Equinix
Annual Report 2006

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Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 10-K xxANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the fiscal year ended December 31, 2006OR ¨¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934For 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: Title of each class Name of each exchange on which registeredCommon Stock, $0.001 The NASDAQ Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Act. x Yes ¨ NoIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x NoIndicate 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 ¨ NoIndicate 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. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer”and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x NoThe 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 as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $1.3 billion.As of January 31, 2007, a total of 29,810,254 shares of the registrant’s common stock were outstanding.DOCUMENTS INCORPORATED BY REFERENCEPart III—Portions of the registrant’s definitive Proxy Statement to be issued in conjunction with the registrant’s 2007 Annual Meeting of Stockholders,which is expected to be filed not later than 120 days after the registrant’s fiscal year ended December 31, 2006. Except as expressly incorporated by reference,the registrant’s Proxy Statement shall not be deemed to be a part of this report on Form 10-K. Table of ContentsEQUINIX, INC.FORM 10-KDECEMBER 31, 2006TABLE OF CONTENTS Item Page No.PART I1. Business 31A. Risk Factors 121B. Unresolved Staff Comments 242. Properties 243. Legal Proceedings 244. Submission of Matters to a Vote of Security Holders 26 PART II 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 276. Selected Financial Data 307. Management’s Discussion and Analysis of Financial Condition and Results of Operations 317A. Quantitative and Qualitative Disclosures About Market Risk 558. Financial Statements and Supplementary Data 569. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 569A. Controls and Procedures 569B. Other Information 57 PART III 10. Directors, Executive Officers and Corporate Governance 5811. Executive Compensation 5812. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 5813. Certain Relationships and Related Transactions, and Director Independence 5814. Principal Accounting Fees and Services 58 PART IV 15. Exhibits and Financial Statement Schedules 59 Signatures 63 2 Table of ContentsPART I ITEM 1.BUSINESSThe 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.OverviewEquinix provides network neutral colocation, interconnection and managed services to enterprises, content companies, systems integrators and theworld’s largest network providers. Through our Internet Business Exchange hubs, or IBX hubs, in ten markets in the U.S. and Asia-Pacific, customers candirectly interconnect with each other for critical traffic exchange requirements. Direct interconnection to our aggregation of networks, which serve more than90% of the world’s Internet routes, enables our customers to increase performance while significantly reducing costs. Based on our network neutral model andthe quality of our IBX hubs, we believe we have established a critical mass of customers. This critical mass and the resulting “network effect” combined witha strong financial position continue to drive new customer growth and bookings. In addition to our business momentum, significant increases in overallcustomer demand combined with reduced supply in the data center market has resulted in strong market growth and pricing power. As a result of our largelyfixed cost model, any growth in revenue would likely drive incremental margins and increased operating cash flow.Our network neutral business model is a key differentiator for us in the market. Because we do not operate a network, we are able to offer our customersdirect interconnection to the largest aggregation of bandwidth providers and Internet service providers. The world’s top tier Internet service providers, numerousaccess networks, second tier providers and international carriers such as AOL, at&t, British Telecom, Cable & Wireless, Comcast, Level 3, NTT, Qwest,SingTel, Sprint and Verizon Business are all currently located at our IBX hubs. Access to such a wide variety of networks has attracted nine of the top 10Internet properties and numerous other enterprise and government customers, including Amazon.com, Bank of America, Electronic Arts, Fox InteractiveMedia, Gannett, The Gap, Goldman Sachs, Google, IBM, McGraw Hill, MSN, NASA, News Corporation, Salesforce.com, Solo Cup, Sony and Yahoo!.Our services are primarily comprised of colocation, interconnection, and managed IT infrastructure services. • Colocation services include cabinets, power, operations space and storage space for our customers’ colocation needs. • Interconnection services include cross connects and switch ports on the Equinix Exchange service. These services provide scalable and reliableconnectivity that allow our customers to exchange traffic directly with the service provider of their choice or directly with each other. • Managed IT infrastructure services allow our customers to leverage our significant telecommunications expertise, maximize the benefits of our IBXhubs and optimize their infrastructure and resources.The market for our services has historically been served by large telecommunications carriers who have bundled their telecommunications services andmanaged services with their colocation offerings. Over the past 3 Table of Contentsseveral years, a number of these telecommunications carriers have eliminated or reduced their colocation footprint to focus on their core businesses.Additionally, many of the competitive providers have failed to scale their businesses and have been forced to exit the market. Although some of our largercustomers, including companies such as AOL, Google or MSN operate or are building their own data centers for their large infrastructure deployments, thesecustomers continue to have a presence in an Equinix data center to use our interconnection services to reach their business partners. The need for large,wholesale outsourced data centers is also, more recently, being addressed by real estate investment trusts (REITs) who are building large centers to meetcustomers’ needs for large or standalone centers, a different customer segment than Equinix serves. However, with the exit of the telecommunications playersand the lack of new supply resulting from either legacy centers being unable to address the power needs of today’s customers or a lack of new builds, therenow exists a significant supply and demand imbalance to address our target customer’s needs. This reduction in supply in the industry has stabilized pricingand increased the demand for our centers because we have gained many of those customers displaced from these companies as access to their networks is alsoavailable in our IBX hubs. Strategically, we will continue to look at attractive opportunities to grow our market share and selectively improve our footprint andservice offerings.Recent DevelopmentsDuring 2006, we granted additional restricted shares to our executive officers and approved stock option grants to our employees as part of our annualrefresh program; purchased a property in Chicago to facilitate our expansion plan in the Chicago metro area; announced our expansion projects in theWashington, D.C., Chicago and New York metro areas by building out new centers adjacent to or nearby our existing Washington, D.C., Chicago and NewYork metro area IBX centers; announced an investigation of our stock option granting practices and related accounting and its subsequent resolution; amendedand increased our revolving credit line with Silicon Valley Bank; sold our Honolulu IBX center and acquired a second IBX center in Tokyo, Japan; andincreased our Ashburn campus mortgage payable. During 2007, we granted additional restricted shares to our executive officers and approved stock optionsand restricted stock units to be granted to our employees as part of our annual refresh program; completed a financing agreement for our Chicago metro areaIBX expansion project; entered into an agreement to purchase the building and property where our original IBX center in the Silicon Valley metro area is locatedand announced our plan to expand our Singapore IBX center. For further information on our recent developments, refer to our discussion of “RecentDevelopments” in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form10-K below.Industry BackgroundThe 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 atno charge to the other party. At first, government and non-profit organizations established places where these networks could exchange traffic, or peer, witheach other—these points were known as network access points, or NAPs. Over time, many NAPs became a natural extension of carrier services and were runby such companies as MFS (now a part of Verizon Business), Sprint, Ameritech and Pacific Bell (both now known as at&t).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 4 Table of Contentsperformance for enterprise and consumer users of the Internet, especially with the rise of important content providers such as AOL, Google, Microsoft, Yahoo!and others. In addition, the providers, as well as a growing number of enterprises, required a more secure and reliable solution for direct connection to a varietyof 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 was 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 exchange networktraffic or peer. Customers have chosen Equinix for peering because they are now able to reach all of the networks with which they peer within one locationusing simple direct connections. Their ability to peer across the room, instead of across a metro area, has increased the scalability of their operations whiledecreasing costs for some customers by upwards of 70%.Our SolutionOur 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 IBX centers and processes toexceed the requirements for the most important financial institutions, government agencies and key enterprise brands such as Adobe, Amazon.com, The Gap,Goldman Sachs, News Corporation, Solo Cup, Sony and Ticketmaster. We have a track record of 99.999% uptime and are continually testing and refiningprocesses to ensure that we will continue to provide high levels of stability and quality.Performance. Because we provide direct access to the providers that serve more than 90% of the world’s Internet routes, customers can quickly,efficiently, cost-effectively and reliably exchange traffic with their network services providers for higher performance operations. The ability to connect directlyto the more than 200 networks enables high-quality direct interconnection. With the mass of networks present, global enterprises are increasingly looking atways to provide network diversity and increase performance of their operations, and are utilizing our IBX centers to ensure their IT infrastructures areoperating at the interconnection hub of the Internet. By using multiple networks, customers are able to build redundancy into their operations in the event thatone of their network service providers has a service interruption or restructuring in their business. The network service providers and geographic diversity weoffer provides customers with the flexibility to enable the highest performing Internet operations.Improved Economics. Our services such as Equinix Exchange and Equinix Internet Core Exchange facilitate peering and dramatically reduce costs forcritical transit, peering and traffic exchange operations by eliminating the costs of private peering or local loops. Networks such as at&t, British Telecom, CoxCommunications and Japan Telcom and content providers such as Electronic Arts, Google, MSN and Yahoo! can save between 20% and 70% of bandwidthcosts through the traffic exchange services we offer. Although some of the larger content providers also own and operate their own large data centers, theycontinue to use Equinix to exchange their network traffic. In addition, content companies and enterprises can save significant bandwidth costs because thenumber of networks housed within Equinix competing for the traffic of these companies results in lower prices while providing increased 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 and support for all our locations throughout the U.S. andAsia-Pacific. 5 Table of ContentsOur 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 companies who have become critical to the Internet. We have been successful in uniting the major companiesthat make up the Internet infrastructure including at&t, Level 3, Qwest, SAVVIS, Sprint and Verizon Business. These companies, which constitute theworld’s top Internet service providers, together with most of the major broadband networks, including AOL, Comcast, Cox Communications and MSN,second tier backbones such as Earthlink, Global Crossing and Verio, top international telecommunications carriers, including Bell Canada, British Telecom,Deutsche Telecom, France Telecom, Japan Telecom, KDDI, SingTel, StarHub, Telia and Telstra, a number of fiber, sonet, ethernet and competitive localexchange companies, including OnFiber Communications (now owned by Qwest) and Yipes, and incumbent local exchange companies, including at&t,Qwest and Verizon, are our customers and use us to interconnect with each other and their customers. Additionally, we provide an important industryleadership role in the area of exchange points and are consistently looked to as an industry expert and key influencer on this subject matter.Content providers and enterprises can now control their own network performance by economically reaching the various service providers they wish towork with by establishing direct connections for this connectivity. For our customers, this represents significant cost savings and increased flexibility to moveamong providers.Financial information about our geographic areas can be found in our consolidated financial statements and the related notes thereto and in“Management’s Discussion and Analysis of Financial Condition and Results of Operation” included elsewhere in this Annual Report on Form 10-K.Our StrategyOur objective is to become the premier hub for critical Internet properties, enterprises, content providers and government agencies to locate theirinformation technology infrastructure operations in order to gain maximum benefits from the choice of networks and partners in the most simple and efficientmanner. Key components of our strategy include the following: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 service over 200 unique networks, including all of the top tier networks, allowing our customers to directly interconnect with providers thatserve more than 90% of global Internet routes. We have a growing mass of key players in the enterprise sector, such as Bank of America, The Gap, Gannett,Goldman Sachs, IBM, Salesforce.com, SOLO Cup, Sony and others. Similarly, we have experienced increasing success in attracting customers from thegovernment sector, such as NASA. We expect the success we have experienced in the financial and digital media segments to continue to drive our growth in2007 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 us in themarket.Promote our IBX Centers as the Highest Performance Points on the Internet. Data center reliability, power availability and network choice arethe most important attributes when our customers are choosing a data center provider. Our premier IBX hubs are next-generation data centers and offercustomers advanced security, reliability and redundancy. Our security design in the U.S. IBX centers includes five levels of biometrics security 6 Table of Contentsto access customer cages. Our power infrastructure includes N+1 redundancy for all systems and has delivered 99.999% uptime over the period fromJanuary 1, 2002 through December 31, 2006. We provide access to over 200 different network providers. Our support staff, trained to aid customers withoperational support, is available 24 hours a day, 365 days a year.Provide New Products and Services within our IBX Centers. We plan to continue to offer additional products and services that are most valuable toour customers as they manage their Internet and network businesses and, specifically, as they attempt to effectively utilize multiple networks. Examplesinclude our IBX Link services which allows customers to easily move traffic between IBX centers located in the same metro area or the Financial Exchangeservice which allows direct interconnection with electronic financial exchanges, such as the Chicago Mercantile Exchange.Ensure Continuous Growth for our Customers. We plan to expand in key markets based on customer demand to ensure a smooth growth path forour customers. For example, we have acquired six new IBX centers in our key markets over the last four years, increasing our customer cabinet capacity by50%, and currently have four additional new IBX builds underway in the U.S. and Tokyo, Japan markets, and two IBX expansions underway in Singaporeand Sydney, Australia. Our strategy is to continue to grow in select existing markets and possibly expand to additional markets where demand and financialreturn potential warrant. We expect to execute this expansion strategy in a cost-effective and prudent manner through a combination of acquiring existing centersthrough lease or purchase, or building new centers based on key criteria, such as demand and potential financial return, in each market.CustomersOur 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 31,2006, we had 1,290 customers worldwide.Typical customers in each category include the following: Carriers/Networks Content Providers Enterpriseat&t Amazon.com AppleBritish Telecom AOL Bank of AmericaCable & Wireless Electronic Arts Deutsche BoerseComcast Fox Interactive Media Fidelity InvestmentsLevel 3 Google The GapNTT MSN Goldman SachsSAVVIS News Corporation IBMSingTel Sony McGraw HillSprint Ticketmaster NASAVerizon Business Yahoo! News Corp.Customers typically sign renewable contracts of one or more years in length. Our single largest customer, IBM, represented approximately 9%, 11% and13% of total revenues for the years ended December 31, 2006, 2005 and 2004, respectively. No other single customer accounted for more than 5% of revenuesduring this time.ServicesOur services are primarily comprised of colocation, interconnection and managed IT infrastructure services.Colocation ServicesOur 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 7 Table of Contentssecurity, scalable cabinet space availability, on-site trained staff 24 hours per day, 365 days a year, dedicated areas for customer care and equipment staging,redundant AC/DC power systems and multiple other redundant, fault-tolerant infrastructure systems. Some specifications or services provided may differ inour Asia-Pacific locations in order to properly meet the local needs of customers in 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 services 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 our sharedor private cages or customize their space. As a customer’s colocation requirements increase, they can expand within their original cage or upgrade into a cagethat meets their expanded requirements. Customers buy the hardware they place in these cabinets directly from their chosen vendors. Cabinets are priced withan initial installation fee and an ongoing recurring monthly charge.Power. Power is an element of increasing importance in customers’ colocation decisions. We offer both AC and DC power circuits at various amperagesand phases customized to a customer’s individual power requirements. Power is priced with an initial installation fee and an ongoing recurring monthly chargebased on the circuit ordered.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 ServicesOur 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 brings a tremendous amount of knowledge to this area. Our staff have published industry-recognized white papers and strategydocuments in the areas of peering and interconnection, many of which are used by leading institutions worldwide in furthering the education and promotion ofthis important network arena. To showcase these efforts, we hold peering forums which are now widely recognized as very influential forums for the world’stop peering experts. We will continue to develop additional services in the area of traffic exchange that will allow our customers to leverage the critical mass ofnetworks now available in our IBX centers. Our 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 IP backbone networks. EquinixInternet Core Exchange is a pre-provisioned interconnection package that enables major backbones to connect their networks directly in a centralized, neutralenvironment for peering and transit. The service includes pre-provisioned interconnections, premium service levels and specialized customer service features tosupport the quality and support levels required by the largest Internet providers in the world. Internet Core Exchange services are priced with an initialinstallation fee and an ongoing monthly recurring charge. 8 Table of ContentsEquinix Exchange. Customers may choose to peer through and connect to our Equinix Exchange via a central switching fabric rather than purchase adirect physical cross connection. With a connection to this switch, a customer can aggregate multiple interconnects over one physical connection with up to 10gigabits of capacity instead of purchasing individual physical cross connects. In 2005, Equinix announced a partnership with Neustar to facilitate voice overInternet protocol (VOIP) peering. The Exchange service is offered as a bundled service that includes a cabinet, power, cross connects and port charges. Theservice is priced by IBX with an initial installation fee and an ongoing monthly recurring charge. Individual IBX prices increase as the number of participantson the exchange service grows.Equinix IBXLink. Customers who are located in one IBX may need to interconnect with networks or other customers located in an adjacent IBX in thesame metro area. IBXLink allows customers to seamlessly interconnect between IBXs at capacities up to an OC-192, or 10 gigabits per second level. IBXLinkservices are priced with an initial installation fee and an ongoing monthly recurring charge dependent on the capacity the customer purchases.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 offer customers the ability to contract for these services through us from any of themajor bandwidth providers. This service, which is provided in Asia, is targeted to customers who require a single bill and a single point of support for theirentire services contract through Equinix for their bandwidth needs. Internet Connectivity Services are priced with an initial installation fee and an ongoingmonthly recurring charge based on the amount of bandwidth committed.Managed IT Infrastructure ServicesWith 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 a day, 365days a year. These professionals are trained to perform installations of customer equipment and cabling. Professional services are custom-priced depending oncustomer 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 manages 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, dependent on the bandwidth used by the customer.Equinix Mail Service. Equinix’s enterprise messaging service, available only in our Singapore location, is a complete outsourced solution, primarilybased on the Lotus Notes and Microsoft Exchange platforms, to which customers entrust the operation and support of their messaging applications. Thisservice is priced with an initial installation fee and an ongoing monthly recurring charge.Equinix Command Center. Equinix Command Center, available only in Asia-Pacific, is a suite of managed services for the management andmonitoring of enterprise-level information systems and network infrastructure. 9 Table of ContentsThe suite of services allows customers to achieve greater efficiency of their IT infrastructure while reducing the cost and complexity of administering andmanaging these functions internally. The services are priced with an initial installation fee and ongoing monthly recurring charges based on customer activity.Sales and MarketingSales. 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 Asia-Pacific regional headquarters in Singapore. Our U.S. sales offices are located in New York; Boston; Reston, Virginia; LosAngeles; Chicago and Silicon Valley. Our Asia-Pacific sales offices are located in Hong Kong, Singapore, Sydney and Tokyo.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 also locate in 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.Marketing. To support our sales effort and to actively promote our brand in the U.S. and Asia-Pacific, we conduct comprehensive marketing programs.Our marketing strategies include an active public relations campaign and on-going customer communications programs. Our marketing efforts are focused onmajor business and trade publications, online media outlets, industry events and sponsored activities. Our staff holds leadership positions in key networkingorganizations and we participate in a variety of Internet, computer and financial industry conferences and place our officers and employees in keynotespeaking engagements at these conferences. We also regularly measure customer satisfaction levels and host key customer forums to ensure customer needs areunderstood and incorporated in product and service planning efforts. From a brand perspective, we build recognition through sponsoring or leading industrytechnical forums and participating in Internet industry standard-setting bodies. We continue to develop and host the industry’s most successful educationalforums focused on peering technologies and peering practices for ISPs and content providers.CompetitionOur current and potential competition includes: • Internet data centers operated by established U.S. communications carriers such as at&t, Level 3, Qwest, SAVVIS and VerizonBusiness and Asia-Pacific communications carriers such as NTT and SingTel. Unlike the major network providers, who constructed datacenters 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 also prefer customers with highmanaged services needs as part of their pricing structures. Locating in our IBX centers provides access to top tier networks and allows customersto negotiate the best prices with a number of carriers resulting in better economics and redundancy. In 2003 and 2004, two major carriers who hadbuilt and operated their own data centers exited the U.S. colocation market. The disposition of these assets has been completed with variousowners assuming the assets, including SAVVIS. Because these operators are not network neutral, we believe we have an advantage in gaining thebusiness of those customers displaced from these carriers because access to their networks is also available in our IBX centers. • U.S. Network access points (NAPS) such as Switch and Data and carrier operated NAPs. NAPs, generally operated by carriers, aretypically older facilities and lack the incentive to upgrade the 10 Table of Contents infrastructure in order to scale with traffic growth. In contrast, we provide state-of-the-art, secure centers and geographic diversity with 24-hoursupport and a full range of network and content provider offerings. • Vertically integrated website hosting, colocation and ISP companies such as SAVVIS, Verizon Business and Vericenter. Most managedservice providers require that customers purchase their entire network and managed services directly from them. We are a network and serviceprovider aggregator and allow customers the ability to contract directly with the networks and webhosting partner best for their business. Bylocating in one of our IBX centers, hosting companies add more value to our business proposition by bringing in more partners and customersand thus enhancing a network effect. • Real Estate Investment Trusts (REITs) such as Digital Realty Trust and Rockwood Capital. Some REITs have leased or begun buildingdata centers focused on meeting the outsourced data center needs of wholesale, or very large, customer deployments. These centers primarilyprovide space and power without additional services. These customers are not typically suited to the Equinix model as we focus on maximizingthe number of customers on a per center basis creating a network effect for customers and to maximize the financial returns on a per site basis.Unlike other providers whose core businesses are bandwidth or managed services, we focus on neutral interconnection hubs for networks, contentproviders, enterprises and government. As a result, we are free of the channel conflict common at other hosting/colocation companies. We compete based on thequality of our IBX centers, our ability to provide a one-stop solution in our U.S. and Asia-Pacific locations, the superior performance and diversity of ournetwork neutral strategy and the economic benefits of the aggregation of top networks and Internet businesses under one roof. Specifically, we have establishedrelationships with a number of leading hosting companies such as IBM (our largest customer) and others. We expect to continue to benefit from severalindustry trends including the consolidation of supply in the colocation market, the need for contracting with multiple networks due to the uncertainty in thetelecommunications market, customers’ increasing power requirements, enterprise customers’ growth in outsourcing and the continued growth of broadband.EmployeesAs of December 31, 2006, we had 616 employees. We had 442 employees based in the U.S. and 174 employees based in Asia-Pacific. Of our U.S.employees, we had 240 based at our corporate headquarters in Foster City, California and our regional sales offices. Of those employees, 99 were inengineering and operations, 65 were in sales and marketing and 76 were in management and finance. We had 202 employees based at our IBX centers inChicago, Illinois; Dallas, Texas; Los Angeles and Silicon Valley, California; New York, New York and the Washington, D.C. metro area markets. Of ourAsia-Pacific employees, we had 116 at our Asia-Pacific headquarters in Singapore and our other regional offices. Of those employees, 45 were in engineeringand operations, 27 were in sales and marketing and 44 were in management and finance. We had 58 employees based at our IBX centers in Hong Kong,Singapore, Sydney and Tokyo.Available InformationWe were incorporated in Delaware in June 1998. We are required to file reports under the Exchange Act with the SEC. You may read and copy ourmaterials on file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information regardingthe SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website at http://www.sec.gov that containsreports, proxy and information statements and other information.You may also obtain copies of our annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K free of chargeby visiting the investor relations page on our website, www.equinix.com. Information contained on our website is not part of this annual report on Form 10-K. 11 Table of ContentsITEM 1A.RISK FACTORSIn addition to the other information contained in this report, the following risk factors should be considered carefully in evaluating our business and us:Risks Related to Our BusinessWe have incurred substantial losses in the past and may continue to incur additional losses in the future.Although we have generated cash from operations since the quarter ended September 30, 2003, for the years ended December 31, 2006, 2005 and 2004,we incurred net losses of $6.4 million, $42.6 million and $68.6 million, respectively. Although we believe we are approaching a position of having our netlosses decrease to a breakeven level or even possibly producing some nominal level of net income in the foreseeable future, we are also currently investingheavily in our future growth through the build-out of several additional IBX centers. As a result, we will incur higher depreciation and other operating expensesthat will negatively impact our ability to achieve and sustain profitability until these new IBX centers generate enough revenue to exceed their operating costsand cover our additional overhead needed to scale our business for this anticipated growth. Although our goal is to achieve profitability, there can be noguarantee that we will become profitable, and we 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 are continuing to invest in our expansion efforts but may not have sufficient customer demand in the future to realize expected returns onthese investments.We are considering the acquisition or lease of additional properties, including construction of new IBX centers beyond those expansion projects alreadyannounced. We will be required to commit substantial operational and financial resources to these IBX centers, generally 12-18 months in advance of securingcustomer contracts, and we may not have sufficient customer demand in those markets to support these centers once they are built. In addition, unanticipatedtechnological changes could affect customer requirements for data centers and we may not have built such requirements into our new IBX centers. Any of thesecontingencies, if they were to occur, could make it difficult for us to realize expected or reasonable returns on these investments.We have begun construction of new IBX centers, and may begin construction of additional new IBX centers, which could involve significant risks toour business.We believe that most of the pre-existing built-out data centers have already been acquired, and that there are few if any viable distressed assets availablefor us to acquire in our key markets today. In order to sustain our growth in these markets, we must acquire suitable land with or without structures to buildour new IBX centers from the ground up (a “greenfield” build). Greenfield builds are currently underway in the Chicago, Washington D.C. and New Yorkmetro areas. A greenfield build involves substantial planning and lead-time, much longer time to completion than we have currently experienced in our recentIBX retrofits of existing data centers, and significantly higher costs of construction, equipment, and materials which could have a negative impact on ourreturns. A greenfield build also requires us to carefully select and rely on the experience of one or several general contractors and associated subcontractorsduring the construction process. Should a general contractor or significant subcontractor experience financial or other problems during the constructionprocess, we could experience significant delays, increased costs to complete the project and other negative impacts to our expected returns. Site selection is alsoa critical factor in our expansion plans, and there may not be suitable properties available in our markets with the necessary combination of high powercapacity and fiber connectivity.While we may prefer to locate new IBX centers adjacent to our existing locations, we may be limited by the inventory and location of suitable propertiesas well as the need for adequate power and fiber to the site. In the event we decide to build new IBX centers separate from our existing IBX centers, we mayprovide services to interconnect these two centers. Should these services not provide the necessary reliability to sustain service, this could result in lowerinterconnection revenue, lower margins and could have a negative impact on customer retention over time. 12 Table of ContentsIf we are not able to generate sufficient operating cash flows or obtain external financing, our ability to fund capital expenditures or fulfill ourobligations or execute expansion plans may be limited.Our capital expenditures, together with ongoing operating expenses and obligations to service our debts, will be a substantial drain on our cash flow andmay decrease our cash balances. We regularly assess markets for external financing opportunities, including debt and equity. Additional debt or equityfinancing may not be available when needed or, if available, may not be available on satisfactory terms. Our inability to obtain needed debt and/or equityfinancing or to generate sufficient cash from operations may require us to abandon projects or curtail capital expenditures. If we curtail capital expenditures orabandon projects, we could be materially adversely affected.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 our customers’ IBX infrastructure and their equipmentlocated in our IBX centers. We continue to acquire IBX centers not built by us. If these IBX centers and their infrastructure assets are not in the condition webelieve them to be in, we may be required to incur substantial additional costs to repair or upgrade the centers. The services we provide in each of our IBXcenters are subject to failure resulting from numerous factors, including: • human error; • physical or electronic security breaches; • fire, earthquake, flood, tornados and other natural disasters; • extreme temperatures; • water damage; • fiber cuts; • power loss; • terrorist acts; • sabotage and vandalism; and • failure of business partners who provide our 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. Forexample, in the event of an unusually long period of record heat, we may not be able to keep certain of our centers in compliance with our stated coolingobjectives or the center’s cooling units could fail under the strain. The record temperatures could also lead to our suppliers experiencing electrical power outagesor shortages. We have service level commitment obligations to certain of our customers, including our significant customers. As a result, service interruptionsor significant equipment damage in our IBX centers could result in difficulty maintaining service level commitments to these customers and potential claimsrelated to such failures. For example, for the year ended December 31, 2005, we recorded $457,000 in service level credits to various customers, primarilyassociated with two separate power outages that affected our Chicago and Washington, D.C. metro area IBX centers.If we incur significant financial commitments to our customers in connection with a loss of power, or our failure to meet other service level commitmentobligations, our liability insurance may not be adequate. In addition, any loss of services, equipment damage or inability to meet our service level commitmentobligations could reduce the confidence of our customers and could consequently impair our ability to obtain and retain customers, which would adverselyaffect both our ability to generate revenues and our operating results.Furthermore, we are dependent upon Internet service providers, telecommunications carriers and other website operators in the U.S., Asia and elsewhere,some of which have experienced significant system failures 13 Table of Contentsand electrical outages in the past. Users of our services may in the future experience difficulties due to system failures unrelated to our systems and services. Iffor any reason, these providers fail to provide the required services, our business, financial condition and results of operations could be materially adverselyimpacted.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 ourcustomers or us and subjecting us to the risk of lawsuits. Efforts to alleviate problems caused by computer viruses or other inappropriate uses or securitybreaches may lead to interruptions, delays or cessation of our managed services.There is no known prevention or defense against denial of service attacks. During a prolonged denial of service attack, Internet service may not beavailable for several hours, thus negatively impacting hosted customers’ on-line business transactions. Affected customers might file claims against us undersuch circumstances. Our property and liability insurance may not be adequate to cover these customer claims.We expect our operating results to fluctuate.We have experienced fluctuations in our results of operations on a quarterly and annual basis. The fluctuations 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: • financing or other expenses related to the acquisition, purchase or construction of additional IBX centers; • mandatory expensing of employee stock-based compensation, including restricted shares and units; • demand for space, power and services at our IBX centers; • changes in general economic conditions and specific market conditions in the telecommunications and Internet industries; • costs associated with the write-off or exit of unimproved or underutilized property; • 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; • the timing required for new and future centers to open or become fully utilized; • competition in the markets in which we operate; • conditions related to international operations; • increasing repair and maintenance expenses in connection with aging IBX centers; • lack of available capacity in our existing IBX centers to book new revenue or delays in opening up new or acquired IBX centers may delay ourability to book new revenue in markets which have otherwise reached capacity; • the timing and magnitude of other 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 we have experienced growth in revenues in recent quarters, this growth rate is not necessarily indicative of futureoperating results. It 14 Table of Contentsis possible that we may never generate net income on a quarterly or annual basis in the future. In addition, a relatively large portion of our expenses are fixed inthe short-term, particularly with respect to lease and personnel expenses, depreciation and amortization and interest expenses. Therefore, our results ofoperations are particularly sensitive to fluctuations in revenues. As such, comparisons to prior reporting periods should not be relied upon as indications ofour future performance. In addition, our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors. Ifthis occurs, we could experience an immediate and significant decline in the trading price of our stock.Our inability to use our tax net operating losses will cause us to pay taxes at an earlier date and in greater amounts, which may harm 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 fromour combination with i-STT Pte. Ltd. and Pihana Pacific, Inc. in 2002, which we call the combination. We expect that a significant portion of our NOLsaccrued prior to December 31, 2002 will expire unused as a result of this limitation. In addition to the limitations on NOL carry-forward utilization describedabove, we believe that Section 382 of the Code will also significantly limit our ability to use the depreciation and amortization on our assets, as well as certainlosses on the sale of our assets, to the extent that such depreciation, amortization and losses reflect unrealized depreciation that was inherent in such assets asof the date of the combination. These limitations will cause us to pay taxes at an earlier date and in greater amounts than would occur absent such limitations.We are exposed to potential risks from recent legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of2002.Although we received an unqualified opinion regarding the effectiveness of our internal controls over financial reporting as of December 31, 2006, in thecourse of our ongoing evaluation of our internal controls over financing reporting, we have identified certain areas which we would like to improve and are inthe process of evaluating and designing enhanced processes and controls to address these areas identified during our evaluation, none of which we believeconstitutes or will constitute a material change. However, we cannot be certain that our efforts will be effective or sufficient for us, or our independent registeredpublic accounting firm, to issue unqualified reports in the future, especially as our business continues to grow and evolve.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.Our 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, including our international expansion plans, our revenues may not increase and ourbusiness and results of operations would be harmed.For the years ended December 31, 2006, 2005 and 2004, we recognized 14%, 13% and 13%, respectively, of our revenues outside North America. Weanticipate that, for the foreseeable future, a significant part of our revenues will be derived from sources outside North America.To date, the neutrality of our IBX centers and the variety of networks available to our customers has often been a competitive advantage for us. In certainof our acquired IBX centers, in Singapore in particular, the limited number of carriers available reduces that advantage. As a result, we may need to adapt ourkey revenue-generating services and pricing to be competitive in that market. 15 Table of ContentsWe may experience gains and losses resulting from fluctuations in foreign currency exchange rates. To date, the majority of our revenues and costs havebeen denominated in U.S. dollars; however, the majority of revenues and costs in our international operations have been denominated in Singapore dollars,Japanese yen and Australia and Hong Kong dollars. Although we have in the past and may decide to undertake foreign exchange hedging transactions in thefuture to reduce foreign currency transaction exposure, we do not currently intend to eliminate all foreign currency transaction exposure. Where our prices aredenominated in U.S. dollars, our sales could be adversely affected by declines in foreign currencies relative to the U.S. dollar, thereby making our productsmore expensive in local currencies.We are currently undergoing an expansion of our IBX center in the Tokyo, Japan metro area and have announced our plans to expand our IBX center inSingapore. Undertaking and managing these expansions in foreign jurisdictions may present unanticipated challenges to us. In addition, any expansionrequires substantial operational and financial resources, and we may not have sufficient customer demand to support the expansion once complete.Unanticipated technological changes could also affect customer requirements for data centers and we may not have built such requirements into our expandedIBX centers. We are also exposed to risks resulting from fluctuations in foreign currency exchange rates in connection with our international expansions. To theextent we are paying contractors in foreign currencies, our expansions could cost more than anticipated from declines in the U.S dollar relative to foreigncurrencies.Our international operations are generally subject to a number of additional risks, including: • the costs of customizing IBX centers for foreign countries; • protectionist laws and business practices favoring local competition; • the greater difficulty or delay in accounts receivable collection; • difficulties in staffing and managing foreign operations; • political and economic instability; • our ability to obtain, transfer, or maintain licenses required by governmental entities with respect to the combined business; and • compliance with evolving governmental regulation with which we have little experience.The increased use of high power density equipment may limit our ability to fully utilize our IBX centers.Customers are increasing their use of high-density electrical power equipment, such as blade servers, in our IBX centers which has significantlyincreased the demand for power on a per cabinet basis. Because most of our centers were built several years ago, the current demand for electrical power mayexceed the designed electrical capacity in these centers. As electrical power, not space, is typically the limiting factor in our IBX data centers, our ability tofully utilize our IBX centers may be limited in these centers. The availability of sufficient power may also pose a risk to the successful operation of our newIBX centers. The ability to increase the power capacity of an IBX, should we decide to, is dependent on several factors including, but not limited to, the localutility’s ability to provide additional power; the length of time required to provide such power; and/or whether it is feasible to upgrade the electricalinfrastructure of an IBX to deliver additional power to customers. Although we are currently designing and building to a much higher power specification,there is a risk that demand will continue to increase and our IBX centers could become obsolete sooner than expected.We may make acquisitions, which pose integration and other risks that could harm our business.We have recently acquired several new IBX centers, and we may seek to acquire additional IBX centers, real estate for development of new IBX centers,or complementary businesses, products, services or technologies. As a result of these acquisitions, we may be required to incur additional debt andexpenditures and issue 16 Table of Contentsadditional shares of our common stock to pay for the acquired businesses, products, services or technologies, which may dilute our stockholders’ ownershipinterest and may delay, or prevent, our profitability. These acquisitions may also expose us to risks such as: • the possibility that we may not be able to successfully integrate acquired businesses or achieve the level of quality in such businesses to which 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; • 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 IBXcenter; • the possibility that carriers may find it cost-prohibitive or impractical to bring fiber and networks into a new IBX center; • the possibility of pre-existing 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; and • the possibility that the concentration of our IBX centers in the Silicon Valley, Los Angeles and Tokyo, Japan metro areas may increase ourexposure to seismic activity, especially if these centers are located on or near fault zones.We cannot assure you that the price for any future acquisitions will be similar to prior IBX acquisitions. In fact, we expect acquisition costs, includingcapital expenditures required to build or render new IBX centers operational, to increase in the future. If our revenue does not keep pace with these potentialacquisition and expansion costs, we may not be able to maintain our current or expected margins as we absorb these additional expenses. There is noassurance we would successfully overcome these risks or any other problems encountered with these acquisitions.Our business could be harmed by prolonged electrical power outages or shortages, increased costs of energy or general lack of availability ofelectrical resources.Our IBX centers are susceptible to regional costs of power, electrical power shortages, planned or unplanned power outages, and limitations, especiallyinternationally, on the availability of adequate power resources.Power outages, such as those that occurred in California during 2001, the Northeast in 2003, and from the tornados on the U.S. East Coast in 2004,could harm our customers and our business. We attempt to limit exposure to system downtime by using backup generators and power supplies; however, wemay not be able to limit our exposure entirely even with these protections in place, as was the case with the power outages we experienced in our Chicago andWashington, D.C. metro area IBX centers in 2005.In addition, global fluctuations in the price of power can increase the cost of energy, and although contractual price increase clauses may exist, we maynot be able to pass these increased costs on to our customers.In each of our markets, we rely on third parties to provide a sufficient amount of power for current and future customers. At the same time, power andcooling requirements are growing on a per unit basis. As a result, some customers are consuming an increasing amount of power per cabinet. We generally donot control the amount of electric power our customers draw from their installed circuits. This means that we could face power limitations in our centers. Thiscould have a negative impact on the effective available capacity of a given center and limit our ability to grow our business, which could have a negativeimpact on our financial performance, operating results and cash flows. 17 Table of ContentsWe may also have difficulty obtaining sufficient power capacity for potential expansion sites in new or existing markets. We may experience significantdelays and substantial increased costs demanded by the utilities to provide the level of electrical service required by our current IBX center designs.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 none of our capital stock issued to STT Communications would constitute “UnitedStates 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 our stockholdersand us. We have entered into an agreement with STT Communications and its affiliate pursuant to which we will no longer be bound by the FIRPTA covenantas of September 30, 2009. If we were to breach this covenant, we may be liable for damages to STT Communications.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 reassessed by taxing authorities. Many state and local governments are facing budget deficits,which may cause them to increase assessments or taxes. If property taxes increase, our business, financial condition and operating results could be adverselyaffected.STT Communications has voting control over a substantial portion of our stock and has influence over matters requiring stockholder consent.As of December 31, 2006, STT Communications, through its subsidiary, i-STT Investments (Bermuda) Ltd., had voting control over approximately15% of our outstanding common stock. In addition, STT Communications is not prohibited from buying shares of our stock in public or privatetransactions. As a result, STT Communications is able to exercise significant control over all matters requiring stockholder approval, including the election ofdirectors and approval of significant corporate transactions, which could prevent or delay a third party from acquiring or merging with us.Our non-U.S. customers include numerous related parties of 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 18 Table of Contentsaffiliated with STT Communications make investments in various companies. They have invested in the past, and may invest in the future, in entities thatcompete 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.If regulated materials are discovered at centers leased or owned by us, we may be required to remove or clean-up such materials, the cost ofwhich could be substantial.We are subject to various environmental and health and safety laws and regulations, including those relating to the generation, storage, handling anddisposal of hazardous substances and wastes. Certain of these laws and regulations also impose joint and several liability, without regard to fault, forinvestigation and cleanup costs on current and former owners and operators of real property and persons who have disposed of or released hazardoussubstances into the environment. Our operations involve the use of hazardous substances and materials such as petroleum fuel for emergency generators, aswell as batteries, cleaning solutions and other materials. In addition, we lease, own or operate real property at which hazardous substances and regulatedmaterials have been used in the past. At some of these locations, hazardous substances or regulated materials are known to be present in soil or groundwaterand there may be additional unknown hazardous substances or regulated materials present at sites we own, operate or lease. To the extent any hazardoussubstances or any other substance or material must be cleaned up or removed from such property, we may be responsible under applicable laws, regulationsor leases for the removal or cleanup of such substances or materials, the cost of which could be substantial. In addition, noncompliance with existing, oradoption of more stringent, environmental or health and safety laws and regulations or the discovery of previously unknown contamination could require us toincur costs or become the basis of new or increased liabilities that could be material.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 retain and attract new customers. Weare not a telecommunications carrier, and as such we rely on third parties to provide our customers with carrier services. We believe that the availability ofcarrier capacity will directly affect our ability to achieve our projected results. We rely primarily on revenue opportunities from the telecommunicationscarriers’ customers to encourage them to invest the capital and operating resources required to connect from their centers to our IBX centers. Carriers will likelyevaluate the revenue opportunity of an IBX center based on the assumption that the environment will be highly competitive. We cannot assure you that anycarrier will elect to offer its services within our IBX centers or that once a carrier has decided to provide Internet connectivity to our IBX centers that it willcontinue to do so for any period of time. Further, many carriers are experiencing business difficulties or announcing consolidations. As a result, some carriersmay be forced to downsize or terminate connectivity within our IBX centers, which could have an adverse effect on our operating results.Our new IBX centers require construction and operation of a sophisticated redundant fiber network. The construction required to connect multiplecarrier facilities to our IBX centers is complex and involves factors outside of our control, including regulatory processes and the availability of constructionresources. If the establishment of highly diverse Internet connectivity to our IBX centers does not occur, is materially delayed or is discontinued, or is subjectto failure, our operating results and cash flow will be adversely affected. Any hardware or fiber failures on this network may result in significant loss ofconnectivity to our new IBX expansion centers. This could affect our ability to attract new customers to these IBX centers or retain existing customers.Our networks may be vulnerable to unauthorized persons accessing our systems, which could disrupt our operations and result in the theft ofour proprietary information.A party who is able to breach the security measures on our networks could misappropriate either our proprietary information or the personal informationof our customers, or cause interruptions or malfunctions in 19 Table of Contentsour operations. We may be required to expend significant capital and resources to protect against such threats or to alleviate problems caused by breaches insecurity, which could have a material adverse affect on our financial performance and operating results.A small number of customers, including IBM, account for a significant portion of our revenues, and the loss of any of these customers couldsignificantly harm our business, financial condition and results of operations.As of December 31, 2006, we had 1,290 customers. While no single customer accounted for 10% of our revenues for the year ended December 31,2006, our top 10 customers accounted for 25% of our revenues during this period. We expect that a small percentage of our customers will continue to accountfor a significant portion of our revenue for the foreseeable future. We cannot guarantee that we will retain these customers or that they will maintain theircommitments in our IBX centers at current levels. For example, although the term of our contract with IBM, our single largest customer, runs through 2011,IBM currently has the right to reduce its commitment to us pursuant to the terms and requirements of its customer agreement. If we lose any of these keycustomers, or if any of them decide to reduce the level of their commitment to us, our business, financial condition and results of operations could beadversely affected.We resell products and services of third parties that may require us to pay for such products and services even if our customers fail to pay us forthe products and 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 contract with third party serviceproviders. These services require us to enter into fixed term contracts for services with third party suppliers of products and services. If we experience the lossof 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. Thepayment of these obligations without a corresponding payment from customers will reduce our financial resources and may have a material adverse affect onour financial performance and operating results.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 those of other providers of space and services fortelecommunications companies, webhosting 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 webhostingfacilities. Similarly, 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 in which we have IBX centers. Some of these competitors may also provide our target customers with additional benefits,including bundled communication services, and may do so in a manner that is more attractive to our potential customers than obtaining space in our IBXcenters. If these competitors were able to adopt aggressive pricing policies together with offering colocation space, our ability to generate revenues would bematerially 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 continue to see increased competition for data center space and customers from large real estate investmenttrusts (“REITS”) 20 Table of Contentswho also operate in our market. We may experience competition from our landlords, some of which are REITS, in this regard. Rather than leasing availablespace in our buildings to large single tenants, they may decide to convert the space instead to smaller square foot units designed for multi-tenant colocation use.Landlords/REITS may enjoy a cost effective advantage in providing services similar to those provided by our IBXs, and in addition to the risk of losingcustomers to these parties this could also reduce the amount of space available to us for expansion in the future. Competitors may operate more successfully orform alliances to acquire significant market share. Furthermore, enterprises that have already invested substantial resources in outsourcing arrangements maybe reluctant or slow to replace, limit or compete with their existing systems by becoming a customer. Customers may also decide it is cost effective for them tobuild-out their own data centers which could have a negative impact on our results of operations. In addition, other companies may be able to attract the samepotential customers that we are targeting. Once customers are located in competitors’ facilities, it may be extremely difficult to convince them to relocate to ourIBX centers.Because we depend on the retention of key employees, failure to maintain competitive compensation packages, including equity incentives, may bedisruptive to our business.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 equity in addition to their regular salaries. In addition to grantingequity to selected new hires, we periodically grant new equity awards to certain employees as an incentive to remain with us. To the extent we are unable to offercompetitive compensation packages to our employees and adequately maintain equity incentives due to equity expensing or otherwise, and should employeesdecide to leave us, this may be disruptive to our business and may adversely affect our business, financial condition 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 center, 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 center’s operating reliability and security and our ability to effectively market our services. In addition, some of ourcustomers are, and are likely to continue to be, Internet companies that face many competitive pressures and that may not ultimately be successful. If thesecustomers do not succeed, they will not continue to use the IBX centers. This may be disruptive to our business and may adversely affect our business,financial condition and results of operations.Our products and services have a long sales cycle that may materially adversely affect our business, financial condition and results 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. Furthermore, we may expend significant time and resources in pursuing a particular sale orcustomer that does not result in revenue. Delays due to the length of our sales cycle may materially adversely affect our business, financial condition andresults of operations.Failure to comply with listing standards for audit committee membership could result in our delisting from The Nasdaq Stock Market andseverely limit the liquidity of our common stock.Our common stock is currently traded on the The Nasdaq Stock Market. Under Nasdaq’s listing maintenance standards, the audit committee of eachNasdaq issuer must have at least three independent members 21 Table of Contentson its audit committee, at least one of whom is a financial expert. On February 8, 2007, we notified Nasdaq that we were not in compliance with theserequirements due to the vacancy created by Mr. Louis J. Lavigne, Jr.’s resignation from Equinix’s Board of Directors and its Audit Committee. Mr. Lavignewas the Audit Committee’s chairman and considered its financial expert. With Mr. Lavigne’s resignation, the Audit Committee is comprised of just twoindependent members and does not have a financial expert. On February 9, 2007, we received a Nasdaq Staff Deficiency Letter confirming that we fail tocomply with Nasdaq’s audit committee requirements.We have a cure period until August 8, 2007 to comply with these requirements and we are currently searching for a new candidate to serve on our Boardof Directors and its Audit Committee who possesses qualifications that will satisfy both the independence requirements and the audit committee financialexpert requirement. However, if we are unable to find a suitable candidate before August 8, 2007, we may be subject to delisting by Nasdaq.If our stock is delisted and thus no longer eligible for quotation on The Nasdaq Stock Market, it would trade either on the Nasdaq Capital Marketor on the over-the-counter market, both of which are viewed by most investors as less desirable and less liquid marketplaces. The loss of our listing on TheNasdaq Stock Market would also complicate compliance with state blue-sky laws. Furthermore, our ability to raise additional capital would be severelyimpaired. As a result of these factors, the value of the common stock would decline significantly.If the market price of our stock continues to be highly volatile, the value of an investment in our common stock may decline.Since January 1, 2006, our common stock has traded between $41.43 and $88.83 per share. The market price of the shares of our common stock hasbeen and may continue to be highly volatile. Actual sales, or the market’s perception with respect to possible sales, of a substantial number of shares of ourcommon stock within a narrow period of time could cause our stock price to fall. Announcements by others or us may also have a significant impact on themarket price of our common stock. These announcements may include: • our operating results; • new issuances of equity, debt or convertible debt; • developments in our relationships with corporate customers; • announcements by our customers or competitors; • changes in regulatory policy or interpretation; • governmental investigations; • changes in the ratings of our stock by securities analysts; • purchase or development of real estate and/or additional IBX centers; • announcements with respect to the operational performance of our IBX centers; • 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.We are subject to securities class action and derivative 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 22 Table of Contentsclass action lawsuits were filed against us, a number of our officers and directors, and several investment banks that were underwriters of our initial publicoffering. The suits allege that the underwriter defendants agreed to allocate stock in our initial public offering to certain investors in exchange for excessive andundisclosed commissions and agreements by those investors to make additional purchases in the aftermarket at pre-determined prices. Plaintiffs allege that theprospectus for our initial public offering was false and misleading and in violation of the securities laws because it did not disclose these arrangements. In July2003, a special litigation committee of our board of directors agreed to participate in a settlement with the plaintiffs. The settlement agreement, as amended, issubject to court approval and sufficient participation by defendants in similar actions. If the proposed settlement, as amended, is not approved by the court, orif a sufficient number of defendants do not participate in the settlement, the defense of this litigation may continue and therefore increase our expenses anddivert management’s attention and resources. In addition, we may, in the future, be subject to other securities class action or similar litigation.On June 29, 2006 and September 18, 2006, shareholder derivative actions were filed in the Superior Court of the State of California, County of SanMateo, naming Equinix as a nominal defendant and several of Equinix’s current and former officers and directors as individual defendants. These actionswere consolidated, and the consolidated complaint was filed in January 2007. The consolidated complaint alleges that the individual defendants breached theirfiduciary duties and violated California securities law as a result of purported backdating of stock option grants, insider trading and the preparation andapproval of inaccurate financial results. Plaintiffs seek to recover, on behalf of Equinix, unspecified monetary damages, corporate governance changes,equitable and injunctive relief, restitution, and fees and costs. Defendants filed a motion to stay this action in deference to a federal derivative action inFebruary 2007. On October 13, 2006, a shareholder derivative action was filed in the United States District Court for the Northern District of California,naming Equinix as a nominal defendant and several current and former officers and directors as individual defendants. This complaint alleges that theindividual defendants breached their fiduciary duties and violated California and federal securities laws as a result of purported backdating of stock options,insider trading and the dissemination of false statements. Plaintiff seeks to recover, on behalf of Equinix, unspecified monetary and punitive damages,corporate governance changes, the imposition of a constructive trust over certain stock options and related proceeds, and fees and costs. The deadline forEquinix to move to dismiss the complaint is April 19, 2007. In addition to the pending derivative actions, we may be subject to additional derivative or otherlawsuits that may be presented on an individual or class basis alleging claims based on our stock option granting practices. Responding to, investigatingand/or defending against these complaints will present a substantial cost to us in both cash and the attention of certain management.Any adverse outcome in litigation could seriously harm our business and results of operations.Risks Related to Our IndustryIf 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 23 Table of Contentsproperty, privacy, libel, telecommunications services, and taxation, apply to the Internet and to related services such as ours. We have limited experience withsuch international regulatory issues and substantial resources may be required to comply with regulations or bring any non-compliant business practices intocompliance with such regulations. In addition, the development of the market for online commerce and the displacement of traditional telephony service by theInternet and related communications services may prompt an increased call for more stringent consumer protection laws or other regulation both in the U.S.and abroad that may impose additional burdens on companies conducting business online and their service providers. The compliance with, adoption ormodification of, laws or regulations relating to the Internet, or interpretations of existing laws, could have a material adverse effect on our business, financialcondition and results of operation.Industry consolidation may have a negative impact on our business model.The telecommunications industry is currently undergoing consolidation. As customers combine businesses, they may require less colocation space, andthere 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. In addition, increased utilizationlevels industry-wide could lead to a reduced amount of attractive expansion opportunities available to us.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 catastrophic events or attacks. ITEM 1B.UNRESOLVED STAFF COMMENTSThere is no disclosure to report pursuant to Item 1B. ITEM 2.PROPERTIESOur executive offices are located in Foster City, California, and we also have sales offices in several cities throughout the United States. Our Asia-Pacificheadquarters office is located in Singapore and we also have office space in Hong Kong; Tokyo, Japan; and Sydney, Australia, which is operated out of ourAustralia IBX center. We have entered into leases for or own IBX centers in Ashburn, Virginia; Chicago, Illinois; Dallas, Texas; Los Angeles, San Jose, SantaClara and Sunnyvale, California; Newark and Secaucus, New Jersey; Hong Kong; Singapore; Sydney, Australia and Tokyo, Japan. We own a campus inAshburn, Virginia that houses some of our IBX centers. We also hold a ground leasehold interest in certain unimproved real property in San Jose, California,consisting of approximately 40 acres; however, we recorded a restructuring charge during the fourth quarter of 2005 related to this certain unimproved realproperty, which we do not utilize for any purpose, as we made the decision to not develop this land and will return this land to the landlord in its entirety nolater than December 31, 2007. In January 2007, we entered into an agreement to purchase a property we currently lease in San Jose, California, which isexpected to close no later than the fourth quarter of 2007. ITEM 3.LEGAL PROCEEDINGSOn 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 “Underwriter Defendants”). The cases werefiled in the United 24 Table of ContentsStates District Court for the Southern District of New York, purportedly on behalf of investors who purchased our stock between August 10, 2000 andDecember 6, 2000. In addition, similar lawsuits were filed against approximately 300 other issuers and related parties. The purported class action allegesviolations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b), Rule 10b-5 and 20(a) of the Securities Exchange Act of 1934 against us andthe Individual Defendants. The plaintiffs have since dismissed the Individual Defendants without prejudice. The suits allege that the Underwriter Defendantsagreed to allocate stock in our initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by thoseinvestors to make additional purchases in the aftermarket at pre-determined prices. The plaintiffs allege that the prospectus for our initial public offering wasfalse and misleading and in violation of the securities laws because it did not disclose these arrangements. The action seeks damages in an unspecifiedamount. On February 19, 2003, the Court dismissed the Section 10(b) claim against us, but denied the motion to dismiss the Section 11 claim. OnOctober 13, 2004, the Court certified a class in six of the approximately 300 other nearly identical actions (the “focus cases”) and noted that the decision isintended to provide strong guidance to all parties regarding class certification in the remaining cases. The Underwriter Defendants appealed the decision andthe Second Circuit vacated the district court’s decision granting class certification in those six cases on December 5, 2006. Plaintiffs have not yet moved tocertify a class in the Equinix case.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 us, the Individual Defendants, the plaintiff class and the vast majority of the other approximately 300 issuer defendants andthe individual defendants currently or formerly associated with those companies. It is unclear what impact the Second Circuit’s decision vacating classcertification in the six focus cases will have on the settlement, which has not yet been finally approved by the Court. On December 14, 2006, a hearing washeld. Plaintiffs informed the Court that they planned to file a petition for rehearing and rehearing en banc. The Court stayed all proceedings, including adecision on final approval of the settlement and any amendments of the complaints, pending the Second Circuit’s decision on Plaintiffs’ petition for rehearing.Plaintiffs filed the petition for rehearing and rehearing en banc on January 5, 2007.Pursuant to the settlement and related agreements, if the settlement receives final approval by the Court, the settlement provides for a release of us and theindividual defendants and our agreeing to assign away, not assert, or release certain potential claims we may have against our underwriters. The settlementagreement also provides a guaranteed recovery of $1.0 billion to plaintiffs for the cases relating to all of the approximately 300 issuers. To the extent that theunderwriter defendants settle all of the cases for at least $1.0 billion, no payment will be required under the issuers’ settlement agreement. To the extent that theunderwriter defendants settle for less than $1.0 billion, the issuers are required to make up the difference. On April 20, 2006, JPMorgan Chase and thePlaintiffs reached a preliminary agreement to settle for $425.0 million. The JPMorgan Chase preliminary agreement has not yet been approved by the Court. Inan amendment to the issuers’ settlement agreement, the issuers’ insurers agreed that the JPMorgan preliminary agreement, if approved, will only offset theinsurers’ obligation to cover the remainder of Plaintiffs’ guaranteed $1.0 billion recovery by 50% of the value of the JP Morgan settlement, or $212.5 million.Therefore, if the JP Morgan preliminary agreement to settle is finalized, and then preliminarily and finally approved by the Court, then the maximum amountthat the issuers’ insurers will be potentially liable for is $787.5 million. It is unclear what impact the Second Circuit’s decision vacating class certification inthe focus cases will have on the JP Morgan Chase preliminary agreement.We have no information as to whether there are any material limitations on the expected recovery by other issuer defendants of any potential financialobligation to plaintiffs from their own insurance carriers. There is no assurance that the court will grant final approval to the issuers’ settlement. As approvalby the Court cannot be assured, we are unable at this time to determine whether the outcome of the litigation would have a material impact on our results ofoperations, financial condition or cash flows. Until the settlement is finalized and approved by the Court, or in the event such settlement is not approved, weand our officers and directors intend to continue to defend the actions vigorously. While an unfavorable outcome to this case is reasonably possible, and wecan estimate our potential exposure to be less than approximately $3.4 million, it is not probable. In addition, as noted above, any payments are expected to becovered by existing insurance and, as a result, we do not expect that the settlement will 25 Table of Contentsinvolve any payment by us. As a result, we have not accrued for any settlements in connection with this litigation as of December 31, 2006.In June 2006, we received an informal inquiry from the Securities and Exchange Commission (“SEC”) and a grand jury subpoena from the UnitedStates Attorney for the Northern District of California (“U.S. Attorney”) requesting documents relating to our stock option grants and practices. In December2006, the SEC formally notified us that it had terminated its investigation of our stock option grants and practices and no enforcement action wasrecommended. In January 2007, the U.S Attorney formally notified us of the withdrawal of its grand jury subpoena.On June 29, 2006 and September 18, 2006, shareholder derivative actions were filed in the Superior Court of the State of California, County of SanMateo, naming Equinix as a nominal defendant and several of Equinix’s current and former officers and directors as individual defendants. These actionswere consolidated, and the consolidated complaint was filed in January 2007. The consolidated complaint alleges that the individual defendants breached theirfiduciary duties and violated California securities law as a result of purported backdating of stock option grants, insider trading and the preparation andapproval of inaccurate financial results. Plaintiffs seek to recover, on behalf of Equinix, unspecified monetary damages, corporate governance changes,equitable and injunctive relief, restitution, and fees and costs. Defendants filed a motion to stay this action in deference to a federal derivative action inFebruary 2007. On October 13, 2006, a shareholder derivative action was filed in the United States District Court for the Northern District of California,naming Equinix as a nominal defendant and several current and former officers and directors as individual defendants. This complaint alleges that theindividual defendants breached their fiduciary duties and violated California and federal securities laws as a result of purported backdating of stock options,insider trading and the dissemination of false statements. Plaintiff seeks to recover, on behalf of Equinix, unspecified monetary and punitive damages,corporate governance changes, the imposition of a constructive trust over certain stock options and related proceeds, and fees and costs. The deadline forEquinix to move to dismiss the complaint is April 19, 2007. In addition to the pending derivative actions, we may be subject to additional derivative orother lawsuits that may be presented on an individual or class basis alleging claims based on our stock option granting practices. Similar lawsuits andinvestigations have been commenced against numerous other companies based on similar allegations.Responding to, investigating and/or defending against civil litigations and government inquiries regarding our stock option grants and practices willpresent a substantial cost to us in both cash and the attention of certain management and may have a negative impact on our operations. In addition, in theevent of any negative finding or assertion by the SEC, U.S. Attorney, court of law or any third-party claim related to our stock option granting practices, wemay be liable for damages, fines or other civil or criminal remedies, or be required to restate our prior period financial statements or adjust our current periodfinancial statements. Any such adverse action could have a material adverse effect on our business and current market value. ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNone during the fourth quarter of the fiscal year ended December 31, 2006. 26 Table of ContentsPART II ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIESOur common stock is quoted on the Nasdaq National Market System under the symbol of “EQIX.” Our common stock began trading in August 2000.The following table sets forth on a per share basis the low and high closing prices of our common stock as reported by the Nasdaq National Market during thelast two years. Low HighFiscal 2006: Fourth Fiscal Quarter $58.91 $82.51Third Fiscal Quarter 46.37 63.21Second Fiscal Quarter 47.70 65.90First Fiscal Quarter 41.43 64.22Fiscal 2005: Fourth Fiscal Quarter $35.31 $42.53Third Fiscal Quarter 38.28 45.09Second Fiscal Quarter 31.61 44.11First Fiscal Quarter 40.67 46.27As of January 31, 2007, we had issued 29,810,254 shares of our common stock held by approximately 285 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. Our ability to pay cash dividends is limited under our line of credit with Silicon ValleyBank, such that, without the prior written consent of Silicon Valley Bank, the aggregate amount of any cash dividends may not exceed 25% of our assets.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 our report on Form 10-Qfor the quarter ended September 30, 2000 regarding the use of proceeds generated by our initial public offering of our common stock.During the year ended December 31, 2006, we did not issue or sell any unregistered securities. 27 Table of ContentsEquity Compensation Plan InformationThe following table provides information as of December 31, 2006 with respect to shares of our common stock issuable under our existing equitycompensation plans: A B C Plan category Number of securitiesto be issued uponexercise ofoutstanding options,warrants and rights Weighted-averageexercise price ofoutstanding options,warrants and rights Number of securitiesremaining availablefor future issuanceunder equitycompensation plans,excluding securitiesreflected in column A Equity compensation plans approved by security holders (1) 2,465,625(2) $44.75 3,120,053(3)Equity compensation plans not approved by security holders 1,006,690 $45.92 191,025 Total 3,472,315 $45.11 3,311,078 (1)On each January 1, the number of shares reserved for issuance under the following equity compensation plans will be automatically increased asfollows: the 2000 Equity Incentive Plan will be automatically increased by the lesser of 6% of the then outstanding shares of common stock or6.0 million shares; the 2000 Director Option Plan will be automatically increased by 50,000 shares of common stock; the 2004 Employee StockPurchase Plan will be automatically increased by the lesser of 2% of the then outstanding shares of common stock or 500,000 shares.(2)Includes 160,000 unissued shares subject to restricted stock grants.(3)Includes 1,160,584 shares available for future issuance under the 2004 Employee Stock Purchase Plan.The following equity compensation plan that was in effect as of December 31, 2006, was adopted without the approval of our security holders:The Equinix, Inc. 2001 Supplemental Stock Plan (the “2001 Plan”) was adopted by the Board of Directors on September 26, 2001. We have reserved1,493,961 shares of common stock for issuance under the 2001 Plan, under which nonstatutory stock options and restricted shares may be granted to non-executive officer employees and consultants of ours or any parent or subsidiary corporation. Options granted under the 2001 Plan must have an exercise priceequal to no less than 85% of the fair market value on the date of grant; however, as of December 31, 2006, all options granted under the 2001 Plan have anexercise price equal to 100% of the fair market value on the date of grant. As of December 31, 2006, options to purchase 1,006,690 shares of common stockwere outstanding under the 2001 Plan, 191,025 shares remained available for future grants, and options covering 296,246 shares had been exercised. In theevent we are acquired and either a) outstanding awards are not assumed or replaced by the acquiring entity, or b) an outstanding award holder’s employmentor service is involuntarily terminated within 18 months of such acquisition, such outstanding awards under the 2001 Plan will become fully vested. TheBoard may amend or terminate the 2001 Plan at any time, and the 2001 Plan will continue in effect indefinitely unless the Board decides to terminate the planearlier. 28 Table of ContentsStock Performance GraphThe graph set forth below compares the cumulative total stockholder return on Equinix’s common stock between December 31, 2001 and December 31,2006 with the cumulative total return of (i) the NASDAQ Composite Index and (ii) the NASDAQ Telecommunications Index. This graph assumes theinvestment of $100.00 on December 31, 2001 in Equinix’s common stock, in the NASDAQ Composite Index, and in the NASDAQ TelecommunicationsIndex, and assumes the reinvestment of dividends, if any.The comparisons shown in the graph below are based upon historical data adjusting for the one for 32 reverse split which became effective onDecember 31, 2002 (the “Stock Split”). Equinix cautions that the stock price performance shown in the graph below is not indicative of, nor intended toforecast, the potential future performance of Equinix’s common stock.Notwithstanding anything to the contrary set forth in any of Equinix’s previous or future filings under the Securities Act of 1933, as amended, orSecurities Exchange Act of 1934, as amended, that might incorporate this Form 10-K or future filings made by Equinix under those statutes, the StockPerformance Graph shall not be deemed filed with the Securities and Exchange Commission and shall not be deemed incorporated by reference into any ofthose prior filings or into any future filings made by Equinix under those statutes. 29 Table of ContentsITEM 6.SELECTED FINANCIAL DATAThe following consolidated statement of operations data for the five years ended December 31, 2006 and the consolidated balance sheet data as ofDecember 31, 2006, 2005, 2004, 2003 and 2002 have been derived from our audited consolidated financial statements and the related notes to the financialstatements. Our historical results are not necessarily indicative of the results to be expected for future periods. The following selected consolidated financialdata for the three years ended December 31, 2006 and as of December 31, 2006 and 2005, should be read in conjunction with our consolidated financialstatements and the related notes to the consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” included elsewhere in this Annual Report on Form 10-K. Years ended December 31, 2006 2005 2004 2003 2002 (dollars in thousands, except per share data) Consolidated Statement of Operations Data: Revenues $286,915 $221,057 $163,671 $117,942 $77,188 Costs and operating expenses: Cost of revenues 188,379 158,354 136,950 128,121 104,073 Sales and marketing 32,619 20,552 18,604 19,483 15,247 General and administrative 72,123 45,110 32,494 34,293 30,659 Restructuring charges 1,527 33,814 17,685 — 28,885 Gain on Honolulu IBX sale (9,647) — — — — Total costs and operating expenses 285,001 257,830 205,733 181,897 178,864 Income (loss) from operations 1,914 (36,773) (42,062) (63,955) (101,676)Interest income 6,627 3,584 1,291 296 998 Interest expense (14,875) (8,880) (11,496) (20,512) (35,098)Gain (loss) on debt extinguishment and conversion — — (16,211) — 114,158 Income taxes (439) (543) (153) — — Cumulative effect of a change in accounting principle 376 — — — — Net loss $(6,397) $(42,612) $(68,631) $(84,171) $(21,618)Net loss per share: Basic and diluted $(0.22) $(1.78) $(3.87) $(8.76) $(7.23)Weighted average shares 28,551 23,956 17,719 9,604 2,990 As of December 31, 2006 2005 2004 2003 2002 (dollars in thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and short-term and long-term investments $156,481 $188,855 $108,092 $72,971 $41,216 Accounts receivable, net 26,864 17,237 11,919 10,178 9,152 Property and equipment, net 546,395 438,790 343,361 343,554 390,048 Total assets 771,832 680,997 501,798 464,532 492,003 Capital lease and other financing obligations, excluding current portion 92,722 94,653 34,529 723 3,633 Mortgage payable, excluding current portion 96,746 58,841 — — — Credit facility, excluding current portion — — — 22,281 89,529 Senior notes — — — 29,220 28,908 Convertible secured notes — — 35,824 31,683 25,354 Convertible subordinated debentures 86,250 86,250 86,250 — — Total stockholders’ equity 355,028 288,673 273,706 320,077 284,194 Other Financial Data: Net cash provided by (used in) operating activities 75,412 67,595 36,912 (17,266) (27,509)Net cash used in investing activities (158,470) (108,722) (56,865) (49,179) (7,528)Net cash provided by financing activities 46,107 134,611 19,239 52,288 16,924 30 Table of ContentsITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following commentary should be read in conjunction with the financial statements and related notes contained elsewhere in this 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” elsewhere in this Annual Report on Form 10-K. All forward-looking statements in this document are based on informationavailable to us as of the date hereof and we assume no obligation to update any such forward-looking statements.OverviewEquinix provides network neutral colocation, interconnection and managed services to enterprises, content companies, systems integrators and theworld’s largest network providers. Through our IBX centers in 10 markets in the U.S. and Asia-Pacific, customers can directly interconnect with each otherfor critical traffic exchange requirements. As of December 31, 2006, we operate IBX centers in the Chicago, Dallas, Los Angeles, New York, Silicon Valleyand Washington, D.C. metro areas in the United States and Hong Kong, Singapore, Sydney and Tokyo in the Asia-Pacific region.Direct interconnection to our aggregation of networks, which serve more than 90% of the world’s Internet routes, allows our customers to increaseperformance while significantly reducing costs. Based on our network neutral model and the quality of our IBX centers, we believe we have established acritical mass of customers. As more customers locate in our IBX centers, it benefits their suppliers and business partners to do so as well to gain the fulleconomic and performance benefits of direct interconnection. These partners, in turn, pull in their business partners, creating a “network effect” of customeradoption. Our interconnection services enable scalable, reliable and cost-effective interconnection and traffic exchange thus lowering overall cost and increasingflexibility. Our focused business model is based on our critical mass of customers and the resulting network effect. This critical mass and the resultingnetwork effect, combined with our strong financial position, continue to drive new customer growth and bookings.Historically, our market has been served by large telecommunications carriers who have bundled their telecommunications products and services withtheir colocation offerings. A number of these telecommunications carriers have eliminated or reduced their colocation footprint to focus on their core businesses.In 2003, as an example, one major telecommunications company, Sprint, announced its plans to exit the colocation and hosting market in order to focus on itscore service offerings, while another telecommunications company, Cable & Wireless Plc, sold its U.S. assets to another telecommunications company,Savvis Communications Corp, in a bankruptcy auction. In 2005 and 2006, other providers, such as Abovenet and Verio, have selectively sold off certain oftheir colocation centers. Each of these colocation providers own and operate a network. We do not own or operate a network, yet have greater than 200 networksoperating out of our IBX centers. As a result, we are able to offer our customers a substantial choice of networks given our network neutrality thereby allowingour customers to choose from numerous network service providers. We believe this is a distinct and sustainable competitive advantage, especially when thetelecommunications industry is experiencing many business challenges and changes as evidenced by the numerous bankruptcies and consolidations withinthis industry during the past several years. Furthermore, this industry consolidation has constrained the supply of suitable data center space and has had apositive effect on industry pricing. 31 Table of ContentsOur utilization rate represents the percentage of our cabinet space billing versus total cabinet space available. Our utilization rate grew to 56% as ofDecember 31, 2006 from 54% as of December 31, 2005; however, excluding the impact of our recent IBX center openings in the Chicago, Los Angeles andSilicon Valley metro areas, our utilization rate would have been 63% as of December 31, 2006. Although we have substantial capacity for growth, ourutilization rates vary from market to market among our IBX centers in the 10 markets across the U.S. and Asia-Pacific. We continue to monitor the availablecapacity in each of our selected markets. To the extent we have limited capacity available in a given market, it may limit our ability for growth in that market.Once capacity becomes limited, we will perform demand studies to determine if future expansion is warranted. In addition, power and cooling requirements forsome customers are growing on a per unit basis. As a result, customers are consuming an increasing amount of power per cabinet. Although we generally donot control the amount of draw our customers take from installed circuits, we have negotiated power consumption limitations with certain of our high powerdemand customers. We could face power limitations in our centers even though we may have additional physical capacity available within a specific IBXcenter. This could have a negative impact on the available utilization capacity of a given center, which could have a negative impact on our ability to growrevenues, affecting our financial performance, operating results and cash flows. As a result of these power limitations in our existing IBX centers, themaximum utilization rate that we expect to achieve for most IBX centers until we consider an IBX center full or sold-out is approximately 75-80% depending onthe building configurations.Strategically, we will continue to look at attractive opportunities to grow our market share and selectively improve our footprint and service offerings,such as our acquisition of the Sprint property in Santa Clara in December 2003, our 2004 expansions in the Washington, D.C. and Silicon Valley metro areamarkets, our 2005 expansions in the Silicon Valley, Chicago and Los Angeles metro area markets and our 2006 expansions in the Washington, D.C.,Chicago, New York and Tokyo, Japan metro area markets, which are expected to open in 2007 (see “Recent Developments” below). However, we will continueto be very selective with any similar opportunity. As was the case with these recent expansions in the Washington, D.C., Silicon Valley, Chicago, Los Angelesand Tokyo area markets, our expansion criteria will be dependent on demand from new and existing customers, quality of the design, power capacity, accessto networks, capacity availability in current market location, amount of incremental investment required by us in the targeted property, lead-time to break-evenand in-place customers. Like our recent expansions, the right combination of these factors may be attractive to us. Dependent on the particular deal, theseacquisitions may require upfront cash payments and additional capital expenditures or may be funded through long-term financing arrangements in order tobring these centers up to Equinix standards. Property expansion may be in the form of a purchase of real property, as was the case with our recentWashington, D.C. and Chicago metro area property acquisitions, or a long-term leasing arrangement.In addition to our successful strategy of acquiring previously or partially built-out centers, we are currently undergoing construction to build out newIBX centers in the Washington, D.C, Chicago and New York metro areas. As part of our strategy, we will continue to contemplate the possibility of newconstruction in selective markets where the inventory for high quality data centers is limited. Decisions to build will consider factors such as customerdemand, market pricing and the financial returns associated with the construction. Future purchases or construction may be completed by us or with partnersor potential customers to minimize the outlay of cash, which can be significant.Recent DevelopmentsIn January 2006, the Compensation Committee of the Board of Directors approved stock options to be granted to employees, excluding executiveofficers, to purchase an aggregate of 648,500 shares of common stock as part of our annual refresh program. In addition, the Compensation Committee of theBoard of Directors also approved the issuance of 250,000 restricted shares of common stock to executive officers. The restricted shares are subject to four-yearvesting, and will only vest at certain time intervals and if the stock appreciates to pre-determined levels. In January 2007, the Stock Option Committee of theBoard of Directors approved stock options to be granted to employees, excluding executive officers, to purchase an aggregate of 511,310 shares of commonstock as part of our annual refresh program. In addition, the Compensation Committee of the Board of 32 Table of ContentsDirectors approved the issuance of 178,400 restricted stock units to certain employees, excluding executive officers, also as part of our annual refreshprogram. The Compensation Committee of the Board of Directors also approved the issuance of an aggregate of 218,000 shares of restricted common stockand restricted stock units to executive officers pursuant to the 2000 Equity Incentive Plan. All awards are subject to vesting provisions. All such equity awardswere accounted for under the provisions of SFAS No. 123(R), “Share-Based Payment,” and related pronouncements, which had a significant impact to us.We expect stock-based compensation expense related to these equity awards to impact our results of operations through 2011. For further information on stock-based compensation, refer to “Accounting for Stock-Based Compensation” in “Critical Accounting Policies and Estimates” below.In February 2006, we announced our intention to build out a new IBX center within our Ashburn campus in order to further expand our existingWashington, D.C. metro area IBX center. We refer to this project as the Washington, D.C. metro area IBX expansion project. In May 2006, we began newconstruction to build out one of the undeveloped buildings located on our Ashburn campus. We expect to spend approximately $60.0 million for theWashington, D.C. metro area IBX expansion project until completion, of which $54.0 million was incurred during the year ended December 31, 2006. Weintend to open this new center for customers in the first quarter of 2007. This IBX center will feature an updated design that will enable us to support theincreased power and cooling demands of customers. The Washington, D.C. metro area IBX expansion project will fulfill our obligation to invest at least $40.0million in capital improvements to our Ashburn campus by December 31, 2007 pursuant to the terms of the Ashburn campus mortgage payable. In December2006, we received an additional financing of $40.0 million under the same terms as the initial Ashburn campus mortgage payable, which increased theAshburn campus mortgage payable from an initial $60.0 million to $100.0 million.In June 2006, we purchased a 228,000 square foot stand-alone office/warehouse complex in the Chicago metro area for $9.8 million, including closingcosts, which we paid for in full during June 2006. We are building this IBX center, which will be our second IBX center location in the Chicago metro area, inmultiple phases. We refer to this project as the Chicago metro area IBX expansion project. This new IBX center will be interconnected to our existing downtownChicago IBX centers through redundant dark fiber links managed by us. We plan to invest approximately $175.0 million to build out the first phase, ofwhich approximately $37.8 million was incurred in 2006. This includes an investment of approximately $40.0 million to construct a specially built 250,000square foot shell, acquire access to power and provision fiber for interconnection to our downtown Chicago IBX center location. The site development planallows for a second expansion phase at an incremental investment of $30.0 million. We intend to open the new center for customers during the second half of2007. In February 2007, we obtained a construction loan of up to $110.0 million which has a term of three years and bears interest at a floating rate (one, threeor six month LIBOR plus 2.75%), with an initial rate of 8.125%, to finance a portion of the development and construction costs of the Chicago metro areaIBX expansion project. We refer to this transaction as the Chicago IBX financing. We have currently drawn $20.0 million on the Chicago IBX financing andexpect to be fully drawn on the Chicago IBX financing by the end of 2007.In June 2006, the Audit Committee of the Board of Directors commenced an independent investigation of our historical stock option granting practicesand related accounting with the assistance of independent outside legal counsel. This review covered the timing and pricing of all stock option grants madeunder our stock option plans since August 11, 2000, the day after our initial public offering. Following our investigation, we received an informal inquiryfrom the Securities and Exchange Commission (“SEC”) and a grand jury subpoena from the United States Attorney for the Northern District of California(“U.S. Attorney”) requesting documents relating to our stock option grants and practices. The Audit Committee of the Board of Directors concluded that wedid not engage in intentional or fraudulent misconduct in the granting of stock options. However, the accounting measurement dates for certain historical stockoption grants differed from their actual grant dates. As a result of revising the accounting measurement dates for these stock option grants, we recordedadditional non-cash stock-based compensation charge totaling $444,000 in our consolidated financial statements for the year ended December 31, 2006. Theamount of the charge was computed pursuant to the requirements of APB 25 for all historical periods through December 31, 2005 and pursuant to SFAS123(R) for the year ended December 31, 2006. This $444,000 33 Table of Contentsstock-based compensation charge represents the total charge for historical periods that we needed to record as a result of the Audit Committee’s conclusion onthis matter. This compensation charge had no effect on our current cash position. We concluded that the cumulative charge as a result of the difference betweenthe measurement dates used for financial accounting and reporting purposes and the actual grant dates for certain stock option grants, totaling $444,000, wasnot material to any previously-reported historical period nor is it material to the current fiscal year. As such, this cumulative charge totaling $444,000 wasrecorded in the statement of operations for the year ended December 31, 2006. In December 2006, the SEC formally notified us that it had terminated itsinvestigation of our stock option grants and practices and no enforcement action was recommended. In January 2007, the U.S Attorney formally notified us ofthe withdrawal of its grand jury subpoena. As fully described in “Legal Proceedings” in Item 3 of this Annual Report on Form 10-K, shareholder derivativeactions were filed in connection with this matter.In August 2006, we amended the $50.0 million Silicon Valley Bank revolving credit line to increase the line to $75.0 million and added General ElectricCapital Corporation as a lender. We refer to this transaction as the $75.0 million Silicon Valley Bank revolving credit line. The $75.0 million Silicon ValleyBank revolving credit line allows for issuance of letters of credit (in addition to revolving borrowings). The $75.0 million Silicon Valley Bank revolving creditline also has an option for us to increase the amount of the line to $100.0 million at a later date, subject to approval of the lender or lenders electing toparticipate in such increase. Borrowings under the $75.0 million Silicon Valley Bank revolving credit line will continue to bear interest at variable interestrates, plus the applicable margins based on either prime rates or LIBOR rates. The $75.0 million Silicon Valley Bank revolving credit line matures onSeptember 15, 2008, is secured by substantially all of our domestic personal property assets and certain of our real property leases, and contains severalfinancial covenants, which require compliance with maximum leverage and working capital ratios and a minimum EBITDA target, all of which we were incompliance with as of the date of filing of this Annual Report on Form 10-K. See “Debt Obligations—Non-Convertible Debt” below for further discussion.In September 2006, we entered into a long-term lease for an approximately 340,000 square foot building in the New York metro area. We intend to buildan IBX center, which will be our third IBX center in the New York metro area, and this new center will be interconnected to our existing IBX centers in theNew York metro area through redundant dark fiber links managed by us. We refer to this project as the New York metro area IBX expansion project.Payments under this lease total $59.4 million, which will be paid in monthly installments and payable through September 2021. The lease, whichcommenced in October 2006, contains a three-year option to purchase the building for $39.0 million. We intend to build out the new center in multiple phasesand expect to open the first phase for customers during the second half of 2007. We intend to invest approximately $95.0 million to build out the first phase ofthe new center, of which approximately $2.2 million was incurred in 2006. We expect to finance at least 60% of the capital expenditures required to completethe New York metro area IBX expansion project in the form of short and long-term financing arrangements, which we expect to obtain in 2007.In December 2006, we sold our Honolulu IBX center for $9.8 million of gross cash proceeds. We refer to this sale as the Honolulu IBX Sale. TheHonolulu IBX center was originally acquired by us in our acquisition of Pihana Pacific, Inc. on December 31, 2002, which we refer to as the Pihanaacquisition. The Honolulu IBX was ascribed a nominal book value in the Pihana acquisition and was our smallest IBX center in our smallest market. Weentered into an agreement to sell the Honolulu IBX center to a company led by former Equinix personnel in November 2006. The Honolulu IBX Sale willenable us to focus on more strategic markets, such as the New York, Chicago, Washington, D.C. and Tokyo metro areas, where we expect to open new IBXcenters in 2007.In December 2006, one of our wholly-owned subsidiaries entered into (i) an asset purchase agreement with VSNL International Japan K.K, or VSNL,for the purchase of certain IBX equipment for $7.5 million in cash, which we refer to as the Tokyo equipment, which also required that we enter into acolocation services agreement with VSNL whereby VSNL will be our customer for 10 years at agreed-upon rates, which we refer to as the VSNL customercontract, and (ii) a long-term operating lease, with an initial term of ten years, for a 73,000 square foot data center in the Tokyo metropolitan area with another,unrelated party, which we refer to as the 34 Table of ContentsTokyo IBX building operating lease. We refer to these transactions as the Tokyo IBX acquisition. This data center will be interconnected to our existing TokyoIBX center through redundant dark fiber links managed by us. Payments under the Tokyo IBX building operating lease will be made monthly, commencingin December 2006, and will be payable through December 2016, totaling approximately 1.8 billion Japanese yen (approximately $15.1 million as translatedusing effective exchange rates at December 31, 2006) in cumulative lease payments. We note that the Tokyo equipment had a fair value of $14.2 millionversus the $7.5 million of cash paid for it. The difference in fair value versus cash consideration was addressed by the below-market rates in the VSNLcustomer contract, which we refer to as VSNL customer contract discount. As a result, the Tokyo equipment purchase was a part-monetary and part-nonmonetary transaction. Pursuant to APB Opinion No. 29, “Accounting for Nonmonetary Transactions”, and EITF 01-2, “Interpretations of APB OpinionNo. 29”, we accounted for the Tokyo equipment entirely at fair value. This resulted in us recording unearned revenue of $6.7 million, the fair value of theVSNL customer contract discount, which we will recognize into revenue over the 10 year term of the VSNL customer contract.In February 2007, we entered into an agreement to purchase the building and property where our original Silicon Valley IBX center is located for $65.0million, which is expected to close no later than November 2007. We intend to finance substantially all of the cost of the property acquisition, following aninitial $6.5 million deposit paid with cash in February 2007.In February 2007, we announced our plan to expand our Singapore IBX center. We expect to finalize a new lease agreement for a new floor in the buildingwhere our current Singapore IBX center is located by the end of the first quarter of 2007. We intend to spend approximately $12.0 million to build out this newfloor, which we expect to open for business during the second half of 2007.Critical Accounting Policies and EstimatesThe 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: • Accounting for stock-based compensation; • Accounting for restructuring charges; and • Accounting for income taxes.Accounting for Stock-Based Compensation. We adopted the provisions of, and account for stock-based compensation in accordance with, SFASNo. 123(R), “Share-Based Payment,” and related pronouncements (“SFAS 123(R)”) effective January 1, 2006. As a result of our adoption of SFAS 123(R),we recorded stock-based compensation expense of $30.8 million during the year ended December 31, 2006. For the years ended December 31, 2005 and 2004,we recorded stock-based compensation expense in accordance with APB 25 of $8.3 million and $1.5 million, respectively. The fair value of stock options andemployee stock purchase plan shares were valued using the Black-Scholes option-pricing model while the fair value of our restricted stock grants, which havea market price condition, were valued using a Monte Carlo simulation option-pricing model. The determination of the fair value of stock-based paymentawards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and highlysubjective variables. 35 Table of ContentsThese variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors orexpected term, risk-free interest rate and expected dividends.We record stock-based compensation expense on stock awards expected to vest during the period net of estimated forfeitures. The estimated forfeitures onunvested stock awards are assessed based on our historical stock awards activity and our expectations about future employee turnover, and these rates aresubject to revision in subsequent periods if actual forfeitures differ from those estimates. Higher forfeitures will result in lower stock-based compensationexpense while lower forfeiture rates will result in higher stock-based compensation expense. We estimate the expected volatility by using the average historicalvolatility of our common stock that we believe is the best representative of the future volatility. The expected term of options used is calculated by taking theaverage of the vesting term and the contractual term of the option, as illustrated in SAB 107. The risk-free interest rate used is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on our equity awards. We do not anticipate paying any cash dividends in the foreseeablefuture and, therefore, the expected dividend rate used is zero.During the year ended December 31, 2006, stock options granted to employees had a total fair value of $39.2 million. Changes in assumptions (as wellas different option-pricing models used for estimating the fair value of stock awards) can significantly affect our future period expense. Based on our analysis,the table below presents the possible impact of increases or decreases of individual variables (representing increases/decreases of 10%, 20%, 30% and 40%) inthe assumptions to the fair value of employee stock options granted during the year ended December 31, 2006 (dollars in thousands): Expected volatility Risk-free interest rate Expected life Weightedaveragerate Increase/decreasein fairvalue(%) (1)Increase/decreasein totalexpense Weightedaveragerate Increase/decreasein fairvalue(%) (1)Increase/decreasein totalexpense Weightedaveragelife Increase/decreasein fairvalue(%) (1)Increase/decreasein totalexpense 69%(2) 4.70%(2) 4.56(2) 76% 6.62% $2,594 5.17% 0.80% $312 5.02 4.04% $1,584 83% 12.86% 5,041 5.64% 1.59% 622 5.47 7.77% 3,048 90% 18.72% 7,337 6.11% 2.37% 930 5.93 11.24% 4,405 97% 24.18% 9,478 6.58% 3.15% 1,237 6.38 14.46% 5,668 62% -6.97% (2,733) 4.23% -0.80% (314) 4.10 -4.39% (1,720)55% -14.27% (5,594) 3.76% -1.61% (630) 3.65 -9.18% (3,599)48% -21.86% (8,570) 3.29% -2.42% (947) 3.19 -14.44% (5,662)41% -29.70% (11,642) 2.82% -3.23% (1,267) 2.74 -20.27% (7,947)(1)Increase/decrease in total expense over the entire vesting period of the individual equity awards is calculated based on percentage increase/decrease in fairvalue to the total fair value of $39.2 million of our employee stock options granted during the year ended December 31, 2006.(2)Variables used in calculating the fair value of our employee stock options granted for the year ended December 31, 2006.The table above shows that changes in expected volatility present the most significant impact to the increases/decreases of stock-based compensationexpense compared to changes in other variables. Assuming other variables remained unchanged, had the expected volatility increased by 40%, our stock-basedcompensation expense recognized, net of estimated forfeitures, for the year ended December 31, 2006 would have been approximately $1.1 million higher thanthe reported stock-based compensation expense (the above table demonstrates potential changes to the total value of equity awards, which is generally amortizedover four years). Had the expected volatility decreased by 40%, our stock-based compensation expense recognized, net of estimated forfeitures, for the yearended December 31, 2006 would have been approximately $1.3 million lower than the reported stock-based compensation expense. The assumptions used incalculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application ofmanagement judgment. 36 Table of ContentsThe guidance in SFAS 123(R) and SAB 107 is relatively new. The application of these principles may be subject to further interpretation and refinementover time. There are significant differences among valuation models, and there is a possibility that we will adopt different valuation models in the future. Thismay result in a lack of consistency in future periods and materially affect the fair value estimate of stock-based payments. It may also result in a lack ofcomparability with other companies that use different models, methods and assumptions.Accounting for Restructuring Charges. We account for restructuring activities in accordance with SFAS No. 146, “Accounting for Costs Associatedwith Exit or Disposal Activities.” We recorded restructuring charges totaling $33.8 million and $17.7 million, respectively, during the years endedDecember 31, 2005 and December 31, 2004 for the exit of certain leases. Under the provisions of SFAS No. 146, we had to estimate the future cash paymentsrequired to exit these leases, net of any estimated sublease income and expense, through the remainder of these lease terms and then determine the present valueof such future cash flows to record the appropriate restructuring charges. Subsequent to the period in which the initial restructuring charge was taken, werecord accretion expense to accrete our accrued restructuring liabilities up to an amount equal to the total estimated future cash payments necessary to completethe exit of these leases.SFAS No. 146 requires us to assume sublease income for these leases and two of these leases extend through 2015. Furthermore, one of these leasescurrently continues to be unoccupied as it remains a difficult property to market. Therefore, significant and inherently uncertain sublease assumptions wererequired at the time we recorded these restructuring charges. If we are unable to generate sublease income in the same amount that was projected at the time werecorded the initial restructuring charges, we will need to revise these restructuring charges accordingly. For example, during the year ended December 31,2006, we recorded an additional restructuring charge of $1.5 million as a result of revised sublease assumptions related to the 2004 restructuring charge. Weexpect that in the future, additional restructuring charge adjustments will recur as we periodically adjust these sublease assumptions to reflect current facts andcircumstances.Accounting for Income Taxes. Significant management judgment is required in determining our provision for income taxes and whether deferred taxassets will be recoverable in full or in part. We calculate our tax provision in accordance with SFAS No. 109, Accounting for Income Taxes. Our estimates andassumptions used in the provision may differ from the actual results as reflected in our income tax returns and we record the required adjustments when theyare identified and settled. When it is more likely than not that all or some portion of specific deferred tax assets such as net operating loss carry-forwards willnot be realized, a valuation allowance must be established for the amount of the deferred tax assets that are not recoverable. The valuation allowance isdetermined pursuant to SFAS No. 109 which requires the assessment of both positive and negative evidence. Such assessment should be performed on ajurisdiction-by-jurisdiction basis. We have provided a full valuation allowance against our net deferred tax assets in the U.S. and we intend to maintain thesame position for fiscal 2006 based on the assessment of the positive and negative evidence present. In addition, we continued to provide a full valuationallowance against the net deferred tax assets in all of our foreign jurisdictions other than Singapore. During fiscal 2006, we released the valuation allowance of$6.9 million against the net deferred tax assets for the entity in Singapore that operates our local IBX center there, primarily reducing goodwill, as webelieved it is more likely than not that the net deferred tax assets with this entity will be realized in future years based on the current and expected futureprofitability of this entity.In addition, the calculation of tax liabilities involves dealing with the inherent uncertainties in the application of complex tax laws and regulations invarious jurisdictions in which we operate. We are also subject to examinations by various taxing authorities. We believe we have adequately reserved in ourfinancial statements for potential tax liabilities including penalties and interest. If events occur and the payment of the reserved tax liability ultimately proves tobe unnecessary, we would reverse the liability and recognize the tax benefit in the period when we determine that the liability is no longer necessary. If,however, the reserved liability proves to be less than the ultimate assessment including penalties and interest, a further charge to expense would becomenecessary. 37 Table of ContentsResults of OperationsYears Ended December 31, 2006 and 2005Revenues. Our revenues for the years ended December 31, 2006 and 2005 were split between the following revenue classifications (dollars inthousands): Year ended December 31, 2006 % 2005 % Recurring revenues $273,160 95% $208,003 94%Non-recurring revenues: Installation and professional services 13,734 5% 12,193 5%Other 21 0% 861 1% 13,755 5% 13,054 6%Total revenues $286,915 100% $221,057 100%Our revenues for the years ended December 31, 2006 and 2005 were geographically comprised of the following (dollars in thousands): Year ended December 31, 2006 % 2005 % U.S. revenues $246,066 86% $191,390 87%Asia-Pacific revenues 40,849 14% 29,667 13%Total revenues $286,915 100% $221,057 100%We recognized revenues of $286.9 million for the year ended December 31, 2006 as compared to revenues of $221.1 million for the year endedDecember 31, 2005, a 30% increase. We analyze 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 our customers are billed on a fixed and recurring basis each month for the duration of their contract, which is generally one to three yearsin length. Our recurring revenues are a significant component of our total revenues comprising greater than 90% of our total revenues for the years endedDecember 31, 2006 and 2005. Historically, approximately half of our then existing customers order new services in any given quarter representing greater thanhalf of the new orders received in 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. These non-recurring revenues are typically billed on the first invoice distributed to the customer. As a percent of total revenues, weexpect non-recurring revenues to represent less than 10% of total revenues for the foreseeable future. Other non-recurring revenues are comprised primarily ofcustomer settlements, 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) utilization. On a consolidated basis, our customer count increased to 1,290 as of December 31, 2006 versus 1,138 as of December 31, 2005, anincrease of 13%. Our utilization rate represents the percentage of our cabinet space billing versus total cabinet space available. On a consolidated basis, ourutilization rate grew to 56% as of December 31, 2006 from 54% as of December 31, 2005; however, excluding the impact of our recent IBX center openings inthe Chicago, Los Angeles and Silicon Valley metro areas, our utilization rate would have been 63% as of December 31, 2006. Although we have substantialcapacity for growth, our utilization rates vary from market to market among our IBX centers in the 10 38 Table of Contentsmarkets across the U.S. and Asia-Pacific. We continue to monitor the available capacity in each of our selected markets. To the extent we have limited capacityavailable in a given market, it may limit our ability for growth in that market. Once capacity becomes limited, we perform demand studies to determine iffuture expansion is warranted. In addition, power and cooling requirements for some customers are growing on a per unit basis. As a result, customers areconsuming an increasing amount of power per cabinet. Although we generally do not control the amount of draw our customers take from installed circuits, wehave negotiated power consumption limitations with certain of our high power demand customers. We could face power limitations in our centers even thoughwe may have additional physical capacity available within a specific IBX center. This could have a negative impact on the available utilization capacity of agiven center, which could have a negative impact on our ability to grow revenues, affecting our financial performance, operating results and cash flows. As aresult of these power limitations in our existing IBX centers, the maximum utilization rate that we expect to achieve for most IBX centers until we consider anIBX center full or sold-out is approximately 75-80% depending on the building configurations. Therefore, consistent with our recent expansion efforts in theChicago, Los Angeles, Silicon Valley, Tokyo and Washington, D.C. metro area markets, we will continue to closely manage available space and powercapacity in each of our operating markets and expect to continue to make strategic and selective expansions to our global footprint when and where appropriate.U.S. Revenues. We recognized U.S. revenues of $246.1 million for the year ended December 31, 2006 as compared to $191.4 million for the year endedDecember 31, 2005. U.S. revenues consisted of recurring revenues of $235.4 million and $180.4 million, respectively, for the years ended December 31, 2006and 2005, a 30% increase. U.S. recurring revenues consist primarily of colocation and interconnection services plus a nominal amount of managedinfrastructure services and, commencing in the fourth quarter of 2005, in connection with our October 2005 purchase of the Ashburn campus property, anominal amount of recurring rental income from the other tenants located on this property that we now own, which totaled $1.4 million for the year endedDecember 31, 2006. The period over period growth in recurring revenues was primarily the result of an increase in orders from both our existing customersand new customers acquired during the period as reflected in the growth in our customer count and utilization rate as discussed above, and selective priceincreases in each of our IBX markets. The total increase in revenues as a result of selective price increases for the year ended December 31, 2006 wasapproximately $3.7 million. In addition, we recorded $7.9 million of revenues from our new IBX centers in the Chicago, Los Angeles and Silicon Valley metroareas, which opened for business during the year ended December 31, 2006. We expect our U.S. recurring revenues, particularly colocation andinterconnection services, to continue to remain our most significant source of revenue for the foreseeable future.In addition, U.S. revenues consisted of non-recurring revenues of $10.7 million and $11.0 million, respectively, for the years ended December 31, 2006and 2005. 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 $817,000 for the year ended December 31, 2005. There wereno such settlement fees for the year ended December 31, 2006. Offsetting some of this non-recurring revenue for the year ended December 31, 2005 wereservice level credits that we recorded totaling $457,000 that were issued or will be issued to certain of our customers related to two separate power outages inour Chicago and Washington, D.C. metro area IBX centers. There were no significant service level credits recorded in the year ended December 31, 2006. Inaddition, we recorded a reduction of $1.2 million to our non-recurring installation revenues as a result of our adoption of SAB 108 during the quarter endedDecember 31, 2006. Excluding settlements and service level credits, U.S. non-recurring revenues, consisting of the recognized portion of deferred installationand professional services, increased 5% period over period, primarily due to strong existing and new customer growth during the year.In December 2006, we sold our Honolulu IBX center and, as a result, subsequent to the sale we no longer recognize revenues from this IBX center.During the year ended December 31, 2006, we recognized $2.3 million of revenue from our Honolulu IBX center or less than 1% of our total U.S. revenues.We expect that this loss of revenue going forward will be more than offset by revenue growth in our existing U.S. IBX centers, as well as the new U.S. IBXcenters opening during 2007 in the Washington, D.C., Chicago and New York metro area markets. 39 Table of ContentsAsia-Pacific Revenues. We recognized Asia-Pacific revenues of $40.8 million for the year ended December 31, 2006 as compared to $29.7 million forthe year ended December 31, 2005, a 38% increase. Asia-Pacific revenues consisted of recurring revenues of $37.8 million and $27.6 million, respectively, forthe years ended December 31, 2006 and 2005, consisting primarily of colocation and managed infrastructure services. In addition, Asia-Pacific revenuesconsisted of non-recurring revenues of $3.0 million and $2.1 million, respectively, for the years ended December 31, 2006 and 2005. Asia-Pacific non-recurring revenues included $21,000 and $44,000, respectively, of contract settlement revenue for the years ended December 31, 2006 and 2005. Asia-Pacificrevenues are generated from Hong Kong, Singapore, Sydney and Tokyo, with Singapore representing approximately 39% and 45%, respectively, of theregional revenues for the years ended December 31, 2006 and 2005. Our Asia-Pacific colocation revenues are similar to the revenues that we generate from ourU.S. IBX centers; however, our Singapore IBX center has additional managed infrastructure service revenue, such as mail service and managed platformsolutions, which we do not currently offer in any other IBX center location. The growth in our Asia-Pacific revenues is primarily the result of an increase in thecustomer base in this region during the past year, particularly in Hong Kong, Sydney and Tokyo. We expect that our Asia-Pacific revenues will continue togrow during 2007, especially in Tokyo, as a result of our December 2006 expansion there, which while currently operational for one customer, will be open forbusiness for additional customers commencing in the second half of 2007.Cost of Revenues. Cost of revenues were $188.4 million for the year ended December 31, 2006 as compared to $158.4 million for the year endedDecember 31, 2005, a 19% 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 is fixed in nature and should not vary significantly from period to period. However, there are certain costs, which are considered morevariable in nature, including utilities and supplies that are directly related to growth of services in our existing and new customer base. We expect the cost ofour utilities, specifically electricity, will increase in the future on a per-unit or fixed basis in addition to on a customer growth or variable basis. In addition, thecost of electricity is generally higher in the summer months as compared to other times of the year.U.S. Cost of Revenues. U.S. cost of revenues was $165.4 million for the year ended December 31, 2006 as compared to $138.3 million for the yearended December 31, 2005. U.S. cost of revenues for the year ended December 31, 2006 included (i) $65.0 million of depreciation expense, (ii) $3.5 million ofaccretion expense comprised of $536,000 for our asset retirement obligations and $3.0 million for our restructuring charges for certain leasehold interestsrecorded in 2004 and 2005 as we accrete the related liabilities to the total estimated future cash payments needed, (iii) $2.7 million of stock-basedcompensation as a result of our adoption of SFAS 123(R) effective January 1, 2006 and (iv) $721,000 of amortization expense associated with the intangibleassets acquired with our Ashburn campus. U.S. cost of revenues for the year ended December 31, 2005 included (i) $57.1 million of depreciation expense and(ii) $1.9 million of accretion expense comprised of $504,000 for our asset retirement obligations and $1.4 million for our restructuring charges for certainleasehold interests recorded in 2004 and 2005 as we accrete the related liabilities to the total estimated future cash payments needed. Our U.S. cost of revenuesfor the year ended December 31, 2006 also included $17.7 million of additional operating costs not incurred in the prior year associated with the recentlyopened IBX centers in the Chicago, Los Angeles and Silicon Valley metro areas (the Chicago and Los Angeles IBX centers opened for business during the threemonths ended June 30, 2006, and the Silicon Valley IBX center opened for business during the three months ending September 30, 2006). Excludingdepreciation, accretion expense, stock-based compensation, amortization expense and the costs associated with operating our new IBX centers, U.S. cost ofrevenues increased period over period to $81.0 million for the year ended December 31, 2006 from $77.8 million for the year ended December 31, 2005, a 4%increase. This increase was primarily the result of increases in (i) utility costs of approximately $6.3 million in line with increasing customer installations andrevenues attributed to customer growth, (ii) compensation costs of approximately $2.9 million, including general salary increases and bonuses and headcountgrowth and (iii) repair and maintenance expenses of approximately $906,000. This increase was partially offset by a reduction of approximately $7.4 millionin rent expense in connection with a 40 Table of Contentsproperty we recorded a restructuring charge for in San Jose in the fourth quarter of 2005 and the purchase of the previously leased Ashburn campus propertyin October 2005. In December 2006, we sold our Honolulu IBX center. During the year ended December 31, 2006, we recorded $1.3 million in costs of revenuefor the Honolulu IBX center, representing less than 1% of our total U.S. cost of revenues. Our cost of revenues will no longer include the costs related to theHonolulu IBX center. However, we continue to anticipate that our cost of revenues will increase in the foreseeable future to the extent that the occupancy levelsin our U.S. IBX centers increase, as newly opened IBX centers in the Chicago, Los Angeles and Silicon Valley metro areas commence operations more fully in2007 and as the new IBX centers in the Washington, D.C., Chicago and New York metro area markets open for business during 2007.Asia-Pacific Cost of Revenues. Asia-Pacific cost of revenues was $23.0 million for the year ended December 31, 2006 as compared to $20.1 million forthe year ended December 31, 2005. Asia-Pacific cost of revenues for the year ended December 31, 2006 included (i) $3.5 million of depreciation expense,(ii) $497,000 of stock-based compensation as a result of our adoption of SFAS 123(R) effective January 1, 2006 and (iii) $260,000 of non-cash rent expenseassociated with the value attributed to warrants issued in May 2004 to our landlord in connection with a lease amendment for our Hong Kong IBX center. Asia-Pacific cost of revenues for the year ended December 31, 2005 included $3.6 million of depreciation expense and $259,000 of non-cash rent expense.Excluding depreciation, stock-based compensation and non-cash rent expense, Asia-Pacific cost of revenues increased period over period to $18.7 million forthe year ended December 31, 2006 from $16.3 million for the year ended December 31, 2005, a 15% increase. This increase was primarily the result ofincreasing utility and bandwidth costs in line with increasing customer installations and revenues attributed to this customer growth. Our Asia-Pacific cost ofrevenues is generated in Hong Kong, Singapore, Sydney and Tokyo. There are several managed infrastructure service revenue streams unique to ourSingapore IBX center, such as mail service and managed platform solutions that are more labor intensive than our service offerings in the United States. Weanticipate that our cost of revenues will increase in the foreseeable future to the extent that the occupancy levels in our Asia-Pacific IBX centers increase and asthe newly acquired IBX center in Tokyo, Japan commences its operations more fully in 2007.Sales and Marketing. Sales and marketing expenses increased to $32.6 million for the year ended December 31, 2006 from $20.6 million for the yearended December 31, 2005.U.S. Sales and Marketing Expenses. U.S. sales and marketing expenses increased to $28.0 million for the year ended December 31, 2006 from $17.5million for the year ended December 31, 2005. Included in U.S. sales and marketing expenses for the year ended December 31, 2006 were $6.8 million ofstock-based compensation expense and $60,000 of amortization expense associated with an intangible asset in connection with our Santa Clara IBX center.Included in U.S. sales and marketing expenses for the year ended December 31, 2005 were $1.6 million of stock-based compensation expense and $60,000 ofamortization expense. The increase in stock-based compensation expense period over period is a result of our adoption of SFAS 123(R) effective January 1,2006. Excluding stock-based compensation and amortization expense, U.S. sales and marketing expenses increased to $21.1 million for the year endedDecember 31, 2006 as compared to $15.9 million for the year ended December 31, 2005, a 33% increase. Sales and marketing expenses consist primarily ofcompensation and related costs for sales and marketing personnel, sales commissions, marketing programs, public relations, promotional materials andtravel. This increase was primarily due to (i) approximately $3.9 million of higher compensation costs, including increases in sales compensation related tostrong new customer bookings throughout 2006 and general salary increases and bonuses for our marketing staff and non-commissioned sales staff and(ii) approximately $815,000 of higher travel costs related to our customer and revenue growth. Going forward, we expect U.S. sales and marketing spending toincrease nominally in absolute dollars as we continue to grow our business.Asia-Pacific Sales and Marketing Expenses. Asia-Pacific sales and marketing expenses increased to $4.6 million for the year ended December 31,2006 as compared to $3.1 million for the year ended December 31, 2005. Included in Asia-Pacific sales and marketing expenses for the year endedDecember 31, 2006 was $600,000 of stock-based compensation as a result of our adoption of SFAS 123(R) effective January 1, 2006. 41 Table of ContentsExcluding stock-based compensation, Asia-Pacific sales and marketing expenses were $4.0 million for the year ended December 31, 2006 versus $3.1 millionfor the year ended December 31, 2005, a 30% increase. This increase was primarily due to approximately $413,000 of higher compensation costs as a result ofthe strong revenue growth in this region and an increase in bad debt expense of approximately $303,000 over the same period last year (the prior year actuallyhad negative bad debt expense as a result of some recoveries of aged receivables previously written-off). Our Asia-Pacific sales and marketing expenses consistof the same types of costs that we incur in our U.S. operations, namely compensation and related costs for sales and marketing personnel, sales commissions,marketing programs, public relations, promotional materials and travel. Our Asia-Pacific sales and marketing expenses are generated in Hong Kong,Singapore, Sydney and Tokyo. We expect that our Asia-Pacific sales and marketing expenses will experience growth in the foreseeable future.General and Administrative. General and administrative expenses increased to $72.1 million for the year ended December 31, 2006 from $45.1million for the year ended December 31, 2005.U.S. General and Administrative Expenses. U.S. general and administrative expenses increased to $60.6 million for the year ended December 31,2006 as compared to $37.3 million for the year ended December 31, 2005. Included in U.S. general and administrative expenses for the year endedDecember 31, 2006 were $17.7 million of stock-based compensation expense and $3.0 million of depreciation expense. Included in U.S. general andadministrative expenses for the year ended December 31, 2005 were $6.7 million of stock-based compensation expense and $1.7 million of depreciationexpense. The increase in stock-based compensation expense period over period is a result of our adoption of SFAS 123(R) effective January 1, 2006. Excludingstock-based compensation expense and depreciation expense, U.S. general and administrative expenses increased to $39.9 million for the year endedDecember 31, 2006, as compared to $28.9 million for the same period last year, a 38% increase. This increase was primarily due to (i) approximately $4.4million of higher compensation costs, including general salary increases, bonuses and headcount growth (175 U.S. general and administrative employees asof December 31, 2006 versus 152 as of December 31, 2005), (ii) an increase in professional fees of approximately $5.0 million due to increased legal fees inconnection with our legal matters such as the review of our past stock option grants and practices, accounting fees and other consulting projects in connectionwith our growth strategies, (iii) an increase in rent, repair and maintenance expenses of approximately $676,000 in connection with our office expansion inFoster City, California and (iv) an increase in travel expenses of approximately $593,000. General and administrative expenses, excluding stock-basedcompensation and depreciation, consist primarily of salaries and related expenses, accounting, legal and other professional service fees and other generalcorporate expenses such as our corporate headquarters office lease. Going forward, we expect U.S. general and administrative spending to increase as wecontinue to scale our operations to support our growth.Asia-Pacific General and Administrative Expenses. Asia-Pacific general and administrative expenses increased to $11.5 million for the year endedDecember 31, 2006 as compared to $7.8 million for the year ended December 31, 2005. Included in Asia-Pacific general and administrative expenses for theyear ended December 31, 2006 were $2.5 million of stock-based compensation as a result of our adoption of SFAS 123(R) effective January 1, 2006 and$229,000 of depreciation expense. Included in Asia-Pacific general and administrative expenses for the year ended December 31, 2005 was $284,000 ofdepreciation expense. Excluding stock-based compensation and depreciation, Asia-Pacific general and administrative expenses increased to $8.8 million for theyear ended December 31, 2006, as compared to $7.5 million for the same period last year, a 17% increase. This increase was primarily due to approximately$913,000 of higher compensation costs, including general salary increases and bonuses. Our Asia-Pacific general and administrative expenses consist of thesame types of costs that we incur in our U.S. operations, namely salaries and related expenses, accounting, legal and other professional service fees and othergeneral corporate expenses. Our Asia-Pacific general and administrative expenses are generated in Hong Kong, Singapore, Sydney and Tokyo. Our Asia-Pacificheadquarters office is located in Singapore. Most of the corporate overhead support functions that we have in the U.S., such as finance, legal, marketing andinformation technology, also reside in our Singapore office in order to support our Asia-Pacific operations; however, each of our Asia-Pacific locations in HongKong, Sydney and Tokyo also have 42 Table of Contentsgeneral and administrative staff dedicated to each specific operation. In addition to our Asia-Pacific headquarters office in Singapore, we also have separateoffice locations in Tokyo and Hong Kong (the Sydney general and administrative staff work out of the Sydney IBX center). We expect that our Asia-Pacificgeneral and administrative expenses will experience some growth in the foreseeable future.Restructuring Charges. During the year ended December 31, 2006, we recorded an additional restructuring charge of $1.5 million as a result ofrevised sublease assumptions on two of our excess space leases in the New York and Los Angeles metro areas as a result of new information becomingavailable. The original restructuring charge for these two leases was recorded in the fourth quarter of 2004 and totaled $17.7 million. We are contractuallycommitted to these two excess space leases through 2015.During the year ended December 31, 2005, we recorded a restructuring charge of $33.8 million, which we refer to as the 2005 restructuring charge. Inlight of the availability of fully or partially built-out data centers in the Silicon Valley, including the possibility of expansion in or near some of the four IBXcenters we currently have in the Silicon Valley, we made the decision that retaining the approximately 40 acre San Jose ground lease for future expansion wasno longer economical. In conjunction with this decision, we entered into an agreement with the landlord of this property for an early termination of the San Joseground lease whereby we would pay $40.0 million over four years, commencing January 1, 2006, to terminate this lease, which would otherwise requiresignificantly higher cumulative lease payments through 2020. The restructuring charge consisted of (i) a $32.3 million charge representing the present value ofour estimated future cash payments to exit this property, which is net of $4.4 million of deferred rent previously accrued for this lease (thereby creating a totalrestructuring liability of $36.7 million associated with this lease) and (ii) a write-off of property and equipment of $1.5 million representing development costsincurred to date to prepare this land for use. We expect, as a result of this restructuring charge, we will realize annual savings in cost of revenues ofapproximately $5.6 million. For further detailed information on our restructuring charges, see Note 19 of our “Notes to Consolidated Financial Statements” inItem 8 of this Annual Report on Form 10-K.Gain on Honolulu IBX sale. During the year ended December 31, 2006, we recorded a $9.6 million gain in connection with the sale of our HonoluluIBX center. We sold this IBX center for $9.8 million in gross cash proceeds.Interest Income. Interest income increased to $6.6 million from $3.6 million for the years ended December 31, 2006 and 2005, 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 higher yields on those balances due to increased interest rates. The average annualized yield for the year ended December 31, 2006 was4.53% versus 3.32% for the year ended December 31, 2005.Interest Expense. Interest expense increased to $14.9 million from $8.9 million for the years ended December 31, 2006 and 2005, respectively. Theincrease in interest expense was primarily due to increases in interest expense associated with the new financings entered into during 2006 and 2005: (i) the$9.7 million financing for equipment we purchased in connection with our Chicago IBX acquisition in November 2005, which bears interest at 7.50%;(ii) the $38.1 million financing in connection with our Los Angeles IBX financing in December 2005, which bears interest at 7.75%; and (iii) the $100.0million mortgage payable, which bears interest at 8.00%, in connection with our Ashburn campus financing, of which $60.0 million was borrowed inDecember 2005 and the remaining $40.0 million was borrowed in December 2006. This increase was partially offset by the debt conversion activities duringthe fiscal year 2005 that resulted in a decrease in interest expense. In November 2005, STT Communications converted the remaining 5% of the outstanding14% convertible secured notes and unpaid interest totaling $2.2 million into 240,578 shares of our preferred stock, which was immediately converted into240,578 shares of our common stock. Furthermore, in connection with various construction projects related to our IBX expansion efforts during the yearended December 31, 2006, we capitalized $1.6 million of interest expense to construction in progress. We did not capitalize any interest during the year endedDecember 31, 2005 as no material amounts of interest qualified for capitalization. Going forward, we expect to incur higher interest expense as we obtainadditional financing to fund our expansion efforts. 43 Table of ContentsIncome Taxes. During fiscal 2006, we recorded $439,000 of income tax provision primarily representing U.S. alternative minimum tax and a net taxbenefit from our operation in Singapore, which resulted from the release of the valuation allowance in the jurisdiction. During fiscal 2005, we recorded$543,000 of income tax provision consisting of U.S. alternative minimum tax and foreign income tax. A valuation allowance is recorded against the netdeferred tax assets in all the jurisdictions other than Singapore as management can not conclude, based on the available objective evidence including recurringhistorical losses, that it is more likely than not the deferred tax assets are recoverable in future years. However, management believed that as of December 31,2006, it is more likely than not that the deferred tax assets would be fully recoverable in Singapore, as the positive evidence present in the jurisdiction issufficient to overcome the negative evidence. We have not incurred any significant income tax expense since inception and we do not expect to incur anymeaningful income tax expense during 2007.Cumulative Effect of a Change in Accounting Principle. As a result of our adoption of SFAS No. 123(R), “Share-Based Payment,” during the yearended December 31, 2006, we recorded a reduction of expense totaling $376,000, which is reflected as a cumulative effect of a change in accounting principleon our statement of operations for this period. This amount reflects the application of an estimated forfeiture rate to partially vested employee equity awards asof January 1, 2006 that we accounted for under APB 25, which was primarily for restricted stock awards to our executive officers that were granted duringthe three months ended March 31, 2005.Years Ended December 31, 2005 and 2004Revenues. Our revenues for the years ended December 31, 2005 and 2004 were split between the following revenue classifications (dollars inthousands): Year ended December 31, 2005 % 2004 % Recurring revenues $208,003 94% $154,449 94%Non-recurring revenues: Installation and professional services 12,193 5% 8,333 5%Other 861 1% 889 1% 13,054 6% 9,222 6%Total revenues $221,057 100% $163,671 100%Our revenues for the years ended December 31, 2005 and 2004 were geographically comprised of the following (dollars in thousands): Year ended December 31, 2005 % 2004 % U.S. revenues $191,390 87% $141,598 87%Asia-Pacific revenues 29,667 13% 22,073 13%Total revenues $221,057 100% $163,671 100%We recognized revenues of $221.1 million for the year ended December 31, 2005 as compared to revenues of $163.7 million for the year endedDecember 31, 2004, a 35% increase.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) utilization. Our customer count increased to 1,138 as of December 31, 2005 versus 950 as of December 31, 2004, an increase of 20%. Our utilizationrate grew to 54% as of December 31, 2005 from 45% as of December 31, 2004; however, excluding the impact of our most recent expansions in theWashington, D.C. and Silicon Valley area markets, our utilization rate would have been 58% as of December 31, 2005. 44 Table of ContentsU.S. Revenues. We recognized U.S. revenues of $191.4 million for the year ended December 31, 2005 as compared to $141.6 million for the year endedDecember 31, 2004. U.S. revenues consisted of recurring revenues of $180.4 million and $134.3 million, respectively, for the years ended December 31, 2005and 2004, a 34% increase. As a result of our October 2005 purchase of the Ashburn campus property, we recognized a nominal amount of recurring rentalincome from the other tenants located on this property that we now own, which totaled $312,000. U.S. recurring revenues for the year ended December 31,2005 included $9.8 million of revenue generated from the recently acquired Washington, D.C. area and Silicon Valley area IBX centers, which opened forbusiness in the fourth quarter of 2004 and first quarter of 2005, respectively. Excluding revenues from these recently acquired U.S. IBX centers, the periodover period growth in recurring revenues was primarily the result of an increase in orders from both our existing customers and new customers acquiredduring the period as reflected in the growth in our customer count and weighted-average utilization rate as discussed above, and selective price increases in eachof our IBX markets.In addition, U.S. revenues consisted of non-recurring revenues of $11.0 million and $7.3 million, respectively, for the years ended December 31, 2005and 2004. Included in U.S. non-recurring revenues were settlement fees of $817,000 and $609,000, respectively, for the years ended December 31, 2005 and2004. Offsetting some of this non-recurring revenue for the year ended December 31, 2005 were service level credits that we recorded totaling $457,000 thatwere issuable to certain of our customers related to two separate power outages in our Chicago and Washington, D.C. metro area IBX centers. There were nosignificant service level credits recorded in the year ended December 31, 2004. Excluding settlements and service level credits, U.S. non-recurring revenues,consisting of the recognized portion of deferred installation and professional services, increased 58% period over period, primarily due to strong existing andnew customer growth during the year, as well as the completion of certain custom projects for the U.S. government during the quarter ended March 31, 2005.Asia-Pacific Revenues. We recognized Asia-Pacific revenues of $29.7 million for the year ended December 31, 2005 as compared to $22.1 million forthe year ended December 31, 2004, a 34% increase. Asia-Pacific revenues consisted of recurring revenues of $27.6 million and $20.2 million, respectively, forthe years ended December 31, 2005 and 2004, consisting primarily of colocation and managed infrastructure services. In addition, Asia-Pacific revenuesconsisted of non-recurring revenues of $2.1 million and $1.9 million, respectively, for the years ended December 31, 2005 and 2004. Asia-Pacific non-recurring revenues included $44,000 and $280,000, respectively, of contract settlement revenue for the years ended December 31, 2005 and 2004. Asia-Pacificrevenues were generated from Hong Kong, Singapore, Sydney and Tokyo, with Singapore representing approximately 45% and 52%, respectively, of theregional revenues for the years ended December 31, 2005 and 2004. The growth in our Asia-Pacific revenues was primarily the result of an increase in thecustomer base in this region during the past year, particularly in Hong Kong, Sydney and Tokyo.Cost of Revenues. Cost of revenues were $158.4 million for the year ended December 31, 2005 as compared to $136.9 million for the year endedDecember 31, 2004, a 16% increase.U.S. Cost of Revenues. U.S. cost of revenues was $138.3 million for the year ended December 31, 2005 as compared to $118.3 million for the yearended December 31, 2004. U.S. cost of revenues for the year ended December 31, 2005 included (i) $57.1 million of depreciation expense and (ii) $1.9 millionof accretion expense comprised of $504,000 for our asset retirement obligations and $1.4 million for our restructuring charges for certain leasehold interestsrecorded in 2004 and 2005 as we accrete the related liabilities to the total estimated future cash payments needed. U.S. cost of revenues for the year endedDecember 31, 2004 included (i) $50.1 million of depreciation expense; (ii) $35,000 of stock-based compensation expense; (iii) $355,000 of accretion expenseassociated with our asset retirement obligation for our various leasehold interests; and (iv) $147,000 of amortization expense associated with the intangibleasset acquired with our Santa Clara IBX center that became fully amortized in December 2004. Our U.S. cost of revenues for the year ended December 31,2005 also included $6.4 million of additional operating costs not incurred in the prior year associated with the recently acquired Washington, D.C. andSilicon Valley metro area IBX centers, which opened for business in the fourth quarter of 2004 and first quarter of 2005, respectively, plus $1.5 million ofcosts attributed to our three most 45 Table of Contentsrecently acquired IBX centers in Sunnyvale, Chicago and Los Angeles which were available to customers in 2006. Excluding depreciation, stock-basedcompensation, accretion expense, amortization expense and the costs associated with operating our new IBX centers, U.S. cost of revenues increased periodover period to $71.1 million for the year ended December 31, 2005 from $67.4 million for the year ended December 31, 2004, a 5% increase. This increasewas primarily the result of increasing utility costs in line with increasing customer installations and revenues attributed to customer growth partially offset bysavings of approximately $1.8 million in operating costs, primarily rent, in connection with a property we recorded a restructuring charge for in Los Angelesin December 2004.Asia-Pacific Cost of Revenues. Asia-Pacific cost of revenues was $20.1 million for the year ended December 31, 2005 as compared to $18.6 millionfor the year ended December 31, 2004. Asia-Pacific cost of revenues for the year ended December 31, 2005 included $3.6 million of depreciation expense and$259,000 of non-cash rent expense associated with the value attributed to warrants issued in May 2004 to our landlord in connection with a lease amendmentfor our Hong Kong IBX center. Asia-Pacific cost of revenues for the year ended December 31, 2004 included $3.7 million of depreciation expense and $194,000of non-cash rent expense. Excluding depreciation and non-cash rent expense, Asia-Pacific cost of revenues increased period over period to $16.3 million for theyear ended December 31, 2005 from $14.7 million for the year ended December 31, 2004, a 10% increase. This increase was primarily the result of increasingutility and bandwidth costs in line with increasing customer installations and revenues attributed to this customer growth.Sales and Marketing. Sales and marketing expenses increased to $20.6 million for the year ended December 31, 2005 from $18.6 million for the yearended December 31, 2004.U.S. Sales and Marketing Expenses. U.S. sales and marketing expenses increased to $17.5 million for the year ended December 31, 2005 from $13.8million for the year ended December 31, 2004. Included in U.S. sales and marketing expenses for the year ended December 31, 2005 were $1.6 million ofstock-based compensation expense and $60,000 of amortization expense associated with an intangible asset in connection with our Santa Clara IBX center.Included in U.S. sales and marketing expenses for the year ended December 31, 2004 was $60,000 of stock-based compensation expense and $59,000 ofamortization expense associated with an intangible asset in connection with our Santa Clara IBX center. The increase in the stock-based compensation expenseperiod over period was a result of the non-cash charge attributed to restricted stock awards granted to our sales and marketing executive officers in the firstquarter of 2005. Excluding stock-based compensation and amortization expense, U.S. sales and marketing expenses increased to $15.9 million for the yearended December 31, 2005 as compared to $13.7 million for the year ended December 31, 2004, a 16% increase. This increase was primarily due toapproximately $1.9 million of higher compensation costs, including increases in sales compensation related to strong new customer bookings throughout2005, general salary increases and bonuses for our marketing staff and non-commissioned sales staff, as well as some moderate headcount growth (68 U.S.sales and marketing employees as of December 31, 2005 versus 65 as of December 31, 2004); however, this growth was partially offset by additionalrecoveries of bad debt expense over the prior year of approximately $190,000 due to a strong and successful collections effort on aged receivables previouslywritten-off.Asia-Pacific Sales and Marketing Expenses. Asia-Pacific sales and marketing expenses decreased to $3.1 million for the year ended December 31,2005 as compared to $4.8 million for the year ended December 31, 2004. Included in Asia-Pacific sales and marketing expenses for the year endedDecember 31, 2004 were $1.8 million of amortization expense associated with several intangible assets associated with our Singapore operations, which werefully amortized in December 2004. Excluding amortization expense, Asia-Pacific sales and marketing expenses were $3.1 million for the year endedDecember 31, 2005 versus $3.0 million for the year ended December 31, 2004, a nominal 3% increase. While there was an increase of approximately $138,000in higher compensation costs during this period, including increases in sales compensation related to strong new customer bookings throughout 2005,particularly in Hong Kong, Sydney and Tokyo, general salary increases and bonuses for our marketing staff and non-commissioned sales staff, as well assome moderate headcount growth (27 Asia-Pacific sales and marketing employees as of December 31, 2005 versus 26 as of December 31, 2004) 46 Table of Contentsand an increase in related travel and entertainment costs of approximately $132,000, this growth was mostly offset by additional recoveries of bad debtexpense over the prior year of approximately $224,000 due to a strong and successful collections effort on aged receivables previously written-off.General and Administrative. General and administrative expenses increased to $45.1 million for the year ended December 31, 2005 from $32.5million for the year ended December 31, 2004.U.S. General and Administrative Expenses. U.S. general and administrative expenses increased to $37.3 million for the year ended December 31, 2005as compared to $25.9 million for the year ended December 31, 2004. Included in U.S. general and administrative expenses for the year ended December 31,2005 were $6.7 million of stock-based compensation expense and $1.7 million of depreciation expense. Included in U.S. general and administrative expensesfor the year ended December 31, 2004 were $1.4 million of stock-based compensation expense and $1.8 million of depreciation expense. The increase in thestock-based compensation expense period over period was primarily a result of the non-cash charge attributed to restricted stock awards granted to ourexecutive officers in the first quarter of 2005, net of forfeitures for two of these executive officers that terminated their employment with us during the firstquarter of 2006. Excluding stock-based compensation expense and depreciation expense, U.S. general and administrative expenses increased to $28.9 millionfor the year ended December 31, 2005, as compared to $22.7 million for the prior period, a 27% increase. This increase was primarily due to approximately$5.2 million of higher compensation costs, including general salary increases, bonuses, headcount growth (152 U.S. general and administrative employees asof December 31, 2005 versus 126 as of December 31, 2004) and $986,000 related to accrued severance charges related to two of our officers that terminatedtheir employment with us, as well as an increase in professional fees, primarily approximately $175,000 of costs associated with the STT divestituretransaction completed in November 2005.Asia-Pacific General and Administrative Expenses. Asia-Pacific general and administrative expenses increased to $7.8 million for the year endedDecember 31, 2005 as compared to $6.6 million for the year ended December 31, 2004. Included in Asia-Pacific general and administrative expenses were$284,000 and $366,000, respectively, of depreciation expense for the years ended December 31, 2005 and 2004. Excluding depreciation, Asia-Pacific generaland administrative expenses increased to $7.6 million for the year ended December 31, 2005, as compared to $6.2 million for the prior period, a 21%increase. This increase was primarily due to approximately $1.2 million of higher compensation costs, including general salary increases and bonuses, aswell as some headcount growth (85 Asia-Pacific general and administrative employees as of December 31, 2005 versus 72 as of December 31, 2004).Restructuring Charges. During the year ended December 31, 2005, we recorded a restructuring charge of $33.8 million, which we refer to as the 2005restructuring charge, as previously described. During the year ended December 31, 2004, we recorded restructuring charges of $17.7 million, which we referto as the 2004 restructuring charge. In light of the availability of fully built-out data centers in select markets at costs significantly below those costs we wouldincur in building out new space, we made the decision in December 2004 to exit leases for excess space adjacent to one of our New York metro area IBXs, aswell as space on the floor above our original Los Angeles IBX. The restructuring charges consisted of (i) a $13.9 million charge representing the present valueof our estimated future cash payments, net of any estimated subrental income and expense, through the remainder of these lease terms and (ii) a write-off ofproperty 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 ourLos Angeles IBX. We entered into a two-year sublease agreement for the excess space in the New York metro area and are currently evaluating opportunitiesrelated to our excess space in Los Angeles and the current restructuring charge for these properties is based on the best available information. As a result ofthese restructuring charges, primarily relating to the Los Angeles property, we realized annual savings in cost of revenues of approximately $1.8 million during2005.Interest Income. Interest income increased to $3.6 million from $1.3 million for the years ended December 31, 2005 and 2004, respectively. Interestincome increased due to higher average cash, cash equivalent 47 Table of Contentsand short-term and long-term investment balances held in interest-bearing accounts during these periods, as well as higher yields on those balances due toincreased interest rates. The average annualized yield for the year ended December 31, 2005 was 3.32% versus 1.64% for the year ended December 31, 2004.Interest Expense. Interest expense decreased to $8.9 million from $11.5 million for the years ended December 31, 2005 and 2004, respectively. Duringthe first quarter of 2005, we converted 95% of the outstanding 14% convertible secured notes and unpaid interest totaling $38.0 million held by STTCommunications into 4.1 million shares of our preferred stock, which was subsequently converted into 4.1 million shares of our common stock in February2005. In addition, STT Communications converted the remaining 5% of the outstanding 14% convertible secured notes and unpaid interest totaling $2.2million into 240,578 shares of our preferred stock, which was immediately converted into 240,578 shares of our common stock in November 2005. Theseconversion activities resulted in a decrease in interest expense in 2005, offset in part by interest expense associated with (i) the $35.3 million capital leaseobligation we recorded in connection with the Washington, D.C. metro area IBX center during the fourth quarter of 2004, which bears interest at 8.50%; (ii) the$18.7 million financing we recorded in connection with the Silicon Valley metro area IBX center equipment and fiber during the first quarter of 2005, whichbears interest at 8.50%; (iii) the $9.7 million financing for equipment we purchased in connection with our Chicago IBX acquisition in November 2005,which bears interest at 7.50%; (iv) the $38.1 million financing we recorded in connection with our Los Angeles IBX financing in December 2005, which bearsinterest at 7.75%; (v) the $60.0 million mortgage payable we recorded in connection with our Ashburn campus financing in December 2005, which bearsinterest at 8.00% and (vi) the $30.0 million borrowing from our $50.0 million Silicon Valley Bank revolving credit line during October 2005, which boreinterest at an initial rate of 5.72% and was fully repaid in January 2006.Loss on Debt Extinguishment and Conversion. In February 2004, with the proceeds from our convertible debenture offering in February 2004,discussed below, we paid off the remaining $34.3 million credit facility and two other smaller debt facilities with a combined total of $2.9 million of principalremaining, as well as redeemed the remaining $30.5 million 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 financing, and which had a beneficial conversionfeature, were converted to 2.5 million shares of our common stock. As a result of these various repayments, redemption and conversion of our older debtfacilities, we recorded a loss on debt extinguishment and conversion of $16.2 million, comprised primarily of the write-off of the various debt issuance costsand discounts associated with these various debt facilities totaling $13.7 million, as well as the premium paid to the holders of our 13% senior notes requiredto redeem these early and other cash transaction costs totaling $2.5 million. There was no loss recorded in connection with the STT convertible secured notesconversion activity during the year ended December 31, 2005 as the STT convertible secured notes did not have a beneficial conversion feature at the time ofissuance on December 31, 2002.Income Taxes. A full valuation allowance is recorded against our net deferred tax assets as management cannot conclude, based on available objectiveevidence including recurring historical losses, that it is more likely than not that the net value of our deferred tax assets will be realized. However, for the yearsended December 31, 2005 and 2004, we recorded $543,000 and $153,000, respectively, of income tax expense, primarily representing income taxes related toalternative minimum tax and foreign jurisdictions.Liquidity and Capital ResourcesOur principal sources of liquidity in recent years have been cash flow generated from operating activities, debt financing including convertible debt,mortgages and term debt, and equity financing arising from sale of common stock and exercises of stock options. As of December 31, 2006, our totalindebtedness was comprised of (i) non-convertible debt and financing obligations totaling $193.6 million from our Washington D.C. metro area IBX capitallease, San Jose IBX equipment and fiber financing, Chicago IBX equipment financing, Los Angeles IBX financing and Ashburn campus mortgage payableand (ii) convertible debt totaling $86.3 million from our convertible subordinated debentures as outlined below. 48 Table of ContentsWe believe we have sufficient cash, coupled with anticipated cash generated from operating activities and anticipated cash from financings, to meet ouroperating requirements for at least the next 12 months. As of December 31, 2006, we had $156.5 million of cash, cash equivalents and short-term and long-term investments. Since the quarter ended September 30, 2003, we have generated positive operating cash flow in each quarter and expect this trend to continuethroughout 2007 and beyond. In addition, as of December 31, 2006, we had $58.6 million of additional liquidity available to us under the $75.0 millionSilicon Valley Bank revolving credit line in the event we need additional cash to fund expansion activities, fund working capital requirements or pursueattractive strategic opportunities that may become available in the future. In addition, from time to time we assess external financing opportunities, both debtand equity, as alternative sources for financing such activities and opportunities. In February 2007, our wholly-owned subsidiary obtained a loan of up to$110.0 million, which has a term of three years and bears interest at a floating rate (one, three or six month LIBOR plus 2.75%), with an initial rate of8.125%, to finance a portion of the development and construction costs of the Chicago metro area IBX expansion project, which we refer to as the ChicagoIBX financing. While we expect that our cash flow from operations will continue to increase, we expect our cash flow used in investing activities, primarily asa result of our expected purchases of property and equipment to complete these expansion projects, will also increase and we expect them to be greater than ourcash flows generated from operating activities. Given our limited operating history, additional potential expansion opportunities that we may decide to pursueand other business risks that may cause our operating results to fluctuate, we may not achieve our desired levels of profitability or cash requirements in thefuture. For further information, refer to “Risk Factors” in Item 1A of this Annual Report on Form 10-K above.Sources and Uses of CashNet cash provided by our operating activities was $75.4 million, $67.6 million and $36.9 million for the years ended December 31, 2006, 2005 and2004, respectively. This increase was primarily due to improved operating results, excluding the increase in stock-back compensation as a result of ouradoption of SFAS 123(R) in 2006; however, these improved operating results were mostly offset by additional restructuring charge payments as a result of our2005 and 2004 restructuring charges. While this increased level of restructuring charge payments has had an impact on our ability to grow our cash fromoperating activities, we expect that we will continue to generate cash from our operating activities throughout 2007 and beyond.Net cash used in investing activities was $158.5 million, $108.7 million and $56.9 million for the years ended December 31, 2006, 2005 and 2004,respectively. Net cash used in investing activities for the year ended December 31, 2006 was primarily the result of the capital expenditures required to bringour recently opened IBX centers in the Chicago, Los Angeles and Silicon Valley metro areas to Equinix standards, our current IBX expansion projects in theWashington, D.C., Chicago, New York and Tokyo metro areas, which will open during 2007, and to support our growing customer base, as well as the netpurchases of $3.5 million of our short-term and long-term investments and the purchase of our Chicago IBX property in June 2006 for $9.8 million, offset bythe proceeds from the sale of our Honolulu IBX in December 2006 of $9.5 million. Net cash used in investing activities during the year ended December 31,2005 was primarily the result of the purchases of the Los Angeles IBX and Ashburn campus properties for $34.7 million and $53.8 million, respectively, andcapital expenditures required to bring our recently acquired IBX centers in the Washington, D.C., Silicon Valley, Chicago and Los Angeles metro areas toEquinix standards and to support our growing customer base offset by the net sales and maturities of short-term and long-term investments of $12.2 million.Net cash used in investing activities during the year ended December 31, 2004 was primarily for the net purchase of short-term and long-term investments of$36.1 million, as well as to fund capital expenditures of $22.9 million to bring our recently acquired IBX centers in the Silicon Valley and Washington, D.C.metro areas to Equinix standards and to support our growing customer base. For 2007 and beyond, we anticipate that our cash used in investing activities,excluding the purchases, sales and maturities of short-term and long-term investments, will primarily be for our capital expenditures, which we expect to besubstantial, as well as additional purchases of real estate that we may undertake in the future. 49 Table of ContentsNet cash provided by financing activities was $46.1 million, $134.6 million and $19.2 million for the years ended December 31, 2006, 2005 and2004, respectively. Net cash provided by financing activities for the year ended December 31, 2006, was primarily due to the $40.0 million borrowing underthe $75.0 million Silicon Valley Bank revolving credit line in September 2006, the $40.0 million additional financing under the Ashburn campus mortgagepayable in December 2006 and proceeds from the exercises of employee stock options and purchases from our employee stock purchase plan, partially offsetby the repayment of $70.0 million in borrowings under the $75.0 million Silicon Valley Bank revolving credit line and principal payments of $2.6 millionfor our capital lease and other financing obligations and the Ashburn campus mortgage payable. Net cash generated by financing activities for the year endedDecember 31, 2005 was primarily the result of proceeds of $30.0 million from our borrowing on the $50.0 million Silicon Valley Bank revolving credit line inOctober 2005, which we repaid in full in January 2006, proceeds of $60.0 million from our Ashburn campus financing in December 2005, proceeds of $38.1million from our Los Angeles IBX financing and proceeds from the exercises of warrants and various employee stock plans, offset primarily by principalpayments of $5.5 million for our various capital lease and other financing obligations. Net cash generated by financing activities for the year endedDecember 31, 2004, was primarily the result of the $86.3 million in gross proceeds from our convertible debenture offering, offset by $70.8 million inpayments on our credit facility, senior notes and capital lease and other financing obligations, as well as debt extinguishment costs associated with payingdown these facilities and $7.3 million in proceeds from our various employee stock plans. We expect to obtain additional financings in 2007, such as theChicago IBX financing, in order to fund our expansion plans.Debt Obligations—Non-Convertible DebtAs of December 31, 2006, our non-convertible debt totaled $193.6 million and was comprised of our (i) Washington D.C. metro area IBX capital lease,(ii) San Jose IBX equipment and fiber financing, (iii) Chicago IBX equipment financing, (iv) Los Angeles IBX financing and (v) Ashburn campus mortgagepayable. Furthermore, as of December 31, 2006, we had utilized $16.4 million of the credit line through the issuance of letters of credit and, as a result, wehad $58.6 million of additional liquidity available to us under the $75.0 million Silicon Valley Bank revolving credit line.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 our existing Washington D.C. metro area IBX center. This lease, which includes the leasing of all of theIBX 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 aresult, recorded property and equipment assets, as well as a capital lease obligation, totaling $35.3 million. Payments under this lease will be made monthlythrough October 2019 at an effective interest rate of 8.50% per annum. As of December 31, 2006, principal of $33.7 million remained outstanding under thiscapital lease.San Jose IBX Equipment and Fiber Financing. In December 2004, we entered into a long-term lease for a 103,000 square foot data center in San Jose,and at the same time entered into separate agreements to purchase the equipment located within this new IBX center and to interconnect all three of our SiliconValley area IBX centers to each other through redundant dark fiber links. Under U.S. generally accepted accounting principles, these three separate agreementsare considered to be a single arrangement. Furthermore, while the building component of this transaction is classified as a long-term operating lease, theequipment and fiber portions of the transaction are classified as financed assets. We took possession of this property during the first quarter of 2005, and as aresult, recorded property and equipment and prepaid fiber assets, as well as a financing obligation, totaling $18.7 million. Payments under this financingobligation will be made monthly through May 2020 at an effective interest rate of 8.50% per annum. As of December 31, 2006, principal of $14.8 millionremained outstanding under this financing obligation.Chicago IBX Equipment Financing. In July 2005, we entered into a long-term sublease for a 107,000 square foot data center in Chicago, and at thesame time entered into a separate agreement to purchase the equipment located within this IBX center. Under U.S. generally accepted accounting principles,these two separate 50 Table of Contentsagreements are considered to be a single arrangement. Furthermore, while the building component of this transaction is classified as a long-term operating lease,the equipment portion of the transaction is classified as financed assets. We took possession of this property and title to the equipment assets in November2005, and as a result, recorded IBX equipment assets, as well as a financing obligation, totaling $9.7 million at that time. Payments under this financingobligation will be made monthly through August 2015 at an effective interest rate of 7.50% per annum. As of December 31, 2006, principal of $8.1 millionremained outstanding under this financing obligation.Los Angeles IBX Financing. In September 2005, we purchased a 107,000 square foot data center in the Los Angeles metro area for $34.7 million,which we paid for in full with cash in September 2005. In October 2005, we entered into a purchase and sale agreement to sell this Los Angeles IBX for $38.7million and to lease it back from the purchaser pursuant to a long-term lease, which closed in December 2005, and we received net proceeds from the sale ofthis property of $38.1 million. However, due to our continuing involvement in regards to certain aspects of this property, the sale and leaseback of thisproperty does not qualify as a sale-leaseback under generally accepted accounting principles, but rather is accounted for as a financing of the property. Werefer to this portion of the transaction as the Los Angeles IBX financing. Pursuant to the Los Angeles IBX financing, we recorded a financing obligationliability totaling $38.1 million in December 2005. Payments under the Los Angeles IBX financing will be made monthly through December 2025 at aneffective interest rate of 7.75% per annum. As of December 31, 2006, principal of $38.1 million remained outstanding under this financing obligation.Ashburn Campus Mortgage Payable. In December 2005, we completed the financing of our October 2005 purchase of the Ashburn campus propertywith a $60.0 million mortgage to be amortized over 20 years. Upon receipt of the $60.0 million of cash in December 2005, we recorded a $60.0 millionmortgage payable. Payments under the Ashburn campus mortgage payable will be made monthly through January 2026 at an effective interest rate of 8% perannum. In December 2006, we obtained an additional financing of $40.0 million under the Ashburn campus mortgage payable, which increased the totalamount financed under the Ashburn campus mortgage payable to $100.0 million, on the same terms as the initial mortgage payable. As of December 31, 2006,principal of $98.9 million remained outstanding under this mortgage payable.$75.0 Million Silicon Valley Bank Revolving Credit Line. In August 2006, we amended the Silicon Valley Bank credit line by entering into a $75.0million revolving line of credit agreement with Silicon Valley Bank, replacing the previously outstanding $50.0 million line of credit arrangement, and addingGeneral Electric Capital Corporation (GE) as a lender. The $75.0 million Silicon Valley Bank revolving credit line allows for issuance of letters of credit (inaddition to revolving borrowings). The $75.0 million Silicon Valley Bank revolving credit line also has an option for us to increase the amount of the line to$100.0 million at a later date, subject to approval of the lender or lenders electing to participate in such increase. Borrowings under the $75.0 million SiliconValley Bank revolving credit line will continue to bear interest at variable interest rates, plus the applicable margins which were in effect prior to theamendment, based on either prime rates or LIBOR rates. As of December 31, 2006, we had a total of $16.4 million of outstanding letters of credit under theletters of credit sublimit of the $75.0 million Silicon Valley Bank revolving credit line reducing the amount of borrowings available to us to $58.6 million.These letters of credit automatically renew in successive one-year periods until the final termination. If the beneficiaries of these letters of credit decide to drawdown on these letters of credit, we will be required to fund these letters of credit either through cash collateral or borrowings under the $75.0 million SiliconValley Bank revolving credit line. As of December 31, 2006, if we had borrowed against the Silicon Valley Bank revolving credit line, our borrowings wouldhave had an effective interest rate of 7.82% per annum. The $75.0 million Silicon Valley Bank revolving credit line matures on September 15, 2008 and issecured by substantially all of our domestic personal property assets and certain of our real property leases and contains several financial covenants, whichrequire compliance with maximum leverage and working capital ratios and a minimum EBITDA target, all of which we were in compliance with as ofDecember 31, 2006.Chicago IBX financing. In February 2007, our wholly-owned subsidiary obtained a loan of up to $110.0 million to finance a portion of the developmentand construction costs of the Chicago metro area IBX expansion 51 Table of Contentsproject, of which $20.0 million of this loan was drawn at closing. The remaining amount of the Chicago IBX financing will be drawn down during theconstruction period of the Chicago metro area IBX expansion project and we expect that the full $110.0 million will be fully drawn down by the end of 2007.The Chicago IBX financing has a term of three years and bears interest at a floating rate (one, three or six month LIBOR plus 2.75%), with an initial rate of8.125%. The Chicago IBX financing has no specific financial covenants. In addition, the Chicago IBX Financing contains a limited parent companyguaranty.Debt Obligations—Convertible DebtConvertible Subordinated Debentures. During February 2004, we sold $86.3 million in aggregate principal amount 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 and is payable in cash. Our convertible subordinated debentures are convertible into 2.2 million sharesof 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, Financings, Leases and Other Contractual CommitmentsWe lease our IBX centers and certain equipment under non-cancelable lease agreements expiring through 2025. The following represents our debtmaturities, financings, leases and other contractual commitments as of December 31, 2006 (in thousands): Convertiblesubordinateddebentures Mortgagepayable Capital leasesand otherfinancingobligations Operatingleases coveredunder accruedrestructuringcharges Operatingleases (1) Othercontractualcommitments(1) Total 2007 — 9,820 9,587 13,953 32,911 121,378 187,649 2008 — 10,164 9,860 13,262 32,741 5,797 71,824 2009 86,250 10,164 10,134 13,309 32,639 518 153,014 2010 — 10,164 10,409 3,357 31,368 477 55,775 2011 — 10,164 10,703 3,464 26,452 545 51,328 2012 and thereafter — 143,668 117,651 13,143 137,840 2,725 415,027 86,250 194,144 168,344 60,488 293,951 131,440 934,617 Less amount representing interest — (95,248) (80,200) — — — (175,448)Plus amount representing residual property value — — 6,555 — — — 6,555 Less amount representing estimated subrentalincome and expense — — — (12,570) — — (12,570)Less amount representing accretion — — — (6,345) — — (6,345) $86,250 $98,896 $94,699 $41,573 $293,951 $131,440 $746,809 52 Table of Contents(1)Represents off-balance sheet arrangements. Other contractual commitments are described below.In connection with six of our IBX operating leases and one utilities contract, we have entered into seven irrevocable letters of credit with Silicon ValleyBank. These letters of credit were provided in lieu of cash deposits under the letters of credit sublimit provision of the $75.0 million Silicon Valley Bankrevolving credit line. The letters of credit total $16.4 million, are collateralized by the $75.0 million Silicon Valley Bank revolving credit line andautomatically renew in successive one-year periods until the final termination. If the beneficiaries of these letters of credit decide to draw down on these letters ofcredit, we will be required to fund these letters of credit either through cash collateral or borrowings under the Silicon Valley Bank revolving credit line. Thiscontingent commitment is not reflected in the table above.Primarily as a result of our recent IBX expansions in the Chicago, Washington D.C. and New York metro areas, as of December 31, 2006, we werecontractually committed for $94.6 million of unaccrued capital expenditures, primarily for IBX equipment not yet delivered and labor not yet provided, inconnection with the work necessary to open these IBX centers prior to making them available to customers for installation. This amount, which is expected tobe paid in 2007, is reflected in the table above as “other contractual commitment.” We have other, non-capital purchase commitments in place as ofDecember 31, 2006, such as commitments to purchase power in select locations, primarily in the U.S. and Singapore, through 2007 and thereafter and otheropen purchase orders, which contractually bind us for goods or services to be delivered or provided during 2007. Such other purchase commitments as ofDecember 31, 2006, which total $36.8 million, are also reflected in the table above as an “other contractual commitments.” In addition, although we are notcontractually obligated to do so, we expect to incur additional capital expenditures beyond the $94.6 million contractually committed as of December 31, 2006in these three markets, as well as Tokyo, during 2007 of approximately $160.0 million to $170.0 million in order to complete the work needed to open theseIBX centers. These non-contractual capital expenditures are not reflected in the table above.Recent Accounting PronouncementsIn February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Instruments,” an amendment of SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities-a replacement of FASB Statement No. 125” (“SFAS No. 155”). SFAS No. 155 improves the financial reporting of certain hybrid financialinstruments by requiring more consistent accounting that eliminates exemptions and provides a means to simplify the accounting for such instruments.Specifically, SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate thederivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 also (i) clarifies which interest-only stripsand principal-only strips are not subject to the requirements of SFAS No. 133; (ii) establishes a requirement to evaluate interests in securitized financial assetsto identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation;(iii) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and (iv) amends SFAS No. 140 to eliminate theprohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than anotherderivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal yearthat begins after September 15, 2006. We are currently in the process of evaluating the impact that the adoption of SFAS No. 155 will have on our financialposition, results of operations and cash flows.In April 2006, the FASB issued FASB Staff Position No. FIN 46(R)-6 (“FSP FIN 46(R)-6”), which addresses how a reporting enterprise shoulddetermine the variability to be considered in applying FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”, as amended (“FIN 46(R)”).The variability that is considered in applying FIN 46(R) affects the determination of (a) whether the entity is a variable interest 53 Table of Contentsentity, (b) which interests are variable interests in the entity and (c) which party, if any, is the primary beneficiary of the variable interest entity. Thatvariability will affect any calculation of expected losses and expected residual returns, if such a calculation is necessary. FSP FIN 46(R)-6 provides additionalguidance to consider for determining variability. FSP FIN 46(R)-6 is effective beginning the first day of the first reporting period beginning after June 15,2006. The adoption of FSP FIN 46(R)-6 has not had a significant impact on our financial position and results of operations.In June 2006, the FASB approved EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should BePresented in the Income Statement (That is, Gross versus Net Presentation)” (“EITF 06-3”). EITF 06-3 includes any tax assessed by a governmental authoritythat is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added andsome excise taxes. EITF 06-3 concludes that the presentation of taxes on either a gross (included in revenue and costs) or a net (excluded from revenue) basis isan accounting policy decision that should be disclosed. In addition, for any such taxes that are reported on a gross basis, an entity should disclose theamounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant.The provisions of EITF 06-3 should be applied to financial reports for interim and annual reporting periods beginning after December 15, 2006, with earlieradoption permitted. We are currently in the process of evaluating the impact that the adoption of EITF 06-3 will have on our financial position, results ofoperations and cash flows.In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which clarifies the accounting foruncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to betaken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, andtransition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We do not expect the adoption of FIN 48 to have a material impact on ourconsolidated financial position, results of operations or cash flows.In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes aframework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal yearsbeginning after December 15, 2007. We are currently in the process of evaluating the impact that the adoption of SFAS No. 157 will have on our financialposition, results of operations and cash flows.In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements” (“SAB 108”), to address diversity in practice in quantifying financial statement misstatements. SAB108 requires that we quantify misstatements based on their impact on each of our financial statements and related disclosures. The adoption of SAB 108 hasnot had a significant impact on our financial position and results of operations; however, we recorded an adjustment totaling $1.2 million, which resulted in areduction to revenue and an offsetting increase to deferred installation revenue, a liability account. This adjustment relates to how we previously accounted forindividual customer installation charges that were less than $1,000. Previously, we recognized revenue on customer installation charges less than $1,000upfront rather than ratably over the longer of the term of the contract or expected customer relationship. We concluded that this cumulative charge was notmaterial to any previously-reported historical period or the current fiscal year. As such, this cumulative charge representing the remaining deferred obligationtotaling $1.2 million was recorded in the fourth quarter of 2006 and is included in the statement of operations for the year ended December 31, 2006 withinour results from operations, versus restating prior periods or as a cumulative effect of a change in accounting principle in the current year.In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”).SFAS No. 159 permits companies to choose to measure, on an 54 Table of Contentsinstrument-by-instrument basis, many financial instruments and certain other assets and liabilities at fair value that are not currently required to be measuredat fair value. SFAS No. 159 is effective as of the beginning of a fiscal year that begins after November 15, 2007. We are currently in the process of evaluatingthe impact that the adoption of SFAS No. 159 will have on our financial position, results of operations and cash flows. ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKMarket RiskThe 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, however, there were no forward contracts in effect at December 31, 2006. The use of these financial instruments was intended to mitigate some ofthe risks associated with fluctuations in currency exchange rates, but does not eliminate such risks. We may decide to employ such contracts again in thefuture. We do not use financial instruments for trading or speculative purposes.Interest Rate RiskOur exposure to market risk resulting from changes in interest rates relates primarily to our investment portfolio. All of our cash equivalents andmarketable securities are designated as available-for-sale and are therefore recorded at fair market value on our consolidated balance sheet with the unrealizedgains or losses reported as a separate component of other comprehensive income or loss. The fair market value of our marketable securities could be adverselyimpacted due to a rise in interest rates, but we do not believe such impact would be material. Securities with longer maturities are subject to a greater interestrate risk than those with shorter maturities and as of December 31, 2006 our portfolio maturity was relatively short. If current interest rates were to increase ordecrease by 10% from their position as of December 31, 2006, the fair market value of our investment portfolio could increase or decrease by approximately$262,000.An immediate 10% increase or decrease in current interest rates from their position as of December 31, 2006 would furthermore not have a materialimpact on our debt obligations due to the fixed nature of the majority of our debt obligations. However, the interest expense associated with our $75.0 millionrevolving credit line, which bears interest at floating rates, plus applicable margins, based on either the prime rate or LIBOR, could be affected. Accordingly,any borrowings from our $75.0 million Silicon Valley Bank revolving credit line are subject to interest rate risk. Assuming $75.0 million was outstandingunder the $75.0 million Silicon Valley Bank revolving credit line, for every 100 basis point change in interest rates, our interest expense could increase ordecrease by $750,000.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 debtwill increase as interest rates fall and decrease as interest rates rise. These interest rate changes may affect the fair market value of the fixed interest rate debtbut do not impact our earnings or cash flows. The fair market value of our convertible subordinated debentures is based on quoted market prices. Theestimated fair value of our convertible subordinated debentures as of December 31, 2006 was approximately $169.4 million versus approximately $98.9million as of December 31, 2005.Foreign Currency RiskThe majority of our recognized revenue is denominated in U.S. dollars, generated mostly from customers in the U.S. However, approximately 14% ofour revenues and 13% of our costs are in the Asia-Pacific region, and a 55 Table of Contentslarge portion of those revenues and costs are denominated in a currency other than the U.S. dollar, primarily the Singapore dollar, Japanese yen and HongKong and Australian dollars. As a result, our operating results and cash flows are impacted by currency fluctuations relative to the U.S. dollar. Goingforward, we expect that approximately 13-15% of our revenues and costs will continue to be generated and incurred in the Asia-Pacific region in currenciesother than the U.S. dollar. In addition, we are currently undergoing an expansion of our IBX center in the Tokyo, Japan metro area and have announced ourplans to expand our IBX center in Singapore. As a result, we are exposed to risks resulting from fluctuations in foreign currency exchange rates in connectionwith our international expansions. To the extent we are paying contractors in foreign currencies, our expansions could cost more than anticipated from declinesin the U.S dollar relative to foreign currencies.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 RiskCertain 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 price changes are electricity and supplies and equipment used in our IBX centers. We areclosely monitoring the cost of electricity at all of our locations.In addition, as we now intend to start building new, “greenfield” IBX centers, we will be subject to commodity price risk for building materials related tothe construction of these IBX centers, such as steel and copper. In addition, the lead-time to procure certain pieces of equipment is substantial, such asgenerators. Any delays in procuring the necessary pieces of equipment for the construction of our IBX centers could delay the anticipated openings of these newIBX centers and, as a result, increase the cost of these projects.We do not employ forward contracts or other financial instruments to hedge commodity price risk. ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe 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 Annual Report on Form10-K. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREThere is no disclosure to report pursuant to Item 9. ITEM 9A.CONTROLS AND PROCEDURESConclusion Regarding the Effectiveness of Disclosure Controls and ProceduresUnder 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 on Form 10-K. 56 Table of ContentsManagement’s Report on Internal Control Over Financial ReportingOur 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, 2006. There were no significant changes in internal control over financial reporting during 2006 that havematerially affected, or are reasonably likely to materially affect, our internal control over financing reporting.Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 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.Changes in Internal Control Over Financial ReportingThere has been no change in our internal controls over financial reporting during the fourth quarter of fiscal 2006 that has materially affected, or isreasonably likely to materially affect, our internal controls over financial reporting. ITEM 9B.OTHER INFORMATIONThere is no disclosure to report pursuant to Item 9B. 57 Table of ContentsPART III ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEInformation required by this item is incorporated by reference to the Equinix Proxy Statement for the 2007 Annual Meeting of Stockholders.We adopted a Code of Ethics applicable for Chief Executive Officer and Senior Financial Officers and a Code of Business Conduct. This information isincorporated by reference to the Equinix Proxy Statement for the 2007 Annual Meeting of Stockholders and is also available on our website, www.equinix.com. ITEM 11.EXECUTIVE COMPENSATIONInformation required by this item is incorporated by reference to the Equinix Proxy Statement for the 2007 Annual Meeting of Stockholders. ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSInformation required by this item is incorporated by reference to the Equinix Proxy Statement for the 2007 Annual Meeting of Stockholders. ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEInformation required by this item is incorporated by reference to the Equinix Proxy Statement for the 2007 Annual Meeting of Stockholders. ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICESInformation required by this item is incorporated by reference to the Equinix Proxy Statement for the 2007 Annual Meeting of Stockholders. 58 Table of ContentsPART 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 Income (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: Incorporated by Reference ExhibitNumber Exhibit Description Form Filing Date/Period EndDate Exhibit FiledHerewith2.1 Combination Agreement, dated as of October 2, 2002, by and among Equinix,Inc., Eagle Panther Acquisition Corp., Eagle Jaguar Acquisition Corp., i-STTPte Ltd, STT Communications Ltd., Pihana Pacific, Inc. and Jane Dietze, asrepresentative of the stockholders of Pihana Pacific, Inc. Def. Proxy 14A 12/12/02 3.1 Amended and Restated Certificate of Incorporation of the Registrant, as amendedto date. 10-K/A 12/31/02 3.1 3.2 Certificate of Designation of Series A and Series A-1 Convertible Preferred Stock. 10-K/A 12/31/02 3.3 3.3 Bylaws of the Registrant. 10-K 12/31/02 3.2 3.4 Certificate of Amendment of the Bylaws of the Registrant. 10-Q 6/30/03 3.4 4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4. 4.2 Registration Rights Agreement (see Exhibit 10.15). 4.3 Indenture (see Exhibit 10.19). 10.1 Warrant Agreement, dated as of December 1, 1999, by and among the Registrantand State Street Bank and Trust Company of California, N.A. (as warrantagent). S-4 (File No. 333-93749) 12/29/99 10.2 10.2 Form of Indemnification Agreement between the Registrant and each of its officersand directors. S-4 (File No. 333-93749) 12/29/99 10.5 10.3+ Lease Agreement with Carlyle-Core Chicago LLC, dated as of September 1,1999. S-4/A (File No. 333-93749) 5/9/00 10.9 10.4+ Lease Agreement with Rose Ventures II, Inc., dated June 10, 1999. S-4/A (File No. 333-93749) 5/9/00 10.12 59 Table of Contents Incorporated by Reference ExhibitNumber Exhibit Description Form Filing Date/Period EndDate Exhibit FiledHerewith10.5 2000 Equity Incentive Plan. S-1 (File No. 333-39752) 6/21/00 10.24 10.6 2000 Director Option Plan. S-1/A (File No. 333-39752) 7/19/00 10.25 10.7 Ground Lease by and between iStar San Jose, LLC and Equinix, Inc., dated June21, 2000. S-1/A (File No. 333-39752) 8/9/00 10.27 10.8+ Lease Agreement with Burlington Associates III Limited Partnership, dated as ofJuly 24, 2000. 10-Q 9/30/00 10.31 10.9 First Modification to Ground Lease by and between iStar San Jose, LLC andEquinix, Inc., dated September 26, 2001. 10-Q 9/30/01 10.46 10.10 2001 Supplemental Stock Plan. 10-Q 9/30/01 10.48 10.11 Second Modification to Ground Lease by and between iStar San Jose, LLC andEquinix, Inc., dated May 20, 2002. 10-Q 6/30/02 10.53 10.12+ Second Amendment to Lease Agreement with Burlington Realty Associates IIILimited Partnership, dated as of October 1, 2002. 10-Q 9/30/02 10.56 10.13 Form of Severance Agreement entered into by the Company and each of theCompany’s executive officers. 10-Q 9/30/02 10.58 10.14 Third Modification to Ground Lease by and between iStar San Jose, LLC andEquinix, Inc., dated as of September 30, 2002. 10-K 12/31/02 10.74 10.15 Registration Rights Agreement by and among Equinix and the Initial Purchasers,dated as of December 31, 2002. 10-K 12/31/02 10.75 10.16 Securities Purchase and Admission Agreement, dated April 29, 2003, amongEquinix, certain of Equinix’s subsidiaries, i-STT Investments Pte Ltd, STTCommunications Ltd and affiliates of Crosslink Capital. 8-K 5/1/03 10.1 10.17 Fourth Modification to Ground Lease by and between iStar San Jose, LLC andEquinix, Inc., dated as of November 21, 2003. 10-K 12/31/03 10.94 10.18+ Sublease Agreement between Sprint Communications Company, L.P. and EquinixOperating Co., Inc. dated as of October 24, 2003. 10-K 12/31/03 10.95 10.19 Indenture among Equinix, Inc. and U.S. Bank National Association as Trusteedated February 11, 2004. 10-Q 3/31/04 10.99 60 Table of Contents Incorporated by Reference ExhibitNumber Exhibit Description Form Filing Date/Period EndDate Exhibit FiledHerewith10.20+ Lease Agreement dated as of April 21, 2004 between Eden Ventures LLC andEquinix, Inc. 10-Q 6/30/04 10.103 10.21 Equinix, Inc. 2004 International Employee Stock Purchase Plan effective as ofJune 3, 2004. 10-Q 6/30/04 10.105 10.22 Equinix, Inc. Employee Stock Purchase Plan effective as of June 3, 2004. 10-Q 6/30/04 10.106 10.23 First Amendment to Sublease Agreement dated as of June 21, 2004 betweenEquinix Operating Co. Inc. and Sprint Communications Company L.P. 10-K 12/31/04 10.107 10.24+ Assignment and Assumption of Lease and First Amendment to Lease dated as ofDecember 6, 2004, between Equinix Operating Company, Inc., AbovenetCommunications, Inc., and Brokaw Interests; and Lease dated December 29,1999 between Abovenet Communications, Inc., and Brokaw Interests. 10-K 12/31/04 10.109 10.25 Form of Restricted Stock Agreement for Equinix’s executive officers under theCompany’s 2000 Equity Incentive Plan. 10-K 12/31/05 10.115 10.26 Lease Agreement dated June 9, 2005 between Equinix Operating Co., Inc. andMission West Properties L.P. and associated Guaranty of Equinix, Inc. 10-Q 6/30/05 10.117 10.27 Letter Agreement dated October 6, 2005 among Equinix, Inc., STTCommunications Ltd. and I-STT Investments Pte. Ltd. 8-K 10/6/05 99.1 10.28 Transition and Severance Agreement between Equinix, Inc. and Philip Koendated November 7, 2005. 8-K 11/8/05 99.1 10.29 Lease Agreement dated December 21, 2005 between Equinix Operating Co., Inc.and iStar El Segundo, LLC and associated Guaranty of Equinix, Inc. 10-K 12/31/05 10.126 10.30+ Loan and Security Agreement and Note between Equinix RP II, LLC and SFT I,Inc. dated December 21, 2005 and associated Guaranty of Equinix, Inc. 10-K 12/31/05 10.127 10.31 Lease Agreement dated as of December 21, 2005 between Equinix RP II, LLCand Equinix, Inc. 10-K 12/31/05 10.128 10.32 Fifth Modification to Ground Lease by and between iStar San Jose, LLC andEquinix, Inc. dated January 1, 2006 and associated Guaranty of Equinix,Inc. 10-K 12/31/05 10.129 61 Table of Contents Incorporated by Reference ExhibitNumber Exhibit Description Form Filing Date/Period EndDate Exhibit FiledHerewith10.33 Lease Agreement dated September 14, 2006 between 777 Sinatra Drive Corp. andEquinix, Inc. 10-Q 9/30/06 10.135 10.34+ Second Amended and Restated Loan and Security Agreement dated August 10,2006 between Silicon Valley Bank, General Electric Capital Corporation,Equinix, Inc. and Equinix Operating Co., Inc. 10-Q 9/30/06 10.136 10.35 2007 Equinix Annual Incentive Plan X10.36 Letter agreements by and between Equinix, Inc. and certain of its executiveofficers repricing upwards certain stock option grants. X10.37 First Omnibus Modification Agreement dated December 27, 2006 by and amongSFT I, Inc. (“SFT I”), Equinix RP II, LLC (“RP II”) and Equinix, Inc.(“Equinix”), Amended and Restated Promissory Note dated December 27,2006 by RP II in favor of SFT I and Reaffirmation of Guaranty datedDecember 27, 2006 by RP II and Equinix in favor of SFT I. X10.38 First Amendment to Deed of Lease dated December 27, 2006 by and betweenEquinix RP II, LLC and Equinix Operating Co., Inc. X21.1 Subsidiaries of Equinix. X23.1 Consent of PricewaterhouseCoopers LLP, Independent Registered PublicAccounting Firm. X31.1 Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X31.2 Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X32.1 Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X32.2 Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X+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’s applicationfor confidential treatment. (b)Exhibits.See (a) (3) above. (c)Financial Statement Schedule.See (a) (2) above. 62 Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this Annual Report on Form 10-Kto be signed on its behalf by the undersigned, thereunto duly authorized. EQUINIX, INC.(Registrant)February 28, 2007 By /s/ PETER F. VAN CAMP Peter F. Van Camp Chairman of the Board andChief Executive OfficerPOWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Peter F. Van Camp orKeith D. Taylor, or either of them, each with the power of substitution, their attorney-in-fact, to sign any amendments to this Annual Report on Form 10-K(including post-effective amendments), and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities andExchange 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 byvirtue 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 Chairman of the Board and Chief Executive Officer(Principal Executive Officer) February 28, 2007/s/ KEITH D. TAYLOR Keith D. Taylor Chief Financial Officer (Principal Financial andAccounting Officer) February 28, 2007/s/ STEVEN T. CLONTZ Steven T. Clontz Director February 28, 2007/s/ STEVEN P. ENG Steven P. Eng Director February 28, 2007/s/ GARY F. HROMADKO Gary F. Hromadko Director February 28, 2007/s/ SCOTT G. KRIENS Scott G. Kriens Director February 28, 2007 Irving F. Lyons, III Director 63 Table of ContentsINDEX TO EXHIBITS ExhibitNumber Description of Document10.35 2007 Equinix Annual Incentive Plan10.36 Letter agreements by and between Equinix, Inc. and certain of its executive officers repricing upwards certain stock option grants.10.37 First Omnibus Modification Agreement dated December 27, 2006 by and among SFT I, Inc. (“SFT I”), Equinix RP II, LLC (“RP II”) andEquinix, Inc. (“Equinix”), Amended and Restated Promissory Note dated December 27, 2006 by RP II in favor of SFT I and Reaffirmationof Guaranty dated December 27, 2006 by RP II and Equinix in favor of SFT I.10.38 First Amendment to Deed of Lease dated December 27, 2006 by and between Equinix RP II, LLC and Equinix Operating Co., Inc.21.1 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. 64 Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors andStockholders of Equinix, Inc.:We have completed integrated audits of Equinix, Inc.’s consolidated financial statements and of its internal control over financial reporting as ofDecember 31, 2006 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits,are presented below.Consolidated financial statementsIn 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, 2006 and 2005, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. Thesefinancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based onour audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of materialmisstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for our opinion.As discussed in Note 13 to the Consolidated Financial Statements, the Company changed the manner in which it accounts for share-basedcompensation in 2006.Internal control over financial reportingAlso, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing underItem 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in allmaterial respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the COSO. TheCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of thePublic Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assuranceabout whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reportingincludes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our auditprovides a reasonable basis for our opinions.A 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 F-1 Table of Contentsassurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’sassets 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./s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaFebruary 28, 2007 F-2 Table of ContentsEQUINIX, INC.Consolidated Balance Sheets(in thousands, except share and per share data) December 31, 2006 2005 Assets Current assets: Cash and cash equivalents $82,563 $119,267 Short-term investments 48,831 52,105 Accounts receivable, net of allowance for doubtful accounts of $273 and $145 26,864 17,237 Prepaids and other current assets 8,003 3,103 Total current assets 166,261 191,712 Long-term investments 25,087 17,483 Property and equipment, net 546,395 438,790 Goodwill 16,919 21,654 Debt issuance costs, net 3,006 3,075 Other assets 14,164 8,283 Total assets $771,832 $680,997 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable and accrued expenses $27,269 $22,557 Accrued property and equipment 23,337 15,783 Borrowings from credit line — 30,000 Current portion of accrued restructuring charges 13,469 12,400 Current portion of capital lease and other financing obligations 1,977 1,552 Current portion of mortgage payable 2,150 1,159 Other current liabilities 10,151 7,972 Total current liabilities 78,353 91,423 Accrued restructuring charges, less current portion 28,103 37,431 Capital lease and other financing obligations, less current portion 92,722 94,653 Mortgage payable, less current portion 96,746 58,841 Convertible subordinated debentures 86,250 86,250 Deferred rent and other liabilities 34,630 23,726 Total liabilities 416,804 392,324 Commitments and contingencies (Note 16) Stockholders’ equity: Common stock, $0.001 par value per share; 300,000,000 shares authorized in 2006 and 2005; 29,516,927 and27,444,566 shares issued and outstanding in 2006 and 2005 29 27 Additional paid-in capital 904,573 839,497 Deferred stock-based compensation — (4,930)Accumulated other comprehensive income 3,870 1,126 Accumulated deficit (553,444) (547,047)Total stockholders’ equity 355,028 288,673 Total liabilities and stockholders’ equity $771,832 $680,997 See accompanying notes to consolidated financial statements. F-3 Table of ContentsEQUINIX, INC.Consolidated Statements of Operations(in thousands, except per share data) Year ended December 31, 2006 2005 2004 Revenues $286,915 $221,057 $163,671 Costs and operating expenses: Cost of revenues 188,379 158,354 136,950 Sales and marketing 32,619 20,552 18,604 General and administrative 72,123 45,110 32,494 Restructuring charges 1,527 33,814 17,685 Gain on Honolulu IBX sale (9,647) — — Total costs and operating expenses 285,001 257,830 205,733 Income (loss) from operations 1,914 (36,773) (42,062)Interest income 6,627 3,584 1,291 Interest expense (14,875) (8,880) (11,496)Loss on debt extinguishment and conversion — — (16,211)Loss before income taxes and cumulative effect of a change in accounting principle (6,334) (42,069) (68,478)Income taxes (439) (543) (153)Net loss before cumulative effect of a change in accounting principle (6,773) (42,612) (68,631)Cumulative effect of a change in accounting principle for stock-based compensation (net ofincome taxes of $0) 376 — — Net loss $(6,397) $(42,612) $(68,631)Net loss per share: Basic and diluted net loss per share before cumulative effect of a change in accounting principle $(0.23) $(1.78) $(3.87)Cumulative effect of a change in accounting principle 0.01 — — Basic and diluted net loss per share $(0.22) $(1.78) $(3.87)Weighted average shares 28,551 23,956 17,719 See accompanying notes to consolidated financial statements. F-4 Table of ContentsEQUINIX, INC.Consolidated Statements of Stockholders’ Equity and Other Comprehensive Income (Loss)For the Three Years Ended December 31, 2006(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, 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 Issuance of common stock upon exercise of common stock options and releaseof restricted stock — — 895,965 1 8,071 — — — 8,072 Issuance of stock upon exercise of stock warrants 965,674 1 111,840 — 1,509 — — — 1,510 Issuance of common stock under employee stock purchase plans — — 218,158 — 3,407 — — — 3,407 Issuance of preferred stock upon conversion of convertible secured notes 4,384,794 4 — — 37,307 — — — 37,311 Issuance of common stock upon conversion of preferred stock (7,219,135) (7) 7,219,135 7 — — — — — Issuance/revaluation of common stock warrants — — — — (3) — — — (3)Settlement of stock price guarantee — — — — 98 — — — 98 Tax benefit from employee stock plans — — — — 38 — — — 38 Deferred stock-based compensation, net of forfeitures — — — — 12,947 (12,947) — — — Amortization of stock-based compensation — — — — — 8,277 — — 8,277 Comprehensive loss: Net loss — — — — — — — (42,612) (42,612)Foreign currency translation loss — — — — — — (767) — (767)Unrealized loss on investments — — — — — — (364) — (364)Net comprehensive loss — — — — — — (1,131) (42,612) (43,743)Balances as of December 31, 2005 — — 27,444,566 27 839,497 (4,930) 1,126 (547,047) 288,673 Issuance of common stock upon exercise of common stock options and releaseof restricted stock — — 1,937,010 2 34,922 — — — 34,924 Issuance of stock upon exercise of stock warrants — — 26 — — — — — — Issuance of common stock under employee stock purchase plans — — 135,325 — 3,912 — — — 3,912 Settlement of stock price guarantee — — — — 9 — — — 9 Tax benefit from employee stock plans — — — — 727 — — — 727 Cumulative effect adjustments upon adoption of FASB123R — — — — (5,306) 4,930 — — (376)Stock-based compensation, net of forfeitures — — — — 30,812 — — — 30,812 Comprehensive income (loss): Net loss — — — — — — — (6,397) (6,397)Foreign currency translation gain — — — — — — 2,408 — 2,408 Unrealized gain on investments — — — — — — 336 — 336 Net comprehensive income (loss) — — — — — — 2,744 (6,397) (3,653)Balances as of December 31, 2006 — $— 29,516,927 $29 $904,573 $— $3,870 $(553,444) $355,028 See accompanying notes to consolidated financial statements. F-5 Table of ContentsEQUINIX, INC.Consolidated Statements of Cash Flows(in thousands) Year ended December 31, 2006 2005 2004 Cash flows from operating activities: Net loss $(6,397) $(42,612) $(68,631)Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 71,737 62,620 55,926 Stock-based compensation 30,767 8,277 1,467 Restructuring charges 1,527 33,814 17,685 Amortization of intangible assets & non-cash prepaid rent 1,041 319 2,243 Accretion of asset retirement obligation & accrued restructuring charges 3,554 1,882 355 Non-cash interest expense 880 1,675 7,805 Cumulative effect of a change in accounting principle (376) — — Loss on debt extinguishment and conversion — — 16,211 Gain on Honolulu IBX sale (9,647) — — Other reconciling items (426) (427) (14)Changes in operating assets and liabilities: Accounts receivable (9,666) (4,854) (1,691)Prepaids and other assets (3,274) 3,245 (4,014)Accounts payable and accrued expenses 4,756 3,755 3,086 Accrued restructuring charges (12,804) (3,066) (761)Other liabilities 3,740 2,967 7,245 Net cash provided by operating activities 75,412 67,595 36,912 Cash flows from investing activities: Purchases of investments (88,422) (107,932) (220,769)Sales of investments 2,969 13,360 7,021 Maturities of investments 81,948 106,773 177,608 Purchase of Los Angeles IBX property — (34,748) — Purchase of Ashburn campus property — (53,759) — Purchase of Chicago IBX property (9,766) — — Purchases of other property and equipment (162,291) (45,412) (22,934)Accrued property and equipment 7,554 12,871 458 Proceeds from Honolulu IBX sale 9,530 — — Proceeds from sale of other property and equipment 8 125 — Sale of restricted cash — — 1,751 Net cash used in investing activities (158,470) (108,722) (56,865)Cash flows from financing activities: Proceeds from exercise of warrants, stock options and employee stock purchase plans 38,836 12,989 7,289 Proceeds from mortgage payable 40,000 60,000 — Proceeds from Los Angeles IBX financing — 38,142 — Proceeds from borrowings under credit line 40,000 30,000 — Proceeds from convertible subordinated debentures — — 86,250 Repayment of borrowings from credit line (70,000) — — Repayment of capital lease and other financing obligations (1,506) (5,523) (3,632)Repayment of mortgage payable (1,104) — — Repayment of credit facility — — (34,281)Repayment of senior notes — — (30,475)Debt extinguishment costs — — (2,505)Debt issuance costs (811) (997) (3,407)Excess tax benefits from stock-based compensation 692 — — Net cash provided by financing activities 46,107 134,611 19,239 Effect of foreign currency exchange rates on cash and cash equivalents 247 (155) (217)Net increase (decrease) in cash and cash equivalents (36,704) 93,329 (931)Cash and cash equivalents at beginning of year 119,267 25,938 26,869 Cash and cash equivalents at end of year $82,563 $119,267 $25,938 Supplemental disclosure of cash flow information: Cash paid for taxes $545 $— $— Cash paid for interest $13,344 $7,133 $3,181 See accompanying notes to consolidated financial statements. F-6 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Nature of Business and Summary of Significant Accounting PoliciesNature of BusinessEquinix, 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 our InternetBusiness Exchange (“IBX”) centers in 10 markets in the U.S. and Asia-Pacific, customers can directly interconnect with every major global network andInternet service provider for their critical peering, transit and traffic exchange requirements. These interconnection points facilitate the highest performance andgrowth of the Internet by serving as neutral and open marketplaces for Internet infrastructure services, allowing customers to expand their businesses whilereducing costs.The Company believes it has sufficient cash, coupled with anticipated cash generated from operating activities and anticipated cash from financings, tomeet its operating requirements for at least the next 12 months. As of December 31, 2006, the Company had $156,481,000 of cash, cash equivalents andshort-term and long-term investments. Since the quarter ended September 30, 2003, the Company has generated positive operating cash flow in each quarterand expects this trend to continue throughout 2007 and beyond. In addition, as of December 31, 2006, the Company had $58,581,000 of additional liquidityavailable to it under the Company’s Silicon Valley Bank Credit Line Amendment (see Note 12), in the event the Company needs additional cash to fundexpansion activities, fund working capital requirements or pursue attractive strategic opportunities that may become available in the future. In addition, fromtime to time the Company assesses external financing opportunities, both debt and equity, as alternative sources for financing such activities andopportunities. In February 2007, a wholly-owned subsidiary of the Company obtained a loan of up to $110,000,000, which has a term of three years andbears interest at a floating rate (one, three or six month LIBOR plus 2.75%), with an initial rate of 8.125%, to finance a portion of the development andconstruction costs of the Chicago Metro Area IBX Expansion Project (see Note 2). While the Company expects that its cash flow from operations will continueto increase, the Company expects its cash flow used in investing activities, primarily as a result of its expected purchases of property and equipment tocomplete these expansion projects, will also increase (see Note 16, “Other Purchase Commitments”) and the Company expects them to be greater than its cashflows generated from operating activities. The Company will investigate additional financing opportunities in connection with the Company’s current andfuture expansion plans, in order to continue to meet its cash requirements to fund its other capital expenditures, debt service and corporate operatingrequirements and maintain its cash and working capital position.Basis of PresentationThe accompanying consolidated financial statements include the accounts of Equinix and its subsidiaries. All significant intercompany accounts andtransactions have been eliminated in consolidation.Use of EstimatesThe 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.ConsolidationThe 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 F-7 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) No. 96-16, “Investor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders HaveCertain Approval or Veto Rights.” As a result, all majority-owned subsidiaries are consolidated unless the Company does not have control. Evidence of such alack of effective control includes the Company’s inability to direct or cause the direction of the management and policies of a person, whether through theownership of voting shares, by contract, or otherwise.The Company’s cumulative translation adjustment as of December 31, 2006, 2005 and 2004 was $3,990,000, $1,582,000 and $2,349,000,respectively.Cash, Cash Equivalents and Short-Term and Long-Term InvestmentsThe 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, commercial paper and certificates of deposit with financial institutions with maturities up to 90days. Short-term investments generally consist of certificates of deposits and commercial paper with original maturities of between 90 and 360 days andhighly liquid debt securities of corporations, municipalities and agencies of the U.S. government and the U.S. government. Long-term investments generallyconsist of debt securities of corporations, municipalities and agencies of the U.S. government and the U.S. government with maturities at the date ofacquisition 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 quotedmarket prices with unrealized gains and losses reported in stockholders’ equity as a component of other comprehensive income. The cost of securities sold isbased on the specific identification method. The Company reviews its investment portfolio quarterly to determine if any securities may be other-than-temporarily impaired due to increased credit risk, changes in industry or sector of a certain instrument or ratings downgrades.Financial Instruments and Concentration of Credit RiskFinancial 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 A+/A1 investment grade, as determined by independent credit rating agencies.A significant portion of the Company’s customer base is comprised of businesses throughout the U.S. However, a portion of the Company’s revenuesare derived from the Company’s Asia-Pacific operations. For the year ended December 31, 2006 the Company’s revenues were split approximately 86% in theU.S. and 14% in Asia-Pacific. For the year ended December 31, 2005 the Company’s revenues were split approximately 87% in the U.S. and 13% in Asia-Pacific. For the year ended December 31, 2004 the Company’s revenues were split approximately 87% in the U.S. and 13% in Asia-Pacific. No single customeraccounted for greater than 10% of accounts receivables or revenues for the year ended December 31, 2006. For the years ended December 31, 2005 and 2004,one customer, IBM, accounted for 11% and 13%, respectively, of revenues for those years. As of December 31, 2005, this same customer accounted for 12%of accounts receivable. No other single customer accounted for greater than 10% of accounts receivables or revenues for the periods presented.As of December 31, 2006 the Company had outstanding commitments of $298,146,000 due to one lender. These commitments are associated with realestate financing obligations in connection with the San Jose Ground Lease Termination (see Note 19), the Los Angeles IBX Financing (see Note 5) andthe Mortgage Payable (see Note 6). In addition, in February 2007 the Company increased its commitment to this same lender in connection with the ChicagoIBX Financing (see Note 20). F-8 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Property and EquipmentProperty and equipment are stated at the Company’s original cost or relative fair value for acquired property and equipment. Depreciation is computedusing the straight-line method over the estimated useful lives of the respective assets, generally two to five years for non-IBX center equipment and furnitureand fixtures and two to 13 years for IBX center equipment. Leasehold improvements and assets acquired under capital lease are amortized over the shorter ofthe lease term or the estimated useful life of the asset or improvement, which is generally ten to fifteen years for the leasehold improvements, unless they areconsidered integral equipment, in which case they are amortized over the lease term. Buildings owned by the Company are depreciated over their estimateduseful life of the building, which is generally forty to fifty years. Pursuant to EITF Issue 05-6, “Determining the Amortization Period for LeaseholdImprovements Purchased after Lease Inception or Acquired in a Business Combination”, (i) leasehold improvements acquired in a business combination areamortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured atthe date of acquisition and (ii) leasehold improvements that are placed into service significantly after and not contemplated at or near the beginning of the leaseterm are amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonablyassured at the date the leasehold improvements are purchased.Construction in ProgressConstruction in progress includes direct and indirect expenditures for the construction and expansion of IBX centers and is stated at original cost. TheCompany has contracted out substantially all of the construction and expansion efforts of its IBX centers to independent contractors under constructioncontracts. Construction in progress includes certain costs incurred under a construction contract including project management services, engineering andschematic design services, design development, construction services and other construction-related fees and services. In addition, the Company hascapitalized certain interest costs during the construction phase. Once an IBX center or expansion project becomes operational, these capitalized costs areallocated to certain property and equipment categories and are depreciated at the appropriate rates consistent with the estimated useful life of the underlyingassets.Interest incurred is capitalized in accordance with SFAS No. 34, “Capitalization of Interest Costs.” Total interest cost incurred and total interest costcapitalized during the year ended December 31, 2006 was $16,450,000 and $1,575,000, respectively. No interest costs were capitalized during the yearsended December 31, 2005 and 2004.Asset Retirement CostsThe fair value of a liability for an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value canbe made. The associated retirement costs are capitalized and included as part of the carrying value of the long-lived asset and amortized over the useful life ofthe asset. Subsequent to the initial measurement, the Company accretes the liability in relation to the asset retirement obligations over time and the accretionexpense is recorded as a cost of revenue. The Company’s asset retirement obligations are primarily related to its IBX centers, of which the majority are leasedunder long-term arrangements, and, in certain cases, are required to be returned to the landlords in original condition. All of the Company’s IBX center leaseshave been subject to significant development by the Company in order to convert them from, in most cases, vacant buildings or warehouses into IBX centers.The majority of the Company IBX centers’ initial lease terms expire at various dates ranging from 2010 to 2025 and all of them have renewal options availableto the Company. F-9 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) During the year ended December 31, 2006, the Company recorded a $200,000 reduction in asset retirement obligations in connection with the HonoluluIBX Sale (see Note 3). During the year ended December 31, 2005, the Company recorded additional asset retirement costs related to a new lease totaling$517,000 and recorded a reduction of asset retirement costs in connection with the purchase of the Ashburn Campus totaling $426,000 as the Company nolonger had the obligation to return the property to it original condition. For the years ended December 31, 2006, 2005 and 2004, the Company recordedaccretion expense related to its asset retirement obligations of $536,000, $504,000 and $355,000, respectively.Goodwill and Other Intangible AssetsThe Company is required to perform an impairment review of its goodwill balance on at least an annual basis, which the Company performs during thefourth 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 eachreporting unit 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 exceedsthe carrying 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 assetsand liabilities. This derives an implied fair value for the reporting unit’s goodwill. The Company then compares the implied fair value of the reportingunit’s goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill is greater than theimplied fair value of its goodwill, an impairment charge would be recognized for the excess.During the three months ended December 31, 2006, 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 concluded that its goodwill, which is fully attributed to the Company’s Singapore reporting unit, was not impaired as the fair value of its Singaporereporting unit exceeded the carrying value of this reporting unit, including goodwill. The primary methods used to determine the fair values for SFAS No. 142impairment purposes were the discounted cash flow and market methods. The assumptions supporting the discounted cash flow method, including thediscount rate, which was assumed to be 13%, 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): 2006 2005 Goodwill $16,919 $21,654 Other intangibles: Intangible asset—customer contracts 4,370 4,051 Intangible asset—leases 1,017 — Intangible asset—tradename 339 313 Intangible asset—workforce 160 160 Intangible asset—lease expenses 111 — 5,997 4,524 Accumulated amortization (5,475) (4,349) 522 175 $17,441 $21,829 F-10 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Company’s goodwill is fully attributed to the Company’s Singapore operation and is an asset denominated in Singapore dollars. As a result, it issubject to foreign currency fluctuations. The Company’s foreign currency translation gains and losses are a component of other comprehensive income andloss.During the fiscal year ended December 31, 2006, the Company recorded a reduction of approximately $6,573,000 of goodwill as a result of a release ofthe Company’s valuation allowance that was recorded against the deferred tax assets in existence at the time when the Company acquired this subsidiary inSingapore on December 31, 2002 (see Note 15).During the first quarter of 2006, the Company finalized its accounting for the Ashburn Campus Property Acquisition (see Note 2) from the fourthquarter of 2005 and, as a result, reduced property and equipment by $1,128,000, offset by an increase in several intangible assets in connection with variousleases acquired from multiple tenants on the Ashburn Campus totaling $1,128,000. The Company amortizes these other identifiable intangible assets on astraight-line basis over their estimated weighted average useful lives of approximately 2.13 years.Other intangible assets, net, are included in other assets on the accompanying consolidated balance sheets as of December 31, 2006 and December 31,2005.For the years ended December 31, 2006, 2005 and 2004, the Company recorded amortization expense of $781,000, $60,000 and $2,049,000,respectively, associated with its other intangible assets. The Company’s remaining intangible assets are expected to be fully amortized by 2010. The Companyexpects to record amortization expense through 2010 as follows (in thousands): Year ending: 2007 $2372008 1802009 672010 38Total $522Fair Value of Financial InstrumentsThe 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, including the Mortgage Payable (see Note 6), approximate their fair value due toeither the short-term maturity or the prevailing interest rates of the related instruments. The fair value of the Company’s Convertible Subordinated Debentures,which were issued in February 2004, is based on quoted market prices (see Note 10). The estimated fair value of the Convertible Subordinated Debentures wasapproximately $169,404,000 and $98,000,000, respectively, as of December 31, 2006 and 2005.Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed OfThe Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an assetmay not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to estimated undiscountedfuture 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 isrecognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. During the quarters ended December 31, 2005 and2004, the Company wrote-down the value F-11 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) of some property and equipment, primarily leasehold improvements, located in excess lease spaces that the Company exited from or intends to exit from andthat do not currently provide any ongoing benefit (see Note 19).Revenue RecognitionEquinix 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 Equinix Exchange ports; (3) managed infrastructure services,such as Equinix Direct, bandwidth, mail service and managed platform solutions and (4) other services consisting of rent from non-IBX space. The remainderof the Company’s revenues are from non-recurring revenue streams, such as from the recognized portion of deferred installation revenues, professionalservices, contract settlements and equipment sales. Revenues from recurring revenue streams are billed monthly and recognized ratably over the term of thecontract, generally one to three years for IBX space customers. Non-recurring installation fees, although generally paid in a lump sum upon installation, aredeferred and recognized ratably over the longer of the term of the related contract or expected customer relationship. Professional service fees are recognized inthe period in which the services were provided and represent the culmination of the earnings process as long as they meet the criteria for separate recognitionunder EITF Abstract No. 00-21, “Revenue Arrangements with Multiple Deliverables.” Revenue from bandwidth and equipment is recognized on a gross basisin accordance with EITF Abstract No. 99-19, “Recording Revenue as a Principal versus Net as an Agent”, primarily because the Company acts as theprincipal in the transaction, takes title to products and services and bears inventory and credit risk. To the extent the Company does not meet the criteria forgross basis accounting for bandwidth and equipment revenue, the Company records the revenue on a net basis. Revenue from contract settlements, which isfor when a customer wishes to terminate their contract early, is generally recognized on a cash basis when no remaining performance obligations exist to theextent that the revenue has not previously 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 generally not been significant. Therewere no significant service level credits recorded during the years ended December 31, 2006 and 2004. During the year ended December 31, 2005, theCompany recorded a total of $457,000 in service level credits to various customers associated with two separate power outages that affected the Company’sChicago and Washington, D.C. metro area IBX centers.Revenue is recognized only when the service has been provided, when there is persuasive evidence of an arrangement, the fee is fixed or determinable andcollection of the receivable is reasonably assured. It is customary business practice to obtain a signed master sales agreement and sales order prior torecognizing revenue in an arrangement. The Company assesses collection based on a number of factors, including past transaction history with the customerand the credit-worthiness of the customer. The Company generally does not request collateral from its customers although in certain cases the Companyobtains a security interest in a customer’s equipment placed in its IBX centers or obtains a deposit. If the Company determines that collection of a fee is notreasonably assured, the Company defers the fee and recognizes revenue at the time collection becomes reasonably assured, which is generally upon receipt ofcash. In addition, Equinix also maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to makerequired payments for which the Company had expected to collect the revenues. If the financial condition of Equinix’s customers were to deteriorate or if theybecome insolvent, resulting in an impairment of their ability to make payments, greater allowances for doubtful accounts may be required. Managementspecifically analyzes accounts receivable and current economic news and trends, historical bad debts, customer concentrations, customer credit-worthinessand changes in customer payment terms when evaluating revenue recognition and the F-12 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) adequacy of the Company’s reserves. A specific bad debt reserve of up to the full amount of a particular invoice value is provided for certain problematiccustomer balances. A general reserve is established for all other accounts based on the age of the invoices and an analysis of historical credits issued.Delinquent account balances are written-off after management has determined that the likelihood of collection is not probable.Income TaxesIncome 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 Company also accounts for any income tax contingencies in accordance with SFAS No. 5, “Accounting for Contingencies.”Stock-Based CompensationOn January 1, 2006, the Company adopted the provisions of, and accounts for stock-based compensation in accordance with, SFAS No. 123(R),“Share-Based Payment,” and related pronouncements (“SFAS 123(R)”). The Company elected the modified-prospective method, under which prior periods arenot revised for comparative purposes. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grantdate for all stock-based awards made to employees and directors based on the fair value of the award using an option-pricing model and is recognized asexpense over the requisite service period, which is generally the vesting period. The Company has three types of equity awards or plans which have beenimpacted by SFAS 123(R): (i) stock options, (ii) restricted stock with both a service and market price condition and (iii) an employee stock purchase plan(“ESPP”). SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued toEmployees,” (“APB 25”) for periods beginning in fiscal year 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”)providing supplemental implementation guidance for SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method inaccordance with APB 25 as allowed under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method, nostock-based compensation expense for employee stock options had generally been recognized in the Company’s consolidated statements of operations becausethe exercise price of its stock options granted to employees and directors since the date of the Company’s initial public offering generally equaled the fairmarket value of the underlying stock at the date of grant. The Company did, however, recognize stock-based compensation in connection with its restrictedstock grants, granted for the first time in the first quarter of 2005, as these were deemed to be a compensatory plan under the provisions of APB 25 and, as aresult, were accounted for as variable awards in the Company’s consolidated statements of operation.The Company currently uses the Black-Scholes option-pricing model to determine the fair value of stock options and shares purchased under theemployee stock purchase plan as they only have a service condition. The Company currently uses a Monte Carlo simulation option-pricing model to determinethe fair value of its restricted stock grants since they have both a service and market price condition. The determination of the fair value of stock-basedpayment awards on the date of grant using an option-pricing model is affected by the F-13 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the Company’s expectedstock price volatility over the term of the awards; actual and projected employee stock option exercise behaviors, which is referred to as expected term; risk-freeinterest rate and expected dividends.As a result of the Company’s adoption of SFAS 123(R), the Company recorded stock-based compensation expense of $30,767,000 or $1.08 per sharefor the year ended December 31, 2006; however, had the Company continued to record its stock-based compensation expense under the provisions of APB 25,the recorded stock-based compensation expense would have been approximately $9,411,000 or $0.33 per share for the year ended December 31, 2006, and asa result, the Company would have recorded net income of $14,959,000 or $0.52 per basic share and $0.50 per diluted share. For the years endedDecember 31, 2005 and 2004, the Company recorded stock-based compensation expense in accordance with APB 25 of $8,277,000 and $1,467,000,respectively.Stock-based compensation expense recognized during a period is based on the value of the portion of stock-based awards that is ultimately expected tovest during the period. Stock-based compensation expense recognized in the year ended December 31, 2006 included compensation expense for stock-basedawards granted prior to, but not yet vested, as of December 31, 2005, based on the fair value on the grant date estimated in accordance with the pro formaprovisions of SFAS 123, and compensation expense for the stock-based awards granted subsequent to December 31, 2005, based on the fair value on thegrant date estimated in accordance with the provisions of SFAS 123(R). In conjunction with the adoption of SFAS 123(R), the Company changed its methodof attributing the value of stock-based compensation expense from the accelerated multiple-option method to the ratable single-option method for stock options,ESPP and new awards granted in 2006; however, restricted stock grants will continue to be amortized over the accelerated multiple-option method due to theirmarket price condition. Compensation expense for all stock-based awards granted on or prior to December 31, 2005, will continue to be recognized using theaccelerated multiple-option approach, while compensation expense for all stock-based awards granted subsequent to December 31, 2005, will be recognizedusing the straight-line single-option method (except for restricted stock as discussed above). Stock-based compensation expense recognized in the Company’sresults for the year ended December 31, 2006 is based on awards ultimately expected to vest; it has been reduced for estimated forfeitures. SFAS 123(R)requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. TheCompany uses historical data to estimate pre-vesting option forfeitures. Prior to fiscal year 2006, the Company accounted for forfeitures as they occurred forthe purposes of pro forma information under SFAS 123 and for any stock-based compensation that the Company recorded to its statements of operationsunder APB 25.The Company estimates the expected term of options granted by taking the average of the vesting term and the contractual term of the option, asillustrated in SAB 107. The Company estimates the volatility of its common stock by using its historical volatility that the Company believes best representsits future volatility in accordance with SAB 107. The Company bases the risk-free interest rate that it uses in its option-pricing models on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on its equity awards. The Company does not anticipate paying any cash dividends in theforeseeable future and therefore uses an expected dividend yield of zero in its option-pricing models. Generally, stock options granted prior to October 1, 2005have a contractual term of ten years from the date of grant, and stock options granted on or after October 1, 2005 have a contractual term of seven years fromthe date of grant.On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards,” that allows for a simplified method to establish the beginning balance of the APIC pool related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and consolidated statements of cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of F-14 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) SFAS 123(R). In 2006, the Company adopted the alternative transition method provided in the FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS 123(R). The adoption did not have a material impact on our results of operations and financial condition.SFAS No. 123(R) does not allow the recognition of a deferred tax asset for unrealized tax benefits associated with the tax deductions in excess of thecompensation recorded (excess tax benefit). The Company will recognize a benefit from stock-based compensation in equity if the excess tax benefit is realizedby following the “with-and-without” approach. The excess tax benefit that the Company recorded during the year ended December 31, 2006 was approximately$727,000.If factors change and the Company employs different assumptions for estimating stock-based compensation expense in future periods or if it decides touse a different valuation model in the future, the future periods may differ significantly from what the Company has recorded in the current period and couldmaterially affect its operating results, net income or loss and net income or loss per share.For further information on stock-based compensation, see Note 13 below.Comprehensive IncomeComprehensive 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 ShareThe 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” and EITF Issue 04-8 “The Effect of Contingently ConvertibleInstruments on Diluted Earnings per Share.” Under the provisions of SFAS No. 128, SAB No. 98 and EITF Issues 03-6 and 04-8, basic and diluted net lossper share are computed using the weighted-average number of common shares outstanding. Options, warrants and contingently convertible instruments werenot included in the computation of diluted net loss per share. In addition, under EITF 04-8, the Company’s Convertible Subordinated Debentures qualify ascontingently convertible instruments; however, they were not included in the Company’s diluted net loss per share calculations because to do so would be anti-dilutive for all periods presented. F-15 Table of ContentsEQUINIX, 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): 2006 2005 2004 Numerator: Net loss $(6,397) $(42,612) $(68,631)Denominator: Weighted average shares 28,796 23,956 17,719 Weighted average unvested restricted shares issued subject to forfeiture (245) — — Total weighted average shares 28,551 23,956 17,719 Net loss per share: Basic and diluted $(0.22) $(1.78) $(3.87)The following table sets forth potential shares of common stock that are not included in the diluted net loss per share calculation above because todo so would be anti-dilutive for December 31: 2006 2005 2004 Series A preferred stock — — 1,868,667 Series A preferred stock warrant — — 965,674 Shares reserved for conversion of convertible secured notes — — 4,191,193 Shares reserved for conversion of convertible subordinated debentures 2,183,548 2,183,548 2,183,548 Unvested restricted shares issued subject to forfeiture 247,750 — — Common stock warrants 9,490 10,688 290,110 Common stock related to stock-based compensation plans 3,626,531 4,442,977 3,801,794 Derivatives and Hedging ActivitiesThe Company follows SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which requires the Company torecognize all derivatives on the consolidated balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through the statement ofoperations. If the 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 infair value of the hedged assets, liabilities or firm commitments through earnings, or recognized in other comprehensive income (loss) until the hedged item isrecognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. As of December 31, 2006, theCompany had not entered into any hedging activities; however, the Convertible Subordinated Debentures that were issued in February 2004 contain oneremaining embedded derivative, which had a zero fair value as of December 31, 2006 (see Note 10).Recent Accounting PronouncementsIn February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Instruments,” an amendment of SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities-a replacement of FASB Statement No. 125” (“SFAS No. 155”). SFAS No. 155 improves the financial reporting of certain hybrid financialinstruments by requiring more consistent accounting that eliminates exemptions and provides a means to simplify the accounting for such instruments.Specifically, SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate thederivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS F-16 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) No. 155 also (i) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; (ii) establishes arequirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments thatcontain an embedded derivative requiring bifurcation; (iii) clarifies that concentrations of credit risk in the form of subordination are not embedded derivativesand (iv) amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertainsto a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after thebeginning of an entity’s first fiscal year that begins after September 15, 2006. The Company is currently in the process of evaluating the impact that theadoption of SFAS No. 155 will have on its financial position, results of operations and cash flows.In April 2006, the FASB issued FASB Staff Position No. FIN 46(R)-6 (“FSP FIN 46(R)-6”), which addresses how a reporting enterprise shoulddetermine the variability to be considered in applying FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”, as amended (“FIN 46(R)”).The variability that is considered in applying FIN 46(R) affects the determination of (a) whether the entity is a variable interest entity, (b) which interests arevariable interests in the entity and (c) which party, if any, is the primary beneficiary of the variable interest entity. That variability will affect any calculationof expected losses and expected residual returns, if such a calculation is necessary. FSP FIN 46(R)-6 provides additional guidance to consider for determiningvariability. FSP FIN 46(R)-6 is effective beginning the first day of the first reporting period beginning after June 15, 2006. The adoption of FSP FIN 46(R)-6has not had a significant impact on the Company’s financial position and results of operations.In June 2006, the FASB approved EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should BePresented in the Income Statement (That is, Gross versus Net Presentation)” (“EITF 06-3”). EITF 06-3 includes any tax assessed by a governmental authoritythat is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use, value added andsome excise taxes. EITF 06-3 concludes that the presentation of taxes on either a gross (included in revenue and costs) or a net (excluded from revenue) basis isan accounting policy decision that should be disclosed. In addition, for any such taxes that are reported on a gross basis, an entity should disclose theamounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant.The provisions of EITF 06-3 should be applied to financial reports for interim and annual reporting periods beginning after December 15, 2006, with earlieradoption permitted. The Company believes that the adoption of EITF 06-3 will not have any significant impact on the Company’s financial position andresults of operations.In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which clarifies the accounting foruncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to betaken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, andtransition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect the adoption of FIN 48 to have a materialimpact on the Company’s consolidated financial position, results of operations or cash flows.In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes aframework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS No. 157 is effective for fiscal yearsbeginning after December 15, 2007. The Company is currently in the process of evaluating the impact that the adoption of SFAS No. 157 will have on itsfinancial position, results of operations and cash flows. F-17 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements” (“SAB 108”), to address diversity in practice in quantifying financial statement misstatements. SAB108 requires that the Company quantifies misstatements based on their impact on each of its financial statements and related disclosures. The adoption ofSAB 108 has not had a significant impact on the Company’s financial position and results of operations; however, the Company recorded an adjustmenttotaling $1,179,000, which resulted in a reduction to revenue and an offsetting increase to deferred installation revenue, a liability account. This adjustmentrelates to how the Company previously accounted for certain individual customer installation charges that were less than $1,000. Previously, the Companyrecognized revenue on customer installation charges less than $1,000 upfront rather than ratably over the longer of the term of the contract or expected customerrelationship. The Company concluded that this cumulative charge was not material to prior years or the current fiscal year. As such, this cumulative chargerepresenting the remaining deferred obligation totaling $1,179,000 was recorded in the fourth quarter of 2006 and is included in the statement of operations forthe year ended December 31, 2006 within the Company’s results from operations.In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”).SFAS No. 159 permits companies to choose to measure, on an instrument-by-instrument basis, many financial instruments and certain other assets andliabilities at fair value that are not currently required to be measured at fair value. SFAS No. 159 is effective as of the beginning of a fiscal year that beginsafter November 15, 2007. The Company is currently in the process of evaluating the impact that the adoption of SFAS No. 159 will have on its financialposition, results of operations and cash flows.2. IBX Acquisitions and ExpansionsWashington, D.C. Metro Area IBX ExpansionIn 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 Capital Lease”). The Company took possession of thisproperty 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, are made through October 2019 at an effective interest rate of 8.50% per annum(see Note 5). The Company refers to this transaction as the “Washington, D.C. Metro Area IBX Expansion.”San Jose IBX AcquisitionIn December 2004, the Company entered into a series of agreements with Abovenet Communications, Inc. (“Abovenet”), including 1) a long-term leasethrough May 2020 for a 103,000 square foot data center in the Silicon Valley area, 2) an asset purchase agreement to purchase the assets located within thisfacility, primarily IBX plant and machinery, and 3) an agreement to interconnect all three of its IBX centers in the Silicon Valley through redundant dark fiberlinks through May 2020, which the Company is managing to allow customers in each center to leverage the benefits of directly interconnecting with othercustomers in the other centers (collectively, the “San Jose IBX Acquisition”). Payments for the San Jose IBX Acquisition total $38,379,000, of which$4,224,000 was paid in several upfront lump-sum payments to Abovenet and the remaining $34,155,000 is paid in monthly installments to the landlord ofthe building from February 2005 to May 2020.The Company has accounted for the San Jose IBX Acquisition as a single accounting arrangement with multiple elements. As a result, the Companyassessed the fair value of each of the individual elements and then F-18 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) assigned the relative fair value to each individual element. The Company determined that the building component of the San Jose IBX Acquisition is a long-term operating lease (the “San Jose IBX Building Operating Lease”) and the equipment purchase and fiber lease portions of the transaction are financed assets(the “San Jose IBX Equipment & Fiber Financing”). The Company took possession of this property during the first quarter of 2005, and as a result, recordedproperty and equipment and prepaid fiber assets, as well as a financing obligation liability, totaling $18,713,000. Payments under the San Jose IBXEquipment & Fiber Financing are made monthly through May 2020 at an effective interest rate of 8.50% per annum. Payments under the San Jose IBXBuilding Operating Lease are made monthly through May 2020 and will total $7,381,000 in cumulative lease payments.Sunnyvale IBX AcquisitionIn June 2005, the Company entered into a long-term lease for a 120,000 square foot data center in the Silicon Valley area (the “Sunnyvale IBXAcquisition”). Payments under this lease, which qualifies as an operating lease, total $45,255,000, which are paid in monthly installments, whichcommenced in October 2005, and are payable through September 2020 (the “Sunnyvale IBX Lease”).Chicago IBX AcquisitionIn July 2005, the Company entered into a (i) long-term sublease of a 107,000 square foot data center in the Chicago metro area and (ii) an asset purchaseagreement to purchase the IBX plant and machinery assets located within this new IBX center with Verio, Inc. (“Verio”) (the “Chicago IBX Acquisition”).Payments due to Verio for the Chicago IBX Acquisition total $25,160,000, of which $1,900,000 was paid in two lump-sum payments during 2005 and theremaining $23,260,000 is paid in monthly installments, which commenced in November 2005, and is payable through August 2015.The Company has accounted for the Chicago IBX Acquisition as a single accounting arrangement with multiple elements. As a result, the Companyassessed the fair value of each of the individual elements and then assigned the relative fair value to each individual element. The Company determined that thebuilding component of the Chicago IBX Acquisition is a long-term operating lease (the “Chicago IBX Building Operating Lease”) and the equipment purchaseportion of the transaction represent financed assets (the “Chicago IBX Equipment Financing”). The Company took possession of this property and took title tothe equipment in November 2005, and as a result, recorded IBX equipment assets, as well as a financing obligation liability, totaling $9,669,000 at that time.Payments under the Chicago IBX Equipment Financing, which commenced November 2005, are made monthly and are payable through August 2015, at aneffective interest rate of approximately 7.50% per annum. Payments under the Chicago IBX Building Operating Lease are also made in monthly installments,which commenced in November 2005, and are payable through August 2015, and total approximately $11,670,000 in cumulative lease payments.Los Angeles IBX AcquisitionIn September 2005, the Company purchased a 107,000 square foot data center in the Los Angeles metro area, which is comprised of the building,building improvements and land for a total purchase price, including closing costs, of $34,748,000, which the Company paid for in full with cash inSeptember 2005 (the “Los Angeles IBX Acquisition. The Company assessed the fair value of the building, building improvements and land elements of theLos Angeles IBX acquisition and then assigned the relative fair value to each element. In October 2005, the Company entered into a purchase and saleagreement to sell this Los Angeles IBX for $38,700,000 and to lease it back from the purchaser pursuant to a long-term lease (the “Los Angeles IBX Sale-Leaseback”). The Los Angeles IBX Sale-Leaseback closed in December 2005 and the Company received net proceeds from the F-19 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) sale of this property of $38,142,000. However, due to the Company’s continuing involvement in regards to certain aspects of this property, the Los AngelesIBX Sale-Leaseback does not qualify as a sale-leaseback under generally accepted accounting principles, but rather is accounted for as a financing of thisproperty (the “Los Angeles IBX Financing”). Pursuant to the Los Angeles IBX Financing, the Company recorded a financing obligation liability totaling$38,142,000 in December 2005, which includes a residual property value of $6,555,000 (the “Residual Property Value”). The Residual Property Valuerepresents a deferred gain on the Los Angeles Sale-Leaseback. Payments under the Los Angeles IBX Financing are made monthly, which commenced inJanuary 2006, and are payable through December 2025, at an effective interest rate of approximately 7.75% per annum.Pursuant to the terms of the Los Angeles IBX Sale-Leaseback, the Company has agreed to make certain pre-approved capital improvements to thisproperty by December 31, 2007, which were completed as of December 31, 2006.Ashburn Campus Property AcquisitionIn October 2005, the Company purchased an office/warehouse complex known as the Beaumeade Business Park located in Ashburn, Virginia (the“Ashburn Campus”), containing approximately 462,000 rentable square feet that was approximately 95% leased at the time of purchase (the “AshburnCampus Property Acquisition”). At the time, the Company occupied approximately 269,000 square feet. The total purchase price for the Ashburn Campus,including closing costs, was $53,759,000, which the Company paid for in full with cash in October 2005. The Company will continue to operate its existingIBX centers within the Ashburn Campus. For those buildings that the Company does not occupy, it will collect rental income from the current tenants and isevaluating these buildings in regards to its future expansion plans. The Company assessed the fair value of the building, building improvements and landelements of the Ashburn Campus Property Acquisition and then assigned the relative fair value to each element, including several intangible assets totaling$1,128,000.The Company financed the purchase of the Ashburn Campus Property Acquisition with the Mortgage Payable (see Note 6).Washington, D.C. Metro Area IBX Expansion ProjectIn February 2006, the Company announced its intention to build out a new IBX center within the Ashburn Campus in order to further expand itsexisting Washington, D.C. metro area IBX center (the “Washington, D.C. Metro Area IBX Expansion Project”). In May 2006, the Company began newconstruction to build out one of the undeveloped buildings located on the Ashburn Campus. The Company expects to spend approximately $60,000,000 forthe Washington, D.C. Metro Area IBX Expansion Project until completion, of which $54,041,000 has been expended as of December 31, 2006. TheWashington, D.C. Metro Area IBX Expansion Project will fulfill the Company’s obligation to invest at least $40,000,000 in capital improvements to theAshburn Campus by December 31, 2007 pursuant to the terms of the initial Mortgage Payable on its Ashburn Campus. In December 2006, the Companyreceived an additional financing of $40,000,000 under the same terms of the initial Mortgage Payable, which increased the total amount financed under theMortgage Payable from $60,000,000 to $100,000,000 (see Note 6).Chicago Metro Area IBX Expansion ProjectIn June 2006, the Company purchased a 228,000 square foot stand-alone office/warehouse complex in the Chicago metro area for $9,766,000,including closing costs, in a cash transaction in June 2006. The Company is building an IBX center, its second IBX center location in the Chicago MetroArea, in multiple phases (the “Chicago F-20 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Metro Area IBX Expansion Project”). The Company plans to spend approximately $175,000,000 to build out the first phase, of which $37,784,000 wasincurred during the year ended December 31, 2006. This includes an investment of approximately $40,000,000 to construct a specially built 250,000 squarefoot shell, acquire access to power and provision fiber for interconnection to the Company’s downtown Chicago IBX center location.In February 2007, a wholly-owned subsidiary of the Company obtained a loan of up to $110,000,000, which has a term of three years and bears interestat a floating rate (one, three or six month LIBOR plus 2.75%), with an initial rate of 8.125%, to finance a portion of the development and construction costs ofthe Chicago Metro Area IBX Expansion Project (see Note 20).New York Metro Area IBX Expansion ProjectIn September 2006, the Company entered into a long-term lease for a 340,000 square foot building in the New York metro area. The Company isbuilding an IBX center, which will be the Company’s third IBX center in the New York metro area (the “New York Metro Area IBX Expansion Project”).Payments under this lease total $59,410,000, which will be paid in monthly installments through September 2021. The lease, which commenced in October2006, contains a three-year option to purchase the building for $39,000,000 and is collateralized by the issuance of $7,800,000 letter of credit under the SiliconValley Bank Credit Line Amendment (see Note 12). The Company intends to build out the new center in multiple phases. The Company intends to investapproximately $95,000,000 to build out the first phase of the new center, of which $2,224,000 was incurred as of December 31, 2006. The Company expectsto finance at least 60% of the capital expenditures required to complete the New York Metro Area IBX Expansion Project in the form of short and long-termfinancing arrangements, which it expects to obtain in 2007.Tokyo IBX AcquisitionIn December 2006, a wholly-owned subsidiary of the Company entered into (i) an asset purchase agreement with VSNL International Japan K.K(“VSNL”) for the purchase of certain IBX equipment for $7,500,000 in cash (the “Tokyo Equipment”), which also required that the Company enter into acolocation services agreement with VSNL whereby VSNL will be a customer of the Company’s for 10 years at agreed-upon rates (the “VSNL CustomerContract”) and (ii) a long-term operating lease, with an initial term of ten years, for a 73,000 square foot data center in the Tokyo metropolitan area withanother unrelated party (the “Tokyo IBX Building Operating Lease” and collectively with the Tokyo Equipment, the “Tokyo IBX Acquisition”). Paymentsunder the Tokyo IBX Building Operating Lease, which commenced in December 2006, will be made monthly and will be payable through December 2016,totaling approximately 1.8 billion Japanese yen (approximately $15,138,000 as translated using effective exchange rates at December 31, 2006) in cumulativelease payments.The Tokyo Equipment had a fair value of $14,237,000 versus the cash paid of $7,500,000. The difference in fair value versus cash consideration wasa result of the VSNL Customer Contract containing below-market rates (the “VSNL Customer Contract Discount”). As a result, the Tokyo Equipmentpurchase was part-monetary and part-nonmonetary transaction. Pursuant to APB Opinion No. 29, “Accounting for Nonmonetary Transactions”, and EITF01-2, “Interpretations of APB Opinion No. 29”, the Company accounted for the Tokyo Equipment at fair value. This resulted in the Company recordingunearned recurring revenue of $6,737,000, the fair value of the VSNL Customer Contract Discount, which the Company will recognize into recurring revenueover the 10 year term of the VSNL Customer Contract.3. Honolulu IBX SaleIn December 2006, the Company sold its Honolulu IBX center for $9,750,000 of gross cash proceeds (the “Honolulu IBX Sale”). The Honolulu IBXcenter was originally acquired by the Company in its acquisition of F-21 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Pihana Pacific, Inc. on December 31, 2002 (the “Pihana Acquisition”). The Honolulu IBX was ascribed a nominal book value in the Pihana Acquisition andwas the Company’s smallest IBX center in the Company’s smallest market. The Company entered into an agreement to sell the Honolulu IBX center to acompany led by former Equinix personnel in November 2006. The Honolulu IBX was not an asset held for sale prior to this. The Honolulu IBX Sale enablesthe Company to focus on more strategic markets, such as the New York, Chicago, Washington, D.C. and Tokyo metro areas, where the Company expect toopen new IBX centers in 2007.The Company accounted for the Honolulu IBX Sale under the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of long-LivedAssets,” which resulted in a gain of $9,647,000 or $0.34 per share in continuing operations comprised of the following (in thousands): Cash proceeds $9,750 Cash transaction costs (220)Net cash proceeds 9,530 Adjustments: Prepaid expenses (4)Property and equipment (280)Asset retirement obligation 200 Deferred rent 201 Subtotal 117 Gain on Honolulu IBX sale $9,647 4. Balance Sheet ComponentsCash, Cash Equivalents and Short-term and Long-Term InvestmentsCash, cash equivalents and short-term and long-term investments consisted of the following as of December 31 (in thousands): 2006 2005 Money market $55,883 $72,491 Commercial paper 37,625 57,607 U.S. government and agency obligations 42,932 43,911 Corporate bonds 16,753 12,370 Other securities 3,288 2,476 Total available-for-sale securities 156,481 188,855 Less amounts classified as cash and cash equivalents (82,563) (119,267)Total securities classified as investments 73,918 69,588 Less amounts classified as short-term investments (48,831) (52,105)Total market value of long-term investments $25,087 $17,483 The original maturities of all short-term investments were less than one year as of December 31, 2006 and 2005. The original maturities of all long-terminvestments were greater than one year and less than two years as of December 31, 2006. As of December 31, 2005, the original maturities of all long-terminvestments were greater than one year and less than two years with the exception of one long-term investment totaling $1,917,000, which had an originalmaturity of greater than two years and less than three years. As of December 31, 2006 and F-22 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 2005, cash equivalents included investments in other securities with various contractual maturity dates that did not exceed 90 days. Gross realized gains andlosses from the sale of securities classified as available-for-sale were not material for the years ended December 31, 2006, 2005 and 2004. For the purpose ofdetermining gross realized gains and losses, the cost of securities is based upon specific identification.As of December 31, 2006, the Company’s net unrealized gains (losses) in its available-for-sale securities were comprised of the following (in thousands): Unrealizedgains Unrealizedlosses Net unrealizedgain (losses) Cash and cash equivalents $2 $(1) $1 Short-term investments 5 (84) (79)Long-term investments 16 (58) (42) $23 $(143) $(120)The Company reviews its investment portfolio to determine if any securities may be other-than-temporarily impaired due to increased credit risk,changes in industry or sector of a certain instrument or ratings downgrades. The securities held at December 31, 2006 were not other-than-temporarilyimpaired. While certain marketable securities carried unrealized losses, the Company expects that it will receive both principal and interest according to thestated terms of each of the securities and that the decline in market value is due to changes in the interest rate environment from the time the securities werepurchased as compared to interest rates at December 31, 2006.The following table summarizes the fair value and gross unrealized losses related to 26 available-for-sale securities with an aggregate cost basis of$56,898,000, aggregated by type of investment and length of time that individual securities have been in continuous unrealized loss position, at December 31,2006 (in thousands): Securities in a lossposition for less than 12months Securities in a lossposition for 12 monthsor more Fair value Grossunrealizedloss Fair value Grossunrealizedloss Commercial paper $15,907 $(2) $— $— U.S. government & agency obligations 15,249 (15) 10,935 (51)Corporate bonds 6,547 (21) 6,430 (52)Other securities 1,687 (2) — — $39,390 $(40) $17,365 $(103)As of December 31, 2005, the Company’s net unrealized gains (losses) in its available-for-sale securities were comprised of the following (in thousands): Unrealizedgains Unrealizedlosses Net unrealizedgain (losses) Cash and cash equivalents $6 $(4) $2 Short-term investments 1 (250) (249)Long-term investments — (209) (209) $7 $(463) $(456)The securities held at December 31, 2005 were not other-than-temporarily impaired. F-23 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table summarizes the fair value and gross unrealized losses related to 42 available-for-sale securities with an aggregate cost basis of$86,917,000, aggregated by type of investment and length of time that individual securities have been in continuous unrealized loss position, at December 31,2005 (in thousands): Securities in a lossposition for less than 12months Securities in a lossposition for 12 monthsor more Fair value Grossunrealizedloss Fair value Grossunrealizedloss Commercial paper $29,697 $(7) $— $— U.S. government & agency obligations 30,336 (190) 11,574 (109)Corporate bonds 7,580 (77) 4,791 (70)Other securities 2,476 (10) — — $70,089 $(284) $16,365 $(179)Accounts ReceivableAccounts receivable, net, consists of the following as of December 31 (in thousands): 2006 2005 Accounts receivable $52,500 $36,430 Unearned revenue (25,363) (19,048)Allowance for doubtful accounts (273) (145) $26,864 $17,237 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 ahead of time in accordance with the terms of their contract. Accordingly, the Companyinvoices its customers at the end of a calendar month for services to be provided the following month.Additions (reductions) to the allowance for doubtful accounts were approximately $39,000, ($464,000) and ($50,000) for the years ended December 31,2006, 2005 and 2004, respectively. Charges (recoveries) against the allowance were approximately $(89,000), ($272,000) and ($72,000) for the years endedDecember 31, 2006, 2005 and 2004, respectively.Property and EquipmentProperty and equipment consisted of the following as of December 31 (in thousands): 2006 2005 Leasehold improvements $417,856 $395,698 IBX plant and machinery 191,243 146,896 IBX equipment 84,499 63,786 Buildings 50,526 51,280 Computer equipment and software 35,913 26,253 Land 24,967 15,415 Furniture and fixtures 2,438 2,218 Construction in progress 88,429 17,271 895,871 718,817 Less accumulated depreciation (349,476) (280,027) $546,395 $438,790 F-24 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Leasehold improvements, IBX plant and machinery, computer equipment and software and buildings recorded under capital leases aggregated$35,361,000 and $35,309,000 at December 31, 2006 and December 31, 2005, respectively. Amortization on the assets recorded under capital leases isincluded in depreciation expense and accumulated depreciation on such assets totaled $4,713,000 and $2,354,000 for the years ended December 31, 2006 andDecember 31, 2005, respectively. For the years ended December 31, 2006, 2005 and 2004, the Company recorded $71,737,000, $62,620,000 and$55,926,000, respectively, of total depreciation expense. The Company recorded substantial property and equipment asset additions during 2006 inconnection with various IBX expansions and acquisitions (see Note 2).As of December 31, 2006 and December 31, 2005, the Company had accrued property and equipment expenditures of $23,337,000 and $15,783,000,respectively. The Company’s planned capital expenditures during 2007 in connection with recently acquired IBX properties and expansion efforts aresubstantial. For further information, refer to “Other Purchase Commitments” in Note 16.In October 2005, the Company wrote-off all remaining property and equipment, primarily leasehold improvements, in connection with the Company’sSan Jose Ground Lease totaling $1,486,000. The Company decided to exit from this excess leased space as these assets do not provide any ongoing benefit (seeNote 19).Accounts Payable and Accrued ExpensesAccounts payable and accrued expenses consisted of the following as of December 31 (in thousands): 2006 2005Accounts payable $4,515 $3,337Accrued compensation and benefits 11,836 8,632Accrued taxes 2,081 3,571Accrued utility and security 3,849 3,420Accrued professional fees 1,362 1,303Accrued interest 1,318 873Accrued other 2,308 1,421 $27,269 $22,557Other Current LiabilitiesOther current liabilities consisted of the following as of December 31 (in thousands): 2006 2005Deferred installation revenue $7,838 $6,324Customer deposits 799 868Deferred recurring revenue 674 — Deferred rent 401 399Other current liabilities 439 381 $10,151 $7,972 F-25 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Deferred Rent and Other LiabilitiesDeferred rent and other liabilities consisted of the following as of December 31 (in thousands): 2006 2005Deferred rent, non-current $20,522 $18,392Deferred recurring revenue, non-current 6,058 — Asset retirement obligations 3,985 3,649Deferred installation revenue, non-current 3,856 1,334Other liabilities 209 351 $34,630 $23,726The Company currently leases the majority of its IBX centers and certain equipment under non-cancelable operating lease agreements expiring through2025 (see Note 16, “Operating Lease Commitments”). The centers’ lease agreements typically provide for base rental rates that increase at defined intervalsduring the term of the lease. In addition, the Company has negotiated rent expense abatement periods to better match the phased build-out of its centers. TheCompany accounts for such abatements and increasing base rentals using the straight-line method over the life of the lease. The difference between the straight-line expense and the cash payment is recorded as deferred rent.In December 2006, the Company purchased the Tokyo Equipment in a part-monetary and part-non-monetary transaction and, as a result, recorded$6,732,000 of deferred recurring revenue, of which $6,058,000 was classified as non-current (see Note 2). This deferred recurring revenue is amortized intorecurring revenue on a straightline basis over the 10-year term of the revenue contract, which commenced in late December 2006.5. Capital Leases and Other Financing ObligationsCapital lease and other financing obligations consisted of the following as of December 31 (in thousands): 2006 2005 Washington, D.C. Metro Area IBX Capital Lease $33,700 $34,530 San Jose IBX Equipment & Fiber Financing 14,769 14,953 Chicago IBX Equipment Financing 8,104 8,582 Los Angeles IBX Financing 38,080 38,140 Other capital leases 46 — 94,699 96,205 Less current portion (1,977) (1,552) $92,722 $94,653 Washington, D.C. Metro Area IBX Capital LeaseIn November 2004, the Company recorded the Washington, D.C. Metro Area IBX Capital Lease (see Note 2). Monthly payments under the Washington,D.C. Metro Area IBX Capital Lease, which commenced in November 2004, will be made through October 2019 at an effective interest rate of 8.50% perannum. As of December 31, 2006, principal of $33,700,000 remained outstanding. F-26 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) San Jose IBX Equipment & Fiber FinancingIn February 2005, the Company recorded the San Jose IBX Equipment & Fiber Financing (see Note 2). Monthly payments under the San Jose IBXEquipment & Fiber Financing, which commenced in February 2005, will be made through May 2020 at an effective interest rate of 8.50% per annum. As ofDecember 31, 2006, principal of $14,769,000 remained outstanding.Chicago IBX Equipment FinancingIn November 2005, the Company recorded the Chicago IBX Equipment Financing (see Note 2). Monthly payments under the Chicago IBX EquipmentFinancing, which commenced in November 2005, will be made through August 2015 at an effective interest rate of 7.50% per annum. As of December 31,2006, principal of $8,104,000 remained outstanding.Los Angeles IBX FinancingIn December 2005, the Company recorded the Los Angeles IBX Financing (see Note 2). Monthly payments under the Los Angeles IBX Financing, whichcommenced in January 2006, will be made through December 2025 at an effective interest rate of 7.75% per annum. As of December 31, 2006, principal of$38,080,000 remained outstanding.Venture Leasing Loan Agreement and VLL Loan AmendmentIn August 1999, the Company entered into a Loan Agreement with Venture Lending & Leasing II, Inc. and other lenders (“VLL” and the “VentureLeasing Loan Agreement”), borrowing up to $10,000,000 for equipment and tenant improvements at the Newark, New Jersey IBX center and general workingcapital purposes. The full $10,000,000 was drawn during 1999. In October 2002, the Company amended the Venture Leasing Loan Agreement to securecertain short-term cash deferment benefits (the “VLL Loan Amendment”).In March 2004, with the proceeds from the Convertible Subordinated Debentures (see Note 10), the Company repaid all remaining amounts outstandingunder the VLL Loan Amendment. As a result, the Company recognized a loss on debt extinguishment on this transaction of $170,000. Refer to Loss on DebtExtinguishment and Conversion (see Note 11).Heller Loan and Heller Loan AmendmentIn June 2001, the Company borrowed $5,000,000 from Heller Financial Leasing, Inc. (the “Heller Loan”) secured by certain equipment located in theNew York metropolitan area IBX center. In August 2002, the Company amended the Heller Loan to secure certain short-term cash deferment benefits (the“Heller Loan Amendment”).In February 2004, with the proceeds from the Convertible Subordinated Debentures, the Company repaid all remaining amounts outstanding under theHeller Loan Amendment. As a result, the Company recognized a loss on debt extinguishment on this transaction of $267,000. Refer to Loss on DebtExtinguishment and Conversion (see Note 11). F-27 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) MaturitiesCombined aggregate maturities for future minimum capital lease and other financing obligations as of December 31, 2006 are as follows (in thousands): Capitalleaseobligations Financingobligations Total 2007 $3,845 $5,742 $9,587 2008 3,940 5,920 9,860 2009 4,032 6,102 10,134 2010 4,121 6,288 10,409 2011 4,223 6,480 10,703 2012 and thereafter 36,943 80,708 117,651 57,104 111,240 168,344 Less amount representing unamortized discount (23,358) (56,842) (80,200)Plus amount representing residual property value — 6,555 6,555 33,746 60,953 94,699 Less current portion (1,016) (961) (1,977) $32,730 $59,992 $92,722 6. Mortgage PayableIn December 2005, the Company financed the Ashburn Campus Property Acquisition (see Note 2) with a $60,000,000, 8% mortgage to be amortizedover 20 years (the “Mortgage Payable”). Payments for the Mortgage Payable are payable monthly, commenced February 2006, and will be payable throughJanuary 2026. The Mortgage Payable is collateralized by the Ashburn Campus property and related assets. Pursuant to the terms of the Mortgage Payable, theCompany agreed to invest at least $40,000,000 in capital improvements to the Ashburn Campus by December 31, 2007 (see Note 16). In December 2006, theCompany obtained additional financing of $40,000,000, which increased the total amount financed by the Mortgage Payable from $60,000,000 to$100,000,000, on the same terms as the initial Mortgage Payable. The Company used this additional funding to finance the Washington, D.C. Metro Area IBXExpansion Project (see Note 2). The Mortgage Payable has numerous covenants; however, there are no specific financial ratios or minimum operatingperformance covenants. As of December 31, 2006, the Company was in compliance with all covenants in connection with the Mortgage Payable.The debt issuance costs incurred related to the Mortgage Payable were capitalized and are being amortized to interest expense using the effective interestmethod over the life of the Mortgage Payable. These debt issuance costs, net of amortization, were $655,000 as of December 31, 2005. In December 2006, theCompany incurred additional issuance costs of $528,000 to secure the additional financing of $40,000,000 to the Mortgage Payable, which will also beamortized to interest expense using the effective interest method over the life of the Mortgage Payable. The Company applied EITF 96-19, “Debtors’Accounting for a Substantive Modification and Exchange of Debt Instruments,” and concluded that the modification to the Mortgage Payable was notsubstantive. As of December 31, 2006, a total of $1,150,000 of issuance costs remained unamortized related to the Mortgage Payable. F-28 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Company’s future payment obligations for the Mortgage Payable as of December 31, 2006 are as follows (in thousands): 2007 $9,820 2008 10,164 2009 10,164 2010 10,164 2011 10,164 2012 and thereafter 143,668 194,144 Less amount representing interest (95,248) 98,896 Less current portion (2,150) $96,746 7. Senior NotesOn 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. During 2002, the Companyreduced amounts outstanding under the Senior Notes in a series of transactions.In March 2004, with the proceeds from the Convertible Subordinated Debentures (see Note 10), the Company redeemed all remaining amountsoutstanding under the Senior Notes. The redemption price of the Senior Notes was equal to 106.5% of their principal, which resulted in an additional cashpremium paid of $1,981,000 (the “Senior Note Cash Premium”). As a result, the Company recognized a loss on debt extinguishment on this transaction of$3,759,000. Refer to Loss on Debt Extinguishment and Conversion (see Note 11).8. Credit FacilityOn 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, which was fully drawn down by June 2001. During 2001 through 2003, primarily as a result of non-compliancewith certain covenants contained in the Credit Facility, the Company amended the Credit Facility numerous times, which, in certain cases, required repaymentof certain amounts previously drawn down.In February 2004, with the proceeds from the Convertible Subordinated Debentures (see Note 10), the Company repaid all remaining amountsoutstanding under the Credit Facility. As a result, the Company recognized a loss on debt extinguishment on this transaction of $4,405,000. Refer to Loss onDebt Extinguishment and Conversion (see Note 11).9. Convertible Secured NotesThe FinancingIn December 2002, STT Communications made a $30,000,000 strategic investment in the Company (the “Financing”) in the form of a convertiblesecured note (the “Convertible Secured Note”), convertible into shares F-29 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) of preferred stock, with a detachable warrant for the further issuance of 965,674 shares of preferred stock (the “Convertible Secured Note Warrant”) valuedat $4,646,000 and recorded as a debt discount. Interest on the Convertible Secured Note was payable in kind in the form of additional convertible securednotes having a principal amount equal to the amount of interest then due having terms which were identical to the terms of the Convertible Secured Note (the“PIK Notes”) (collectively, the “STT Convertible Secured Notes”).During the quarter ended March 31, 2005, the Company converted an aggregate of $38,035,000 of the STT Convertible Secured Notes and associatedinterest into 4,144,216 shares of the Company’s Series A-1 preferred stock (the “95% STT Convertible Secured Notes Conversion”). The converted amountrepresented 95% of the outstanding STT Convertible Secured Notes plus interest due through February 14, 2005. A total of $1,923,000 of STT ConvertibleSecured Notes remained outstanding (the “Remaining STT Convertible Secured Notes”) and continued to be governed by the terms of the Financing. OnFebruary 1, 2005, STT Communications elected to convert the Series A-1 preferred stock issued in connection with the 95% STT Convertible Secured NotesConversion into 4,144,216 shares of the Company’s common stock. The Series A-1 preferred stock converted into common stock on a 1 to 1 basis. As aresult of the 95% STT Convertible Secured Notes Conversion, 95% of the outstanding Convertible Secured Notes and PIK Notes, plus interest throughFebruary 14, 2005 and unamortized discount and debt issuance costs, was converted into stockholders’ equity in accordance with APB Opinion No. 26,“Early Extinguishment of Debt.” As a result of the 95% STT Convertible Secured Notes Conversion, a total of $35,206,000 was credited to stockholders’equity during the first quarter of 2005, which was comprised of $36,543,000 of Convertible Secured Note and PIK Notes principal and $1,492,000 ofinterest through the conversion date, offset by $2,510,000 and $319,000 of unamortized debt discount and issuance costs, respectively.In November 2005, STT Communications elected to convert the Remaining STT Convertible Secured Notes and associated interest into 240,578 sharesof the Company’s Series A-1 preferred stock (the “Remaining STT Convertible Secured Notes Conversion”). The converted amount represented the RemainingSTT Convertible Secured Notes Conversion plus interest due through November 7, 2005. On November 7, 2005, STT Communications elected to convertits Series A-1 preferred stock issued in connection with the Remaining STT Convertible Secured Notes Conversion into 240,578 shares of the Company’scommon stock. The Series A-1 preferred stock converted into common stock on a 1 to 1 basis. As a result of the Remaining STT Convertible Secured NotesConversion, the outstanding Remaining STT Convertible Secured Notes, plus interest through November 7, 2005 and unamortized discount and debtissuance costs, was converted into stockholders’ equity in accordance with APB Opinion No. 26, “Early Extinguishment of Debt.” As a result of theRemaining STT Convertible Secured Notes Conversion, a total of $2,105,000 was credited to stockholders’ equity during the fourth quarter of 2005.The Convertible Secured Note Warrant was exercised in November 2005, resulting in 965,674 shares of the Company’s preferred stock being issuedand total cash proceeds to the Company of $10,000. On the same date in November 2005, STT Communications elected to convert the preferred stock issuedin connection with the exercise of the Convertible Secured Note Warrant into 965,674 shares of the Company’s common stock. The preferred stock convertedinto common stock on a 1 to 1 basis.The Crosslink FinancingIn June 2003, the Company and certain of its subsidiaries, along with STT Communications and its affiliate, completed 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 F-30 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Secured Note Warrants”) (collectively, the “Crosslink Financing”). The Crosslink Convertible Secured Note Warrants were fully exercised in June 2003.Interest on the Crosslink Convertible Secured Notes were payable in kind in the form of additional convertible secured notes having a principal amount equalto the amount of interest then due having terms which are similar to the terms of the Crosslink 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 recognized a loss on debt conversion on this transaction of $7,610,000,representing the write-off of unamortized debt discount, in accordance with EITF Issue 00-27 “Application of Issue No. 98-5 to Certain ConvertibleInstruments.” Refer to Loss on Debt Extinguishment and Conversion (see Note 11).10. Convertible Subordinated DebenturesIn 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 is 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, 2006, 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 of 30 consecutive trading days ending on the last trading day of the previouscalendar quarter, is greater than or equal to 120% of the conversion price per share of the Company’s common stock, or approximately $47.40 pershare; • 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 commonstock and the conversion rate on each such day; • if the Convertible Subordinated Debentures have been called for redemption; or • upon the occurrence of certain specified corporate transactions described in the Indenture, such as a consolidation, merger or binding 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 F-31 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) debenture. Instead, interest will be deemed cancelled, extinguished and forfeited upon conversion. Convertible Subordinated Debentures called for redemptionmay 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 the Company to purchase all or a portion of the Convertible SubordinatedDebentures on February 15, 2009, February 15, 2014 and February 15, 2019, each of which is referred to as a purchase date. In addition, upon afundamental change of the Company, as defined in the Indenture, each holder of the Convertible Subordinated Debentures may require the Company torepurchase some or all of the Convertible Subordinated Debentures at a purchase price equal to 100% of the principal amount plus accrued and unpaidinterest.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, 2006 and 2005. The Company will be remeasuring the remaining embedded derivative each reporting period, as applicable.Changes in fair value will be reported in the statement of operations.The costs related to the Convertible Subordinated Debentures were capitalized and are being amortized to interest expense using the effective 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 $1,365,000 and $2,011,000 as of December 31, 2006 and 2005,respectively.11. Loss on Debt Extinguishment and ConversionAs 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) F-32 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 12. Silicon Valley Bank Credit Line and AmendmentsIn December 2004, the Company entered into a $25,000,000 line of credit arrangement with Silicon Valley Bank that originally would have matured inDecember 2006 (the “Silicon Valley Bank Credit Line”). In September 2005, the Company amended the Silicon Valley Bank Credit Line by entering into a$50,000,000 revolving line of credit agreement with Silicon Valley Bank, replacing the previously outstanding $25,000,000 line of credit arrangement with thesame bank. In October 2005, the Company elected to borrow $30,000,000 from the Silicon Valley Bank Credit Line at a one-month LIBOR interest rate,inclusive of the applicable margin, at the rate of 5.72% per annum (the “$30,000,000 Borrowing”), which was used to fund a portion of the Ashburn CampusProperty Acquisition (see Note 2). The Company decided to repay the $30,000,000 Borrowing in full in January 2006.In August 2006, the Company amended the Silicon Valley Bank Credit Line to increase the line to $75,000,000, replacing the previously outstanding$50,000,000 line of credit arrangement, and added General Electric Capital Corporation as a lender (the “Silicon Valley Bank Credit Line Amendment”). TheSilicon Valley Bank Credit Line Amendment allows for issuance of letters of credit (in addition to revolving borrowings), which would have the effect ofreducing the amount available for borrowing under the Silicon Valley Bank Credit Line Amendment during the period that such letters of credit remainoutstanding. The Silicon Valley Bank Credit Line Amendment also has an option for the Company to increase the amount of the line to $100,000,000 at a laterdate, subject to approval of the lender or lenders electing to participate in such increase. Borrowings under the Silicon Valley Bank Credit Line Amendmentwill continue to bear interest at variable interest rates, plus the applicable margins, which were in effect prior to the amendment, based on either prime rates orLIBOR rates. The Silicon Valley Bank Credit Line Amendment matures on September 15, 2008 and is secured by substantially all of the Company’sdomestic personal property assets and certain of the Company’s real property leases and contains several financial covenants, which require compliance withmaximum leverage and working capital ratios and a minimum EBITDA target, all of which the Company was in compliance with as of December 31, 2006.As of December 31, 2006, if the Company had borrowed against the Silicon Valley Bank Credit Line Amendment, it would have had an effective interest rateof 7.82% per annum.In September 2006, the Company elected to borrow $40,000,000 (the “$40,000,000 Borrowing”) from the Silicon Valley Credit Line Amendment, ofwhich $20,000,000 of the $40,000,000 Borrowing was borrowed at the prime rate, inclusive of the applicable margin, of 8.75% per annum and the remaining$20,000,000 was borrowed at one-month LIBOR interest rate, inclusive of the applicable margin, at the rate of 7.824%. The $40,000,000 Borrowing wasrepaid in full in October 2006.As of December 31, 2006, a total of $16,419,000 remained outstanding under the letters of credit sublimit and, as a result, the amount of borrowingsavailable to the Company was $58,581,000. These letters of credit automatically renew in successive one-year periods until the final termination. If thebeneficiaries for any of these letters of credit decide to draw down on these letters of credit, the Company will be required to fund these letters of credit eitherthrough cash collateral or borrowings under the Silicon Valley Bank Credit Line Amendment.The costs incurred related to the Silicon Valley Bank Credit Line were capitalized and were being amortized to interest expense using the effective interestmethod over the life of the Silicon Valley Bank Credit Line. The Company incurred $253,000 and $342,000 of additional issuance costs for the amendmentsto the Silicon Valley Bank Credit Line during the years ended December 31, 2006 and 2005, respectively, which will also be amortized to interest expenseusing the effective interest method over the life of the Silicon Valley Bank Credit Line. In accordance with EITF Issue 98-14, “Debtor’s Accounting forChanges in Line-of-Credit or Revolving-Debt Arrangements”, the Company has capitalized the total of such issuance costs, which are being amortized to F-33 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) interest expense using the effective interest method over the life of the Silicon Valley Bank Credit Line Amendment. These debt issuance costs, net ofamortization, were $461,000 and $409,000 as of December 31, 2006 and 2005, respectively.13. Stockholders’ EquityIn 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 StockOn December 31, 2002, as a result of the i-STT Acquisition, 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. In November 2005, STT Communicationselected to convert these shares into 1,868,667 shares of the Company’s common stock. As of December 31, 2006 and 2005, the Company had no preferredstock issued and outstanding.Common StockAs of December 31, 2006, the Company has reserved the following shares of authorized but unissued shares of common stock for future issuance: Conversion of convertible subordinated debentures 2,183,548Common stock options 5,462,809Common stock purchase plans 1,160,584Common stock warrants 9,490 8,816,431Stock Option PlansIn May 2000, the Company’s stockholders approved the adoption of the 2000 Equity Incentive Plan as the successor plan to the 1998 Stock Plan. InAugust 2000 the Company no longer issued additional grants under the 1998 Stock Plan, and unexercised options under the predecessor 1998 Stock Planthat cancel due to an optionee’s termination may be reissued under the successor 2000 Equity Incentive Plan. Under the 2000 Equity Incentive Plan,nonstatutory stock options, restricted shares, restricted stock units, and stock appreciation rights may be granted to employees, outside directors andconsultants at not less than 85% of the fair market value on the date of grant, and incentive stock options may be granted to employees at not less than 100%of the fair market value on the date of grant. Options granted prior to October 1, 2005 generally expire 10 years from the grant date, and options granted toemployees and consultants on or after October 1, 2005 will generally expire seven years from the grant date, subject to continuous service of the optionee.Stock options and restricted shares granted under the 2000 Equity Incentive Plan generally vest over four years. As of December 31, 2006, the Company hasreserved a total of 8,219,601 shares for issuance under the 2000 Equity Incentive Plan of which 1,622,279 were still available for grant, and the plan reserveis increased on January 1 each year by the lesser of 6% of the common stock then outstanding or 6,000,000 shares. The 2000 Equity Incentive Plan isadministered by the Compensation Committee of the Board of Directors, and the Board may terminate or amend the plan, with approval of the stockholders asmay be required by applicable regulations, at any time. F-34 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) In May 2000, the Company’s stockholders approved the adoption of the 2000 Director Option Plan, which was amended and restated effectiveJanuary 1, 2003. Under the 2000 Director Option Plan, each non-employee board member who was not previously an employee of the Company will receive anautomatic initial nonstatutory stock option grant, which vests in four annual installments. In addition, each non-employee board member will receive anannual non-statutory stock option grant on the date of the Company’s regular Annual Meeting of Stockholders, provided the board member will continue toserve as a director thereafter. Such annual option grants shall vest in full on the earlier of a) the first anniversary of the grant, or b) the date of the regularAnnual Meeting of Stockholders held in the year following the grant date. A new director who receives an initial option will not receive an annual option in thesame calendar year. Options granted under the 2000 Director Option Plan will have an option price not less than 100% of the fair market value on the date ofgrant and will have a 10-year contractual term, subject to continuous service of the board member. As of December 31, 2006, the Company has reserved393,440 shares subject to options for issuance under the 2000 Director Option Plan of which 337,188 were still available for grant, and an additional 50,000shares is added to the reserve on January 1 each year. The 2000 Director Option Plan is administered by the Compensation Committee of the Board ofDirectors, and the Board may terminate or amend the plan, with approval of the stockholders as may be required by applicable regulations, at any time.In September 2001, the Company adopted the 2001 Supplemental Stock Plan, under which non-statutory stock options and restricted shares may begranted to consultants and employees who are not executive officers or board members, at not less than 85% of the fair market value on the date of grant.Options granted prior to October 1, 2005 generally expire 10 years from the grant date, and options granted on or after October 1, 2005 will generally expireseven years from the grant date, subject to continuous service of the optionee. Current stock options granted under the 2001 Supplemental Stock Plan generallyvest over four years. As of December 31, 2006, the Company has reserved a total of 1,493,961 shares for issuance under the 2001 Supplemental Stock Plan,of which 191,025 were still available for grant. The 2001 Supplemental Stock Plan is administered by the Compensation Committee of the Board ofDirectors, and the plan will continue in effect indefinitely unless the Board decides to terminate it earlier.The 1998 Stock Plan, 2000 Equity Incentive Plan, 2000 Director Option Plan and 2001 Supplemental Stock Plan are collectively referred to as the“Stock Option Plans.”Stock Option Plan ActivityStock option activity under the Stock Option Plans is summarized as follows: Numberof sharesoutstanding Weighted-averageexerciseprice pershareStock options outstanding at December 31, 2003 3,407,938 $17.56Stock options granted 1,523,200 29.78Stock options exercised (1,038,306) 5.74Stock options canceled (91,038) 28.50Stock options outstanding at December 31, 2004 3,801,794 25.42Stock options granted 1,381,375 42.07Stock options exercised (855,903) 9.43Stock options canceled (164,727) 38.03Stock options outstanding at December 31, 2005 4,162,539 33.67Stock options granted 1,209,870 55.61Stock options exercised (1,593,697) 21.91Stock options canceled (466,397) 49.54Stock options outstanding at December 31, 2006 3,312,315 45.11 F-35 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The total intrinsic value of stock options exercised during the years ended December 31, 2006, 2005 and 2004 was $55,238,000, $26,865,000 and$29,908,000, respectively. The intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of theshares. The total fair value of options vested during the years ended December 31, 2006, 2005 and 2004 was $21,181,000, $23,276,000 and $19,025,000,respectively.The following table summarizes information about outstanding equity awards as of December 31, 2006: Outstanding ExercisableRange of exercise prices Number ofshares Weighted-averageremainingcontractuallife Weighted-averageexerciseprice Number ofshares Weighted-averageexerciseprice$ 2.13 to $ 17.70 352,809 6.21 $8.91 349,589 $8.92$18.61 to $ 29.44 355,976 6.62 25.73 248,667 25.52$29.71 to $ 30.02 421,452 7.13 29.97 256,646 29.98$30.38 to $ 38.76 270,893 6.38 35.93 85,195 35.52$38.85 to $ 44.61 294,208 8.22 41.71 83,696 41.90$44.70 to $ 44.89 374,359 8.05 44.89 142,296 44.89$45.08 to $ 52.51 148,973 6.33 48.04 1,435 46.55$52.85 to $ 52.85 548,135 6.16 52.85 105,783 52.85$53.09 to $ 73.95 314,319 6.63 60.11 18,903 57.53$78.12 to $312.00 231,191 4.32 132.55 181,338 146.77 3,312,315 6.68 45.11 1,473,548 43.05The total aggregate intrinsic value of stock options outstanding as of December 31, 2006, 2005 and 2004 was $114,228,000, $55,443,000 and$89,981, 000, respectively. As of December 31, 2006, 2005 and 2004, the weighted average remaining contractual life of options outstanding was 6.68 years,7.79 years and 8.37 years, respectively. The total aggregate intrinsic value of stock options exercisable as of December 31, 2006, 2005 and 2004 was$51,1178,000, $40,315,000 and $31,103,000, respectively. As of December 31, 2006, 2005 and 2004, the weighted average remaining contractual life ofoptions exercisable was 6.28 years, 7.10 years and 7.69 years, respectively. The weighted-average exercise price of options outstanding at December 31, 2006,2005 and 2004 was $45.11, $33.74 and $25.42, respectively. The weighted-average exercise price of options exercisable at December 31, 2006, 2005 and2004 was $43.05, $32.97 and $37.21, respectively.Fair Value Calculations—Stock OptionsThe Company uses the Black-Scholes option-pricing model to determine the fair value of stock options with the following weighted average assumptionsfor the years ended December 31: 2006 2005 2004 Dividend yield 0% 0% 0%Expected volatility 69% 78% 98%Risk-free interest rate 4.70% 4.00% 2.58%Expected life (in years) 4.6 3.9 3.5 The weighted-average fair value of stock options per share on the date of grant was $32.58, $24.61 and $19.48, respectively, for the years endedDecember 31, 2006, 2005 and 2004. F-36 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Restricted Share ActivityAs noted above, the Company grants restricted shares out of the 2000 Equity Incentive Plan. Restricted Share activity under the 2000 Equity IncentivePlan is summarized as follows: Number ofsharesoutstanding Weighted-averagegrantdatefair valueper shareRestricted shares outstanding, December 31, 2004 — $— Restricted shares granted 320,500 43.76Restricted shares issued, vested (40,062) 43.76Restricted shares canceled — — Restricted shares outstanding, December 31, 2005 280,438 43.76Restricted shares granted 274,000 44.43Restricted shares issued, unvested (1) (274,000) 44.43Restricted shares issued, vested (69,313) 43.76Restricted shares canceled (51,125) 43.76Restricted shares outstanding, December 31, 2006 (2) 160,000 43.76(1)On January 10, 2006 and May 22, 2006, the Company granted 250,000 restricted shares and 24,000 restricted shares, respectively, to its executiveofficers and at the same time, unlike the previous year’s restricted stock grants (see footnote 2 below), issued these shares into an escrow account underthe names of each of the executive officers. These shares have voting rights and are considered issued and outstanding. They are released from theescrow account as they vest. However, they are subject to forfeiture if the individual officers do not meet the vesting requirements. See “Net Loss PerShare” in Note 1.(2)As of December 31, 2006, there were a total of 160,000 restricted shares outstanding and unissued. These restricted shares were granted on February 8,2005 to the Company’s executive officers. These shares were not placed into an escrow account in the names of each of the executive officers. Theseshares do not have voting rights and are not considered issued and outstanding. These restricted shares will only be issued when they become vested.Unvested restricted shares as of December 31, 2005 totaled 280,438. Unvested restricted shares as of December 31, 2006 totaled 407,750, comprised of247,750 issued shares and 160,000 unissued shares.Fair Value Calculations—Restricted SharesThe Company uses a Monte Carlo simulation option-pricing model to determine the fair value of restricted shares as they have both a service and marketprice condition with the following weighted average assumptions for the years ended December 31: 2006 2005 2004 Dividend yield 0% 0% — Expected volatility 71% 80% — Risk-free interest rate 4.43% 3.55% — Market risk premium 8.5% 8.5% — Beta 1.28 1.28 — The weighted-average fair value per share of restricted shares on the date of grant was $44.43 and $43.76, respectively, for the years ended December 31,2006 and 2005. F-37 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Employee Stock Purchase PlansIn May 2000, the Company adopted the 2000 Employee Stock Purchase Plan (the “2000 Purchase Plan”) under which 31,250 shares was reserved forissuance, and after January 1, 2005, no additional shares were added to the 2000 Purchase Plan. The last purchase under the 2000 Purchase Plan was in July2005, at which time the 2000 Purchase Plan ceased and the unused reserved shares expired.In June 2004, the Company’s stockholders approved the adoption of the 2004 Employee Stock Purchase Plan and International Employee StockPurchase Plan (the “2004 Purchase Plans”, collectively with the 2000 Purchase Plan, the “Purchase Plans”) as successor plans to the 2000 Purchase Plan. Atotal of 500,000 shares have been reserved for issuance under the 2004 Purchase Plans, and the number of shares available for issuance under the 2004Purchase Plans automatically increases on January 1 each year, beginning in 2005, by the lesser of 2% of the shares of common stock then outstanding or500,000 shares. As of December 31, 2006, a total of 1,160,584 shares remain available for purchase under the Purchase Plans. The 2004 Purchase Planspermit eligible employees to purchase common stock on favorable terms via payroll deductions, up to 15% of the employee’s cash compensation, subject tocertain share and statutory dollar limits. Two overlapping offering periods commence during each calendar year, on each February 14 and August 14 or suchother periods or dates as determined by the Compensation Committee from time to time, and the offering periods last up to 24 months with a purchase dateevery six months. The price of each share purchased is 85% of the lower of a) the fair market value per share of common stock on the last trading day beforethe commencement of the applicable offering period or b) the fair market value per share of common stock on the purchase date. The 2004 Purchase Plans areadministered by the Compensation Committee of the Board of Directors, and such plans will terminate automatically in June 2014 unless a) the 2004 PurchasePlans are extended by the Board of Directors and b) the extension is approved within 12 months by the Company’s stockholders.For the years ended December 31, 2006, 2005 and 2004, 135,325, 218,158 and 314,637 shares, respectively, were issued under the Purchase Plans ata weighted average purchase price of $28.91, $15.62 and $4.24 per share, respectively.Fair Value Calculations—Employee Stock Purchase PlansThe Company uses the Black-Scholes option-pricing model to determine the fair value of shares purchased under the Purchase Plans with the followingweighted average assumptions for the years ended December 31: 2006 2005 2004 Dividend yield 0% 0% 0%Expected volatility 69% 76% 98%Risk-free interest rate 4.95% 3.27% 2.58%Expected life (in years) 1.25 1.25 1.25 The weighted-average fair value per share of shares purchased on the date of purchase was $18.10, $9.65 and $5.03, respectively, for the years endedDecember 31, 2006, 2005 and 2004.Cumulative Effect Adjustments Under SFAS 123(R)Upon adoption of SFAS 123(R) on January 1, 2006, the Company recorded the following two cumulative effect adjustments: • For awards with compensation cost recognized in the financial statements under APB 25 that were partially vested upon the adoption of SFAS123(R), an adjustment to record estimated forfeitures was recorded as a cumulative effect adjustment upon a change in accounting principletotaling $376,000 in the Company’s consolidated statement of operations for the year ended December 31, 2006. F-38 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) • For deferred stock-based compensation related to equity awards granted prior to the adoption of SFAS 123(R), such amounts were eliminatedagainst additional paid-in capital upon adoption, which totaled $4,930,000 as of December 31, 2005.Stock-Based Compensation Recognized in the Statement of OperationsThe following table presents, by operating expense, the Company’s stock-based compensation expense recognized in the Company’s consolidatedstatement of operations under SFAS 123(R) for the year ended December 31, 2006 and under APB 25 for the years ended December 31, 2005 and 2004 (inthousands): 2006 2005 2004Cost of revenues $3,238 $— $35Sales and marketing 7,449 1,561 60General and administrative 20,080 6,716 1,372 $30,767 $8,277 $1,467As of December 31, 2006, the Company capitalized $45,000 of stock-based compensation expense as construction in progress in property andequipment.The Company’s stock-based compensation recognized in the consolidated statement of operations was comprised of the following types of equity awardsfor the years ended December 31 (in thousands): 2006 2005 2004Stock options $21,181 $1,849 $1,467Restricted shares 7,848 6,428 — Employee stock purchase plan 1,738 — — $30,767 $8,277 $1,467As of December 31, 2006, the total stock-based compensation cost related to unvested equity awards not yet recognized, net of estimated forfeitures,totaled $45,024,000, which is expected to be recognized over a weighted-average period of 2.62 years.Pro Forma Stock-Based Compensation Under SFAS 123 for Periods Prior to Fiscal 2006The following table presents what the net loss and net loss per share would have been had the Company adopted SFAS 123 for the years endedDecember 31 (in thousands, except per share data): 2005 2004 Net loss as reported $(42,612) $(68,631)Stock-based compensation expense included in net loss 8,112 1,459 Stock-based compensation expense if SFAS No. 123 had been adopted (32,529) (20,756)Pro forma net loss $(67,029) $(87,928)Basic and diluted net loss per share: As reported $(1.78) $(3.87)Pro forma (2.80) (4.96) F-39 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 14. Stock Option Granting PracticesIn June 2006, the Audit Committee of the Company’s Board of Directors commenced an independent investigation of the Company’s historical stockoption granting practices and related accounting with the assistance of independent outside legal counsel. This review covered the timing and pricing of allstock option grants made under the Company’s stock option plans since August 11, 2000, the day after the Company’s Initial Public Offering (“IPO”).In June 2006 the Company received an informal inquiry from the SEC and a grand jury subpoena from the U.S. Attorney for the Northern District ofCalifornia requesting documents relating to the Company’s stock option grants and practices. In December 2006, the SEC formally notified the Company thatit has terminated its investigation of the Company’s stock grants and practices and no enforcement action was recommended. In January 2007, the U.SAttorney formally notified the Company of the withdrawal of its grand jury subpoena.Based on the results of its review, the Audit Committee determined that the accounting measurement dates of certain stock option grants issued in thepast differ from the actual grant dates. The Audit Committee concluded that the Company did not engage in intentional or fraudulent misconduct in thegranting of stock options. However, the accounting measurement dates for certain historical stock option grants differed from their actual grant dates. As aresult of revising the accounting measurement dates for these stock option grants, the Company recorded additional non-cash stock-based compensationcharge of $444,000 in the Company’s consolidated financial statements for the year ended December 31, 2006. The amount of the charge was computedpursuant to the requirements of APB 25 for all historical periods through December 31, 2005 and pursuant to SFAS 123(R) for the year ended December 31,2006. This $444,000 stock-based compensation charge represents the total charge for historical periods that the Company needed to record as a result of theAudit Committee’s conclusion on this matter. This compensation charge had no effect on the Company’s current cash position.The Company concluded that the cumulative charge as a result of the difference between the measurement dates used for financial accounting andreporting purposes and the actual grant dates for certain stock option grants, totaling $444,000, was not material to any previously-reported historical periodand the current fiscal year. As such, this cumulative charge totaling $444,000 was recorded in the quarter ended June 30, 2006 and is included in the statementof operations for the year ended December 31, 2006, versus restating prior periods. This additional stock-based compensation was combined with theCompany’s stock-based compensation recorded in connection with FASB 123(R) for the year ended December 31, 2006 as outlined in Note 13. As ofDecember 31, 2006, the total remaining incremental stock-based compensation charge related to these stock option grants with a revised accountingmeasurement date not yet recognized, net of estimated forfeitures, totaled approximately $9,000, which is expected to impact the Company’s operating resultsthrough 2008.The following table presents, by operating expense category, the Company’s cumulative stock-based compensation charge totaling $444,000 recognizedin the Company’s consolidated statement of operations for the year ended December 31, 2006 (in thousands): Cost of revenues $63Sales and marketing 99General and administrative 282 $444There were no significant income tax effects relating to this adjustment for the Company. However, the Company has determined that certain employeeshave some tax exposure in regards to Section 409A of the F-40 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Internal Revenue Code as a result of this adjustment. To address this situation, the Company repriced upwards a portion of individual stock option grants forthese impacted employees, including certain executive officers, who are still employed with the Company. To offset this increase in exercise price, theCompany gave certain of these individuals a new stock option grant to offset this reduction in value. However, none of the executive officers received anoffsetting stock option grant. All such adjustments, both individually and in the aggregate, were not significant to the Company.15. Income TaxesIncome or loss before income taxes is attributable to the following geographic locations for the years ended December 31 (in thousands): 2006 2005 2004 United States $(7,990) $(40,781) $(60,319)Foreign 1,656 (1,288) (8,159)Loss before income taxes and cumulative effect of a change in accounting principle $(6,334) $(42,069) $(68,478)The provision for income tax consisted of the following components (in thousands). 2006 2005 2004Current: Federal $497 $425 $30State 217 128 — Foreign 62 (10) 123Subtotal 776 543 153Deferred: Federal — — — State — — — Foreign (337) — — Subtotal (337) — — Provision for income taxes $439 $543 $153State tax expense not based on income is included in general and administrative expenses and the aggregated amount was insignificant for the yearsended December 31, 2006, 2005 and 2004.The fiscal 2006, 2005 and 2004 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): 2006 2005 2004 Federal tax at statutory rate $(2,217) $(14,724) $(23,967)State taxes 217 128 — Deferred tax assets generated in current year not benefited 1,843 15,056 18,411 Meals and entertainment 48 73 58 Non-cash interest expense — 322 5,579 Stock option deduction 326 (726) — Release of valuation allowance (337) — — Others 559 414 72 Total tax expense $439 $543 $153 F-41 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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): 2006 2005 Deferred tax assets: Depreciation and amortization $78,121 $59,073 Reserves 27,374 30,343 Deferred compensation 8,849 2,689 Stock warrants 339 6,308 State tax 58 44 Net operating losses and credits 36,794 48,982 Gross deferred tax assets 151,535 147,439 Valuation allowance (144,625) (147,439)Total deferred tax assets $6,910 $— The consolidated balance sheet reflects the allocation of the valuation allowance based on the pro-rata portion of gross current and non-current deferredtax assets in each jurisdiction where a valuation allowance is required. The Company’s deferred tax assets are included in both prepaids and other currentassets and other assets on the accompanying consolidated balance sheet as of December 31, 2006.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 in each tax jurisdiction. After considering primarily such factors as the Company’s history of operating losses, the nature of theCompany’s deferred tax assets and the absence of taxable income in prior carryback years, management concluded that a 100% valuation allowance wasrequired in all the jurisdictions, other than Singapore, in which the Company operates. However, the Company released the valuation allowance against thedeferred tax assets in Singapore during the year ended December 31, 2006, as its operation in the jurisdiction has sustained a cumulative profitability for threeyears including the current year and the operating plan in the jurisdiction indicates future taxable income. The Company believed that as of December 31,2006, it is more likely than not that the deferred tax assets would be fully recoverable in Singapore. As a result of recognizing $6,910,000 deferred tax assetsin Singapore, the Company recorded a decrease to Goodwill of approximately $6,573,000 representing the acquired deferred tax assets in the i-STTacquisition, against which a full valuation allowance was originally provided.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. In 2003, the Company conducted an analysisto determine whether an ownership change had occurred due to the significant stock transactions in each of the reporting years disclosed. The analysisindicated that an ownership change occurred during the fiscal year 2002, which resulted in an annual limitation of approximately $819,000, for the netoperating 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 $16,400,000. 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 at the time of the change in control. Such a limitation will be effective for a five-year period subsequent to thechange in control through 2007. The Company had also updated the analysis for the fiscal year 2006 and concluded there was no ownership change underSection 382 of the Internal Revenue Code in the year. F-42 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Company expects to pay a limited amount of tax for fiscal year 2007. The tax costs will be primarily limited to alternative minimum taxes as theCompany anticipates utilizing its net operating loss carryforwards from post-2002 tax years and expects to have significant tax deductions attributable to stockoptions exercised in the year.The Company has net operating loss carryforwards of approximately $79,000,000 and $95,000,000 for federal and state income tax purposes,respectively, as of December 31, 2006. The net operating loss carryforwards expire, if not utilized, at various intervals from the year 2007 to 2026.Approximately $38,000,000 of the net operating loss carryforwards is attributable to the excess of employee stock option deduction, the benefits from whichwill be allocated to paid-in capital when subsequently utilized in future years. In addition, the Company’s foreign operations had approximately $103,000,000of net operating loss and unclaimed capital allowance carryforwards for the local income tax purposes, of which approximately $19,000,000 will expire, if notutilized, at various intervals from the year 2009 to 2012 while the remaining can be carried forward indefinitely.The Company is subject to ongoing tax examinations of its tax returns by the Internal Revenue Service and other tax authorities in various jurisdictions.The Company’s federal income tax return for fiscal 2003 is currently under the examination by the Internal Revenue Service, which has substantiallycompleted the field work as of December 31, 2006. The Company does not expect that the tax examination will result in an additional tax liability. Should anyissues addressed in the Company’s tax examination be resolved in a manner not consistent with the Company’s expectations, the Company could be requiredto adjust its provision for income tax in the period such resolution occurs.16. Commitments and ContingenciesOperating Lease Terminations and AmendmentsIn 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 and issued a parent company guarantee for the remaining monthly lease payments through October 2013 totaling $5,783,000 as ofDecember 31, 2006. In exchange for entering into the Amendment to the Hong Kong IBX Lease, the Company issued warrants to the landlord to purchase100,000 shares of the Company’s common stock at an exercise price of $15.00 per share, which were immediately exercisable (the “Hong Kong LeaseAmendment Warrants”) and which were exercised for cash during 2005. The Hong Kong Warrants were valued at $2,477,000 using the Black-Scholesoption-pricing model, which are being amortized to rent expense over the remaining 10 year term of the lease. The following assumptions were used indetermining 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-freeinterest rate of 2.80% and a contractual life of seven years. The value of these warrants is included in other assets on the accompanying consolidated balancesheet.In October 2005, the Company announced that it had entered into an agreement for the early termination of its approximate 40 acre ground lease of realproperty in San Jose, California (the “San Jose Ground Lease”) whereby the Company will pay $40,000,000 over the next four years, commencing January 1,2006 in equal quarterly installments, to terminate this lease, which would otherwise require significantly higher cumulative lease payments through 2020 (the“San Jose Ground Lease Termination”). As a result of the San Jose Ground Lease Termination, the Company recorded a significant restructuring charge in thefourth quarter of 2005 (see Note 19). Pursuant to the terms of the San Jose Ground Lease Termination, the revised lease termination date is no later thanDecember 31, 2007. The Company does not currently use the San Jose Ground Lease property for any purpose. F-43 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) In February 2006, the Company amended the lease to its corporate headquarters office in Foster City, California, to add additional space and to extendthe lease term an additional three years to March 2011.Operating Lease CommitmentsThe Company currently leases the majority of its IBX centers and certain equipment under noncancelable operating lease agreements. The majority of theCompany’s operating leases for its IBX centers expire at various dates expiring from 2010 through 2025 with renewal options available to the Company. Thecenters’ lease agreements typically provide for base rental rates that increase at defined intervals during the term of the lease. In addition, the Company hasnegotiated 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.Minimum future operating lease payments, excluding operating leases covered under restructuring charges (see Note 19), as of December 31, 2006 aresummarized as follows (in thousands): Year ending: 2007 $32,9112008 32,7412009 32,6392010 31,3682011 26,4522012 and thereafter 137,840Total $293,951Total rent expense was approximately $28,385,000, $29,425,000 and $30,837,000 for the years ended December 31, 2006, 2005 and 2004,respectively. Deferred rent, primarily included in deferred rent and other liabilities on the accompanying consolidated balance sheets, was $20,923,000 and$18,792,000 as of December 31, 2006 and 2005, respectively.Other Purchase CommitmentsPrimarily as a result of the Company’s recent Washington, D.C. Metro Area IBX Expansion Project, Chicago Metro Area IBX Expansion Project andNew York Metro Area IBX Expansion Project (see Note 2), as of December 31, 2006, the Company was contractually committed for $94,602,000 ofunaccrued capital expenditures, primarily for IBX equipment not yet delivered and labor not yet provided, in connection with the work necessary to open theseIBX centers and make them available to customers for installation. In addition, the Company has numerous other, non-capital purchase commitments in placeas of December 31, 2006, such as commitments to purchase power in select locations, primarily in the U.S. and Singapore, through 2007 and thereafter andother open purchase orders for goods or services to be delivered or provided during 2007. Such other miscellaneous purchase commitments total $36,838,000as of December 31, 2006.Letter of Credit CommitmentsThe Company entered into seven irrevocable letters of credit with Silicon Valley Bank. These letters of credit were provided in lieu of cash depositsunder the Letters of Credit Sublimit provision in connection with the Silicon Valley Bank Credit Line Amendment (see Note 12). The letters of credit total$16,419,000, are F-44 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) collateralized by the Silicon Valley Bank Credit Line and automatically renew in successive one-year periods until the final termination. If the beneficiaries ofthese letters of credit decide to draw down on these letters of credit, the Company will be required to fund these letters of credit.Legal Matters Relating to Stock Option Granting PracticesIn June 2006, the Company received an informal inquiry from the Securities and Exchange Commission (“SEC”) and a grand jury subpoena from theUnited States Attorney for the Northern District of California (“U.S. Attorney”) requesting documents relating to the Company’s stock option grants andpractices. In December 2006, the SEC formally notified the Company that it had terminated its investigation of the Company’s stock option grants andpractices and no enforcement action was recommended. In January 2007, the U.S Attorney formally notified the Company of the withdrawal of its grand jurysubpoena.On June 29, 2006 and September 18, 2006, shareholder derivative actions were filed in the Superior Court of the State of California, County of SanMateo, naming Equinix as a nominal defendant and several of the Company’s current and former officers and directors as individual defendants. Theseactions were consolidated, and the consolidated complaint was filed in January 2007. The consolidated complaint alleges that the individual defendantsbreached their fiduciary duties and violated California securities law as a result of purported backdating of stock option grants, insider trading and thepreparation and approval of inaccurate financial results. Plaintiffs seek to recover, on behalf of the Company, unspecified monetary damages,corporate governance changes, equitable and injunctive relief, restitution, and fees and costs. Defendants filed a motion to stay this action in deference to afederal derivative action in February 2007. On October 13, 2006, a shareholder derivative action was filed in the United States District Court for the NorthernDistrict of California, naming the Company as a nominal defendant and several current and former officers and directors as individual defendants. Thiscomplaint alleges that the individual defendants breached their fiduciary duties and violated California and federal securities laws as a result of purportedbackdating of stock options, insider trading and the dissemination of false statements. Plaintiff seeks to recover, on behalf of the Company, unspecifiedmonetary and punitive damages, corporate governance changes, the imposition of a constructive trust over certain stock options and related proceeds, and feesand costs. The deadline for Equinix to move to dismiss the complaint is April 19, 2007. In addition to the pending derivative actions, the Company may besubject to additional derivative or other lawsuits that may be presented on an individual or class basis alleging claims based on the Company’s stock optiongranting practices. Similar lawsuits and investigations have been commenced against numerous other companies based on similar allegations.Responding to, investigating and/or defending against civil litigations and government inquiries regarding the Company’s stock option grants andpractices will present a substantial cost to the Company in both cash and the attention of certain management and may have a negative impact on theCompany’s operations. In addition, in the event of any negative finding or assertion by the SEC, U.S. Attorney, court of law or any third-party claim relatedto the Company’s stock option granting practices, the Company may be liable for damages, fines or other civil or criminal remedies, or be required to restateits prior period financial statements or adjust its current period financial statements. Any such adverse action could have a material adverse effect on theCompany’s business and current market value.The Company believes that while an unfavorable outcome to any or all of the above-mentioned inquiries, cases or complaints is reasonably possible, itis not probable. As a result, the Company has not accrued for any settlements in connection with these legal matters as of December 31, 2006. F-45 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Other Legal ActionsOn 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 andDecember 6, 2000. In addition, similar lawsuits were filed against approximately 300 other issuers and related parties. The purported class action allegesviolations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b), Rule 10b-5 and 20(a) of the Securities Exchange Act of 1934 against theCompany and Individual Defendants. On October 13, 2004, the Court certified a class in six of the approximately 300 other nearly identical actions (the “focuscases”) and noted that the decision is intended to provide strong guidance to all parties regarding class certification in the remaining cases. The UnderwriterDefendants appealed the decision and the Second Circuit vacated the district court’s decision granting class certification in those six cases on December 5,2006. Plaintiffs have not yet moved to certify a class in the Equinix case.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. Pursuant to the settlement and related agreements, if thesettlement receives final approval by the Court, the settlement provides for a release of the Company and the individual defendants and the Company’sagreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters. The settlement agreement also providesa guaranteed recovery of $1.0 billion to plaintiffs for the cases relating to all of the approximately 300 issuers. To the extent that the underwriter defendantssettle all of the cases for at least $1.0 billion, no payment will be required under the issuers’ settlement agreement. To the extent that the underwriter defendantssettle for less than $1.0 billion, the issuers are required to make up the difference. The Company is unable at this time to determine whether the outcome of thelitigation would have a material impact on its results of operations, financial condition or cash flows. Until the settlement is finalized and approved by theCourt, or in the event such settlement is not approved, the Company and its officers and directors intend to continue to defend the actions vigorously. While anunfavorable outcome to this case is reasonably possible, and the Company can estimate its potential exposure to be less than approximately $3.4 million, it isnot probable. In addition, as noted above, any payments are expected to be covered by existing insurance and, as a result, the Company does not expect thatthe settlement will involve any payment by the Company. As a result, the Company has not accrued for any settlements in connection with this litigation as ofDecember 31, 2006.Estimated and Contingent LiabilitiesThe Company estimates exposure on certain liabilities, such as income and property taxes, based on the best information available at the time ofdetermination. With respect to real and personal property taxes, the Company records what it can reasonably estimate based on prior payment history, currentlandlord estimates or estimates based on current or changing fixed asset values in each specific municipality, as applicable. However, there are circumstancesbeyond the Company’s control whereby the underlying value of the property or basis for which the tax is calculated on the property may change, such as alandlord selling the underlying property of one of the Company’s IBX center leases or a municipality changing the assessment value in a jurisdiction and, as aresult, the Company’s property tax obligations may vary from period to period. Based upon the most current facts and circumstances, the Company makesthe necessary 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. F-46 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) In July 2005, the Company received a Notice of Proposed Assessment of Income Tax from the state of Hawaii asserting a tax deficiency, plus interest,totaling $613,000. The deficiency stems from certain refundable tax credits that the state of Hawaii subsequently disallowed in the examination of the Hawaiiincome tax returns for the tax years of 2000 and 2001 filed by Pihana Pacific, Inc., which the Company acquired on December 31, 2002. The Companyappealed the assessment in 2006, but the appellate board ruled in favor of the state. As a result, the Company had fully accrued the tax liabilities plus interestas of December 31, 2006. The Company is currently assessing whether to appeal the decision to the Tax Appeal Court.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 for 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 AgreementsIn 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, 2006, no claims had been made by the former employer.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. In thefourth quarter of 2005, the Company accrued $318,000 in connection with one of these severance agreements for an executive officer whose employment withthe Company ended in early 2006 as agreed upon during the fourth quarter of 2005. During the year ended December 31, 2006, the Company paid thisaccrued severance in full.In November 2005, the Company entered into a transition and separation agreement with one of the Company’s executive officers in which the agreed-upon separation date with the Company was in March 2006 (the “Transition and Separation Agreement”). Pursuant to the terms of the Transition andSeparation Agreement, the Company accrued $668,000 of severance-related costs during 2005. In addition, the Company modified all outstanding stockoption grants for this executive officer and, as a result, the Company recorded $1,389,000 of stock-based compensation expense during the fourth quarter of2005 in connection with these modifications. During the year ended December 31, 2006, the Company paid $70,000 of the severance and accrued anadditional severance charge of $207,000 for this officer. As of December 31, 2006, $805,000 of the severance-related costs for this ex-officer remained unpaid.The Company expects to resolve this matter in 2007.Employee Benefit PlanThe Company has a 401(k) Plan that allows eligible employees to contribute a portion of their compensation, limited to $15,000 and $14,000 for theyears ended December 31, 2006 and 2005, respectively. Employee contributions and earnings thereon vest immediately. No employer contributions were madeduring the year ended December 31, 2005 or anytime prior. Commencing in 2006, the Company had elected to begin making contributions on behalf of itsemployees, which were limited to 50% of the employees’ first 6% of salary deferred into their 401(k) account and were subject to vesting based on theindividual employee’s start date. During the year ended December 31, 2006, the Company’s obligation to contribute to the 401(k) Plan was $885,000, ofwhich $203,000 remained unpaid as of December 31, 2006. F-47 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Guarantor ArrangementsAs 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 Company has no significant liabilities recorded for these agreements as of December 31, 2006.The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Companyindemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’sbusiness partners or customers, in connection with any U.S. patent, or any copyright or other intellectual property infringement claim by any third party withrespect to the Company’s services. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. Themaximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, theCompany has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes theestimated fair value of these agreements is minimal. The Company has no significant liabilities recorded for these agreements as of December 31, 2006.The Company enters into arrangements with its business partners, whereby the business partner agrees to provide services as a subcontractor for theCompany’s implementations. Accordingly, the Company enters into standard indemnification agreements with its customers, whereby the Companyindemnifies them for other acts, such as personal property damage, of its subcontractors. The maximum potential amount of future payments the Companycould be required to make under these indemnification agreements is unlimited; however, the Company has general and umbrella insurance policies that enablethe Company to recover a portion of any amounts paid. The Company has never incurred costs to defend lawsuits or settle claims related to theseindemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. The Company has no significantliabilities recorded for these agreements as of December 31, 2006.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 the Company’s control, could result in service level commitments to these customers. The Company’sliability insurance may not be adequate to cover those expenses. In addition, any loss of services, equipment damage or inability to meet the Company’sservice level commitment obligations, particularly in the early stage of the Company’s development, could reduce the confidence of the Company’s customersand could consequently impair the Company’s ability to obtain and retain customers, which would adversely affect both the Company’s ability to generaterevenues and the Company’s operating results. There were no significant service level credits recorded during the year ended December 31, 2006. TheCompany generally has the ability to determine such service level credits prior to the associated revenue being recognized. The Company has no significantliabilities in connection with service level credits as of December 31, 2006.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 F-48 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) connection with the Combination, none of the Company’s capital stock issued to STT Communications constitutes “United States real property interests”within the meaning of Section 897(c) of the Internal Revenue Code of 1986. Under Section 897(c) of the Code, the Company’s 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 the Company equals or exceeds 50% of the sum of the aggregate fair market values of (a) the Company’s “United States realproperty interests,” (b) the Company’s interests in real property located outside the U.S., and (c) any other assets held by the Company which are used or heldfor use in the Company’s trade or business. The Company refers to this provision in the Combination Agreement as the FIRPTA covenant. Pursuant to theFIRPTA covenant, the Company may be forced to take commercially reasonable proactive steps to ensure the Company’s compliance with the FIRPTAcovenant, including, but not limited to, (a) a sale-leaseback transaction with respect to all real property interests, or (b) the formation of a holding companyorganized under the laws of the Republic of Singapore which would issue shares of its capital stock in exchange for all of the Company’s outstanding stock(this reorganization would require the submission of that transaction to the Company’s stockholders for their approval and the consummation of thatexchange). The Company has entered into an agreement with STT Communications and its affiliate pursuant to which, the Company will no longer be boundby the FIRPTA covenant as of September 30, 2009. Currently, the Company is in compliance with the FIRPTA covenant. The Company has no liabilitiesrecorded related to non-compliance with the FIRPTA covenant as of December 31, 2006.17. Related Party TransactionsTrade Activity with Affiliates of STT Communications and Other Related PartiesA significant amount of the Company’s Asia-Pacific revenues are generated in Singapore and a significant portion of the business in Singapore istransacted with entities affiliated with STT Communications, which is the Company’s single largest stockholder. For the year ended December 31, 2006,revenues recognized with related parties, primarily entities affiliated with STT Communications, were $5,912,000 and as of December 31, 2006, accountsreceivable with these related parties was $1,413,000. For the year ended December 31, 2006, costs and services procured with related parties, primarily entitiesaffiliated with STT Communications, were $3,710,000 and as of December 31, 2006, accounts payable with these related parties was $313,000. For the yearended December 31, 2005, revenues recognized with related parties, primarily entities affiliated with STT Communications, were $6,034,000 and as ofDecember 31, 2005, accounts receivable with these related parties was $811,000. For the year ended December 31, 2005, costs and services procured withrelated parties, primarily entities affiliated with STT Communications, were $3,148,000 and as of December 31, 2005, accounts payable with these relatedparties was $574,000. 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 endedDecember 31, 2004, costs and services procured with related parties, primarily entities affiliated with STT Communications, were $2,701,000 and as ofDecember 31, 2004, accounts payable with these related parties was $281,000.Other TransactionsIn 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. During 2005, all of the outstanding STT Convertible Secured Notesand accrued and unpaid interest through November 7, 2005, was converted into 4,384,794 shares of the Company’s stock (see Note 9). F-49 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 18. Segment InformationThe Company and its subsidiaries are principally engaged in the design, build-out and operation of network neutral IBX centers. All revenues resultfrom the operation of these IBX centers. The Company’s chief operating decision-maker evaluates performance, makes operating decisions and allocatesresources based on financial data consistent with the presentation in the accompanying consolidated financial statements.The Company’s geographic statement of operations disclosures are as follows for the years ended December 31 (in thousands): 2006 2005 2004 Total revenues: United States $246,066 $191,390 $141,598 Asia-Pacific 40,849 29,667 22,073 $286,915 $221,057 $163,671 Cost of revenues: United States $165,413 $138,249 $118,311 Asia-Pacific 22,966 20,105 18,639 $188,379 $158,354 $136,950 Income (loss) from operations: United States $76 $(35,448) $(34,107)Asia-Pacific 1,838 (1,325) (7,955) $1,914 $(36,773) $(42,062)The Company’s long-lived assets are located in the following geographic areas as of December 31 (in thousands): 2006 2005United States $553,619 $457,280Asia-Pacific 51,952 32,005 $605,571 $489,285The Company’s goodwill totaling $16,919,000 and $21,654,000 as of December 31, 2006 and 2005, respectively, is part of the Company’sSingapore reporting unit, which is reported within the Asia-Pacific segment.Revenue information on a services basis is as follows (in thousands): 2006 2005 2004Colocation $201,772 $152,606 $111,986Interconnection 53,811 40,877 31,414Managed infrastructure 16,197 14,208 11,049Rental 1,380 312 — Recurring revenues 273,160 208,003 154,449Non-recurring revenues 13,755 13,054 9,222 $286,915 $221,057 $163,671 F-50 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 19. Restructuring Charges2004 Restructuring ChargesIn 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.The Company estimated the future cash payments required to exit these two leased spaces, net of any estimated subrental income and expense, throughthe remainder of these lease terms and then calculated the present value of such future cash flows in order to determine the appropriate restructuring charge torecord. Subsequent to recording the initial restructuring charge, the Company records accretion expense to accrete its accrued restructuring liability up to anamount equal to the total estimated future cash payments necessary to complete the exit of these leases. Should the actual lease exit costs differ from theCompany’s estimates, the Company may need to adjust its restructuring charges associated with the excess lease spaces, which would impact net income inthe period such determination was made.A summary of the movement in the 2004 accrued restructuring charges during the year ended December 31, 2006 is outlined as follows (in thousands): Accruedrestructuringcharge as ofDecember 31,2005 Accretionexpense Restructuringchargeadjustment Cashpayments Accruedrestructuringcharge as ofDecember 31,2006 Estimated lease exit costs $13,702 $815 $1,527 $(2,187) $13,857 13,702 $815 $1,527 $(2,187) 13,857 Less current portion (2,171) (3,096) $11,531 $10,761 In September 2006, the Company recorded an additional restructuring charge of $1,527,000 as a result of revised sublease assumptions on these twoexcess space leases as new information became available.A summary of the 2004 restructuring charges during the year ended December 31, 2005 is outlined as follows (in thousands): Accruedrestructuringcharge as ofDecember 31,2004 Accretionexpense Cashpayments Accruedrestructuringcharge as ofDecember 31,2005 Estimated lease exit costs $14,750 $873 $(1,921) $13,702 14,750 $873 $(1,921) 13,702 Less current portion (1,952) (2,171) $12,798 $11,531 F-51 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) As the Company currently has no plans to enter into lump sum lease terminations with either of the landlords associated with these two excess spaceleases, the Company has reflected its accrued restructuring liability as both current and non-current on the accompanying consolidated balance sheets as ofDecember 31, 2006 and December 31, 2005. The Company is contractually committed to these two excess space leases through 2015.The Company’s minimum future payments associated with these two excess space leases is as follows (in thousands): 2007 $3,217 2008 3,262 2009 3,309 2010 3,357 2011 3,464 2012 and thereafter 13,143 29,752 Less amount representing estimated subrental income and expense (12,570) 17,182 Less amount representing accretion (3,325) 13,857 Less current portion (3,096) $10,761 2005 Restructuring ChargesIn October 2005, in light of the availability of fully or partially built-out data centers in the Silicon Valley, including the possibility of expansion amongsome of the four IBX centers the Company currently has in the Silicon Valley, the Company made the decision that retaining the approximately 40 acre SanJose Ground Lease for future expansion was no longer economical. In conjunction with this decision, the Company entered into an agreement with the landlordof this property for the early termination of the San Jose Ground Lease property whereby the Company will pay $40,000,000 over the next four years plusproperty taxes, commencing January 1, 2006, to terminate this lease, which would otherwise require significantly higher cumulative lease payments through2020 (see Note 16) (the “San Jose Ground Lease Termination”). As a result of the San Jose Ground Lease Termination, the Company recorded a $33,814,000restructuring charge in the fourth quarter of 2005, which represents the present value of the Company’s estimated future cash payments to exit this property,as well as the write-off of all remaining property and equipment attributed to the development of this property.The Company estimated the future cash payments required to exit the San Jose Ground Lease, net of any estimated subrental income and expense,through the remainder of the lease term and then calculated the present value of such future cash flows in order to determine the appropriate restructuringcharge to record. The Company’s use of this property terminates on December 31, 2007 and can be terminated at any time prior to December 31, 2007 uponthe landlord providing the Company at least 10 days prior written notice; however, even if the landlord terminates early, the Company is still required to paythe full $40,000,000 of payments due. Subsequent to recording the initial restructuring charge, the Company records accretion expense to accrete its accruedrestructuring liability up to an amount equal to the total estimated future cash payments necessary to complete the exit of the San Jose Ground Lease. F-52 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) A summary of the 2005 restructuring charges during the year ended December 31, 2006 is outlined as follows (in thousands): Accruedrestructuringcharge as ofDecember 31,2005 Accretionexpense Cashpayments Accruedrestructuringcharge as ofDecember 31,2006 Estimated lease exit costs $36,129 $2,203 $(10,617) $27,715 36,129 $2,203 $(10,617) 27,715 Less current portion (10,229) (10,373) $25,900 $17,342 A summary of the 2005 restructuring charges during the year ended December 31, 2005 is outlined as follows (in thousands): Total 2005restructuringcharges Non-cashcharges Transfer ofdeferred rentliability Accretionexpense Cashpayments Accruedrestructuringcharge as ofDecember 31,2005 Estimated lease exit costs $32,328 $— $4,441 $505 $(1,145) $36,129 Write-off of property and equipment 1,486 (1,486) — — — — $33,814 $(1,486) $4,441 $505 $(1,145) $36,129 Less current portion (10,229) $25,900 Prior to the Company’s decision to exit the San Jose Ground Lease in October 2005, the Company had recorded deferred rent in connection with thisleasehold as it straightlined the associated rent expense from lease inception in May 2000 to October 2005 totaling $4,441,000. In conjunction with theCompany’s decision to exit from the San Jose Ground Lease, the Company reclassified this deferred rent liability from deferred rent to accrued restructuringcharges as of October 31, 2005 and adjusted the restructuring charge accordingly.The Company’s minimum future payments associated with the San Jose Ground Lease are as follows (in thousands): 2007 $10,736 2008 10,000 2009 10,000 30,736 Less amount representing estimated subrental income and expense — 30,736 Less amount representing accretion (3,021) 27,715 Less current portion (10,373) $17,342 F-53 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 20. Subsequent EventsOn January 1, 2007, pursuant to the provisions of the Company’s stock plans (see Note 13), the number of common shares in reserve automaticallyincreased by 1,771,015 shares for the 2000 Equity Incentive Plan, 500,000 shares for the 2004 Purchase Plans and 50,000 shares for the 2000 Director OptionPlan.In January 2007, the Stock Option Committee of the Board of Directors approved stock options to be granted to employees, excluding executive officers,to purchase an aggregate of 511,310 shares of common stock as part of the Company’s annual refresh program. In addition, the Compensation Committee ofthe Board of Directors approved the issuance of 178,400 restricted stock units to certain employees, excluding executive officers, also as part of theCompany’s annual refresh program. The Compensation Committee of the Board of Directors also approved the issuance of an aggregate of 218,000 shares ofrestricted common stock and restricted stock units to executive officers pursuant to the 2000 Equity Incentive Plan. All awards are subject to vestingprovisions. All such equity awards will be accounted for under the provisions of SFAS No. 123(R), “Share-Based Payment,” and related pronouncements,which will have a significant impact to the Company.In February 2007, the Company entered into an agreement to purchase the building and property where its original Silicon Valley IBX center is locatedfor $65.0 million, which is expected to close no later than November 2007. The Company intends to finance substantially all of the cost of the propertyacquisition, following an initial $6.5 million deposit paid with cash in February 2007.In February 2007, a wholly-owned subsidiary of the Company obtained a loan of up to $110,000,000 to finance a portion of the development andconstruction costs of the Chicago Metro Area IBX Expansion Project (see Note 2) (the “Chicago IBX Financing”), of which $19,956,000 of the Chicago IBXFinancing was drawn at closing. The remaining amount of the Chicago IBX Financing will be drawn during the construction period of the Chicago Metro AreaIBX Expansion Project and the Company expects that the $110,000,000 will be fully drawn by the end of 2007. The Chicago IBX Financing has a term ofthree years and bears interest at a floating rate (one, three or six month LIBOR plus 2.75%), with an initial rate of 8.125%. The Chicago IBX Financing hasno specific financial covenants. In addition, the Chicago IBX Financing contains a limited parent company guaranty.21. Quarterly 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 fluctuationsin the Company’s cash flows and the cash and cash equivalents and accounts receivable accounts on the Company’s consolidated balance sheet. Causes ofsuch fluctuations may include the volume and timing of new orders and renewals, the timing of the opening of new IBX centers, the sales cycle for theCompany’s services, the introduction of new services, changes in service prices and pricing models, trends in the Internet infrastructure industry, generaleconomic conditions, extraordinary events such as acquisitions or litigation 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. F-54 Table of ContentsEQUINIX, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table presents selected quarterly information for fiscal 2006 and 2005: Firstquarter Secondquarter Thirdquarter Fourthquarter (in thousands, except per share data) 2006: Revenues $64,869 $68,548 $73,726 $79,772 Net income (loss) before cumulative effect of a change in accounting principle (5,446) (5,270) (5,168) 9,111(a)Net income (loss) (5,070) (5,270) (5,168) 9,111(a)Basic net income (loss) per share: Before cumulative effect of a change in accounting principle (0.19) (0.19) (0.18) 0.31 After cumulative effect of a change in accounting principle (0.18) (0.19) (0.18) 0.31 Diluted net income (loss) per share: Before cumulative effect of a change in accounting principle (0.19) (0.19) (0.18) 0.30 After cumulative effect of a change in accounting principle (0.18) (0.19) (0.18) 0.30 2005: Revenues $48,684 $52,479 $58,096 $61,798 Net loss (5,794) (3,431) (783) (32,604)(b)Basic and diluted net loss per share (0.26) (0.14) (0.03) (1.25)(a)Includes a $9,647,000 gain on Honolulu IBX sale (see Note 3).(b)Includes a $33,814,000 restructuring charge (see Note 19). F-55 Exhibit 10.35EQUINIX ANNUAL INCENTIVE PLANJANUARY 1, 2007PLAN OBJECTIVESEquinix will offer the Equinix Incentive Plan to provide eligible employees with the opportunity to participate in company performance. It is designed tomotivate employees to achieve certain company objectives, provide competitive total cash compensation for key positions and retain top talent.PLAN FEATURESELIGIBILITY/PARTICIPATIONAll regular full-time and part-time employees will be eligible to participate. Commissioned sales employees will not be eligible. Full-time and part-time new hireswill be eligible to participate as of hire date. Employees not employed by the Company at the beginning of the year shall only be eligible for a percentage ofhis/her Target Bonus equal to that percentage of the year he/she was employed by the Company. Employees with start dates on or after October 1st will not beeligible to participate for the plan ending December 31st of the year of hire.An employee is not eligible to receive a bonus if he/she is on a Performance Improvement Plan (PIP) or is not employed by the Company on the date a TargetBonus is paid. Payouts will be pro-rated over the period based on the position the employee held during the performance period. For example, if an employee ispromoted from Senior Manager to Director, his/her bonus will be calculated upon the number of days in each position. As another example, if an employee ispromoted from a non-commissioned position to a commissioned sales position, his/her bonus will be pro-rated based on the number of days worked in a non-commissioned position. Employees on an approved Leave of Absence will be eligible for the pro-rated bonus amount based on the number of days they workedas an active employee during the plan year.The plan is effective January 1, 2007 and will end on December 31, 2007.PAYMENT OF AWARDSIndividual awards will be paid as soon after the close of the fiscal year as practical. PLAN ADMINISTRATIONThe Compensation Committee of the Board of Directors may modify or terminate this plan at any time. The CEO will have final decision over anyinterpretations or disputes of the plan.CALCULATING COMPANY PERFORMANCE AND FUNDING OF INCENTIVE POOLThe funding level of the Incentive Pool will be based on Company performance against revenue and EBITDA goals, as set forth in the Board approvedoperating plan adjusted from time to time throughout the plan year. Fifty percent (50%) of the Incentive Pool will be funded each quarter if revenue andEBITDA targets for that quarter have been met, provided total year forecasted results meet or exceed the operating plan. The remaining fifty percent (50%) ofthe Incentive Pool will be funded each quarter if the Company over-performs against the operating plan revenue and EBITDA targets. The revenue andEBITDA goals will exclude the impact of one-time events affecting the operating plan, such as expansion projects or acquisitions not contemplated in theoperating plan. The specific revenue and EBITDA goals for each year shall be as set forth on a Design Criteria established prior to the end of the first quarterof each year.For 2007, the Design Criteria shall be as follows:Fifty percent (50%) of Incentive Pool shall be funded if the Company hits its operating plan for revenue and EBITDA for the year. For every 1% belowoperating plan for revenue and EBITDA, the Incentive Pool shall be reduced by 10%. For instance, if the Company is 2% below plan, only 30% of theIncentive Plan shall be funded. There shall be no Incentive Pool if either revenue or EBITDA is less than 95% of operating plan target.Funding of the remaining fifty percent (50%) of the incentive pool shall take place should the Company achieve revenue or EBITDA in excess of plan. In thecase where the Company achieves revenue above its plan, the Incentive Pool will be funded based upon the incremental revenue over plan, provided theCompany has also achieved EBITDA over-plan performance at an equivalent or greater percentage than incremental revenue over plan. Should EBITDA over-performance exceed the amount of revenue over-performance, the pool will also be funded by the amount that EBITDA over-performance exceeds revenue over-performance, up to the maximum calculated incentive payout. Should EBITDA over-performance be less than revenue over-performance, no incremental poolfunding will be provided. Exhibit 10.36EQUINIX, INC.December 15, 2006Peter Van CampDear Peter:On September 25, 2003, you were granted an option to purchase 350,000 shares of the Company’s Common Stock (the “2003 Option”). You haverequested an amendment to the terms of the 2003 Option in order to ensure compliance with Section 409A of the Internal Revenue Code. Accordingly, you andthe Company agree that the 2003 Option and the option agreement governing the 2003 Option (the “Option Agreement”) shall be amended as follows:1. Exercise Price. Under Section 409A of the Internal Revenue Code, the grant of an option at a discount can result in adverse tax consequences forthe optionee under Section 409A. The negative tax consequences of Section 409A can be mitigated by exchanging the discount option for an option with anexercise price at the fair market value of the common stock on the original date of grant. Accordingly, you hereby elect to raise the exercise price of the 2003Option solely with respect to 67,167 of the shares purchasable under the 2003 Option to the fair market value per share on the original grant date, that is to$20.82. This adjustment to the exercise price shall apply to the 67,167 of the shares purchasable under the 2003 Option that vested and became exercisablefrom March 25, 2006 to September 25, 2006, excluding the first 889 shares that became exercisable on March 25, 2006.2. Exercisability. With respect to the 91,667 of the shares purchasable under the 2003 Option which become exercisable for the first time incalendar 2005 and which were not exercised in 2005 (the “2005 Shares”) and 20,333 of the shares purchasable under the 2003 Option which becomeexercisable for the first time in January through March 2006 (including 889 of the shares that became exercisable in March 2006) (the “2006 Shares”), youhereby elect to exercise the 2005 Shares and 2006 Shares in accordance with the schedule set forth on Exhibit A. To the extent you do not exercise the 2003Option for the 2005 Shares and 2006 Shares in accordance with Exhibit A, the 2003 Option will expire immediately following the last day of the applicablecalendar year solely with respect to the identified portion of the 2005 Shares and 2006 Shares.3. Effective Date. This Agreement will become effective as of the date it is signed by you.4. Effect of Amendment on the Option Agreement. Except as amended herein, all of the terms of the Option Agreement shall continue in full forceand effect. 5. Governing Law. This letter agreement shall be governed by, and construed in accordance with, the laws of the State of California, as such lawsare applied to contracts entered into and to be performed entirely within the State of California.You may indicate your agreement with these terms and effect this election by signing and dating the enclosed duplicate original of this letteragreement and returning it to the Company. Very truly yours,EQUINIX, INC.By: /s/ Keith D. TaylorTitle: Chief Financial Officer Accepted and Agreed To:/s/ Peter Van CampSignature of Peter Van CampDated: December 15, 2006 EXHIBIT A409A Election FormOptionee: Peter Van CampOption covered by the election:112,000 shares purchasable under an option to purchase 350,000 shares of the Company’s Common Stock granted on September 25, 2003 (the“2003 Option”)The 2005 Shares and 2006 Shares identified below shall only be exercisable (to the extent otherwise vested and exercisable pursuant to the terms of the OptionAgreement) during the calendar years specified below:91,667 of the 2005 Shares during calendar year 200720,333 of the 2006 Shares during calendar year 2007I acknowledge and agree that my 2003 Option is being amended so that the 2005 Shares and 2006 Shares will only be exercisable at the times set forth in thisElection and the attached letter agreement: /s/ Peter Van CampSignature of Peter Van CampDated: December 15, 2006 EQUINIX, INC. Mr. Peter Van Camp December 13, 2006 Re:Actual Option Grant Date: April 9, 2001 Exercise Price on Actual Option Grant Date: $29.44 Valid Grant Date for Income Tax Purposes (the “Valid Grant Date”): April 11, 2001 Fair market value on Valid Grant Date: $43.20 Number of Shares Granted: 16,713 Number of Shares Subject to 409A: 3,126Dear PVC:On the Actual Option Grant Date set forth above, you were granted an option to purchase the number of shares of Equinix, Inc. (the “Company”)Common Stock set forth above (the “Option”). We are proposing an amendment to the terms of the Option in order to ensure compliance with Section 409A ofthe Internal Revenue Code of 1986 (the “Code”).New tax legislation has been enacted that triggers adverse tax consequences for holders of options that have an exercise price per share that is lessthan the fair market value per share of the underlying stock on the option’s Valid Grant Date. Specifically, Section 409A of the Code and the TreasuryRegulations promulgated under such section provide that an option with an exercise price per share that is less than the fair market value per share of theunderlying stock on the Valid Grant Date is a “discounted option” that will be subject to adverse tax consequences, including income tax, an additional tax of20% and interest plus penalties.For a limited period of time, the Internal Revenue Service will allow discounted options to be remedied in a manner to avoid the adverse taxconsequences under Code Section 409A. One such remedy is to increase the per share exercise price of a discounted option, such that the per share exerciseprice is equal to the fair market value per share of the underlying stock on the Valid Grant Date of the discounted option. For you, this means that the exerciseprice per share of the Option must be increased to the fair market value per share of the Company’s Common Stock on the Valid Grant Date of the Option (setforth above). By signing below, the exercise price of the number of shares of the Option subject to 409A will be increased. If you exercised any portion of thenumber of shares of the Option subject to 409A, the exercise price of the Option will be adjusted solely with respect to the unexercised portion of the number ofshares of the Option subject to 409A.Please also be advised that the entire 16,713 shares subject to the Option, although originally deemed to be Incentive stock options, will bereclassified as Non-qualified Stock Options.This letter is not intended to provide you with any tax advice and does not intend to provide a comprehensive explanation of all of the ways tocomply with Code Section 409A to avoid the adverse tax consequences with respect to discounted options. The Company encourages you to consult your owntax adviser to discuss the tax implications of your Option before deciding whether to sign this letter. This Agreement will become effective as of the date it is signed by you. This Agreement shall be governed by, and construed in accordance with,the laws of the State of California, as such laws are applied to contracts entered into and to be performed entirely within the State of California.By signing below, you agree that the exercise price per share of the Option will be increased so that it is equal to the fair market value per share ofthe Company’s Common Stock on the Valid Grant Date, as indicated above. The remaining terms of the Option remain in full force and effect. Please sign andreturn this letter to Darrin Short of the Stock Services Department, no later than December 15, 2006. If you do not sign this letter, your Option will remainunchanged and you will be subject to the adverse tax consequences of Code Section 409A. Very truly yours,EQUINIX, INC.By: /s/ Keith D. TaylorTitle: Chief Financial Officer Accepted and Agreed To:/s/ Peter Van CampSignature of [Optionee]Dated: December 19, 2006 EQUINIX, INC. Ms. Marjorie Backaus December 13, 2006 Re:Actual Option Grant Date: January 9, 2001 Exercise Price on Actual Option Grant Date: $119.00 Valid Grant Date for Income Tax Purposes (the “Valid Grant Date”): January 10, 2001 Fair market value on Valid Grant Date: $122.00 Number of Shares Granted: 3,907 Number of Shares Subject to 409A: 82Dear Margie:On the Actual Option Grant Date set forth above, you were granted an option to purchase the number of shares of Equinix, Inc. (the “Company”)Common Stock set forth above (the “Option”). We are proposing an amendment to the terms of the Option in order to ensure compliance with Section 409A ofthe Internal Revenue Code of 1986 (the “Code”).New tax legislation has been enacted that triggers adverse tax consequences for holders of options that have an exercise price per share that is lessthan the fair market value per share of the underlying stock on the option’s Valid Grant Date. Specifically, Section 409A of the Code and the TreasuryRegulations promulgated under such section provide that an option with an exercise price per share that is less than the fair market value per share of theunderlying stock on the Valid Grant Date is a “discounted option” that will be subject to adverse tax consequences, including income tax, an additional tax of20% and interest plus penalties.For a limited period of time, the Internal Revenue Service will allow discounted options to be remedied in a manner to avoid the adverse taxconsequences under Code Section 409A. One such remedy is to increase the per share exercise price of a discounted option, such that the per share exerciseprice is equal to the fair market value per share of the underlying stock on the Valid Grant Date of the discounted option. For you, this means that the exerciseprice per share of the Option must be increased to the fair market value per share of the Company’s Common Stock on the Valid Grant Date of the Option (setforth above). By signing below, the exercise price of the number of shares of the Option subject to 409A will be increased. If you exercised any portion of thenumber of shares of the Option subject to 409A, the exercise price of the Option will be adjusted solely with respect to the unexercised portion of the number ofshares of the Option subject to 409A.This letter is not intended to provide you with any tax advice and does not intend to provide a comprehensive explanation of all of the ways tocomply with Code Section 409A to avoid the adverse tax consequences with respect to discounted options. The Company encourages you to consult your owntax adviser to discuss the tax implications of your Option before deciding whether to sign this letter. This Agreement will become effective as of the date it is signed by you. This Agreement shall be governed by, and construed in accordance with,the laws of the State of California, as such laws are applied to contracts entered into and to be performed entirely within the State of California.By signing below, you agree that the exercise price per share of the Option will be increased so that it is equal to the fair market value per share ofthe Company’s Common Stock on the Valid Grant Date, as indicated above. The remaining terms of the Option remain in full force and effect. Please sign andreturn this letter to Darrin Short of the Stock Services Department, no later than December 15, 2006. If you do not sign this letter, your Option will remainunchanged and you will be subject to the adverse tax consequences of Code Section 409A. Very truly yours,EQUINIX, INC.By: /s/ Keith D. TaylorTitle: Chief Financial Officer Accepted and Agreed To:/s/ Margie BackausSignature of [Optionee]Dated: December 26, 2006 EQUINIX, INC. Mr. Peter T. Ferris December 13, 2006 Re:Actual Option Grant Date: January 9, 2001 Exercise Price on Actual Option Grant Date: $119.00 Valid Grant Date for Income Tax Purposes (the “Valid Grant Date”): January 10, 2001 Fair market value on Valid Grant Date: $122.00 Number of Shares Granted: 3,907 Number of Shares Subject to 409A: 82Dear Pete:On the Actual Option Grant Date set forth above, you were granted an option to purchase the number of shares of Equinix, Inc. (the “Company”)Common Stock set forth above (the “Option”). We are proposing an amendment to the terms of the Option in order to ensure compliance with Section 409A ofthe Internal Revenue Code of 1986 (the “Code”).New tax legislation has been enacted that triggers adverse tax consequences for holders of options that have an exercise price per share that is lessthan the fair market value per share of the underlying stock on the option’s Valid Grant Date. Specifically, Section 409A of the Code and the TreasuryRegulations promulgated under such section provide that an option with an exercise price per share that is less than the fair market value per share of theunderlying stock on the Valid Grant Date is a “discounted option” that will be subject to adverse tax consequences, including income tax, an additional tax of20% and interest plus penalties.For a limited period of time, the Internal Revenue Service will allow discounted options to be remedied in a manner to avoid the adverse taxconsequences under Code Section 409A. One such remedy is to increase the per share exercise price of a discounted option, such that the per share exerciseprice is equal to the fair market value per share of the underlying stock on the Valid Grant Date of the discounted option. For you, this means that the exerciseprice per share of the Option must be increased to the fair market value per share of the Company’s Common Stock on the Valid Grant Date of the Option (setforth above). By signing below, the exercise price of the number of shares of the Option subject to 409A will be increased. If you exercised any portion of thenumber of shares of the Option subject to 409A, the exercise price of the Option will be adjusted solely with respect to the unexercised portion of the number ofshares of the Option subject to 409A.This letter is not intended to provide you with any tax advice and does not intend to provide a comprehensive explanation of all of the ways tocomply with Code Section 409A to avoid the adverse tax consequences with respect to discounted options. The Company encourages you to consult your owntax adviser to discuss the tax implications of your Option before deciding whether to sign this letter. This Agreement will become effective as of the date it is signed by you. This Agreement shall be governed by, and construed in accordance with,the laws of the State of California, as such laws are applied to contracts entered into and to be performed entirely within the State of California.By signing below, you agree that the exercise price per share of the Option will be increased so that it is equal to the fair market value per share ofthe Company’s Common Stock on the Valid Grant Date, as indicated above. The remaining terms of the Option remain in full force and effect. Please sign andreturn this letter to Darrin Short of the Stock Services Department, no later than December 15, 2006. If you do not sign this letter, your Option will remainunchanged and you will be subject to the adverse tax consequences of Code Section 409A. Very truly yours,EQUINIX, INC.By: /s/ Keith D. TaylorTitle: Chief Financial Officer Accepted and Agreed To:/s/ Peter FerrisSignature of [Optionee]Dated: December 20, 2006 EQUINIX, INC. Ms. Renee Lanam December 13, 2006 Re:Actual Option Grant Date: January 9, 2001 Exercise Price on Actual Option Grant Date: $119.00 Valid Grant Date for Income Tax Purposes (the “Valid Grant Date”): January 10, 2001 Fair market value on Valid Grant Date: $122.00 Number of Shares Granted: 3,907 Number of Shares Subject to 409A: 82Dear Renee:On the Actual Option Grant Date set forth above, you were granted an option to purchase the number of shares of Equinix, Inc. (the “Company”)Common Stock set forth above (the “Option”). We are proposing an amendment to the terms of the Option in order to ensure compliance with Section 409A ofthe Internal Revenue Code of 1986 (the “Code”).New tax legislation has been enacted that triggers adverse tax consequences for holders of options that have an exercise price per share that is lessthan the fair market value per share of the underlying stock on the option’s Valid Grant Date. Specifically, Section 409A of the Code and the TreasuryRegulations promulgated under such section provide that an option with an exercise price per share that is less than the fair market value per share of theunderlying stock on the Valid Grant Date is a “discounted option” that will be subject to adverse tax consequences, including income tax, an additional tax of20% and interest plus penalties.For a limited period of time, the Internal Revenue Service will allow discounted options to be remedied in a manner to avoid the adverse taxconsequences under Code Section 409A. One such remedy is to increase the per share exercise price of a discounted option, such that the per share exerciseprice is equal to the fair market value per share of the underlying stock on the Valid Grant Date of the discounted option. For you, this means that the exerciseprice per share of the Option must be increased to the fair market value per share of the Company’s Common Stock on the Valid Grant Date of the Option (setforth above). By signing below, the exercise price of the number of shares of the Option subject to 409A will be increased. If you exercised any portion of thenumber of shares of the Option subject to 409A, the exercise price of the Option will be adjusted solely with respect to the unexercised portion of the number ofshares of the Option subject to 409A.This letter is not intended to provide you with any tax advice and does not intend to provide a comprehensive explanation of all of the ways tocomply with Code Section 409A to avoid the adverse tax consequences with respect to discounted options. The Company encourages you to consult your owntax adviser to discuss the tax implications of your Option before deciding whether to sign this letter. This Agreement will become effective as of the date it is signed by you. This Agreement shall be governed by, and construed in accordance with,the laws of the State of California, as such laws are applied to contracts entered into and to be performed entirely within the State of California.By signing below, you agree that the exercise price per share of the Option will be increased so that it is equal to the fair market value per share ofthe Company’s Common Stock on the Valid Grant Date, as indicated above. The remaining terms of the Option remain in full force and effect. Please sign andreturn this letter to Darrin Short of the Stock Services Department, no later than December 15, 2006. If you do not sign this letter, your Option will remainunchanged and you will be subject to the adverse tax consequences of Code Section 409A. Very truly yours,EQUINIX, INC.By: /s/ Keith D. TaylorTitle: Chief Financial Officer Accepted and Agreed To:/s/ Renee LanamSignature of [Optionee]Dated: December 19, 2006 Exhibit 10.37Execution CounterpartFIRST OMNIBUS MODIFICATION AGREEMENTTHIS FIRST OMNIBUS MODIFICATION AGREEMENT (this “Agreement”), is made as of the 27th day of December, 2006, by andamong EQUINIX RP II LLC, a Delaware limited liability company, having an address c/o Equinix, Inc., 301 Velocity Way, 5th Floor, Foster City,California 94404 (“Borrower”), EQUINIX, INC., a Delaware corporation, having an address 301 Velocity Way, 5th Floor, Foster City, California 94404 (“Guarantor”; Borrower and Guarantor are herein collectively referred to as “Borrower Parties” or individually as a “Borrower Party”), and SFT I,INC., a Delaware corporation, having an address at 1114 Avenue of the Americas, 27th Floor, New York, New York 10036, and its successors and assigns(“Lender”).RECITALSA. Borrower and Lender entered into that certain Loan and Security Agreement, dated as of December 21, 2005 (the “Initial Closing Date”) (the“Original Loan Agreement”), wherein, among other things, Lender agreed to make, and Borrower agreed to accept, a loan (the “Original Loan”) in theoriginal principal amount of SIXTY MILLION AND NO/100 DOLLARS ($60,000,000.00) (the “Original Loan Amount”) of which $58,895,377.83 isoutstanding as of the date hereof.B. To further evidence and secure the Original Loan, Borrower Parties, as applicable, executed and delivered as of December 21, 2005 (the “InitialClosing Date”) that certain (i) Promissory Note from Borrower dated the Initial Closing Date in the original principal amount of the Original Loan Amount(the “Original Note”); (ii) Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated the Initial Closing Dare executed byBorrower in favor of the Trustee (as defined therein) for the benefit of Lender, as recorded in the Office of the Clerk of the Circuit Court for Loudoun County,Virginia (the “Land Records”) on December 22, 2005, as Instrument Number 20051222-0143326 (the “Original DOT”); (iii) Assignment of Leases andRents dated the Initial Closing Date executed by Borrower in favor of Lender, as recorded in the Land Records on December 22, 2005 as Instrument Number20051222-0143327 (the “Original ALR”); (iv) Assignment of Leases and Rents (Master Lease – Equinix, Inc.) dated the Initial Closing Date executed byGuarantor in favor of Lender (the “Master Lease ALR”); (v) Guaranty dated the Initial Closing Date given by Guarantor in favor of Lender (the“Guaranty”); (vi) Environmental Indemnity Agreement executed by Borrower Parties favor of Lender dated the Initial Closing Date (the “EnvironmentalIndemnity”); (vii) Assignment of Contracts, Agreements and Equipment Leases executed by Borrower in favor of Lender dated the Initial Closing Date (the“Assignment of Contracts”); and (viii) Assignment of Licenses, Permits and Approvals executed by Borrower in favor of Lender dated the Initial ClosingDate (the “Assignment of Licenses” such Assignment of Licenses, together with the Original Loan Agreement, the Original Note, the Original DOT, theOriginal ALR, the Master Lease ALR, the Guaranty, the Environmental Indemnity, the Assignment of Contracts and all other documents evidencing, securing,guaranteeing, governing or relating to the Original Loan are hereinafter collectively referred to as the “Original Loan Documents”). 1 C. On the Initial Closing Date and as of the date hereof, Borrower was and is the sole owner of fee simple title to that certain parcel of land located inLoudoun County, Virginia (the “Land”), and more particularly described on Exhibit A attached to the Original Recorded Mortgage.D. Borrower and Lender have determined that it is desirable to increase the amount of the Original Loan by an additional Forty Million and No/100Dollars ($40,000,000.00) (the “Additional Loan Advance”) and amend and modify certain terms and provisions of the Original Loan Documents asprovided herein. The Original Loan, as increased by the amount of the Additional Loan Advance is hereinafter referred to as the “Loan”, of which$98,895,377.83 will be outstanding as of the date hereof after giving effect to the Additional Loan Advance.E. Concurrently herewith and as a condition hereto, Borrower and certain other parties are executing and delivering that certain: (i) Amended andRestated Promissory Note of even date herewith whereby the Original Note is being amended and restated, (ii) First Amendment to Deed of Trust, Assignmentof Leases and Rents, Security Agreement and Fixture Filing and Assignment of Leases and Rents of even date herewith, (iii) Reaffirmation of Guaranty of evendate herewith whereby Guarantor reaffirms its obligations under the Guaranty, (iv) First Amendment to Deed of Lease of even date herewith between Guarantorin its capacity as lessee and Borrower in its capacity as lessor, (v) Guaranty of Lease of even date herewith given by Guarantor, and (vi) Assignment of Leasesand Rents (Master Lease – Equinix Operating Co., Inc.) of even date herewith (collectively with this Agreement, the “Loan Document Amendments” andtogether with the Original Loan Documents, as amended or reaffirmed hereby and thereby, the “Loan Documents”).F. All capitalized terms not defined in this Agreement shall have the meanings ascribed thereto in the Original Loan Agreement, as amended by thisAgreement (as so amended, the “Loan Agreement”).STATEMENT OF AGREEMENTNOW, THEREFORE, in consideration of the foregoing premises and the execution and delivery of the Loan Document Amendments, and forother good and valuable consideration in hand paid, the receipt and sufficiency of which is hereby acknowledged, the Borrower Parties and Lender agree asfollows:1. Recitals. All of the Recitals set forth above are incorporated herein by reference and shall be deemed to be a part of this Agreement.2. Borrower’s Acknowledgments. Borrower, to the best of its knowledge, represents, warrants, acknowledges and agrees that as of the date ofthis Agreement: (a) no breach, default or event which with the passage of time, the giving of notice or both would become a default exists under any of theOriginal Loan Documents; (b) all of the provisions of the Original Loan Documents, including without limitation all representations and warranties ofBorrower set forth therein, are unchanged, except as expressly amended hereby or by any of the other Loan Document 2 Amendments, as applicable, are in full force and effect and are hereby ratified and confirmed as true and complete in all material respects without exception asof today’s date; (c) after giving effect to the written consent of the Working Capital Lenders required under the SVB Loan Agreement, this Agreement and theother Loan Document Amendments and the Original Loan Documents will not and do not contravene or constitute an event which itself constitutes, or whichwith the passing of time or giving of notice or both would constitute, a default under any security instrument, loan agreement, indenture or other agreement towhich Borrower is a party or by which Borrower or any of Borrower’s property is bound.3. Guarantor’s Acknowledgments. Guarantor, to the best of its knowledge, represents, warrants, acknowledges and agrees that as of the dateof this Agreement: (a) no breach, default or event which with the passage of time, the giving of notice or both would become a default exists under any of theOriginal Loan Documents; (b) all of the provisions of the Original Loan Documents, including without limitation all representations and warranties ofGuarantor set forth therein, are unchanged, except as expressly amended hereby or by any of the other Loan Document Amendments, as applicable, are in fullforce and effect and are hereby ratified and confirmed as true and complete in all material respects without exception as of today’s date; (c) after giving effect tothe written consent of the Working Capital Lenders required under the SVB Loan Agreement, this Agreement and the other Loan Document Amendments andthe Original Loan Document Amendments will not and do not contravene or constitute an event which itself constitutes, or which with the passing of time orgiving of notice or both would constitute, a default under any security instrument, loan agreement, indenture or other agreement to which Guarantor is a partyor by which Guarantor or any of Guarantor’s property is bound. Guarantor hereby unconditionally, irrevocably, absolutely and forever waives and surrendersany and all defenses, setoffs, claims, counterclaims or deductions against the Lender, with respect to the Original Loan Documents, the Loan or theenforcement thereof by Lender against Guarantor arising out of or related to any facts, circumstances, events or happenings occurring prior to the making ofthe Additional Loan Advance.4. Borrower Party Acknowledgements. Borrower acknowledges and agrees that (i) it hereby ratifies and reaffirms its respective obligations andliabilities with respect to the Original Loan Documents to which it is a party, as the same may have been modified herein or by any of the other LoanDocument Amendments and acknowledge that such Original Loan Documents, as so modified, are in full force and effect on the date hereof and (ii) there existno defenses, setoffs, claims, counterclaims or deductions against the Loan and the enforcement thereof by Lender against Borrower and the Property. Borrowerhereby unconditionally, irrevocably, absolutely and forever waives and surrenders any and all defenses, setoffs, claims, counterclaims or deductions againstthe Lender with respect to the Original Loan Documents, the Loan or the enforcement thereof by Lender against Borrower and the Property, arising out of orrelated to any facts, circumstances, events or happenings occurring prior to the making of the Additional Loan Advance. Nothing herein contained shall in anymanner impair the enforceability or validity of the Note or any other Loan Document or any other security for the Loan, or alter, waive, annul or affect anyprovision, condition, or covenant therein or any rights, powers or remedies thereunder, except as specifically provided in the Loan Document Amendments. Itis the intent of the parties hereto that the terms and provisions of all of the Original Loan Documents as herein amended, shall continue in full force and effectexcept as specifically modified hereby or by any of the other Loan Document Amendments and that 3 such terms and provisions, as so modified, are hereby ratified and confirmed. Nothing herein contained is intended as, or shall be construed as, a novation oralteration of the liens, security agreements, guarantees and assignments evidenced by any of the Original Loan Documents, all of which liens, securityagreements, guarantees and assignments continue to reflect and retain, without diminution or alteration, their original enforceability, priority and rank.5. Modification of Original Loan Agreement. Effective as of the date of this Agreement, the Original Loan Agreement is hereby amended asfollows:(a) The definition of “Base Rate” is hereby deleted in its entirety and the following shall be inserted in lieu thereof: “means a fixed rate per annumequal to eight percent (8.00%), provided that beginning on January 1, 2016, such fixed rate per annum shall be reduced to seven and three quarters of onepercent (7.75%).(b) The definition of “Closing Date” is hereby deleted in its entirety and the following shall be inserted in lieu thereof: “means December 21, 2005,or, the date on which the Closing occurs with respect to the Additional Loan Advance, as applicable.”(c) The definition of “Commitment Fee” is hereby deleted in its entirety and the following shall be inserted in lieu thereof: “means an amount ofmoney equal to $700,000, which amount includes the Original Commitment Fee paid on the Initial Closing Date.”(d) The definition of “Loan” is hereby deleted in its entirety and the following shall be inserted in lieu thereof: “means the loan in the originalprincipal amount of $60,000,000 from Lender to Borrower, as increased by the Additional Loan Advance, as evidenced by the Promissory Note.”(e) The definition of “Promissory Note” is hereby deleted in its entirety and the following shall be inserted in lieu thereof: “means the Amended andRestated Promissory Note made by Borrower to the order of Lender in the original principal amount of $98,895,377.83.”(f) The definition of “SVB Loan Agreement” is hereby deleted in its entirety and the following shall be inserted in lieu thereof: “means that certainSecond Amended and Restated Loan and Security Agreement, dated as of August 10, 2006, among Carveout Guarantor and Borrower Representative, asborrowers, the Working Capital Lenders, and Silicon Valley Bank, as administrative agent for the Working Capital Lenders.”(g) The definition of “Yield Maintenance Amount” is hereby deleted in its entirety and the following shall be inserted in lieu thereof: means thepositive excess, if any, as of the date of prepayment of (i) the present value of the Yield Maintenance Cash Flows, which present value shall be calculatedusing a discount rate equal to “X” divided by 12; where “X” equals the Treasury Rate (the “Yield Maintenance Spread”) in the event of a prepayment of theNote, over (ii) the outstanding principal balance of the Loan on the date of prepayment. For purposes of computing the Yield Maintenance Amount with regardto Section 2.4(C)(iii) the date of prepayment shall be deemed the date the Loan is accelerated. The Yield Maintenance Amount shall be computed assuming thescheduled “Lockout Expiration Date” as if it were the Maturity Date of the Loan. 4 (h) The definition of “Treasury Rate” means the annualized yield on securities issued by the United States Treasury having a maturitycorresponding to the scheduled Lockout Expiration Date, as quoted in Federal Reserve Statistical Release H. 15(519) under the heading “U.S. GovernmentSecurities – Treasury Constant Maturities” for the Treasury Rate Determination Date (as defined below). If yields for such securities of such maturity are notshown in such publication, then the Treasury Rate shall be determined by Lender by linear interpolation between the yields of securities of the next longer andnext shorter maturities. If said Federal Reserve Statistical Release or any other information necessary for determination of the Treasury Rate in accordance withthe foregoing is no longer published or is otherwise unavailable, then the Treasury Rate shall be reasonably determined by Lender based on comparable data.(i) Section 1.1 of the Loan Agreement is hereby amended to add the following definitions:(i) “Additional Loan Advance” means $40,000,000 to be advanced by Lender in connection with the execution and delivery of thePromissory Note.(ii) “Equinix” means Equinix, Inc., a Delaware corporation.(iii) “Equinix Parent Transaction Event” means any Transfer or series of related Transfers (a) resulting in any Person or Groupacquiring, directly or indirectly, more than a forty-nine (49%) ownership interest in Carveout Guarantor (if such Person or Group did not, prior to suchTransfer or series of Transfers, own at least forty-nine percent (49%) of the ownership interests of Carveout Guarantor) or (b) made in connection with themerger, consolidation or reorganization of Carveout Guarantor and which, in the case of either clause (a) or (b), does not constitute a Qualified ParentTransaction Event.(iv) “Financial Strength Criteria” has the meaning set forth in the Master Lease.(v) “Initial Closing Date” means December 21, 2005.(vi) “Investment Grade Criteria” has the meaning set forth in the Master Lease.(vii) “Original Commitment Fee” means an amount of money equal to $300,000 which was previously paid by Borrower on the InitialClosing Date.(viii) “Qualified Parent Transaction Event” means any transaction that is permitted under subclause (x) or subclause (y) ofSection 7.11. 5 (ix) “Working Capital Lenders” means the “Lenders” from time to time party to the SVB Loan Agreement.(x) “Yield Maintenance Cash Flows” means the aggregate of (i) the monthly scheduled payments that would be payable to Lender fromthe date of prepayment through the Lockout Expiration Date if the Loan were not prepaid and (ii) a balloon payment equal to the outstanding principal amountof the Loan on the Lockout Expiration Date, assuming, in the case of clause (i) and clause (ii), that the scheduled payments would be paid in full, in cash onthe dates such scheduled payments would be otherwise due and payable from the date of prepayment through the Lockout Expiration Date.(j) Section 2.3 is hereby deleted in its entirety and the following shall be inserted in lieu thereof:“(a) Interest for the period commencing on the Initial Closing Date and ending on December 31, 2005 shall be paid on the Initial ClosingDate. On each Payment Date thereafter commencing with the Payment Date occurring on February 1, 2006, Borrower shall pay to Lender (i) interest andprincipal in an amount equal to Five Hundred One Thousand Eight Hundred Sixty-Four and No/00 Dollars ($501,864.00) per month so that the full principalamount outstanding is amortized over the twenty (20) year term (the “Original P&I Payment”) and (ii) any other amounts that are due and payable under thisAgreement and the other Loan Documents (including, without limitation, any Default Interest and Late Charges). A final payment will be required on theMaturity Date.(b) Commencing on the date of disbursement of the Additional Loan Advance, interest accruing on the Additional Loan Amount for theperiod from the date of disbursement of such Additional Loan Advance until December 31, 2006 shall be due and payable on January 1, 2007 together withthe Original P&I Payment. On each Payment Date thereafter commencing with the Payment Date occurring on February 1, 2007, Borrower shall pay to Lenderin lieu of the Original P&I Payment, which payment shall be incorporated into the amount set forth below (i) interest and principal in an amount equal to EightHundred Forty-Seven Thousand Twenty-Eight and No/00 Dollars ($847,028.00) per month so that the full principal amount outstanding is amortized over theremainder of the twenty (20) year term of the Loan and (ii) any other amounts that are due and payable under this Agreement and the other Loan Documents(including, without limitation, any Default Interest and Late Charges). A final payment will be required on the Maturity Date.” For the avoidance of doubt,nothing contained herein shall require Borrower to pay interest on the Additional Loan Advance prior to the date of disbursement thereof.”(k) Section 2.8 is hereby deleted in its entirety and the following shall be inserted in lieu thereof: “Borrower shall pay any unpaid amount of theCommitment Fee to Lender on the Closing Date.”(l) Section 2.4(C) is hereby amended by adding the following subsection: “(iv) Notwithstanding any provision to the contrary contained in thisAgreement, in the event of an Equinix Parent Transaction Event, (x) Lender may declare immediately due and payable, without 6 further notice, protest, presentment, notice of protest or demand, all Obligations including, without limitation, all monies advanced under this Agreement, theNote, the Mortgage and/or any of the Loan Documents which are then unpaid, together with all interest then accrued thereon up to and including the date ofLender’s receipt of payment in full of the Loan and all other amounts then owing (including any Default Interest owed as a result of such acceleration and thePrepayment Premium) and (y) so long as no Event of Default shall have occurred and be continuing immediately prior to such Equinix Parent TransactionEvent, the “Yield Maintenance Spread” used to calculate the Yield Maintenance Amount for purposes of determining the Prepayment Premium shall equal theTreasury Rate plus two and one-half percent (2.5%).”(m) Clause (i) of Section 5.1 (F) is hereby amended to read in its entirety as follows:“(i)(x) Borrower is a direct, wholly-owned subsidiary of Borrower Representative, (y) Borrower Representative is a direct, wholly-ownedsubsidiary of Carveout Guarantor and (z) the equity interests in Carveout Guarantor are publicly offered securities, within the meaning of 29 C.F.R. §2510.3-101 (b)(2)”.(n) The second sentence of Section 7.11 is hereby deleted in its entirety and the following shall be inserted in lieu thereof:“Notwithstanding the foregoing, the following shall not be deemed to be prohibited under this Section 7.11: (i) Transfers to a Family Member ortrust for the benefit of a Family Member by devise or descent or by operation of law, (ii) a Transfer of an indirect ownership interest in Borrower, by thecurrent owner thereof to a Family Member of such current owner (or a trust for the benefit of any such Family Members), (iii) the Master Lease and Transfersby the Master Lessee to the extent permitted under the Master Lease, (iv) Transfers of ownership interests in a Person whose stock is listed or quoted on theNew York Stock Exchange, the American Stock Exchange or NASDAQ and (v) a Transfer or series of related Transfers, or the creation or issuance of director indirect ownership interests in Carveout Guarantor, in connection with the merger, consolidation or reorganization of Carveout Guarantor, so long as, in thecase of any transactions described in clauses (i) through (v) above, either of the following is true:(x) no such transaction results in any Person or Group acquiring, directly or indirectly, more than a forty-nine percent (49%) direct or indirectinterest in Borrower (if such Person or Group did not, prior to such transaction, own at least forty-nine percent (49%) of the direct or indirect ownershipinterests in Borrower); or(y) after giving effect to such transaction, both of the following conditions are satisfied: (I) the Tenant under the Master Lease is either Equinix oran entity that succeeds to the obligations of Equinix under the Master Lease (by assignment, operation of law or otherwise) and satisfies (or whose obligationsunder the Master Lease are guarantied by an entity that satisfies) the Investment Grade Criteria or the Financial Strength Criteria and (II) either Equinix (oranother entity that succeeds to the obligations of Equinix and satisfies the Investment Grade Criteria or the Financial Strength Criteria) remains obligated withrespect to the Carveout Guaranty and the Environmental Indemnity Agreement or another entity that satisfies the Investment Grade Criteria or 7 the Financial Strength Criteria assumes the obligations of Carveout Guarantor under the Carveout Guaranty and the Environmental Indemnity Agreement andexecutes such documents assuming the Carveout Guaranty and the Environmental Indemnity Agreement in form and substance reasonably acceptable toLender.”(o) Exhibit B (Permitted Title Exceptions and Matters) is hereby amended to read in its entirety as set forth on Schedule A attached hereto.(p) Schedule 4.7 (Litigation) is hereby amended to read in its entirety as set forth on Schedule B hereto.(q) Schedule 4.8 (Taxes) is hereby amended to read in its entirety as set forth on Schedule C hereto.(r) Schedule 4.18 (Accounts) is hereby amended to read in its entirety as set forth on Schedule D hereto.6. Modification of Certain Original Loan Documents. Effective as of the date hereof, the Master Lease ALR, the Guaranty, the Assignment ofContracts, the Environmental Indemnity, and the Assignment of Licenses (each, a “Specified Original Loan Document” and, collectively, the “SpecifiedOriginal Loan Documents”) are hereby amended and modified as follows:(a) Any and all references to the “Note” shall be deemed to refer to the Amended and Restated Promissory Note dated as of the date hereof. Any andall references to the “Loan Documents” (or any particular Loan Document) shall be deemed to refer to the Original Loan Documents (or such particular LoanDocuments) as amended by the Loan Document Amendments, as applicable. Any and all references to the “Loan Agreement” shall be deemed to refer to theOriginal Loan Agreement as amended by this Agreement.(b) Any and all references to “Loan” not otherwise defined therein shall be deemed to have the definition of “Loan” as set forth in the Original LoanAgreement as amended by this Agreement.(c) Exhibit A of the Assignment of Contracts is hereby amended and restated to read in its entirety as set forth on Schedule E hereto.7. Terms of Original Loan Documents and Effect of Amendment of Loan Documents. Except as modified herein or in the other LoanDocument Amendments, the terms and provisions of the Original Loan Documents shall remain in full force and effect and are unamended. This Agreement,the other Loan Document Amendments and the Loan Documents constitute the only agreements and understandings between and among the parties hereto withrespect to the Loan. There are no oral, course of dealing or implied agreements or understandings with Lender. 8 8. Execution of this Agreement. Each Borrower Party hereby represents and warrants that it is duly and unconditionally authorized andempowered to execute this Agreement without any further act or consent being required.9. Agreement Counterparts. This Agreement may be executed in counterparts, all of which taken together shall constitute one agreementbinding on all parties notwithstanding that all parties are not signatories to the original or the same counterpart.10. Further Assurances. Each of the Borrower Parties agrees to sign, execute and deliver and to do or make, upon the written request of Lender,any and all agreements, instruments, papers, deeds, acts or things, as may be reasonably required by Lender to effectuate the purpose of this Agreement andthe other Loan Documents.11. Conditions to Effectiveness of this Agreement. As a condition to the Lender’s agreement to make the Additional Advance, Borrower shalldeliver, or cause to be delivered, to Lender the following:(a) Payment of the remaining unpaid portion of the Commitment Fee in the amount of $400,000;(b) payment of Lender’s expenses in connection herewith, including without limitation, Lender’s reasonable legal fees;(c) an opinion letter(s) from counsel to the Borrower Parties as to due authorization, execution and enforceability of this Agreement, the Amendedand Restated Promissory Note, the First Amendment to Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing andAssignment of Leases and Rents, the Reaffirmation of Guaranty, the First Amendment to Deed of Lease, the Guaranty of Lease and/or the Assignment ofLeases and Rents (Master Lease – Equinix Operating Co., Inc.) in form and content reasonably acceptable to Lender; and(d) originals of the Loan Document Amendments duly executed by the respective Borrower Parties;(e) updated officer’s certificates, current good standing/qualification certificates, and authorizing resolutions for Borrower, Carveout Guarantorand Borrower Representative;(f) copies of Uniform Commercial Code financing statement, judgment, tax lien, bankruptcy and litigation search reports of such jurisdictionsand offices as Lender may reasonably designate with respect to Borrower, Carveout Guarantor, Borrower Representative and such other Persons as Lendermay reasonably require;(g) appropriate endorsements to the Title Policy as Lender may reasonably require; 9 (h) a copy of the written consent of the Working Capital Lenders to the Additional Loan Advance and the transactions contemplated hereby;(i) such other documents or instruments as Lender may reasonably require in connection herewith; and(j) no Event of Default or any event which with the giving of notice or the passage of time shall result in an Event of Default shall exist.The Commitment Fee shall be considered fully earned upon the execution of this Agreement.12. Brokerage Commission. Borrower hereby represents and warrants that no broker’s or finder’s fee, commission or similar compensationwill be payable with respect to the modification of the Original Loan as set forth in the Loan Document Amendments, the making of the Additional LoanAdvance, the amendment to the Master Lease or any of the other transactions contemplated hereby or by any of the Loan Document Amendments based uponany broker or lender engaged by Borrower, Carveout Guarantor or any affiliate of Borrower. Borrower shall protect, defend, indemnify and hold Lenderharmless from and against all loss, cost, liability and expense incurred as a result of any claim for a broker’s or finder’s fee against Lender or any Person, inconnection with the transaction herein contemplated, provided such claim is made by or arises through or under Borrower or is based in whole or in part uponalleged acts or omissions of Borrower. Lender shall protect, defend, indemnify and hold Borrower harmless from and against all loss, cost, liability andexpense incurred as a result of any claim for a broker’s or finder’s fee against Borrower or any other Person in connection with the transaction hereincontemplated, provided such claim is made by or arises through or under Lender or is based in whole or in part upon alleged acts or omissions of Lender,except that under no circumstances shall Lender be liable for a broker engaged by Borrower, Carveout Guarantor or any affiliate of Borrower.13. Submission, Execution and Completion of Agreement. The submission of this Agreement or any of the documents referenced herein bythe Borrower Parties or their respective agents or attorneys for review or signature does not constitute a commitment or agreement by Lender to modify theLoan, and this Agreement and the other Loan Document Amendments (other than Borrower’s obligation to reimburse Lender for its costs and expenses inregard to this Agreement and the other Loan Document Amendments) shall have no binding force or effect against Lender unless and until Lender has executedand delivered such document or, if Lender is not a party thereto, has affirmatively accepted such document. The Borrower Parties each hereby acknowledge,represent and warrant that it has had advice of counsel of its own choosing in negotiations for and the preparation of this Agreement and the other LoanDocument Amendments, that it has read this Agreement and the other Loan Document Amendments or has had the same read to it by its counsel, that it hashad this Agreement and the other Loan Document Amendments fully explained by such counsel, and that it is fully aware of each such document’s contentsand legal effect and understands the significance and consequences of executing and delivering this Agreement and the other Loan Document Amendments toLender. 10 14.Release.(a) Borrower. As a material inducement for Lender to enter into this Agreement, Borrower, for itself, its partners and their respective successorsand assigns, does hereby forever release, discharge and acquit Lender, its parent corporation, and each of their respective affiliates, subsidiaries, successorsand assigns, and the officers, directors, members, partners, shareholders, participants, beneficiaries, trustees, employees, agents, any subsequent holder ofthe Note, any trustee, fiscal agent, servicer, underwriter and placement agent (collectively with Lender, the “Lender Parties”), of and from any and allclaims, demands, obligations, liabilities, indebtedness, breaches of contract, breaches of duty or any relationship, acts, omissions, misfeasance,malfeasance, cause or causes of action, judgments, debts, controversies, damages, costs, losses and expenses, of every type, kind, nature, description orcharacter existing prior to the making of the Additional Loan Advance and irrespective of how, why, or by reason of what facts, whether heretofore or nowexisting, or which could, might or may now or hereafter be claimed to exist, of whatever kind, name or nature, whether known or unknown, past or present,latent or patent, suspected or unsuspected, anticipated or unanticipated, liquidated or unliquidated (collectively, the “Claims” and individually a “Claim”),each as though fully set forth herein at length, which in any way arise out of, are connected with or relate to the Original Loan or the transactions arising fromor related thereto, provided, however, that the foregoing shall not release any of the Lender Parties from any Claims based upon or arising from the grossnegligence or willful misconduct of such Lender Parties. Borrower hereby agrees, represents and warrants that it realizes and acknowledges that factual mattersnow unknown to it may have given or may hereafter give rise to a Claim, and it further agrees, represents and warrants that this Agreement has been negotiatedand agreed upon in light of that realization and that it nevertheless hereby intends to release, discharge and acquit the Lender Parties, and each of them, fromany and all such Claims which in any way arise out of, are connected with, or relate to, the Original Loan or the transactions arising from or related thereto. Infurtherance of this intention, Borrower expressly waives any and all rights conferred upon it by the provisions of any present or future law, and expresslyconsents that the releases set forth in this Section 14(a) shall be given full force and effect according to each and all of its express terms and provisions to theextent permitted by applicable law. Borrower hereby represents and warrants to Lender that (i) it owns all of the purported rights to such Claims that it isreleasing by this Agreement and that no other person or entity has any interest in said Claims by reason of any contract or dealing with Borrower or any of itsagents, and (ii) Borrower has not assigned to any other person or entity all or any part of such Claims.(b) Guarantor. As a material inducement for Lender to enter into this Agreement, Guarantor for itself, its shareholders, partners or members (asapplicable) and its successors and assigns, does hereby forever release, discharge and acquit each of the Lender Parties of and from any and all Claims, eachas though fully set forth herein at length, which in any way arise out of, are connected with or relate to the Original Loan or the transactions arising from orrelated thereto, provided, however, that the foregoing shall not release any of the Lender Parties from any Claims based upon or arising from the grossnegligence or willful misconduct of such Lender Parties. Guarantor, hereby agrees, represents and warrants that it realizes and acknowledges that factualmatters now unknown to it may have given or may hereafter give rise to a Claim, and it further agrees, represents and warrants that this Agreement has beennegotiated and agreed upon in light of 11 that realization and that it nevertheless hereby intends to release, discharge and acquit the Lender Parties, and each of them, from any and all such Claimswhich in any way arise out of, are connected with, or relate to, the Original Loan or the transactions arising from or related thereto. In furtherance of thisintention, Guarantor expressly waives any and all rights conferred upon it by the provisions of any present or future law, and expressly consents that thereleases set forth in this Section 14(b) shall be given full force and effect according to each and all of its express terms and provisions to the extent permitted byapplicable law. Guarantor hereby represents and warrants to Lender that (i) except to the extent any of the Claims constitute collateral assigned to the WorkingCapital Lenders under the SVB Loan Agreement, it owns all of the purported rights to such Claims that it is releasing by this Agreement and that no otherperson or entity has any interest in said Claims by reason of any contract or dealing with Guarantor or any of its agents and has received any required releasesfrom the Working Capital Lenders to the extent required, and (ii) except to the extent any of the Claims constitute collateral assigned to the Working CapitalLenders under the SVB Loan Agreement, Guarantor has not assigned to any other person or entity all or any part of such Claims; provided, however, thatnotwithstanding the assignment of any such Claims to the Working Capital Lenders, Guarantor is fully authorized (to the extent required) to enter into thisAgreement and the foregoing release shall be binding on such Working Capital Lenders.(c) General Limitation on Release. Nothing contained in this Section 14 shall be deemed or construed to be a release of any party’s rights orobligations under this Agreement, the Loan Document Amendments or any of the Original Loan Documents or of any Claim arising from events, acts oromissions occurring after the making of an Additional Loan Advance or that do not arise out of or relate to, or that are not connected with, the Original Loan orthe transactions arising from or relating thereto. It is hereby further understood and agreed that the acceptance of delivery of this Agreement by the LenderParties shall not be deemed or construed as an admission of liability by any party released by the terms hereof, and each such party hereby expressly deniesliability of any nature whatsoever arising from or related to the subject of this Agreement.[SIGNATURES APPEAR ON THE FOLLOWING PAGE] 12 IN WITNESS WHEREOF, the parties have executed this First Omnibus Modification Agreement or have caused the same to be executed by theirrespective duly authorized representatives as of the date first above written. BORROWER:EQUINIX RP II LLC,a Delaware limited liability companyBy: /s/ Keith D. TaylorName: Keith D. TaylorIts: Manager GUARANTOR:EQUINIX, INC.,a Delaware corporationBy: /s/ Keith D. TaylorName: Keith D. TaylorIts: Chief Financial Officer[EXECUTION BY LENDER ON FOLLOWING PAGE] LENDER:SFT I, INC.,a Delaware corporationBy: /s/ Barclay G. Jones, IIIName: Barclay G. Jones, IIITitle: Executive Vice President AMENDED AND RESTATED PROMISSORY NOTE $98,895,377.83 as of December 27, 2006FOR VALUE RECEIVED, EQUINIX RP II LLC, a Delaware limited liability company (“Borrower”), promises to pay to SFT I, INC., aDelaware corporation (“Holder”), or order, at 1114 Avenue of the Americas, 27th Floor, New York, New York 10036, or at such other place as Holder mayfrom time to time in writing designate, in lawful money of the United States of America, the principal sum of NINETY-EIGHT MILLION EIGHTHUNDRED NINETY-FIVE THOUSAND THREE HUNDRED SEVENTY-SEVEN AND 83/100 ($98,895,377.83) or such other sum as may be thetotal amount outstanding pursuant to this Note (the “Loan”), payable at such rates and at such times as are provided in the “Loan Agreement” (ashereinafter defined). Terms used but not otherwise defined herein are used herein as defined in the Loan Agreement.Payments of both principal and interest are to be made in lawful money of the United States of America.This Amended and Restated Promissory Note (this “Note”) evidences Indebtedness incurred under, and is subject to the terms and provisions of, thatcertain Loan and Security Agreement by and among the Borrower and the Holder dated as of December 21, 2005 (the “Original Loan Agreement”), asamended by the First Omnibus Modification Agreement by and among Borrower and Holder dated as of even date hereof (the “Omnibus Agreement,” andcollectively with the Original Loan Agreement, as the same may be further amended, modified or supplemented from time to time, the “Loan Agreement”).The Loan Agreement, to which reference is hereby made, sets forth said terms and provisions, including those under which this Note may or must be paidprior to its due date or may have its due date accelerated or extended. The Loan Agreement also contains provisions for the payment of late charges and interestat the Default Rate, all as more specifically set forth therein. Repayment of the Indebtedness evidenced by this Note is secured by the Mortgage and the otherLoan Documents referred to in the Loan Agreement, and reference is made thereto for a statement of terms and provisions. This Note amends, restates andrenews, in its entirety, that certain Promissory Note dated as of December 21, 2005 (the “Initial Closing Date”), executed by Borrower in favor of Holder inthe original principal amount of $60,000,000 (the “Original Note”). This Note is a replacement of and is not in addition to the Original Note. The OriginalNote shall be returned to Borrower upon the execution and delivery of this Note to Holder with the following notation: “This Promissory Note has beenamended and restated in full and is no longer in force or effect.” This Note shall be deemed effective as of the date hereof. This Note shall not cause a novationof any of the obligations of Borrower under the Original Note, as amended and restated pursuant to this Note, nor shall it release, limit, or impair in any waythe priority of any security interest and liens held by Holder against any assets of Borrower. For the avoidance of doubt, nothing contained herein shall requireBorrower to pay interest on the Additional Loan Advance prior to the date of disbursement thereof. This Note may only be prepaid in whole or in part in accordance with the terms of Section 2.4 of the Loan Agreement (or as otherwise expressly providedelsewhere in the Loan Agreement or the other Loan Documents). Any payments of the outstanding principal balance of the Loan evidenced by this Note,whether voluntary or involuntary, shall be accompanied by interest accrued to the date of prepayment and the Prepayment Premium, to the extent, if any,provided in Section 2.4 of the Loan Agreement (except to the extent any other provision of the Loan Agreement expressly provides otherwise).EXCEPT AS OTHERWISE EXPRESSLY PERMITTED IN THIS NOTE OR THE OTHER LOAN DOCUMENTS, BORROWER HEREBYEXPRESSLY (i) WAIVES ANY RIGHTS IT MAY HAVE UNDER LAW TO PREPAY THIS NOTE, IN WHOLE OR IN PART, WITHOUT PENALTY,UPON ACCELERATION OF THE MATURITY DATE, AND (ii) AGREES THAT IF, FOR ANY REASON, A PREPAYMENT OF ALL OR ANYPORTION OF THE PRINCIPAL AMOUNT OF THIS NOTE IS MADE, INCLUDING, WITHOUT LIMITATION, UPON OR FOLLOWING ANYACCELERATION OF THE MATURITY DATE BY HOLDER ON ACCOUNT OF ANY DEFAULT BY BORROWER, INCLUDING, WITHOUTLIMITATION, ANY TRANSFER, DISPOSITION, OR FURTHER ENCUMBRANCE PROHIBITED OR RESTRICTED BY THE LOANAGREEMENT, THEN BORROWER SHALL BE OBLIGATED TO PAY CONCURRENTLY WITH SUCH PREPAYMENT THE PREPAYMENTPREMIUM TO THE EXTENT REQUIRED UNDER SECTION 2.4 OF THE LOAN AGREEMENT. BY INITIALING THIS PROVISION IN THESPACE PROVIDED BELOW, BORROWER HEREBY DECLARES THAT (1) EACH OF THE MATTERS SET FORTH IN THIS PARAGRAPH ISTRUE AND CORRECT, (2) HOLDER’S AGREEMENT TO MAKE THE LOAN EVIDENCED BY THIS NOTE AT THE INTEREST RATES SETFORTH IN THE LOAN AGREEMENT AND FOR THE TERM SET FORTH IN THIS NOTE CONSTITUTES ADEQUATE CONSIDERATION FORTHIS WAIVER AND AGREEMENT, AND HAS BEEN GIVEN INDIVIDUAL WEIGHT BY BORROWER AND HOLDER, (3) BORROWER IS ASOPHISTICATED AND KNOWLEDGEABLE REAL ESTATE INVESTOR WITH COMPETENT AND INDEPENDENT LEGAL COUNSEL, AND(4) BORROWER FULLY UNDERSTANDS THE EFFECT OF THIS WAIVER AND AGREEMENT.KTOn behalf of the BorrowerThe remedies of Holder, as provided in this Note, the Loan Agreement and the other Loan Documents, shall be cumulative and concurrent and may bepursued singularly, successively or together, at the sole discretion of Holder, and may be exercised as often as occasion therefor shall occur; and the failure toexercise any such right or remedy shall in no event be construed as a waiver or release thereof. In any action, sale of collateral, or other proceedings to enforcethis Note, the Loan Agreement or any other Loan Document, Holder need not file or produce the original of this Note, but only need file or produce a photocopyof this Note certified by Holder to be a true and correct copy of this Note.In the event of any dispute, action or lawsuit regarding the terms hereof, subject to the provisions of the Loan Agreement, the prevailing party will havethe right to recover from the other party all court costs and reasonable attorneys’ fees and disbursements incurred with respect thereto, in addition to all otherapplicable damages and costs.BORROWER AND ANY GUARANTOR OF THIS NOTE WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, DILIGENCE,PRESENTMENT FOR PAYMENT, DEMAND, NOTICE OF DEMAND, NOTICE OF PROTEST, NOTICE OF NONPAYMENT OR DISHONOR,NOTICE OF INTENTION TO ACCELERATE, NOTICE OF ACCELERATION, PROTEST AND NOTICE OF PROTEST OF THIS NOTE, AND ALLOTHER NOTICES (OTHER 2 THAN AS EXPRESSLY PROVIDED IN THE LOAN AGREEMENT OR OTHER LOAN DOCUMENTS) IN CONNECTION WITH THE DELIVERY,ACCEPTANCE, PERFORMANCE, DEFAULT OR ENFORCEMENT OF THE PAYMENT OF THIS NOTE. BORROWER FURTHER WAIVES, TOTHE EXTENT PERMITTED BY APPLICABLE LAW, ALL VALUATION AND APPRAISEMENT PRIVILEGES, CLAIMS OF LACK OF DILIGENCEOR DELAYS IN COLLECTION OR ENFORCEMENT OF THIS NOTE, THE RELEASE OF ANY PARTY LIABLE, THE RELEASE OF ANYSECURITY FOR THE DEBT, THE TAKING OF ANY ADDITIONAL SECURITY AND ANY OTHER INDULGENCE OF FORBEARANCE.Holder shall not be deemed, by any act of omission or commission, to have waived any of its rights or remedies hereunder unless such waiver is inwriting and signed by Holder, and then only to the extent specifically set forth in the writing. The acceptance by Holder of any payment hereunder which isless than payment in full of all amounts due and payable at the time of such payment shall not constitute a waiver of the right to exercise any of the foregoingoptions at that time or at any subsequent time or nullify any prior exercise of any such option without the express consent of Holder, except as and to the extentotherwise provided by law. A waiver with reference to one event shall not be construed as continuing or as a bar to or waiver of any right or remedy as to asubsequent event.PURSUANT TO SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK, BORROWER AND ANYGUARANTOR OF THIS NOTE AGREE THAT THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BEGOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE UNITED STATES OF AMERICA AND THE LAWS OF THESTATE OF NEW YORK. IN ACCORDANCE WITH SECTION 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK,BORROWER AGREES THAT ANY ACTION TO ENFORCE THE TERMS OF THIS NOTE MAY BE COMMENCED IN ANY COURT LOCATEDIN THE STATE OF NEW YORK. BORROWER HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE UNITED STATESDISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATINGTO THIS NOTE, AND BORROWER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THEDEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING.Whenever used, the singular number shall include the plural, the plural shall include the singular, and the words “Holder” and “Borrower” shall bedeemed to include their respective heirs, executors, successors and assigns.All notices which Holder or Borrower may be required or permitted to give hereunder shall be made in the same manner as set forth in Section 11.5 ofthe Loan Agreement.In the event any one or more of the provisions hereof shall be invalid, illegal or unenforceable in any respect, the validity of the remaining provisionshereof shall be in no way affected, prejudiced or disturbed thereby. 3 Borrower acknowledges that Holder may, in its sole discretion, sell all or any part of its interest in the Loan evidenced by this Note, including, withoutlimitation, for purposes of effecting a Securitization.Notwithstanding anything to the contrary contained in this Note or any other Loan Documents, to the fullest extent permitted by applicable law, theHolder’s rights hereunder shall be reinstated and revived, and the enforceability of this Note and the other Loan Documents shall continue, with respect to anyamount at any time paid on account of the Loan which thereafter shall be required to be restored by Holder pursuant to a court order or judgment (whether ornot final or non-appealable), as though such amount had not been paid. The rights of Holder created or granted herein and the enforceability of the LoanDocuments at all times shall, to the fullest extent permitted by applicable law, remain effective to cover the full amount of the Loan even though the Loan,including any part thereof or any other security or guaranty therefor, may be or hereafter may become invalid or otherwise unenforceable as against any otherparty and whether or not any other party shall have any personal liability with respect thereto.Borrower and Holder, by acceptance of this Note, hereby agree that the Loan Documents supersede any prior oral or written agreements of the parties;without limiting the generality of the foregoing, in the event of conflict between the terms of this Note and the terms of the Loan Agreement, the terms of theLoan Agreement shall prevail.Time is of the essence for the performance of each and every covenant of the parties hereunder or under the other Loan Documents. No excuse, delay, actof God, or other reason, whether or not within the control of Borrower or Holder (as the case may be), shall operate to defer, reduce or waive Borrower’s orHolder’s (as the case may be) performance of any such covenant or obligation.This Note shall be subject to the limitation of liability set forth in Section 11.13 of the Loan Agreement, the terms of which are incorporated herein byreference.[EXECUTION ON FOLLOWING PAGE] 4 IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, has duly executed this Amended and Restated Promissory Note as of theday and year first above written. BORROWER:EQUINIX RP II LLC,a Delaware limited liability companyBy: /s/ Keith D. TaylorName: Keith D. TaylorTitle: Manager REAFFIRMATION OF GUARANTYTHIS REAFFIRMATION OF GUARANTY (this “Reaffirmation”) is made as of the 27th day of December, 2006, by (i) EQUINIX RP II LLC, aDelaware limited liability company (“Borrower”), having a business address at c/o Equinix, Inc., 301 Velocity Way, 5th Floor, Foster City, California 94404,and (ii) EQUINIX, INC., a Delaware corporation (the “Guarantor”), having a business address at 301 Velocity Way, 5th Floor, Foster City, California 94404,to and for the benefit of SFT I, INC., a Delaware corporation, having an office at 1114 Avenue of the Americas, 27th Floor, New York, New York 10036(“Lender”).RECITALSA. Pursuant to that certain Loan and Security Agreement dated as of December 21, 2005 (the “Loan Agreement”) Lender made a loan (the “OriginalLoan”) to Borrower in the original principal amount of $60,000,000, as evidenced by that certain Promissory Note dated as of December 21, 2005 (the“Original Note”), payable to the order of Lender of which $58,895,377.83 is outstanding as of the date hereof.B. In connection with the Original Loan: (i) Guarantor executed and delivered that certain Guaranty dated as of December 21, 2005, in favor of Lender(the “Limited Guaranty”), and (ii) Borrower and Guarantor executed and delivered that certain Environmental Indemnity Agreement, dated as of December 21,2005, in favor of Lender (the “Environmental Indemnity”) (the Limited Guaranty and the Environmental Indemnity are hereinafter collectively, the“Guaranty”).C. The Original Loan is secured by: (i) that certain Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as ofDecember 21, 2005 (the “Deed of Trust”), and recorded among the land records of Loudoun County, Virginia (the “Land Records”) as Instrument Number:20051222-0143326, given by Borrower to the Trustee (as defined therein) for the benefit of Lender and encumbering certain real and personal property locatedin Loudoun County, Virginia as more particularly described therein, and (ii) that certain Assignment of Leases and Rents dated as of December 21, 2005, andrecorded among the Land Records as Instrument Number 20051222-0143327, given by Borrower, as assignor, to Lender (the “Assignment”, together with theLoan Agreement, Original Note, Deed of Trust, Limited Guaranty, Environmental Indemnity and such other documents executed in connection with theOriginal Loan, the “Original Loan Documents”).D. Borrower and Lender have entered into that certain Amended and Restated Promissory Note dated as of even date herewith (the “Amended andRestated Note”) pursuant to which Borrower and Lender have agreed to amend and restate the Original Note to increase the outstanding principal sum underthe Original Note to $98,895,377.83 (the “Loan”) which is the sum of the outstanding principal amount of the Original Loan on the date hereof plus theprincipal amount of the Additional Loan Advance (as defined in the Loan Agreement).E. In connection with the Amended and Restated Note, the Borrower, Guarantor and Lender, as applicable, have entered into that certain (i) FirstOmnibus Modification Agreement dated as of even date herewith (the “Omnibus Agreement”), (ii) First Amendment to Deed of Trust, Assignment of Leases and Rents, Security Agreement andFixture Filing & Assignment of Leases and Rents dated as of even date herewith (the “DOT and ALR Amendment”), and (iii) First Amendment to Deed ofLease dated of even date herewith (the “Deed of Lease Amendment, together with the Omnibus Agreement, DOT and ALR Amendment and the Amended andRestated Note, the “Loan Document Amendments” and together with the Original Loan Documents, as amended thereby, the “Loan Documents”).F. To induce Lender to increase the outstanding principal sum under the Original Note to $98,895,377.83 as set forth in and pursuant to Amended andRestated Note, Guarantor has agreed to execute and deliver this Reaffirmation for the benefit of Lender.NOW, THEREFORE, in consideration of the mutual promises herein contained and other good and valuable consideration, the receipt and sufficiencyof which are hereby acknowledged, Guarantor hereby agrees as follows:1. The Recitals are hereby incorporated herein and made a material part of this Reaffirmation.2. By its execution, Guarantor hereby ratifies and confirms all of the terms, covenants and conditions of the Guaranty in all respects and agrees that theGuaranty remains in full force and effect, and constitutes the legal, valid and binding obligations of Guarantor, enforceable against Guarantor in accordancewith its terms subject to bankruptcy, insolvency, moratorium, reorganization and other similar laws affecting creditors’ rights generally and to the applicationof general equitable principles in connection with the enforcement thereof. No material adverse change in the condition, financial or otherwise, of Guarantor hasoccurred between the respective dates of the financial statements which were furnished to Lender in connection with the Original Loan and the date hereof.3. By its execution below, Borrower hereby ratifies and confirms all of the terms, covenants and conditions of the Loan Documents and agrees that eachof the Loan Documents remains in full force and effect, and constitutes legal, valid and binding obligations of Borrower, enforceable against Borrower inaccordance with its terms subject to bankruptcy, insolvency, moratorium, reorganization and other similar laws affecting creditors’ rights generally and to theapplication of general equitable principles in connection with the enforcement thereof. No material adverse change in the condition, financial or otherwise, ofBorrower has occurred between the respective dates of the financial statements which were furnished to Lender relating to Borrower in connection with theOriginal Loan and the date hereof.4. Borrower and Guarantor each hereby represents to Lender that neither Borrower nor Guarantor have any knowledge of any event which with thegiving of notice, the passage of time, or both would constitute an Event of Default under the Loan Documents and has full power, authority and legal right toexecute this Reaffirmation and to keep and observe all of the terms of this Reaffirmation, the Loan Document Amendments and the Loan Documents on suchPerson’s part, as applicable, to be observed and performed. 2 5. Capitalized terms used but not defined in this Reaffirmation shall have the meanings assigned to them in the respective Guaranty, which areincorporated into this Reaffirmation by this reference as if fully set forth herein. Each reference in the respective Guaranty to “this Guaranty” or “thisAgreement”) shall mean the respective Guaranty as modified and affirmed by this Reaffirmation.6. This Reaffirmation is not intended to be, and shall not cause or result in a novation with respect to any respective Guaranty.7. Guarantor acknowledges that there is no defense, claim, or right of set-off whatsoever existing as of the date hereof to the obligations evidenced by theAmended and Restated Note or the Loan Documents.8. Guarantor hereby ratifies and confirms that, except as expressly modified by this Reaffirmation and the Omnibus Agreement, each Guarantycontinues in full force and effect in accordance with its terms.9. The acceptance of this Reaffirmation by Lender in this instance shall not in any way imply that this Reaffirmation is a condition to the continuanceof Guarantor’s obligations under the respective Guaranty or that any similar agreement is required for further modifications to any of the Loan DocumentAmendments or any of the Loan Documents.10. Neither the Borrower nor the Guarantor assumes the responsibilities and obligations under this Reaffirmation or under any Loan Documents towhich it is not a party by their respective signatures hereon except as provided for specifically herein or in the Loan Documents to which it is a party. Nothingin this Reaffirmation shall be construed to impose liability or obligation on these parties as a result of their signatures herein unless such liability or obligationis specifically allocated to them in this Reaffirmation or in the Loan Documents.[The rest of this page intentionally left blank. Signatures appear on the following page.] 3 IN WITNESS WHEREOF, Borrower and Guarantor have executed and delivered this Reaffirmation of Guaranty as of the date first above written. BORROWER:EQUINIX RP II LLC,a Delaware limited liability companyBy: /s/ Keith D. TaylorName: Keith D. TaylorIts: Manager GUARANTOR:EQUINIX, INC.,a Delaware corporationBy: /s/ Keith D. TaylorName: Keith D. TaylorIts: Chief Financial Officer Exhibit 10.38FIRST AMENDMENT TO DEED OF LEASETHIS FIRST AMENDMENT TO DEED OF LEASE (“Amendment”) is made and entered into as of the 27th day of December, 2006 by andbetween EQUINIX RP II LLC, a Delaware limited liability company (“Landlord”), and EQUINIX OPERATING CO, INC., a Delaware corporation (“Tenant”), successor-in-interest to EQUINIX INC., a Delaware corporation (“Equinix”).WITNESSETH: A.Landlord and Equinix have heretofore entered into that certain Deed of Lease dated as of December 21, 2005 (the “Lease”) for the Leased Premiseslocated at Beaumeade Corporate Park, 21691, 21701, 21711, 21715, 21721 and 21731 Filigree Court, Ashburn, Virginia 2014 (the “Property”). B.Equinix has assigned its interest in the Lease to Tenant and Tenant has assumed all of Equinix’s obligations under the Lease pursuant to that certainAssignment and Assumption of Lease and Consent to Assignment and Assumption of Lease of even date herewith between Tenant and Equinix. C.The parties mutually desire to amend the Lease, subject to the terms and conditions hereof.NOW THEREFORE, in consideration of the mutual terms and conditions herein contained, the parties hereby agree as follows: 1.Term. Notwithstanding anything to the contrary set forth in Section 5(a) of the Lease, the Commencement Date shall be December 21, 2005, and theExpiration Date shall be January 31, 2026. 2.Definitions. (a) The definition of SFT I Mortgage is hereby amended and restated as follows:“SFT I Mortgage” shall mean that certain Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated December 21,2005, granted by Landlord for the benefit of Mortgage Lender to secure Landlord’s obligations under the Mortgage Lender Financing as evidenced by theMortgage Loan Documents, as amended by that certain First Amendment to Deed of Trust, Assignment of Leases and Rents, Security Agreement andFixture Filing and Assignment of Leases and Rents, dated as of December 27, 2006 (as further amended or modified from time to time). 1 (b)The following defined term is hereby added in the appropriate alphabetical order:“Customer Agreements” shall mean Customer Agreements as defined in Section 19(d).“Equinix” shall mean Equinix, Inc., a Delaware corporation.“Equinix OpCo” shall mean Equinix Operating Co., Inc., a Delaware corporation.“Financial Strength Criteria” as applied to any Person as of any date of determination means that such Person (a) has a net worth and financialstrength on such date of determination equal to or greater than the lower of (1) the net worth and financial strength of Equinix on the Initial Closing Dateand (2) the net worth and financial strength of Carveout Guarantor (as such term is used in the Loan Agreement) on such date of determination,provided that in either case, the net worth of such Person is not less than $262,000,000, and (b) is experienced in, or, has a management team withexperience in the management and operation of first-class data centers comparable to data centers operated by Equinix or Equinix OpCo, and which,clause (a) and (b) are demonstrated to the reasonable satisfaction of Landlord and Lender and approved in writing by Lender, which approval shall notbe unreasonably withheld, delayed or conditioned.“Investment Grade Criteria” as applied to any Person means that such Person has a credit rating of either “BBB-” or higher from S&P or “Baa3”or higher from Moody’s, (or an approximately equivalent credit rating from an alternative nationally recognized credit rating agency, as applicable).“Moody’s” means Moody’s Investors Service, Inc., or its successor in interest“Loan Agreement” means that certain Loan and Security Agreement dated December 21, 2005 between Landlord and Mortgage Lender executed inconnection with the Mortgage Lender Financing, as amended by that certain First Omnibus Modification Agreement dated December 27, 2006, asamended or modified from time to time.“S&P” means Standard & Poor’s Ratings Services or its successor in interest 3.Basic Rent. Section 6(a) of the Lease is hereby amended and restated as follows:(a) Commencing on the Commencement Date, Tenant shall pay to Landlord, in lawful money of the United States, without set-off, counterclaim,recoupment, abatement, suspension, deferment, diminution, deduction, reduction or defense, except as otherwise specifically set forth herein, for eachcalendar month of the Term, monthly rent in the amount of $602,236.84 (“Basic Rent”), in advance, on the first day of the Term and then on the firstday of each calendar month thereafter (each such day being a “Basic Rent Payment Date”); without abatement, deduction, claim, offset, prior notice ordemand. If the first day of the Term is not the first day of a calendar month, then the amount of the Basic 2 Rent due and payable shall be prorated. Each such rental payment shall be made, at Landlord’s sole discretion, to Landlord by wire transfer in FederalFunds in accordance with the wiring instructions set forth on Exhibit “E” attached hereto and made a part hereof and/or to such one or more otherPersons, at such addresses as Landlord may direct by fifteen (15) days’ prior written notice to Tenant (in which event Tenant shall give Landlord noticeof each such payment concurrent with the making thereof), on or before the applicable Basic Rent Payment Date. Notwithstanding anything to thecontrary herein, beginning on the Basic Rent Payment Date occurring on January 1, 2007 and for the remainder of the Term through the Expiration Date,Basic Rent shall mean the monthly rent in the amount of $1,011,633.00. 4.Alterations and Improvements. Section 12(a) of the Lease is hereby amended and restated as follows:(a) Landlord has reviewed and approved the initial alterations contemplated by Tenant as described on Exhibit “F” (the “Initial Alterations”), comprisingat least $40,000,000.00 in hard costs and soft costs (which soft costs shall not exceed customary and commercially reasonable amounts) and whichshall among other things, upgrade, improve and enhance the value of the Building C, Building E and Building F, and acknowledges that such InitialAlterations shall not require further approval by Landlord but that Tenant shall deliver to Landlord the as-built drawings in CAD and hard copy andcopies of any permits for such Initial Alterations upon completion thereof, as required below. Tenant shall not remove any portion of the InitialAlterations at the end of the Term and such Initial Alterations shall become a part of the Leased Premises and Landlord’s property. On or beforeDecember 31, 2007, subject to reasonable extensions for force majeure delays, and in accordance with this Section 12, Tenant shall be required to(i) complete the Initial Alterations and (ii) complete all Work in connection with the build-out of Building E and commence operations of Building E. Inconnection with the Initial Alterations, Tenant shall provide Landlord and Lender, if not otherwise previously provided, with a copy the plans andspecifications and budget for the Initial Alterations. 5.Preapproved Assignments. Section 19 is hereby amended to read in its entirety as follows:“(a) Tenant shall have the right, upon fifteen (15) days prior written notice to Landlord, with no consent of Landlord being required or necessary (“Preapproved Assignment”), to assign this Lease by operation of law or otherwise to any of the following Persons (each a “Preapproved Assignee”): (i) anaffiliate, subsidiary, or parent of Equinix, Inc., or a corporation, partnership or other legal entity wholly owned by Equinix, Inc. (collectively, an“Affiliated Party”), or (ii) a successor to Tenant by acquisition or merger, or by a consolidation or reorganization, or by any Transfer (as defined in theLoan Agreement) or series of Transfers resulting in any Person acquiring, directly or indirectly, more than a forty-nine percent (49%) ownership interestin Tenant (if such Person did not, prior to such Transfers, own at least forty-nine percent (49%) of 3 the ownership interests of Tenant, pursuant to which Tenant ceases to exist as a legal entity (each such party a “Successor Party”); provided, however,that as a condition precedent to such Preapproved Assignment, such Preapproved Assignee shall either (x) satisfy the Investment Grade Criteria or theFinancial Strength Criteria on the date of such Preapproved Assignment or (y) provide or cause to be provided to Landlord a guaranty in form andsubstance reasonably acceptable to Landlord and approved by Lender in writing from an entity that satisfies the Investment Grade Criteria or theFinancial Strength Criteria on the date of such Preapproved Assignment.” 6.Effective Date. This Amendment shall become effective as an amendment to the Lease as of the date of this Amendment (the “Effective Date”) and shallcontinue in effect until its termination in accordance with the terms of the Lease. 7.Whole Amendment. This Amendment in conjunction with the Lease sets forth the entire agreement between the parties with respect to the matters set forthherein and therein. There have been no additional oral or written representations or agreements. In case of any inconsistency between the provisions of theLease and this Amendment, the provisions of this Amendment shall govern and control. 8.Counterparts. This Amendment may be executed by facsimile or by original signature in any number of counterparts, each of which when executed anddelivered, will be deemed an original and all of which taken together, will be deemed one and the same agreement. 9.Miscellaneous. This Amendment (a) shall be binding upon and inure to the benefit of the parties hereto and their respective representatives, transferees,successors and assigns and (b) shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Virginia. Anycapitalized term not otherwise defined herein shall have the meaning set forth in the Lease. 10.Ratification. Except as expressly modified by this Amendment, all of the terms, conditions and provisions of the Lease are hereby ratified and confirmedand shall continue in full force and effect during the Term of the Lease.[signatures appear on following page] 4 IN WITNESS WHEREOF, the parties have executed this Amendment under seal as of the date first above written. LANDLORD:EQUINIX RP II LLC,a Delaware limited liability companyBy: /s/ Keith D. Taylor (Seal)Name: Keith D. Taylor Title: Manager TENANT:EQUINIX OPERATING CO., INC.,a Delaware corporationBy: /s/ Keith D. Taylor (Seal)Name: Keith D. Taylor Title: CFO Exhibit 21.1List of Equinix’s Subsidiaries Name JurisdictionEquinix Operating Co., Inc. DelawareEquinix-DC, Inc. DelawareEquinix Europe, Inc. DelawareEquinix Cayman Islands Holdings Cayman IslandsEquinix Dutch Holdings N.V. NetherlandsEquinix Netherlands B.V. NetherlandsEquinix Germany GmbH GermanyEquinix Asia Pacific Pte Ltd SingaporeEquinix Singapore Holdings Pte Ltd SingaporeEquinix Singapore Pte Ltd SingaporeEquinix Pacific Pte Ltd SingaporeEquinix Shanghai Co., Ltd. ChinaPihana Pacific SDN, BHD MalaysiaEquinix Pacific, Inc. DelawareEquinix Pacific Business Recovery, Inc. DelawareEquinix Japan KK (in Kanji) JapanEquinix Australia Pty Ltd AustraliaEquinix Hong Kong Ltd Hong KongEquinix RP, Inc. DelawareEquinix RP II LLC DelawareCHI 3, LLC DelawareCHI 3 Procurement, LLC IllinoisNY3, LLC DelawareSV1, LLC Delaware Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 333-45280, 333-58074, 333-71870, 333-85202, 333-104078, 333-113765, 333-117892, 333-122142 and 333-132466) and Form S-3 (Nos. 333-104077, 333-108783, 333-109697, 333-114723, 333-116322, 333-120224, 333-122144, 333-123923 and 333-128857) of Equinix, Inc. of our report dated February 28, 2007 relating to the consolidated financial statements,management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting,which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaFebruary 28, 2007 Exhibit 31.1CERTIFICATION PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, 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; and5. 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: February 28, 2007 /s/ PETER F. VAN CAMPPeter F. Van CampChief Executive Officer Exhibit 31.2CERTIFICATION PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002I, Keith D. Taylor, 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; and5. 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: February 28, 2007 /s/ KEITH D. TAYLORKeith D. TaylorChief Financial Officer Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Equinix, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2006 as filed with the Securitiesand Exchange Commission on the date hereof (the “Report”), I, Peter F. Van Camp, Chief Executive Officer and President of the Company, certify, pursuant to18 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 Officer and PresidentFebruary 28, 2007 Exhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Equinix, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2006 as filed with the Securitiesand Exchange Commission on the date hereof (the “Report”), I, Keith D. Taylor, 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/ KEITH D. TAYLORKeith D. TaylorChief Financial OfficerFebruary 28, 2007

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