Inc./ Sharp Eye, Inc.10.112 Conversion Agreement dated January 10, 2005 between Equinix, Inc. and i-STT Investments Pte Ltd.10.113 First Amendment to Lease dated January 18, 2005 between Eden Ventures LLC and Equinix, Inc.10.114 Notice to Convert Series A-1 Preferred Stock into Common Stock, dated February 1, 2005 by i-STT Investments Pte Ltd.Table of ContentsIndex to Financial StatementsExhibitNumber Description of Document16.1(1) Letter regarding change in certifying accountant.17.1(19) Resignation Letter of Jean Mandeville dated February 4, 200521.1(9) Subsidiaries of Equinix.23.1 Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.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.(15) Incorporated herein by reference to the exhibit of the same number in the Registrant’s Annual Report on Form 10-K for the year ended December 31,2003.(16) 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 31,2004.(17) Incorporated herein by reference to the exhibit of the same number in the Registrant’s Registration Statement in Form S-3 (Commission File No. 333-116322).(18) 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 30,2004.(19) Incorporated herein by reference to exhibit 99.2 in the Registrant’s Current Report on Form 8-K filed on February 9, 2005.+ 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.Table of ContentsIndex to Financial StatementsReport of Independent Registered Public Accounting Firm To the Board of Directors andStockholders of Equinix, Inc.: We have completed an integrated audit of Equinix, Inc.’s 2004 consolidated financial statements and of its internal control over financial reporting as ofDecember 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company AccountingOversight Board (United States). Our opinions, based on our audits, are presented below. Consolidated financial statements In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, thefinancial position of Equinix, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financialstatements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion. Internal control over financial reporting Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all materialrespects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financialreporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company’smanagement is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control overfinancial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control overfinancial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance aboutwhether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includesobtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions. F-1Table of ContentsIndex to Financial StatementsA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. PricewaterhouseCoopers LLP San Jose, CaliforniaMarch 10, 2005 F-2Table of ContentsIndex to Financial StatementsEQUINIX, INC. CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data) December 31, 2004 2003 Assets Current assets: Cash and cash equivalents $25,938 $26,869 Short-term investments 64,499 46,102 Accounts receivable, net of allowance for doubtful accounts of $337 and $315 11,919 10,178 Prepaids and other current assets 4,726 3,139 Total current assets 107,082 86,288 Long-term investments 17,655 — Property and equipment, net 343,361 343,554 Goodwill 22,018 21,228 Debt issuance costs, net 3,164 5,954 Other assets 8,518 7,508 Total assets $501,798 $464,532 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable and accrued expenses $21,028 $18,052 Accrued interest payable 1,706 1,114 Current portion of accrued restructuring charges 1,952 828 Current portion of debt facilities and capital lease obligations 675 2,689 Current portion of credit facility — 12,000 Other current liabilities 6,877 3,843 Total current liabilities 32,238 38,526 Accrued restructuring charges, less current portion 12,798 — Debt facilities and capital lease obligations, less current portion 34,529 723 Credit facility, less current portion — 22,281 Senior notes — 29,220 Convertible secured notes 35,824 31,683 Convertible subordinated debentures 86,250 — Deferred rent and other liabilities 26,453 22,022 Total liabilities 228,092 144,455 Commitments and contingencies (Note 14) Stockholders’ equity: Preferred stock, $0.001 par value per share; 100,000,000 shares authorized in 2004 and 2003; 1,868,667 sharesissued and outstanding in 2004 and 2003; liquidation value of $18,298 as of December 31, 2004 and 2003 2 2 Common stock, $0.001 par value per share; 300,000,000 shares authorized in 2004 and 2003; 18,999,468 and15,084,425 shares issued and outstanding in 2004 and 2003 19 15 Additional paid-in capital 776,123 755,698 Deferred stock-based compensation (260) (1,032)Accumulated other comprehensive income 2,257 1,198 Accumulated deficit (504,435) (435,804) Total stockholders’ equity 273,706 320,077 Total liabilities and stockholders’ equity $501,798 $464,532 See accompanying notes to consolidated financial statements. F-3Table of ContentsIndex to Financial StatementsEQUINIX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share data) Year ended December 31, 2004 2003 2002 Revenues $163,671 $117,942 $77,188 Costs and operating expenses: Cost of revenues 136,950 128,121 104,073 Sales and marketing 18,604 19,483 15,247 General and administrative 32,494 34,293 30,659 Restructuring charges 17,685 — 28,885 Total costs and operating expenses 205,733 181,897 178,864 Loss from operations (42,062) (63,955) (101,676)Interest income 1,291 296 998 Interest expense (11,496) (20,512) (35,098)Gain (loss) on debt extinguishment and conversion (16,211) — 114,158 Net loss before income taxes (68,478) (84,171) (21,618)Income taxes (153) — — Net loss $(68,631) $(84,171) $(21,618) Net loss per share: Basic and diluted $(3.87) $(8.76) $(7.23) Weighted average shares 17,719 9,604 2,990 See accompanying notes to consolidated financial statements. F-4Table of ContentsIndex to Financial StatementsEQUINIX, INC. Consolidated Statements of Stockholders’ Equity and Other Comprehensive Income (Loss)For the Three Years Ended December 31, 2004(in thousands, except share data) Preferred stock Common stock Additionalpaid-incapital Deferredstock-basedcompensation Accumulatedothercomprehensiveincome (loss) Accumulateddeficit Totalstockholders’equity Shares Amount Shares Amount Balances as of December 31, 2001 — $— 2,502,412 $3 $544,420 $(11,022) $135 $(330,015) $203,521 Issuance of common stock upon exercise of common stock options — — 12,965 — 112 — — — 112 Issuance of common stock upon exercise of common stock warrants — — 58,551 — 11 — — — 11 Issuance of common stock under employee stock purchase plan — — 16,689 — 415 — — — 415 Issuance of common stock upon exchange of senior notes — — 2,357,001 2 30,831 — — — 30,833 Issuance of common and preferred stock upon acquisition of i-STT 1,868,667 2 1,084,686 1 31,184 — — — 31,187 Issuance of common stock upon acquisition of Pihana — — 2,416,379 2 25,515 — — — 25,517 Issuance/revaluation of common and preferred stock warrants — — — — 6,856 — — — 6,856 Deferred stock-based compensation, net of forfeitures — — — — (1,279) 1,279 — — — Amortization of stock-based compensation — — — — — 6,878 — — 6,878 Comprehensive income (loss): Net loss — — — — — — — (21,618) (21,618)Foreign currency translation gain — — — — — — 498 — 498 Unrealized loss on short-term investments — — — — — — (16) — (16) Net comprehensive 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 common stock options — — 383,198 — 1,541 — — — 1,541 Issuance of common stock upon exercise of common stock warrants — — 536,457 1 10 — — — 11 Issuance of common stock under employee stock purchase plan — — 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 value of beneficial conversion feature inconnection with Crosslink 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 Issuance of common stock upon exercise of common stock options — — 1,038,306 1 5,954 — — — 5,955 Issuance of common stock upon exercise of common stock warrants — — 62,100 — — — — — — Issuance of common stock under employee stock purchase plan — — 314,637 — 1,334 — — — 1,334 Issuance of common stock upon conversion of convertible secured notes — — 2,500,000 3 9,997 — — — 10,000 Issuance/revaluation of common stock warrants — — — — 2,445 — — — 2,445 Deferred stock-based compensation, net of forfeitures — — — — 695 (695) — — — Amortization of stock-based compensation — — — — — 1,467 — — 1,467 Comprehensive income (loss): Net loss — — — — — — — (68,631) (68,631)Foreign currency translation gain — — — — — — 1,147 — 1,147 Unrealized loss on investments — — — — — — (88) — (88) Net comprehensive income (loss) — — — — — — 1,059 (68,631) (67,572) Balances as of December 31, 2004 1,868,667 $2 18,999,468 $19 $776,123 $(260) $2,257 $(504,435) $273,706 See accompanying notes to consolidated financial statements. F-5Table of ContentsIndex to Financial StatementsEQUINIX, INC. Consolidated Statements of Cash Flows(in thousands) Year ended December 31, 2004 2003 2002 Cash flows from operating activities: Net loss $(68,631) $(84,171) $(21,618)Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and accretion 56,281 60,642 54,082 Amortization of stock-based compensation 1,467 2,905 6,878 Amortization of intangible assets and non-cash prepaid rent 2,243 2,106 — Amortization of debt-related issuance costs and discounts 2,693 5,574 4,179 Non-cash interest on convertible secured notes 5,112 4,693 — Amortization of deferred rent 3,449 3,174 1,798 Allowance for (recovery of) doubtful accounts (50) — 2,329 Loss on disposal of assets 36 186 11 Loss (gain) on debt extinguishment and conversion 16,211 — (114,158)Restructuring charges 17,685 — 28,885 Changes in operating assets and liabilities: Accounts receivable (1,691) (662) (2,511)Prepaids and other current assets (1,458) 6,885 4,290 Other assets (2,556) 379 2,604 Accounts payable and accrued expenses 3,086 (6,567) 11,126 Accrued restructuring charges (761) (11,350) (9,279)Other current liabilities 3,759 (497) 2,374 Other liabilities 37 (563) 1,501 Net cash provided by (used in) operating activities 36,912 (17,266) (27,509) Cash flows from investing activities: Purchases of short-term and long-term investments (220,769) (46,098) (14,662)Maturities of short-term investments 177,608 — — Sales of short-term investments 7,021 — 43,536 Purchases of property and equipment (22,934) (7,750) (6,508)Accrued construction costs and property and equipment 458 2,454 (28,708)Purchase of restricted cash and short-term investments — (50) (5,090)Sale of restricted cash and short-term investments 1,751 2,265 3,904 Net cash used in investing activities (56,865) (49,179) (7,528) Cash flows from financing activities: Proceeds from issuance of common stock 7,289 106,564 537 Proceeds from convertible subordinated debentures 86,250 — — Proceeds from convertible secured notes — 10,000 30,000 Acquisition of cash from i-STT and Pihana, less acquisition costs — — 29,180 Repayment of debt facilities and capital lease obligations (3,632) (6,074) (6,118)Repayment of credit facility (34,281) (57,229) (13,490)Repayment of senior notes (30,475) — (17,691)Debt extinguishment costs (2,505) — (3,600)Debt issuance costs (3,407) (973) (1,894) Net cash provided by financing activities 19,239 52,288 16,924 Effect of foreign currency exchange rates on cash and cash equivalents (217) (190) 498 Net increase (decrease) in cash and cash equivalents (931) (14,347) (17,615)Cash and cash equivalents at beginning of year 26,869 41,216 58,831 Cash and cash equivalents at end of year $25,938 $26,869 $41,216 Supplemental disclosure of cash flow information: Cash paid for interest $3,181 $13,548 $19,948 See accompanying notes to consolidated financial statements. F-6Table of ContentsIndex to Financial StatementsEQUINIX, 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 is the leading global provider of network-neutraldata centers and Internet exchange services for enterprises, content companies, systems integrators and network services providers. Through the Company’s15 Internet Business Exchange (“IBX”) centers in five countries, customers can directly interconnect with every major global network and Internet serviceprovider for their critical peering, transit and traffic exchange requirements. These interconnection points facilitate the highest performance and growth of theInternet by serving as neutral and open marketplaces for Internet infrastructure services, allowing customers to expand their businesses while reducing costs. In October 2002, the Company entered into agreements to consummate a series of related acquisition and financing transactions. These transactionsclosed on December 31, 2002. Under the terms of these agreements, the Company combined its business with two similar businesses, which arepredominantly based in the Asia-Pacific region, through the acquisition of i-STT Pte Ltd (“i-STT”) and Pihana Pacific, Inc. (“Pihana”) by issuingapproximately 3.5 million shares of Equinix common stock and approximately 1.9 million shares of Equinix preferred stock. The Company refers to thistransaction as the combination (the “Combination”) (see Note 2). In conjunction with the Combination, the Company issued to i-STT’s former parentcompany, STT Communications Ltd. (“STT Communications”), a $30.0 million convertible secured note in exchange for cash. The Company refers to thistransaction 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 12). 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 (see Note 9). The Company used the net proceeds from this offering primarily to repay all amounts outstanding under the Credit Facility,the Heller Loan Amendment, the VLL Loan Amendment and the Senior Notes during February and March 2004. In addition, in March 2004, holders of theCompany’s $10.0 million in Convertible Secured Notes issued in connection with the Crosslink Financing, converted the $10.0 million of principal into 2.5million shares of the Company’s common stock. The Company refers to this transaction as the “Crosslink Conversion.” As a result of the extinguishment ofdebt associated with the Credit Facility, Heller Loan Amendment, VLL Loan Amendment and the Senior Notes, as well as the Crosslink Conversion, theCompany recognized a loss on debt extinguishment and conversion totaling $16.2 million (see Note 10). As of December 31, 2004, the Company had $108.1 million of cash, cash equivalents and short-term and long-term investments. The Companybelieves that this cash, coupled with anticipated cash flows generated from operations, will be sufficient to meet the Company’s capital expenditure, workingcapital, debt service and corporate overhead requirements within the Company’s currently identified business objectives. F-7Table of ContentsIndex to Financial StatementsEQUINIX, 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 center 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 purchase price allocation, the Company attributed no value to this investment as i-STT Nation Limited was in the early stages ofoperations and was not able to generate positive operating cashflow for the foreseeable future. During the year ended December 31, 2003, the Company madethe decision to wind-down i-STT Nation Limited, entered into a wind-down agreement and liquidated this subsidiary. The costs of wind-down were accountedfor as a purchase price adjustment (see Note 2). The Company’s cumulative translation adjustment as of December 31, 2004, 2003 and 2002 was $2,349,000, $1,202,000 and $617,000, respectively. 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 and Long-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 original maturities of between 90 and 360 days and highly liquid debt F-8Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) securities of corporations, municipality agencies of the U.S. government and the U.S. government. Long-term investments generally consist of debt securitiesof corporations, municipality agencies of the U.S. government and the U.S. government with maturities at the date of acquisition of greater than 360 days.Short-term and long-term investments are classified as “available-for-sale” and are carried at fair value based on quoted market prices with unrealized gainsand losses reported in stockholders’ equity as a component of comprehensive income. The cost of securities sold is based on the specific identification method. Financial Instruments and Concentration of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash, cash equivalents and short-term andlong-term investments to the extent these exceed federal insurance limits and accounts receivable. Risks associated with cash, cash equivalents and short-termand long-term investments are mitigated by the Company’s investment policy, which limits the Company’s investing to only those marketable securities ratedat least A-1/P-1 and AA/Aa2 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 now include revenues from these Asia-Pacific operations. The Company performs ongoing credit evaluations of its customers. For theyears ended December 31, 2004, 2003 and 2002, one customer, IBM, accounted for 13%, 15% and 20%, respectively, of revenues for those years. As ofDecember 31, 2004 and 2003, this same customer accounted for 12% and 11%, respectively, of accounts receivable. No other single customer accounted forgreater than 10% of accounts receivables or revenues for the periods presented. Property and Equipment Property and equipment are stated at the Company’s original cost. Depreciation is computed using the straight-line method over the estimated useful livesof the respective assets, generally two to five years for non-IBX center equipment and two to twelve years for IBX center equipment. Leasehold improvementsand assets acquired under capital lease are amortized over the shorter of the lease term or the estimated useful life of the asset or improvement, which isgenerally ten to fifteen years for the leasehold improvements. 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 obligations 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. During the year ended December 31, 2004, the Company recorded additional asset retirement costs related to new leases totaling $83,000. In addition,during the fourth quarter of 2004, the Company revised certain of its estimates used in its calculations for asset retirement costs. As a result, the Companyrecorded an increase to its F-9Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) asset retirement obligations of $1,057,000 and increased the related long-lived assets accordingly, which the Company reflects within leasehold improvementsin property and equipment. For the years ended December 31, 2004 and 2003, the Company recorded accretion expense related to its asset retirement obligationsof $355,000 and $562,000, respectively. Goodwill and Other Intangible Assets The Company recorded goodwill as part of the Combination, which closed on December 31, 2002 (see Note 2), which is fully attributed to theCompany’s Singapore operation. The Company is required to perform an impairment review of its goodwill balance on at least on an annual basis, which theCompany performs during the fourth quarter. 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’sgoodwill 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, 2004, 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 14%, 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): 2004 2003 Goodwill $22,018 $21,228 Other intangibles: Intangible asset—customer contracts 4,114 3,927 Intangible asset—tradename 318 300 Intangible asset—workforce 160 160 4,592 4,387 Accumulated amortization (4,357) (2,106) 235 2,281 $22,253 $23,509 F-10Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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, 2004 and 2003. For the year ended December 31, 2004, the Company recorded $2,049,000 of amortization expense associated with its other intangible assets. For theyear ended December 31, 2003, the Company recorded $2,106,000 of amortization expense associated with its other intangible assets. Prior to 2003, theCompany had not recorded amortization expense. The Company expects to record the following amortization expense during the next five years (in thousands): Year ending: 2005 $602006 602007 602008 552009 — Total $235 Fair Value of Financial Instruments The carrying value amounts of the Company’s financial instruments, which include cash equivalents, short-term and long-term investments, accountsreceivable, accounts payable, accrued expenses and long-term obligations approximate their fair value due to either the short-term maturity or the prevailinginterest rates of the related instruments. The fair value of the Company’s Senior Notes was based on quoted market prices. The estimated fair value of theSenior Notes was approximately $24.4 million as of December 31, 2003. In March 2004, the Company redeemed all of the Senior Notes, which had a total of$30.5 million of principal outstanding as of December 31, 2003 (see Note 6). The fair value of the Company’s Convertible Subordinated Debentures, whichwere issued in February 2004, are based on quoted market prices (see Note 9). The estimated fair value of the Convertible Subordinated Debentures wasapproximately $106.2 million as of December 31, 2004. 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”. SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset toestimated undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows,an impairment 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 June30, 2002, and also during the quarter ended December 31, 2004, the Company wrote-down the value of some property and equipment, primarily leaseholdimprovements, located in excess lease spaces that the Company exited from or intends to exit from and that do not currently provide any ongoing benefit (seeNote 17). F-11Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 centers as of December 31, 2002. This assessment involved an assessment of the future net cash flowsgenerated by each IBX center over their respectful useful lives and comparing this against the carrying value of that IBX center. The revenue and costassumptions used in this analysis were based on numerous factors, including the current revenue and cost performance of each IBX hub, historical growthrates, the remaining space to fill each IBX center to full capacity relative to the market demand in each of the individual geographic markets of each IBX hub,expected inflation rates and any other available economic indicators and factors that the Company believed were relevant. This analysis showed that the total ofthe undiscounted future cash flows was greater than the carrying amount of the assets, and accordingly, no impairment was deemed to have occurred.Significant judgments and assumptions were required in the forecast of future operating results used in the preparation of the estimated future cash flows,including profit margins, customer growth and the timing of overall market growth and the Company’s percentage of that market. The Company reviewed thisanalysis as of December 31, 2003, and again as of December 31, 2004, and noted that the Company had generally performed better in all significant aspectscompared to the projections used in the prior year and that no impairment indicators or triggering events were present. As a result, no further impairmentanalysis was performed; however, if future results do not match these estimates, revised future forecasts could result in a material adverse effect on theassessment of the Company’s long-lived assets, thereby requiring the Company to write down the assets. 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 and power; (2) interconnection services, such as cross connects and Gigabit Ethernet ports and (3) managed infrastructure services,such as Equinix Direct, bandwidth and other e-business services such as mail service and managed platform solutions. The remainder of the Company’srevenues are from non-recurring revenue streams, such as from the recognized portion of deferred installation revenues, professional services, contractsettlements and equipment sales. Revenues from recurring revenue streams are billed monthly and recognized ratably over the term of the contract, generallyone to three years. Fees for the provision of e-business services are recognized progressively as the services are rendered in accordance with the contract terms,except where the future costs cannot be estimated reliably, in which case fees are recognized upon the completion of services. Non-recurring installation fees,although generally paid in a lump sum upon installation, are deferred and recognized ratably over the term of the related contract or expected customerrelationship. Professional service fees are recognized in the period in which the services were provided and represent the culmination of the earnings process aslong as they meet the criteria for separate recognition under EITF Abstract No. 00-21, “Revenue Arrangements with Multiple Deliverables.” Revenue frombandwidth and equipment is recognized on a gross basis in accordance with EITF Abstract No. 99-19, “Recording Revenue as a Principal versus Net as anAgent”, primarily because the Company acts as the principal in the transaction, takes title to products and services and bears inventory and credit risk. Tothe extent the Company does not meet the criteria for gross basis accounting for bandwidth and equipment revenue, the Company records the revenue on a netbasis. Revenue from contract settlements is recognized on a cash basis when no remaining performance obligations exist to the extent that the revenue has notpreviously been recognized. The Company occasionally guarantees certain service levels, such as uptime, as outlined in individual customer contracts. To the extent that theseservice levels are not achieved, the Company reduces revenue for any credits given to the customer as a result. The Company generally has the ability todetermine such service level credits prior to the associated revenue being recognized, and historically, these credits have not been significant. Revenue is recognized only when the service has been provided and when there is persuasive evidence of an arrangement, the fee is fixed or determinableand collection of the receivable is reasonably assured. It is F-12Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) customary business practice to obtain a signed master sales agreement and sales order prior to recognizing revenue in an arrangement. The Company assessescollection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Companygenerally does not request collateral from its customers although in certain cases the Company obtains a security interest in a customer’s equipment placed inits IBX centers or obtains a deposit. If the Company determines that collection of a fee is not reasonably assured, the Company defers the fee and recognizesrevenue at the time collection becomes reasonably assured, which is generally upon receipt of cash. In addition, Equinix also maintains an allowance fordoubtful accounts for estimated losses resulting from the inability of its customers to make required payments for those customers that the Company hadexpected to collect the revenues. If the financial condition of Equinix’s customers were to deteriorate or if they become insolvent, resulting in an impairment oftheir ability to make payments, allowances for doubtful accounts may be required. Management specifically analyzes accounts receivable and currenteconomic news and trends, historical bad debts, customer concentrations, customer credit-worthiness and changes in customer payment terms whenevaluating revenue recognition and the adequacy of the Company’s reserves. A specific bad debt reserve of up to the full amount of a particular invoice value isprovided for certain problematic customer balances. A general reserve is established for all other accounts based on the age of the invoices. Delinquent accountbalances are written-off after management has determined that the likelihood of collection is not probable. Income Taxes Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences areexpected 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 theenactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are expected more likely than not to berealized in the future. The assessment of whether or not a valuation allowance is required often requires significant judgment including the forecast of futuretaxable income and the evaluation of tax planning strategies in each of the jurisdictions in which the Company operates. The Company also accounts for anyincome tax contingencies in accordance with SFAS No. 5, “Accounting for Contingencies.” 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. Unearned deferred compensation resulting from employee option grants is amortized on an accelerated basis over the vesting period of the individualoptions, in accordance with FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans”(“FASB Interpretation No. 28”). Primarily as a result of employee stock options being granted at exercise prices below fair market value prior to the Company’s initial public offering(“IPO”) in August 2000, the Company recorded a deferred stock- F-13Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) based compensation charge on its balance sheet of $54,537,000 in 2000, which was amortized over the four-year vesting life of these individual stock optionsnet of the reversal of any previously recorded accelerated stock-based compensation expense due to the forfeitures of those stock options prior to vesting. Theamortization of the deferred stock-based compensation related to these pre-IPO stock options ended in August 2004. In addition, in September 2003, theCompensation Committee of the Board of Directors awarded a stock option grant to the Company’s chief executive officer at a 15% discount to the then fairmarket value of the Company’s common stock on the date of grant and, as a result, recorded a $1,093,000 deferred stock-based compensation charge, whichis amortized over the three-year vesting period of this grant. As of December 31, 2004, there was a total of $260,000 of deferred stock-based compensationremaining to be amortized, primarily for this grant to the Company’s chief executive officer. The Company expects stock-based compensation expense relatedto this specific option grant 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): 2004 2003 2002Cost of revenues $35 $59 $266Sales and marketing 60 294 952General and administrative 1,372 2,552 5,660 $1,467 $2,905 $6,878 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): 2004 2003 2002 Net loss as reported $(68,631) $(84,171) $(21,618)Stock-based compensation expense included in net loss 1,459 2,818 6,859 Stock-based compensation expense if SFAS No. 123 had been adopted (20,756) (10,238) (12,866) Pro forma net loss $(87,928) $(91,591) $(27,625) Basic and diluted net loss per share: As reported $(3.87) $(8.76) $(7.23)Pro forma (4.96) (9.54) (9.24) 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: 2004 2003 2002 Dividend yield 0% 0% 0%Expected volatility 98% 110% 135%Risk-free interest rate 2.58% 2.24% 3.75%Expected life (in years) 3.50 3.50 3.50 The weighted-average fair value of stock options per share on the date of grant was $19.48, $3.91 and $21.58 for the years ended December 31, 2004,2003 and 2002, respectively. The Company’s fair value F-14Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) calculations for employee’s stock purchase rights under the Purchase Plan (see Note 12) were made using the Black-Scholes option pricing model withweighted average assumptions consistent with those used for employee grants as indicated above; however, the assumption for expected life (in years) used forthe Purchase Plan was approximately two years for each of the 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. Net Loss Per Share The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share;” SEC Staff Accounting Bulletin (“SAB”) No. 98;EITF Issue 03-6, “Participating Securities and the Two-Class Method Under FASB 128”, which the Company adopted during the second quarter of 2004 andEITF Issue 04-8 “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share”, which the Company adopted during the fourth quarterof 2004. Under the provisions of SFAS No. 128, SAB No. 98 and EITF Issues 03-6 and 04-8, basic and diluted net loss per share are computed using theweighted-average number of common shares outstanding. Options, warrants and contingently convertible instruments were not included in the computation ofdiluted net loss per share because the effect would be anti-dilutive, and do not qualify as participating securities under EITF Issue 03-6. Under EITF Issue 03-6, the Company’s preferred stock qualifies as a participating security, but was not included in the Company’s basic and diluted net loss per sharecalculations as the holder of preferred stock does not have a contractual obligation to share in the Company’s losses. In addition, under EITF 04-8, theCompany’s Convertible Subordinated Debentures qualify as contingently convertible instruments; however, they were not included in the Company’s dilutednet loss per share calculations because to do so would be anti-dilutive for all periods presented. F-15Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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): 2004 2003 2002 Numerator: Net loss $(68,631) $(84,171) $(21,618) Denominator: Weighted average shares 17,719 9,606 3,015 Weighted average unvested shares subject to repurchase — (2) (25) Total weighted average shares 17,719 9,604 2,990 Net loss per share: Basic and diluted $(3.87) $(8.76) $(7.23) 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: 2004 2003 2002Series A preferred stock 1,868,667 1,868,667 1,868,667Series A preferred stock warrant 965,674 965,674 965,674Shares reserved for conversion of convertible secured notes 4,191,193 6,160,765 2,785,205Shares reserved for conversion of convertible subordinated debentures 2,183,548 — —Common stock warrants 290,110 245,835 269,586Common stock options 3,801,794 3,407,938 725,821Common stock subject to repurchase — 150 6,986 Derivatives and Hedging Activities The Company follows SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which requires the Company torecognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through the statement of operations. Ifthe derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of thehedged assets, liabilities or firm commitments through earnings, or recognized in other comprehensive income (loss) until the hedged item is recognized inearnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. As of December 31, 2004, the Company hadnot entered into any hedging activities; however, the Convertible Subordinated Debentures that were issued in February 2004 contain one remaining embeddedderivative, which had a zero fair value as of December 31, 2004 (see Note 9). Recent Accounting Pronouncements In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No.51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not 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 F-16Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 clarifyingcertain aspects of FIN 46 and providing certain entities with exemptions from the requirements of FIN 46. For variable interest entities created or acquired priorto February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after March 15, 2004. The adoption of FIN 46 didnot have a material impact on the Company’s results of operations, financial position or cash flows. In May 2003, the FASB issued SFAS No. 150, ”Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”SFAS No. 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments 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 FASB 150-3which deferred the measurement provisions of SFAS No. 150 indefinitely for certain mandatorily redeemable non-controlling interests that were issued beforeNovember 5, 2003. The FASB plans to reconsider implementation issues and, perhaps, classification or measurement guidance for those non-controllinginterests during the deferral period. In 2003, the Company 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 the Company’s results of operations, financial position or cash flows. While the effective dateof certain elements of SFAS No. 150 have been deferred, the adoption of SFAS No. 150 when finalized is not expected to have a material impact on theCompany’s financial position, results of operations or cash flows. In March 2004, the FASB approved EITF Issue 03-6 “Participating Securities and the Two-Class Method under FAS 128.” EITF Issue 03-6 supersedesthe guidance in Topic No. D-95, “Effect of Participating Convertible Securities on the Computation of Basic Earnings per Share”, and requires the use of thetwo-class method of participating securities. The two-class method is an earnings allocation formula that determines earnings per share for each class ofcommon stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In addition,EITF Issue 03-6 addresses other forms of participating securities, including options, warrants, forwards and other contracts to issue an entity’s commonstock, with the exception of stock-based compensation (unvested options and restricted stock) subject to the provisions of APB Opinion No. 25 and FASBNo. 123. EITF Issue 03-6 is effective for reporting periods beginning after March 31, 2004 and should be applied by restating previously reported earnings pershare. The Company adopted the provisions of EITF Issue 03-6 during the second quarter of 2004. The adoption of EITF Issue 03-6 did not have a materialeffect on the Company’s basic and diluted net loss per share data at this time. In June 2004, the FASB issued EITF Issue 03-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITFIssue 03-1 establishes a common approach to evaluating other-than-temporary impairment to investments in an effort to reduce the ambiguity in impairmentmethodology found in APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” and FASB No. 115, “Accounting forCertain Investments in Debt and Equity Securities”, which has resulted in inconsistent application. In September 2004, the FASB issued FASB Staff PositionEITF Issue 03-1-1, which deferred the effective date for the measurement and recognition guidance clarified in EITF Issue 03-1 indefinitely; however, thedisclosure requirements remain effective for fiscal years ending after June 15, 2004. While the effective date for certain elements of EITF Issue 03-1 have beendeferred, the adoption of EITF Issue 03-1 when finalized in its current form is not expected to have a material impact on the Company’s financial position,results of operations or cash flows. In November 2004, the FASB approved EITF Issue 04-8 “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share.” EITFIssue 04-8 addresses when contingently convertible instruments should be F-17Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) included in diluted earnings per share. For purposes of EITF Issue 04-8, contingently convertible instruments are instruments that have embedded conversionfeatures that are contingently convertible or exercisable based on (a) a market price trigger or (b) multiple contingencies if one of the contingencies is a marketprice trigger and the instrument can be converted or share settled based on meeting the specified market condition. EITF Issue 04-8 is effective for reportingperiods beginning after December 15, 2004 and should be applied by restating previously reported earnings per share data. The Company adopted theprovisions of EITF Issue 04-8 during the fourth quarter of 2004. The adoption of EITF Issue 04-8 did not have a material effect on the Company’s diluted netloss per share data at this time. In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) revises SFAS No. 123, “Accounting for Stock-Based Compensation” and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation, such asemployee stock purchase plans and restricted stock awards. In addition, SFAS No. 123(R) supercedes Accounting Principles Board Opinion (APB) No. 25,“Accounting for Stock Issued to Employees” and amends SFAS No. 95, “Statement of Cash Flows.” Under the provisions of SFAS No. 123(R), stock-basedcompensation awards must meet certain criteria in order for the award to qualify for equity classification. An award that does not meet those criteria will beclassified as a liability and be remeasured each period. SFAS No. 123(R) retains the requirements on accounting for the income tax effects of stock-basedcompensation contained in SFAS No. 123; however, it changes how excess tax benefits will be presented in the statement of cash flows. SFAS No. 123(R) iseffective for reporting periods beginning after June 15, 2005. The Company is currently considering the financial accounting, income tax and internal controlimplications of SFAS No. 123(R). The adoption of SFAS No. 123(R) is expected to have a significant impact on the Company’s financial position and resultsof operations. In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29.” SFAS No. 153addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value measurement for nonmonetary exchanges of similarproductive assets contained in APB Opinion No. 29 and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153specifies that a nonmonetary exchange has commercial substance if the future cash flows of an entity are expected to change significantly as a result of theexchange. SFAS No. 153 is effective for fiscal periods beginning after June 15, 2005. As the provisions of SFAS No. 153 are to be applied prospectively, theadoption of SFAS No. 153 will not have an impact on the Company’s historical financial statements; however, the Company will assess the impact of theadoption of this pronouncement on any future nonmonetary transactions that the Company enters into, if any. 2. The Combination Acquisition of i-STT On December 31, 2002, a wholly-owned subsidiary of the Company acquired all issued and outstanding shares of i-STT from STT Communications(the “i-STT Acquisition”). i-STT was a similar business to that of Equinix with IBX center operations in Singapore and Thailand. The entire purchase priceof $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 12). F-18Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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. Included in the net liabilities assumed as of December 31, 2002, was an accrual of $400,000 representingthe estimated costs to exit from an undeveloped IBX center leasehold interest in Shanghai, China. The Company completed the exit of this lease during thesecond quarter of 2003. During the quarter ended March 31, 2003, the Company recorded an adjustment to increase the goodwill acquired in the i-STTAcquisition by $650,000 as a result of the decision to wind-down the joint venture in Thailand, i-STT Nation Limited. The wind-down costs attributed to i-STT Nation Limited were treated as a purchase price adjustment consistent with the provisions of EITF 95-3 “Costs to Exit an Activity of an AcquiredCompany.” As of the date of closing of the Combination, the Company planned to exit the Thailand business. However, because i-STT Nation Limited wasnot a wholly-owned subsidiary, third-party consents were required for the Company to exit this business and since, as of the date of the Combination, theCompany did not have such consents, the Company was unable to estimate the timing for such exit. During the first quarter of 2003, senior management fromthe Company had several meetings with the third parties, whose consent was required to discuss the cost and timing for the Company to exit the business, andas a result, the Company estimated that its share of the costs to shut down the 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 the Shanghai leasehold and winding down the joint venture in Thailand were less thanexpected, and as a result, the Company recorded an adjustment to reduce the remaining accruals for these efforts totaling $446,000, which decreased thegoodwill balance acquired in the i-STT Acquisition. Over the course of 2003, the Company recorded several adjustments to the provisional purchase priceallocation following the resolution of certain contingencies, including the Shanghai 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 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 Acquisition”). Pihana was a similarbusiness to that of Equinix with IBX center operations in Singapore; F-19Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Tokyo, Japan; Sydney, Australia; Hong Kong, China, as well as Los Angeles and Honolulu in the U.S. The entire purchase price of $28,376,000 wascomprised of (i) 2,416,379 shares of the Company’s common stock, with a total value of $25,517,000, (ii) total cash consideration and direct transactioncosts of $2,683,000 and (iii) the value of Pihana shareholder warrants assumed in the Pihana 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 surroundingthe date the transaction was announced in October 2002. The fair value of the Pihana Shareholder Warrants, which represent the right to purchase 133,442shares of the Company’s common stock at an exercise price of $191.81 per share, was determined using the Black-Scholes option-pricing model and thefollowing assumptions: fair market value per share of $5.70, dividend yield of 0%, expected volatility of 135%, risk-free interest rate of 4% and a contractuallife 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 center leasehold, severance related to an approximate 30% reduction inworkforce, including several officers of Pihana and some transaction-related professional fees. A substantial portion of these costs were paid during 2003. Priorto December 31, 2002, Pihana sold their Korean IBX center operations, which was excluded from the Pihana Acquisition, terminated or amended severaloperating leaseholds and recorded a substantial impairment charge against the value of their property and equipment assumed in the Pihana Acquisition.During the fourth quarter of 2003, the Company recorded several adjustments to the provisional purchase price allocation following the resolution of certaincontingencies totaling $1,184,000, which increased the property and equipment balance assumed in the Pihana Acquisition. In addition, during 2004, theCompany recorded several additional adjustments to the provisional purchase price allocation following the settlement of certain liabilities accrued at theconsummation date totaling $157,000, which decreased the property and equipment balance assumed in the Pihana 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 $33,341 Accounts receivable 754 Other current assets 651 Property and equipment 6,718 Restricted cash 927 Other assets 2,329 Total assets acquired 44,720 Accounts payable and accrued expenses (3,294)Accrued restructuring charges and transaction fees (9,536)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. 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. F-20Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) A summary of the changes in accrued restructuring charge from December 31, 2003 to December 31, 2004 is outlined as follows (in thousands): Acquiredrestructuringaccruals as ofDecember 31,2003 Purchasepriceadjustments Cashpayments Acquiredrestructuringaccruals as ofDecember 31,2004Workforce reduction and related costs $218 $(90) $(128) $—Lease exit and office shutdown costs 390 (67) (323) — $608 $(157) $(451) $— 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. 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, 2002, 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, 2002. F-21Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Unaudited pro forma consolidated results of operations for the year ended December 31, 2002 is as follows (in thousands, except per share data): 2002 Revenues $93,150 Net loss (69,351)Basis and diluted net loss per share (10.68) These unaudited pro forma results do not include the effects of the the Senior Note Exchange (see Note 6) or Financing (see Note 8). 3. IBX Acquisitions and Expansions Santa Clara IBX Acquisition In December 2003, the Company entered into a definitive agreement to sublease an already constructed 160,000 square foot data center in Santa Clara,California, and acquire certain related assets from Sprint Communications Company, L.P. (“Sprint”). The Company refers to this transaction as the SantaClara 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 fair value of $3,980,000. Concurrent with the negotiations with Sprint to sublease the property and take over the operations of this IBX hub, theCompany also negotiated with the various customers already located within this IBX center and entered into new contracts with the key customers. TheCompany also hired a number of Sprint employees that were working within this IBX center. 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. F-22Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Washington, D.C. Metro Area IBX Expansion In April 2004, the Company entered into a long-term lease for a 95,000 square foot data center in the Washington, D.C. metro area. This center isadjacent to the Company’s existing Washington D.C. metro area IBX. This lease, which includes the leasing of all of the IBX plant and machinery equipmentlocated within the building, is classified as a capital lease (the “Washington, D.C. Metro Area IBX Expansion Capital Lease”). The Company took possessionof this property during the fourth quarter of 2004, and as a result, recorded property and equipment assets, as well as a capital lease obligation, totaling$35,309,000. Monthly payments under this lease, which commenced in November 2004, will be made through 2019 at an effective interest rate of 8.50% perannum (see Note 5). The Company refers to this transaction as the “Washington, D.C. Metro Area IBX Expansion.” San Jose IBX Acquisition In December 2004, the Company entered into a long-term lease for a 103,000 square foot data center in the Silicon Valley area through an Assignment andAssumption of Lease agreement with Abovenet Communications, Inc. (“Abovenet”) (the “New San Jose IBX Lease”). This center is close to the Company’sexisting IBX centers in the Silicon Valley, and this new addition expands the global Equinix footprint to approximately 1.4 million square feet. The Companywill take possession of this property during the first quarter of 2005. Concurrent with the signing of the New San Jose IBX Lease, the Company alsopurchased the assets, primarily IBX plant and machinery, located in this center from Abovenet for a purchase price of $924,000 The Company will fund thispurchase price when it takes possession of this property during the first quarter of 2005 (the “New San Jose IBX Asset Purchase Agreement”) . The Companyalso entered into an agreement with Abovenet to interconnect all three of its IBX centers in the Silicon Valley through redundant dark fiber links for a fee of$3,300,000 (the “Silicon Valley IBX Fiber Ring Agreement”). The Company will manage the dark fiber links and will allow customers in each center toleverage the benefits of directly interconnecting with other customers in the other centers. Pursuant to the terms of the Silicon Valley IBX Fiber Ring Agreement,the Company paid $2,550,000 towards the work to be performed by Abovenet in December 2004, with the remaining $750,000 to be paid no later than May1, 2005. The Silicon Valley IBX Fiber Ring Agreement has an initial term from the time the fiber is available, which is expected to be March 2005, throughMay 2020. The Company has reflected the $2,550,000 payment for the Silicon Valley IBX Fiber Ring Agreement within both prepaids and other currentassets and other assets (non-current) on the accompanying balance sheet as of December 31, 2004. Lastly, Abovenet, a customer of the Company’s prior toentering into any of these agreements, expanded its customer contract with the Company to include being a customer in this new San Jose IBX (the “AbovenetCustomer Contract”). The Company refers to this transaction as the “San Jose IBX Acquisition.” The Company is currently evaluating the accounting treatment for the San Jose IBX Acquisition, including its analysis of fair value for each of theindividual elements involved in this transaction, and will have this evaluation completed in March 2005. F-23Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 4. Balance Sheet Components Cash, Cash Equivalents and Short-term and Long-Term Investments Cash, cash equivalents and short-term and long-term investments consisted of the following as of December 31 (in thousands): 2004 2003 Money market $15,944 $9,254 U.S. government and agency obligations 38,048 4,043 Commercial paper 30,391 — Corporate bonds 17,202 22,615 Auction rate securities 6,507 33,559 Other securities — 3,500 Total available-for-sale securities 108,092 72,971 Less amounts classified as cash and cash equivalents (25,938) (26,869) Total securities classified as investments 82,154 46,102 Less amounts classified as short-term investments (64,499) (46,102) Total market value of long-term investments $17,655 $— The original maturities of all short-term investments were less than one year as of December 31, 2004 and 2003. The original maturities of all long-terminvestments was greater than one year and less than two years with the exception of one long-term investment totaling $3,164,000, which had an originalmaturity of greater than two years and less than three years, as of December 31, 2004. As of December 31, 2004 and 2003, cash equivalents includedinvestments in other securities with various contractual maturity dates that do not exceed 90 days. Gross realized gains and losses from the sale of securitiesclassified as available-for-sale were not material for the years ended December 31, 2004, 2003 and 2002. For the purpose of determining gross realized gainsand losses, the cost of securities is based upon specific identification. As of December 31, 2004 and 2003, unrealized gains and losses were net losses of $92,000 and $4,000, respectively. As of December 31, 2004, theCompany’s net unrealized losses in its available-for-sale securities was comprised of the following (in thousands): Unrealizedgains Unrealizedlosses Netunrealizedlosses Cash and cash equivalents $— $— $— Short-term investments 61 (87) (26)Long-term investments 1 (67) (66) $62 $(154) $(92) There were no individual marketable securities which carried an unrealized loss for the past twelve consecutive months; however, there were sevenmarketable securities which carried an unrealized loss for at least six months. The net unrealized losses of these seven instruments was $51,000. These sevendebt instruments have an aggregate fair value of $16,042,000 and are comprised of four corporate bonds rated AA or better, and three government agencysecurities. The Company has evaluated the credit risk of the securities which carried unrealized losses for six or more consecutive months. The credit risk ofthese instruments has not been adversely affected by a ratings downgrade and there has been no negative impact relating to the industry or sector of the F-24Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) issuers of these instruments. The government agency securities have continued to trade at consistent spreads over the past year, providing further indicationthat there has been no negative impact to these securities. The credit ratings of these securities remain within the Company’s investment policy guidelines.Based upon this evaluation, the Company has determined that the unrealized losses are predominantly the result of rising interest rates relative to rates at thetime the securities were purchased in the first half of 2004. This decline in value of these investments is primarily related to changes in interest rates and isconsidered to be temporary in nature, and as a result, the Company has continued to account for these as unrealized losses as of December 31, 2004. TheCompany’s unrealized losses as of December 31, 2003 were not significant. Certain auction rate securities have been reclassified from cash equivalents to short-term investments. Auction rate securities are variable rate bonds tiedto short-term interest rates with maturities on the face of the securities in excess of ninety days. Auction rate securities have interest rate resets through amodified Dutch auction, at pre-determined short-term intervals, usually every seven, twenty-eight or thirty-five days. They trade at par and are callable at paron any interest payment date at the option of the issuer. Interest paid during a given period is based upon the interest rate determined during the prior auction. Although these securities are issued and rated as long-term bonds, they are priced and traded as short-term instruments because of the liquidity providedthrough the interest rate reset. The Company had historically classified these instruments as cash equivalents if the period between interest rate resets wasninety days or less, which was based on our ability to either liquidate our holdings or roll our investment over to the next reset period. Based upon the Company’s re-evaluation of these securities, the Company has reclassified its auction rate securities, previously classified as cashequivalents, as short-term investments on the accompanying consolidated balance sheet as of December 31, 2003. This resulted in a reclassification from cashand cash equivalents to short-term investments of $33,559,000 on the December 31, 2003 consolidated balance sheet. In addition, purchases of short-term andlong-term investments and sales of short-term investments, included in the accompanying consolidated statements of cash flows, have been revised to reflectthe purchase and sale of auction rate securities during the periods presented. The Company accounts for its marketable securities in accordance with SFASNo. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Such investments are classified as “available-for-sale” and are reported at fairvalue in the Company’s consolidated balance sheets. The short-term nature and structure, the frequency with which the interest rate resets and the ability tosell auction rate securities at par and at the Company’s discretion indicates that such securities should more appropriately be classified as short-terminvestments with the intent of meeting the Company’s short-term working capital requirements. Accounts Receivable Accounts receivable, net, consists of the following as of December 31 (in thousands): 2004 2003 Accounts receivable $26,119 $19,164 Unearned revenue (13,863) (8,671)Allowance for doubtful accounts (337) (315) $11,919 $10,178 Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Unearned revenue consists of pre-billing for services that havenot yet been provided, but which have been billed to customers F-25Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) ahead of time in accordance with the terms of their contract. Accordingly, the Company invoices its customers at the end of a calendar month for services to beprovided the following month. Additions (reductions) to the allowance for doubtful accounts were approximately ($50,000), zero and $2,329,000 for the years ended December 31,2004, 2003 and 2002, respectively. Charges (recoveries) against the allowance were approximately ($72,000), $82,000 and $2,313,000 for the years endedDecember 31, 2004, 2003 and 2002, respectively. Prepaids and Other Current Assets Prepaids and other current assets consist of the following as of December 31 (in thousands): 2004 2003Prepaid rent $1,830 $—Prepaid insurance 826 1,076Prepaid other 1,112 906Taxes receivable 728 948Other current assets 230 209 $4,726 $3,139 Prepaid rent as of December 31, 2004, primarily represented rent for January 2005 for the Company’s various U.S. IBX operating leases, which theCompany paid in December 2004. Property and Equipment Property and equipment is comprised of the following as of December 31 (in thousands): 2004 2003 Leasehold improvements $402,620 $383,574 IBX plant and machinery 89,960 64,557 IBX equipment 47,437 40,023 Computer equipment and software 21,711 18,875 Furniture and fixtures 2,041 1,979 563,769 509,008 Less accumulated depreciation (220,408) (165,454) $343,361 $343,554 Leasehold improvements, IBX plant and machinery and computer equipment and software recorded under capital leases aggregated $35,309,000 andzero as of December 31, 2004 and 2003, respectively. The Company recorded a capital lease in connection with its IBX expansion in the Washington, D.C.metro area during the fourth quarter of 2004 (see Note 3). Amortization on the assets recorded under capital leases is included in depreciation expense. Included within leasehold improvements is the value attributed to the earned portion of several warrants issued to certain fiber carriers and theCompany’s contractor totaling $9,883,000 at both December 31, 2004 and December 31, 2003. Amortization of such warrants is included in depreciationexpense. F-26Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) In December 2004, the Company wrote-off all remaining property and equipment, primarily leasehold improvements, located in the excess lease space onthe floor above the Company’s Los Angeles IBX totaling $3,816,000. The Company decided to exit from this excess lease space and these assets do notprovide any ongoing benefit (see Note 17). Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consisted of the following as of December 31 (in thousands): 2004 2003Accounts payable $2,835 $3,833Accrued compensation and benefits 5,969 3,655Accrued taxes 3,376 2,539Accrued property and equipment 2,912 2,454Accrued utility and security 2,457 2,017Accrued professional fees 1,741 1,281Accrued other 1,738 2,273 $21,028 $18,052 Other Current Liabilities Other current liabilities consisted of the following as of December 31 (in thousands): 2004 2003Customer deposits $3,229 $109Deferred installation revenue 3,019 2,693Other current liabilities 629 1,041 $6,877 $3,843 A significant portion of customer deposits as of December 31, 2004, represents a customer’s deposit towards an installation project at one of theCompany’s IBX centers. Upon completion of this installation project, this deposit will be reclassified to deferred installation revenue and amortized intorevenue over the expected life of the customer relationship. Deferred Rent and Other Liabilities Deferred rent and other liabilities consisted of the following as of December 31 (in thousands): 2004 2003Deferred rent $22,493 $19,889Asset retirement obligations 3,054 1,559Other liabilities 906 574 $26,453 $22,022 The Company currently leases all but one of its IBX centers and certain equipment under noncancelable operating lease agreements expiring through2020. The centers’ lease agreements typically provide for base rental rates that increase at defined intervals during the term of the lease. In addition, theCompany has F-27Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) negotiated rent expense abatement periods to better match the phased build-out of its centers. The Company accounts for such abatements and increasing baserentals using the straight-line method over the life of the lease. The difference between the straight-line expense and the cash payment is recorded as deferredrent. 5. Debt Facilities and Capital Lease Obligations Debt facilities and capital lease obligations consisted of the following as of December 31 (in thousands): 2004 2003 Washington, D.C. Metro Area IBX Expansion Capital Lease $35,204 $— VLL Loan Amendment (net of unamortized discount of zero and $112 as of December 31, 2004 and2003, respectively) — 735 Heller Loan Amendment (net of unamortized discount of zero and $3 as of December 31, 2004 and2003, respectively) — 2,476 Orix Equipment Leases — 201 35,204 3,412 Less current portion (675) (2,689) $34,529 $723 Washington, D.C. Metro Area IBX Expansion Capital Lease In April 2004, the Company entered into a long-term lease for a 95,000 square foot data center in the Washington, D.C. metro area. This lease, whichincludes the leasing of all of the IBX plant and machinery equipment located in the building, is classified as a capital lease (the “Washington, D.C. Metro AreaIBX Expansion Capital Lease”). The Company took possession of this property during the fourth quarter of 2004, and as a result, recorded property andequipment assets, as well as a capital lease obligation, totaling $35,309,000. Monthly payments under this lease, which commenced in November 2004, willbe made through 2019 at an effective interest rate of 8.50% per annum. As of December 31, 2004, principal of $35.2 million remained outstanding. 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 IBXcenter 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 tobe used to finance up to 85% of the projected cost of tenant improvements and equipment for the Newark IBX center. 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 F-28Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) yield 0%, expected volatility of 80%, risk-free interest rate of 5.0% and a contractual life of seven years, was $1,174,000. Such amount was recorded as adiscount to the applicable 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 had an effective interest rate ofapproximately 14.7% per annum. 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 Subordinated Debentures (see Note 9), the Company repaid all amounts outstanding under theVLL Loan Amendment, including $749,000 of principal, plus accrued and unpaid interest, and terminated the VLL Loan Amendment. As a result, theCompany recognized a loss on debt extinguishment on this transaction of $170,000, comprised of the write-off of unamortized debt issuance costs and debtdiscount totaling $74,000 and other transaction fees of $96,000. Refer to Gain (Loss) on Debt Extinguishment and Conversion (see Note 10). 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 was secured by certain equipmentlocated in the New York metropolitan area IBX center. 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 F-29Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) share of $36.16, dividend yield of 0%, expected volatility of 80%, risk-free interest rate of 5% and a contractual life of five years. Such amount was recordedas a discount to the applicable loan amount, and is being amortized to interest expense using the effective interest method, over the life of the loan. 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 had an effective interest rate of approximately 16.5% per annum. In February 2004, with the proceeds from the Convertible Subordinated Debentures, the Company repaid all amounts outstanding under the Heller LoanAmendment, including $2,177,000 of principal, plus accrued and unpaid interest, and terminated the Heller Loan Amendment. As a result, the Companyrecognized a loss on debt extinguishment on this transaction of $267,000, comprised of the write-off of unamortized debt issuance costs and debt discounttotaling $87,000 and other transaction fees of $180,000. Refer to Gain (Loss) on Debt Extinguishment and Conversion (see Note 10). 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 Asia-Pacific covered under a Master Lease Agreement with Sun Microsystems, Inc., which wassubsequently assigned to Orix USA Corporation (the “Orix Equipment Leases”). The original amount financed under these capital leases was approximately$3,503,000 (as translated using effective exchange rates at December 31, 2002). These capital lease arrangements beared interest at an average rate of 6.4% perannum and were repayable over 30 months. As of December 31, 2004, all amounts outstanding under the Orix Equipment Leases have been paid in full. Maturities Combined aggregate maturities for future minimum capital lease obligations as of December 31, 2004 are as follows (in thousands): 2005 $3,642 2006 3,733 2007 3,826 2008 3,922 2009 4,020 Thereafter 45,287 64,430 Less amount representing interest (29,226) 35,204 Less current portion (675) $34,529 F-30Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 was being amortized to interest expense, using the effective interest method, over the life of the debt. The Senior Notes had 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 was payable semi-annually, in arrears, on June 1 and December 1 of each year. The notes were unsecured, senior obligations of the Companyand were effectively subordinated to all existing and future indebtedness of the Company, whether or not secured. The Senior Notes were governed by the Indenture dated December 1, 1999, between the Company, as issuer, and State Street Bank and TrustCompany of California, N.A., as trustee (the “Senior Note Indenture”). Subject to certain exceptions, the Senior Note Indenture restricted, among other things,the Company’s ability to incur additional indebtedness and the use of proceeds therefrom, pay dividends, incur certain liens to secure indebtedness or engagein merger transactions. 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. We refer to these transactions as the “Senior Note Retirements.”Refer to Gain (Loss) on Debt Extinguishment and Conversion (see Note 10). 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. Refer to Gain (Loss) on Debt Extinguishment and Conversion (seeNote 10). In March 2004, with the proceeds from the Convertible Subordinated Debentures (see Note 9), the Company redeemed all amounts outstanding underthe Senior Notes, including $30,475,000 of principal, plus accrued and unpaid interest, and terminated the Senior Notes. The redemption price of the SeniorNotes was equal to 106.5% F-31Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) of their principal, which resulted in an additional cash premium paid of $1,981,000 (the “Senior Note Cash Premium”). As a result, the Company recognizeda loss on debt extinguishment on this transaction of $3,759,000, comprised of the Senior Note Cash Premium, the write-off of unamortized debt issuancecosts and debt discount totaling $1,653,000 and other transaction fees of $125,000. Refer to Gain (Loss) on Debt Extinguishment and Conversion (see Note10). 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. 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. F-32Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) • 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 a previously outstanding debt facility since paid off in full. • 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 F-33Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) • 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 12), 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 beared 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 been amended to monthly from quarterly, and such modifications remained in effect under the terms of the Third Amendment to theAmended and Restated Credit Facility. Borrowings under the Third Amendment to the Amended and Restated Credit Facility were collateralized by a first priority lien against substantially allof the Company’s assets. The costs related to the issuance of the Credit Facility were capitalized and were being amortized to interest expense using the effective interest method,over the 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 had been added to debt issuance costs and were 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. In February 2004, with the proceeds from the Convertible Subordinated Debentures, the Company repaid all amounts outstanding under the CreditFacility, including $34,281,000 of principal, plus accrued and unpaid interest, and terminated the Credit Facility. As a result, the Company recognized a losson debt extinguishment on this transaction of $4,405,000, comprised of the write-off of unamortized debt issuance costs totaling $4,282,000 and othertransaction fees of $123,000. Refer to Gain (Loss) on Debt Extinguishment and Conversion (see Note 10). 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 F-34Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Note”), convertible into shares of preferred stock, with a detachable warrant for the further issuance of 965,674 shares of preferred stock (the “ConvertibleSecured Note Warrant”). The Convertible Secured Note bears non-cash interest at a rate of 14% per annum, payable semi-annually in arrears on May 1 andNovember 1, and have an initial term through November 2007. Interest on the Convertible Secured Note will be payable in kind in the form of additionalconvertible secured notes having a principal amount equal to the amount of interest then due having terms which are identical to the terms of the ConvertibleSecured Note (the “PIK Notes”) (collectively, the “STT Convertible Secured 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 theCompany’s common stock on the date of issuance, was less than the stock conversion ratio outlined in the agreement. The allocated value to the ConvertibleSecured Note Warrant of $4,646,000 will be amortized using the effective interest rate method to interest expense over the five-year term of the ConvertibleSecured Note. The Convertible Secured Note was 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 was guaranteed by all of the Company’s existing subsidiaries and by all of the Company’s future domesticsubsidiaries. In November 2004, the Company and STT Communications entered into an Omnibus Amendment Agreement in which STT Communications’security interests in the Company in connection with the Financing were lifted, except for one of the Company’s cash accounts, secured in the amount of anyoutstanding STT Convertible Secured Notes plus six months of forward-looking interest. 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 F-35Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) of Control Warrant, which has an exercise price of $0.01 per share and a contractual life of five years, is contingently exercisable for shares of the Company’scommon stock with a total current 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, which are no longer outstanding as a result of the Company paying off the Credit Facility in full in February 2005 (see Note7). These two additional warrants, comprised of the Series A Cash Trigger Warrant and the Series B Cash Trigger Warrant (collectively, the “Cash TriggerWarrants”), were contingently exercisable if the Company (i) did not have sufficient funds to pay, and failed to pay when due, any principal, interest, fee orother amount due under the Second Amendment to the Amended and Restated Credit Facility, as amended, or (ii) breached the Company’s obligations tomaintain certain minimum cash balances under the terms of the Second Amendment to the Amended and Restated Credit Facility, as amended. The CashTrigger Warrants, which were to have a contractual life for as long as the Company had any remaining amounts due under the Second Amendment to theAmended and Restated Credit Facility, as amended, would have had an exercise price and be exercisable for shares of the Company’s common stock valued atup 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 F-36Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Warrant and the Cash Trigger Warrants. As a result, the Change in Control Warrant and the Cash Trigger Warrants have been treated, and will continue to betreated, 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 inthese warrants have occurred, if ever. During 2003 and 2004, the Company issued four PIK Notes to STT Communications totaling $8,466,000. The terms of the PIK Notes are identical tothe terms of the Convertible Secured Note issued on December 31, 2002. The PIK Notes are due December 2007. The Company has considered the guidance ofEITF Abstract No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,” and has determined that the PIK Notes do not contain abeneficial conversion feature as the fair value of the Company’s common stock on the date of issuance was less than the stock conversion ratio outlined in theFinancing agreement. As of December 31, 2004, the Company had a total of $38,466,000 of principal outstanding for the STT Convertible Secured Notes,which are presented net of remaining discount as $35,824,000 on the accompanying balance sheet as of December 31, 2004. The STT Convertible Secured Notes were convertible into 4,191,193 shares of the Company’s preferred and common stock as of December 31, 2004. 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 $336,000 and $455,000 as of December 31, 2004 and 2003, respectively. In January 2005, the Company converted 95% of the outstanding STT Convertible Secured Notes and accrued and unpaid interest through February14, 2005, into 4,144,216 shares of the Company’s stock (see Note 18). 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 beared 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 had an initial term through November 2007. Interest on the CrosslinkConvertible Secured Notes were 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 were 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 were to be convertible into shares of the Company’s common stock at a price of $4.84 perunderlying share at any time at the option of the holders. Such conversion prices were to have been adjusted to mitigate or prevent dilution, if dividends weredeclared on the Company’s common stock or the Company issued, or contracted to issue, shares of the Company’s common stock at a price per share below$4.84 per share. F-37Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 had considered the guidance of EITF Abstract No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,”and had determined that the Crosslink Convertible Secured Notes did contain a beneficial conversion feature. The beneficial conversion feature was valued at$7,204,000 (the “Crosslink Beneficial Conversion Feature”), and was also reflected as a discount to the debt principal. The combined values of both theCrosslink Convertible Secured Note Warrants and the Crosslink Beneficial Conversion Feature, totaling $10,000,000, was being amortized using the effectiveinterest rate method to interest expense over the term of the Crosslink Convertible Secured Notes. The Crosslink Convertible Secured Notes shared 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. The Convertible Secured Note and PIK Notes issued in connection with the Financing, the Crosslink Convertible Secured Notes and the Crosslink PIKNotes were collectively referred to herein as the “Convertible Secured Notes.” In March 2004, holders of the Company’s Convertible Secured Notes issued in connection with the Crosslink Financing, converted the $10,000,000 ofprincipal into 2,500,000 shares of the Company’s common stock. The Company refers to this transaction as the “Crosslink Conversion.” As a result of theCrosslink Conversion and the fact that the Crosslink Financing had the Crosslink Beneficial Conversion Feature, the Company recognized a loss on debtconversion on this transaction of $7,610,000, representing the write-off of unamortized debt discount, in accordance with EITF Issue 00-27 “Application ofIssue No. 98-5 to Certain Convertible Instruments.” Refer to Gain (Loss) on Debt Extinguishment and Conversion (see Note 10). 9. Convertible Subordinated Debentures In February 2004, the Company issued $86,250,000 principal amount of 2.5% Convertible Subordinated Debentures due February 15, 2024 (the“Convertible Subordinated Debentures”). Interest is payable semi-annually, in arrears, on February 15 and August 15 of each year. The Convertible Subordinated Debentures are governed by the Indenture dated February 11, 2004, between the Company, as issuer, and U.S. BankNational Association, as trustee (the “Indenture”). The Indenture does not contain any financial covenants or any restrictions on the payment of dividends, theincurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by the Company. The Convertible Subordinated Debentures areunsecured and rank junior in right of payment to the Company’s existing or future senior debt. The Convertible Subordinated Debentures are convertible into shares of the Company’s common stock. Each $1,000 principal amount of ConvertibleSubordinated Debentures are convertible into 25.3165 shares of the Company’s common stock. This represents an initial conversion price of approximately$39.50 per share of common stock. As of December 31, 2004, the Convertible Subordinated Debentures were convertible into 2,183,548 shares of theCompany’s common stock. Holders of the Convertible Subordinated Debentures may convert their individual debentures into shares of the Company’scommon stock only under any of the following circumstances: • during any calendar quarter after the quarter ending June 30, 2004 (and only during such calendar quarter) if the sale price of the Company’scommon stock, for at least 20 trading days during the period F-38Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) of 30 consecutive trading days ending on the last trading day of the previous calendar quarter, is greater than or equal to 120% of the conversionprice per share of our common stock, or approximately $47.40 per share; • subject to certain exceptions, during the five business-day period after any five consecutive trading-day period in which the trading price perConvertible Subordinated Debenture for each day of that period was less than 98% of the product of the sale price of the Company’s common stockand the conversion rate on each such day; • if the Convertible Subordinated Debentures have been called for redemption; or • upon the occurrence of certain specified corporate transactions described in the Indenture, such as a consolidation, merger or binding shareexchange in which the Company’s common stock would be converted into cash or property other than securities. The conversion rates may be adjusted upon the occurrence of certain events including for any cash dividend, but they will not be adjusted for accruedand unpaid interest. Holders of the Convertible Subordinated Debentures will not receive any cash payment representing accrued and unpaid interest uponconversion of a debenture. Instead, interest will be deemed cancelled, extinguished and forfeited upon conversion. Convertible Subordinated Debentures calledfor redemption may be surrendered for conversion prior to the close of business on the business day immediately preceding the redemption date. The Company may redeem all or a portion of the Convertible Subordinated Debentures at any time after February 15, 2009 at a redemption price equalto 100% of the principal amount of the Convertible Subordinated Debentures, plus accrued and unpaid interest, if any, to but excluding the date of redemption. Holders of the Convertible Subordinated Debentures have the right to require us to purchase all or a portion of the Convertible Subordinated Debentureson February 15, 2009, February 15, 2014 and February 15, 2019, each of which is referred to as a purchase date. In addition, upon a fundamental changeof the Company, as defined in the Indenture, each holder of the Convertible Subordinated Debentures may require us to repurchase some or all of theConvertible Subordinated Debentures at a purchase price equal to 100% of the principal amount plus accrued and unpaid interest. The Company has considered the guidance in EITF Abstract No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features orContingently Adjustable Conversion Ratios”, and has determined that the Convertible Subordinated Debentures do not contain a beneficial conversion featureas the fair value of the Company’s common stock on the date of issuance, was less than the initial conversion price outlined in the agreement. The ConvertibleSubordinated Debentures contained two embedded derivatives, a bond parity clause and a contingent interest provision, which no longer exists as a result ofthe filing of a registration statement, which was declared effective by the SEC in July 2004. The remaining embedded derivative, the bond parity clause, had azero fair value as of December 31, 2004. The Company will be remeasuring the remaining embedded derivative each reporting period, as applicable. Changesin fair value will be reported in the statement of operations. The costs related to the Convertible Subordinated Debentures were capitalized and are being amortized to interest expense using the effective interestmethod, through February 15, 2009, the first date that the holders of the Convertible Subordinated Debentures can force redemption to the Company. Debtissuance costs related to the Convertible Subordinated Debentures, net of amortization, were $2,651,000 as of December 31, 2004. F-39Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 10. Gain (Loss) on Debt Extinguishment and Conversion As a result of the extinguishment of debt associated with the Credit Facility, Heller Loan Amendment, VLL Loan Amendment and the Senior Notes, aswell as the Crosslink Conversion, the Company recognized a total loss on debt extinguishment and conversion totaling $16,211,000 for the year endedDecember 31, 2004, as summarized below (in thousands): Creditfacility Heller loanamendment VLL loanamendment Seniornotes Crosslinkconversion Total Write-off of debt issuance costs and discounts $(4,282) $(87) $(74) $(1,653) $(7,610) $(13,706)Senior note cash premium — — — (1,981) — (1,981)Other transaction costs (123) (180) (96) (125) — (524) $(4,405) $(267) $(170) $(3,759) $(7,610) $(16,211) As a result of the Senior Note Retirements and Senior Note Exchange, the Company recognized a substantial gain on debt extinguishment totaling$114,158,000 for the year ended December 31, 2002, as summarized below (in thousands): Senior noteretirements Senior noteexchange Total Reduction in senior note principal $52,751 $116,774 $169,525 Reduction in accrued interest 785 8,855 9,640 Value of common stock issued (18,351) (12,482) (30,833)Cash payment of senior note principal (2,511) (15,181) (17,692)Write-off of debt issuance costs and discounts (4,386) (8,496) (12,882)Other transaction costs (1,100) (2,500) (3,600) $27,188 $86,970 $114,158 11. Silicon Valley Bank Credit Line In December 2004, the Company entered into a $25,000,000 line of credit arrangement with Silicon Valley Bank that matures in December 2006 (the“Silicon Valley Bank Credit Line”). This facility is a $25,000,000 revolving line of credit which, at the Company’s election, up to $10,000,000 may beconverted into a 24-month term loan, repayable in eight quarterly installments. Borrowings under the Silicon Valley Bank Credit Line bear interest at floatinginterest rates plus applicable margins over the LIBOR rate or the greater of the bank’s prime rate or 4.0%. If the Company elects to convert any revolvingborrowings into a 24-month term loan, the applicable margin upon conversion to a term loan would be increased by 0.25% per annum. As of December 31, 2004 and through the date of filing of this report on Form 10-K, there were no borrowings outstanding under the Silicon ValleyBank Credit Line. If the Company had elected to borrow under the Silicon Valley Bank Credit Line at December 31, 2004, the Company would have had aninterest rate of 4.40% per annum. The Silicon Valley Bank Credit Line also features sublimits, which enable the Company to issue letters of credit (the “Lettersof Credit Sublimit”), enter into foreign exchange forward contracts and make advances for cash management services. The Company’s utilization under anyof these sublimits would have the effect of reducing the amount available for borrowing under the Silicon Valley Bank Credit Line during the period that suchsublimits remain utilized and outstanding. As of December 31, 2004 the Company had utilized $3,172,000 under the Letters of Credit Sublimit with theissuance of three letters of credit and, as a result, F-40Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) reduced the amount of borrowings available to the Company from $25,000,000 to $21,828,000. As of December 31, 2004, there has been no other utilizationamong the other sublimits. The Silicon Valley Bank Credit Line is secured by the Company’s domestic assets except that such security interest does not include real andintellectual property. The Silicon Valley Bank Credit Line has several covenants, including financial covenants that are subject to a quarterly test and whichrequire the Company to maintain a minimum cash balance, a 6-month cumulative revenue target and a minimum operating cash flow target. The SiliconValley Bank Credit Line is furthermore subject to a tiered financial covenant test, Covenant Levels 1 and 2, which are also reflected in the applicableborrowing margins that are available to the Company. As of December 31, 2004, the Company was still subject to Covenant Level 1. In January 2005, theCompany converted 95% of the outstanding STT Convertible Secured Notes and accrued and unpaid interest, into 4,144,216 shares of the Company’spreferred stock (see Note 18). As a result of this conversion, the Company became subject to Covenant Level 2 and the applicable borrowing margin wasreduced by 0.25% per annum. In addition, two of the financial covenants are adjusted during Covenant Level 2 such that the minimum cash balance isincreased and the minimum operating cash flow target is removed. As of December 31, 2004, the Company was in compliance with all covenants inconnection with the Silicon Valley Bank Credit Line. The costs incurred related to the Silicon Valley Bank Credit Line were capitalized and are being amortized to interest expense using the effective interestmethod over the life of the Silicon Valley Bank Credit Line. These debt issuance costs, net of amortization, were $177,000 as of December 31, 2004. 12. 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, 2004, 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 were 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; • 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 F-41Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) • 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. Effective December 31, 2004, these voting rights expired. 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; however, this restrictionwas lifted subsequent to December 31, 2004. Notwithstanding this limitation, and except for limitations imposed by the HSR Antitrust Improvements Act of1976, as amended (the “HSR Act”), the Company’s Series A-1 preferred stock is convertible into Series A preferred stock or common stock in the followingcircumstances: • 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-42Table of ContentsIndex to Financial StatementsEQUINIX, 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, 2004 and 2003, there were zero and 150 shares,respectively, subject to repurchase. As of December 31, 2004, the Company has reserved the following shares of authorized but unissued shares of common stock for future issuance: Conversion of convertible secured notes 4,191,193Conversion of convertible subordinated debentures 2,183,548Conversion of issued and outstanding preferred stock 1,868,667Conversion of preferred stock warrant 965,674Common stock warrants 290,110Common stock options 5,569,142Common stock purchase plans 500,353 15,568,687 Employee Stock Purchase Plans In May 2000, the Company adopted the 2000 Employee Stock Purchase Plan (the “Purchase Plan”) under which 31,250 shares were reserved forissuance thereafter. On each January 1, the number of shares in reserve will automatically increase by 2% of the total number of shares of common stockoutstanding at that time, or, if less, by 600,000 shares. The Purchase Plan permits purchases of common stock via payroll deductions. The maximum payrolldeduction is 15% of the employee’s cash compensation. Purchases of the common stock will occur on January 31 and July 31 of each year. The price of eachshare purchased will be 85% of the lower of: • The fair market value per share of common stock on the date immediately before the first day of the applicable offering period (which lasts 24months); or • The fair market value per share of common stock on the purchase date. F-43Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The value of the shares purchased in any calendar year may not exceed $25,000. In June 2004, the Company’s stockholders approved the adoption of the 2004 Employee Stock Purchase Plan and International Employee StockPurchase Plan (collectively, the “Purchase Plans”) as successor plans to the 2000 Employee Stock Purchase Plan. A total of 500,000 shares have been reservedfor issuance under the Purchase Plans. The number of shares of common stock available for issuance under the Purchase Plans will automatically increase onthe first trading day of each calendar year beginning January 1, 2005 by an amount equal to the lesser of 2% of the shares of common stock outstanding onJanuary 1 of each year or 500,000 shares. The Purchase Plans permit purchases of common stock via payroll deductions; however, the InternationalEmployee Stock Purchase Plan may allow participants to accumulate amounts for the purchase of shares through other means in addition to payrolldeductions to the extent deemed necessary or desirable to comply with laws and regulations of the applicable country of residence. The maximum contributionis 15% of the employee’s annual cash compensation. Purchases of the common stock will occur on February 14 and August 14 of each year, commencingFebruary 14, 2005. The price of each share purchased will be 85% of the lower of: • The fair market value per share of common stock on the date immediately before the first day of the applicable offering period (which lasts 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 on a combined basis for the 2004 Employee Stock Purchase Plan andthe 2000 Employee Stock Purchase Plan. In addition, no purchase right shall be granted under the 2004 Employee Stock Purchase Plan to any person whoimmediately thereafter would own, directly or indirectly, stock or hold outstanding options or rights to purchase stock possessing 5% or more of the combinedvoting power or value of all classes of stock of the Company. The 2000 Employee Stock Purchase Plan was succeeded by the 2004 Employee Stock Purchase Plan and after January 1, 2005, no additional shareswill be added to the 2000 Employee Stock Purchase Plan. The last purchase under the 2000 Employee Stock Purchase Plan will be on January 31, 2006, atwhich time this original Purchase Plan will cease. For the year ended December 31, 2004, 314,637 shares were issued under the Purchase Plan at a weighted average purchase price of $4.24 per share. Forthe 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 yearended December 31, 2002, 16,689 shares were issued under the Purchase Plan at a weighted average purchase price of $24.84 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. F-44Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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. The Plans also provide for theissuance of stock, including restricted stock awards. 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. A summary of the Plans is as follows: Sharesavailablefor grant Number ofshares Weighted-averageexercise priceper shareBalances, December 31, 2001 3,903,813 653,160 $74.26Additional shares authorized 934,651 — —Options granted (147,244) 147,244 26.75Options exercised — (12,965) 8.67Options forfeited 61,618 (61,618) 77.66 Balances, December 31, 2002 4,752,838 725,821 65.51Additional shares authorized 556,921 — —Options granted (3,275,295) 3,275,295 5.52Options exercised — (383,198) 4.02Options forfeited 209,980 (209,980) 20.08 Balances, December 31, 2003 2,244,444 3,407,938 17.56Additional shares authorized 955,066 — —Options granted (1,523,200) 1,523,200 29.78Options exercised — (1,038,306) 5.74Options forfeited 91,038 (91,038) 28.50 Balances, December 31, 2004 1,767,348 3,801,794 25.42 F-45Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table summarizes information about stock options outstanding as of December 31, 2004: Outstanding ExercisableRange of exercise prices Numberof shares Weighted-averageremainingcontractual life Weighted-averageexerciseprice Numberof shares Weighted-averageexerciseprice$ 2.13 to $ 3.00 136,482 8.13 $2.97 65,183 $2.93$ 3.14 to $ 3.39 1,198,361 8.18 3.25 393,141 3.25$ 4.02 to $ 5.70 15,034 8.17 5.28 5,352 5.50$ 7.36 to $ 10.24 40,194 8.37 8.53 18,517 8.48$ 12.16 to $ 18.00 468,235 8.33 16.47 247,306 15.54$ 18.61 to $ 27.86 542,278 8.97 25.94 117,162 25.57$ 28.48 to $ 41.60 1,145,405 8.94 30.98 267,220 29.97$ 42.24 to $ 76.00 36,825 6.39 55.13 32,922 55.23$ 85.33 to $128.00 79,531 5.87 115.51 77,631 115.67$140.00 to $208.00 103,661 5.40 145.99 103,609 145.98$224.00 to $384.00 35,788 5.54 232.61 35,788 232.61 3,801,794 8.37 25.42 1,363,831 37.21 The weighted-average remaining contractual life of options outstanding at December 31, 2004 and December 31, 2003 was 8.37 years and 8.91 years,respectively. The weighted-average exercise price of options outstanding at December 31, 2004 and December 31, 2003 was $25.42 and $17.56, respectively. Stock-Based Compensation Employees The Company uses the intrinsic-value method prescribed in APB No. 25 in accounting for its stock-based compensation arrangements with employees.Stock-based compensation expense is recognized for employee stock option grants in those instances in which the deemed fair value of the underlying 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 $695,000 and $983,000 for the years ended December 31, 2004 and 2003, respectively. A total of $1,459,000, $2,818,000 and $6,859,000 has beenamortized to stock-based compensation expense for the years ended December 31, 2004, 2003 and 2002, respectively, on an accelerated basis over the vestingperiod of the individual options, in accordance 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 recorded no deferred stock-based compensation for the year ended December 31, 2004; however, the Company recognized an increase in deferredstock-based compensation of $89,000 for the year ended December 31, 2003. A total of $8,000, $87,000 and $19,000 has been amortized to stock-basedcompensation expense for the years ended December 31, 2004, 2003, and 2002, respectively. F-46Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) There were no non-employee stock options grants during 2004 or 2002. There was one non-employee stock option grant during 2003. The Company’scalculations for non-employee grants were made using the Black-Scholes option-pricing model with the following weighted average assumptions for the yearsended December 31: 2004 2003 2002Dividend yield — 0% —Expected volatility — 110% —Risk-free interest rate — 4.62% —Contractual life (in years) — 10.00 — Warrants 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 centers in exchange for colocation space and related benefits in such IBX centers. In connection withthis agreement, 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, 2004, a total of1,562 shares remain unearned. As the Company has no plans to construct any additional IBX centers in the foreseeable future, the value of these unearnedshares is reflected in other assets on the accompanying balance sheets totaling $1,000 and $7,000 as of December 31, 2004 and 2003, 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 centers in exchange for colocation space and related benefits in such IBXcenters. 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 F-47Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) five years from the date of grant. The shares are subject to repurchase at the original exercise price if certain performance commitments are not completed by apre-determined date. Colt is not obligated to install high-bandwidth local connectivity services and, apart from forfeiting the relevant number of shares andcolocation space, will not be penalized for not installing. The warrant was initially valued at $2,795,000 using the Black-Scholes option-pricing model andwas initially recorded to construction in progress. The following assumptions were used in determining the fair value of the warrants: deemed fair marketvalue per share of $434.56, dividend yield of 0%, expected volatility of 80%, risk-free interest rate of 6.23% and a contractual life of 5 years. Under theapplicable guidelines in EITF 96-18, the underlying shares of common stock associated with this warrant subject to repurchase are revalued at each balancesheet date to reflect their current fair value until the performance commitment is complete. As of December 31, 2004, the Colt Warrant remains unearned as aresult of the Company’s revised European services strategy (see Note 14). As a result, the value of these unearned shares is now reflected in other assets on theaccompanying balance sheet totaling $1,000 and $27,000 as of December 31, 2004 and 2003, respectively. 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. Under the UUNET StrategicAgreement, WorldCom agreed to install high-bandwidth local connectivity services and UUNET agreed to provide high-speed data entrance facilities to anumber of the Company’s IBX centers in exchange for colocation services and related benefits in such IBX centers. In connection with this strategic agreement,the Company granted WorldCom Venture Fund a warrant (the “WorldCom Venture Fund Warrant”) to purchase up to 20,313 shares of Company’s commonstock at $170.67 per share. The WorldCom Venture Fund Warrant was immediately exercisable and expired five years from the date of grant. The warrantwas subject to repurchase at the original exercise price if certain performance commitments were not completed by a pre-determined date. WorldCom andUUNET were not obligated to install high-bandwidth local connectivity services and provide high-speed data entrance facilities, respectively, and, apart fromforfeiting the relevant number of shares and colocation space, were not to be penalized for not performing. The warrant was initially valued at $7,255,000using the Black-Scholes option-pricing model and had been recorded initially to construction in progress until installation was complete. The followingassumptions were used in determining the fair value of the warrant: 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. In September 2001, the Company amended and restated the Worldcom Venture FundWarrant, issued in June 2000, and reduced the total number of shares available to purchase to 9,219 shares of the Company’s common stock at $170.56 pershare, which had been previously earned. 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), the Amendment to the Hong Kong IBX Lease (see Note 14) and the Pihana Acquisition (see Note 2). F-48Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Company has the following common stock warrants outstanding as of December 31, 2004: Underlyingsharesoutstanding Exerciseprice ExpirationdateCommon stock warrants: Fiber Warrant 16,875 $128.00 March 31, 2005Other warrant 186 160.00 May 1, 2005Colt Warrant 7,813 170.67 June 20, 2005Pihana Shareholder Warrants 133,442 191.81 October 29, 2005Heller Warrant 1,172 128.00 June 26, 2006Worldcom Venture Fund Warrant 9,219 170.56 September 24, 2006Amended and Restated Original VLL Warrants 845 0.32 October 11, 2007VLL Loan Amendment Warrants 2,906 0.32 October 11, 2007Senior Note Warrants 16,618 0.21 December 1, 2007Headquarter Warrant 1,034 192.00 January 28, 2010Hong Kong Lease Amendment Warrants 100,000 15.00 May 17, 2011 290,110 In addition to the above common stock warrants outstanding as of December 31, 2004, the Company also has several additional warrants issued inconnection with the Financing, which are comprised of the Convertible Secured Note Warrant and the Change in Control Warrants (see Note 8). The Changein Control Warrants are contingently issuable. 13. Income Taxes Income or loss before income taxes is attributable to the following geographic locations for the years ended December 31 (in thousands): 2004 2003 2002 United States $(60,319) $(68,807) $(21,013)Foreign (8,159) (15,364) (605) Loss before income taxes $(68,478) $(84,171) $(21,618) 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. However, there was $153,000 of tax provision primarily recorded for the Company’s foreign operations for the year ended December 31,2004. State tax expense not based on income is included in general and administrative expenses and the aggregated amount is immaterial for the years endedDecember 31, 2004, 2003 and 2002. F-49Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The fiscal 2004, 2003 and 2002 income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 35% to pre-taxincome (loss) as a result of the following for the years ended December 31 (in thousands): 2004 2003 2002 Federal tax at statutory rate $(23,967) $(29,460) $(7,566)State taxes — — — Domestic NOL not benefitted 15,475 21,798 7,302 Foreign NOL not benefitted 2,936 4,707 211 Meals and entertainment 58 28 53 Non-cash interest expense 5,579 2,666 — Other 72 261 — Total tax expense $153 $— $— 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): 2004 2003 Deferred tax assets: Depreciation and amortization $42,663 $35,957 Reserves 15,730 3,131 Charitable contributions 19 4 Deferred compensation 66 9,179 Credits — 114 Capitalized start-up costs 195 706 Stock warrants 6,499 — Net operating losses 56,606 18,184 Gross deferred tax assets 121,778 67,275 Valuation allowance (121,778) (67,275) 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.Approximately $1,932,000 of the valuation allowance for deferred tax assets is attributable to employee stock option deductions, the benefit from which willbe allocated to additional paid-in capital rather than current income when subsequently recognized. Federal and State tax laws, including California tax laws, 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. F-50Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The analysis indicated that an ownership change occurred during the fiscal year 2002, which resulted in an annual limitation of approximately $819,000, forthe net operating loss carryforwards generated prior to 2003 and therefore, the Company has substantially reduced its federal and state net operating losscarryforwards for the period prior to 2003 to approximately $16.4 million. Additionally, Section 382 of the Internal Revenue Code limits the Company’s abilityto utilize the tax deductions associated with its depreciable assets as of the end of the 2002 tax year to offset the taxable income in future years, due to theexistence 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 subsequentto the change in control through 2007. The Company has also updated the analysis for fiscal year 2004 and concluded there was no ownership change underSection 382 of the Internal Revenue Code in the year. The Company expects to pay a limited amount of tax for fiscal years 2005 and 2006. The tax costs will be primarily limited to alternative minimumtaxes as the Company anticipates utilizing its net operating loss carryforwards from post-2002 tax years and expects to have significant tax deductionsattributable to stock options exercised in the years. The Company has net operating loss carryforwards of approximately $89.0 million available to reduce future taxable income for U.S. and state incometax purposes as of December 31, 2004. The U.S. net operating loss carryforwards will begin to expire, if not utilized, in the year 2019. The state net operatingloss carryforwards will begin to expire, if not utilized, in the year 2006. In addition, the Company’s foreign operations had approximately $77.9 million of netoperating loss carryforwards available to reduce future taxable income for local income tax purposes. Approximately $21.2 million of the foreign operating losscarryforwards will begin to expire, if not utilized, in the year 2005, while the rest of the foreign operating loss carryforwards can be carried forwardindefinitely. 14. 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 F-51Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Ground Lease Amendment”). Pursuant to the terms of the Second San Jose Ground Lease Amendment, for a one-time fee of $5,000,000, which was recordedas a restructuring charge (see Note 17), the Company had a one-year option, effective July 1, 2002, to elect to exclude from this lease anywhere from 20 to 40acres of the unimproved real property. In September 2002, the Company exercised the option it had purchased in May 2002 and reduced its obligation underthe San Jose Ground Lease by approximately one-half and entered into a further amendment of the San Jose Ground Lease (the “Third San Jose Ground LeaseAmendment”), which became effective upon the closing of the Combination (see Note 2) and Financing (see Note 8). Pursuant to the terms of the Third SanJose Ground Lease Amendment, in connection with the exercise of the $5,000,000 option, the landlord 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 fairvalue 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 haveotherwise been paid during this period for the remaining one-half of the lease. The Company amortized this prepaid rent expense ratably over the 15-monthperiod. The remaining balance, approximately $19,010,000, was written off and recorded as a restructuring charge as the Company was unable to recognizeany future economic benefit attributed to the remaining balance of the letters of credit (see Note 17). 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 17). 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 17) 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 17). 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 F-52Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) assumptions were used in determining the fair value of the earned portion of this warrant: fair market value per share 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 warrant was 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 17). 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 center (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 had 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 expired, whichwas on December 31, 2004. In December 2004, the Company recorded a restructuring charge in connection with this excess space (see Note 17). The Companyentered into a two-year sublease with the current tenant of this excess space. 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 center lease in Singapore that the Companyacquired in the Pihana Acquisition (the “Pihana Singapore IBX Hub”) effective September 30, 2003, (b) the Buyer has entered into a new lease agreementdirectly with the landlord for the Pihana Singapore IBX Hub, (c) the Company sold the related assets located in and transferred certain agreements related tothe operations of the Pihana Singapore IBX Center to the Buyer for one Singapore dollar (pursuant to the Combination, these assets had no value ascribed tothem), (d) the Company contemporaneously entered into a separate colocation agreement for a smaller portion of space in the Pihana Singapore IBX Center for60 months in which the Company will be the customer of the Buyer at current fair value rates at the time and (e) the Buyer has agreed to procure additionalIBX center services in the Company’s other Singapore IBX center that it acquired in the i-STT Acquisition at current fair value rats at the time (the “SingaporeAsset Sale Agreement”). As a result of the Singapore Asset Sale Agreement, the Company surrendered several deposits related to the Pihana Singapore IBXHub; however, this loss was offset by the write-off of the associated deferred rent and asset retirement obligation liabilities associated with the PihanaSingapore IBX Center resulting in a nominal loss on asset sale of $18,000. As a result of this transaction, the Company has only one primary IBX center inSingapore (the one acquired in the i-STT Acquisition) rather than two. F-53Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) In May 2004, a wholly-owned subsidiary of the Company amended its lease for its Hong Kong IBX center (the “Amendment to the Hong Kong IBXLease”). Pursuant to the terms of the Amendment to the Hong Kong IBX Lease, the Company amended the term of the lease and the monthly rent paymentsdue under the lease. In addition, the Company issued a guarantee to the landlord that the Company’s wholly-owned Hong Kong subsidiary will comply withall terms of the amended lease for the remainder of the lease term. The remaining monthly lease payments covered under this guarantee through October 2013total $7.1 million as of December 31, 2004. In exchange for entering into the Amendment to the Hong Kong IBX Lease, the Company issued warrants to thelandlord to purchase 100,000 shares of the Company’s common stock at an exercise price of $15.00 per share, which are immediately exercisable (the “HongKong Lease Amendment Warrants”). The Hong Kong Warrants were valued at $2,477,000 using the Black-Scholes option-pricing model, which are beingamortized to rent expense over the remaining term of the lease. The following assumptions were used in determining the fair value of the Hong Kong Warrants:fair market value per share of $28.13, dividend yield of 0%, expected volatility of 100%, risk-free interest rate of 2.80% and a contractual life of seven years.The value of these warrants is included in other assets on the accompanying balance sheet as of December 31, 2004. For the year ended December 31, 2004, theCompany recorded $194,000 of non-cash rent expense associated with the Hong Kong Lease Amendment Warrants. In June 2004, a wholly-owned subsidiary of the Company amended its lease for its Tokyo IBX center (the “Amendment to the Tokyo IBX Lease”).Pursuant to the terms of the Amendment to the Tokyo IBX Lease, which is governed by Japanese law, the Company amended the monthly rent payments dueunder the lease for the remainder of the lease term commencing April 2004, resulting in a monthly reduction of 3.5 million Japanese yen (approximately$34,000 as translated using effective exchange rates at December 31, 2004). Operating Lease Commitments The Company currently leases all but one of its IBX centers and certain equipment under noncancelable operating lease agreements expiring through2020. The centers’ lease agreements typically provide for base rental rates that increase at defined intervals during the term of the lease. In addition, theCompany has negotiated rent expense abatement periods to better match the phased build-out of its centers. The Company accounts for such abatements andincreasing base rentals using the straight-line method over the life of the lease. The difference between the straight-line expense and the cash payment is recordedas deferred rent. Minimum future operating lease payments as of December 31, 2004 are summarized as follows (in thousands): Year ending: 2005 $28,6382006 30,6892007 30,4102008 29,8562009 29,715Thereafter 177,945 Total $327,253 Total rent expense was approximately $30,837,000, $28,646,000 and $25,193,000 for the years ended December 31, 2004, 2003 and 2002,respectively. Deferred rent, primarily included in deferred rent and other liabilities on the accompanying balance sheets, was $22,915,000 and $20,283,000as of December 31, 2004 and 2003, respectively. F-54Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Although the Company has not concluded on the accounting treatment related to the San Jose IBX Acquisition in December 2004 (see Note 3), theminimum future lease payments associated with the New San Jose IBX Lease have been included in the minimum future operating lease payments as ofDecember 31, 2004 presented above. In December 2004, the Company recorded a restructuring charge related to two excess operating leaseholds that the Company intends to exit from (seeNote 17). As of December 31, 2004, the Company had a restructuring charge accrual related to these two excess operating leases totaling $14.8 million on theaccompanying balance sheet. As a result of already presenting the liability associated with these two operating leases on the Company’s balance sheet, thefuture lease costs associated with these two leases for excess space are not presented in the operating lease totals presented above. Other Purchase Commitments As a result of the San Jose IBX Acquistion, the Company is obligated to pay $924,000 to Abovenet in connection with the New San Jose IBX AssetPurchase Agreement. The Company expects to pay for this in March 2005 when the Company takes possession of this property. In addition, the Company isalso obligated to pay $750,000 to Abovenet in connection with the Silicon Valley IBX Fiber Ring Agreement as of December 31, 2004, which the Company isobligated to pay no later than May 1, 2005 (see Note 3). Letter of Credit Commitments In connection with three of our IBX operating leases, the Company has entered into three irrevocable letters of credit with Silicon Valley Bank. Theseletters of credit were provided in lieu of cash deposits under the Letters of Credit Sublimit provision in connection with the Silicon Valley Bank Credit Line(see Note 11). The letters of credit total $3,172,000, are collateralized by the Silicon Valley Bank Credit Line and automatically renew in successive one-yearperiods until the final lease expiration dates. If the landlords for any of these three IBX operating leases decide to draw down on these letters of credit, theCompany will be required to fund these letters of credit. Legal Actions On July 30, 2001 and August 8, 2001, putative shareholder class action lawsuits were filed against the Company, certain of its officers and directors(the “Individual Defendants”), and several investment banks that were underwriters of the Company’s IPO. 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. In addition, similar lawsuits were filed against approximately 300 other issuers and related parties. The purported class action alleges violations ofSections 11 and 15 of the Securities Act of 1933 (the “1933 Act”) and Sections 10(b), Rule 10b-5 and 20(a) of the Securities Exchange Act of 1934 (the “1934Act”) against the Company and Individual Defendants. The plaintiffs have since dismissed the Individual Defendants without prejudice. The suits allege thatthe underwriter defendants agreed to allocate stock in the Company’s IPO to certain investors in exchange for excessive and undisclosed commissions andagreements by those investors to make additional purchases in the aftermarket at pre-determined prices. The plaintiffs allege that the prospectus for theCompany’s IPO was false and misleading and in violation of the securities laws because it did not disclose these arrangements. The action seeks damages inan unspecified amount. On February 19, 2003, the Court dismissed the Section 10(b) claim against the Company, but denied the motion to dismiss theSection 11 claim. In July 2003, a Special Litigation Committee of the Equinix Board of Directors approved a settlement agreement and related agreements which set forththe terms of a settlement between the Company, the Individual Defendants, the plaintiff class and the vast majority of the other approximately 300 issuerdefendants and the F-55Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) individual defendants currently or formerly associated with those companies. Among other provisions, the settlement provides for a release of the Companyand the Individual Defendants and the Company’s agreeing to assign away, not assert, or release certain potential claims the Company may have against itsunderwriters. The settlement agreement also provides a guaranteed recovery of $1 billion to plaintiffs for the cases relating to all of the approximately 300issuers. To the extent that the underwriter defendants settle all of the cases for at least $1 billion, no payment will be required under the issuers’ settlementagreement. To the extent that the underwriter defendants settle for less than $1 billion, the issuers are required to make up the difference. It is anticipated thatany potential financial obligation of Equinix to plaintiffs pursuant to the settlement, currently such claims are expected to be less than $3.4 million, will becovered by existing insurance and we do not expect that the settlement will involve any payment by the Company. The Company has no information as towhether there are any material limitations on the expected recovery by other issuer defendants of any potential financial obligation to plaintiffs from their owninsurance carriers. The settlement agreement has been submitted to the Court for approval. The underwriter defendants have filed objections to the settlementagreement. As approval by the Court cannot be assured, the Company is unable at this time to determine whether the outcome of the litigation would have amaterial impact on its results of operations, financial condition or cash flows. On October 13, 2004, the Court certified a Section 11 class in four of the six cases that were the subject of class certification motions and determinedthat the class period for Section 11 claims is the period between the IPO and the date that unregistered shares entered the market. The Court noted that itsdecision on those cases is intended to provide strong guidance to all parties regarding class certification in the remaining cases. Plaintiffs have not yet moved tocertify a class in the Equinix case. Until the settlement is finalized and approved by the Court, or in the event such settlement is not approved, the Companyand its officers and directors intend to continue to defend the actions vigorously. While an unfavorable outcome to this case is reasonably possible, it is notprobable. As a result, the Company has not accrued for any settlements in connection with this litigation as of December 31, 2004. 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 center leases or a municipality changing the assessment value in a jurisdiction and, as a result,the Company’s property tax obligations may vary from period to period. Based upon the most current facts and circumstances, the Company makes 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 In January 2001, the Company had agreed to indemnify an officer of the Company for any claims brought by his former employer under anemployment and non-compete agreement the officer had with this employer. As of December 31, 2004, no claims had been made by the former employer. F-56Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Through September 2003, the Company had entered into severance agreements with certain of its executive officers. Under the terms of the agreements,the officers are entitled to one year’s salary, bonus and certain healthcare benefits in the event of an involuntary termination for reasons other than cause. Employee Benefit Plan The Company has a 401(k) Plan that allows eligible employees to contribute a portion of their compensation, limited to $13,000 in 2004. 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, 2004. 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, 2004. 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. A significant amount of these indemnification agreements were grandfathered under the provisions of FIN45 as they were in effect prior to December 31, 2002. The Company has no significant liabilities recorded for these agreements as of December 31, 2004. 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 F-57Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) in the ordinary course of business, subcontract the performance of any of its services. Accordingly, the Company enters into standard indemnificationagreements with its customers, whereby the Company indemnifies them for other acts, such as personal property damage, of its subcontractors. Themaximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, theCompany has general and umbrella insurance policies that enable the Company to recover a portion of any amounts paid. The Company has never incurredcosts to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of theseagreements is minimal. A significant amount of these arrangements were grandfathered under the provisions of FIN 45 as they were in effect prior to December31, 2002. The Company has no significant liabilities recorded for these agreements as of December 31, 2004. 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 centers, whether or not within our control, could result in service level commitments to these customers. The Company’s liabilityinsurance may not be adequate to cover those expenses. In addition, any loss of services, equipment damage or inability to meet the Company’s service levelcommitment obligations, particularly in the early stage of the Company’s development, could reduce the confidence of the Company’s customers and couldconsequently impair the Company’s ability to obtain and retain customers, which would adversely affect both the Company’s ability to generate revenues andthe Company’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, 2004. 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 F-58Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Combination Agreement as the FIRPTA covenant. Pursuant to the FIRPTA covenant, the Company may be forced to take commercially reasonable proactivesteps to ensure the Company’s compliance with the FIRPTA covenant, including, but not limited to, (a) a sale-leaseback transaction with respect to all realproperty interests, or (b) the formation of a holding company organized under the laws of the Republic of Singapore which would issue shares of its capitalstock in exchange for all of the Company’s outstanding stock (this reorganization would require the submission of that transaction to the Company’sstockholders for their approval and the consummation of that exchange). Currently, the Company is in compliance with the FIRPTA covenant. Thisarrangement was grandfathered under the provisions of FIN 45 as it was in effect prior to December 31, 2002. Accordingly, the Company has no liabilitiesrecorded related to non-compliance with the FIRPTA covenant as of December 31, 2004. 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, 2004. 15. Related Party Transactions Trade Activity with Affiliates of STT Communications and Other Related Parties 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 stockholder. For the year ended December 31, 2004, revenues recognized with related parties, primarily entities affiliated with STTCommunications, were $5,347,000 and as of December 31, 2004, accounts receivable with these related parties was $955,000. For the year ended December31, 2004, costs and services procured with related parties, primarily entities affiliated with STT Communications, were $2,701,000 and as of December 31,2004, accounts payable with these related parties was $281,000. For the year ended December 31, 2003, revenues recognized with related parties, primarilyentities affiliated with STT Communications, were $6,946,000, and as of December 31, 2003, accounts receivable with these related parties was $1,393,000.For the year ended December 31, 2003, costs and services procured with related parties, primarily entities affiliated with STT Communications, were$481,000, and as of December 31, 2003, accounts payable with these related parties was $139,000. 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. There was no revenue recognized from these agreements during 2003 or 2004. Other Transactions During 2003, the Company entered into an agreement with STT Communications to wind-down the Company’s Thailand joint venture (see Note 14). InOctober 2003, the Company entered into an asset sale F-59Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) agreement with an affiliate of STT Communications (see Note 14). In November 2004, the Company and STT Communications entered into an OmnibusAmendment Agreement in which STT Communications’ security interests in the Company in connection with the Financing were lifted, except for one of theCompany’s cash accounts, secured in the amount of any outstanding STT Convertible Secured Notes plus six months of forward-looking interest. (see Note8). In January 2005, the Company converted 95% of the outstanding STT Convertible Secured Notes and accrued and unpaid interest through February 14,2005, into 4,144,216 shares of the Company’s stock (see Note 18). 16. Segment Information The Company and its subsidiaries are principally engaged in the design, build-out and operation of neutral IBX centers. All revenues result from theoperation of these IBX centers. The Company’s chief operating decision-maker evaluates performance, makes operating decisions and allocates resourcesbased on 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, commencing in fiscal2003, the Company’s consolidated statement of operations includes revenues and expenses from Asia-Pacific. The Company’s geographic statement of operations disclosures are as follows for the years ended December 31 (in thousands): 2004 2003 2002 Total revenues: United States $141,598 $99,669 $77,188 Asia-Pacific 22,073 18,273 — $163,671 $117,942 $77,188 Cost of revenues: United States $118,311 $107,477 $104,073 Asia-Pacific 18,639 20,644 — $136,950 $128,121 $104,073 Loss from operations: United States $(34,107) $(48,621) $(101,676)Asia-Pacific (7,955) (15,334) — $(42,062) $(63,955) $(101,676) The Company’s long-lived assets are located in the following geographic areas as of December 31 (in thousands): 2004 2003United States $360,694 $343,419Asia-Pacific 34,022 34,825 $394,716 $378,244 F-60Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Company’s goodwill totaling $22,018,000 and $21,228,000 as of December 31, 2004 and 2003, respectively, is part of the Company’s Singaporereporting unit, which is reported within the Asia-Pacific segment. Revenue information on a services basis is as follows (in thousands): 2004 2003 2002Colocation $111,986 $77,136 $54,399Interconnection 31,414 20,361 9,770Managed infrastructure 11,049 12,492 1,150 Recurring revenues 154,449 109,989 65,319Non-recurring revenues 9,222 7,953 11,869 $163,671 $117,942 $77,188 17. 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 centers. 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. As a result, the Company took a total restructuring charge of$48,565,000 primarily related to the write-down of European construction in progress assets to their net realizable value, the write-off of several Europeanletters of credit related to various European operating leases, the accrual of estimated European and U.S. leasehold exit costs and the severance accrual relatedto 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 during 2002. As of December 31, 2001, the Company had successfully surrendered one of theEuropean leases. The Company completed the exit of the remaining European leases and one of the U.S. leases during 2002 (see Note 14). The collective costsof these European exit activities, primarily the exit of the German leasehold and an additional loss incurred on the sale of the European assets held for resale,exceeded the amount estimated by management during the third quarter of 2001. As a result, the Company recorded an additional restructuring charge duringthe second quarter of 2002 (see 2002 Restructuring Charges below). The reduction in workforce was substantially completed during the fourth quarter of 2001. A summary of the movement in the 2001 restructuring charge accrual from December 31, 2003 to December 31, 2004 is outlined as follows (inthousands): Accruedrestructuringcharge as ofDecember 31,2003 Non-cashcharges Cashpayments Accruedrestructuringcharge as ofDecember 31,2004U.S. lease exit costs $42 $— $(42) $— $42 $— $(42) $— F-61Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) A summary of the movement in the 2001 restructuring charge 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 31,2003U.S. lease exit costs $810 $— $(768) $42 $810 $— $(768) $42 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 14); 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 reduction inworkforce was substantially completed during the second quarter of 2002 and the other lease exit costs were completed in 2003 and 2004. 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 14). 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. A summary of the movement in the 2002 restructuring charges accrual from December 31, 2003 to December 31, 2004 is outlined as follows (inthousands): Accruedrestructuringcharge as ofDecember 31,2003 Non-cashcharges Cashpayments Accruedrestructuringcharge as ofDecember 31,2004Additional lease exit costs $178 $— $(178) $— $178 $— $(178) $— F-62Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 $— $(670) $178 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 2004 Restructuring Charges In December 2004, in light of the availability of fully built-out data centers in select markets at costs significantly below those costs the Company wouldincur in building out new space, the Company made the decision to exit leases for excess space adjacent to one of the Company’s New York metro area IBXs,as well as space on the floor above its original Los Angeles IBX. As a result of the Company’s decision to exit these spaces, the Company recordedrestructuring charges totaling $17,685,000, which represents the present value of the Company’s estimated future cash payments, net of any estimatedsubrental income and expense, through the remainder of these lease terms, as well as the write-off of all remaining property and equipment attributed to thepartial build-out of the excess space on the floor above its Los Angeles IBX as outlined below. Both lease terms run through 2015. The Company adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, at the beginning of its fiscal year 2003.Under the provisions of SFAS No. 146, the Company estimated the future cash payments required to exit these two leased spaces, net of any estimatedsubrental income and expense, F-63Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) through the remainder of these lease terms and then calculated the present value of such future cash flows in order to determine the appropriate restructuringcharge to record. In future periods, the Company will record accretion expense to accrete its accrued restructuring liability up to an amount equal to the totalestimated future cash payments necessary to complete the exit of these leases. Should the actual lease exit costs differ from the Company’s estimates, theCompany may need to adjust its restructuring charges associated with the excess lease spaces, which would impact net income in the period suchdetermination was made. A summary of the 2004 restructuring charges through December 31, 2004 is outlined as follows (in thousands): Total 2004restructuringcharges Non-cashcharges Transfer ofdeferredrent liability Accruedrestructuringcharge as ofDecember 31,2004 Estimated lease exit costs $13,869 $— $881 $14,750 Write-off of property and equipment 3,816 (3,816) — — $17,685 $(3,816) $881 14,750 Less current portion (1,952) $12,798 Prior to the Company’s decision to exit the excess space on the floor above its original Los Angeles IBX in December 2004, the Company had recordeddeferred rent in connection with this leasehold as it straightlined the associated rent expense from lease inception in April 2001 to December 2004 totaling$881,000. In conjunction with the Company’s decision to exit from this excess lease, the Company reclassified this deferred rent liability from deferred rent toaccrued restructuring charges as of December 31, 2004 and adjusted the restructuring charge accordingly. In January 2005, the Company sublet the excess space in the New York metro area for a two-year period and is currently evaluating opportunities relatedto its excess space in Los Angeles, as well as the excess space in the New York metro area beyond the two-year sublease. As the Company currently has noplans to enter into lump sum lease terminations with either of the landlords associated with these two excess space leases, the Company has reflected itsaccrued restructuring liability as both current and non-current on the accompanying balance sheet as of December 31, 2004. The Company is contractuallycommitted to these two excess space leases through 2015. F-64Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Company’s minimum future operating lease payments associated with these two excess space leases is as follows (in thousands): 2005 $2,433 2006 2,766 2007 3,216 2008 3,262 2009 3,309 Thereafter 19,964 34,950 Less amount representing estimated subrental income and expense (15,978) 18,972 Less amount representing accretion (4,222) 14,750 Less current portion (1,952) $12,798 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 remained accrued for these restructuring activities, which were settled in 2004 (see Note 2). 18. Subsequent Events On January 1, 2005, pursuant to the provisions of the Company’s stock plans (see Note 12), the number of common shares in reserve automaticallyincreased by 1,139,968 shares for the 2000 Equity Incentive Plan, 379,989 shares for the Employee Stock Purchase Plan, 379,989 shares for the 2004Employee Stock Purchase Plan and 50,000 shares for the 2000 Director Stock Option Plan. On January 10, 2005, in accordance with the Financing (see Note 8), Equinix converted an aggregate of $38,035,000 of STT Convertible Secured Notesand associated interest into 4,144,216 shares of the Company’s Series A-1 preferred stock (the “95% STT Convertible Secured Notes Conversion”). Theconverted amount represented 95% of the outstanding STT Convertible Secured Notes plus interest due through February 14, 2005. A total of $1,923,000 ofSTT Convertible Secured Notes remain outstanding (the “Remaining STT Convertible Secured Notes”) and will continue to be governed by the terms of theFinancing. The Remaining STT Convertible Secured Notes will be eligible for conversion by Equinix in early 2006 provided certain conditions are met,including if the closing price of the Company’s common stock exceeds $32.12 per share for 30 consecutive trading days. On February 1, 2005, STT electedto convert its Series A-1 preferred stock into 4,144,216 shares of the Company’s common stock. The Series A-1 preferred stock converted into common stockon a 1 to 1 basis. As a result of the 95% STT Convertible Secured Notes Conversion, 95% of the outstanding Convertible Secured Notes and PIK Notes,plus unpaid interest through February 14, 2005 and unamortized discount and debt issuance costs, was converted into stockholders’ equity in accordancewith APB Opinion No. 26, “Early Extinguishment of Debt” and SFAS No. 84, “Induced Conversions of Convertible Debt, an amendment of APB OpinionNo. 26.” F-65Table of ContentsIndex to Financial StatementsEQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) On February 8, 2005, the Compensation Committee of the Board of Directors approved the grant of stock options to employees, excluding executiveofficers, to purchase an aggregate of approximately 860,000 shares of common stock as part of the Company’s annual refresh program at an exercise price of$44.89 per share. On February 8, 2005, the Compensation Committee of the Board of Directors also approved the issuance of 320,500 shares of restrictedshares of common stock to executive officers pursuant to the 2000 Equity Incentive Plan. The restricted shares are subject to four-year vesting, and will onlyvest if the stock appreciates at pre-determined levels. F-66Table of ContentsIndex to Financial StatementsEQUINIX, 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 2004 and 2003: Firstquarter Secondquarter Thirdquarter Fourthquarter (in thousands, except per share data) 2004: Revenues $36,820 $39,423 $42,439 $44,989 Net loss (30,142)(a) (9,205) (6,615) (22,669)(b)Basic and diluted net loss per share (2.00) (0.51) (0.36) (1.21)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)(a) Includes a $16.2 million loss on debt extinguishment and conversion (see Note 10).(b) Includes a $17.7 million restructuring charge (see Note 17). F-67 Exhibit 10.107 FIRST AMENDMENT TO SUBLEASE AGREEMENT THIS FIRST AMENDMENT TO SUBLEASE AGREEMENT (this “Amendment”) is made as of June 21, 2004 by and between SPRINTCOMMUNICATIONS COMPANY, L.P., a Delaware limited partnership (“Sublandlord”), and EQUINIX OPERATING CO., INC., a Delawarecorporation (“Subtenant”). R E C I T A L S A. Sublandlord and Subtenant entered into that certain Sublease Agreement dated as of October 24, 2003 (the “Sublease”), with respect to certainpremises located at 1350 Duane Avenue, Santa Clara, California, as more particularly described in the Sublease. Capitalized terms used but not defined hereinshall have the meanings set forth in the Sublease. B. Sublandlord and Subtenant desire to amend the Sublease in the manner set forth below. A G R E E M E N T NOW THEREFORE, in consideration of the agreements of Sublandlord and Subtenant herein contained and other valuable consideration, the receiptand adequacy of which are hereby acknowledged, Sublandlord and Subtenant hereby agree to modify the Sublease as follows: 1. RENT MODIFICATION Notwithstanding anything to the contrary in the Sublease, Section 7.1 shall be deleted in its entirety and shall be replaced with the following: “Subtenant shall pay to Sublandlord as “Monthly Base Rent” the following amounts: (i) during the first 24 months and 12 days of the Term, anamount equal to 25% of the Base Monthly Rent payable by Sublandlord under the Master Lease; and (ii) thereafter for the remainder of the Term, Subtenantshall pay to Sublandlord, 45% of the Base Monthly Rent payable by Sublandlord under the Master Lease. Notwithstanding the immediately previous sentenceor anything to the contrary contained herein, (x) if a Subtenant Default occurs during the first 24 months and 12 days of the Term, the Monthly Base Rentpayable by Subtenant shall increase to 45% of the Base Monthly Rent payable by Sublandlord under the Master Lease; and (y) if a Subtenant Default occursafter the initial 24 months and 12 days of the Term, Subtenant shall, within thirty (30) days of Sublandlord’s written demand, pay to Sublandlord an amountequal to Three Thousand Nine Hundred Thirty-Nine and/no Dollars ($3,939.00) multiplied by the number of days elapsed from the Commencement Dateuntil the date on which Subtenant’s Default occurred, but not to exceed a total of 3,000,000.00, as well as all unpaid and accrued rental amounts. The foregoingsentence shall not limit and the Sublandlord shall have available to it all other non-monetary remedies available to it pursuant to Section 13.2 of the MasterLease. As used herein, “Subtenant Default” shall mean a default by Subtenant hereunder that continues beyond any applicable grace, notice and cure periods. Subtenant agrees tocommence paying an amount equal to the Monthly Base Rent in advance for the first month of the Term on the Commencement Date and to make rentpayments thereafter on the first day of each month during the remaining Term of this Sublease. All rental amounts hereunder for any partial month will beprorated on the basis of the actual number of days elapsed. Except as expressly permitted in this Sublease, all rental amounts hereunder shall be payable toSublandlord without notice, demand, deduction, offset or abatement in lawful money of the United States of America at P.O. Box 219061, Kansas City, MO64121-9061 or to such other person or at such other address as Sublandlord may designate in writing. If any Monthly Base Rent or Additional Rent is notreceived by Sublandlord from Subtenant within five (5) days of the later of (i) when due or (ii) after written notice to Subtenant that the same has not beenreceived by Sublandlord (provided such notice for late payment has not previously been given in the preceding twelve months), then Subtenant shallimmediately pay to Sublandlord a late charge equal to the lesser of any penalties, default interest charges or other similar costs computed based on thedelinquent amount actually incurred by Sublandlord under the Master Lease by reason of Subtenant’s late payment or three percent (3%) of such delinquentrent, as liquidated damages for Subtenant’s failure to make timely payment. If any rent remains delinquent for a period in excess of thirty (30) days then, inaddition to such late charge, Subtenant shall pay to Sublandlord interest on any rent that is not paid when due at the Agreed Interest Rate following the datesuch amount became due until paid. This paragraph shall not be deemed to grant Subtenant an extension of time within which to pay rent or preventSublandlord from exercising any other right or remedy.” 2. NOTICE MODIFICATION Notwithstanding anything to the contrary in the Sublease, Section 15 of the Sublease shall be modified to provide that all notices to Sublandlord shallalso be sent to the following in addition to the addresses already provided in Section 15: Sprint Communications Company, L.P., 6100 Sprint Pkwy,KSOPHK0410-4A671, Overland Park, KS 66251, Attention: Director, EPS Transaction and Project Services, Facsimile No. (913) 315-0302. 3. MISCELLANEOUS A. In the event of any inconsistencies between the terms of this Amendment and the Sublease, the terms of this Amendment shall prevail. ThisAmendment shall bind and inure to the benefit of Sublandlord and Subtenant and their respective legal representatives and successors and assigns. B. This Amendment 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 Amendment, all terms and conditions of the Sublease shall remain in full force and effect. D. This Amendment is a fully-integrated agreement which, together with the Sublease, contains all of the parties’ representations, warranties, agreementsand understandings with respect to the subject matter hereof. The parties agree that there are no other agreements or understandings, written or oral, express orimplied, tacit or otherwise in respect of the subject matter of this Amendment. This Amendment may be amended only in writing. E. This Amendment will be governed by the law of the State of California, without regard to its choice of law rules. IN WITNESS WHEREOF, Sublandlord and Subtenant have executed this Modification as of the date first above written. SUBLANDLORD:SPRINT COMMUNICATIONS COMPANY L.P.,By: /s/ PAM HATCHERName: Pam HatcherTitle: Manager Program Management SUBTENANT:EQUINIX OPERATING CO., INC.,a Delaware corporationBy: /s/ RENEE F. LANAMName: Renee F. LanamTitle: Chief Financial Officer  Exhibit 10.108 EXECUTION VERSION OMNIBUS AMENDMENT AGREEMENT This OMNIBUS AMENDMENT AGREEMENT is made and entered into as of November 24, 2004 (this “Agreement”) by and among Equinix, Inc., aDelaware corporation (“Parent”), the subsidiaries of Parent that are Guarantors of Parent’s obligations under the Securities Purchase Agreement referred tobelow, each of the holders of the Notes issued pursuant to such Securities Purchase Agreement (the “Noteholders”) and iSTT Investments Pte Ltd., a companyorganized under the laws of the Republic of Singapore, as collateral agent under the Junior Pledge and Security Agreement referred to below (the “CollateralAgent”), and amends such Securities Purchase Agreement (such Agreement, the “Purchase Agreement”). Unless otherwise defined in this Agreement,capitalized terms used in this Agreement without definition have the respective meanings given to them in the Purchase Agreement. WHEREAS, on December 31, 2002, Parent issued and sold to the A-1 Purchasers A-1 Notes in the aggregate principal amount of $30,000,000 andPreferred Warrants, Cash Trigger Warrants and Change in Control Warrants; WHEREAS, on June 5, 2003, Parent issued and sold to the A-2 Purchasers A-2 Notes in the aggregate principal amount of $10,000,000 and CommonWarrants, New Cash Trigger Warrants and Change in Control Warrants; WHEREAS, all indebtedness under the A-2 Notes has been converted into Common Stock pursuant to the Purchase Agreement; WHEREAS, Parent, the Noteholders and the Collateral Agent desire to secure the payment of the A-1 Notes with collateral in an amount sufficient tofully pay and satisfy, when and as the same become due, all indebtedness of Parent under the A-1 Notes (such collateral to be held in account number 449-OH560-12-025 with Salomon Smith Barney Inc. (the “Pledged Account”), under and subject to the terms of a Control Agreement (the “Control Agreement”) inthe form attached hereto as Exhibit A), to provide for the release of all other collateral presently held by the Collateral Agent under the Master Pledge andSecurity Agreement dated as of December 31, 2002 between Parent, the Guarantors and the Collateral Agent (the “Junior Pledge and Security Agreement”), andto make certain other agreements, in connection therewith; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants in this Agreement, the Parties, intending to be legally bound, agreeas follows: 1. Definitions. As used herein, the following terms shall have respective meanings set forth below: “Cash” means all money, currency or a credit balance credited in any Deposit Account or Securities Account. “Cash Equivalents” means (i) direct sovereign obligations of the United States of America (including obligations issued or held in book-entry form onthe books of the Department of the Treasury of the United States of America), or obligations, the timely payment of principal and interest of which is fully guaranteed by the United States of America or any agency or instrumentality thereof (provided that the full faith andcredit of the United States of America is pledged in support thereof); (ii) interest-bearing demand or time deposits (including certificates of deposit) which areheld in banks which have general obligations rated at least AA or equivalent by S&P or Moody’s; (iii) commercial paper rated (on the date of acquisitionthereof) at least A-1 or P-1 or equivalent by S&P or Moody’s, respectively; (iv) money market funds, so long as such funds are rated Aaa by Moody’s andAAA by S&P; (v) floating rate securities whereby the interest rates is indexed to a money market index including Treasury bills, LIBOR, Prime Rate orFederal Funds and which have a rating of AAA by S&P; (vi) bonds and medium term notes, provided such investments have a minimum rating of AA orbetter by S&P; (vii) bankers acceptances, provided such investments have a minimum rating of AA or better by S&P; (viii) municipal obligations, so long assuch funds are rated Aaa by Moody’s and AAA by S&P; or (ix) any advances, loans or extensions of credit or any stock, bonds, notes, debentures or othersecurities as the Collateral Agent may from time to time approve in its sole discretion. “Deposit Account” has the meaning assigned to it in the Uniform Commercial Code as in effect from time to time in the State of New York. “Effective Time” means the time when all conditions to the effectiveness of this Agreement set forth in Section 4 hereof have been satisfied. “Securities Account” has the meaning assigned to it in the Uniform Commercial Code as in effect from time to time in the State of New York. 2. Amendments to Purchase Agreement. Conditional upon the occurrence of the Effective Time, the Purchase Agreement is amended as follows: (a) Section 5 is amended in its entirety to reads as follows: “5. “Affirmative Covenants. Parent and each Existing Guarantor, jointly and severally, covenant and agree that so long as the Notes areoutstanding, Parent and each Existing Guarantor shall, and shall cause each of its Restricted Subsidiaries to, perform all covenants set forth in thisSection 5. 5.1 [Reserved] 5.2 Certificate Upon Event of Default. Promptly upon any officer of Parent obtaining knowledge (a) of any condition or event that constitutes aDefault or an Event of Default or that notice has been given to Parent with respect thereto; or (b) that any Person has given any notice to Parent or any ofits Subsidiaries or taken any other action with respect to any event or condition set forth in Section 8(a)(iii), a certificate of an executive officer of Parentspecifying the nature and period of existence of such condition or event, or specifying the notice given and action taken by any such Person and thenature of any such claimed Event of Default, - 2 -Default, event or condition, and what action Parent has taken, is taking and proposes to take with respect thereto. 5.3 Notice of Adverse Proceeding. Promptly upon any officer of Parent obtaining knowledge of the institution of, or non-frivolous threat of, anyAdverse Proceeding not previously disclosed in writing by Parent to the Holders, or any material development in any Adverse Proceeding that, ifadversely determined, could be reasonably expected to have a Material Adverse Effect, or seeks to enjoin or otherwise prevent the consummation of, or torecover any damages or obtain relief as a result of, the transactions contemplated hereby or any of the other Financing Documents, written notice thereoftogether with such other information as may be reasonably available to Parent to enable the Holders and their counsel to evaluate such matters. 5.4 Further Assurances. At any time or from time to time upon the request of Requisite Holders, Parent and any Guarantor shall, at its expense,promptly execute, acknowledge and deliver such further documents and do such other acts and things as Requisite Holders or the Collateral Agent mayreasonably request in order to effect fully the purposes of the Financing Documents, including without limitation the Control Agreement for DepositAccounts and/or Securities Accounts. 5.5 Tax Treatment. (a) Parent and each Guarantor shall use their best efforts to ensure that any aspect of the Combination is not treated as a tax-free reorganizationunder the Internal Revenue Code. (b) For purposes of determining the extent to which gain may be recognized pursuant to Section 897 of the Internal Revenue Code, the Parties agreeto treat the conversion of Notes to Conversion Preferred Stock or Common Stock, as the case may be, pursuant to Sections 9.4 and 9.5 as an event inwhich no gain or loss is realized for United States federal income tax purposes, unless there is a change in Law affecting such treatment that becomeseffective after the date of this Agreement. Notwithstanding the foregoing, to the extent any Conversion Preferred Stock or Common Stock is issued withrespect to any accrued and unpaid interest (including PIK Notes) on a Note upon the conversion, the amount equal to such accrued and unpaid interest(including PIK Notes) shall constitute interest income to the Holder of such Note, unless such Holder previously included such amount as income. 5.6 Collateral Obligations. Parent shall cause each Guarantor to fulfill its obligations under the A-1 Security Documents and any amendmentthereof.” - 3 -(b) Section 6 is amended in its entirety to read as follows: “6. Negative Covenants. Parent and the Guarantors, jointly and severally, covenant and agree that, so long as any Notes are outstanding Parentand each Guarantor shall perform, and shall cause each of its Restricted Subsidiaries to perform, all covenants in this Section 6. 6.1 Cash Covenant. Parent shall not permit aggregate Cash and Cash Equivalents of Parent and its Subsidiaries to be less than the “ApplicableAmount” set forth on Attachment 1 hereto for the corresponding “Applicable Period” in such Attachment 1 (which “Applicable Amounts” shall beadjusted from time to time in the manner set forth in Attachment 1). Such Cash and Cash Equivalents in such amounts shall at all times be held inDeposit Accounts or Securities Accounts for which Control Agreements are in effect (the terms “Cash”, “Cash Equivalents”, “Control Agreements” and“Securities Account” being used herein as defined in the Junior Pledge and Security Agreement, dated as of December 31, 2002, between each of theParent and the other “Grantors” named therein and iSTT Investments Pte Ltd, as Collateral Agent, as amended by that certain Omnibus AmendmentAgreement, dated as of November 24, 2004).” 6.2 Usury Laws. To the extent permitted by law, neither Parent nor the Guarantors shall seek to avoid, limit or otherwise fail to discharge any ofthe Financing Obligations under any applicable usury or similar laws. 6.3 Tax Treatment. Neither Parent nor the Guarantors shall take any action that would cause or would be likely to cause the Combination to betreated as a tax-free reorganization under the Internal Revenue Code.” 3. Amendments to Junior Pledge and Security Agreement. Conditional upon the occurrence of the Effective Time, the Junior Pledge and SecurityAgreement is amended as follows. (a) Section 1.1 is amended by adding thereto, in the appropriate alphabetical order, the following new definitions: “Cash” means all money, currency or a credit balance credited in any Securities Account. “Cash Equivalents” means (i) direct sovereign obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury of the United States of America), or obligations, the timely payment of principal andinterest of which is fully - 4 -guaranteed by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States ofAmerica is pledged in support thereof); (ii) interest-bearing demand or time deposits (including certificates of deposit) which are held in bankswhich have general obligations rated at least AA or equivalent by S&P or Moody’s; (iii) commercial paper rated (on the date of acquisition thereof)at least A-1 or P-1 or equivalent by S&P or Moody’s, respectively; (iv) money market funds, so long as such funds are rated Aaa by Moody’sand AAA by S&P; (v) floating rate securities whereby the interest rates is indexed to a money market index including Treasury bills, LIBOR,Prime Rate or Federal Funds and which have a rating of AAA by S&P; (vi) bonds and medium term notes, provided such investments have aminimum rating of AA or better by S&P; (vii) bankers acceptances, provided such investments have a minimum rating of AA or better by S&P;(viii) municipal obligations, so long as such funds are rated Aaa by Moody’s and AAA by S&P; or (ix) any advances, loans or extensions ofcredit or any stock, bonds, notes, debentures or other securities as the Collateral Agent may from time to time approve in its sole discretion. “Control Agreements” means (i) the Control Agreement attached as Exhibit A to the Omnibus Amendment Agreement dated as of November24, 2004 by and among the Parent, the Guarantors, the Noteholders, the Collateral Agent, and Salomon Smith Barney Inc., and (ii) any otheragreements substantially in the form of said Control Agreement, or in form and substance satisfactory to the Collateral Agent, entered into toreplace or supplement the agreement referred to in the foregoing item (i), meeting the requirements set forth in the fifth sentence of Section 3.4(c)hereof, in each case as amended or supplemented from time to time.” “Securities Account” means “securities account” as defined in the UCC. (b) Section 1.3 is amended in its entirety to read as follows: “1.3 Grant of Security. Each Grantor hereby grants to the Collateral Agent a security interest and continuing lien on all of such Grantor’sright title and interest in, to and under the following personal property of such Grantor in each case whether now owned or existing or hereafteracquired or arising and wherever located (all of which being hereinafter collectively referred to as the “Collateral”): (a) all Securities Accountsand - 5 -Deposit Accounts with respect to which Control Agreements have been executed and delivered to the Collateral Agent, (b) all Cash, CashEquivalents, securities, securities entitlements, investments and other financial assets, investment property or other property from time to timecredited thereto, (c) all proceeds thereof, (d) all distributions in connection therewith and (e) all income received thereon.” (c) All provisions of the Junior Pledge and Security Agreement that relate solely to (i) the Intercreditor Agreement or (ii) properties, assets or intereststhat do not constitute Collateral thereunder, shall be deemed deleted. 4. Release of Guarantors. Noteholders and Collateral Agent each agree that (a) each Guarantor is hereby released from all of its obligations under anyGuaranty and (b) each such Guaranty is hereby terminated and of no further force and effect. 5. Conditions to Effectiveness. The effectiveness of the amendments to the Purchase Agreement set forth in Section 2 above, the effectiveness of theamendments to the Junior Pledge and Security Agreement set forth in Section 3 above and the release of the Guarantors set forth in Section 4 above shall beconditional upon the satisfaction of each of the following conditions (the time upon which all such conditions have been satisfied being hereinafter referred toas the “Effective Time”): (a) Parent, the Collateral Agent and Salomon Smith Barney Inc. shall have executed and delivered to each other counterparts of the ControlAgreement. (b) There shall be on deposit in the Pledged Account Cash or Cash Equivalents in the aggregate amount of at least $38,466,350. (c) The Collateral Agent shall have executed and delivered to Parent such documents (including termination statements under the UniformCommercial Code), as are necessary to fully confirm, perfect and complete of record the termination of the liens and security interests of Collateral Agentin all of the items of properties, assets and interests that will no longer constitute Collateral under the Junior Pledge and Security Agreement upon theeffectiveness of the amendments set forth in Section 3 hereof, and shall have returned to Parent or the appropriate Guarantor all securities and othercollateral in the possession of the Collateral Agent. 6. Confirmation of Agreements. Except as expressly amended herein, the Purchase Agreement and the Junior Pledge and Security Agreement shall remainin full force and effect in accordance with their terms. 7. Cancellation of Certain Warrants. The Parties acknowledge that the Expiration Date under the Cash Trigger Warrants has occurred and suchWarrants are terminated and are of no further force or effect. - 6 -8. Further Actions. The Collateral Agent shall, and each of the Noteholders authorizes and directs the Collateral Agent to, at no expense to the CollateralAgent or the Noteholders, take such actions as may be reasonably requested by Parent (i) to reflect the termination of all liens and security interests onproperties, assets or interests of Parent or any of its Subsidiaries that will not, from and after the Effective Time, constitute Collateral, including the filing ofUniform Commercial Code termination statements and the return to Parent or the appropriate Guarantor of all securities and other possessory collateral held bythe Collateral Agent and not constituting Collateral from and after the Effective Time, (ii) to evidence the termination of each Guaranty and the release of eachGuarantor from its obligations thereunder or (iii) otherwise to give effect to the agreements made herein. 9. Counterparts. This Agreement may be executed in any number of counterparts and by the different Parties on separate counterparts, each of whichwhen so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. 10. Amendment, Waiver, etc. Neither this Agreement nor any of the terms hereof may be amended, waived or terminated unless such amendment,waiver or termination is in writing signed by Parent, the Collateral Agent and the Requisite Holders. 11. Governing Law. This Agreement shall be governed by and enforced in accordance with the laws of the State of New York (including Sections 5-1401 and 5-1402 of the General Obligations Law of the State of New York). 12. Representations and Warranties of the Parties. Each of the Parties represents and warrants to one another that this Agreement has been dulyauthorized, executed and delivered and is the legal, valid, binding and enforceable obligation of each such Party and that such execution, delivery andperformance by such Party does not violate any law, rule, regulation, order, contract, agreement or arrangement applicable to such Party. 13. Expenses. Parent shall promptly reimburse the Collateral Agent for all reasonable fees, costs and expenses incurred by it in connection with thenegotiation, execution, delivery and performance of this Agreement, including but not limited to the Control Agreement(s), the aggregate amount of which isestimated by Collateral Agent to be approximately $35,000. 14. Termination. Collateral Agent shall be entitled to terminate this Agreement if the Effective Time does not occur by December 31, 2004 (unless thedelay is caused by the failure or refusal of Collateral Agent to satisfy the condition set forth in Section 5(c)). Upon such termination, all rights and obligationsof the Parties shall become null and void, except that Section 12 shall survive any termination of this Agreement and each Party shall remain liable for anybreach by it of this Agreement. - 7 -IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed and delivered by their respective duly authorized officers as ofthe date first written above. Parent: EQUINIX, INC. By: /s/ PETER VAN CAMP Name: Peter Van Camp Title: CEO EQUINIX OPERATING CO., INC. By: /s/ PETER VAN CAMP Name: Peter Van Camp Title: CEO EQUINIX EUROPE, INC. By: /s/ PETER VAN CAMP Name: Peter Van Camp Title: CEO EQUINIX-DC, INC. By: /s/ PETER VAN CAMP Name: Peter Van Camp Title: CEO EQUINIX CAYMAN ISLANDS HOLDINGS By: /s/ PETER VAN CAMP Name: Peter Van Camp Title: CEO - 8 - EQUINIX DUTCH HOLDINGS N.V. By: /s/ PETER VAN CAMP Name: Peter Van Camp Title: CEO EQUINIX NETHERLANDS B.V. By: /s/ PETER VAN CAMP Name: Peter Van Camp Title: CEO EQUINIX FRANCE SARL By: /s/ PETER VAN CAMP Name: Peter Van Camp Title: CEO EQUINIX GERMANY GMBH By: /s/ PETER VAN CAMP Name: Peter Van Camp Title: CEO EQUINIX UK LIMITED By: /s/ PETER VAN CAMP Name: Peter Van Camp Title: CEO - 9 - PIHANA PACIFIC, INC. By: /s/ PETER VAN CAMP Name: Peter Van Camp Title: CEO PIHANA PACIFIC BUSINESS RECOVERY, INC. By: /s/ PETER VAN CAMP Name: Peter Van Camp Title: CEOCollateral Agent: iSTT INVESTMENT PTE LTD, as Collateral Agent By: /s/ JEAN MANDEVILLE Name: Jean Mandeville Title: Chief Financial OfficerNoteholder: iSTT INVESTMENT PTE LTD, as Noteholder By: /s/ JEAN MANDEVILLE Name: Jean Mandeville Title: Chief Financial Officer - 10 - EXHIBIT 10.109CONFIDENTIAL TREATMENT REQUESTEDCONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THESECURITIES EXCHANGE COMMISSION. ASSIGNMENT AND ASSUMPTION OF LEASE This ASSIGNMENT AND ASSUMPTION OF LEASE (this “Agreement”), dated as of December 6, 2004, is entered into by and betweenABOVENET COMMUNICATIONS, INC., a Delaware corporation (“Assignor”) and EQUINIX OPERATING CO., INC., a Delaware corporation(“Assignee”). RECITALS WHEREAS, Assignor is the current lessee under that certain Lease dated as of December 29, 1999 by and between BROKAW INTERESTS(“Landlord”) and Assignor, a copy of which is attached hereto as Exhibit A and incorporated herein by this reference (the “Lease”), pursuant to whichAssignor leases from Landlord certain real property described therein and located in San Jose, California, which is commonly referred to as 1735 LundyAvenue and is more particularly identified in the Lease (the “Premises”); WHEREAS, Assignor desires to assign to Assignee, and Assignee desires to assume from Assignor, all of Assignor’s rights, title, interests, privilegesand obligations as lessee under the Lease on the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and promises set forth herein and other good and valuable consideration, the receipt andsufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Terms. Capitalized terms used herein but not defined herein shall have the meanings specified in the Lease. 2. Assignment. Assignor does hereby assign, transfer and set over to Assignee effective from and after the Effective Date, as defined below, (i) all ofAssignor’s rights, title, interests, privileges and benefits as lessee in, to, and under the Lease, including, without limitation, the Security Deposit and, (ii) allof Assignor’s rights, title, interests, privileges and benefits in and to the Premises; to have and to hold the same together with all rights, easements, privilegesand appurtenances thereunto belonging or appertaining or held and enjoyed therewith, for and during the full unexpired term of the Lease. 3. Acceptance. Assignee hereby accepts the within assignment from and after the Effective Date and, in addition, does hereby covenant and agree, for thebenefit of Assignor and Landlord, to faithfully observe, assume, keep, perform and fulfill all of the terms, covenants, conditions and obligations required tobe observed, performed and fulfilled by the lessee under the Lease accruing from and after the Effective Date. 4. Delivery of Premises. Assignor and Assignee acknowledge and agree that possession of the Premises shall only be delivered to Assignee on theEffective Date. In addition, Assignor and Assignee also acknowledge and agree that Assignee shall accept the Premises in an “AS IS” condition and, except asset forth in Section 9(a)(v) below, Assignor has made no representations or warranties regarding the physical condition of the Premises or its suitability forAssignee’s use and that Assignee is relying on its own independent investigation of the Premises in entering into this Agreement. Notwithstanding the foregoing,the Assignor states that to the best of its knowledge, without any independent investigation or special inquiry (i) it has received no written notice of violationsof local, state or federal building codes, statues, rules or regulations, including, without limitation, the Americans With Disabilities Act (“ADA”) or anyapplicable life safety requirements, with respect to the Tenant Improvements and other Alterations made by the Assignor to the Premises, (ii) all mechanicaland electrical systems for the Premises, including, without limitation, all power distribution systems, emergency generators and accompanying fuel deliverysystems, HVAC systems (including airside, waterside, controls and automation elements thereof), building alarm and security management systems, lifesafety and fire suppression systems, and lighting systems, are in ordinary operating condition, (iii) the electrical distribution system for the Premises has arated critical load capacity of [*] megawatts; Assignor’s use of such electrical distribution system has not reached such critical load capacity but such systemhas been adequate for Assignor’s uses at the Premises, and (iv) it has received no written notice that any underground storage tanks located on the Premisesleak or have leaked during the term of the Lease. Assignor shall have no liability in connection with the statements in the preceding sentence unless and to theextent that such statements are determined by a court of competent jurisdiction to be intentionally fraudulent in making such statements. A list of TenantImprovements, Alterations, trade fixtures, equipment and components existing in the Premises is attached as Exhibit B. Assignor agrees that in the event of anycasualty loss or condemnation to the Premises between the date hereof and the Effective Date that would give the Assignor the right to terminate the Lease withrespect to all or a part of the Premises that Assignor shall not exercise such right without the consent of Assignee, which consent shall not be unreasonablywithheld, conditioned or delayed. Assignor also agrees that Assignor shall provide Assignee with early access to the Premises for the purposes of inspecting thePremises relating to improvements or alterations that Assignee may desire to make on the Premises and related activities, subject to appropriate insurance andindemnities from Assignee. 5. Conveyance of Personal Property and Related Items. As a condition to the Effective Date, Assignor and Assignee must enter into a Bill of Sale (the“Bill of Sale”), to be attached hereto as Exhibit C and incorporated herein by this reference, pursuant to which Assignor will transfer to Assignee the TenantImprovements and Alterations and Tenants’ trade fixtures, equipment and components. Any sales taxes associated with the transfer of such personal propertywill be paid for as provided in the Bill of Sale. On the Effective Date Assignor shall also assign to Assignee, pursuant to a mutually acceptable formassignment, and without recourse to Assignor, (i) any service contracts relating to the use or operation of the Premises that are approved by Assignee, if and tothe extent that the same are assignable without the consent of the other party thereto, (a list of all service contracts with respect to the Premises is*CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION. 2attached as Schedule 1) (ii) all warranties, guaranties, causes of action or similar intangible personal property rights, if any, and to the extent that the same areassignable without the consent of the other party thereto, (a list of all such warranties, guaranties, causes of action or similar intangible personal propertyrights with respect to the Premises is attached as Schedule 2) relating to the use or operation of the Premises, and shall deliver to Assignee all keys, operatingmanuals, books and records, copies of service or vendor contracts, utility bills, statements from Landlord and similar items relating to the use or occupancyof the Premises. 6. Consent/Final Agreement. The “Effective Date” for this Agreement shall be the later of (i) the date on which (a) the consent of Landlord required underthe Lease is obtained and the Assignee and Landlord have entered into First Amendment to Lease in the form attached hereto as Exhibit D and (b) the Assignorand the Assignee have agreed to terms on and executed the Bill of Sale to be attached hereto as Exhibit C; and (ii) March 1, 2005. The date on which theforegoing conditions are satisfied is referred to as the “Effective Date” and upon the occurrence of such date, this Agreement shall be considered a finalagreement (and not executory) and no further action on behalf of Assignor or Assignee shall be required. If on or before December 31, 2004 (x) the Landlordshall not have consented to this Agreement and entered into the First Amendment to Lease or (y) Assignor and the Assignee have not agreed to terms on andexecuted the Bill of Sale, this Agreement shall automatically terminate. 7. Master Service Agreement. Assignor and Assignee acknowledge that Assignor shall have the right, pursuant to that certain Master Service Agreementdated as of March 31, 2003 between Assignor and Assignee (the “MSA”), as supplemented by the Amendment to the Master Service Agreement dated of evendate herewith, to use and occupy the portion of the Premises referred to as Collocation Room #5 for the purpose of maintaining and operating its IPinfrastructure, fiber termination panels and other equipment. Assignor and Assignee acknowledge that the Assignor’s right to use said Collocation Room #5 inconnection with the foregoing is only pursuant to the MSA and is not a right under the Master Lease and shall be subject to all of the provisions of the MSA,as it may be amended from time to time. In the event that Assignee defaults on its obligations under this Agreement, Assignor shall have the option to terminatethe MSA with respect to Collocation Room #5, in Assignor’s sole discretion. 8. Security Deposit. Upon the Effective Date, Assignee shall pursuant to a separate agreement between Assignor and Assignee reimburse Assignor for thenet present value of the Security Deposit posted by Assignor under the Lease and not previously returned to Assignor. 9. Representations and Warranties. (a) Assignor hereby represents and warrants to Assignee as of the date hereof: i. Assignor is a corporation duly organized under the laws of Delaware and has full right, power and authority to enter into this Agreementand to carry out its obligations hereunder and all required corporate actions necessary to authorize Assignor to enter into this Agreement and tocarry out its obligations hereunder have been taken. 3ii. Attached hereto as Exhibit A is a true and complete copy of the Lease, including all amendments or modifications thereto, whichconstitute all agreements between Landlord and Assignor affecting the Premises. iii. Assignor is the holder of the entire interest of the tenant under the Lease. iv. Subject to obtaining the consent of Landlord, Assignor has obtained all consents and approvals required to allow this Agreement to bevalid and effective on its part, provided that this representation does not apply to service contracts, warranties, license agreements or othercontracts or intangible personal property rights referenced generally in Section 5 hereinabove where the consent of other parties may be required. v. The Premises will be in substantially the same condition on the Effective Date as on the date hereof, normal wear and tear and damage byinsured casualty excepted, provided such proceeds are remitted to Assignee if the damage is not repaired. vi. To the best of its knowledge there are no defaults by any party under the Lease and there are no events or circumstances which with thepassage of time and or the giving of notice would result in a default under the Lease, except that a dispute exists between Landlord and Assignorregarding Landlord’s obligation to return a portion of the Security Deposit. vii. Assignor has paid and performed all obligations required to be paid or performed by Assignor under the Lease through the EffectiveDate. viii. The term of the Lease expires on May 31, 2020. ix. Schedule 3 contains a listing of the additional charges paid by Assignor under the Lease for the most recent two (2) fiscal years. (b) Assignee warrants and represents to Assignor as follows: i. Assignee is a corporation duly organized under the laws of Delaware and has full right power and authority to enter into this Agreementand to carry out its obligations hereunder and all required corporate actions necessary to authorize Assignee to enter into this Agreement and tocarry out its obligations hereunder have been taken. Subject to obtaining the consent of Landlord, Assignee has obtained all consents andapprovals required to allow this Agreement to be valid and effective on its part, ii. Assignor has reviewed the terms of the Lease. 10. Indemnity. (a) Assignor hereby indemnifies and agrees to defend, through attorneys reasonably acceptable to Assignee, and to hold harmless Assignee and itsrespective successors, assigns, legal and beneficial owners, officers, directors, agents and employees (“Assignee Parties”) from and against any and allreasonable costs, damages (excluding 4consequential damages), claims, expenses and liabilities which may at any time be asserted against or suffered by Assignee or the Assignee Parties as aresult of or on account of any material breach by Assignee of any representation, warranty or covenant contained in this Agreement, or which arise orhave arisen, under the Lease as a result of acts, omissions or events that occur prior to the Effective Date. Assignee hereby indemnifies and agrees todefend, through attorneys reasonably acceptable to Assignor, and to hold harmless Assignor and its respective successors, assigns, legal and beneficialowners, officers, directors, agents and employees (“Assignor Parties”) from and against any and all reasonable costs, damages (excluding consequentialdamages), claims, expenses and liabilities which may at any time be asserted against or suffered by Assignor or the Assignor Parties as a result of or onaccount of any material breach by Assignee of any representation, warranty or covenant contained in this Agreement, or which arise or have arisen,under the Lease as a result of acts, omissions or events that occur on or after the Effective Date. (b) Assignee shall deliver to Assignor within three (3) business days after Assignee’s receipt thereof, or delivery thereof by Assignee, a copy of anydefault notice received from or delivered to Landlord under the Lease. Assignee agrees that in the event that Assignee defaults in any of its obligationsunder the Lease and demand is made upon Assignor to perform or cure such obligations that Assignee shall upon written request from Assignor made atany time after the expiration of any applicable grace period in connection with such default and prior to the cure thereof by Assignee: (i) reassign toAssignor, without recourse, representation or warranty, but free and clear of all liens and encumbrances, all of Assignee’s interest under the Lease anddeliver the Premises to Assignor in the same condition as exists on the Effective Date, subject to normal wear and tear and loss by casualty orcondemnation, (ii) transfer to Assignor free and clear of all liens and encumbrances any equipment or other personal property transferred to Assignee inconnection with the assignment contemplated herein and assign to Assignor all of Assignee’s interest in any Tenant Improvements or Alterations, eachwith recourse, representation or warranty and (iii) transfer to Assignor without recourse, representation or warranty all service contracts or intangiblepersonal property related to the leasehold interest or the operation of the Premises as a collocation facility. In connection with any such reassignment ofthe Lease to the Assignor, (y) Assignor shall have a right of reentry to the Premises to effectuate an orderly transition of the occupancy of the Premises,and (z) Assignor shall reimburse Assignee for any Security Deposit, whether in the form of cash or a letter of credit, held by Landlord, less anyamounts which Landlord actually applies on account of defaults by Assignee under the Lease and any actual damages suffered by Assignor on accountof any such defaults by Assignee. 11. Prorations. All expenses with respect to the Premises shall be apportioned as of the Effective Date as follows, with Assignee being responsible for andgetting the benefit of all such items during the entire day on which Effective Date occurs and thereafter and Assignor being responsible for and getting thebenefit of all such items for the period prior to the Effective Date. If any of the aforesaid prorations cannot be calculated accurately on the Effective Date, thenthey shall be calculated as soon after the Effective Date as feasible. Either party owing the other party a sum of money based on such subsequent proration(s)shall promptly pay said sum to the other party, with interest thereon at the rate of ten percent (10%) per annum from the Effective Date to the date of payment,if payment is not made within ten (10) days after delivery of a bill therefor. 512. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the respective legal representatives, successors andassigns of the parties hereto. The words “Assignor” and “Assignee,” wherever used herein, shall include the persons and entities named herein or in the Leaseand designated as such and their respective heirs, legal representatives, successors or assigns. 13. Notices. All notices or requests provided for hereunder shall be in writing and shall be delivered by any of the following methods: (a) hand, (b)United States Registered or Certified Mail, return receipt requested, postage prepaid, or (c) prepaid nationally recognized overnight carrier, and if to Assignor,to Abovenet Communications, Inc., 360 Hamilton Avenue, White Plains, New York 10601, Attention: President, with a copy to the same address Attentionand General Counsel; or if to Assignee, 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, CA 94404, Attention: General Counsel,Facsimile No. (650) 513 7909. All such notices shall be deemed received either when hand delivered if sent in the manner provided in (a) above, two (2)business days after being placed in the United States Mail if sent in the manner set forth in (b) above or upon delivery or attempted delivery if sent in themanner provided in (c) above. The parties hereto shall have the right from time to time to change their respective address by at least five (5) days prior writtennotice to the other party. 14. Brokers. Each of Assignor and Assignee represents and warrants to the other that it has dealt with no broker, agent or other person in connectionwith this Agreement other than CB Richard Ellis, Inc. and Liberty Greenfield LLP, whose commission will be paid by Assignor pursuant to a separate writtenagreement. Each of Assignor and Assignee agrees to indemnify and hold the other harmless from and against any claims by any broker, agent or other personclaiming a commission or other form of compensation by virtue of having dealt with the indemnifying party with regard to this Agreement. The provisions ofthis Section 14 shall survive the expiration or earlier termination of this Agreement. 15. Reimbursement for Landlord’s Expenses. Assignor shall, in accordance with the terms of the Lease, reimburse Landlord for the expenses incurredby Landlord in connection with the request for Landlord’s consent to this Agreement, including, but not limited to, reasonable attorneys’ fees anddisbursements. 16. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the state of California (without giving effect toits choice of law principles). 17. Confidentiality. Assignor and Assignee 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 Assignor or Assignee, disclose suchinformation to any third party. Notwithstanding the foregoing, Assignor and Assignee 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 6consultants) to keep such information confidential. Assignor and Assignee shall each have the right to publicize the consummation of this Agreement (otherthan the monetary terms) in whatever manner each deems appropriate; provided, however, that any press release or other public disclosure regarding thetransactions contemplated herein, and the wording of same, must be approved in writing in advance by both parties. 18. Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each ofwhich when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 19. Severability. In the event that any one or more of the provisions contained in this Agreement shall be held to be invalid, illegal, or unenforceable inany respect, such invalidity, illegality, or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if suchinvalid, illegal, or unenforceable provision had never been contained herein. 20. Attorneys’ Fees. If any action at law or in equity, including an action for declaratory relief, is brought to enforce or interpret the provisions of thisAgreement, the prevailing party shall be entitled to recover reasonable attorneys’ fees from the other party. 21. Amendments. This Agreement may not be altered, changed or amended, except by an instrument in writing executed by all parties hereto. 22. Entire Agreement. This Agreement constitutes the entire agreement and supersedes all prior agreements and undertakings, both written and oral,among Assignor and Assignee with respect to the subject matter hereof and is not intended to confer upon any other person or entity any rights or remedieshereunder, except as otherwise expressly provided herein. [Signature page follows] 7IN WITNESS WHEREOF, the parties hereto have executed and entered into this Agreement as of the date first above written. Assignor:ABOVENET COMMUNICATIONS, INC.a Delaware corporationBy: /s/ ROBERT SOKOTAName: Robert SokotaTitle: SVP & General Counsel Assignee:EQUINIX OPERATING CO., INC.a Delaware corporationBy: /s/ RENEE F. LANAMName: Renee LanamTitle: Chief Financial Officer 8CONSENT Landlord hereby consents to the foregoing Assignment and Assumption of Lease on the terms and conditions set forth above. The foregoing consent ofLandlord shall not release AboveNet Communications, Inc. from any of its obligations under the Lease. Without limiting the generality of the foregoing, theLandlord specifically agrees to the reassignment provisions contained in Section 10.(b) above. Landlord also represents and warrants as follows to theAssignor and Assignee: i. Attached hereto as Exhibit A is a true and complete copy of the Lease, including all amendments or modifications thereto, which constitute allagreements between Landlord and Assignor affecting the Premises. ii. To the best of its knowledge, and except for the dispute described in paragraph 9(a)(vi) above, there are no defaults by any party under the Lease andthere are no events or circumstances which with the passage of time and or the giving of notice would result in a default under the Lease. Landlordacknowledges and agrees that upon the occurrence of the Effective Date as described above and the execution of the accompanying First Amendment to Lease,the foregoing dispute shall be resolved in all respects. iii. Assignor has paid and performed all obligations required to be paid or performed by Assignor under the Lease through the Effective Date. iv. The term of the Lease expires on May 31, 2020. Landlord also acknowledges and agrees that it is not entitled to receive any amounts pursuant to Section 17.B. of the Lease with respect to the assignment andassumption of Lease contemplated herein and the acquisition by Assignee of Assignee’s interest in the Tenant Improvements, Alterations and other personalproperty in connection with this Agreement. Landlord:BROKAW INTERESTS,a California limited partnershipBy: /s/ JOHN M. SOBRATOName: John M. SobratoTitle: General Partner 9 EXHIBIT A Lease BetweenBrokaw Interests and AboveNet Communications, Inc. Section Page #1. PARTIES 12. PREMISES 13. USE 1 A. Permitted Uses 1 B. Uses Prohibited 1 C. Advertisements and Signs 1 D. Covenants, Conditions and Restrictions 24. TERM AND RENTAL 2 A. Base Monthly Rent 2 B. Late Charges 3 C. Security Deposit 35. CONSTRUCTION 4 A. Landlord’s Work 4 B. Tenant Construction 56. ACCEPTANCE OF POSSESSION AND COVENANTS TO SURRENDER 5 A. Delivery and Acceptance 5 B. Late Delivery 6 C. Condition Upon Surrender 6 D. Failure to Surrender 77. ALTERATIONS AND ADDITIONS 8 A. Tenant’s Alterations 8 B. Free From Liens 8 C. Compliance With Governmental Regulations 88. MAINTENANCE OF PREMISES 9 A. Landlord’s Obligations 9 B. Tenant’s Obligations 9 C. Waiver of Liability 99. HAZARD INSURANCE 10 A. Tenant’s Use 10 B. Landlord’s Insurance 10 C. Tenant’s Insurance 10 D. Waiver 1110. TAXES 1111. UTILITIES 1112. TOXIC WASTE AND ENVIRONMENTAL DAMAGE 11 A. Tenant’s Responsibility 11 B. Tenant’s Indemnity Regarding Hazardous Materials 12 C. Actual Release by Tenant 13 D. Environmental Monitoring 14 Page i13. TENANT’S DEFAULT 14 A. Remedies 14 B. Right to Re-enter 15 C. Abandonment 15 D. No Termination 16 E. Non-Waiver 16 F. Performance by Landlord 16 G. Habitual Default 1714. LANDLORD’S LIABILITY 17 A. Limitation on Landlord’s Liability 17 B. Limitation on Tenant’s Recourse 17 C. Indemnification of Landlord 1715. DESTRUCTION OF PREMISES 18 A. Landlord’s Obligation to Restore 18 B. Limitations on Landlord’s Restoration Obligation 1816. CONDEMNATION 1917. ASSIGNMENT OR SUBLEASE 19 A. Consent by Landlord 19 B. Assignment or Subletting Consideration 20 C. No Release 20 D. Reorganization of Tenant 21 E. Permitted Transfers 21 F. Effect of Default 22 G. Conveyance by Landlord 22 H. Successors and Assigns 2218. OPTION TO EXTEND THE LEASE TERM 22 A. Grant and Exercise of Option 22 B. Determination of Fair Market Rental 23 C. Resolution of a Disagreement over the Fair Market Rental 24 D. Personal to Tenant 2419. GENERAL PROVISIONS 24 A. Attorney’s Fees 24 B. Authority of Parties 24 C. Brokers 25 D. Choice of Law 25 E. Dispute Resolution 25 F. Entire Agreement 26 G. Entry by Landlord 26 H. Estoppel Certificates 27 I. Exhibits 27 J. Interest 27 K. This paragraph intentionally left blank 27 L. No Presumption Against Drafter 27 M. Notices 28 N. Property Management 28 O. Rent 28 P. Representations 28 Q. Rights and Remedies 28 Page ii R. Severability 28 S. Submission of Lease 28 T. Subordination 28 U. Survival of Indemnities 29 V. Time 29 W. Transportation Demand Management Programs 29 X. Waiver of Right to Jury Trial 3020. LEASE GUARANTY 30 EXHIBIT A - PremisesEXHIBIT B - Tenant Improvement Plans and SpecificationsEXHIBIT C - Komag Termination AgreementEXHIBIT D - Required ConditionEXHIBIT E - Guaranty of Lease Page iii1. PARTIES: THIS LEASE is entered into on this 29th day of December, 1999 (“Effective Date”), between Brokaw Interests, a California LimitedPartnership, whose address is 10600 North De Anza Boulevard, Suite 200, Cupertino, CA 95014 and AboveNet Communications, Inc., a DelawareCorporation, whose address is 50 West San Fernando Street, Suite 1010, San Jose, California, 95113, hereinafter called respectively Landlord and Tenant. 2. PREMISES: Landlord hereby leases to Tenant, and Tenant hires from Landlord those certain Premises with the appurtenances, situated in the City of SanJose, County of Santa Clara, State of California, commonly known and designated as 1735 Lundy Avenue and consisting of 103,420 rentable square feet(“Building”) as shown on Exhibit “A” and all improvements located therein including but not limited to buildings, parking areas, landscaping, loadingdocks, sidewalks, service areas and other facilities. Unless expressly provided otherwise, the term Premises as used herein shall include the TenantImprovements (defined in Section 5.B and subject to Tenant’s ownership thereof) constructed by Tenant pursuant to Section 5.B. 3. USE: A. Permitted Uses: Tenant shall use the Premises only for the following purposes and shall not change the use of the Premises without the prior writtenconsent of Landlord: Internet colocation and connection, telecommunications, data center and office uses, together with related service and support functions.All commercial trucks and delivery vehicles shall be parked at the rear of the Building, and permitted to remain on the Premises only so long as is reasonablynecessary to complete the loading and unloading. Landlord makes no representation or warranty that any specific use of the Premises desired by Tenant ispermitted pursuant to any Laws. B. Uses Prohibited: Tenant shall not commit or suffer to be committed on the Premises any waste, nuisance, or other act or thing which may disturbthe quiet enjoyment of any other tenant in or around the Premises, nor allow any sale by auction or any other use of the Premises for an unlawful purpose.Tenant shall not: (i) damage or overload the electrical, mechanical or plumbing systems of the Premises, (ii) attach, hang or suspend anything from the ceiling,walls or columns of the building or set any load on the floor in excess of the load limits for which such items are designed, except as expressly set forth in theTenant Improvement Plans and Specifications and unless the building is modified by Tenant to support such loads, or (iii) generate dust, fumes or wasteproducts which create a fire or health hazard or damage the Premises, including without limitation the soils or ground water in or around the Premises. Exceptas expressly set forth in the Tenant Improvement Plans and Specifications, no materials, supplies, equipment, finished products or semi-finished products,raw materials or articles of any nature, or any waste materials, refuse, scrap or debris, shall be stored upon or permitted to remain on any portion of thePremises outside of the Building without Landlord’s prior approval, which approval may be withheld in its sole discretion. C. Advertisements and Signs: Tenant will not place or permit to be placed, in, upon or about the Premises any signs not approved by the city andother governing authority having jurisdiction. Tenant will not place or permit to be placed upon the Premises any signs, advertisements or notices without thewritten consent of Landlord as to type, size, design, lettering, Page 1coloring and location, which consent will not be unreasonably withheld. Any sign placed on the Premises shall be removed by Tenant, at its sole cost, prior tothe Expiration Date or promptly following the earlier termination of the Lease, and Tenant shall repair, at its sole cost, any damage or injury to the Premisescaused thereby, and if not so removed, then Landlord may have same so removed at Tenant’s expense. D. Covenants, Conditions and Restrictions: This Lease is subject to the effect of (i) any covenants, conditions, restrictions, easements, mortgages ordeeds of trust, ground leases, rights of way of record and any other matters or documents of record; and (ii) any zoning laws of the city, county and statewhere the Building is situated (collectively referred to herein as “Restrictions”) and Tenant will conform to and will not violate the terms of any suchRestrictions. 4. TERM AND RENTAL: A. Base Monthly Rent: The term (“Lease Term”) shall be for two hundred forty five (245) months, commencing on the date Landlord deliverspossession of the Premises to Tenant, estimated to occur on January 1, 2000 (the “Commencement Date”), subject to adjustment pursuant to Section 6.Abelow, and ending 245 months thereafter (“Expiration Date”). Notwithstanding the Parties agreement that the Lease Term begins on the Commencement Date,this Lease and all of the obligations of Landlord and Tenant shall be binding and in full force and effect from and after the Effective Date. In addition to allother sums payable by Tenant under this Lease, Tenant shall pay base monthly rent (“Base Monthly Rent”) for the Premises pursuant to the followingschedule: Months 01 - 05: [*]Months 06 - 17: [*]Months 18 - 29: [*]Months 30 - 41: [*]Months 42 - 53: [*]Months 54 - 65: [*]Months 66 - 77: [*]Months 78 - 89: [*]Months 90 - 101: [*]Months 102 - 113: [*]Months 114 - 125: [*]Months 126 - 137: [*]Months 138 - 149: [*]Months 150 - 161: [*]Months 162 - 173: [*]Months 174 - 185: [*]Months 186 - 197: [*]Months 198 - 209: [*]Months 210 - 221: [*]Months 222 - 233: [*]Months 234 - 245: [*] Base Monthly Rent shall be due in advance on or before the first day of each calendar month during the Lease Term, commencing on the first day of the 6thmonth following the Commencement Date. All sums payable by Tenant under this Lease shall be paid to Landlord in lawful money of the United States ofAmerica, without offset or deduction and without prior notice or demand, at the address specified in Section 1 of this Lease or at such place or places as maybe designated in writing by Landlord during the Lease Term. Base Monthly Rent for any period less than a calendar month shall be a pro rata portion of themonthly installment. Concurrently with Tenant’s execution of this Lease, Tenant shall pay to Landlord the sum of [*] as prepaid rent for the first month of theLease for which Base Monthly Rent is due.*CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION. Page 2B. Late Charges: Tenant hereby acknowledges that late payment by Tenant to Landlord of Base Monthly Rent and other sums due hereunder willcause Landlord to incur costs not contemplated by this Lease, the exact amount of which is extremely difficult to ascertain. Such costs include but are notlimited to: administrative, processing, accounting, and late charges which may be imposed on Landlord by the terms of any contract, revolving credit,mortgage, or trust deed covering the Premises. Accordingly, if any installment of Base Monthly Rent or other sum due from Tenant shall not be received byLandlord or its designee within five (5) business days after the rent is due, Tenant shall pay to Landlord a late charge equal to five (5%) percent of suchoverdue amount, which late charge shall be due and payable on the same date that the overdue amount was due. The parties agree that such late chargerepresents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant, excluding interest and attorney’s fees and costs.If any rent or other sum due from Tenant remains delinquent for a period in excess of thirty (30) days then, in addition to such late charge, Tenant shall pay toLandlord interest on any rent that is not paid when due at the Agreed Interest Rate specified in Section 19.J following the date such amount became due untilpaid. Acceptance by Landlord of such late charge shall not constitute a waiver of Tenant’s default with respect to such overdue amount nor prevent Landlordfrom exercising any of the other rights and remedies granted hereunder, in the event that a late charge is payable hereunder, whether or not collected, for three(3) consecutive installments of Base Monthly Rent, then the Base Monthly Rent shall automatically become due and payable quarterly in advance, rather thanmonthly, notwithstanding any provision of this Lease to the contrary. C. Security Deposit: Concurrently with Tenant’s execution of this Lease, Tenant has deposited with Landlord the sum of One Million Four HundredTwenty Seven Thousand and No/100 Dollars ($1,427,000.00) (“Security Deposit”). Landlord shall not be deemed a trustee of the Security Deposit, may usethe Security Deposit in business, and shall not be required to segregate it from its general accounts. Tenant shall not be entitled to interest on the SecurityDeposit. If Tenant defaults with respect to any provisions of the Lease, including but not limited to the provisions relating to payment of Base Monthly Rent orother charges, Landlord may, to the extent reasonably necessary to remedy Tenant’s default, use any or all of the Security Deposit towards payment of thefollowing: (i) Base Monthly Rent or other charges in default; (ii) any other amount which Landlord may spend or become obligated to spend by reason ofTenant’s default including, but not limited to Tenant’s failure to restore or clean the Premises following vacation thereof. If any portion of the Security Depositis so used or applied, Tenant shall, within ten (10) days after written demand from Landlord, deposit cash with Landlord in an amount sufficient to restorethe Security Deposit to its full original amount, and shall pay to Landlord such other sums as necessary to reimburse Landlord for any sums paid byLandlord. Tenant may not assign or encumber the Security Deposit without the consent of Landlord. Any attempt to do so shall be void and shall not bebinding on Landlord. The Security Deposit shall be returned to Tenant within thirty (30) days after the Expiration Date and surrender of the Premises toLandlord, less any amount deducted in accordance with this Section, together with Landlord’s written notice Page 3itemizing the amounts and purposes for such deduction. In the event of termination of Landlord’s interest in this Lease, Landlord may deliver or credit theSecurity Deposit to Landlord’s successor in interest in the Premises and thereupon be relieved of further responsibility with respect to the Security Deposit tothe extent that Landlord’s successor assumes all obligations under this Lease. Landlord agrees that in lieu of a cash Security Deposit, Tenant may deposit a letter of credit in a form reasonably acceptable to Landlord. Landlord shall beentitled to draw against the letter of credit at any time provided only that Landlord certifies to the issuer of the letter of credit that Tenant is in default under theLease. Tenant shall keep the letter of credit in effect during the entire Lease Term, as the same may be extended, plus a period of four (4) weeks after expirationof the Lease Term. At least thirty (30) days prior to expiration of any letter of credit, the term thereof shall be renewed or extended for a period of at least one (1)year. Tenant’s failure to so renew or extend the letter of credit shall be a material default of this Lease by Tenant. In the event Landlord draws against the letterof credit, Tenant shall replenish the existing letter of credit or cause a new letter of credit to be issued such that the aggregate amount of letters of credit availableto Landlord at all times during the Lease Term is the amount of the Security Deposit originally required. Notwithstanding the foregoing, Tenant may reduce the amount of the Security Deposit upon the following conditions: (i) after the 36th month of the LeaseTerm, the amount of the Security Deposit may be reduced by $713,500.00 provided Tenant has not been in monetary default under the Lease during theprevious 36 months; (ii) after the 72nd month of the Lease Term, the amount of the Security Deposit may be reduced by $583,500.00 provided Tenant hasnot been in monetary default under the Lease during the previous 36 months; and (iii) provided Tenant has not been in monetary default under the Leaseduring the Lease Term, the amount of the Security Deposit shall be reduced to $130,000.00 after Tenant’s parent company, Metromedia Fiber Network, Inc.,has posted a net profit (before interest, tax, depreciation, and amortization expenses) for four (4) consecutive quarters. 5. CONSTRUCTION: A. Landlord’s Work: Within the first two (2) months of the Lease Commencement Date, Landlord shall: (i) ensure that the Building structure andBuilding exterior is in compliance with all applicable city, state, and government zoning codes, laws and regulations (excluding ADA, which is specificallyaddressed below); and (ii) ensure that the Premises are properly closed with respect to Hazardous Materials associated with the Premises’ former use, anddeliver to Tenant all related documentation in Landlord’s possession. Landlord agrees to reimburse Tenant for the cost of: (i) putting the existing Buildingsystems (excluding Building systems installed as part of the Tenant Improvements, or Building systems Tenant intends to remove) in good operating conditionand repair including the plumbing, HVAC, and electrical; (ii) any required ADA modifications to the Premises, excluding ADA requirements for new TenantImprovements and improvements Tenant intends to remove. Landlord also agrees to reimburse Tenant the sum of Fifty Two Thousand and No/100 Dollars($52,000.00) towards Tenant’s cost of installing a new roof membrane on the Building within the first year of the Lease Term. Page 4B. Tenant Construction: Within the first year of the Lease Term, Tenant agrees to remove the existing disc media fabrication improvements at thePremises and install new improvements (“Tenant Improvements”) consistent with Tenant’s use of the Premises as a data center. Tenant shall cause allimprovements to the Premises not included in Landlord’s Work to be constructed at Tenant’s expense by a general contractor selected by Tenant (“GeneralContractor”) in accordance with construction plans and outline specifications prepared at Tenant’s expense by an architect selected by Tenant (“Tenant’sArchitect”), to be attached to this Lease as Exhibit “B” (“Tenant Improvement Plans and Specifications”). The Tenant Improvements Plans and Specificationsshall include any information required by the relevant agencies regarding Tenant’s use of Hazardous Materials, if applicable. Prior to commencingconstruction of the Tenant Improvements, Tenant shall: (i) obtain all required governmental approvals and permits; and (ii) provide Landlord seven (7) days’prior notice so that Landlord may post a notice of nonresponsibility. Landlord acknowledges that the Tenant improvements will include typical improvementswhich support combined office and data-telecommunications center uses, which may consist of the following: (i) raised floors; (ii) floor-to-ceiling equipmentracks; (iii) additional power panels, power converters, and related equipment and fixtures to provide within the Premises additional electric power to supporttelecommunication equipment; (iv) a UPS system, including back-up, diesel powered generators; (v) fiber conduit, cabling, and risers to support servers,routers, and other equipment; (vi) antenna in the antenna farm; (vii) specialized HVAC systems to support temperature requirements for data-telecommunications areas, including dry cooler units; and (viii) wall partitions to create separate office areas. As part of the Tenant Improvements, Tenantshall have the right, at its sole cost, to install a trench and conduit from the street to the carrier rooms to be located within the Premises, provided that plansand specifications and the contractor to be retained for such work are subject to Landlord’s reasonable approval. Any Tenant Improvement work shall beconducted at Tenant’s risk and in accordance with all Laws. Tenant shall indemnify and hold Landlord harmless from and against all costs, damages,claims, liabilities and expenses (including attorneys’ fees) suffered by or claimed against Landlord, directly or indirectly, based on, arising out of or resultingfrom Tenant’s construction of the Tenant Improvements. All costs associated with Tenant Improvements shall be paid by Tenant. Immediately uponcompletion of the Tenant Improvements, Tenant agrees to provide Landlord a complete set of half-size (15” x 21”) vellum as-built drawings for the TenantImprovements and a certificate of occupancy for the Premises. The Tenant Improvements shall be the property of Tenant until the expiration of the Lease Termor any earlier termination of the Lease, at which time the Tenant Improvements shall become the property of Landlord and shall remain upon and besurrendered with the Premises, and title thereto shall automatically vest in Landlord without any payment therefor. 6. ACCEPTANCE OF POSSESSION AND COVENANTS TO SURRENDER: A. Delivery and Acceptance: Landlord shall deliver and Tenant shall accept possession of the Premises on the Commencement Date provided,however, that Landlord shall retain a right of entry to complete Landlord’s Work provided Landlord does not interfere with Page 5construction of Tenant Improvements. Tenant acknowledges that it has had an opportunity to conduct, and has conducted, such inspections of the Premisesas it deems necessary to evaluate its condition. Except as otherwise specifically provided herein, Tenant agrees to accept possession of the Premises in its thenexisting condition, subject to all Restrictions and without representation or warranty by Landlord except as provided in Section 5 above. Landlord and Tenant hereby acknowledge that: (i) Komag Corporation (“Komag”) currently occupies the Premises; and (ii) Landlord and Komag haveexecuted a lease termination agreement, attached as Exhibit “D”, that terminates Komag’s lease on December 31, 1999. Landlord, at its sole cost and expense,shall use its reasonable best efforts to assure that Komag vacates and surrenders the Premises, which efforts shall include, without limitation, the promptinitiation of an unlawful detainer proceeding if necessary. Landlord shall be obligated to deliver the Premises to Tenant in such condition (the “RequiredCondition”) that it is free of possession by Komag with equipment and fixtures of Komag removed or left in place pursuant to Exhibit “E” attached hereto. B. Late Delivery: In the event Landlord does not deliver the Premises to Tenant in the Required Condition by January 1, 2000, then the CommencementDate shall not occur until such delivery is made. Further, in the event Landlord does not deliver the Premises to Tenant in the Required Condition by February1, 2000, then in addition to such delayed Commencement Date, the Base Monthly Rent which is otherwise payable commencing on the 6th month thereaftershall be abated by a per diem (calculated on a 30-day month using the Base Monthly Rent rate applicable in the 6th month of the Lease Term) amount for eachday in the period commencing on February 1, 2000 and ending on the date the Premises are delivered to Tenant in the Required Condition. The rent abatementfor a delay in the Commencement Date shall be the sole and exclusive remedy of Tenant with respect to the failure by Landlord to deliver the Premises toTenant in the Required Condition. Notwithstanding anything to the contrary contained in this Lease, in the event: (i) Komag has not obtained a closure permit (or other evidence from applicablegovernmental agencies) by January 15, 2000 affirming that Komag has removed all Hazardous Materials associated with its use at the Premises; and (ii) BaseMonthly Rent is not already being abated pursuant to the preceding paragraph, then this Lease shall not be void or voidable nor shall Landlord be liable forany loss or damage resulting therefrom; however, Landlord shall pay to Tenant an amount equal to all Holdover Rent due from Komag to Landlord pursuantto paragraph 5 of the attached Exhibit “D”. C. Condition Upon Surrender: Tenant further agrees on the Expiration Date or on the sooner termination of this Lease, to surrender the Premises toLandlord in good condition and repair, normal wear and tear excepted. In this regard, “normal wear and tear” shall be construed to mean wear and tear causedto the Premises by the natural aging process which occurs in spite of prudent application of the best standards for maintenance, repair replacement, andjanitorial practices, and does not include items of neglected or deferred maintenance. In any event, Tenant shall cause the following to be done prior to theExpiration Date or sooner termination of this Lease: (i) all interior walls shall be repaired, patched and otherwise made paint-ready, (ii) all tiled floors shall becleaned and waxed, (iii) all Page 6carpets shall be cleaned and shampooed, (iv) all broken, marred, stained or non-conforming acoustical ceiling tiles shall be replaced, (v) all cabling placedabove the ceiling by Tenant or Tenant’s contractors shall be removed, (vi) all windows shall be washed; (vii) the HVAC system shall be serviced by areputable and licensed service firm and left in “good operating condition and repair” as so certified by such firm, (viii) the plumbing and electrical systemsand lighting shall be placed in good order and repair (including replacement of any burned out, discolored or broken light bulbs, ballasts, or lenses. On orbefore the Expiration Date or sooner termination of this Lease, Tenant shall remove all its personal property and trade fixtures from the Premises. All propertyand fixtures not so removed shall be deemed as abandoned by Tenant. At the expiration of the Lease Term, Landlord shall not have the right to require thatTenant remove from the Premises any of the Tenant Improvements (other than Tenant’s equipment, fixtures and components) or any Alterations made withLandlord’s consent unless Landlord, at the time of granting such consent, indicates that the subject Alteration must be removed upon the expiration of theLease Term. With respect to Permitted Alterations as defined in Section 7.A below, Tenant shall ascertain from Landlord within ninety (90) days before theExpiration Date whether Landlord desires to have such Permitted Alterations removed. Tenant shall repair any damage to the Building which results fromTenant’s removal of any Permitted Alteration and any improvements and/or Tenant’s equipment, fixtures, and components. Such repair and restoration shallinclude causing the Premises to be brought into compliance with all applicable building codes and laws in effect at the time of the removal to the extent suchcompliance is necessitated by the repair and restoration work. D. Failure to Surrender: If the Premises are not surrendered at the Expiration Date or sooner termination of this Lease in the condition required by thisSection 6, Tenant shall be deemed in a holdover tenancy pursuant to this Section 6.C and Tenant shall indemnify, defend, and hold Landlord harmlessagainst loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeedingtenant founded on such delay and costs incurred by Landlord in returning the Premises to the required condition, plus interest at the Agreed Interest Rate. Anyholding over after the termination or Expiration Date with Landlord’s express written consent, shall be construed as month-to-month tenancy, terminable onthirty (30) days written notice from either party, and Tenant shall pay as Base Monthly Rent to Landlord a rate equal to one hundred twenty five percent(125%) of the Base Monthly Rent due in the month preceding the termination or Expiration Date, plus all other amounts payable by Tenant under this Lease.Any holding over shall otherwise be on the terms and conditions herein specified, except those provisions relating to the Lease Term and any options to extendor renew, which provisions shall be of no further force and effect following the expiration of the applicable exercise period. If Tenant remains in possession ofthe Premises after the Expiration Date or sooner termination of this Lease without Landlord’s consent, Tenant’s continued possession shall be on the basis of atenancy at sufferance and Tenant shall pay as rent during the holdover period an amount equal to one hundred fifty percent (150%) of the Base Monthly Rentdue in the month preceding the termination or Expiration Date, plus all other amounts payable by Tenant under this Lease. This provision shall survive thetermination or expiration of the Lease. Page 77. ALTERATIONS AND ADDITIONS: A. Tenant’s Alterations: Tenant shall not make, or suffer to be made, any alteration or addition to the Premises (“Alterations”), or any part thereof,without obtaining Landlord’s prior written consent and delivering to Landlord the proposed architectural and structural plans for all such Alterations at leastfifteen (15) days prior to the start of construction. If such Alterations affect the structure of the Building, Tenant additionally agrees to reimburse Landlord itsreasonable out-of-pocket costs incurred in reviewing Tenant’s plans. After obtaining Landlord’s consent, which consent shall state whether or not Landlordwill require Tenant to remove such Alteration at the expiration or earlier termination of this Lease, Tenant shall not proceed to make such Alterations untilTenant has obtained all required governmental approvals and permits. Tenant agrees to provide Landlord: (i) written notice of the anticipated and actual start-date of the work, (ii) a complete set of half-size (15” X 21”) vellum as-built drawings, and (iii) a certificate of occupancy for the work upon completion of theAlterations. All Alterations shall be constructed in compliance with all applicable building codes and laws including, without limitation, the Americans withDisabilities Act of 1990 as amended from time to time. Upon the Expiration Date, all Alterations, except movable furniture and trade fixtures, shall become apart of the realty and belong to Landlord but shall nevertheless be subject to removal by Tenant as provided in Section 6 above. Alterations which are notdeemed as trade fixtures include heating, lighting, electrical systems, air conditioning, walls, carpeting, or any other installation which has become an integralpart of the Premises. All Alterations shall be maintained, replaced or repaired by Tenant at its sole cost and expense. Notwithstanding the foregoing, Tenantshall be entitled, without obtaining Landlord’s consent, to make Alterations which do not affect the structure of the Building and which do not cost more thanOne Hundred Thousand Dollars ($100,000.00) per Alteration (“Permitted Alteration”); provided, however, that Tenant shall still be required to comply with allother provisions of this paragraph, and such Permitted Alterations are subject to removal by Tenant at Landlord’s election pursuant to Section 6.C above at theexpiration or earlier termination of the Lease. Tenant shall not be required to seek Landlord’s consent with respect to any replacements, modifications, retrofits,or upgrades of Tenant’s equipment, fixtures, and components, provided that any work or installation with respect to the foregoing shall otherwise be carriedout in compliance with this Lease. B. Free From Liens: Tenant shall keep the Premises free from all liens arising out of work performed, materials furnished, or obligations incurred byTenant or claimed to have been performed for Tenant. In the event Tenant fails to discharge any such lien within ten (10) days after receiving notice of thefiling, Landlord shall be entitled to discharge the lien at Tenant’s expense and all resulting costs incurred by Landlord, including attorney’s fees shall be duefrom Tenant as additional rent. C. Compliance With Governmental Regulations: The term Laws or Governmental Regulations shall include all federal, state, county, city orgovernmental agency laws, statutes, ordinances, standards, rules, requirements, or orders now in force or hereafter enacted, promulgated, or issued. The termalso includes government measures regulating or enforcing public access, traffic mitigation, occupational, health, or safety standards for Page 8employers, employees, landlords, or tenants. Tenant, at Tenant’s sole expense shall make all repairs, replacements, alterations, or improvements needed tocomply with all Governmental Regulations. The judgment of any court of competent jurisdiction or the admission of Tenant in any action or proceedingagainst Tenant (whether Landlord be a party thereto or not) that Tenant has violated any such law, regulation or other requirement in its use of the Premisesshall be conclusive of that fact as between Landlord and Tenant. 8. MAINTENANCE OF PREMISES: A. Landlord’s Obligations: Landlord at its sole cost and expense, shall maintain in good condition, order, and repair, and replace as and whennecessary, the foundation, exterior load bearing walls and roof structure of the Building. B. Tenant’s Obligations: Tenant shall clean, maintain, repair and replace when necessary the Premises and every part thereof through regularinspections and servicing, including but not limited to: (i) all plumbing and sewage facilities, (ii) all heating ventilating and air conditioning facilities andequipment, (iii) all fixtures, interior walls floors, carpets and ceilings, (iv) all windows, door entrances, plate glass and glazing systems including caulking,and skylights, (v) all electrical facilities and equipment, (vi) all automatic fire extinguisher equipment, (vii) the parking lot and all underground utilityfacilities servicing the Premises, (viii) the roof membrane system, and (ix) all waterscape, landscaping and shrubbery. All wall surfaces and floor tile are to bemaintained in an as good a condition as when Tenant took possession free of holes, gouges, or defacements. With respect to items (ii) and (viii) above, Tenantshall provide Landlord a copy of a service contract between Tenant and a licensed service contractor providing for periodic maintenance of all such systems orequipment in conformance with the manufacturer’s recommendations. Tenant shall provide Landlord a copy of such preventive maintenance contracts andpaid invoices for the recommended work if requested by Landlord. If as a part of Tenant’s fulfillment of its maintenance obligations during the last five (5)years of the Lease Term, a roof replacement to the Premises is paid for by Tenant, Landlord shall reimburse Tenant for the cost of the replacement less the sumof (i) Fifty Thousand Dollars ($50,000.00) plus (ii) that portion of the cost over $50,000.00 equal to the product of such cost multiplied by a fraction, thenumerator of which is the number of years remaining in the Lease Term, the denominator of which is the useful life (in years) of the roof replacement. C. Waiver of Liability: Failure by Landlord to perform any defined services, or any cessation thereof, when such failure is caused by accident,breakage, repairs, strikes, lockout or other labor disturbances or labor disputes of any character or by any other cause, similar or dissimilar, shall not renderLandlord liable to Tenant in any respect, including damages to either person or property, nor be construed as an eviction of Tenant, nor cause an abatement ofrent, nor relieve Tenant from fulfillment of any covenant or agreement hereof. Should any equipment or machinery utilized in supplying the services listedherein break down or for any cause cease to function properly, upon receipt of written notice from Tenant of any deficiency or failure of any services,Landlord shall use reasonable diligence to repair the same promptly, but Tenant shall have no right to terminate this Lease and shall have no claim for rebate ofrent or damages on account of any interruptions in service occasioned thereby or resulting therefrom. Tenant waives the Page 9provisions of California Civil Code Sections 1941 and 1942 concerning the Landlord’s obligation of tenantability and Tenant’s right to make repairs anddeduct the cost of such repairs from the rent. Landlord shall not be liable for a loss of or injury to person or property, however occurring, through or inconnection with or incidental to furnishing, or its failure to furnish, any of the foregoing. 9. HAZARD INSURANCE: A. Tenant’s Use: Tenant shall not use or permit the Premises, or any part thereof, to be used for any purpose other than that for which the Premises arehereby leased; and no use of the Premises shall be made or permitted, nor acts done, which will cause an increase in premiums or a cancellation of anyinsurance policy covering the Premises or any part thereof, nor shall Tenant sell or permit to be sold, kept, or used in or about the Premises, any articleprohibited by the standard form of fire insurance policies. Tenant shall, at its sole cost, comply with all requirements of any insurance company ororganization necessary for the maintenance of reasonable fire and public liability insurance covering the Premises and appurtenances. B. Landlord’s Insurance: Landlord agrees to purchase and keep in force fire, extended coverage insurance in an amount equal to the replacement costof the Building (not including any Tenant Improvements or Alterations paid for by Tenant from sources other than the Work Allowance) as determined byLandlord’s insurance company’s appraisers. If commercially available and carried by other owners of commercial properties in the area, such fire andproperty damage insurance may be endorsed to cover loss caused by such additional perils against which Landlord may elect to insure, including earthquakeand/or flood (if available at commercially reasonable rates), and shall contain reasonable deductibles which, in the case of earthquake and flood insurancemay be up to fifteen percent (15%) of the replacement value of the property. Additionally Landlord may maintain a policy of (i) commercial general liabilityinsurance insuring Landlord (and such others designated by Landlord) against liability for personal injury, bodily injury, death and damage to propertyoccurring or resulting from an occurrence in, on or about the Premises or Project in an amount as Landlord determines is reasonably necessary for itsprotection, and (ii) rental lost insurance covering a twelve (12) month period. Tenant agrees to pay Landlord as additional rent, on demand, the full cost ofsaid insurance as evidenced by insurance billings to Landlord, and in the event of damage covered by said insurance, the amount of any deductible undersuch policy. Payment shall be due to Landlord within ten (10) days after written invoice to Tenant. It is understood and agreed that Tenant’s obligation underthis Section will be prorated to reflect the Lease Commencement and Expiration Dates. C. Tenant’s Insurance: Tenant agrees, at its sole cost, to insure its personal property, Tenant Improvements (for which it has paid from sources otherthan the Work Allowance), and Alterations for their full replacement value (without depreciation) and to obtain worker’s compensation and public liability andproperty damage insurance for occurrences within the Premises with a combined single limit of not less than Five Million Dollars ($5,000,000.00). Tenant’sliability insurance shall be primary insurance containing a cross-liability endorsement, and shall provide coverage on an “occurrence” rather than on a “claimsmade” basis. Tenant shall name Landlord and Landlord’s lender as an additional insured and shall Page 10deliver a copy of the policies and renewal certificates to Landlord. All such policies shall provide for thirty (30) days’ prior written notice to Landlord of anycancellation, termination, or reduction in coverage. D. Waiver: Landlord and Tenant hereby waive all rights each may have against the other on account of any loss or damage sustained by Landlord orTenant, as the case may be, or to the Premises or its contents, which may arise from any risk covered by their respective insurance policies (or which wouldhave been covered had such insurance policies been maintained in accordance with this Lease) as set forth above. The Parties shall use their reasonable effortsto obtain from their respective insurance companies a waiver of any right of subrogation which said insurance company may have against Landlord orTenant, as the case may be. 10. TAXES: Tenant shall be liable for and shall pay as additional rental, prior to delinquency, the following: (i) all taxes and assessments levied againstTenant’s personal property and trade or business fixtures; (ii) all real estate taxes and assessment installments or other impositions or charges which may belevied on the Premises or upon the occupancy of the Premises, including any substitute or additional charges which may be imposed applicable to the LeaseTerm; and (iii) real estate tax increases due to an increase in assessed value resulting from a sale, transfer or other change of ownership of the Premises as itappears on the City and County tax bills during the Lease Term. Tenant’s obligation under this Section shall be prorated to reflect the Lease Commencementand Expiration Dates. If, at any time during the Lease Term a tax, excise on rents, business license tax or any other tax, however described, is levied orassessed against Landlord as a substitute or addition, in whole or in part, for taxes assessed or imposed on land or Buildings, Tenant shall pay and dischargeits pro rata share of such tax or excise on rents or other tax before it becomes delinquent; except that this provision is not intended to cover net income taxes,inheritance, gift or estate tax imposed upon Landlord. In the event that a tax is placed, levied, or assessed against Landlord and the taxing authority takes theposition that Tenant cannot pay and discharge its pro rata share of such tax on behalf of Landlord, then at Landlord’s sole election, Landlord may increase theBase Monthly Rent by the exact amount of such tax and Tenant shall pay such increase. If by virtue of any application or proceeding brought by Landlord,there results a reduction in the assessed value of the Premises during the Lease Term, Tenant agrees to pay Landlord a fee consistent with the fees charged by athird party appeal firm for such services. 11. UTILITIES: Tenant shall pay directly to the providing utility all water, gas, electric, telephone, and other utilities supplied to the Premises. Landlordshall not be liable for loss of or injury to person or property, however occurring, through or in connection with or incidental to furnishing or the utilitycompany’s failure to furnish utilities to the Premises, and in such event Tenant shall not be entitled to abatement or reduction of any portion of Base MonthlyRent or any other amount payable under this Lease. 12. TOXIC WASTE AND ENVIRONMENTAL DAMAGE: A. Tenant’s Responsibility: Without the prior written consent of Landlord, Tenant or Tenant’s agents, employees, contractors and invitees (“Tenant’sAgents”) shall not bring, use, or permit upon the Premises, or generate, Page 11create, release, emit, or dispose (nor permit any of the same) from the Premises any chemicals, toxic or hazardous gaseous, liquid or solid materials or waste,including without limitation, material or substance having characteristics of ignitability, corrosivity, reactivity, or toxicity or substances or materials which arelisted on any of the Environmental Protection Agency’s lists of hazardous wastes or which are identified in Division 22 Title 26 of the California Code ofRegulations as the same may be amended from time to time or any wastes, materials or substances which are or may become regulated by or under theauthority of any applicable local, state or federal laws, judgments, ordinances, orders, rules, regulations, codes or other governmental restrictions, guidelinesor requirements (“Hazardous Materials”) except for those substances customary in typical office and data center uses for which no consent shall be required.In order to obtain consent, Tenant shall deliver to Landlord its written proposal describing the toxic material to be brought onto the Premises, measures to betaken for storage and disposal thereof, safety measures to be employed to prevent pollution of the air, ground, surface and ground water. Landlord’s approvalmay be withheld in its reasonable judgment_. In the event Landlord consents to Tenant’s use of Hazardous Materials on the Premises or such consent is notrequired, Tenant represents and warrants that it shall comply with all Governmental Regulations applicable to Hazardous Materials including doing thefollowing: (i) adhere to all reporting and inspection requirements imposed by Federal, State, County or Municipal laws, ordinances or regulations and willprovide Landlord a copy of any such reports or agency inspections; (ii) obtain and provide Landlord copies of all necessary permits required for the use andhandling of Hazardous Materials on the Premises; (iii) enforce Hazardous Materials handling and disposal practices consistent with industry standards; (iv)surrender the Premises free from any Hazardous Materials arising from Tenant’s bringing, using, permitting, generating, creating, releasing, emitting ordisposing of Hazardous Materials; and (v) properly close the facility with regard to Hazardous Materials including the removal or decontamination of anyprocess piping, mechanical ducting, storage tanks, containers, or trenches which have come into contact with Hazardous Materials and obtain a closurecertificate from the local administering agency within 30 days following the Expiration Date. Provided Tenant complies with the provisions of this Section 12 and any other applicable Sections of the Lease, Landlord hereby consents to Tenant’s use ofdiesel and the presence of diesel tanks on the Premises, provided such diesel tanks are either above-grade or in existing appropriate vaults on the Premises. B. Tenant’s Indemnity Regarding Hazardous Materials: Tenant shall, at its sole cost and expense, comply with all laws pertaining to, and shallwith counsel reasonably acceptable to Landlord, indemnify, defend and hold harmless Landlord and Landlord’s trustees, shareholders, directors, officers,employees, partners, affiliates, and agents from, any claims, liabilities, costs or expenses incurred or suffered arising from the bringing, using, permitting,generating, emitting or disposing of Hazardous Materials by Tenant, Tenant’s Agents, or a third party whose presence upon the Premises are related toTenant’s use and occupancy thereof, through the surface soils of the Premises during the Lease Term or the violation of any Governmental Regulation orenvironmental law, by Tenant or Tenant’s Agents. Tenant’s indemnification, defense, and hold Page 12harmless obligations include, without limitation, the following: (i) claims, liability, costs or expenses resulting from or based upon administrative, judicial(civil or criminal) or other action, legal or equitable, brought by any private or public person under common law or under the Comprehensive EnvironmentalResponse, Compensation and Liability Act of 1980 as amended (“CERCLA”), the Resource Conservation and Recovery Act of 1980 (“RCRA”) or any otherFederal, State, County or Municipal law, ordinance or regulation now or hereafter in effect; (ii) claims, liabilities, costs or expenses pertaining to theidentification, monitoring, cleanup, containment, or removal of Hazardous Materials from soils, riverbeds or aquifers including the provision of an alternativepublic drinking water source; (iii) all costs of defending such claims; (iv) losses attributable to diminution in the value of the Premises or the Building; (v)loss or restriction of use of rentable space in the Building; (vi) Adverse effect on the marketing of any space in the Building; and (vi) all other liabilities,obligations, penalties, fines, claims, actions (including remedial or enforcement actions of any kind and administrative or judicial proceedings, orders orjudgments), damages (including consequential and punitive damages), and costs (including attorney, consultant, and expert fees and expenses) resulting fromthe release or violation. This Section 12.B shall survive the expiration or termination of this Lease. C. Actual Release by Tenant: Tenant agrees to notify Landlord of any lawsuits or orders which relate to the remedying of or actual release ofHazardous Materials on or into the soils or ground water at or under the Premises. Tenant shall also provide Landlord all notices required by Section25359.7(b) of the Health and Safety Code and all other notices required by law to be given to Landlord in connection with Hazardous Materials. Withoutlimiting the foregoing, Tenant shall also deliver to Landlord, within twenty (20) days after receipt thereof, any written notices from any governmental agencyalleging a material violation of, or material failure to comply with, any federal, state or local laws, regulations, ordinances or orders, the violation of which orfailure to comply with poses a foreseeable and material risk of contamination of the ground water or injury to humans (other than injury solely to Tenant orTenant’s Agents. In the event of any release on or into the Premises or into the soil or ground water under the Premises, the Building or the Project of anyHazardous Materials used, treated, stored or disposed of by Tenant or Tenant’s Agents, Tenant agrees to comply, at its sole cost, with all laws, regulations,ordinances and orders of any federal, state or local agency relating to the monitoring or remediation of such Hazardous Materials. In the event of any suchrelease of Hazardous Materials Tenant shall immediately give verbal and follow-up written notice of the release to Landlord, and Tenant agrees to meet andconfer with Landlord and its Lender to attempt to eliminate and mitigate any financial exposure to such Lender and resultant exposure to Landlord underCalifornia Code of Civil Procedure Section 736(b) as a result of such release, and promptly to take reasonable monitoring, cleanup and remedial steps given,inter alia, the historical uses to which the Property has and continues to be used, the risks to public health posed by the release, the then available technologyand the costs of remediation, cleanup and monitoring, consistent with acceptable customary practices for the type and severity of such contamination and allapplicable laws. Nothing in the preceding sentence shall eliminate, modify or reduce the obligation of Tenant under 12.B of this Lease to indemnify, defendand hold Page 13Landlord harmless from any claims liabilities, costs or expenses incurred or suffered by Landlord. Tenant shall provide Landlord prompt written notice ofTenant’s monitoring, cleanup and remedial steps. In the absence of an order of any federal, state or local governmental or quasi-governmental agency relating to the cleanup, remediation or other responseaction required by applicable law, any dispute arising between Landlord and Tenant concerning Tenant’s obligation to Landlord under this Section 12.Cconcerning the level, method, and manner of cleanup, remediation or response action required in connection with such a release of Hazardous Materials shallbe resolved by mediation and/or arbitration pursuant to this Lease. D. Environmental Monitoring: Landlord and its agents shall have the right to inspect, investigate, sample and monitor the Premises including any air,soil, water, ground water or other sampling or any other testing, digging, drilling or analysis to determine whether Tenant is complying with the terms of thisSection 12. If Landlord discovers that Tenant is not in compliance with the terms of this Section 12, any such costs incurred by Landlord, includingattorneys’ and consultants’ fees, shall be due and payable by Tenant to Landlord within five (5) days following Landlord’s written demand therefore. 13. TENANT’S DEFAULT: The occurrence of any of the following shall constitute a material default and breach of this Lease by Tenant: (i) Tenant’sfailure to pay the Base Monthly Rent including additional rent or any other payment due under this Lease by the date such amount is due, where such failurecontinues for five (5) business days after Landlord’s delivery of written notice, (ii) the abandonment of the Premises by Tenant for a consecutive period ofninety (90) days or longer; (iii) Tenant’s failure to observe and perform any other required provision of this Lease, where such failure continues for thirty (30)days after written notice from Landlord; provided, however, that if the nature of the default is such that it cannot reasonably be cured within the 30-dayperiod, Tenant shall not be deemed in default if it commences within such period to cure, and thereafter diligently prosecutes the same to completion; (iv)Tenant’s making of any general assignment for the benefit of creditors; (v) the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt orof a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same isdismissed after the filing); (vi) the appointment of a trustee or receiver to take possession of substantially all of Tenant’s assets located at the Premises or ofTenant’s interest in this Lease, where possession is not restored to Tenant within thirty (30) days; or (vii) the attachment, execution or other judicial seizure ofsubstantially all of Tenant’s assets located at the Premises or of Tenant’s interest in this Lease, where such seizure is not discharged within thirty (30) days. A. Remedies: In the event of any such default by Tenant, then in addition to other remedies available to Landlord at law or in equity, Landlord shallhave the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the eventLandlord elects to so terminate this Lease, Landlord may recover from Tenant all the following: (i) the worth at time of award of any unpaid rent which hadbeen earned at the time of such termination; (ii) the worth at time of award of the amount by which the unpaid rent which would have been earned aftertermination until the time of award exceeds the amount of such rental Page 14loss for the same period that Tenant proves could have been reasonably avoided; (iii) the worth at time of award of the amount by which the unpaid rent for thebalance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; (iv) any otheramount necessary to compensate Landlord for all detriment proximately caused by.-Tenant’s failure to perform its obligations under this Lease, or which in theordinary course of things would be likely to result therefrom; including the following: (x) expenses for repairing, altering or remodeling the Premises forpurposes of reletting, (y) broker’s fees, advertising costs or other expenses of reletting the Premises and (z) costs of carrying the Premises such as taxes,insurance premiums, utilities and security precautions; and (v) at Landlord’s election, such other amounts in addition to or in lieu of the foregoing as may bepermitted by applicable California law. The computation of the damages pursuant to the foregoing shall include a credit for that portion of any rent to whichLandlord is entitled pursuant to a subsequent lease which, for the remaining balance of the Lease Term under this Lease, is higher than the Base Monthly Rentwhich would be due hereunder during such period. The term “rent”, as used herein, is defined as the minimum monthly installments of Base Monthly Rentand all other sums required to be paid by Tenant pursuant to this Lease, all such other sums being deemed as additional rent due hereunder. As used in (i) and(ii) above, “worth at the time of award” shall be computed by allowing interest at a rate equal to the discount rate of the Federal Reserve Bank of San Franciscoplus five (5%) percent per annum. As used in (iii) above, “worth at the time of award” shall be computed by discounting such amount at the discount rate ofthe Federal Reserve Bank of San Francisco at the time of award plus one (1%) percent. B. Right to Re-enter: In the event of any such default by Tenant, Landlord shall have the right, after terminating this Lease, to re-enter the Premises andremove all persons and property. Such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant,and disposed of by Landlord in any manner permitted by law. C. Abandonment: If Landlord does not elect to terminate this Lease as provided in Section 13.A or 13.B above, then the provisions of California CivilCode Section 1951.4, (Landlord may continue the lease in effect after Tenant’s breach and abandonment and recover rent as it becomes due if Tenant has aright to sublet and assign, subject only to reasonable limitations) as amended from time to time, shall apply and Landlord may from time to time, withoutterminating this Lease, either recover all rental as it becomes due or relet the Premises or any part thereof for such term or terms and at such rental or rentalsand upon such other terms and conditions as Landlord in its sole discretion may deem advisable, with the right to make alterations and repairs to thePremises. In the event that Landlord elects to so relet, rentals received by Landlord from such reletting shall be applied in the following order to: (i) the paymentof any indebtedness other than Base Monthly Rent due hereunder from Tenant to Landlord; (ii) the payment of any cost of such reletting; (iii) the payment ofthe cost of any alterations and repairs to the Premises; and (iv) the payment of Base Monthly Rent due and unpaid hereunder. The residual rentals, if any,shall be held by Landlord and applied in payment of future Base Monthly Rent as the same may become due and payable hereunder. Landlord shall theobligation to market the space but shall have no obligation to relet the Premises Page 15following a default if Landlord has other comparable available space within the Building or Project. In the event the portion of rentals received from suchreletting which is applied to the payment of rent hereunder during any month be less than the rent payable during that month by Tenant hereunder, then Tenantshall pay such deficiency to Landlord immediately upon demand. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord,as soon as ascertained, any costs and expenses incurred by Landlord in such reletting or in making such alterations and repairs not covered by the rentalsreceived from such reletting. D. No Termination: Landlord’s re-entry or taking possession of the Premises pursuant to 13.B or 13.C shall not be construed as an election toterminate this Lease unless written notice of such intention is given to Tenant or unless the termination is decreed by a court of competent jurisdiction.Notwithstanding any reletting without termination by Landlord because of any default by Tenant, Landlord may at any time after such reletting elect toterminate this Lease for any such default. E. Non-Waiver: Landlord may accept Tenant’s payments without waiving any rights under this Lease, including rights under a previously servednotice of default. No payment by Tenant or receipt by Landlord of a lesser amount than any installment of rent due shall be deemed as other than payment onaccount of the amount due. If Landlord accepts payments after serving a notice of default, Landlord may nevertheless commence and pursue an action toenforce rights and remedies under the previously served notice of default without giving Tenant any further notice or demand. Furthermore, the Landlord’sacceptance of rent from the Tenant when the Tenant is holding over without express written consent does not convert Tenant’s Tenancy from a tenancy atsufferance to a month to month tenancy. No waiver of any provision of this Lease shall be implied by any failure of Landlord to enforce any remedy for theviolation of that provision, even if that violation continues or is repeated. Any waiver by Landlord of any provision of this Lease must be in writing. Suchwaiver shall affect only the provision specified and only for the time and in the manner stated in the writing. No delay or omission in the exercise of any rightor remedy by Landlord shall impair such right or remedy or be construed as a waiver thereof by Landlord. No act or conduct of Landlord, including, withoutlimitation, the acceptance of keys to the Premises, shall constitute acceptance of the surrender of the Premises by Tenant before the Expiration Date. Onlywritten notice from Landlord to Tenant of acceptance shall constitute such acceptance of surrender of the Premises. Landlord’s consent to or approval of anyact by Tenant which requires Landlord’s consent or approvals shall not be deemed to waive or render unnecessary Landlord’s consent to or approval of anysubsequent act by Tenant. F. Performance by Landlord: If Tenant fails to perform any obligation required under this Lease or by law or governmental regulation, Landlord in itssole discretion may, without notice, without waiving any rights or remedies and without releasing Tenant from its obligations hereunder, perform suchobligation, in which event Tenant shall pay Landlord as additional rent all sums reasonably paid by Landlord in connection with such substituteperformance, including interest at the Agreed Interest Rate (as defined in Section 19.J) within ten (10) days of Landlord’s written notice for such payment. Page 16G. Habitual Default: The provisions of Section 13 notwithstanding, the Parties agree that if Tenant shall have materially defaulted in the performanceof any (but not necessarily the same) term or condition of this Lease for five (5) or more times during any twelve (12) month period during the Lease Term,then such conduct shall, at the election of the Landlord, represent a separate event of default which cannot be cured by Tenant. Tenant acknowledges that thepurpose of this provision is to prevent repetitive material defaults by Tenant, which work a hardship upon Landlord and deprive Landlord of Tenant’s timelyperformance under this Lease. 14. LANDLORD’S LIABILITY: A. Limitation on Landlord’s Liability: In the event of Landlord’s failure to perform any of its covenants or agreements under this Lease, Tenantshall give Landlord written notice of such failure and shall give Landlord thirty (30) days to cure or commence to cure such failure prior to any claim forbreach or resultant damages, provided, however, that: (i) if the nature of the default is such that it cannot reasonably be cured within the 30-day period,Landlord shall not be deemed in default if it commences within such period to cure, and thereafter diligently prosecutes the same to completion; and (ii) in theevent of emergency, Landlord shall use its best efforts to cure or commence to cure such failure as soon as reasonably possible. In addition, upon any suchfailure by Landlord, Tenant shall give notice by registered or certified mail to any person or entity with a security interest in the Premises (“Mortgagee”) thathas provided Tenant with notice of its interest in the Premises, and shall provide Mortgagee a reasonable opportunity to cure such failure. Tenant agrees thateach of the Mortgagees to whom this Lease has been assigned is an expressed third-party beneficiary hereof. Tenant waives any right under California CivilCode Section 1950.7 or any other present or future law to the collection of any payment or deposit from Mortgagee or any purchaser at a foreclosure sale ofMortgagee’s interest unless Mortgagee or such purchaser shall have actually received and not refunded the applicable payment or deposit. Tenant Furtherwaives any right to terminate this Lease and to vacate the Premises on Landlord’s default under this Lease. Tenant’s sole remedy on Landlord’s default is anaction for damages or injunctive or declaratory relief. B. Limitation on Tenant’s Recourse: If Landlord is a corporation, trust, partnership, joint venture, unincorporated association or other form ofbusiness entity, then (i) the obligations of Landlord shall not constitute personal obligations of the officers, directors, trustees, partners, joint venturers,members, owners, stockholders, or other principals or representatives except to the extent of their interest in the Premises. Tenant shall have recourse only tothe interest of Landlord in the Premises or for the satisfaction of the obligations of Landlord and shall not have recourse to any other assets of Landlord for thesatisfaction of such obligations. Notwithstanding the foregoing, the provisions of this Section 14.B shall not apply to a default by Landlord in the return of theSecurity Deposit. C. Indemnification of Landlord: As a material part of the consideration rendered to Landlord, Tenant hereby waives all claims against Landlord fordamages to goods, wares and merchandise, and all other personal property in, upon or about said Premises and for injuries to persons in or about saidPremises, from any cause arising at any time to the fullest extent permitted by Page 17law, and Tenant shall indemnify, defend with counsel reasonably acceptable to Landlord and hold Landlord, and their shareholders, directors, officers,trustees, employees, partners, affiliates- and agents from any claims, liabilities, costs or expenses incurred or suffered arising from the use of occupancy ofthe Premises or any part of the Project by Tenant or Tenant’s Agents, the acts or omissions of Tenant or Tenant’s Agents, Tenant’s breach of this Lease, or anydamage or injury to person or property from any cause, except to the extent caused by the willful misconduct or active negligence of Landlord or from thefailure of Tenant to keep the Premises in good condition and repair as herein provided, except to the extent due to the gross negligence or willful misconduct ofLandlord. Further, in the event Landlord is made party to any litigation due to the acts or omission of Tenant and Tenant’s Agents, Tenant will indemnify,defend (with counsel reasonably acceptable to Landlord) and hold Landlord harmless from any such claim or liability including Landlord’s costs andexpenses and reasonable attorney’s fees incurred in defending such claims. 15. DESTRUCTION OF PREMISES: A. Landlord’s Obligation to Restore: In the event of a destruction of the Premises during the Lease Term Landlord shall repair the same to a similarcondition to that which existed prior to such destruction. Such destruction shall not annul or void this Lease; however, Tenant shall be entitled to aproportionate reduction of Base Monthly Rent from the date of destruction until the repairs are sufficiently complete to allow Tenant to conduct its businesswithout material interference, such proportionate reduction to be based upon the extent to which the repairs interfere with Tenant’s business in the Premises, asreasonably determined by Landlord. In no event shall Landlord be required to replace or restore Alterations, Tenant Improvements paid for by Tenant fromsources other than the Work Allowance or Tenant’s fixtures or personal property. With respect to a destruction which Landlord is obligated to repair or mayelect to repair under the terms of this Section, Tenant waives the provisions of Section 1932, and Section 1933, Subdivision 4, of the Civil Code of the Stateof California, and any other similarly enacted statute, and the provisions of this Section 15 shall govern in the case of such destruction. B. Limitations on Landlord’s Restoration Obligation: Notwithstanding the provisions of Section 15.A, Landlord shall have no obligation to repair,or restore the Premises if any of the following occur: (i) if the repairs cannot be made in one hundred eighty (180) days from the date of receipt of allgovernmental approvals necessary under the laws and regulations of State, Federal, County or Municipal authorities to effect such repairs, as reasonablydetermined by Landlord, (ii) if the holder of the first deed of trust or mortgage encumbering the Building elects not to permit the insurance proceeds payableupon damage or destruction to be used for such repair or restoration, (iii) the damage or destruction is not fully covered by the insurance maintained byLandlord and any amounts Tenant elects, in its sole discretion, to pay towards the cost of repair or restoration, (iv) the damage or destruction occurs in the lasttwenty four (24) months of the Lease Term, (v) Tenant is in default pursuant to the provisions of Section 13, or (vi) Tenant has vacated the Premises for morethan one hundred twenty (120) days. In any such event Landlord may elect either to (i) complete the repair or restoration, or (ii) terminate this Lease byproviding Tenant written notice of its election within sixty (60) days following the damage or Page 18destruction. If the repairs cannot be made within one hundred eighty (180) days from the date of receipt of all governmental approvals necessary under thelaws and regulations of State, Federal, County or Municipal authorities to effect such repairs, Tenant may elect to terminate this Lease by providing Landlordwritten notice of its election within sixty (60) days following the date of the damage or destruction. 16. CONDEMNATION: If any part of the Premises shall be taken for any public or quasi-public use, under any statute or by right of eminent domain orprivate purchase in lieu thereof, and only a part thereof remains which is susceptible of occupation hereunder, this Lease shall, as to the part so taken,terminate as of the day before title vests in the condemnor or purchaser (“Vesting Date”) and Base Monthly Rent payable hereunder shall be adjusted so thatTenant is required to pay for the remainder of the Lease Term only such portion of Base Monthly Rent as the value of the part remaining after such takingbears to the value of the entire Premises prior to such taking. Further, in the event of such partial taking, Landlord shall have the option to terminate this Leaseas of the Vesting Date. If all of the Premises or such part thereof be taken so that there does not remain a portion susceptible for occupation hereunder, thisLease shall terminate on the Vesting Date. If part or all of the Premises be taken, all compensation awarded upon such taking shall go to Landlord; and Tenantshall have no claim thereto; except Landlord shall cooperate with Tenant, without cost to Landlord, to recover compensation for damage to or taking of anyAlterations, Tenant Improvements paid for by Tenant from sources other than the Work Allowance, or for Tenant’s moving costs. Tenant hereby waives theprovisions of California Code of Civil Procedures Section 1265.130 and any other similarly enacted statue, and the provisions of this Section 16 shall governin the case of a taking. 17. ASSIGNMENT OR SUBLEASE: A. Consent by Landlord: Except as specifically provided in this Section 17.E, Tenant may not assign, sublet, hypothecate, or allow a third party touse the Premises without the express written consent of Landlord. In the event Tenant desires to assign this Lease or any interest herein or sublet the Premises orany part thereof, Tenant shall deliver to Landlord (i) executed counterparts of any agreement and of all ancillary agreements with the proposedassignee/subtenant, (ii) current financial statements of the transferee covering the preceding three years, (iii) the nature of the proposed transferee’s business tobe carried on in the Premises, (iv) a statement outlining all consideration to be given on account of the Transfer, and (v) a current financial statement ofTenant. Landlord may condition its approval of any Transfer on receipt of a certification from both Tenant and the proposed transferee of all consideration tobe paid to Tenant in connection with such Transfer. At Landlord’s request, Tenant shall also provide additional information reasonably required by Landlordto determine whether it will consent to the proposed assignment or sublease. Landlord shall have a fifteen (15) day period following receipt of all the foregoingwithin which to notify Tenant in writing that Landlord elects to: (i) terminate this Lease in the event the proposed sublease or assignment is for substantially allof space in the Premises; (ii) permit Tenant to assign or sublet such space to the named assignee/subtenant on the terms and conditions set forth in the notice;or (iii) refuse consent. If Landlord should fail to notify Tenant in writing of such election within the 15-day period, Landlord shall be deemed to have electedoption (iii) above. In the event Landlord elects option (i) Page 19above, this Lease shall expire with respect to such part of the Premises on the date upon which the proposed sublease or transfer was to commence, and fromsuch date forward, Base Monthly Rent and Tenant’s Allocable Share of all other costs and charges shall be adjusted based upon the proportion that therentable area of the Premises remaining bears to the total rentable area of the Building. In the event Landlord elects option (ii) above, Landlord’s written consentto the proposed assignment or sublease shall not be unreasonably withheld, provided and upon the condition that: (i) the proposed assignee or subtenant isengaged in a business that is limited to the use expressly permitted under this Lease; (ii) the proposed assignee or subtenant is a company with sufficientfinancial worth and management ability to undertake the financial obligation of this Lease and Landlord has been furnished with reasonable proof thereof; (iii)the proposed assignment or sublease is in form reasonably satisfactory to Landlord; and (iv) Tenant reimburses Landlord on demand for any reasonable coststhat may be incurred by Landlord in connection with said assignment or sublease, including the costs of making investigations as to the acceptability of theproposed assignee or subtenant and legal costs incurred in connection with the granting of any requested consent. Additionally, Tenant acknowledges thatLandlord may condition its consent to any assignment or sublease upon the continued guaranty of the Lease by Guarantor as defined in Lease Section 20below. In the event all or any one of the foregoing conditions are not satisfied, Landlord shall be considered to have acted reasonably if it withholds its consent. B. Assignment or Subletting Consideration: Any rent or other economic consideration realized by Tenant under any sublease and assignment, inexcess of the Base Monthly Rent payable hereunder and reasonable subletting and assignment costs (i.e., Alterations directly associated with such sublease,legal fees and real estate commissions), shall be divided and paid fifty percent (50%) to Landlord and fifty percent (50%) to Tenant. Tenant’s obligation to payover Landlord’s portion of the consideration constitutes an obligation for additional rent hereunder. The above provisions relating to Landlord’s right toterminate the Lease and relating to the allocation of excess rent are independently negotiated terms of the Lease which constitute a material inducement for theLandlord to enter into the Lease, and are agreed by the Parties to be commercially reasonable. No assignment or subletting by Tenant shall relieve it of anyobligation under this Lease. Any assignment or subletting which conflicts with the provisions hereof shall be void. C. No Release: Any assignment shall be made only if and shall not be effective until the assignee shall execute, acknowledge, and deliver to Landlordan agreement, in form and substance satisfactory to Landlord, whereby the assignee shall assume all the obligations of this Lease on the part of Tenant to beperformed or observed and shall be subject to all the covenants, agreements, terms, provisions and conditions in this Lease. Notwithstanding any suchassignment and the acceptance of rent by Landlord from any assignee, Tenant and any guarantor shall remain fully liable for the payment of Base MonthlyRent and additional rent due, and to become due hereunder, for the performance of all the covenants, agreements, terms, provisions and conditions containedin this Lease on the part of Tenant to be performed and for all acts and omissions of any licensee, assignee or any other person claiming under or through anysubtenant or assignee that shall be in violation of any of the terms and conditions of this Lease, and Page 20any such violation shall be deemed a violation by Tenant. Tenant shall indemnify, defend and hold Landlord harmless from and against all losses, liabilities,damages, costs and expenses (including reasonable attorney fees) resulting from any claims that may be made against Landlord by the proposed assignee orsubtenant or by any real estate brokers or other persons claiming compensation in connection with the proposed assignment or sublease. D. Reorganization of Tenant: The provisions of this Section 17.D shall apply if Tenant is a corporation and: (i) there is a dissolution, merger,consolidation, or other reorganization of or affecting Tenant, where Tenant is not the surviving corporation, or (ii) there is a sale or transfer to one person orentity (or to any group of related persons or entities) of stock possessing more than 50% of the total combined voting power of all classes of Tenant’s capitalstock issued, outstanding and entitled to vote for the election of directors, and after such sale or transfer of stock Tenant’s stock is no longer publicly traded.In a transaction under clause (i) the surviving corporation shall promptly execute and deliver to Landlord an agreement in form reasonably satisfactory toLandlord under which such surviving corporation assumes the obligations of Tenant hereunder, and in a transaction under clause (ii) the transferee or buyershall promptly execute and deliver to Landlord an agreement in form reasonably satisfactory to Landlord under which such transferee or buyer assumes theobligations of Tenant under the Lease. E. Permitted Transfers: Notwithstanding anything contained in this Section 17, so long as Tenant otherwise complies with the provisions of thisArticle, Tenant may enter into any of the following transfers (a “Permitted Transfer”) without Landlord’s prior consent, and Landlord shall not be entitled toterminate the Lease or to receive any part of any subrent resulting therefrom that would otherwise be due pursuant to Sections 17.A and 17.B. Tenant maysublease all or part of the Premises or assign its interest in this Lease to (i) any corporation which controls, is controlled by, or is under common control withthe original Tenant to this Lease by means of an ownership interest of more than 50%; (ii) a corporation which results from a merger, consolidation or otherreorganization in which Tenant is not the surviving corporation, so long as the surviving corporation has a net worth at the time of such assignment that isequal to or greater than the net worth of Tenant immediately prior to such transaction; and (iii) a corporation which purchases or otherwise acquires all orsubstantially all of the assets of Tenant so long as such acquiring corporation has a net worth at the time of such assignment that is equal to or greater than thenet worth of Tenant immediately prior to such transaction. “Permitted Transfers” shall also include any Business Agreements (defined below) entered into by Tenant with respect to the Premises, provided that Tenantremains in possession and control of the Premises, and provided further that any Business Affiliates (as defined below) comply in all respects with this Lease,including, without limitation, the provisions hereof related to permitted uses and legal compliance. The term “Business Agreement(s)” shall mean any license,sublease, co-location agreement (defined below), or other arrangement which permits the use or occupancy of portions of the Premises by any of Tenant’ssubsidiaries, divisions, customers, “peering” partners, and/or contractors and subcontractors (collectively, “Business Affiliates”) and/or their equipment andpersonnel. The term “Co-location Page 21agreement(s)” shall mean any agreement entered into by Tenant with another party whereby Tenant is providing (whether by cable, fiber or other form ofphysical transmission, wireless transmission, or any other mode of transmission) co-location, access, or any other form of connection to (a) the Internet, (b)any Internet successor or affiliated networking system, and/or (c) any other existing or future telecommunications, networking, or communication systems. F. Effect of Default: In the event of Tenant’s default, Tenant hereby assigns all rents due from any assignment or subletting to Landlord as security forperformance of its obligations under this Lease, and Landlord may collect such rents as Tenant’s Attorney-in-Fact, except that Tenant may collect such rentsunless a default occurs as described in Section 13 above. A termination of the Lease due to Tenant’s default shall not automatically terminate an assignment orsublease then in existence; rather at Landlord’s election, such assignment or sublease shall survive the Lease termination, the assignee or subtenant shall attornto Landlord, and Landlord shall undertake the obligations of Tenant under the sublease or assignment; except that Landlord shall not be liable for prepaidrent, security deposits or other defaults of Tenant to the subtenant or assignee, or for any acts or omissions of Tenant and Tenant’s Agents. G. Conveyance by Landlord: As used in this Lease, the term “Landlord” is defined only as the owner for the time being of the Premises, so that in theevent of any sale or other conveyance of the Premises or in the event of a master lease of the Premises, Landlord shall be entirely freed and relieved of all itscovenants and obligations hereunder, and it shall be deemed and construed, without further agreement between the Parties and the purchaser at any such saleor the master tenant of the Premises, that the purchaser or master tenant of the Premises has assumed and agreed to carry out any and all covenants andobligations of Landlord hereunder. Such transferor shall transfer and deliver Tenant’s security deposit to the purchaser at any such sale or the master tenant ofthe Premises, and thereupon the transferor shall be discharged from any further liability in reference thereto. H. Successors and Assigns: Subject to the provisions of this Section 17, the covenants and conditions of this Lease shall apply to and bind the heirs,successors, executors, administrators and assigns of all Parties hereto; and all Parties hereto comprising Tenant shall be jointly and severally liable hereunder. 18. OPTION TO EXTEND THE LEASE TERM: A. Grant and Exercise of Option: Landlord grants to Tenant, subject to the terms and conditions set forth in this Section 18.A, two (2) options (the“Options”) to extend the Lease Term for an additional term (the “Option Term”). Each Option Term shall be for a period of sixty (60) months and shall beexercised, if at all, by written notice to Landlord no earlier than eighteen (18) months prior to the date the Lease Term would expire but for such exercise but nolater than twelve (12) months prior to the date the Lease Term would expire but for such exercise, time being of the essence for the giving of such notice. IfTenant exercises the Option, all of the terms, covenants and conditions of this Lease except for the grant of additional Options pursuant to this Section,provided that Base Monthly Rent for the Premises payable by Tenant during the Option Term shall be the greater of (i) the Base Monthly Rent applicable to theperiod immediately prior to the commencement of the Option Page 22Term, and (ii) ninety five percent (95%) of the Fair Market Rental as hereinafter defined. Notwithstanding anything herein to the contrary, if Tenant is inmonetary or material non-monetary default under any of the terms, covenants or conditions of this Lease either at the time Tenant exercises the Option or at anytime thereafter prior to the commencement date of the Option Term, Landlord shall have, in addition to all of Landlord’s other rights and remedies provided inthis Lease, the right to terminate the Option upon notice to Tenant, in which event the Lease Term shall not be extended pursuant to this Section 18.A. As usedherein, the term “Fair Market Rental” is defined as the rental and all other monetary payments, including any escalations and adjustments thereto (includingwithout limitation Consumer Price Indexing) that Landlord could obtain during the Option Term from a third party desiring to lease the Premises, based uponthe current use and other potential uses of the Premises, as determined by the rents then being obtained for new leases of space comparable in age and quality tothe Premises in the same real estate submarket as the Building. Fair Market Rental shall further take into account that Tenant is in occupancy and makingfunctional use of the Premises in its then existing condition and no additional work allowance or tenant improvements shall be required of Landlord; however,Fair Market Rental shall not take into account Alterations or Tenant Improvements installed by Tenant which it has the right to remove pursuant to Section 7above. The appraisers shall be instructed that the foregoing five percent (5%) discount is intended to reduce comparable rents which include (i) brokeragecommissions, (ii) tenant improvement allowances, and (iii) vacancy costs, to account for the fact that Landlord will not suffer such costs in the event Tenantexercises its Option. B. Determination of Fair Market Rental: If Tenant exercises the Option, Landlord shall send Tenant a notice setting forth the Fair Market Rental forthe Option Term within thirty (30) days following the Exercise Date. If Tenant disputes Landlord’s determination of Fair Market Rental for the Option Term,Tenant shall, within thirty (30) days after the date of Landlord’s notice setting forth Fair Market Rental for the Option Term, send to Landlord a notice statingthat Tenant either elects to terminate its exercise of the Option, in which event the Option shall lapse and this Lease shall terminate on the Expiration Date, orthat Tenant disagrees with Landlord’s determination of Fair Market Rental for the Option Term and elects to resolve the disagreement as provided in Section18.C below. If Tenant does not send Landlord a notice as provided in the previous sentence, Landlord’s determination of Fair Market Rental shall be the BaseMonthly Rent payable by Tenant during the Option Term. If Tenant elects to resolve the disagreement as provided in Section 18.C and such procedures are notconcluded prior to the commencement date of the Option Term, Tenant shall pay to Landlord as Base Monthly Rent the Fair Market Rental as determined byLandlord in the manner provided above. If the Fair Market Rental as finally determined pursuant to Section 18.C is greater than Landlord’s determination,Tenant shall pay Landlord the difference between the amount paid by Tenant and the Fair Market Rental as so determined in Section 18.C within thirty (30)days after such determination. If the Fair Market Rental as finally determined in Section 18.C is less than Landlord’s determination, the difference between theamount paid by Tenant and the Fair Market Rental as so determined in Section 18.C shall be credited against the next installments of Base Monthly Rent duefrom Tenant to Landlord hereunder. Page 23C. Resolution of a Disagreement over the Fair Market Rental: Any disagreement regarding Fair Market Rental shall be resolved as follows: Within thirty (30) days after Tenant’s response to Landlord’s notice setting forth the Fair Market Rental, Landlord and Tenant shall meet at a mutuallyagreeable time and place, in an attempt to resolve the disagreement. If within the 30-day period referred to above, Landlord and Tenant cannot reach agreement as to Fair Market Rental, each party shall select one appraiser todetermine Fair Market Rental. Each such appraiser shall arrive at a determination of Fair Market Rental and submit their conclusions to Landlord and Tenantwithin thirty (30) days after the expiration of the 30-day consultation period described above. If only one appraisal is submitted within the requisite time period, it shall be deemed as Fair Market Rental. If both appraisals are submitted within such timeperiod and the two appraisals so submitted differ by less than ten percent (10%), the average of the two shall be deemed as Fair Market Rental. If the twoappraisals differ by more than 10%, the appraisers shall immediately select a third appraiser who shall, within thirty (30) days after his selection, make andsubmit to Landlord and Tenant a determination of Fair Market Rental. This third appraisal will then be averaged with the closer of the two previous appraisalsand the result shall be Fair Market Rental. All appraisers specified pursuant to this Section shall be members of the American Institute of Real Estate Appraisers with not less than ten (10) years’experience appraising office and industrial properties in the Santa Clara Valley. Each party shall pay the cost of the appraiser selected by such party and one-half of the cost of the third appraiser. D. Personal to Tenant: All Options provided to Tenant in this Lease are personal and granted to AboveNet Communications, Inc. (or a permittedtransferee as described in Section 17.E) and are not exercisable by any third party should Tenant assign or sublet all or a portion of its rights under this Lease,unless Landlord consents to permit exercise of any option by any assignee or subtenant, in Landlord’s sole and absolute discretion. 19. GENERAL PROVISIONS: A. Attorney’s Fees: In the event a suit or alternative form of dispute resolution is brought for the possession of the Premises, for the recovery of anysum due hereunder, to interpret the Lease, or because of the breach of any other covenant herein; then the losing party shall pay to the prevailing partyreasonable attorney’s fees including the expense of expert witnesses, depositions and court testimony as part of its costs which shall be deemed to have accruedon the commencement of such action. The prevailing party shall also be entitled to recover all costs and expenses including reasonable attorney’s fees incurredin enforcing any judgment or award against the other party. The foregoing provision relating to post-judgment costs is severable from all other provisions ofthis Lease. B. Authority of Parties: Tenant represents and warrants that it is duly formed and in good standing, and is duly authorized to execute and deliver thisLease on behalf of said corporation, in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the by-laws of said corporation, and that this Lease is binding Page 24upon said corporation in accordance with its terms. At Landlord’s request, Tenant shall provide Landlord with corporate resolutions or other proof in a formacceptable to Landlord, authorizing the execution of the Lease. C. Brokers: Tenant represents it has not utilized or contacted a real estate broker or finder with respect to this Lease other than Cornish & CareyCommercial and Tenant agrees to indemnify, defend and hold Landlord harmless against any claim, cost, liability or cause of action asserted by any otherbroker or finder claiming through Tenant. D. Choice of Law: This Lease shall be governed by and construed in accordance with California law. Except as provided in Section 19.E, venue shallbe Santa Clara County. E. Dispute Resolution: Landlord and Tenant and any other party that may become a party to this Lease or be deemed a party to this Lease includingany subtenants agree that, except for any claim by Landlord for unlawful detainer or any claim within the jurisdiction of the small claims court (which smallclaims court shall be the sole court of competent jurisdiction), any controversy, dispute, or claim of whatever nature arising out of, in connection with or inrelation to the interpretation, performance or breach of this Lease, including any claim based on contract, tort, or statute, shall be resolved at the request of anyparty to this agreement through a two-step dispute resolution process administered by J.A.M.S. or another judicial mediation service mutually acceptable to theparties located in Santa Clara County, California. The dispute resolution process shall involve first, mediation, followed, if necessary, by final and bindingarbitration administered by and in accordance with the then existing rules and practices of J.A.M.S. or other judicial mediation service selected. In the event ofany dispute subject to this provision, either party may initiate a request for mediation and the parties shall use reasonable efforts to promptly select a J.A.M.S.mediator and commence the mediation. In the event the parties are not able to agree on a mediator within thirty (30) days, J.A.M.S. or another judicial mediationservice mutually acceptable to the parties shall appoint a mediator. The mediation shall be confidential and in accordance with California Evidence Code §1119 et seq. The mediation shall be held in Santa Clara County, California and in accordance with the existing rules and practice of J.A.M.S. (or otherjudicial and mediation service selected). The parties shall use reasonable efforts to conclude the mediation within sixty (60) days of the date of either party’srequest for mediation. The mediation shall be held prior to any arbitration or court action (other than a claim by Landlord for unlawful detainer or any claimwithin the jurisdiction of the small claims court which are not subject to this mediation/arbitration provision and may be filed directly with a court ofcompetent jurisdiction). Should the prevailing party in any dispute subject to this Section 19.E attempt an arbitration or a court action before attempting tomediate, the prevailing party shall not be entitled to attorney’s fees that might otherwise be available to them in a court action or arbitration and in additionthereto, the party who is determined by the arbitrator to have resisted mediation, shall be sanctioned by the arbitrator or judge. IF A MEDIATION IS CONDUCTED BUT IS UNSUCCESSFUL, IT SHALL BE FOLLOWED BY FINAL AND BINDING ARBITRATIONADMINISTERED BY AND IN ACCORDANCE WITH THE THEN EXISTING RULES AND PRACTICES OF J.A.M.S. OR THE Page 25OTHER JUDICIAL AND MEDIATION SERVICE SELECTED, AND JUDGMENT UPON ANY AWARD RENDERED BY THE ARBITRATOR(S)MAY BE ENTERED BY ANY STATE OR FEDERAL COURT HAVING JURISDICTION THEREOF AS PROVIDED BY CALIFORNIA CODE OFCIVIL PROCEDURE SECTION 1280 ET SEQ., AS SAID STATUTES THEN APPEAR, INCLUDING ANY AMENDMENTS TO SAID STATUTESOR SUCCESSORS TO SAID STATUTES OR AMENDED STATUTES, EXCEPT THAT IN NO EVENT SHALL THE PARTIES BE ENTITLED TOPROPOUND INTERROGATORIES OR REQUEST FOR ADMISSIONS DURING THE ARBITRATION PROCESS. THE ARBITRATOR SHALL BE ARETIRED JUDGE OR A LICENSED CALIFORNIA ATTORNEY. THE VENUE FOR ANY SUCH ARBITRATION OR MEDIATION SHALL BE INSANTA CLARA COUNTY, CALIFORNIA. NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERSINCLUDED IN THE “MEDIATION AND ARBITRATION OF DISPUTES” PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDEDBY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURTOR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL,UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE “MEDIATION AND ARBITRATION OF DISPUTES” PROVISION. IF YOUREFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THEAUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION ISVOLUNTARY. WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDEDIN THE “MEDIATION AND ARBITRATION OF DISPUTES” PROVISION TO NEUTRAL ARBITRATION. LANDLORD: /s/ JMS TENANT: /s/ JM, EW F. Entire Agreement: This Lease and the exhibits attached hereto contains all of the agreements and conditions made between the Parties hereto andmay not be modified orally or in any other manner other than by written agreement signed by all parties hereto or their respective successors in interest. ThisLease supersedes and revokes all previous negotiations, letters of intent, lease proposals, brochures, agreements, representations, promises, warranties, andunderstandings, whether oral or in writing, between the parties or their respective representatives or any other person purporting to represent Landlord orTenant. G. Entry by Landlord: Upon prior notice to Tenant and subject to Tenant’s reasonable security regulations, Tenant shall permit Landlord and hisagents to enter into and upon the Premises at all reasonable times, and without any rent abatement or reduction or any liability to Tenant for any loss ofoccupation or quiet enjoyment of the Premises thereby occasioned, for the following purposes: (i) inspecting and maintaining the Premises; (ii) making repairs,alterations or additions to the Premises; (iii) erecting additional building(s) Page 26and improvements on the land where the Premises are situated or on adjacent land owned by Landlord; (iv) performing any obligations of Landlord under theLease including remediation of Hazardous Materials if determined to be the responsibility of Landlord, (v) posting and keeping posted thereon notices of nonresponsibility for any construction, alteration or repair thereof, as required or permitted by any law, and (vi) showing the Premises to Landlord’s or the MasterLandlord’s existing or potential successors, purchaser, tenants and lenders. Tenant shall permit Landlord and his agents, at any time within one hundredeighty (180) days prior to the Expiration Date (or at any time during the Lease if Tenant is in default hereunder), to place upon the Premises “For Lease” signsand exhibit the Premises to real estate brokers and prospective tenants at reasonable hours. H. Estoppel Certificates: At any time during the Lease Term, Tenant shall, within ten (10) days following written notice from Landlord, execute anddeliver to Landlord a written statement certifying, if true, the following: (i) that this Lease is unmodified and in full force and effect (or, if modified, stating thenature of such modification); (ii) the date to which rent and other charges are paid in advance, if any; (iii) acknowledging that there are not, to Tenant’sknowledge, any uncured defaults on Landlord’s part hereunder (or specifying such defaults if they are claimed); and (iv) such other information as Landlordmay reasonably request. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of Landlord’s interest in thePremises. Tenant’s failure to deliver such statement within such time shall be conclusive upon the Tenant that this Lease is in full force and effect withoutmodification, except as may be represented by Landlord, and that there are no uncured defaults in Landlord’s performance. Tenant agrees to provide, withinfive (5) days of Landlord’s request, Tenant’s most recent three (3) years of audited financial statements for Landlord’s use in financing or sale of the Premisesor Landlord’s interest therein. I. Exhibits: All exhibits referred to are attached to this Lease and incorporated by reference. J. Interest: All rent due hereunder, if not paid when due, shall bear interest at the rate of the Reference Rate published by Bank of America, SanFrancisco Branch, plus two percent (2%) per annum from that date until paid in full (“Agreed Interest Rate”). This provision shall survive the expiration orsooner termination of the Lease. Despite any other provision of this Lease, the total liability for interest payments shall not exceed the limits, if any, imposedby the usury laws of the State of California. Any interest paid in excess of those limits shall be refunded to Tenant by application of the amount of excessinterest paid against any sums outstanding in any order that Landlord requires. If the amount of excess interest paid exceeds the sums outstanding, the portionexceeding those sums shall be refunded in cash to Tenant by Landlord. To ascertain whether any interest payable exceeds the limits imposed, any non-principal payment (including late charges) shall be considered to the extent permitted by law to be an expense or a fee, premium, or penalty rather than interest. K. This paragraph intentionally left blank. L. No Presumption Against Drafter: Landlord and Tenant understand, agree and acknowledge that this Lease has been freely negotiated by bothParties; and that in any controversy, dispute, or contest Page 27over the meaning, interpretation, validity, or enforceability of this Lease or any of its terms or conditions, there shall be no inference, presumption, orconclusion drawn whatsoever against either party by virtue of that party having drafted this Lease or any portion thereof. M. Notices: All notices, demands, requests, or consents required to be given under this Lease shall be sent in writing by U.S. certified mail, returnreceipt requested, or by personal delivery addressed to the party to be notified at the address for such party specified in Section 1 of this Lease, or to suchother place as the party to be notified may from time to time designate by at least fifteen (15) days prior notice to the notifying party. When this Lease requiresservice of a notice, that notice shall replace rather than supplement any equivalent or similar statutory notice, including any notices required by Code of CivilProcedure Section 1161 or any similar or successor statute. When a statute requires service of a notice in a particular manner, service of that notice (or asimilar notice required by this Lease) shall replace and satisfy the statutory service-of-notice procedures, including those required by Code of Civil ProcedureSection 1162 or any similar or successor statute. N. Property Management: In addition, Tenant agrees to pay Landlord along with the expenses to be reimbursed by Tenant a monthly fee formanagement services rendered by either Landlord or a third party manager engaged by Landlord (which may be a party affiliated with Landlord), in theamount of one percent (1%) of the Base Monthly Rent. O. Rent: All monetary sums due from Tenant to Landlord under this Lease, including, without limitation those referred to as “additional rent”, shall bedeemed as rent. P. Representations: Tenant acknowledges that neither Landlord nor any of its employees or agents have made any agreements, representations,warranties or promises with respect to the Premises or with respect to present or future rents, expenses, operations, tenancies or any other matter. Except asherein expressly set forth herein, Tenant relied on no statement of Landlord or its employees or agents for that purpose. Q. Rights and Remedies: Subject to Section 14 above, All rights and remedies hereunder are cumulative and not alternative to the extent permitted bylaw, and are in addition to all other rights and remedies in law and in equity. R. Severability: If any term or provision of this Lease is held unenforceable or invalid by a court of competent jurisdiction, the remainder of the Leaseshall not be invalidated thereby but shall be enforceable in accordance with its terms, omitting the invalid or unenforceable term. S. Submission of Lease: Submission of this document for examination or signature by the parties does not constitute an option or offer to lease thePremises on the terms in this document or a reservation of the Premises in favor of Tenant. This document is not effective as a lease or otherwise until executedand delivered by both Landlord and Tenant. T. Subordination: This Lease is subject and subordinate to ground and underlying leases, mortgages and deeds of trust (collectively “Encumbrances”)which may now affect the Premises, to any covenants, conditions or restrictions of record, and to all renewals, modifications, Page 28consolidations, replacements and extensions thereof; provided, however, if the holder or holders of any such Encumbrance (“Holder”) require that this Leasebe prior and superior thereto, within seven (7) days after written request of Landlord to Tenant, Tenant shall execute, have acknowledged and deliver alldocuments or instruments, in the form presented to Tenant, which Landlord or Holder deems necessary or desirable for such purposes. Landlord shall havethe right to cause this Lease to be and become and remain subject and subordinate to any and all Encumbrances which are now or may hereafter be executedcovering the Premises or any renewals, modifications, consolidations, replacements or extensions thereof, for the full amount of all advances made or to bemade thereunder and without regard to the time or character of such advances, together with interest thereon and subject to all the terms and provisions thereof;provided only, that as a condition to such subordination, in the event of termination of any such lease or upon the foreclosure of any such mortgage or deed oftrust, Holder agrees in writing to recognize Tenant’s rights under this Lease as long as Tenant is not then in default and continues to pay Base Monthly Rentand additional rent and observes and performs all required provisions of this Lease. Within ten (10) days after Landlord’s written request, Tenant shallexecute any documents required by Landlord or the Holder to make this Lease subordinate to any lien of the Encumbrance. If Tenant fails to do so, then inaddition to such failure constituting a default by Tenant, it shall be deemed that this Lease is so subordinated to such Encumbrance. Notwithstandinganything to the contrary in this Section, Tenant hereby attorns and agrees to attorn to any entity purchasing or otherwise acquiring the Premises at any sale orother proceeding or pursuant to the exercise of any other rights, powers or remedies under such encumbrance. Landlord shall cause the existing lender, Union Labor Life Insurance Company, to furnish to Tenant, within forty-five (45) days of the date of both parties’execution of this Lease, with a written agreement providing for (i) recognition by the lender of all of the terms and conditions of this Lease; and (ii) continuationof this Lease upon foreclosure of existing lender’s security interest in the Premises. In the event that Landlord is unable to provide such agreement, Tenant’ssole remedy shall be termination of the Lease, which election shall be made within fourteen (14) days following the expiration of such forty-five (45) dayperiod. U. Survival of Indemnities: All indemnification, defense, and hold harmless obligations of Landlord and Tenant under this Lease shall survive theexpiration or sooner termination of the Lease. V. Time: Time is of the essence hereunder. W. Transportation Demand Management Programs: Should a government agency or municipality require Landlord to institute TDM(Transportation Demand Management) facilities and/or programs, Tenant agrees that the cost of TDM imposed facilities and programs required on thePremises, including but not limited to employee showers, lockers, cafeteria, or lunchroom facilities, shall be paid by Tenant. Further, any ongoing costs orexpenses associated with a TDM program which are required for the Premises and not provided by Tenant, such as an on-site TDM coordinator, shall beprovided by Landlord with such costs being included as additional rent and reimbursed to Landlord by Tenant within thirty (30) days after demand. If Page 29TDM facilities and programs are instituted on a Project wide basis, Tenant shall pay its proportionate share of such costs in accordance with Section 8 above. X. Waiver of Right to Jury Trial: Landlord and Tenant waive their respective rights to trial by jury of any contract or tort claim, counterclaim, cross-complaint, or cause of action in any action, proceeding, or hearing brought by either party against the other on any matter arising out of or in any wayconnected with this Lease, the relationship of Landlord and Tenant, or Tenant’s use or occupancy of the Premises, including any claim of injury or damage orthe enforcement of any remedy under any current or future law, statute, regulation, code, or ordinance. 20. LEASE GUARANTY: A material provision of the Lease and a material inducement of Landlord to enter into this Lease is the guaranty of thisLease by Metromedia Fiber Network, Inc. a Delaware Corporation, (“Guarantor”) which is attached hereto as Exhibit “E” and made a part hereof. Page 30IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the day and year first above written. Landlord: The 1979 Revocable Trust, a California Limited Partnership Tenant: AboveNet Communications, a Delaware CorporationBy: /s/ John M. Sobrato By: /s/ Jeff MonroeIts: Trustee Its: VP Real Estate * By: /s/ Ezekiel Wimert Its: VP Worldwide Operations *NOTE: This lease must be signed by two (2) officers of such corporation: one being the chairman of the board, the president, or a vice president,and the other being the secretary, an assistant secretary, the chief financial officer or an assistant treasurer. If one (1) individual is signing in two(2) of the foregoing capacities, that individual must sign twice; once as one officer and again as the other officer and in such event, Tenant mustdeliver to Landlord a certified copy of a corporate resolution authorizing the signatory to execute this Lease.  FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE (this “Amendment”) is entered into as of December 6, 2004 by and between BROKAW INTERESTS, aCalifornia limited partnership (“Landlord”) and EQUINIX OPERATING CO., INC., a Delaware corporation, as successor-in-interest to ABOVENETCOMMUNICATIONS, INC., a Delaware corporation (“Tenant”). Capitalized terms used herein and not otherwise defined herein shall have the respectivemeanings given to such terms in that certain Lease dated as of December 29, 1999 between Landlord and Tenant (the “Lease”). For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree that the Lease shallbe amended as follows: 1. Amendments to Lease. Landlord and Tenant hereby agree that the Lease shall be modified as follows: 1.1 With respect to Section 4.C, Tenant agrees, notwithstanding anything to the contrary in the Lease, that the cash security deposit of OneMillion Four Hundred Twenty Seven Thousand and No/100 Dollars ($1,427,000.00) shall not be returned or reduced in amount until the expiration ofthe Lease. Within thirty (30) days following the expiration of the Lease, Landlord agrees to return such deposit to Tenant less any amounts Landlord isentitled to deduct pursuant to this Section 4.C. Further Tenant shall have no right to post a letter of credit in lieu of a cash deposit. 1.2 The reference to “one hundred eighty (180) days” in Section 15.B. (i) shall be changed to twelve (12) months. 1.3 The reference to “twenty-four (24) months” in Section 15.B.(iv) shall be changed to eighteen (18) months. 1.4 The reference to “one hundred eighty (180) days” in the last sentence of Section 15.B. shall be changed to twelve (12) months. 1.5 The second sentence of Section 16 shall be deleted. 1.6 With respect to Section 17.E., the definition of Permitted Transfer shall be amended to include an assignment of the Tenant’s entire interestunder this Lease or of all or any portion of the Premises to (i) an affiliate, subsidiary, or parent of Equinix, Inc., or a corporation, partnership or otherlegal entity wholly owned by Equinix, Inc. (collectively, an “Affiliated Party”), or (ii) a successor to Tenant by acquisition or merger, or by aconsolidation or reorganization pursuant to which Tenant ceases to exist as a legal entity (each such party a “Successor Party”). Simultaneously withany such Permitted Transfer, Tenant’s successor shall sign a form of assumption agreement that is approved in advance by Landlord, which approvalshall not be unreasonably withheld, conditioned, or delayed. As used herein and for so long as Equinix Operating Co., Inc., or its affiliate is the Tenantunder the Lease, (A) “parent” shall mean a company which owns a majority of Equinix, Inc.’s voting equity; (B) “subsidiary” shall mean an entity wholly owned by Equinix, Inc. or acontrolling interest in whose voting equity is owned by Equinix, Inc.; and (C) “affiliate” shall mean an entity controlled by, controlling or undercommon control with Equinix, Inc. 1.7 Section 18.D. of the Lease shall be deleted with the effect that the option to extend the Lease under Article 18 shall be available to Tenant andits permitted transferees. 1.8 Any exercise by Landlord of its rights to enter the Premises pursuant to any provision of the Master Lease, including, without limitation,Section 19.G., shall be done in a way that does not materially interfere with Tenant’s quiet enjoyment of the Premises. 1.9 Section 19.G.(iii) shall be deleted. 1.10 The following language shall be inserted at the end of Section 19.G.(vi): “;provided, however, that with respect to prospective tenants, suchright may only be exercised in the last nine (9) months of the Lease.” 1.11 Notwithstanding anything to the contrary contained in the Lease, Tenant shall have the right, without the prior written consent of Landlordbeing obtained, to subject Tenant’s leasehold estate pursuant to this Lease, and its personal property, equipment, components and trade fixtures, to aleasehold mortgage and/or security agreement to secure financing or other obligations which Tenant may obtain or incur. In connection with any suchleasehold mortgage and/or security agreement or otherwise, Landlord will, within thirty (30) days following receipt of written request therefor, provide toTenant and Tenant’s lender(s) an estoppel certificate certifying if true, the following: (i) that the Lease is unmodified and in full force and effect (or, ifmodified, stating the nature of such modification); (ii) the date to which rent and other charges are paid under the Lease, including the date, if any, towhich rent and other charges have been paid in advance; (iii) acknowledging that there are not, to the Landlord’s knowledge, any uncured defaults onthe party of the Tenant under the Lease (or if there are any defaults, identifying the defaults); and (iv) such other information as Tenant or Tenant’slenders may reasonably request. In addition, Landlord agrees to provide any lender of Tenant who Landlord has been notified in writing of therequirement with written notice of any defaults by Tenant under the Lease and the same opportunity to cure such defaults as therein provided to Tenantbefore Landlord exercises its remedies under this Lease, and to provide Tenant’s lender(s) with a reasonable opportunity to enter upon the Premises forthe purpose of removing any property of Tenant which has been pledged as collateral to Tenant’s lender(s) or which has been subjected to any suchleasehold mortgage and/or security agreement. Notwithstanding anything to the contrary set forth above any such leasehold mortgage and/or securityagreement shall be subject and subordinate to the Landlord’s rights under the Lease and any rights of reentry or reversion of Tenant’s predecessor ininterest. 1.12 Within ten (10) days after Tenant’s written request, Landlord and Tenant shall execute and record a Memorandum of Lease in a formreasonably acceptable to Tenant and Landlord. After the Lease terminates, within ten (10) days after Landlord’s request, Tenant shall 2deliver to Landlord an executed quit claim in form reasonably acceptable to Landlord and Tenant to remove the Memorandum of Lease from title to thePremises. 1.13 In the event that Tenant defaults in any of its obligations under the Lease, Landlord agrees that it will simultaneous with giving notice thereofto the Tenant, as and to the extent required by the Lease, provide written notice thereof to AboveNet Communications, Inc. (“AboveNet”), at 360Hamilton Avenue, White Plains, New York 10601, Attention: President, with a copy to the same address Attention: General Counsel, accept a cure ofany such default from AboveNet and shall, to the extent provided in the Assignment and Assumption of Lease between Tenant and AboveNet, allowAboveNet the right of reentry in the Premises and allow the Lease to be reassigned to AboveNet, without the requirement of any Landlord consent, and,in the event of such reassignment, recognize AboveNet as the Tenant thereunder. 2. Terms. Capitalized terms used herein but not defined herein shall have the meanings specified in the Lease. 3. Effect of Amendment. As modified by this Amendment, the Lease shall remain in full force and effect and is hereby ratified and confirmed. Allreferences to the Lease herein shall mean the Lease (as defined above) as modified by this Amendment. The execution, delivery and effectiveness of thisAmendment shall not operate as a waiver of any right, power or remedy of Landlord or Tenant nor constitute a waiver of any provision of the Lease. 4. Neutral Construction. This Amendment is the product of negotiation among the parties hereto and represents the jointly conceived, bargained-for andagreed upon language mutually determined by the parties to express their intentions in executing and delivering this Amendment. Any ambiguity or uncertaintyin this Amendment shall equally be deemed to be caused by, or attributable to, the parties hereto collectively. This Amendment shall be construed in a neutralmanner in any action or proceeding to enforce or interpret it, and no term or condition hereof shall be construed more or less favorably to any one party. 5. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which takentogether shall constitute one and the same instrument. The signature page and acknowledgment of any counterpart may be removed therefrom and attached toany other counterpart to evidence execution thereof by all of the parties hereto without affecting the validity thereof. [signatures appear on next page] 3IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment effective as of the date first written above. LANDLORDBROKAW INTERESTSa California limited partnershipBy: /s/ John M. SobratoName: John M. SobratoTitle: General PartnerTENANTEQUINIX OPERATING CO., INC.,a Delaware corporationBy: /s/ Renee F. LanamName: Renee LanamTitle: Chief Financial Officer The undersigned, as predecessor-in-interest to Tenant under the Lease, hereby consents to this Amendment to Lease and hereby agrees that this Amendmentshall not release the undersigned from any liability that it may have under the Lease. ABOVENET COMMUNICATIONS., INC.,a Delaware corporationBy: /s/ Robert SokotaName: Robert SokotaTitle: SVP & General Counsel Exhibit 10.110 CONFIDENTIAL TREATMENT REQUESTEDCONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THESECURITIES EXCHANGE COMMISSION. LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (as amended, restated, or otherwise modified from time to time, this “Agreement”) dated the EffectiveDate, between SILICON VALLEY BANK (“Bank”) and EQUINIX, INC., a Delaware corporation, whose address is 301 Velocity Way, 5th Floor, Foster City,California 94404 (“Borrower”), provides the terms on which Bank will lend to Borrower, and Borrower will repay Bank. 1.ACCOUNTING AND OTHER TERMS Accounting terms not defined in this Agreement shall be construed following GAAP. Calculations and determinations must be made following GAAP.The term “financial statements” includes the notes and schedules. The terms “including” and “includes” always mean “including (or includes) withoutlimitation,” in this or any Loan Document. Capitalized terms in this Agreement shall have the meanings as set forth in Section 13. All other terms contained inthis Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein. 2.LOAN AND TERMS OF PAYMENT 2.1 Promise to Pay. Borrower hereby unconditionally promises to pay Bank the unpaid principal amount of all Credit Extensions hereunder with all interest, fees, andfinance charges due thereon as and when due in accordance with this Agreement. 2.1.1 Revolving Advances. (a) Subject to the terms and conditions hereof, Bank shall make Advances to Borrower from time to time until the Revolving Maturity Datenot exceeding the Committed Revolving Line minus the Sublimit Utilization Amount. Until the Revolving Maturity Date and subject to the termshereof and the applicable terms and conditions precedent in Sections 3.1 and 3.2, Borrower may borrow, repay, and reborrow under this Section2.1.1. The proceeds of the Advances shall be used solely for working capital purposes. (b) Interest on each Advance shall be paid pursuant to the terms of Section 2.4(c). The outstanding principal amount of and all accrued butunpaid interest on the Advances shall be due and payable on the Revolving Maturity Date, except as otherwise set forth in Section 2.5. (c) To obtain an Advance, Borrower must follow the procedures set forth in Section 3.3. 2.1.2 Letters of Credit Sublimit. Bank will issue letters of credit (“Letters of Credit”) for Borrower’s account not exceeding the Committed Revolving Line minus the sum of (a) allamounts for services utilized under the Cash Management Services Sublimit, (b) the FX Reserve, and (c) the sum of the outstanding principal balance of theAdvances. Each Letter of Credit will have an expiry date of no later than 180 days after the Revolving Maturity Date. Borrower’s reimbursement obligationwith respect to any Letter of Credit with an expiry date later than the Revolving Maturity Date will be secured by cash on terms reasonably acceptable to Bankon or before the Revolving Maturity Date if the term of this Agreement is not extended by Bank. Borrower agrees to execute any further documentation inconnection with the Letters of Credit as Bank may reasonably request. 2.1.3 FX Forward Contracts. If there is availability under the Committed Revolving Line, then Borrower may enter into foreign exchange forward contracts with the Bank underwhich Borrower commits to purchase from or sell to Bank a set amount of foreign currency more than one business day after the contract date (the “FXForward Contract”). Bank will subtract ten percent (10%) of each outstanding FX Forward Contract from the foreign exchange sublimit (the “FXReserve”). The foreign exchange sublimit shall be the Committed Revolving Line minus the sum of (a) all amounts for services utilized under the CashManagement Services Sublimit, (b) the amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit), and (c) the sum ofthe outstanding principal balance of the Advances. The total FX Forward Contracts at any one time may not exceed ten (10) times the amount of the FXReserve. 2.1.4 Cash Management Services. Borrower may use amounts up to the Committed Revolving Line minus the sum of (a) the amount of all outstanding Letters of Credit (including drawnbut unreimbursed Letters of Credit), (b) the FX Reserve, and (c) the sum of the outstanding principal balance of the Advances (the “Cash ManagementServices Sublimit”) for Bank’s Cash Management Services, which may include merchant services, direct deposit of payroll, business credit card, andcheck cashing services identified in various cash management services agreements related to such services, including automated clearing house and electronicfunds transfer services (the “Cash Management Services”). Such aggregate amounts utilized under the Cash Management Services Sublimit will at all timesreduce the amount otherwise available to be borrowed under the Committed Revolving Line. Any amounts Bank pays on behalf of Borrower or any amountsthat are not paid by Borrower when due for any Cash Management Services will be treated as Prime Rate Advances under the Committed Revolving Line andwill accrue interest at the rate for Prime Rate Advances. 2.2 Suspension and Termination of Commitment to Lend; Termination of this Agreement. Bank shall have no obligation to make Credit Extensions (a) upon the occurrence and during the continuance of an Event of Default or if there exists anyevent, condition, or act which 2with notice or lapse of time, or both, would constitute an Event of Default or (b) upon the occurrence of any Change in Control of Borrower. Bank’s obligationto make Credit Extensions shall terminate on the Revolving Maturity Date. Borrower may, upon five (5) Business Days’ prior written notice to Bank,irrevocably terminate this Agreement provided that all Obligations have been paid in full and no Letters of Credit remain outstanding (other than Letters ofCredit that have been secured by cash on terms acceptable to Bank) as of the effective date of such termination. 2.3 Overadvances. If, at any time Borrower’s aggregate obligations under Sections 2.1.1, 2.1.2, 2.1.3, and 2.1.4, exceed the Committed Revolving Line, Borrower must,after written notice from Bank, immediately pay Bank the excess. 2.4 Interest Rates. (a) During the Revolving Period, Borrower shall pay interest on the Advances (other than Advances with respect to which Borrower has selectedthe Term Loan Option) at the following rates: (i) the greater of (A) the Prime Rate and (B) four percent (4.00%) per annum, or (ii) at the election ofBorrower, Adjusted LIBOR plus the Applicable Revolver LIBOR Margin per annum. (b) If Borrower has selected the Term Loan Option, then, commencing on the Term Loan Option Date, Borrower shall pay interest on Advanceswith respect to which Borrower has selected the Term Loan Option at the following rates: (i) the Prime Rate per annum or (ii) at the election of Borrower,Adjusted LIBOR plus the Applicable Term LIBOR Margin per annum. The Applicable Margins are as follows: Applicable Margin InitialMargin Margin duringCovenantLevel 2 Applicable Revolver LIBOR Margin 2.00% 1.75%Applicable Term LIBOR Margin 2.25% 2.00% (c) Pursuant to the terms of Section 3.7, interest on each Advance shall be paid in arrears on each Interest Payment Date. Interest shall also be paidon the date of any prepayment of any Advance pursuant to this Agreement for the portion of any Advance so prepaid and upon payment (includingprepayment) in full thereof. (d) After an Event of Default occurs and so long as such Event of Default continues, including after an acceleration of the Obligations pursuant toSection 9.1(a) (whether before or after entry of judgment to the extent permitted by law), Obligations shall accrue interest at two percent (2.00%) abovethe rate effective immediately before the Event of Default; provided, however, that on and after the expiration of any Interest Period applicable to 3any LIBOR Advance outstanding on the date of occurrence of such Event of Default or acceleration, the Effective Amount of such LIBOR Advanceshall, during the continuance of such Event of Default or after acceleration, bear interest at a rate per annum equal to the Prime Rate plus two percent(2.00%). Payment or acceptance of the increased interest provided in this Section 2.4(d) is not a permitted alternative to timely payment and shall notconstitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Bank. 2.5 Term Loan Option. (a) To select the Term Loan Option, no less than five (5) calendar days prior to the Term Loan Option Date, Borrower shall complete, execute,and deliver to Bank an election notice substantially in the form attached hereto as Exhibit A. (b) If Borrower selects the Term Loan Option, the Advances chosen to continue under such Term Loan Option are payable in eight (8) equalquarterly installments of principal plus accrued interest, beginning on the First Installment Payment Date and ending on the Term Loan Maturity Date.In addition, Borrower may prepay, without penalty or premium, all or any portion of the Advances chosen to be continued under the Term Loan Option.Prepayments of Advances under the Term Loan Option will be applied to payments due in the inverse order of their maturity. When repaid or prepaid,Advances chosen to be continued by Borrower under the Term Loan Option may not be reborrowed. 2.6 General Provisions. Bank may debit any of Borrower’s deposit accounts maintained with Bank for principal and interest payments due and owing or any amountsBorrower owes Bank pursuant to the Loan Documents which are then due and owing, including the Designated Deposit Account. These debits are not a set-off. Payments received after 12:00 noon (Pacific time) are considered received at the opening of business on the next Business Day. When a payment is due ona day that is not a Business Day, the payment is due the next Business Day and additional fees or interest accrue. 2.7 Fees. Borrower shall pay to Bank: (a) all documented Bank Expenses incurred through and after the Effective Date, when due (including (i) reasonable attorneys’ fees and expensesincurred in connection with the documentation, negotiation, execution, and delivery of the Loan Documents associated with the initial Credit Extension,which shall not exceed $30,000 unless otherwise agreed by Borrower and which shall be due and payable on the Effective Date, and (ii) fees andexpenses relating to Bank’s initial field examination of Borrower, which fees and expenses shall not exceed $5,000, unless otherwise agreed byBorrower); and (b) on the Effective Date, a fully-earned loan fee (the “Loan Fee”) equal to $95,000. If Borrower fails to maintain an average of $25,000,000 ondeposit with Bank for the 12 months following the Effective Date, then Borrower shall pay to Bank on the earlier to occur of the first anniversary of theEffective Date or the date this Agreement terminates, an 4additional loan fee equal to the product of $82.19 multiplied by the number of days that Borrower failed to maintain $25,000,000 on deposit with Bankduring such period; and (c) as additional compensation for Bank’s Revolving Loan Commitment, in arrears, on the first Business Day of each quarter prior to theRevolving Maturity Date and on the Revolving Maturity Date, a fee for Borrower’s non-use of available funds in an amount equal to 0.20% multipliedby the difference between (i) the Revolving Loan Commitment and (ii) the sum of (A) the daily average of the closing balance of the aggregate Advancesoutstanding during the period for which such fee is due (any period, a “Usage Period”), plus, (B) the daily average of the face amount of all Letters ofCredit issued for the account of Borrower outstanding during such Usage Period, plus, (C) the daily average of the FX Reserve during such UsagePeriod, plus, (D) the daily average of the amount of all Cash Management Services utilized by Borrower during such Usage Period. 2.8 Mandatory Prepayment Event. Concurrently with the occurrence of any Change in Control of Borrower, Borrower shall prepay in full, without penalty or premium, all outstandingObligations and shall post cash collateral, upon terms reasonably acceptable to Bank, in the face amount of any undrawn Letters of Credit. 3.CONDITIONS OF CREDIT EXTENSIONS 3.1 Conditions Precedent to Initial Credit Extension. Bank’s obligation to make the initial Credit Extension is subject to the condition precedent that the following have been satisfied, all in form andsubstance reasonably satisfactory to Bank: (a) the parties shall have executed and delivered the Loan Documents; (b) Borrower shall have delivered executed one or more Control Agreement(s), in form and substance satisfactory to Bank, by and amongBorrower, Bank, and such banks or financial institutions as is necessary for Bank to perfect its security interest in the Domestic Collateral Accounts; (c) Borrower shall have delivered its Operating Documents and a good standing certificate of Borrower from the Secretary of State of Borrower’sjurisdiction of formation; (d) Borrower shall have delivered a copy of the resolutions of its Board of Directors certified to be a true and correct copy by its secretary or otherauthorized officer, together with incumbency information and specimen signatures; (e) Bank shall have received the certificates of insurance described in Section 6.5 hereof; 5(f) Subject to the limitations set forth in Section 2.7, Borrower shall have paid all documented and invoiced costs and fees, including BankExpenses, then due; and (g) Borrower shall have delivered to Bank, in addition to the documents required in Sections 3.2 and 3.3, all documents, certificates, and otherassurances that Bank or its counsel may reasonably request. 3.2 Conditions Precedent to all Credit Extensions. Bank’s obligation to make each Credit Extension, including the initial Credit Extension, is subject to the following: (a) timely receipt of a Notice of Borrowing in the form attached as Exhibit B; and (b) the representations and warranties in Section 5 shall be true, accurate and complete on the date of the Notice of Borrowing and on the FundingDate, and no Event of Default shall have occurred and be continuing, or result from, an Advance and/or Credit Extension; provided, however, thatthose representations and warranties expressly referring to a date other than the Funding Date are true, accurate and complete as of such date; andprovided, further, that the representations and warranties set forth in Section 5 shall be deemed to be made with respect to the financial statements mostrecently delivered to the Bank pursuant to Section 6.2. Borrower’s receipt of an Advance is Borrower’s representation and warranty on that date that therepresentations and warranties in Section 5 remain true, accurate and complete, subject to the provisos set forth in the preceding sentence. 3.3 Procedure for the Borrowing of Advances. (a) Subject to the prior satisfaction of all other applicable conditions to the making of an Advance set forth in this Agreement, including Section3.1 and Section 3.2 for Advances made on the Effective Date and Section 3.2 for all Advances, each Advance shall be made upon Borrower’sirrevocable written notice delivered to Bank in the form of a Notice of Borrowing, each executed by a Responsible Officer of Borrower or his or herdesignee or without instructions if the Advances are necessary to meet Obligations which have become due. Bank may rely on any telephone notice givenby a person whom Bank believes is a Responsible Officer or designee. Borrower will indemnify Bank for any loss Bank suffers due to such reliance(other than losses resulting from Bank’s gross negligence or willful misconduct). Such Notice of Borrowing must be received by Bank prior to 12:00noon(Pacific time), (i) at least three (3) Business Days prior to the requested Funding Date, in the case of LIBOR Advances, and (ii) at least one (1)Business Day prior to the requested Funding Date, in the case of Prime Rate Advances, specifying: (i) the amount of the Advance, which, if a LIBOR Advance is requested, shall be in an aggregate minimum principal amount of $1,000,000or in any integral multiple of $100,000 in excess thereof; (ii) the requested Funding Date, which shall be a Business Day; 6(iii) whether the Advance is to be comprised of LIBOR Advances or Prime Rate Advances; and (iv) the duration of the Interest Period applicable to any such LIBOR Advances included in such notice; provided that if the Notice ofBorrowing shall fail to specify the duration of the Interest Period for any Advance comprised of LIBOR Advances, such Interest Period shall beone (1) month. (b) The proceeds of all such Advances will then be made available to Borrower on the Funding Date by Bank by transfer to the DesignatedDeposit Account. 3.4 Conversion and Continuation Elections. (a) So long as (1) no Event of Default or event which with notice, passage of time, or both would constitute an Event of Default exists; (2) noparty hereto shall have sent any notice of termination of this Agreement; and (3) Borrower shall have complied with such customary procedures as Bankhas established from time to time for Borrower’s requests for LIBOR Advances, Borrower may, upon irrevocable written notice to Bank: (i) elect to convert on any Business Day, Prime Rate Advances in an amount equal to $1,000,000 or any integral multiple of $100,000 inexcess thereof into LIBOR Advances; (ii) elect to continue on any Interest Payment Date any LIBOR Advances maturing on such Interest Payment Date (or any part thereof in anamount equal to $1,000,000 or any integral multiple of $100,000 in excess thereof); provided, that if the aggregate amount of LIBOR Advancesshall have been reduced, by payment, prepayment, or conversion of part thereof, to be less than $1,000,000, such LIBOR Advances shallautomatically convert into Prime Rate Advances; or (iii) elect to convert on any Interest Payment Date any LIBOR Advances maturing on such Interest Payment Date (or any part thereof in anamount equal to $1,000,000 or any integral multiple of $100,000 in excess thereof) into Prime Rate Advances. (b) Borrower shall deliver a Notice of Conversion/Continuation substantially in the form attached hereto as Exhibit C to be received by Bankprior to 11:00 a.m. (Pacific time) at least (i) three (3) Business Days in advance of the Conversion Date or Continuation Date, if any Advances are to beconverted into or continued as LIBOR Advances; and (ii) one (1) Business Day in advance of the Conversion Date, if any Advances are to be convertedinto Prime Rate Advances, in each case specifying: (i) the proposed Conversion Date or Continuation Date; (ii) the aggregate amount of the Advances to be converted or continued which, if any Advances are to be converted into or continued asLIBOR Advances, shall be in an aggregate minimum principal amount of $1,000,000 or in any integral multiple of $100,000 in excess thereof; 7(iii) whether a conversion or a continuation is proposed; and (iv) the duration of the requested Interest Period. (c) If upon the expiration of any Interest Period applicable to any LIBOR Advances, Borrower shall have timely failed to select a new Interest Periodto be applicable to such LIBOR Advances, Borrower shall be deemed to have elected to convert such LIBOR Advances into Prime Rate Advances. (d) Any LIBOR Advances shall, at Bank’s option, convert into Prime Rate Advances in the event that (i) an Event of Default, or event which withnotice, the passage of time, or both would constitute an Event of Default, shall exist, (ii) the Agreement shall terminate, or (iii) the aggregate principalamount of the Prime Rate Advances which have been previously converted to LIBOR Advances, or the aggregate principal amount of existing LIBORAdvances continued, as the case may be, at the beginning of an Interest Period shall at any time during such Interest Period exceed the CommittedRevolving Line. Borrower agrees to pay Bank, upon demand by Bank (or Bank may, at its option, charge the Designated Deposit Account or any otheraccount Borrower maintains with Bank) any amounts required to compensate Bank for any loss (including loss of anticipated profits), cost, or expenseincurred by Bank, as a result of the conversion of LIBOR Advances to Prime Rate Advances pursuant to any of the foregoing. Concurrently with anydemand for compensation under this Section 3.4(d), Bank will furnish Borrower with a statement setting forth the basis and amount of such request byBank for such compensation. Determinations by Bank for purposes of this Section 3.4(d) of the amounts required to compensate Bank in respect ofany loss, costs or expense incurred by Bank as a result of the conversion of LIBOR Advances to Prime Rate Advances pursuant to the circumstances setforth in Sections 3.4(d)(i)-(iii) shall be conclusive absent manifest error. (e) Notwithstanding anything to the contrary contained herein, Bank shall not be required to purchase United States Dollar deposits in theLondon interbank market or other applicable LIBOR market to fund any LIBOR Advances, but the provisions hereof shall be deemed to apply as ifBank had purchased such deposits to fund the LIBOR Advances. 3.5 Special Provisions Governing LIBOR Advances. Notwithstanding any other provision of this Agreement to the contrary, the following provisions shall govern with respect to LIBOR Advances as to thematters covered: (a) Determination of Applicable Interest Rate. As soon as practicable on each Interest Rate Determination Date, Bank shall determine (whichdetermination shall, absent manifest error in calculation, be final, conclusive and binding upon all parties) the interest rate that shall apply to theLIBOR Advances for which an interest rate is then being determined for the applicable Interest Period and shall promptly give notice thereof (in writing orby telephone confirmed in writing) to Borrower. (b) Inability to Determine Applicable Interest Rate. In the event that Bank shall have determined (which determination shall be final andconclusive and binding upon all parties hereto), on any Interest Rate Determination Date with respect to any LIBOR Advance, that by reason ofcircumstances affecting the London interbank market adequate and 8fair means do not exist for ascertaining the interest rate applicable to such Advance on the basis provided for in the definition of LIBOR, Bank shall onsuch date give notice (by telefacsimile or by telephone confirmed in writing) to Borrower of such determination, whereupon (i) no Advances may bemade as, or converted to, LIBOR Advances until such time as Bank notifies Borrower that the circumstances giving rise to such notice no longer exist,and (ii) any Notice of Borrowing or Notice of Conversion/Continuation given by Borrower with respect to Advances in respect of which suchdetermination was made shall be deemed to be rescinded by Borrower and, with respect to a Notice of Conversion/Continuation, be deemed a request toconvert or continue Advances referred to therein as Prime Rate Advances. (c) Compensation for Breakage or Non-Commencement of Interest Periods. Borrower shall compensate Bank, upon written request byBank (which request shall set forth the manner and method of computing such compensation), for all reasonable losses, expenses and liabilities, if any(including any interest paid by Bank to lenders of funds borrowed by it to make or carry its LIBOR Advances and any loss, expense or liabilityincurred by Bank in connection with the liquidation or re-employment of such funds) such that Bank may incur: (i) if for any reason (other than adefault by Bank or due to any failure of Bank to fund LIBOR Advances due to illegality under Section 3.6(e) or impracticability under Section 3.6(d))a borrowing or a conversion to or continuation of any LIBOR Advance does not occur on a date specified in a Notice of Borrowing or a Notice ofConversion/Continuation, as the case may be, or (ii) if any principal payment or any conversion of any of its LIBOR Advances occurs on a date priorto the last day of an Interest Period applicable to that Advance. Concurrently with any demand for compensation under this Section 3.5(c), Bank will furnish Borrower with a statement setting forth the basis andamount of such request by Bank for such compensation. Determinations by Bank for purposes of this Section 3.5(c) of the amounts required to compensateBank in respect of any loss, expense or liability incurred by Bank as a result of the circumstances set forth in Sections 3.5(c)(i)-(ii) shall be conclusive absentmanifest error. (d) Assumptions Concerning Funding of LIBOR Advances. Calculation of all amounts payable to Bank under this Section 3.5 and underSection 3.3 shall be made as though Bank had actually funded each of its relevant LIBOR Advances through the purchase of a Eurodollar depositbearing interest at the rate obtained pursuant to the definition of LIBOR Rate in an amount equal to the amount of such LIBOR Advance and having amaturity comparable to the relevant Interest Period; provided, however, that Bank may fund each of its LIBOR Advances in any manner it sees fit andthe foregoing assumptions shall be utilized only for the purposes of calculating amounts payable under this Section 3.5 and under Section 3.3. (e) LIBOR Advances After Event of Default. After the occurrence of and during the continuation of an Event of Default, (i) Borrower may notelect to have an Advance be made or continued as, or converted to, a LIBOR Advance after the expiration of any Interest Period then in effect for suchAdvance, and (ii) subject to the provisions of Section 3.5(c), any Notice of Conversion/Continuation given by Borrower with respect to a requestedconversion/continuation that has not yet occurred shall be deemed to be rescinded by Borrower and be deemed a request to convert or continue Advancesreferred to therein as Prime Rate Advances. 93.6 Additional Requirements/Provisions Regarding LIBOR Advances. (a) If for any reason (including voluntary or mandatory prepayment or acceleration), Bank receives all or part of the principal amount of aLIBOR Advance prior to the last day of the Interest Period for such Advance, Borrower shall immediately notify Borrower’s account officer at Bankand, within fifteen (15) days after written demand by Bank, pay Bank the amount (if any) by which (i) the additional interest which would have beenpayable on the amount so received had it not been received until the last day of such Interest Period exceeds (ii) the interest which would have beenrecoverable by Bank by placing the amount so received on deposit in the certificate of deposit markets, the offshore currency markets, or United StatesTreasury investment products, as the case may be, for a period starting on the date on which it was so received and ending on the last day of suchInterest Period at the interest rate determined by Bank in its reasonable discretion. Bank’s determination as to such amount shall be conclusive absentmanifest error. (b) Borrower shall pay Bank, within fifteen (15) days after written demand by Bank, from time to time such amounts as Bank may determine tobe necessary to compensate it for any costs incurred by Bank that Bank determines are attributable to its making or maintaining of any amountreceivable by Bank hereunder in respect of any Advances relating thereto (such increases in costs and reductions in amounts receivable being hereincalled “Additional Costs”), in each case resulting from any Regulatory Change which: (i) changes the basis of taxation of any amounts payable to Bank under this Agreement in respect of any Advances (other than changeswhich affect taxes measured by or imposed on the overall net income or capital of Bank by the jurisdiction in which Bank has its principaloffice); (ii) imposes or modifies any reserve, special deposit or similar requirements relating to any extensions of credit or other assets of, or anydeposits with, or other liabilities of Bank (including any Advances or any deposits referred to in the definition of LIBOR); or (iii) imposes any direct costs on Bank in respect of any Advances. Bank will notify Borrower of any event occurring after the Effective Date which will entitle Bank to compensation pursuant to this Section 3.6(b) aspromptly as practicable after it obtains knowledge thereof and determines to request such compensation. Concurrently with any demand for compensationunder this Section 3.6(b), Bank will furnish Borrower with a statement setting forth the basis and amount of such request by Bank for such compensation.Determinations and allocations by Bank for purposes of this Section 3.6(b) of the effect of any Regulatory Change on its costs of maintaining its obligationsto make Advances, of making or maintaining Advances, or on amounts receivable by it in respect of Advances, and of the additional amounts required tocompensate Bank in respect of any Additional Costs, shall be conclusive absent manifest error. 10(c) If Bank shall determine that the adoption or implementation of any applicable law, rule, regulation, or treaty regarding capital adequacy, or anychange therein, or any change in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency chargedwith the interpretation or administration thereof, or compliance by Bank (or its applicable lending office) with any respect or directive regarding capitaladequacy (whether or not having the force of law) of any such authority, central bank, or comparable agency, has or would have the effect of reducingthe rate of return on capital of Bank or any person or entity controlling Bank (a “Parent”) as a consequence of its obligations hereunder to a level belowthat which Bank (or its Parent) could have achieved but for such adoption, change, or compliance (taking into consideration policies with respect tocapital adequacy) by an amount deemed by Bank to be material, then from time to time, within fifteen (15) days after written demand by Bank,Borrower shall pay to Bank such additional amount or amounts as will compensate Bank for such reduction. Concurrently with any demand forcompensation under this Section 3.6(c), Bank will furnish Borrower with a statement setting forth the basis and amount of such request by Bank forsuch compensation, which statement shall be conclusive absent manifest error. (d) If, at any time, (i) the amount of LIBOR Advances for periods equal to the corresponding Interest Periods is not available to Bank in theoffshore currency interbank markets, or (ii) LIBOR does not accurately reflect the cost to Bank of lending the LIBOR Advances, then Bank shallpromptly give notice thereof to Borrower. Upon the giving of such notice, Bank’s obligation to make the LIBOR Advances shall terminate. (e) If it shall become unlawful for Bank to continue to fund or maintain any LIBOR Advances, or to perform its obligations hereunder, upondemand by Bank, Borrower shall prepay the Advances in full with accrued interest thereon and all other amounts payable by Borrower hereunder(including, without limitation, any amount payable in connection with such prepayment pursuant to Section 3.6(a)). Notwithstanding the foregoing, tothe extent a determination by Bank as described above relates to a LIBOR Advance then being requested by Borrower pursuant to a Notice of Borrowingor a Notice of Conversion/Continuation, Borrower shall have the option, subject to the provisions of Section 3.5(c), to (i) rescind such Notice ofBorrowing or Notice of Conversion/Continuation by giving notice (by telefacsimile or by telephone confirmed in writing) to Bank of such rescission onthe date on which Bank gives notice of its determination as described above, or (ii) modify such Notice of Borrowing or Notice ofConversion/Continuation to obtain a Prime Rate Advance or to have outstanding Advances converted into or continued as Prime Rate Advances by givingnotice (by telefacsimile or by telephone confirmed in writing) to Bank of such modification on the date on which Bank gives notice of its determinationas described above. (f) Failure or delay on the part of Bank to demand compensation pursuant to the provisions of Sections 3.6(b) or 3.6(c) shall not constitute awaiver of Bank’s right to demand such compensation, provided that Borrower shall not be required to compensate Bank pursuant to the provisions ofSections 3.6(b) or 3.6(c) for any costs incurred or reductions suffered more than 90 days prior to the date that Bank notifies Borrower of the RegulatoryChange giving rise to such increased costs or reductions and of Bank’s intention to claim compensation therefor. 113.7 Calculation of Interest and Fees. Interest on the Advances and all fees payable hereunder shall be computed on the basis of a 360-day year and the actual number of days elapsed (otherthan Prime Rate Advances, which shall be computed on the basis of a 365-day year and the actual number of days elapsed) in the period during which suchinterest accrues. In computing interest on any Advance, the date of the making of such Advance shall be included and the date of payment shall be excluded;provided, however, that if any Advance is repaid on the same day on which it is made, such day shall be included in computing interest on such Advance. (a) Prime Rate Advances. Each change in the interest rate of the Prime Rate Advances based on changes in the Prime Rate shall be effective onthe effective date of such change and to the extent of such change. Interest on Prime Rate Advances is payable quarterly by debit to the DesignatedDeposit Account on each Interest Payment Date. (b) LIBOR Advances. The interest rate applicable to each LIBOR Advance shall be determined in accordance with Section 3.5(a) hereunder.Subject to Sections 3.5 and 3.6, such rate shall apply during the entire Interest Period applicable to such LIBOR Advance, and interest calculatedthereon shall be payable on the Interest Payment Date applicable to such LIBOR Advance. 4.CREATION OF SECURITY INTEREST 4.1 Grant of Security Interest. Borrower hereby grants Bank, to secure the payment and performance in full of all of the Obligations and the performance of each of Borrower’s dutiesunder the Loan Documents, a continuing security interest in the Collateral and all proceeds and products thereof. Borrower warrants and represents that thesecurity interest granted herein shall be a perfected first priority security interest in the Filing Collateral (which security interest shall be perfected by the filingof any financing statements required by the Code) and in the Domestic Collateral Accounts (which security interest shall be perfected by “control” pursuant toSection 9104 or Section 9106 of the Code, as applicable), subject only to Permitted Liens. Borrower agrees that any disposition of the Collateral in violation of this Agreement, by either Borrower or any other Person, shall be deemed to violatethe rights of Bank under the Code. If the Agreement is terminated, Bank’s lien and security interest in the Collateral shall continue until Borrower fullysatisfies its Obligations. If Borrower shall at any time, file a commercial tort claim in any court where the amount of damages claimed exceeds $500,000,Borrower shall promptly notify Bank in a writing signed by Borrower of the brief details thereof and grant to Bank in such writing a security interest thereinand in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance reasonably satisfactory to Bank. Once the Obligations have been indefeasibly paid in full (other than inchoate indemnity obligations) or otherwise performed in full and Bank’sobligations to provide Credit Extensions hereunder have terminated, (i) Bank’s security interest in the Collateral shall automatically terminate, (ii) all rights tothe Collateral shall automatically revert to Borrower and (iii) Bank 12shall promptly return any pledged Collateral to Borrower, or to the Person or Persons legally entitled thereto, and shall promptly endorse, execute, deliver,record and file all financing statements, instruments and documents, and do all other acts and things, reasonably required for the return of the Collateral toBorrower, or to the Person or Persons legally entitled thereto, and to evidence or document the release and termination of Bank’s interests arising under thisAgreement, all as reasonably requested by, and at the expense of, Borrower. Bank’s Lien on any Collateral sold or otherwise transferred by Borrower in atransaction which is not a Default or Event of Default under this Agreement shall terminate effective upon such sale or other transfer. Upon such termination orBank’s release of any Collateral prior to indefeasible payment or performance in full of the Obligations, Bank shall execute and deliver to Borrower (or to aparty designated by Borrower) such documents as may be appropriate to confirm such termination or release, including documents necessary to terminatefinancing statements or to evidence the release (or partial release) of Collateral under financing statements filed under the Code. 4.2 Authorization to File Financing Statements. Borrower hereby authorizes Bank to file financing statements with all appropriate jurisdictions, to perfect or protect Bank’s interest or rights hereunder. 5.REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: 5.1 Due Organization and Authorization. Borrower and each Subsidiary is duly existing and, in any jurisdiction in which such legal concept is applicable, in good standing in its jurisdiction oforganization and is qualified and licensed to do business in, and, in any jurisdiction in which such legal concept is applicable, is in good standing in, anyjurisdiction in which the conduct of its business or its ownership of property requires that it be qualified, except where the failure to do any of the foregoingcould not reasonably be expected to cause a Material Adverse Change. In connection with this Agreement, Borrower has delivered to Bank a certificate signedby Borrower and entitled “Collateral Information Certificate”. Borrower represents and warrants to Bank that: (a) Borrower’s exact legal name is that indicatedon the Collateral Information Certificate and on the signature page hereof; (b) Borrower is an organization of the type, and is organized in the jurisdiction, setforth in the Collateral Information Certificate; (c) the Collateral Information Certificate accurately sets forth Borrower’s organizational identification number oraccurately states that Borrower has none; and (d) the Collateral Information Certificate accurately sets forth Borrower’s place of business, or, if more than one,its chief executive office as well as Borrower’s mailing address if different, and (e) all other information set forth on the Collateral Information Certificatepertaining to Borrower is accurate and complete. If Borrower does not now have an organizational identification number, but later obtains one, Borrower shallpromptly notify Bank of such organizational identification number. The execution, delivery and performance of the Loan Documents have been duly authorized by Borrower, and do not conflict with Borrower’sorganizational documents, nor constitute an event of default under any material agreement by which Borrower is bound. 13Borrower is not in default under any agreement to which or by which it is bound in which the default could reasonably be expected to cause a Material AdverseChange. 5.2 Collateral. Borrower has good title to the Collateral, free of Liens except Permitted Liens. Borrower maintains its primary operating accounts with Bank or withBank’s Affiliates and all other deposit or investment accounts of Borrower are disclosed in the Collateral Information Certificate or have otherwise beendisclosed to Bank in writing. The Domestic Accounts are bona fide, existing obligations, and the service or property has been performed or delivered to theaccount debtor or its agent for immediate shipment to and unconditional acceptance by the account debtor. Except as otherwise disclosed in writing to Bank,no Collateral consisting of Inventory with an aggregate value in excess of $200,000 is in the possession of any third party bailee (such as a warehouse). Exceptas hereafter disclosed to Bank in writing by Borrower pursuant to and within the timeframe provided by Section 6.2(f)(i), none of the components of theCollateral with an aggregate value in excess of $200,000 is maintained at locations other than as provided in the Collateral Information Certificate. In the eventthat Borrower, after the date hereof, intends to deliver possession of any Collateral consisting of Inventory with an aggregate value in excess of $200,000 to abailee, then Borrower shall first obtain the written consent of Bank, and such bailee must acknowledge in writing that the bailee is holding such Collateral forthe benefit of Bank. All Inventory is in all material respects of good and marketable quality, free from material defects. 5.3 Litigation. Except as shown in the Collateral Information Certificate, there are no actions or proceedings pending or, to the knowledge of Borrower’s ResponsibleOfficers or legal counsel, threatened in writing by or against Borrower or any Subsidiary which could reasonably be expected to cause a Material AdverseChange. 5.4 No Material Deterioration in Financial Statements. All consolidated financial statements for Borrower, and any Subsidiary, delivered to Bank fairly present in all material respects Borrower’sconsolidated financial condition and Borrower’s consolidated results of operations. There has not been a Material Adverse Change since the date of the mostrecent financial statements submitted to Bank. 5.5 Solvency. The fair salable value of Borrower’s assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; Borrower is not left withunreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature. 5.6 Regulatory Compliance. Borrower is not an “investment company” or a company “controlled” by an “investment company” under the Investment Company Act. Borrower is notengaged as one of its important 14activities in extending credit for margin stock (under Regulations T and U of the Federal Reserve Board of Governors). Borrower has complied in all materialrespects with the Federal Fair Labor Standards Act. Borrower has not violated any laws, ordinances or rules, the violation of which could reasonably beexpected to cause a Material Adverse Change. None of Borrower’s or any Subsidiary’s properties or assets has been used by Borrower or any Subsidiary or, tothe best of Borrower’s knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally.Borrower and each Subsidiary have timely (taking into account any extensions of time granted to Borrower) filed all required tax returns and paid, or madeadequate provision to pay, all material taxes, except those being contested in good faith with adequate reserves under GAAP. Borrower and each Subsidiaryhave obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all government authorities that arenecessary to continue its business as currently conducted, except where the failure to make such declarations, notices or filings would not reasonably beexpected to cause a Material Adverse Change. 5.7 Subsidiaries. Except as shown in the Collateral Information Certificate or as Borrower may otherwise notify Bank in writing from time to time, Borrower does notown any stock, partnership interest or other equity securities except for Permitted Investments. 5.8 Full Disclosure. No written representation, warranty or other statement of Borrower in any certificate or written statement given to Bank (taken together with all suchwritten certificates and written statements given to Bank) contains any untrue statement of a material fact or omits to state a material fact necessary to make thestatements contained in the certificates or statements not misleading, it being recognized by Bank that the projections and forecasts provided by Borrower ingood faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections andforecasts may differ from the projected or forecasted results. 6.AFFIRMATIVE COVENANTS Borrower shall, and, where indicated, shall cause each of its Domestic Subsidiaries to, do all of the following for so long as Bank has an obligation tolend or there are outstanding Obligations: 6.1 Government Compliance. (a) Except as to Subsidiaries in connection with a transaction permitted by Section 7.1(f) or a merger permitted by Section 7.4, maintain its andall its Domestic Subsidiaries’ legal existence and, to the extent such legal concept is applicable, good standing in their respective jurisdictions oforganization except where the failure to do so could not reasonably be expected to cause a Material Adverse Change; 15(b) Maintain its and its Domestic Subsidiaries’ qualification to do business (to the extent such legal concept is applicable) in each jurisdictionwhere the failure to so qualify could reasonably be expected to cause a Material Adverse Change; and (c) Comply, and have each of its Domestic Subsidiaries comply, with all laws, ordinances and regulations to which it is subject, for whichnoncompliance or would reasonably be expected to cause a Material Adverse Change. 6.2 Financial Statements, Reports, Certificates. (a) Deliver to Bank: (i) as soon as available, but no later than forty-five (45) days after the last day of each quarter, a company preparedconsolidated balance sheet and income statement covering Borrower’s consolidated operations during the period certified by a Responsible Officer and ina form acceptable to Bank; (ii) as soon as available, but no later than ninety (90) days after the last day of Borrower’s fiscal year, audited consolidatedfinancial statements prepared under GAAP, consistently applied, together with an opinion on the financial statements from a nationally-recognized,independent, certified public accounting firm; (iii) within five (5) Business Days of filing, copies of all reports on Forms 10-K and 10-Q filed with theSecurities and Exchange Commission; (iv) a prompt report of any legal actions pending or threatened in writing against Borrower or any Subsidiary thatcould result in damages or costs to Borrower or any Subsidiary of Two Million Dollars ($2,000,000) or more; (v) as soon as available, but no later thanninety (90) days after the end of each fiscal year, a one (1) year (prepared on a quarterly basis) financial projections of Borrower on a consolidatedbasis, including a balance sheet and statements of income and cash flows prepared in accordance with GAAP and showing projected operatingrevenues, expenses and debt service of Borrower on a consolidated basis; and (vi) budgets, sales projections, operating plans or other financialinformation reasonably requested by Bank. Documents required to be delivered pursuant to this Section 6.2(a) (to the extent any such documents are included in materials otherwise filedwith the SEC) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date on which Borrower posts suchdocuments, or provides a link thereto on the Borrower’s website on the Internet at Borrower’s website address of www.equinix.com (or such otherwebsite address as Borrower may provide to Bank in writing from time to time); provided that: (x) to the extent Bank is otherwise unable to receive anysuch electronically delivered documents, Borrower shall, upon request by Bank, deliver paper copies of such documents to Bank until a written requestto cease delivering paper copies is given by Bank and (y) Borrower shall notify Bank (by telecopier or electronic mail) of the posting of any suchdocuments or provide to Bank by electronic mail electronic versions (i.e., soft copies) of such documents. (b) Borrower shall deliver to Bank, as soon as available, but no later than forty-five (45) days after the last day of each month and together withthe annual financial statements set forth in clause (a)(ii) above, a Compliance Certificate signed by a Responsible Officer in the form of Exhibit D. (c) Except as otherwise provided herein, once per calendar year, Borrower shall, during normal business hours, from time to time upon five (5)Business Days’ 16prior notice: (i) provide Bank and any of its officers, employees and agents access to its properties, facilities, advisors, officers and employees ofBorrower and to the Collateral, (ii) permit Bank, and any of its officers, employees and agents, to inspect, audit and make extracts from Borrower’sbooks and records, and (iii) permit Bank, and its officers, employees and agents, to inspect, review, evaluate and make test verifications and counts ofthe Domestic Accounts, Inventory and other Collateral of Borrower. So long as no Default or Event of Default shall have occurred and be continuing,Borrower shall reimburse Bank for not more than one (1) inspection in any calendar year in an amount not to exceed $10,000. If an Event of Default hasoccurred and is continuing, Borrower shall provide access to (x) its properties, facilities, advisors, officers and employees of Borrower and to theCollateral at all times and without advance notice, and (y) its suppliers and customers upon request from Bank. Borrower shall promptly makeavailable to Bank and its counsel originals or copies of all books and records that Bank may reasonably request. (d) Borrower shall permit Bank to conduct its initial field examination within ninety (90) days after the Effective Date. In addition to any audits orinspections conducted by Bank pursuant to the terms of clause (c) above, Borrower shall permit Bank to conduct annual field examinations during theterm of this Agreement; provided, however, that Bank shall not be entitled to reimbursement for Bank Expenses in excess of $5,000 per examination;provided, further that at such time as Covenant Level 2 is in effect and so long as no Event of Default has occurred and is continuing, Bank shall nolonger require a field examination of Borrower on an annual basis. (e) If, at any time prior to Covenant Level 2, the amount of unrestricted cash and Cash Equivalents (net of Obligations and any STT Debt plusany interest accrued thereon) maintained by Borrower and Guarantor with Bank, any Affiliate of Bank, or any other financial institution located in theUnited States is less than $15,000,000 in the aggregate, then Borrower shall deliver to Bank, within thirty (30) days after the last day of each month,aged listings (by invoice date) of accounts receivable and of accounts payable and a listing of Eligible Domestic Accounts, certified by a ResponsibleOfficer. (f) Borrower shall provide written notice to Bank (i) such notice to be delivered at the end of the fiscal quarter in which the following suchrelocation or additions occur, if Borrower relocates its chief executive office, or adds any new offices or business locations, including warehouses(unless such new offices or business locations contain less than $200,000 in Borrower’s assets or property), (ii) such notice to be delivered at least thirty(30) days prior to the effective date of the following changes, if Borrower changes (1) its jurisdiction of organization, (2) its organizational structure ortype, (3) its legal name, or (4) the organizational number (if any) assigned by its jurisdiction of organization. 6.3 Inventory; Returns. Keep all Inventory in good and marketable condition, free from material defects. Returns and allowances between Borrower and its account debtors shallfollow Borrower’s customary practices. Borrower must promptly notify Bank of all returns, recoveries, disputes and claims, that involve more than$250,000. 176.4 Taxes. Make, and cause each Subsidiary to make, timely (taking into account any extensions of time granted to Borrower) payment of all material federal,state, and local taxes or assessments (other than taxes and assessments which Borrower is contesting in good faith, with reserves maintained to the extentrequired by GAAP) and will deliver to Bank, on demand, appropriate certificates attesting to such payments. 6.5 Insurance. Keep its business and the Collateral insured for such risks and in such amounts as is customary for Persons similarly situated as Borrower. Allproperty policies shall have a lenders’ loss payable endorsement showing Bank as an additional loss payee; all liability policies shall show Bank as anadditional insured; all policies shall provide that the insurer must give Bank at least twenty (20) days notice before canceling its policy. At Bank’s request,Borrower shall deliver certified copies of policies and evidence of all premium payments. Following the occurrence and during the continuance of an Event ofDefault, proceeds payable under any policy shall, at Bank’s option be payable to Bank on account of the Obligations. 6.6 Primary Accounts. (a) Maintain Borrower’s primary operating accounts with Bank or any Affiliate of Bank (collectively, “SVB Accounts”); (b) Provide Bank five (5) Business Days advance written notice before establishing any Domestic Collateral Account at or with any bank orfinancial institution (other than Bank). In addition, for each Domestic Collateral Account that Borrower at any time maintains, Borrower shall causeeach applicable bank or financial institution (other than Bank) at or with which any Domestic Collateral Account is maintained to execute and deliver aControl Agreement or other appropriate instrument with respect to such Domestic Collateral Account to perfect Bank’s security interest in such DomesticCollateral Account; and (c) At all times STT Debt of $2,500,000 or more is outstanding, maintain cash or investment property pledged to STT separate from cash orCash Equivalents in SVB Accounts or Domestic Collateral Accounts. 6.7 Financial Covenants. (a) (i) At all times that Covenant Level 1 is in effect, Borrower and Guarantor shall maintain (A) with Bank, any Affiliate of Bank, or any otherfinancial institution located in the United States, unrestricted cash and Cash Equivalents (excluding cash and Cash Equivalents in amount equal to theoutstanding principal amount of the STT Debt plus all unpaid interest accrued thereon), and (B) [*], plus (2) the then outstanding amount of theObligations. In measuring the Liquidity (which shall be tested on a monthly basis), not more than $7,500,000 shall be attributable to Eligible DomesticAccounts. (ii) At all times Covenant Level 2 is in*CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION. 18effect, Borrower and Guarantor shall maintain with Bank, any Affiliate of Bank, or any other financial institution located in the United States, cashand Cash Equivalents in an aggregate amount (excluding cash and Cash Equivalents in amount equal to the outstanding principal amount of the STTDebt plus all unpaid interest accrued thereon) of at least (1) [*]. (iii) In the event Covenant Level 2 is not yet in effect on the first anniversary of theEffective Date, Borrower and Guarantor shall maintain with Bank, any Affiliate of Bank, or any other financial institution located in the United States,cash and Cash Equivalents in an aggregate amount (excluding cash and Cash Equivalents in amount equal to the outstanding principal amount of theSTT Debt plus all unpaid interest accrued thereon) of at least (1) [*] (the “Alternate Covenant Level”). (b) At each date that is a quarter-end, Borrower and its consolidated Subsidiaries shall have achieved total revenue for the two-quarter periodending on such date equal to or greater than the amounts set forth in below opposite each time period set forth below: Period Minimum Total RevenueFor the two fiscal quarters ending 9/30/04 [*]For the two fiscal quarters ending 12/31/04 [*]For the two fiscal quarters ending 3/31/05 [*]For the two fiscal quarters ending 6/30/05 [*]For the two fiscal quarters ending 9/30/05 [*]For the two fiscal quarters ending 12/31/05 and each quarter-end thereafter [*] (c) For each quarter, Borrower and its consolidated Subsidiaries shall achieve an operating cash flow (as determined in accordance with GAAPand reported on Borrower’s financial statements, measured on a rolling two-quarters basis, of at least $4,000,000; provided, however, losses for anyquarter shall not exceed $1,000,000. At such time as Covenant Level 2 is in effect, Borrower shall no longer be required to maintain such minimumoperating cash flow, and this Section 6.7(c) shall no longer be applicable. 6.8 Intentionally Omitted. 6.9 Further Assurances. Borrower shall execute any further instruments and take further action as Bank reasonably requests to perfect or continue Bank’s security interest in theCollateral or to effect the purposes of this Agreement.*CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION. 197.NEGATIVE COVENANTS Borrower shall not, and, where indicated, shall not permit any of its Subsidiaries to, do any of the following without Bank’s prior written consent, forso long as Bank has an obligation to lend or there are any outstanding Obligations: 7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of (collectively a “Transfer”), or permit any of its Subsidiaries to Transfer, all or any part of itsbusiness or property, except for (a) Transfers of Inventory in the ordinary course of business; (b) non-exclusive licenses, leases, and similar arrangements forthe use of the property of Borrower or its Subsidiaries in the ordinary course of business; (c) Transfers of worn out, surplus, damaged, or obsoleteEquipment; (d) Transfers associated with the making or disposition of a Permitted Investment; (e) dispositions of cash or Permitted Investments in a mannernot prohibited by this Agreement; (f) mergers or consolidations of any Subsidiary into Borrower or another Subsidiary or liquidations of or dissolutions ofSubsidiaries; (g) Transfers in connection with transaction permitted under Section 7.4; (h) Transfers of unimproved real property; (i) Transfers of anyFacility if as of the date of such Transfer such Facility is a Non-Performing Facility; and (j) Transfers not otherwise permitted in this Section 7.1, provided,that the aggregate book value of all such other Transfers by Borrower and its Subsidiaries, together, shall not exceed $5,000,000 in any fiscal year. 7.2 Changes in Business. Engage in or permit any of its Subsidiaries to engage in any business other than the businesses currently engaged in by Borrower or reasonably relatedthereto. 7.3 Dissolution. Dissolve or elect to dissolve. 7.4 Mergers; Consolidations. Merge or consolidate with another corporation or entity, or acquire all or substantially all of the capital stock or property of a Person; provided thatBorrower may merge or consolidate with another corporation or entity or acquire all or substantially all of the capital stock or property of a Person, if (a) aDefault or an Event of Default shall not have occurred and be continuing and would not occur as a result of such transaction, and (b) Borrower is the solesurvivor after giving effect to the transaction; 7.5 Indebtedness. Prior to the effectiveness of Covenant Level 2, create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other thanPermitted Indebtedness. While Covenant Level 2 is in effect, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, if any of theforegoing would result in the occurrence of or constitute a Default or an Event of Default. 7.6 Encumbrance. Prior to the effectiveness of Covenant Level 2, create, incur, or allow any Lien on any of its property, or assign or convey any right to receive income,including the sale of any Accounts, or permit any of its Subsidiaries to do so, except for Permitted Liens. While Covenant Level 2 is in effect, create, incur, orallow any Lien on any of its property, or permit any of its Subsidiaries 20to do so, if any of the foregoing would result in the occurrence of or constitute a Default or an Event of Default. Permit any Collateral not to be subject to thefirst priority security interest granted herein, subject only to Permitted Liens. 7.7 Distributions; Investments. Prior to the effectiveness of Covenant Level 2, directly or indirectly acquire or own any Person, or make any Investment in any Person, other thanPermitted Investments, or permit any of its Domestic Subsidiaries to do so; or pay any dividends or make any distribution or payment or redeem, retire orpurchase any capital stock except for Permitted Distributions. While Covenant Level 2 is in effect, directly or indirectly acquire or own any Person, or makeany Investment in any Person, or permit any of its Domestic Subsidiaries to do so, if such acquisition, ownership or Investment would result in theoccurrence of or constitute a Default or an Event of Default; or pay any dividends or make any distribution or payment or redeem, retire or purchase anycapital stock if any of the foregoing would result in the occurrence of or constitute a Default or an Event of Default. 7.8 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinarycourse of Borrower’s business, or upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm’s length transactionwith a non-affiliated Person. 7.9 Subordinated Debt. Prior to the effectiveness of Covenant Level 2, make or permit any payment on any Subordinated Debt, except under the terms of the Subordinated Debtor any intercreditor agreement to which Bank is a party, or amend any provision in any document relating to the Subordinated Debt without Bank’s priorwritten consent. While Covenant Level 2 is in effect, make or permit any payment on any Subordinated Debt, except under the terms of the Subordinated Debtor any intercreditor agreement to which Bank is a party, or amend any provision in any document relating to the Subordinated Debt, if any of the foregoingwould result in the occurrence of or constitute a Default or an Event of Default. 7.10 Compliance. Become an “investment company” or a company controlled by an “investment company,” under the Investment Company Act of 1940 or undertake asone of its important activities extending credit to purchase or carry margin stock, or use the proceeds of any Credit Extension for that purpose; fail to meet theminimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with theFederal Fair Labor Standards Act or violate any other law or regulation, if the violation could reasonably be expected to have a material adverse effect onBorrower’s business or operations or would reasonably be expected to cause a Material Adverse Change, or permit any of its Subsidiaries to do so. 218.EVENTS OF DEFAULT Any one of the following is an Event of Default: 8.1 Payment Default. If Borrower fails to pay (a) the principal portion of any Credit Extension when due, or (b) the interest portion of any Credit Extension within three (3)Business days after the date due, or (c) any other monetary Obligations within three (3) Business Days after payment of such other Obligation becomesdelinquent. During any cure period, the failure to cure the payment default is not an Event of Default (but no Credit Extensions will be made during the cureperiod). 8.2 Covenant Default. (a) If Borrower fails to perform any obligation under Section 6.7 or violates any of the covenants contained in Sections 7.5, 7.6 or 7.7 of thisAgreement, or (b) If Borrower fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained inthis Agreement, in any other Loan Document, or in any other present or future agreement between Borrower and Bank and as to any default under suchother term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within fifteen (15) days after a ResponsibleOfficer is aware of the occurrence thereof; provided, however, that if the default cannot by its nature be cured within the fifteen (15) day period orcannot after diligent attempts by Borrower be cured within such fifteen (15) day period, and such default is likely to be cured within a reasonable time,then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and withinsuch reasonable time period the failure to have cured such default shall not be deemed an Event of Default (but no Credit Extensions will be made duringsuch cure period). 8.3 Material Adverse Change. If a Material Adverse Change occurs. 8.4 Attachment. If (a) any material portion of Borrower’s assets is attached, seized, levied on, or comes into possession of a trustee or receiver and the attachment, seizureor levy is not removed in fifteen (15) days; (b) the service of process upon Borrower seeking to attach, by trustee or similar process, any material portion offunds of Borrower on deposit with Bank, or any entity under the control of Bank (including a subsidiary); (c) Borrower is enjoined, restrained, or preventedby court order from conducting a material part of its business; (d) a judgment or other claim becomes a Lien on a material portion of Borrower’s assets; or (e)a notice of lien, levy, or assessment is filed against any material portion of Borrower’s assets by any government agency and not paid within fifteen (15) daysafter Borrower receives notice. These are not Events of Default if stayed or if a bond is posted pending contest by Borrower (but no Credit Extensions shall bemade during the cure period). For purposes of this Section 8.4, “material portion” means an amount equal to or in excess of Two Million Dollars ($2,000,000). 228.5 Insolvency. If (a) Borrower is unable to pay its debts (including trade debts) as they mature; (b) Borrower begins an Insolvency Proceeding; or (c) an InsolvencyProceeding is begun against Borrower and not dismissed or stayed within sixty (60) days (but no Credit Extensions shall be made before any InsolvencyProceeding is dismissed). 8.6 Other Agreements. If there is a default in any agreement (other than a lease of real property under which a bona fide dispute exists between Borrower and the landlordregarding the existence of a default and for which adequate reserves are maintained) to which Borrower is a party with a third party or parties resulting in aright by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of [*] or that could resultin a Material Adverse Change. 8.7 Judgments. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least Two Million Dollars ($2,000,000) shallbe rendered against Borrower and shall (a) remain unsatisfied and unstayed for a period of ten (10) days and (b) not be appealed within the shorter of forty-five (45) days or the time period during which such appeal is required to be brought under applicable law (provided that no Credit Extensions will be madeprior to the satisfaction or stay of such judgment). 8.8 Misrepresentations. If Borrower or any Person acting for Borrower makes any material misrepresentation or material misstatement now or later in any warranty orrepresentation in this Agreement or in any writing delivered to Bank or to induce Bank to enter this Agreement or any Loan Document. 9.RIGHTS AND REMEDIES 9.1 Rights and Remedies. When an Event of Default occurs and continues Bank may, without notice or demand, do any or all of the following: (a) declare all Obligations immediately due and payable (but if an Event of Default described in Section 8.5 occurs, all Obligations areimmediately due and payable without any action by Bank); (b) stop advancing money or extending credit for Borrower’s benefit under this Agreement or under any other agreement between Borrower andBank;*CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION. 23(c) settle or adjust disputes and claims directly with account debtors for amounts, on terms and in any order that Bank considers advisable andnotify any Person owing Borrower money of Bank’s security interest in such funds and collect and verify the amount of such account. Borrower shallcollect all payments in trust for Bank and, if requested by Bank, immediately deliver the payments to Bank in the form received from the accountdebtor, with proper endorsements for deposit; (d) make any payments and do any acts it considers necessary or reasonable to protect its security interest in the Collateral. Borrower shallassemble the Collateral if Bank requests and make it available as Bank designates. Bank may enter premises where the Collateral is located, take andmaintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to itssecurity interest and pay all expenses incurred. Borrower grants Bank a license to enter and occupy any of its premises, without charge, to exercise anyof Bank’s rights or remedies; (e) apply to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) any amount held by Bank owing to or for the credit or theaccount of Borrower; (f) ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral. Bank is hereby granted a non-exclusive, royalty-free license or other right to use, without charge, Borrower’s labels, patents, copyrights, mask works, rights of use of any name,trade secrets, trade names, trademarks, service marks, and advertising matter, or any similar property as it pertains to the Collateral, in completingproduction of, advertising for sale, and selling any Collateral and, in connection with Bank’s exercise of its rights under this Section, Borrower’s rightsunder all licenses and all franchise agreements inure to Bank; (g) place a “hold” on any account maintained with Bank and/or deliver a notice of exclusive control, any entitlement order, or other directions orinstructions pursuant to any control agreement or similar agreements providing control of any Collateral; (h) require Borrower to provide cash collateral in the face amount of all undrawn Letters of Credit; (i) terminate any FX Forward Contracts; and (j) dispose of the Collateral according to the Code. 9.2 Power of Attorney. Borrower hereby irrevocably appoints Bank as its lawful attorney-in-fact, to be effective upon the occurrence and during the continuance of an Event ofDefault, to: (a) endorse Borrower’s name on any checks or other forms of payment or security; (b) sign Borrower’s name on any invoice or bill of lading forany Account or drafts against account debtors, (c) settle and adjust disputes and claims about the Accounts directly with account debtors, for amounts and onterms Bank determines reasonable; (d) make, settle, and adjust all claims under Borrower’s insurance policies; and (e) transfer the Collateral into the name ofBank or a third party as the Code permits. Borrower hereby appoints Bank as its lawful attorney-in-fact to sign Borrower’s 24name on any documents necessary to perfect or continue the perfection of any security interest regardless of whether an Event of Default has occurred until allObligations have been satisfied in full and Bank is under no further obligation to make Credit Extensions hereunder. Bank’s foregoing appointment asBorrower’s attorney in fact, and all of Bank’s rights and powers, coupled with an interest, are irrevocable until all Obligations have been fully repaid andperformed and Bank’s obligation to provide Credit Extensions terminates. 9.3 Intentionally Omitted. 9.4 Bank Expenses. If Borrower fails to pay any amount or furnish any required proof of payment to third persons Bank may make all or part of the payment or obtaininsurance policies required in Section 6.5. Any amounts paid by Bank as provided herein are Bank Expenses and are immediately due and payable and shallbear interest at the highest applicable default rate and be secured by the Collateral. No payments by Bank shall be deemed an agreement to make similarpayments in the future or Bank’s waiver of any Event of Default. 9.5 Bank’s Liability for Collateral. So long as Bank complies with reasonable banking practices regarding the safekeeping of Collateral, Bank shall not be liable or responsible for: (a) thesafekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any act or default of any carrier,warehouseman, bailee, or other Person. Borrower bears all risk of loss, damage or destruction of the Collateral. 9.6 Remedies Cumulative. Bank’s rights and remedies under this Agreement, the other Loan Documents, and all other agreements among Borrower and Bank, are cumulative.Bank has all rights and remedies provided under the Code, by law, or in equity. Bank’s exercise of one right or remedy is not an election, and Bank’s waiverof any Event of Default is not a continuing waiver. Bank’s delay in enforcing its rights is not a waiver, election, or acquiescence. No waiver hereunder byBank shall be effective unless signed by Bank and then is only effective for the specific instance and purpose for which it was given. 9.7 Demand Waiver. Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release,compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Bank on which Borrower is liable. 10.NOTICES Notices or demands by either party about this Agreement must be in writing and personally delivered or sent by an overnight delivery service, or bycertified mail, postage prepaid, return receipt requested, or by facsimile at the addresses and facsimile numbers listed 25below. For purposes of Section 2.3, Bank may send notice to Borrower by electronic mail at the email address set forth below (provided that a copy of suchnotice shall be mailed promptly thereafter to Borrower at the address set forth below). Failure to provide copies of notices to Borrower or Bank to the Personsnamed below to receive copies shall not invalidate the notice to Borrower or to Bank, as applicable. A party may change its notice address by written notice tothe other party. If to Borrower: Equinix, Inc. 301 Velocity Way, 5th Floor Foster City, California 94404 Attn: Treasurer Fax: (650) 513-7913 Email:mmock@equinix.comwith a copy to: Equinix, Inc. 301 Velocity Way, 5th Floor Foster City, California 94404 Attn: General Counsel Fax: (650) 513-7913and to: Orrick, Herrington & Sutcliffe LLP 405 Howard Street San Francisco, California 94105 Attn: Richard S. Grey, Esq. Fax: (415) 773-5759If to Bank: Silicon Valley Bank 3003 Tasman Drive Santa Clara, California 95054 Attn: Maria Leaf Fax: (650) 320-0016with a copy to: Bingham McCutchen LLP Three Embarcadero Center San Francisco, California 94111-4067 Attn: Pamela J. Martinson, Esq. Fax: (415) 393-2286 11.CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER California law governs the Loan Documents without regard to principles of conflicts of law. Borrower and Bank each submit to the exclusivejurisdiction of the State and Federal courts in California, and Borrower accepts jurisdiction of the courts and venue in Santa Clara County, California.NOTWITHSTANDING THE FOREGOING, BANK SHALL HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINSTBORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION WHICH BANK DEEMS NECESSARY 26OR APPROPRIATE IN ORDER TO REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE BANK’S RIGHTS AGAINST BORROWEROR ITS PROPERTY. BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF ORBASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT,TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTOTHIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL. 12.GENERAL PROVISIONS 12.1 Successors and Assigns. This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrower may not assign this Agreement or any rightsor Obligations under it without Bank’s prior written consent which may be granted or withheld in Bank’s sole discretion. Bank has the right, with the consent(not to be unreasonably withheld or delayed) of Borrower so long as no Default or Event of Default has occurred, to sell, assign or transfer all or any part of,or any interest in, Bank’s obligations, rights and benefits under this Agreement, the Loan Documents or any other related agreement, provided that no consentshall be required for Bank to grant participations in all or any part of, or any interest in, Bank’s obligations, rights and benefits under this Agreement so longas the sale of any such participation interests does not relieve Bank of its obligations hereunder or create any additional obligations of Borrower. 12.2 Indemnification. Borrower hereby indemnifies, defends and holds Bank and its respective officers, employees, and agents harmless against: (a) all obligations,demands, claims, and liabilities asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses, orBank’s Expenses incurred, or paid by Bank from, following, or consequential to transactions between Bank and Borrower (including reasonable attorneys’fees and expenses), except to the extent any of the foregoing are caused by Bank’s gross negligence or willful misconduct. 12.3 Attorneys’ Fees, Costs and Expenses. In any action or proceeding between Borrower and Bank arising out of the Loan Documents the prevailing party will be entitled to recover its reasonableattorneys’ fees and other reasonable costs and expenses incurred, in addition to any other relief to which it may be entitled. 12.4 Right of Set-Off. Borrower hereby grants to Bank, a lien, security interest and right of set-off as security for all Obligations to Bank hereunder, whether now existing orhereafter arising upon and against all deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of Bank orany entity under the control of Bank (including a Bank 27subsidiary) or in transit to any of them. At any time after the occurrence and during the continuance of an Event of Default, without demand or notice, Bankmay set-off the same or any part thereof and apply the same to any liability or obligation of Borrower and any guarantor even though unmatured andregardless of the adequacy of any other collateral securing the Obligations. ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTSOR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHTOF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER OR ANY GUARANTOR, ARE HEREBYKNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED. 12.5 Time of Essence. Time is of the essence for the payment and performance of all Obligations in this Agreement. 12.6 Severability of Provisions. Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision. 12.7 Amendments in Writing, Integration. All amendments to this Agreement must be in writing signed by both Bank and Borrower. This Agreement and the Loan Documents represent the entireagreement about this subject matter, and supersede prior negotiations or agreements. All prior agreements, understandings, representations, warranties, andnegotiations between the parties about the subject matter of this Agreement and the Loan Documents merge into this Agreement and the Loan Documents. 12.8 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed anddelivered, are an original, and all taken together, constitute one Agreement. 12.9 Survival. All covenants, representations and warranties made in this Agreement continue in full force while any Obligations remain outstanding. The obligation ofBorrower in Section 12.2 to indemnify Bank shall survive until the statute of limitations with respect to such claim or cause of action shall have run. 12.10 Confidentiality. In handling any confidential information, Bank shall exercise the same degree of care that it exercises for its own proprietary information, but disclosureof information may be made: (a) to Bank’s subsidiaries or affiliates in connection with their business with Borrower; (b) to 28prospective transferees or purchasers of any interest in the Credit Extensions (provided, however, Bank shall obtain such prospective transferee’s orpurchaser’s agreement to the terms of this provision); (c) as required by law, regulation, subpoena, or other order; (d) as required in connection with Bank’sexamination or audit; and (e) as Bank considers appropriate in exercising remedies under this Agreement. Confidential information does not includeinformation that either: (x) is in the public domain or in Bank’s possession when disclosed to Bank (other than information that becomes part of the publicdomain by reason of Bank’s breach of this Section 12.10), or becomes part of the public domain after disclosure to Bank; or (y) is disclosed to Bank by athird party, if, at the time of disclosure, Bank does not know that the third party is prohibited from disclosing the information. 12.11 Designation of Obligations as “Designated Senior Debt”. Borrower and Bank expressly agree that the Obligations constitute “Designated Senior Debt” for purposes of and as defined in that certain Indenture,dated as of February 11, 2004, between Borrower and U.S. Bank National Association, as Trustee, as amended, modified or supplemented from time to time. 13.DEFINITIONS 13.1 Definitions. In this Agreement: “Accounts” are all existing and later arising accounts, contract rights, and other obligations owed Borrower or Guarantor in connection with its sale orlease of goods (including licensing software and other technology) or provision of services, all credit insurance, guaranties, other security and all merchandisereturned or reclaimed by Borrower or Guarantor and Borrower’s Books relating to any of the foregoing, as such definition may be amended from time to timeaccording to the Code. “Adjusted LIBOR” means, for each Interest Period in respect of LIBOR Advances comprising part of the same Advances, an interest rate per annum(rounded upward to the nearest 1/16th of one percent (0.0625%)) equal to LIBOR for such Interest Period divided by one (1) minus the Reserve Requirementfor such Interest Period. “Advance” or “Advances” is a loan advance (or advances) under the Committed Revolving Line. “Affiliate” of any Person is (a) any Person that owns or controls directly or indirectly such Person, (b) any Person that controls or is controlled by or isunder common control with such Person, and (c) each of such Person’s senior executive officers or directors, (d) for any Person that is a limited liabilitycompany, such Person’s managers and members, and (e) for any Person that is a partnership, such Person’s general partner. “Alternate Covenant Level” has the meaning set forth in Section 6.7(a). 29“Applicable Margins” means, collectively, the Applicable Revolver LIBOR Margin and the Applicable Term LIBOR Margin. “Applicable Revolver LIBOR Margin” means the per annum interest rate from time to time in effect and payable in addition to the LIBOR Rateapplicable to the Advances, as determined by reference to Section 2.4(b) of the Agreement. “Applicable Term LIBOR Margin” means the per annum interest rate from time to time in effect and payable in addition to the LIBOR Rate applicableto the Advances, as determined by reference to Section 2.4(b) of the Agreement. “Bank Expenses” are all audit fees and expenses and costs or expenses (including reasonable attorneys’ fees and expenses) for preparing, negotiating,administering, defending and enforcing the Loan Documents (including appeals or Insolvency Proceedings). “Borrower’s Books” are all Borrower’s and Guarantor’s books and records including ledgers, records regarding Borrower’s and Guarantor’s assets orliabilities, the Collateral, business operations or financial condition and all computer programs or discs or any equipment containing the information. “Business Day” is any day that is not a Saturday, Sunday or a day on which Bank is closed. “Cash Equivalents” are (a) marketable direct obligations issued or unconditionally guaranteed by the United States or its agency or any state maturingwithin one (1) year from its acquisition, (b) commercial paper maturing no more than one (1) year after its acquisition and having an A-1/P-1 or better ratingfrom either Standard & Poor’s Corporation or Moody’s Investors Service, Inc., (c) Bank’s certificates of deposit issued maturing no more than one (1) yearafter issue, (d) shares in money market funds rated Aaa/AAA, and (e) any other investments administered through Bank or its Affiliates. “Cash Management Services” has the meaning ascribed to it in Section 2.1.4. “Cash Management Services Sublimit” has the meaning ascribed to it in Section 2.1.4. “Change in Control” is a transaction in which (a) any “person” or “group” (within the meaning of Section 13(d) and 14(d)(2) of the SecuritiesExchange Act of 1934, as amended (the “Act”)), other than STT or its Affiliates, becomes the “beneficial owner” (as defined in Rule 13d-3 under the Act),directly or indirectly, of greater than 35% of the shares of all classes of stock then outstanding of a Person ordinarily entitled to vote in the election of thedirectors of such Person; or (b) STT, considered together with its Affiliates, becomes the “beneficial owner” (as defined in Rule 13d-3 under the Act), directlyor indirectly, of greater than 50% of the shares of all classes of stock then outstanding of a Person ordinarily entitled to vote in the election of the directors ofsuch Person. “Code” is the Uniform Commercial Code as adopted in California as amended and in effect from time to time. 30“Collateral” is the property described on Exhibit E attached hereto. “Collateral Information Certificates” are the Collateral Information Certificates delivered by Borrower and Guarantor to Bank on or before theEffective Date. “Committed Revolving Line” is an aggregate principal amount equal to $25,000,000. “Commodity Account” has the meaning ascribed to it in the Code. “Contingent Obligation” is, for any Person, any direct or indirect liability, contingent or not, of that Person for (a) any indebtedness, lease, dividend,letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed, co made, discounted or sold with recourse by thatPerson, or for which that Person is directly or indirectly liable; (b) any obligations for undrawn letters of credit for the account of that Person; and (c) allobligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designatedto protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but “Contingent Obligation” does not includeendorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation forwhich the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith;but the amount may not exceed the maximum of the obligations under the guarantee or other support arrangement. “Continuation Date” means any date on which Borrower elects to continue a LIBOR Advance into another Interest Period. “Control Agreement” means, collectively, any control agreement entered into among Borrower, Bank and the depositary bank, securities intermediary,or commodity intermediary at which Borrower maintains a Deposit Account, Securities Account, or a Commodity Account, pursuant to which Bank obtainscontrol (within the meaning of the applicable provision of the Code) over such Deposit Account, Securities Account, or Commodity Account. “Conversion Date” means any date on which Borrower elects to convert a Prime Rate Advance to a LIBOR Advance or a LIBOR Advance to a PrimeRate Advance. “Copyright” means any of the following now owned or hereafter acquired or created (as a work for hire for the benefit of Borrower) by Borrower or inwhich Borrower now holds or hereafter acquires or receives any right or interest, in whole or in part: (a) any copyright, whether registered or unregistered, heldpursuant to the laws of the United States or of any other country or foreign jurisdiction, (b) registration, application or recording in the United StatesCopyright Office or in any similar office or agency of the United States or any other country or foreign jurisdiction, (c) any continuation, renewal or extensionthereof, and (d) any registration to be issued in any pending application, and shall include any right or interest in and to work protectable by any of theforegoing which are presently or in the future owned, created or authorized (as a work for hire for the benefit of Borrower) or acquired by Borrower, in wholeor in part. 31“Covenant Level 1” means the period from the Effective Date until the date Borrower elects to comply with Covenant Level 2. “Covenant Level 2” means the period beginning on the date Borrower elects to comply with Covenant Level 2 by giving notice thereof to Bank inwriting, either by checking the appropriate space on the Compliance Certificate or otherwise, until termination of this Agreement. “Credit Extension” is each Advance, Letter of Credit, FX Forward Contract, Cash Management Services, or any other extension of credit by Bank forBorrower’s benefit. “Default” means an event, condition, or act which with notice or the passage of time, or both, would constitute an Event of Default. “Deferred Revenue” is all amounts received in advance of performance and not yet recognized as revenue. “Deposit Accounts” means all present and future “deposit accounts” as defined in the Code in effect on the date hereof with such additions to suchterm as may hereafter be made, and includes without limitation all general and special bank accounts, demand accounts, checking accounts, savingsaccounts and certificates of deposit, whether maintained with Bank or other institutions. “Designated Deposit Account” means that certain deposit account maintained with Bank in the name of Borrower, account number [*]. “Domestic Accounts” means Accounts for which the account debtor has its principal place of business in the United States. “Domestic Collateral Account” is any Deposit Account, Securities Account or Commodity Account established by Borrower or Guarantor at or withany bank or financial institution located in the United States. “Domestic Subsidiary” means any direct or indirect Subsidiary of Borrower or Guarantor which is organized under the laws of the United States orany State thereof. “Effective Amount” means with respect to any Advances on any date, the aggregate outstanding principal amount thereof after giving effect to anyborrowing and prepayments or repayments thereof occurring on such date. “Effective Date” means the date that Bank signs this Agreement as indicated on the signature page hereof. “Eligible Domestic Accounts” are Accounts in the ordinary course of Borrower’s and Guarantor’s business that meet all the representations andwarranties in Section 5.2, and which*CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES ANDEXCHANGE COMMISSION. 32contain selling terms and conditions acceptable to Bank; provided, that Bank may change eligibility standards by giving Borrower and Guarantor noticethereof. Unless Bank agrees otherwise in writing, Eligible Domestic Accounts will not include: (a) Accounts against which Bank does not have a perfected, first priority security interest; (b) Accounts that the account debtor has not paid within 90 days of invoice date; (c) Accounts for an account debtor, 35% or more of whose Accounts have not been paid within 90 days of invoice date; (d) Accounts with credit balances over 90 days from invoice date; (e) Accounts for an account debtor, including Affiliates, whose total obligations to Borrower and Guarantor exceed 40% of all Accounts, for the amountsthat exceed that percentage, unless the Bank approves otherwise in writing; (f) Accounts for which the account debtor does not have its principal place of business in the United States; (g) Accounts for which the account debtor is a federal, state or local government entity or any department, agency, or instrumentality and against whichBank’s security interest has not been perfected under the Assignment of Claims Act; (h) Accounts for which Borrower or Guarantor owes the account debtor, but only up to the amount owed (sometimes called “contra” accounts, accountspayable, customer deposits or credit accounts); (i) Accounts for demonstration or promotional equipment, or in which goods are consigned, sales guaranteed, sale or return, sale on approval, bill andhold, or other terms if account debtor’s payment may be conditional; (j) Accounts for which the account debtor is an Affiliate, officer, employee, or agent of Borrower or Guarantor; (k) Accounts in which the account debtor disputes liability or makes any claim and Bank believes there may be a basis for dispute (but only up to thedisputed or claimed amount), or if the Account Debtor is subject to an Insolvency Proceeding, or becomes insolvent, or goes out of business; or (l) Accounts for which Bank reasonably determines collection to be doubtful, or the Account holder to be an unacceptable business risk. “Equipment” is all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in whichBorrower has any interest. 33“Facility” means any Internet Business Exchange™ (IBX) center owned or operated by the Borrower or any of its Subsidiaries. “Filing Collateral” means any Collateral in which a security interest may be perfected by the filing of a financing statement in the appropriatejurisdiction under the Code. “First Installment Payment Date” means the date that is ninety (90) days from the Term Loan Option Date. “Foreign Assets” means (a) any tangible assets not located within the United States; (b) Accounts that are not Domestic Accounts; (c) any DepositAccount, Securities Account, Commodity Account or Letter of Credit Right if the jurisdiction (as determined pursuant to Section 9304, 9305 or 9306, asapplicable, of the Code) of the related depositary bank, securities intermediary, commodity intermediary or issuer is outside the United States; (d) any equitysecurities issued by a Subsidiary of Borrower or Guarantor that is not a Domestic Subsidiary; and (e) any “instrument” (as defined in the Code) if the payorthereof does not have its principal place of business in the United States. “Funding Date” is the date on which an Advance is made to or on account of Borrower. “FX Forward Contract” has the meaning ascribed thereto in Section 2.1.3. “FX Reserve” has the meaning ascribed thereto in Section 2.1.3. “GAAP” is generally accepted accounting principles in effect under the laws of the United States of America from time to time. “General Intangibles” has the meaning ascribed to it in the Code. “Governmental Authority” means (a) any foreign, federal, state, county, or municipal government, or political subdivision thereof, (b) anygovernmental or quasi-governmental agency, authority, board, bureau, commission, department, instrumentality or public body, (c) any court oradministrative tribunal or (d) with respect to any Person, any arbitration tribunal or other non-governmental authority to whose jurisdiction that Person hasconsented. “Guarantor” means Equinix Operating Co., Inc., a Delaware corporation. “Indebtedness” is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations forsurety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations and (d)Contingent Obligations. “Insolvency Proceeding” is any proceeding by or against any Person under the United States Bankruptcy Code, or any other bankruptcy orinsolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization,arrangement, or other relief. 34“Intellectual Property” means any intellectual property, in any medium, of any kind or nature whatsoever, now or hereafter owned or acquired orreceived by Borrower or in which Borrower now holds or hereafter acquires or receives any right or interest, and shall include, in any event, any Copyright,Trademark, Patent, trade secret, customer list, Internet domain name (including any right related to the registration thereof), proprietary or confidentialinformation, Mask Works, source, object or other programming code, invention (whether or not patented or patentable), technical information, procedure,design, knowledge, know how, software, data base, data, skill, expertise, recipe, experience, process, model, drawing, material or record, all claims fordamages by way of past, present and future infringement of any of the rights included above and all licenses or other rights to use any property or rights of atype described above. “Interest Payment Date” means, with respect to any LIBOR Advance, the last day of each Interest Period applicable to such LIBOR Advance and,with respect to Prime Rate Advances, the last day of each fiscal quarter, and each date a Prime Rate Advance is converted into a LIBOR Advance to the extentof the amount converted to a LIBOR Advance. “Interest Period” means, as to any LIBOR Advance, the period commencing on the date of such LIBOR Advance, or on the conversion/continuationdate on which the LIBOR Advance is converted into or continued as a LIBOR Advance, and ending on the date that is one (1), two (2), or three (3), monthsthereafter, in each case as Borrower may elect in the applicable Notice of Borrowing or Notice of Conversion/Continuation; provided, however, that (a) noInterest Period with respect to any LIBOR Advance being repaid during the Revolving Period shall end later than the Revolving Maturity Date unless suchLIBOR Advance is selected to be repaid under the Term Loan Option, (b) no Interest Period with respect to any LIBOR Advance being repaid under the TermLoan Option shall end later than the Term Loan Maturity Date, (c) the last day of an Interest Period shall be determined in accordance with the practices of theLIBOR interbank market as from time to time in effect, (d) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Periodshall be extended to the following Business Day unless, in the case of a LIBOR Advance, the result of such extension would be to carry such Interest Periodinto another calendar month, in which event such Interest Period shall end on the preceding Business Day, (e) any Interest Period pertaining to a LIBORAdvance that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month atthe end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period, and (f) interest shall accrue fromand include the first Business Day of an Interest Period but exclude the last Business Day of such Interest Period. “Interest Rate Determination Date” means each date for calculating the LIBOR for purposes of determining the interest rate in respect of an InterestPeriod. The Interest Rate Determination Date shall be the second Business Day prior to the first day of the related Interest Period for a LIBOR Advance. “Inventory” is present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing andshipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind anddescription now or later owned by or in the custody or possession, actual or constructive, of Borrower, including inventory temporarily out of its custody orpossession or in 35transit and including returns on any accounts or other proceeds (including insurance proceeds) from the sale or disposition of any of the foregoing and anydocuments of title. “Investment” is any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capitalcontribution to any Person. “Investment Property” has the meaning ascribed to it in the Code. “Letter of Credit” has the meaning ascribed to it in Section 2.1.2. “Letter of Credit Rights” has the meaning ascribed to it in the Code. “LIBOR” means, for any Interest Rate Determination Date with respect to an Interest Period for any Advance to be made, continued as or converted intoa LIBOR Advance, the rate of interest per annum determined by Bank to be the per annum rate of interest at which deposits in United States Dollars areoffered to Bank in the London interbank market in which Bank customarily participates at 11:00 a.m. (local time in such interbank market) two (2) BusinessDays prior to the first day of such Interest Period for a period approximately equal to such Interest Period and in an amount approximately equal to the amountof such Advance. “LIBOR Advance” means an Advance that bears interest based on Adjusted LIBOR. “Lien” is a mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. “Loan Documents” are, collectively, this Agreement, the Collateral Information Certificates, any note executed by Borrower, the Guaranty and anyother present or future agreement between Borrower or Guarantor and/or for the benefit of Bank in connection with this Agreement, all as amended, extended orrestated. “Mask Works” are all mask works or similar rights available for the protection of semiconductor chips, now owned or later acquired. “Material Adverse Change” is: (a) a material impairment in the perfection or priority of Banks’ security interest in the Collateral or in the value ofsuch Collateral; or (b) a material adverse change in the business, operations, or financial condition of Borrower and Guarantor taken as a whole, whichresults in a material impairment of the prospect of repayment of any portion of the Obligations. “Non-Performing Facility” means, as of any date of determination, a Facility with negative operating cash flow during the period consisting of the twoimmediately preceding quarters. “Notice of Borrowing” means a notice given by Borrower to Bank in accordance with Section 3.2(a), substantially in the form of Exhibit B, withappropriate insertions. “Notice of Conversion/Continuation” means a notice given by Borrower to Bank in accordance with Section 3.4, substantially in the form of ExhibitC, with appropriate insertions. 36“Obligations” are debts, principal, interest, Bank Expenses, and other amounts Borrower owes Bank now or later, including Cash ManagementServices, Letters of Credit and FX Forward Contracts, if any and including interest accruing after Insolvency Proceedings begin and debts, liabilities, orobligations of Borrower assigned to Bank. “Operating Documents” shall mean, for any Person, such Person’s formation documents, as currently filed with the Secretary of State of suchPerson’s state of formation, and, (a) if such Person is a corporation, its bylaws in current form, (b) if such Person is a limited liability company, its limitedliability company agreement (or similar agreement), each of the foregoing with all current modifications and amendments thereto. “Other Property” means (a) the following as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made,and all rights relating thereto: all present and future “commercial tort claims”, “documents”, “instruments”, “promissory notes”, “chattel paper”, “letters ofcredit”, “letter-of-credit rights”, “fixtures”, “farm products” and “money”; and (b) all other goods and personal property of every kind, tangible andintangible, whether or not governed by the Code, but shall not include Intellectual Property. “Patent” means any of the following now hereafter owned or acquired or received by Borrower or in which Borrower now holds or hereafter acquires orreceives any right or interest: (a) letters patent and right corresponding thereto, of the United States or any other country or other foreign jurisdiction, anyregistration and recording thereof, and any application for letters patent, and rights corresponding thereto, of the United States or any other country or otherforeign jurisdiction, including, without limitation, registrations, recordings and applications in the United States Patent and Trademark Office or in anysimilar office or agency of the United States, any State thereof or any other country or other foreign jurisdiction; (b) any reissue, continuation, continuation-in-part or extension thereof; (c) any petty patent, divisional, and patent of addition; and (d) any patent to issue in any such application. “Permitted Distributions” means: (a) purchases of capital stock from former employees, consultants and directors pursuant to repurchase agreements or other similar agreements; (b) distributions or dividends consisting solely of Borrower’s capital stock; (c) purchases for value of any rights distributed in connection with any stockholder rights plan; (d) payments of dividends or distributions made by any Subsidiary of Borrower to Borrower or another Subsidiary of Borrower; (e) mandatory dividends provided for under Borrower’s Certificate of Incorporation as in existence as of the Effective Date; (f) exchanges of equity securities of Borrower for other equity securities of Borrower that do not provide for any mandatory dividend or redemption priorto the Revolving Maturity Date; and 37(g) other distributions, dividends or purchases of Borrower’s capital stock in cash, provided that the aggregate amount of such distributions,dividends, or purchases made pursuant to this clause (g) not exceeding 25% of Borrower’s assets. “Permitted Indebtedness” is: (a) Borrower’s indebtedness to Bank under this Agreement or the other Loan Documents; (b) Indebtedness existing on the Effective Date and shown on the Collateral Information Certificate; (c) Subordinated Debt; (d) Indebtedness to trade creditors incurred in the ordinary course of business; (e) capitalized leases and purchase money Indebtedness secured by Permitted Liens not exceeding $65,000,000; (f) Indebtedness secured by Permitted Liens; (g) Indebtedness under any performance, surety, statutory or appeal bonds or similar obligations incurred in the ordinary course of business (h) (i) Indebtedness of Borrower to any of its Subsidiaries to the extent it is Subordinated Debt; (ii) Indebtedness of any Subsidiary of Borrower toanother Subsidiary of Borrower; and (iii) Indebtedness of any Subsidiary to Borrower to the extent permitted under clause (h) of the definition of PermittedInvestments; (i) guaranty obligations of Borrower or any Subsidiary in respect of Permitted Indebtedness of any wholly-owned Subsidiary of such Person; (j) Indebtedness of any Persons acquired in connection with any merger or acquisition transaction permitted under this Agreement; (k) Indebtedness incurred in connection with Rate Contracts; (l) obligations resulting from the assumption of a real property lease or sublease to the extent such obligation is treated as a capital lease obligation foraccounting purposes only; (m) other Indebtedness not otherwise permitted by Section 7.5 not exceeding $1,000,000 in the aggregate outstanding at any time; and (n) extensions, refinancings, modifications, amendments and restatements of any items of Permitted Indebtedness (a) through (j) above, provided thatthe principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon Borrower or its Subsidiary, as thecase may be. 38“Permitted Investments” are: (a) Investments shown on the Collateral Information Certificate and existing on the Effective Date; (b) Cash Equivalents; (c) Investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course ofBorrower; (d) Investments accepted in connection with Transfers permitted by Section 7.1; (e) Investments consisting of extensions of credit to Borrower’s or its Subsidiaries’ customers in the nature of accounts receivable, prepaid royalties ornotes receivable arising from the sale or lease of goods, provision of services or licensing activities of Borrower; (f) Investments consisting of (i) travel advances and employee relocation loans and other employee loans and advances in the ordinary course ofbusiness, and (ii) loans to employees, officers or directors relating to the purchase of equity securities of Borrower or its Subsidiaries pursuant to employeestock purchase plans or agreements approved by Borrower’s Board of Directors; (g) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement ofdelinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business; (h) (i) Investments of Subsidiaries of Borrower in or to Borrower; (ii) Investments of Subsidiaries of Borrower in or to other Subsidiaries of Borrower;and (iii) Investments of Borrower in or to Subsidiaries in an amount not to exceed $1,000,000 in any month and $12,000,000 in any fiscal year so long as noEvent of Default exists or would result therefrom; (i) Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers who are not Affiliates, in theordinary course of business; provided that this paragraph (i) shall not apply to Investments of Borrower in any Subsidiary; (j) Investments resulting from transactions not prohibited by Section 7.4 or Investments acquired in connection with such transactions; (k) Investments consisting of joint ventures entered into by Borrower or any Subsidiary not exceeding $1,000,000 in the aggregate; (l) deposits, prepayment and other credits to suppliers made in the ordinary course of business not in excess of $100,000; and (m) Investments permitted by the investment policy adopted by Borrower’s Board of Directors, a true and correct copy of which has been provided toBank. 39“Permitted Liens” are: (a) Liens existing on the Effective Date and shown on the Collateral Information Certificate or arising under this Agreement or other Loan Documents; (b) Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for whichBorrower maintains adequate reserves on its Books, if they have no priority over any of Bank’s security interests; (c) Liens (including with respect to capital leases) on property (including accessions, additions, parts, replacements, fixtures, improvements andattachments thereto, and the proceeds thereof) acquired or held by Borrower or its Subsidiaries incurred for financing such property (including accessions,additions, parts, replacements, fixtures, improvements and attachments thereto, and the proceeds thereof), if the Lien is confined to such property (includingaccessions, additions, parts, replacements, fixtures, improvements and attachments thereto, and the proceeds thereof) and the Indebtedness is PermittedIndebtedness; (d) Liens to secure existing Indebtedness of any Persons acquired in connection with any merger or acquisition transaction permitted under thisAgreement; (e) licenses or sublicenses granted in the ordinary course of Borrower’s business and any interest or title of a licensor or under any license or sublicense,if the licenses and sublicenses permit granting Bank a security interest; (f) Liens incurred in the extension, renewal or refinancing of the Indebtedness secured by Liens described in (a) through (d), but any extension, renewalor replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase; (g) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Section 8.3 or 8.6; (h) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s, landlord’s or other like Liens arising in the ordinary course of business whichare not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceeding if adequate reserves with respectthereto are maintained on the books of the applicable Person; (i) pledges or deposits in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other social securitylegislation; (j) deposits to secure the performance of bids, trade contracts (other than for borrowed money), contracts for the purchase of property, leases, statutoryobligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case, incurred in the ordinary course of business andnot representing an obligation for borrowed money; (k) easements, rights-of-way, restrictions and other similar encumbrances affecting real property which do not materially detract from the value of theproperty subject thereto or materially interfere with the ordinary conduct of the business of the applicable Person; 40(l) statutory, common law or contractual Liens of depository institutions or institutions holding securities accounts (including rights of set-off) providedthey are subordinate to Bank’s Liens pursuant to the terms of a control agreement; (m) Liens in favor of customs or revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation ofgoods; (n) Liens on insurance proceeds in favor of insurance companies granted solely to secure financed insurance premiums; (o) purported Liens evidenced by the precautionary filing of UCC financing statements relating solely to operating leases of personal property enteredinto in the ordinary course of business; and (p) Liens on escrowed cash representing a portion of the proceeds of permitted sales of assets by Borrower or any Subsidiary established to satisfycontingent post-closing obligations that it owes (including earn-outs, indemnities and working capital adjustments). “Person” is any individual, sole proprietorship, partnership, limited liability company, joint venture, company association, trust, unincorporatedorganization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency. “Prime Rate” is Bank’s most recently announced “prime rate,” even if it is not the lowest rate offered by Bank. “Prime Rate Advance” means an Advance that bears interest based on the Prime Rate. “Rate Contract” means swap agreements (as that term is defined in Section 101 of the Federal Bankruptcy Reform Act of 1978, as amended) and anyother agreements or arrangements designed to provide protection against fluctuations in interest or currency exchange rates. “Regulatory Change” means, with respect to Bank, any change on or after the date of this Agreement in United States federal, state, or foreign laws orregulations, including Regulation D, or the adoption or making on or after such date of any interpretations, directives, or requests applying to a class oflenders including Bank, of or under any United States federal or state, or any foreign laws or regulations (whether or not having the force of law) by any courtor governmental or monetary authority charged with the interpretation or administration thereof. “Requirement of Law” means, as to any Person, any law (statutory or common), treaty, rule, regulation, guideline or determination of an arbitrator orof a Governmental Authority, in each case applicable to or binding upon the Person or any of its Property or to which the Person or any of its Property issubject. “Reserve Requirement” means, for any Interest Period, the average maximum rate at which reserves (including any marginal, supplemental, oremergency reserves) are required to be maintained during such Interest Period under Regulation D against “Eurocurrency liabilities” (as such term is used inRegulation D) by member banks of the Federal Reserve System. Without 41limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by Bank by reason of any RegulatoryChange against (a) any category of liabilities which includes deposits by reference to which Adjusted LIBOR is to be determined as provided in the definitionof LIBOR or (b) any category of extensions of credit or other assets which include Advances. “Responsible Officer” is any of the Chief Executive Officer, President, Chief Financial Officer, Chief Accounting Officer, Controller, Vice President-Finance, or Treasurer of Borrower. “Revolving Maturity Date” is December 6, 2006. “Revolving Period” means the period from the Effective Date through, and including, the Revolving Maturity Date. “STT” means iSTT Investments Pte Ltd, a corporation organized under the laws of the Republic of Singapore, as agent for the holders of certainconvertible secured notes referred to in the definition of “STT Debt.” “STT Debt” means the Indebtedness of Borrower to certain holders of convertible secured notes due 2007 pursuant to the STT Purchase Agreement. “STT Purchase Agreement” means that certain Securities Purchase Agreement dated as of October 2, 2002, by and among Borrower, the guarantorsparty thereto, and the purchases named therein, as amended, modified, supplemented or restated from time to time. “Securities Account” has the meaning ascribed to it in the Code. “Subordinated Debt” is debt incurred by Borrower subordinated to Borrower’s debt to Bank (pursuant to a subordination agreement entered intoamong Bank, Borrower and the subordinated creditor), on terms reasonably acceptable to Bank. “Subsidiary” is any Person, corporation, partnership, limited liability company, joint venture, or any other business entity of which more than fiftypercent (50%) of the voting stock or other equity interests is owned or controlled, directly or indirectly, by the Person or one or more Affiliates of the Person. “Sublimit Utilization Amount” means the sum of (a) all amounts for services utilized under the Cash Management Services Sublimit, (b) the amountof all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit), and (c) the FX Reserve. “Term Loan Option” means Borrower’s option to have up to $10,000,000 of the then-outstanding principal amount of the Advances be repaid pursuantto the terms of Section 2.5(b). “Term Loan Option Date” is 364 days from the Effective Date. “Term Loan Maturity Date” means the date that is twenty-four (24) months from the Term Loan Option Date. 42“Trademark” means any of the following now or hereafter owned or acquired or received by Borrower or in which Borrower now holds or hereafteracquires or receives any right or interest: (a) any trademark, trade name, corporate name, business name, trade style, service mark, logo, other source orbusiness identifier, print or label on which any of the foregoing have appeared or appear, design or other general intangibles of like nature, now existing orhereafter adopted or acquired, all registrations and recordings thereof, and any applications in connection therewith, including registration, recording andapplication in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country orother foreign jurisdiction and (b) any reissue, extension or renewal of any of the foregoing. “Usage Period” has the meaning ascribed to it in Section 2.7(c). 43IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. BORROWER EQUINIX, INC. By: /s/ Peter Van Camp Name: Peter Van Camp Title: Chief Executive OfficerBANK SILICON VALLEY BANK By: /s/ Amanda Peters Name: Amanda Peters Title: Vice President Effective Date: 12/6/04 44TABLE OF CONTENTS Page1. Accounting and Other Terms 12. Loan and Terms of Payment 1 2.1 Promise to Pay 1 2.1.1 Revolving Advances 1 2.1.2 Letters of Credit Sublimit 2 2.1.3 FX Forward Contracts 2 2.1.4 Cash Management Services 2 2.2 Suspension and Termination of Commitment to Lend; Termination of this Agreement 2 2.3 Overadvances 3 2.4 Interest Rates 3 2.5 Term Loan Option 4 2.6 General Provisions 4 2.7 Fees 4 2.8 Mandatory Prepayment Event 53. Conditions Of Credit Extensions 5 3.1 Conditions Precedent to Initial Credit Extension 5 3.2 Conditions Precedent to all Credit Extensions 6 3.3 Procedure for the Borrowing of Advances 6 3.4 Conversion and Continuation Elections 7 3.5 Special Provisions Governing LIBOR Advances 8 3.6 Additional Requirements/Provisions Regarding LIBOR Advances 10 3.7 Calculation of Interest and Fees 124. Creation of Security Interest 12 4.1 Grant of Security Interest 12 4.2 Authorization to File Financing Statements 135. REPRESENTATIONS AND WARRANTIES 13 5.1 Due Organization and Authorization 13 5.2 Collateral 14 5.3 Litigation 14 5.4 No Material Deterioration in Financial Statements 14 5.5 Solvency 14 5.6 Regulatory Compliance 14 5.7 Subsidiaries 15 5.8 Full Disclosure 156. AFFIRMATIVE COVENANTS 15 6.1 Government Compliance 15 6.2 Financial Statements, Reports, Certificates 16 6.3 Inventory; Returns 17  6.4 Taxes 18 6.5 Insurance 18 6.6 Primary Accounts 18 6.7 Financial Covenants 18 6.8 Intentionally Omitted 19 6.9 Further Assurances 197. NEGATIVE COVENANTS 20 7.1 Dispositions 20 7.2 Changes in Business 20 7.3 Dissolution 20 7.4 Mergers; Consolidations 20 7.5 Indebtedness 20 7.6 Encumbrance 20 7.7 Distributions; Investments 21 7.8 Transactions with Affiliates 21 7.9 Subordinated Debt 21 7.10 Compliance 218. EVENTS OF DEFAULT 22 8.1 Payment Default 22 8.2 Covenant Default 22 8.3 Material Adverse Change 22 8.4 Attachment 22 8.5 Insolvency 23 8.6 Other Agreements 23 8.7 Judgments 23 8.8 Misrepresentations 239. RIGHTS AND REMEDIES 23 9.1 Rights and Remedies 23 9.2 Power of Attorney 24 9.3 Intentionally Omitted 25 9.4 Bank Expenses 25 9.5 Bank’s Liability for Collateral 25 9.6 Remedies Cumulative 25 9.7 Demand Waiver 2510. NOTICES 2511. CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER 2612. GENERAL PROVISIONS 27 12.1 Successors and Assigns 27 12.2 Indemnification 27 12.3 Attorneys’ Fees, Costs and Expenses 27 12.4 Right of Set-Off 27  12.5 Time of Essence 28 12.6 Severability of Provisions 28 12.7 Amendments in Writing, Integration 28 12.8 Counterparts 28 12.9 Survival 28 12.10 Confidentiality 28 12.11 Designation of Obligations as “Designated Senior Debt” 2913. DEFINITIONS 29 13.1 Definitions 29 Exhibit 10.111 SUBLEASE BETWEEN EQUINIX, INC.,a Delaware corporation SUBLANDLORD and AT LAST SPORTSWEAR INC.a New York corporation and SHARP EYE, INC.a New Jersey corporation collectively theSUBTENANT 275 Hartz WaySecaucus, New Jersey 07094 Dated: January 1, 2005Table of Contents Page1. SUBLEASE 42. PRIME LEASE 43. DEFINITIONS 54. PRIME LANDLORD 55. EFFECTIVE DATE 66. TERM 67. RENT 68. SUBTENANT FIT-UP 79. SUBTENANT’S CONTRIBUTIONS 710. ALTERATIONS 711. REPAIRS AND MAINTENANCE 712. UTILITIES AND SERVICES 813. ASSIGNMENT AND SUBLEASING 814. INSURANCE 815. COMPLIANCE WITH LAWS 816. SUBORDINATION 917. CASUALTY AND CONDEMNATION 918. CONSENT OR APPROVAL OF PRIME LANDLORD 919. NOTICES 920. BROKERS 1021. SUBLANDLORD’S AND SUBTENANT’S POWER TO EXECUTE 1022. TABLE OF CONTENTS - CAPTIONS 1123. CONSENT TO SUBLEASE BY PRIME LANDLORD 11 224. ENTIRE AGREEMENT 1125. SECURITY DEPOSIT 1126. HOLD OVER 12 EXHIBIT A Description of Subleased Premises 14EXHIBIT B Prime Lease 15 3SUBLEASE This Sublease is entered into as of this 1st day of January, 2005, by and between EQUINIX, INC., a Delaware corporation, with offices at 301 VelocityWay, Foster City, California 94404 (hereinafter “Sublandlord”) and At Last Sportswear Inc., a New York corporation, with offices at 275 Hartz Way,Secaucus, New Jersey 07094 and Sharp Eye, Inc., a New Jersey corporation, with offices at 275 Hartz Way, Secaucus, New Jersey 07094 (collectively the“Subtenant”). INTRODUCTORY STATEMENTS A.By Lease dated July 24, 2000, as amended, (the “Prime Lease”), Secaucus TT, LLC, successor-in-interest to Burlington Realty Associates IIILimited Partnership (the “Prime Landlord”) leased to Sublandlord, 338,787 square feet of floor space in the building known as 275 Hartz Way,Secaucus, New Jersey (the “Building”). B.Subtenant has agreed to sublet from Sublandlord certain portions of the Building. C.The parties desire to enter into this Sublease defining their respective rights, duties and liabilities relating to the Subleased Premises defined below. NOW THEREFORE, Sublandlord and Subtenant, in consideration of the mutual promises and covenants contained herein and other good andvaluable consideration, the receipt and sufficiency of which is hereby acknowledged, and each with intent to be legally bound, for themselves and theirrespective successors and assigns, agree as follows: 1. SUBLEASE Sublandlord, for and in consideration of the Subtenant’s payment of the rent and performance of the covenants contained in this Sublease, doeshereby demise and lease to Subtenant the following portions of the Building: the premises described as “Premises B” in the Prime Lease (as hereinafter defined)which contains approximately 154,887 rentable square feet of floor space, as shown and further described on the floor plan attached hereto as Exhibit A (the“Subleased Premises”). 2. PRIME LEASE A true and complete copy of the Prime Lease is attached hereto as Exhibit B. Where not expressly inconsistent with the terms hereof and except asotherwise stated herein to the contrary, this Sublease shall be subject and subordinate to all of the terms and conditions contained in the Prime Lease, except asotherwise set forth herein. Where not expressly inconsistent with the terms hereof or clearly applicable only to the original parties of the Prime Lease and exceptas otherwise stated herein to the contrary, 4all such terms and conditions are hereby incorporated into this Sublease and shall be binding upon Subtenant with respect to the Subleased Premises to thesame extent as if Subtenant were named as the “Tenant” and Sublandlord as the “Landlord” under the Prime Lease. For purposes of this Sublease, referencesin the Prime Lease to the “Term” shall mean the Term of this Sublease and references to the “Premises” in the Prime Lease shall mean the Subleased Premises.Each party agrees that during the Term (as defined below) it shall not do or omit to do anything which would result in a default under the Prime Lease, andeach party agrees to indemnify and hold the other and its officers, partners, employees and agents harmless from any claims, judgments, damages, fines,penalties, costs, liabilities (including sums paid in settlement of claims) or loss including attorney’s fees through the trial, appellate and administrative levels,consultants fees, and expert fees which arise during or after the Term in connection with its obligations under the Prime Lease, as incorporated herein;provided that the liability of the Subtenant under the foregoing indemnity shall only relate to Claims first arising after the Effective Date (as defined inParagraph 5). With the exceptions set forth herein, Subtenant shall be entitled to all of the rights and privileges of the Sublandlord as tenant under the terms ofthe Prime Lease with respect to the Subleased Premises. The following provisions of the Prime Lease shall not be incorporated into this Sublease: Lease Paragraphs 1d, 1e, 1f, 1g, 1k, 1m, 1p, 1q, 1r, 1t, 4, 5, 10, 49, 53, 54, 55, 56, and Exhibits B and C. Lease Addendum Paragraphs 1, 2, and 4. Sublandlord shall not do or suffer or permit anything to be done or suffered which would cause the Prime Lease to be terminated or forfeited by virtue ofany right of termination or forfeiture reserved or vested in the Prime Landlord thereunder, nor shall Sublandlord do or suffer or permit anything to be done orsuffered which would cause the Sublandlord to be or become in default of any obligation under the Prime Lease. Notwithstanding anything contained herein to the contrary, Sublandlord shall not agree to an amendment or modification of the Prime Lease which mayhave a material adverse effect on Subtenant’s business or Subtenant’s intended use or purpose for the Subleased Premises or which significantly increases anyof Subtenant’s obligations under this Sublease in a material adverse way, unless Sublandlord shall first obtain Subtenant’s prior written approval thereof,which approval may be withheld solely in the exercise of Subtenant’s good faith and reasonable business judgment. 3. DEFINITIONS All terms not expressly defined in this Sublease shall have the meanings given to them in the Prime Lease. 4. PRIME LANDLORD Subtenant agrees to look solely to the Prime Landlord, and not to Sublandlord, for the performance of services and obligations which are the obligationsof Prime Landlord under the Prime Lease with respect to the Subleased Premises. At Subtenant’s expense and request, Sublandlord will take any reasonableactions necessary to enable Subtenant to enforce the Sublandlord’s rights as tenant under the Prime Lease with respect to the Subleased Premises, including,without limitation, forwarding requests for the Prime Landlord’s (i) consent or approval, if necessary, for alterations, improvements and additions, and (ii)compliance with its obligations to effectuate repairs and provide maintenance for the Subleased Premises in accordance with the terms of the Prime Lease. 55. EFFECTIVE DATE This Sublease shall be of no force and effect unless and until it is executed by both Sublandlord and Subtenant. The date upon which a fullyexecuted copy of this Sublease is delivered to both Sublandlord and Subtenant is hereinafter referred to as the “Effective Date”. 6. TERM The term of this Sublease (the “Term”) shall commence on January 1, 2005 and shall end at 11:59 p.m. on the second (2nd) anniversary of theCommencement Date (the “Expiration Date”). The Subtenant has no renewal or extension rights hereunder. Subtenant shall have no right to remain in theSubleased Premises after the Expiration Date. 7. RENT (a) The Base Rent during the Term hereunder shall be payable in lawful money of the United States of America as follows: the sum of EIGHTHUNDRED THIRTEEN THOUSAND ONE HUNDRED FIFTY SIX AND 75/100 DOLLARS ($813,156.75) per annum, based upon the rate of $5.25per square foot. The Base Rent shall be payable in advance on the first day of each calendar month during the Term in equal monthly installments, except thata proportionately lesser sum may be paid for the first and last months of the Term of this Sublease if the Commencement Date occurs on a date other than thefirst day of the month or ends on other than the last day of a month. (b) In addition to the Base Rent reserved under Section 6(a) of this Sublease, Subtenant shall pay as additional rent, (i) Subtenant’s share of operatingexpenses (as set forth in Paragraph 9 herein), (ii) Subtenant’s pro-rata share of real estate taxes (as set forth in Paragraph 9 herein) and (iii) any other chargesas shall become due and payable under this Sublease (collectively “Additional Rent”; the Base Rent and Additional Rent are herein collectively referred to as“Rent”). (c) All Rent shall be payable at the office of the Sublandlord at the following address: Equinix, Inc.301 Velocity WayFoster City, California 94404Attention: Paul Silliman or at such other address as directed by written notice from Sublandlord to Subtenant. 68. SUBTENANT FIT-UP Subtenant agrees to accept the Sublease Premises in their “As-Is” condition as of the date hereof without improvement by Sublandlord. Subtenant shallarrange and perform the work in the Subleased Premises Space necessary to prepare the Subleased Premises for Subtenant’s occupancy (“Subtenant’sWork”). All Subtenant’s Work shall be performed in accordance with the provisions of Paragraph 25 of the Prime Lease. 9. SUBTENANT’S CONTRIBUTIONS (a) During the period Commencing on the Commencement Date through the first (1st) anniversary of the Commencement Date, Subtenant shall pay toSublandlord in respect of any and all operating expense payments owing by Sublandlord under the Prime Lease applicable to the Subleased Premises anannual amount equal to THIRTY NINE THOUSAND SEVEN HUNDRED EIGHTY AND 00/100 ($39,780.00) DOLLARS. The Expense Amount shall bepaid in equal monthly installments of THREE THOUSAND THREE HUNDRED FIFTEEN AND 00/100 ($3,315.00) DOLLARS on the first day of eachand every month together with the monthly installments of Base Rent and shall be prorated for any partial month(s). (b) During the period commencing on the first (1st) anniversary of the Commencement Date through the balance of the Term, Subtenant shall pay toSublandlord, Subtenant’s pro-rata share of all operating expenses payable by Sublandlord under the Prime Lease for the Subleased Premises. Subtenant’s pro-rata share of operating expenses is 38.35%. (c) During the Term Subtenant shall pay to Sublandlord, Subtenant’s pro-rata share of all real estate taxes payable by Sublandlord under the PrimeLease for the Subleased Premises. Subtenant’s pro-rata share of real estate taxes is 38.35%. 10. ALTERATIONS Subtenant shall not make any alterations, improvements or installations in or to the Subleased Premises without the prior written consent ofSublandlord, which consent shall not be unreasonably withheld, provided, however, that the Prime Landlord provides its consent to such alterations,improvements or installations if such consent is required under the Prime Lease. All alterations and improvements shall be subject to the terms and conditionsof the Prime Lease, and in those instances, if required, shall be subject to the Prime Landlord’s approval as provided in the Prime Lease. Any Alterationspermitted under this Sublease and the Prime Lease or which are consented to by the Prime Landlord shall be made by Subtenant or Subtenant’s contractors atthe sole cost and expense of Subtenant. At the expiration of the Term, Subtenant shall be required to surrender the Subleased Premises directly to the PrimeLandlord in the condition required under the Prime Lease. 11. REPAIRS AND MAINTENANCE Any repair and maintenance obligations with respect to the Subleased Premises which are the responsibility of the Sublandlord, as tenant under thePrime Lease, shall be performed by Subtenant at Subtenant’s sole cost and expense. Subtenant agrees 7that it will notify Sublandlord promptly of the need for any repair to the Subleased Premises, even if Sublandlord is not be responsible for any such repair.Notwithstanding anything contained herein to the contrary, in the event that a condition exists in the Subleased Premises that Prime Landlord is obligated torepair under the terms of the Prime Lease, Subtenant shall so advise Sublandlord, and Sublandlord, in turn, shall promptly advise Prime Landlord thereof.Sublandlord shall have no liability to Subtenant for Prime Landlord’s failure to make any such repair. 12. UTILITIES AND SERVICES Subtenant shall be entitled to all those services and utilities which Prime Landlord is required to provide under the terms of the Prime Lease. Subtenantshall look solely to the Prime Landlord for the provisions of such services and utilities, and Sublandlord shall not be responsible for Prime Landlord’s failureto provide the same unless such failure is caused by the negligent or willful acts or omissions of Sublandlord or its contractors or subcontractors or its or theiragents or employees. 13. ASSIGNMENT AND SUBLEASING Except as herein otherwise expressly provided, all of the terms, covenants, conditions and provisions of Paragraph 21 of the Prime Lease are herebyincorporated in, and made a part of this Sublease, and such rights and obligations as are contained in Paragraph 21 of the Prime Lease are hereby imposedupon the respective parties hereto; the Sublandlord herein being substituted for the Landlord named in the Prime Lease, and the Subtenant being substitutedfor the Tenant named in the Prime Lease. Subtenant shall not (a) assign this Sublease, nor (b) permit this Sublease to be assigned by operation of law orotherwise, nor (c) underlet all or any part of the Subleased Premises, nor (d) permit the Subleased Premises or any desk space contained therein to be occupiedby any person(s) other than Subtenant, nor (e) pledge or encumber this Sublease, the term and estate hereby granted or the rentals hereunder, without firstobtaining: (i) Prime Landlord’s prior written consent and all other required consents to same as set forth in and pursuant to the Prime Lease, and (ii)Sublandlord’s consent as set forth in and pursuant to the incorporated provisions of the Prime Lease. 14. INSURANCE Subtenant agrees to comply with all of the insurance requirements and obligations of Sublandlord as set forth in the Prime Lease and to name bothSublandlord and Prime Landlord as additional insureds on any required insurance policies. 15. COMPLIANCE WITH LAWS In addition to any obligations under the Prime Lease, Subtenant shall promptly comply with all statutes, ordinances, rules, orders, regulations andrequirements of the Federal, State and municipal Governments and of any and all their Departments and Bureaus (collectively, “Legal Requirements”)applicable to its particular use and occupancy of the Subleased Premises by Subtenant or any subtenant or assignee of Subtenant; including, withoutlimitation Legal Requirements for the correction, prevention and abatement of nuisances, violations or other grievances, in, upon or connected with theSubleased Premises during the Term and laws relating to environmental matters and the Americans with Disabilities Act (the “ADA”), and shall also promptlycomply with, and 8execute all rules, orders and regulations of the Board of Fire Underwriters for the prevention of fires applicable to the Subleased Premises, at its own cost andexpense. Notwithstanding anything herein to the contrary, Subtenant shall not be obligated to make any structural repairs, alterations or improvements to theSubleased Premises nor shall Subtenant be responsible for complying with any legal requirements relating to conditions existing prior to the CommencementDate. 16. SUBORDINATION This Sublease shall be subject and subordinate to the Prime Lease, any ground lease and to any mortgage or deed of trust thereon or on the fee simpleinterest in the Building or the land on which the Building is located. 17. CASUALTY AND CONDEMNATION If the Prime Lease is terminated with respect to the Subleased Premises pursuant to the provisions of the Prime Lease, this Sublease shall automaticallyterminate at the same time. If the Prime Lease is not terminated with respect to the Subleased Premises upon the occurrence of a casualty or condemnation, theprovisions of the Prime Lease with respect to casualty or condemnation shall apply to this Sublease and the Subleased Premises. 18. CONSENT OR APPROVAL OF PRIME LANDLORD If the consent or approval of Prime Landlord is required under the Prime Lease with respect to any matter relating to the Subleased Premises, Subtenantshall be required first to obtain the consent or approval of Sublandlord with respect thereto and, if Sublandlord grants such consent or approval, Sublandlordor Subtenant may forward a request for consent or approval to the Prime Landlord, but Sublandlord shall not be responsible for obtaining such consent orapproval. Sublandlord shall have no liability to Subtenant for the failure of Prime Landlord to give its consent. Subtenant further acknowledges that its soleremedy with respect to any assertion that Sublandlord’s failure to consent to any matter relating to the Subleased Premises is unreasonable shall be the remedyof specific performance and Subtenant shall have no other claim or cause of action against Sublandlord as a result of Sublandlord’s actions in refusing toconsent thereto. In the event Prime Landlord does not accept requests for consent directly from Subtenant, Sublandlord shall promptly deliver such requests toPrime Landlord on Subtenant’s behalf. 19. NOTICES All notices given pursuant to the provisions of this Sublease shall be in writing, addressed to the party to whom notice is given and sent registered orcertified mail, return receipt requested, in a postpaid envelope or by nationally recognized overnight delivery service as follows: 9To Subtenant:At Last Sportswear Inc.275 Hartz WaySecaucus, New Jersey 07094Attention: Sanjay IsraniSharp Eye, Inc.275 Hartz WaySecaucus, New Jersey 07094Attention: Steve SahniTo Sublandlord:Equinix, Inc.301 Velocity WayFoster City, California 94404Attention: Paul Silliman All notices shall be deemed given upon receipt or rejection. Either party by notice to the other may change or add persons and places where notices are tobe sent or delivered. In no event shall notice have to be sent on behalf of either party to more than three persons. It is understood and agreed that unless specifically modified by this Sublease, Sublandlord shall be entitled to the length of notice required to be givenPrime Landlord under the Prime Lease plus five (5) days and shall be entitled to give Subtenant the amount of notice required to be given tenant under thePrime Lease less five (5) days. 20. BROKERS The parties warrant that they have had no dealings with any real estate broker or agent in connection with this Sublease. Each party covenants to pay,hold harmless and indemnify the other from and any all costs, expenses or liabilities for any compensation, commissions and charges claimed by any otherbroker or agent with respect to this Sublease or the negotiation thereof, based upon alleged dealings with the indemnifying party. The provisions of thisParagraph 20 shall survive the expiration or termination of this Sublease. 21. SUBLANDLORD’S AND SUBTENANT’S POWER TO EXECUTE Sublandlord and Subtenant covenant, warrant and represent that they have full power and proper authority to execute this Sublease. 1022. TABLE OF CONTENTS - CAPTIONS The Table of Contents and the captions appearing in this Sublease are inserted only as a matter of convenience and do not define, limit, construe ordescribe the scope or intent of the sections of this Sublease or in any way affect this Sublease. 23. CONSENT TO SUBLEASE BY PRIME LANDLORD This Sublease shall not become operative until and unless the Prime Landlord has given to Sublandlord its consent hereto. Sublandlord willimmediately following the Effective Date submit to Prime Landlord a request for consent to this Sublease. Sublandlord shall diligently pursue such request forconsent including providing any documentation required by the Prime Landlord to process such request for consent. Sublandlord shall not be responsible forPrime Landlord’s failure to consent to this Sublease. Should Prime Landlord not consent to this Sublease within sixty (60) days of the Effective Date,Sublandlord and Subtenant shall each have the right to terminate this Sublease upon ten (10) days written notice of such termination to the other party. IfPrime Landlord declines to consent to this Sublease, each party shall be released from all obligations with respect hereto and neither party shall have anyfurther rights in law or in equity with respect to this Sublease. 24. ENTIRE AGREEMENT This Sublease (which includes each of the Exhibits attached hereto) contains the entire agreement between the parties and all prior negotiations andagreements are merged into this Sublease. This Sublease may not be changed, modified, terminated or discharged, in whole or in part, nor any of itsprovisions waived except by a written instrument which (a) shall expressly refer to this Sublease and (b) shall be executed by the party against whomenforcement of the change, modification, termination, discharge or waiver shall be sought. 25. SECURITY DEPOSIT (a) Subtenant shall deposit with Sublandlord the sum of ONE HUNDRED THIRTY FIVE THOUSAND FIVE HUNDRED TWENTY SIX AND00/100 DOLLARS ($135,526.00) (the “Security Deposit”) as security for the full and faithful performance of every portion of this Sublease to be performedby Subtenant. If Subtenant defaults with respect to any provision of this Sublease, Sublandlord may use, apply or retain all or any portion of the SecurityDeposit to remedy such default. If any portion of said Security Deposit is so used or applied, Subtenant shall, within ten (10) days after demand therefor,deposit cash with Sublandlord in an amount sufficient to restore the Security Deposit to its original amount, and Subtenant’s failure to do so shall be amaterial breach of this Sublease. Sublandlord shall not be required to keep this Security Deposit separate from its general funds, and Subtenant shall not beentitled to interest on such deposit. If Subtenant shall fully and faithfully perform every provision of this Sublease to be performed by it, the Security Depositor any balance thereof shall be returned to Subtenant within thirty (30) days of termination of the Term. (b) In lieu of cash, Subtenant may deliver to Landlord an unconditional, irrevocable letter of credit (“L/C”) issued by a “Bank” (as defined below) in aform 11acceptable to Sublandlord. Such L/C shall contain the following provisions: “This credit shall be automatically extended without amendment for additionalperiods of one (1) year from the present or any future expiration date hereof, unless we inform you (To the Attention of: Renee Lanam) in writing by certifiedmail dispatched by us at least thirty (30) days prior to the present or any future expiration date that we elect not to extend it.” Whenever a valid L/C is not inSublandlord’s possession, Subtenant agrees to have cash Security deposited with Landlord as otherwise required pursuant to this Paragraph 25. In the eventof a sublease of the Building subject to this Sublease, Sublandlord shall have the right to transfer the security to the vendee or lessee with charge toSublandlord and the Letter of Credit shall provide an automatic procedure for such transfer. For purposes of this Paragraph 25, a “Bank” is defined as abank or trust company having a principal office in the State of New Jersey, having undivided capital and surplus of at least $100,000,000.00. 26. HOLD OVER As a courtesy, Sublandlord shall endeavor to provide Subtenant with three (3) months written notice of the Expiration Date of this Sublease priorto the date thereof. However, failure by Sublandlord to provide such courtesy notice to Subtenant shall in no way be construed as an extension of the Term ofthis Sublease. If Subtenant shall hold-over after the end of the Term, such holding over shall be construed as a tenancy from month-to-month, subject to all ofthe provisions, conditions and obligations of this Sublease. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 12IN WITNESS WHEREOF, the parties hereto have caused this Sublease to be properly executed as of the day and year first above written. ATTEST: SUBLANDLORD EQUINIX, INC./s/ J. HAAG By: /s/ RENEE F. LANAM Name: Renee Lanam Its: Chief Financial OfficerATTEST: SUBTENANT AT LAST SPORTSWEAR INC./s/ NANCY TRINKLE By: /s/ SANJAY ISRANI Name: Sanjay Israni Its: Treasurer SHARP EYE, INC./s/ NANCY TRINKLE By: /s/ SANJIN STEVEN SAHNI Name: Sanjin Steven Sahni Its: Secretary 13Exhibit 10.112 January 10, 2005 CONFIDENTIAL VIA FACSIMILE AND OVERNIGHT DELIVERY Board of Directors i-STT Investments Pte Ltd51 Cuppage Road#10-11/17Starhub CentreSingapore 229469 Dear Jean, Re: A-1 Note Conversion This letter memorializes the agreement between i-STT Investments Pte Ltd (“i-STT) and Equinix, Inc. (“Equinix” or the “Company”) regarding the conversionof 95% of the Company’s A-1 Notes held by i-STT into shares of the Company’s Series A-1 Preferred Stock. All capitalized terms not otherwise defined inthis letter agreement shall have the meanings ascribed to them in that certain Securities Purchase Agreement dated October 2, 2002, among the Company and i-STT (the “Purchase Agreement”). Equinix hereby elects to effect an Optional Conversion of 95% of the A-1 Notes and PIK Notes paid through November 1, 2004, plus 95% of the accrued andunpaid PIK Notes that would have been due had the A-1 Notes remained outstanding through February 14, 2005 (collectively, the “Converted Notes”). Theshares issuable upon conversion of Converted Notes are calculated as follows: 95% of A-1 Notes, including 95% of PIK Notes paid through November 1, 2004 : $36,543,032.6995% of accrued and unpaid interest November 1, 2004 through February 14, 2005: $1,492,173.84Conversion price: $9.1779Series A-1 Preferred Stock issuable January 1, 2005: 4,144,216 By executing this letter agreement in the space designated below, i-STT hereby agrees that, as of 12:01 a.m. Pacific Time on January 1, 2005 (the “SettlementDate”), the Converted Notes shall be converted into a total of 4,144,216 Series A-1 Preferred Stock. Equinix undertakes to take anyand all measures to effect the subsequent conversion of any or all of the 4,144,216 Series A-1 Preferred Stock into 4,144,216 Common Stock, as may berequired from time to time by i-STT, following i-STT’s exercise of such conversion right(s) pursuant to Equinix’s Certificate of Designation dated 30December 2002. If you have any questions concerning this matter, please contact me at (650) 513-7057. Very truly yours, /s/ RENEE F. LANAMRenee F. Lanam cc: General Counsel, STT Communications Ltd Brandi Galvin Brett Pletcher ACKNOWLEDGED AND AGREED: i-STT Investments Pte. Ltd.By: /s/ JEAN MANDEVILLETitle: Jean Mandeville, DirectorDate: 11 January 2005 2Exhibit 10.113 FIRST AMENDMENT TO LEASE AGREEMENT THIS FIRST AMENDMENT TO LEASE AGREEMENT (this “Amendment”) is made and entered into as of January 18, 2005, by and betweenEDEN VENTURES LLC, a Delaware limited liability company (“Landlord”), and EQUINIX, INC., a Delaware corporation (“Tenant”). RECITALS A. Landlord and Tenant entered into that certain Deed of Lease dated as of April 21, 2004 (the “Lease”), for the lease of a data center facility known asBuilding 1, Ashburn Business Park located at 44470 Chilum Place, Ashburn, Virginia, as more particularly described in the Lease. B. Landlord, and Tenant desire to amend certain provisions of the Lease. NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are herebyacknowledged, Landlord and Tenant, intending to be legally bound, hereby covenant and agree as follows: 1. Recitals. The foregoing recitals are hereby incorporated into this Amendment by reference, as if fully set forth in this first paragraph. 2. Floor Plan of Premises. Exhibit A-1 to the Lease is hereby deleted in its entirety and replaced by Exhibit A-1 attached to this Amendment. 3. Connector Work. Exhibit A-2 to the Lease is hereby deleted in its entirety and replaced by Exhibit A-2 attached to this Amendment. 4. Equipment List. Exhibit A-5 to the Lease is hereby deleted in its entirety and replaced with Exhibit A-5 attached hereto. 5. Landlord’s Work. Exhibit C to the Lease shall be Exhibit C attached to this Amendment. 6. Premises. The second sentence of Section 1.3 of the Lease is hereby deleted in its entirety and replaced with the following: “Notwithstanding the foregoing, Landlord represents and warrants (i) the Premises comply with all local, state and federal building codes,statutes, rules or regulations, including, without limitation, the Americans With Disabilities Act (“ADA”) and all applicable life safetyrequirements, (ii) all mechanical and electrical systems for the Premises, including, without limitation, all power distribution systems, emergencygenerators and accompanying fuel delivery systems, HVAC systems (including airside, waterside, controls and automation elements thereof),building alarm and security management systems, life safety and fire suppression systems, and lighting systems, are in good operatingcondition, except for suchdeficiencies as would not be discovered by the level of testing performed by Landlord, and (iii) all underground storage tanks located on the Landare, as of the date hereof, free of leaks and there have never been any leaks in such tanks during the period of Landlord’s ownership of the Land.” 7. Security Deposit. (a) Section 5.1(a) of the Lease is hereby deleted in its entirety and replaced with the following: “(a) Tenant has delivered to Landlord an unconditional, irrevocable letter of credit in the amount of Two Million Dollars ($2,000,000), and suchletter of credit provides that, at least thirty (30) days prior to the then-current expiration date of such letter of credit, such letter of credit shall beeither (1) renewed (or automatically and unconditionally extended) from time to time through the ninetieth (90th) day after the expiration of theLease Term, or (2) replaced with cash in the same amount. Notwithstanding anything in this Lease to the contrary, any cure or grace periods setforth in this Lease shall not apply to any of the foregoing, and, specifically, if Tenant fails to timely comply with the above requirements, thenLandlord shall have the right to immediately draw upon the letter of credit without notice to Tenant. Each letter of credit shall be issued by acommercial bank that has a credit rating with respect to certificates of deposit, short term deposits or commercial paper of at least P-2 (orequivalent) by Moody’s Investor Services, Inc., or at least A-2 (or equivalent) by Standard & Poor’s Corporation, and shall be otherwiseacceptable to Landlord in its reasonable discretion. If the issuer’s credit rating is reduced below P-2 (or equivalent) by Moody’s Investors Service,Inc. or below A-2 (or equivalent) by Standard & Poor’s Corporation, then Landlord shall have the right to require that Tenant obtain from adifferent issuer a substitute letter of credit that complies in all respects with the requirements of this Section, and Tenant’s failure to obtain suchsubstitute letter of credit within fifteen (15) business days following Landlord’s written demand therefor (with no other notice or cure or graceperiod being applicable thereto, notwithstanding anything in this Lease to the contrary) shall entitle Landlord to immediately draw upon the thenexisting letter of credit in whole or in part, without notice to Tenant. In the event the issuer of any letter of credit held by Landlord is placed intoreceivership or conservatorship by the Federal Deposit Insurance Corporation or any successor or similar entity, then, effective as of the date suchreceivership or conservatorship occurs, said letter of credit shall be deemed to not meet the requirements of this Section, and, within fifteen (15)business days thereof, Tenant shall replace such letter of credit with cash or a letter of credit conforming to the requirements of this Section 5.1(and Tenant’s failure to do so shall, notwithstanding anything in this Lease to the contrary, constitute an Event of Default for which there shall beno notice or grace or cure periods being applicable thereto other than the 2.aforesaid fifteen (15) business day period). Any failure or refusal of the issuer to honor the Letter of Credit shall be at Tenant’s sole risk and shallnot relieve Tenant of its obligations hereunder with respect to the security deposit. Notwithstanding the foregoing provisions of this Section 5.1, solong as Silicon Valley Bank maintains a credit rating by Standard & Poor’s Corporation of at least BBB, Silicon Valley Bank shall be anapproved issuer of any letter of credit issued pursuant to this Section 5.1. If Silicon Valley Bank’s credit rating is at anytime reduced below BBBby Standard & Poor’s Corporation, then Landlord shall have the right to require that Tenant obtain from a different issuer a substitute letter ofcredit that complies in all respects with the requirements of this Section 5.1, and Tenant’s failure to obtain such substitute letter of credit withinfifteen (15) business days following Landlord’s written demand therefor (with no other notice or cure or grace period being applicable thereto,notwithstanding anything in this Lease to the contrary) shall entitle Landlord to immediately draw upon the then existing letter of credit in whole orin part, without notice to Tenant. Any substitute letter of credit provided in accordance with this Section 5.1 shall be (a) in form and substancesatisfactory to Landlord in its sole discretion (Landlord hereby approving the form letter of credit attached hereto as Exhibit D); (b) at all times inthe amount of the cash security deposit it replaces, and shall permit multiple draws; (c) issued by a commercial bank reasonably acceptable toLandlord from time to time with an office in the Washington, D.C. metropolitan area; (d) made payable to, and expressly transferable andassignable at no charge by, the owner from time to time of the Building or, at Landlord’s option, the holder of any mortgage (whichtransfer/assignment shall be conditioned only upon the execution of a written document in connection therewith); (e) payable at sight uponpresentment to a local branch of the issuer of a simple sight draft or certificate stating that Tenant is in default under this Lease and the amountthat Landlord is owed in connection therewith; (f) of a term not less than one year; and (g) at least thirty (30) days prior to the then-currentexpiration date of such letter of credit, either (1) renewed (or automatically and unconditionally extended) from time to time through the ninetieth(90th) day after the expiration of the Lease Term, or (2) replaced with cash in the same amount. “ 8. Alterations. Tenant hereby acknowledges and agrees that the Connector Work and the Landlord’s Work described in Section 9.1 of the Lease havebeen performed in a satisfactory and acceptable manner in all respects. In that connection, Landlord hereby agrees to provide to Tenant a credit towardsadditional rent/operating expense charges in the amount of $80,000 to be used by Tenant for amounts due in March 2005. 9. General Contractors. With respect to any Improvements undertaken by Tenant pursuant to Section 9.2 of the Lease, Landlord agrees to allow Tenantto use Turner Construction or to consider use by Tenant of an unbonded general contractor subject to Landlord’s approval, in its sole discretion, of any suchgeneral contractor taking into account such contractor’s reputation in the industry, such contractor’s creditworthiness and such other matters as Landlordshall determine. 3.10. Fiber Conduits. Section 11.2 of the Lease is hereby deleted in its entirety and replaced with the following: “(a) Landlord and Tenant acknowledge that the Project currently is served by a fiber duct bank containing twenty-four (24) conduits. Landlordshall grant to Tenant, on Landlord’s standard form (attached hereto as Exhibit E) but for no additional charge, an exclusive license coterminouswith the Lease Term to use, at Tenant’s sole cost and expense, eight (8) of the twenty-four (24) existing conduits in the fiber loop serving AshburnBusiness Park extending from MH-T1 through and including MH-T15 with two (2) connections to the Building, all as shown on Exhibit A-3attached hereto, (the “Tenant’s Licensed Conduits”) for any lawful telecommunications purpose, including, without limitation, for purposes ofpulling dark fiber through the Tenant’s Licensed Conduits and using such fiber in connection with Tenant’s business operations within thePremises. Such license shall include the right to use existing fiber within the Tenant’s Licensed Conduits subject to the rights of fiber carriers.Landlord reserves the right at all times during the Term to access and splice into, within any manhole, all unused fiber brought in by carriers andservice providers (but not Tenant’s infrastructure) within the Tenant’s Licensed Conduits. Tenant shall deliver to Landlord as built drawingsusing Autocad showing all carrier telecommunication, fiber and copper wire and cables within the Tenant’s Licensed Conduits together with a listof all carriers within thirty (30) days of the Lease Commencement Date and thereafter within fifteen (15) days of the addition of such wiring orcable. Tenant shall be responsible for obtaining and maintaining all approvals, permits and licenses required by any federal, state or localgovernment for installation and operation of the Tenant’s Licensed Conduits and for paying all fees attendant thereto and for complying with allother Legal Requirements relating to the Tenant’s Licensed Conduits. Tenant shall have sole responsibility for the maintenance, repair andreplacement of the Tenant’s Licensed Conduits and of all servicing ancillary thereto. Subject to Landlord’s reasonable rules and regulations,Tenant shall have access to all telecommunications vaults, manholes and underground facilities on the Land or any other adjoining propertyowned by Landlord or its affiliates for the purpose of servicing any of Tenant’s cables or equipment in or adjacent to the Tenant’s LicensedConduits and of splicing into unused fiber brought in by carriers and service providers (but not Landlord’s infrastructure) within the conduitsother than the Tenant’s Licensed Conduits. Notwithstanding the above and in connection with Tenant’s access to, servicing, or splicing ofTenant’s cables or equipment in or adjacent to the telecommunications vaults, manholes and underground facilities within or servicing theTenant’s Licensed Conduit, Tenant is required to contact Jim Hathaway or Jeff Monroe at (703)-932- 4.8264 to open a service request and to complete all of the following: (i) Tenant shall request permission to access the Tenant’s Licensed Conduits,which approval shall not be unreasonably withheld or delayed. (ii) Tenant shall submit for Landlord’s approval, which approval shall not beunreasonably withheld or delayed, complete drawings and construction details in CADD format for the work to be performed, and (iii) Tenantshall coordinate with Landlord concerning any penetrations of any of Landlord’s equipment or manhole facilities and concerning any potentialinterference with Landlord’s conduit or equipment. Upon completion of Tenant’s work, Tenant shall deliver to Landlord as-built drawings usingAutocad showing all carrier telecommunication, fiber and copper wire and cables within the Tenant’s Licensed Conduits together with a list of allcarriers within thirty (30) days of the addition of such wiring or cabling. (b) The parties acknowledge that Tenant, as grantee, and TrizecHahn Regional Pooling LLC, as grantor, have entered into that certain Deed ofEasement dated October 15, 2004 under the terms of which Tenant has been granted an easement (“Tenant’s Offsite Easement”) for theinstallation and use of a fiber conduit (“Tenant’s Offsite Conduit”) from the property line of the Land, over and across the adjoining businesspark to an offsite facility occupied by Tenant. Subject to the terms of this Section 11.2 and Article IX hereof, Tenant has installed a fiber ductbank (the “Connector Duct Bank”) transversing the Land generally in the location identified as “Equinix Conduit Facility” on Exhibit A-3.1hereto which Connector Duct Bank connects at the property line of the Land to Tenant’s Offsite Conduit, and Tenant shall be granted a licensecoterminous with the Lease Term to use the Connector Duct Bank, subject however to the reservation in Landlord of the exclusive right to usethree (3) conduits in the Connector Duct Bank (“Landlord’s Reserved Conduits”) for all lawful purposes. In connection with the constructionand installation of the Connector Duct Bank, (i) Tenant shall submit for Landlord’s approval, which approval shall not be unreasonablywithheld or delayed, complete drawings and construction details in CADD format for the construction of the Connector Duct Bank and an ALTAboundary survey, or other survey reasonably acceptable to Landlord, of the Land showing the location of the proposed Connector Duct Bank,and (ii) Tenant shall coordinate with Landlord concerning any penetration of the exterior façade of the Building and concerning any potentialinterference with other Building utilities. In no event shall the Connector Duct Bank exceed 24 inches in width. Moreover, Tenant shall grant toLandlord, for no charge, the exclusive right to use, at Landlord’s sole cost and expense, three (3) conduits in Tenant’s Offsite Conduit for the termof Tenant’s Offsite Easement (“Landlord’s Offsite Conduits”) for all uses permitted under the Tenant’s Offsite Easement. Landlord’s ReservedConduits and Landlord’s Offsite Conduits shall be identified as Conduits 12-14 and will generate in Tenant’s Manhole #EQ-1 and terminate inLandlord’s Manhole #MH-T9 as identified on Exhibit A-3.1. Landlord shall be 5.responsible for obtaining and maintaining all approvals, permits and licenses required by any federal, state or local government for installationand operation of Landlord’s Reserved Conduits and Landlord’s Offsite Conduits and for paying all fees attendant thereto and for complying withall other Legal Requirements relating to Landlord Reserved Conduits and Landlord’s Offsite Conduits. Landlord shall have sole responsibility forthe maintenance and repair of Landlord’s Reserved Conduits and Landlord’s Offsite Conduits and of all servicing ancillary thereto. Subject toTenant’s reasonable rules and regulations and the terms of Tenant’s Offsite Easement, as applicable, Landlord shall have access to alltelecommunications vaults, manholes and underground facilities within the Connector Duct Bank and Tenant’s Offsite Conduit for the purposeof servicing any of Landlord’s cables or equipment in or adjacent to the Landlord’s Reserved Conduits and Landlord’s Offsite Conduits and ofsplicing into unused fiber brought in by carriers and service providers (but not Tenant’s infrastructure) within the Connector Duct Bank andTenant’s Offsite Conduit. Notwithstanding the above and in connection with Landlord’s access to, servicing, or splicing of Landlord’s cables orequipment in or adjacent to the telecommunications vaults, manholes and underground facilities within or servicing the Connector Duct Bank andTenant’s Offsite Conduit, Landlord is required to contact Tenant’s Response Center (ERC) at (888)-892-0607 to open a Service Request and tocomplete all of the following: (i) Landlord shall request permission to access the Connector Duct Bank and Tenant’s Offsite Conduit facilities,which approval shall not be unreasonably withheld or delayed. (ii) Landlord shall submit for Tenant’s approval, which approval shall not beunreasonably withheld or delayed, complete drawings and construction details in CADD format for the work to be performed, and (iii) Landlordshall coordinate with Tenant concerning any penetrations of any of Tenant’s equipment or manhole facilities and concerning any potentialinterference with Tenant’s conduit or equipment. Upon completion of Landlord’s work, Landlord shall deliver to Tenant as-built drawings usingAutocad showing all carrier telecommunication, fiber and copper wire and cables within the Landlord’s Reserved Conduits and Landlord’sOffsite Conduits together with a list of all carriers within thirty (30) days of the addition of such wiring or cabling. (c) In addition to Tenant’s Offsite Easement, Tenant may pursue obtaining another diverse easement (“Tenant’s Offsite Easement II”) from theadjoining landowner for the installation of an additional fiber duct bank (“Tenant’s Offsite Conduit II”) in a different location and running tothe property line of the Land. In the event Tenant obtains Tenant’s Offsite Easement II and installs Tenant’s Offsite Conduit II, subject toLandlord’s consent as to location and the terms of this Section 9.2 and Article IX hereof, Tenant shall have the right to install an additional fiberduct bank (the “Connector Duct Bank II”) on the Land originating at the point Tenant’s Offsite Conduit II meets the property line of the Land, 6.transversing the Land and connecting to the Building, and Tenant shall be granted a license coterminous with the Lease Term to use the ConnectorDuct Bank II, subject however to the reservation in Landlord of the exclusive right to use three (3) conduits in the Connector Duct Bank II (“Landlord’s Reserved Conduits II”). Landlord and Tenant agree to share, on a pro rata basis (Landlord to pay for 3 of the 14 conduits, or21%) of the installation cost of the Connector Duct Bank II. In connection with the construction of the Connector Duct Bank II, (i) the location ofthe Connector Duct Bank II shall be subject to Landlord’s prior written consent, and shall follow a path so as to minimize cost of construction (ii)Tenant shall submit for Landlord’s approval, which approval shall not be unreasonably withheld or delayed, complete drawings andconstruction details in CADD format for the construction of the Connector Duct Bank II and an ALTA boundary survey, or other surveyreasonably acceptable to Landlord, of the Land showing the location of the proposed Connector Duct Bank II, and (iii) Tenant shall coordinatewith Landlord concerning any penetration of the exterior façade of the Building and concerning any potential interference with other Buildingutilities. In no event shall the Connector Duct Bank II exceed 24 inches in width. Moreover, Tenant shall grant to Landlord, for no charge, theexclusive right to use, at Landlord’s sole cost and expense, three (3) conduits in the Tenant’s Offsite Conduit II (“Landlord’s Offsite ConduitsII”) for all purposes permitted under Tenant’s Offsite Easement II. Landlord shall be responsible for obtaining and maintaining all approvals,permits and licenses required by any federal, state or local government for installation and operation of Landlord’s Reserved Conduits II andLandlord’s Offsite Conduits II and for paying all fees attendant thereto and for complying with all other Legal Requirements relating to Landlord’sOffsite Conduits II. Landlord shall have sole responsibility for the maintenance and repair of Landlord’s Reserved Conduits II and Landlord’sOffsite Conduits II and of all servicing ancillary thereto. Subject to Tenant’s reasonable rules and regulations and the terms of Tenant’s OffsiteEasement II, as applicable, Landlord shall have access to all telecommunications vaults, manholes and underground facilities within theConnector Duct Bank II and Tenant’s Offsite Conduit II for the purpose of servicing any of Landlord’s cables or equipment in or adjacent toLandlord’s Reserved Conduits II and Landlord’s Offsite Conduits II and of splicing into unused fiber brought in by carriers and serviceproviders (but not Tenant’s infrastructure) within the Connector Duct Bank II and Tenant’s Offsite Conduit II. All of Landlord’s access to andwork related to the Connector Duct Bank II and Tenant’s Offsite Conduit II shall be performed in accordance with the procedures outlined in (b)above. (d) All repairs to the Property made necessary by reason of the furnishing, installation, maintenance, or operation of the Licensed Conduits,Connector Duct Bank and Connector Duct Bank II or any replacements thereof shall be at Tenant’s sole cost. Upon the expiration or earlier 7.termination of this Lease, subject to the rights of the affected carrier or provider, the fiber in the Licensed Conduits, Connector Duct Bank andConnector Duct Bank II shall become the property of Landlord and Tenant hereby assigns all right, title, and interest of Tenant therein toLandlord. Tenant’s use of the Licensed Conduits, Connector Duct Bank and Connector Duct Bank II shall not interfere with the structure of theBuilding, any of the building systems, or the equipment or property (including airwaves reception and other equipment) of any other tenant in theBuilding or any third party providing services to the Building. Except for such as arise from Landlord’s gross negligence or willful misconduct oras provided in Section 11.4 below, Landlord shall have no liability on account of any damage to or interference with the operation of the LicensedConduits, Connector Duct Bank, and Connector Duct Bank II by any third party. Each party shall defend, indemnify and hold harmless theother, and its affiliates and agents, from and against any loss, cost, damage or expense (including reasonable attorneys’ fees) incurred by suchparty arising out of or as a result of the other’s exercise of any easements, licenses and rights under this Section 11.2 or the breach of theprovisions of this Section 11.2.” 11. Power Conduits. Section 11.3 of the Lease is hereby deleted in its entirety and replaced with the following: “Landlord and Tenant acknowledge that utility power is currently provided to the Project through two stacked conduits originating from theswitchgear located on the Land (“Power Conduits”). In order that Tenant be able to contract directly with the electrical provider, the existingswitchgear will be separated into two independent switchgears, Switchgear A and Switchgear B, by means of a tie breaker AB (tie circuit breakerAB racked out and padlocked), with Switchgear B including tie circuit breaker BC being dedicated solely to providing utility power to theBuilding. Landlord shall grant to Tenant, on Landlord’s standard form but for no additional charge, an exclusive license coterminous with theTerm of this Lease to use, at Tenant’s sole cost and expense, the Switchgear B including tie circuit breaker BC and one of the Power Conduitsfrom Switchgear B feeder branch circuit “A2” up to and including the point at which power feeders are connected to the Building, as shown onExhibit A-4 hereto (the “Licensed Power Conduit”) and referenced in original drawing E400, for the purpose of providing critical power to thePremises. Landlord shall not use future tie feeder capability provisioned on Tenant’s side of Switchgear B. Tenant shall be responsible forobtaining and maintaining, to the extent required, all approvals, permits and licenses required by any federal, state or local government or utilityprovider for installation and operation of the Switchgear B, including tie circuit breaker BC and the Licensed Power Conduit, from the point ofconnection to the utility provider in the switchgear to the Building, for paying all fees attendant thereto and for complying with all other legalrequirements 8.relating to the Switchgear B, including tie circuit breaker BC and the Licensed Power Conduit. Tenant shall have the sole responsibility formaintenance, repair and replacement of Switchgear B, and the Licensed Power Conduit and all facilities ancillary thereto, if any. Landlord shallhave the sole responsibility for maintenance, repair and replacement of Switchgear A and all facilities ancillary thereto, including the tie breakerAB, and for obtaining all approvals, permits and licenses required by any federal, state or local government or utility provider for installation andoperation of Switchgear A, for paying all fees attendant thereto and for complying with all other legal requirements relating to Switchgear A. Tenantshall not make any modifications to Switchgear B or circuit breaker BC including structural configuration, controls, and circuit setup withoutLandlord’s prior written approval, such approval not to be unreasonably withheld or delayed. Prior to performing maintenance within itsrespective switchgear, the party performing such maintenance shall provide reasonable notice to the other party except in an emergency. Subject toLandlord’s reasonable rules and regulations, Tenant shall have access to all manholes and underground facilities relating to and for the purpose ofservicing and maintaining the Licensed Power Conduit. Tenant shall coordinate with Landlord concerning any penetration of the exterior side ofthe Building in concerning any potential interference with other Building utilities. All repairs to the Project made necessary by reason of thefurnishing, installation, maintenance or operation of the Licensed Power Conduit or any replacements thereof, shall be at Tenant’s sole cost. Uponthe expiration or early termination of this Lease, the Licensed Power Conduit and all wiring and cables within shall become the property ofLandlord and Tenant hereby assigns all right and title and interest therein to Landlord. Tenant’s use of the Licensed Power Conduit shall notinterfere with the structure of the Building, and any other Building systems for the equipment or property of any third party providing services tothe Building. Except for such as arise from Landlord’s gross negligence or willful misconduct or as provided in Section 11.4 below, Landlordshall have no liability on account of any damage to or interference with the operation of the Licensed Conduits by any third party. Landlord andTenant each reserve the right in connection with the maintenance, repair, replacement of and splicing within the Power Conduits or other conduitsserving the Project, and upon reasonable advance written notice to the other, to cause critical power to be interrupted to any building on the Land,it being recognized that any such interruption may cause Landlord or Tenant, as the case may be, to be required to implement use of redundantpower during such periods of interruption.” Affirmation of Rentable Area. Landlord and Tenant hereby confirm that the Premises contain 95,440 square feet of rentable area. 9.12. Miscellaneous Terms and Provisions. (a) Lease Terms. All other provisions of the Lease shall remain in effect and unchanged except as modified herein, and all terms, covenants andconditions shall remain in effect as modified by this Amendment. If any provision of this Amendment conflicts with the Lease, the provisions of thisAmendment shall control. (b) Ratification. Except as otherwise expressly modified by the terms of this Amendment, the Lease shall remain unchanged and continue in fullforce and effect. All terms, covenants and conditions of the Lease not expressly modified herein are hereby confirmed and ratified and remain in full force andeffect, and, as further amended hereby, constitute valid and binding obligations of Tenant enforceable according to the terms thereof. (c) Binding Effect. All of the covenants contained in this Amendment, including, but not limited to, all covenants of the Lease as modified hereby,shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, legal representatives and permitted successors and assigns. (d) Effectiveness. The submission of this Amendment shall not constitute an offer, and this Amendment shall not be effective and binding unlessand until fully executed and delivered by each of the parties hereto. (e) Counterparts. This Amendment may be executed in multiple counterparts, each of which shall be an original, but all of which shall constituteone and the same Amendment. (f) Defined Terms. Unless otherwise provided herein, all terms used in this Amendment that are defined in the Lease shall have the meaningsprovided in the Lease. [SIGNATURES ON NEXT PAGE] 10.IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment to Lease Agreement under seal as of the day and year first above written. WITNESS/ATTEST: LANDLORD: EDEN VENTURES LLC, a Delaware limitedliability company [SEAL] By: EDEN MANAGEMENT LLC, aDelaware limited liability company,Manager/s/ MARIA KENNY By: /s/ HOSSEIN FATEH Name: Hossein Fateh Title: Managing MemberWITNESS/ATTEST: TENANT: EQUINIX, INC.,a Delaware corporation [SEAL]/s/ PAUL SILLIMAN By: /s/ RENEE F. LANAM Name: Renee Lanam Title: Chief Financial Officer 11.Exhibit 10.114 i-STT Investments Pte. Ltd. 51 Cuppage Road #10-11/171st February 2005 Singapore 229469 (Regn No.: 199600443G)Equinix, Inc. 301 Velocity Way, 5th Floor Foster City California 94404-4803 BY COURIER & BY HANDUnited States of America (650)513 7800 Attention:Renee F. Lanam Chief Financial Officer Dear Sirs NOTICE TO CONVERT SERIES A-1 PREFERRED STOCK INTO COMMON STOCK We hereby give you notice, pursuant to the Certificate of Designation of Series A Convertible Preferred Stock and Series A-1 Convertible Preferred Stock ofEquinix, Inc. dated 30th December 2002 (the “Certificate of Designation”), that we are electing to convert the 4,144,216 Series A-1 Convertible Preferred Stockof Equinix, Inc. (the “Company”) standing in our name on the books of the Company into 4,144,216 shares of Common Stock of the Company. As the Preferred Share Certificate representing the said 4,144,216 Series A-1 Convertible Preferred Stock of Equinix, Inc. is already in the custody of theCompany, no surrender of the Preferred Share Certificate is necessary in connection with the aforementioned conversion. We hereby request and authorize theCompany to cancel the Preferred Share Certificate and to issue in its place a new share certificate for 4,144,216 shares of Common Stock of the Company. Wepropose that the conversion be effective as of 2nd February 2005. We hereby request that the certificate for shares of Common Stock which are to be issued pursuant to this conversion be issued in the name of i-STTInvestments Pte Ltd, and that i-STT Investments Pte Ltd be treated for all purposes as the record holder of such shares of Common Stock in accordance withthe terms of the Certificate of Designation. Kindly issue and deliver up the certificate(s) for the 4,144,216 share of Common Stock by courier to our Counsel, Latham and Watkins LLP, at 633 WestFifth Street, Suite 4000, Los Angeles, CA 90071-2007 (Attention: Dominic Yoong/ Ryan Hochgesang) as soon as practicable, and in any event, no later than12th February 2005. Thank you for your assistance in this matter. Sincerely,/s/ PEK SIOK LANPek Siok LanDirectori-STT Investments Pte Ltd cc:General Counsel, STT Communications LtdBrandi Galvin, General Counsel, Equinix, Inc.Dominic Yoong/Ryan Hochgesang, Latham & Watkins LLPExhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-45280, 333-58074, 333-71870, 333-85202, 333-104078, 333-113765 and 333-117892) and Form S-3 (Nos. 333-104077, 333-108783, 333-109697, 333-114723, 333-116322 and 333-120224) of Equinix,Inc. of our report dated March 10, 2005 relating to the financial statements, management’s assessment of the effectiveness of internal control over financialreporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP San Jose, CaliforniaMarch 10, 2005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 10, 2005 /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 10, 2005 /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, 2004 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 10, 2005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, 2004 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 10, 2005

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