t65431_10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
(Mark
One)
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|
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended March 31, 2009
OR
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|
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For
the transition period from _______ to ______
Commission
File Number: 000-27265
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INTERNAP
NETWORK SERVICES CORPORATION
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|
(Exact
Name of Registrant as Specified in Its
Charter)
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DELAWARE
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91-2145721
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(State
or Other Jurisdiction of
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(I.R.S.
Employer
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Incorporation
or Organization)
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Identification
No.)
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250
Williams Street
Atlanta,
Georgia 30303
(Address
of Principal Executive Offices, Including Zip Code)
(404)
302-9700
(Registrant’s
Telephone Number, Including Area Code)
Indicate by check mark
whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes x No o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such
files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
(Check
one):
|
Large
accelerated filer
|
o
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|
Accelerated
filer
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x
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|
Non-accelerated
filer
|
o
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|
Smaller
reporting company
|
o
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|
(Do
not check if a smaller reporting
company)
|
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No x
As of
April 30, 2009, 50,769,939 shares of the registrant’s outstanding common stock,
$0.001 par value per share, were outstanding.
INTERNAP
NETWORK SERVICES CORPORATION
FORM
10-Q
FOR
THE QUARTER ENDED MARCH 31, 2009
TABLE
OF CONTENTS
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Pages
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3
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16
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25
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26
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27
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27
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27
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28
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29
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This
Quarterly Report on Form 10-Q contains “forward-looking statements” within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or
the Exchange Act. Forward-looking statements include statements regarding
industry trends, our future financial position and performance, business
strategy, revenues and expenses in future periods, projected levels of growth
and other matters that do not relate strictly to historical facts. These
statements are often identified by the use of words such as “may,” “will,”
“seeks,” “anticipates,” “believes,” “estimates,” “expects,” “projects,”
“forecasts,” “plans,” “intends,” “continue,” “could,” “should” or similar
expressions or variations. These statements are based on the beliefs and
expectations of our management team based on information currently available.
Such forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties that could cause actual results to differ
materially from those contemplated by forward-looking statements. Important
factors currently known to our management that could cause or contribute to such
differences include, but are not limited to, those set forth in this Form 10-Q
under “Item 1A. Risk Factors.” We undertake no obligation to update any
forward-looking statements as a result of new information, future events or
otherwise.
As
used herein, except as otherwise indicated by context, references to “we,” “us,”
“our,” or the “Company” refer to Internap Network Services
Corporation.
INTERNAP
NETWORK SERVICES CORPORATION
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
March
31,
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|
|
|
2009
|
|
|
2008
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Internet
protocol (IP) services
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|
$ |
28,593 |
|
|
$ |
31,124 |
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|
Data
center services
|
|
|
30,617 |
|
|
|
25,185 |
|
|
Content
delivery network (CDN) services
|
|
|
4,714 |
|
|
|
5,744 |
|
|
Total
revenues
|
|
|
63,924 |
|
|
|
62,053 |
|
|
|
|
|
|
|
|
|
|
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Operating
costs and expenses:
|
|
|
|
|
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|
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Direct
costs of network, sales and services, exclusive of depreciation and
amortization, shown below:
|
|
|
|
|
|
|
|
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|
IP
services
|
|
|
11,336 |
|
|
|
11,290 |
|
|
Data
center services
|
|
|
22,255 |
|
|
|
18,124 |
|
|
CDN
services
|
|
|
2,074 |
|
|
|
1,949 |
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Direct
costs of amortization of acquired technologies
|
|
|
1,158 |
|
|
|
1,229 |
|
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Direct
costs of customer support
|
|
|
4,403 |
|
|
|
4,365 |
|
|
Product
development
|
|
|
1,902 |
|
|
|
2,291 |
|
|
Sales
and marketing
|
|
|
7,799 |
|
|
|
8,829 |
|
|
General
and administrative
|
|
|
8,980 |
|
|
|
7,348 |
|
|
Provision
for doubtful accounts
|
|
|
375 |
|
|
|
655 |
|
|
Depreciation
and amortization
|
|
|
6,878 |
|
|
|
5,381 |
|
|
Restructuring
|
|
|
870 |
|
|
|
— |
|
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Executive
transition
|
|
|
2,242 |
|
|
|
— |
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Gain
on disposals of property and equipment
|
|
|
— |
|
|
|
(16
|
) |
|
Total
operating costs and expenses
|
|
|
70,272 |
|
|
|
61,445 |
|
|
(Loss)
income from operations
|
|
|
(6,348
|
) |
|
|
608 |
|
|
|
|
|
|
|
|
|
|
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Non-operating
(income) expense:
|
|
|
|
|
|
|
|
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|
Interest
income
|
|
|
(76
|
) |
|
|
(701
|
) |
|
Interest
expense
|
|
|
164 |
|
|
|
310 |
|
|
Other,
net
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|
59 |
|
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|
81 |
|
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Total
non-operating expense (income)
|
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|
147 |
|
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|
(310
|
) |
|
|
|
|
|
|
|
|
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(Loss)
income before income taxes and equity in loss (earnings) of equity method
investment
|
|
|
(6,495
|
) |
|
|
918 |
|
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Provision
for income taxes
|
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|
45 |
|
|
|
251 |
|
|
Equity
in loss (earnings) of equity-method investment, net of
taxes
|
|
|
68 |
|
|
|
(72
|
) |
|
Net
(loss) income
|
|
$ |
(6,608 |
) |
|
$ |
739 |
|
|
|
|
|
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Net
(loss) income per share:
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|
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Basic
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$ |
(0.13 |
) |
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$ |
0.01 |
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Diluted
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|
$ |
(0.13 |
) |
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$ |
0.01 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
INTERNAP
NETWORK SERVICES CORPORATION
(In
thousands, except per share amounts)
|
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March
31,
2009
|
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December
31,
2008
|
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$ |
52,894 |
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$ |
46,870 |
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Short-term
investments in marketable securities
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2,605 |
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7,199 |
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Accounts
receivable, net of allowance for doubtful accounts of $2,317 and $2,777,
respectively
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26,352 |
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28,634 |
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Inventory
|
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|
421 |
|
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|
381 |
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Prepaid
expenses and other assets
|
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|
9,978 |
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10,866 |
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Deferred
tax asset, current portion, net
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|
9 |
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|
1 |
|
|
|
|
|
|
|
|
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Total
current assets
|
|
|
92,259 |
|
|
|
93,951 |
|
|
|
|
|
|
|
|
|
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Property
and equipment, net of accumulated depreciation of $192,258 and $185,895,
respectively
|
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|
96,463 |
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|
97,350 |
|
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Investments
and other related assets, of which $6,996 and $7,027, respectively, are
measured at fair value
|
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|
8,748 |
|
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|
8,650 |
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Intangible
assets, net of accumulated amortization of $32,024 and $30,351,
respectively
|
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|
32,269 |
|
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|
33,942 |
|
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Goodwill
|
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|
90,977 |
|
|
|
90,977 |
|
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Deposits
and other assets
|
|
|
2,903 |
|
|
|
2,763 |
|
|
Deferred
tax asset, non-current, net
|
|
|
2,469 |
|
|
|
2,450 |
|
|
|
|
|
|
|
|
|
|
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Total
assets
|
|
$ |
326,088 |
|
|
$ |
330,083 |
|
|
|
|
|
|
|
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|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
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|
|
|
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|
Current
liabilities:
|
|
|
|
|
|
|
|
|
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Accounts
payable
|
|
$ |
18,530 |
|
|
$ |
19,642 |
|
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Accrued
liabilities
|
|
|
8,880 |
|
|
|
8,756 |
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Deferred
revenues, current portion
|
|
|
4,226 |
|
|
|
3,710 |
|
|
Capital
lease obligations, current portion
|
|
|
194 |
|
|
|
274 |
|
|
Restructuring
liability, current portion
|
|
|
3,574 |
|
|
|
2,800 |
|
|
Other
current liabilities
|
|
|
119 |
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
35,523 |
|
|
|
35,298 |
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable
|
|
|
20,000 |
|
|
|
20,000 |
|
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Deferred
revenues, less current portion
|
|
|
2,452 |
|
|
|
2,248 |
|
|
Capital
lease obligations, less current portion
|
|
|
3,229 |
|
|
|
3,244 |
|
|
Restructuring
liability, less current portion
|
|
|
5,766 |
|
|
|
6,222 |
|
|
Deferred
rent
|
|
|
14,820 |
|
|
|
14,114 |
|
|
Other
long-term liabilities
|
|
|
731 |
|
|
|
762 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
82,521 |
|
|
|
81,888 |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 20,000 shares authorized; no shares issued or
outstanding
|
|
|
— |
|
|
|
— |
|
|
Common
stock, $0.001 par value; 60,000 shares authorized; 50,828 and 50,224
shares outstanding at March 31, 2009 and December 31, 2008,
respectively
|
|
|
51 |
|
|
|
50 |
|
|
Additional
paid-in capital
|
|
|
1,217,732 |
|
|
|
1,216,267 |
|
|
Treasury
stock, at cost, 4 and 83 shares at March 31, 2009 and December 31, 2008,
respectively
|
|
|
(11
|
) |
|
|
(370
|
) |
|
Accumulated
deficit
|
|
|
(973,431
|
) |
|
|
(966,823
|
) |
|
Accumulated
items of other comprehensive loss
|
|
|
(774
|
) |
|
|
(929
|
) |
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
243,567 |
|
|
|
248,195 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
326,088 |
|
|
$ |
330,083 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
INTERNAP
NETWORK SERVICES CORPORATION
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(6,608 |
) |
|
$ |
739 |
|
|
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
8,036 |
|
|
|
6,610 |
|
|
Gain
on disposal of property and equipment, net
|
|
|
— |
|
|
|
(16
|
) |
|
Provision
for doubtful accounts
|
|
|
375 |
|
|
|
655 |
|
|
Equity
in loss (earnings) from equity-method investment
|
|
|
68 |
|
|
|
(72
|
) |
|
Non-cash
changes in deferred rent
|
|
|
706 |
|
|
|
556 |
|
|
Stock-based
compensation expense
|
|
|
2,056 |
|
|
|
2,375 |
|
|
Deferred
income taxes
|
|
|
(27
|
) |
|
|
251 |
|
|
Other,
net
|
|
|
48 |
|
|
|
(63
|
) |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,907 |
|
|
|
2,818 |
|
|
Inventory
|
|
|
(40
|
) |
|
|
(198
|
) |
|
Prepaid
expenses, deposits and other assets
|
|
|
754 |
|
|
|
(3,195
|
) |
|
Accounts
payable
|
|
|
(1,112
|
) |
|
|
(1,474
|
) |
|
Accrued and
other liabilities
|
|
|
124 |
|
|
|
(1,833
|
) |
|
Deferred
revenue
|
|
|
720 |
|
|
|
(475
|
) |
|
Accrued
restructuring liability
|
|
|
318 |
|
|
|
(653
|
) |
|
Net
cash flows provided by operating activities
|
|
|
7,325 |
|
|
|
6,025 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(5,476
|
) |
|
|
(10,123
|
) |
|
Purchases
of investments in marketable securities
|
|
|
— |
|
|
|
(9,321
|
) |
|
Maturities
of investments in marketable securities
|
|
|
4,580 |
|
|
|
9,379 |
|
|
Proceeds
from disposal of property and equipment
|
|
|
— |
|
|
|
16 |
|
|
Change
in restricted cash
|
|
|
— |
|
|
|
1,993 |
|
|
Net
cash flows used in investing activities
|
|
|
(896
|
) |
|
|
(8,056
|
) |
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
19,800 |
|
|
|
— |
|
|
Principal
payments on notes payable
|
|
|
(19,800
|
) |
|
|
— |
|
|
Payments
on capital lease obligations
|
|
|
(95
|
) |
|
|
(191
|
) |
|
Stock-based
compensation plans
|
|
|
(231
|
) |
|
|
64 |
|
|
Other,
net
|
|
|
(28
|
) |
|
|
(23
|
) |
|
Net
cash flows used in financing activities
|
|
|
(354
|
) |
|
|
(150
|
) |
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rates on cash and cash equivalents
|
|
|
(51
|
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
6,024 |
|
|
|
(2,180
|
) |
|
Cash
and cash equivalents at beginning of period
|
|
|
46,870 |
|
|
|
52,030 |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
52,894 |
|
|
$ |
49,850 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
INTERNAP
NETWORK SERVICES CORPORATION
STOCKHOLDERS’
EQUITY AND COMPREHENSIVE (LOSS) INCOME
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Par
Value
|
|
|
Additional
Paid-In
Capital
|
|
|
Treasury
Stock
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Total
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE
MONTHS ENDED MARCH 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2008
|
|
|
50,224 |
|
|
$ |
50 |
|
|
$ |
1,216,267 |
|
|
$ |
(370 |
) |
|
$ |
(966,823 |
) |
|
$ |
(929 |
) |
|
$ |
248,195 |
|
|
Net
loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,608
|
) |
|
|
— |
|
|
|
(6,608
|
) |
|
Change
in unrealized gains and losses on investments, net of
taxes
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
235 |
|
|
|
235 |
|
|
Foreign
currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(80
|
) |
|
|
(80
|
) |
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,453
|
) |
|
Stock
compensation plans activity and stock-based compensation
expense
|
|
|
604 |
|
|
|
1 |
|
|
|
1,465 |
|
|
|
359 |
|
|
|
— |
|
|
|
— |
|
|
|
1,825 |
|
|
Balance, March
31, 2009
|
|
|
50,828 |
|
|
$ |
51 |
|
|
$ |
1,217,732 |
|
|
$ |
(11 |
) |
|
$ |
(973,431 |
) |
|
$ |
(774 |
) |
|
$ |
243,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE
MONTHS ENDED MARCH 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2007
|
|
|
49,759 |
|
|
$ |
50 |
|
|
$ |
1,208,191 |
|
|
$ |
— |
|
|
$ |
(862,010 |
) |
|
$ |
402 |
|
|
$ |
346,633 |
|
|
Net
income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
739 |
|
|
|
— |
|
|
|
739 |
|
|
Change
in unrealized gains and losses on investments, net of
taxes
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(345
|
) |
|
|
(345
|
) |
|
Foreign
currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
57 |
|
|
|
57 |
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
451 |
|
|
Stock
compensation plans activity and stock-based compensation
expense
|
|
|
475 |
|
|
|
— |
|
|
|
2,341 |
|
|
|
(135
|
) |
|
|
— |
|
|
|
— |
|
|
|
2,206 |
|
|
Balance, March
31, 2008
|
|
|
50,234 |
|
|
$ |
50 |
|
|
$ |
1,210,532 |
|
|
$ |
(135 |
) |
|
$ |
(861,271 |
) |
|
$ |
114 |
|
|
$ |
349,290 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
INTERNAP
NETWORK SERVICES CORPORATION
|
|
|
|
1.
|
Nature
of Operations and Basis of
Presentation
|
Internap
Network Services Corporation (“Internap,” “we,” “us,” “our” or the “Company”) is
an Internet solutions company providing a suite of network optimization and
delivery products and services that manage, deliver and distribute applications
and content with a 100% availability service level agreement. With a global
platform of data centers, managed Internet services and a content delivery
network, or CDN, we help our customers innovate their business, improve service
levels and lower the cost of information technology operations. These solutions,
combined with progressive and proactive technical support, enable our customers
to migrate business-critical applications from private to public networks. Our
customers represent a variety of industries, including entertainment and media,
financial services, healthcare, travel, e-commerce, retail and
technology.
We
deliver services through our 67 service points across North America, Europe,
Asia, India and Australia. Our Private Network Access Points, or P-NAPs, feature
multiple direct high-speed connections to multiple major Internet backbones,
also referred to as network service providers or NSP’s, including AT&T
Inc.; Sprint Nextel Corporation; Verizon Communications Inc.; Global Crossing
Limited; and Level 3 Communications, Inc. We operate in three business segments:
IP services, data center services and CDN services.
Our
unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission,
or SEC, and include all of our accounts and those of our wholly owned
subsidiaries. Certain information and note disclosures, normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States, have been condensed or omitted pursuant to such
rules and regulations. The unaudited condensed consolidated financial statements
reflect all adjustments, which consist of normal recurring adjustments,
necessary for a fair statement of our financial position as of March 31, 2009
and our operating results, cash flows and changes in stockholders’ equity for
the interim periods presented. The balance sheet at December 31, 2008 has been
derived from our audited financial statements as of that date. These financial
statements and the related notes should be read in conjunction with our
financial statements and notes thereto contained in our Annual Report on Form
10-K for the year ended December 31, 2008 filed with the SEC.
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities and revenues and
expenses in the financial statements. Examples of estimates subject to possible
revision based upon the outcome of future events include, among others, the
provision for doubtful accounts, network cost accruals, income taxes, sales, use
and other taxes, recoverability of long-lived assets and goodwill, depreciation
of property and equipment, the valuation of investments, restructuring
allowances and stock-based compensation. Actual results could differ from those
estimates.
The
results of operations for the three months ended March 31, 2009 are not
necessarily indicative of the results that may be expected for any future
periods or for the year ending December 31, 2009 or subsequent
years.
The
following tables show operating results for our reportable business segments,
along with reconciliations from segment gross profit to (loss) income before
income taxes and equity in earnings of equity-method investment. Segment
information for the three months ended March 31, 2009 and 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IP
Services
|
|
|
Data
Center
Services
|
|
|
CDN
Services
|
|
|
Total
|
|
|
Three
Months Ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
28,593 |
|
|
$ |
30,617 |
|
|
$ |
4,714 |
|
|
$ |
63,924 |
|
|
Direct
costs of network, sales and services, exclusive of depreciation and
amortization, included below
|
|
|
11,336 |
|
|
|
22,255 |
|
|
|
2,074 |
|
|
|
35,665 |
|
|
Segment
gross profit
|
|
$ |
17,257 |
|
|
$ |
8,362 |
|
|
$ |
2,640 |
|
|
|
28,259 |
|
|
Other
operating expenses, including depreciation and
amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,607 |
|
|
Loss
from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,348
|
) |
|
Non-operating
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147 |
|
|
Loss
before income taxes and equity in loss (earnings) of equity-method
investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(6,495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
31,124 |
|
|
$ |
25,185 |
|
|
$ |
5,744 |
|
|
$ |
62,053 |
|
|
Direct
costs of network, sales and services, exclusive of depreciation and
amortization, included below
|
|
|
11,290 |
|
|
|
18,124 |
|
|
|
1,949 |
|
|
|
31,363 |
|
|
Segment
gross profit
|
|
$ |
19,834 |
|
|
$ |
7,061 |
|
|
$ |
3,795 |
|
|
|
30,690 |
|
|
Other
operating expenses, including depreciation and
amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,082 |
|
|
Income
from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
608 |
|
|
Non-operating
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
310 |
|
|
Income
before income taxes and equity in loss (earnings) of equity-method
investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
918 |
|
Segment
gross profit is segment revenues less direct costs of network, sales and
services, exclusive of depreciation and amortization and does not include direct
costs of acquired technologies, direct costs of customer support or any other
depreciation or amortization associated with direct costs.
INTERNAP
NETWORK SERVICES CORPORATION
|
3.
|
Restructuring
and Impairments
|
On
March 31, 2009, we announced that we reduced our workforce by 45 employees,
representing 10% of our total workforce. The reductions were primarily in
back-office staff functions and included the elimination of certain senior
management positions. We expect the total estimated costs associated with the
restructuring to be approximately $1.2 million, of which we recorded $0.9
million during the three months ended March 31, 2009. We expect to incur all
remaining charges by June 30, 2009. These costs relate primarily to
non-recurring severance payments. Substantially all of these charges consist
of cash expenditures.
In
2007 and 2001, we also implemented significant restructuring plans that resulted
in substantial charges for real estate and network infrastructure obligations,
personnel and other charges. We subsequently incurred additional related charges
as we continued to evaluate our restructuring reserve.
The
following table displays the activity and balances for the restructuring
activity for the three months ended March 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
2008
Restructuring
Liability
|
|
|
Restructuring
Charges
|
|
|
Cash
Payments
|
|
|
Plan
Adjustments1
|
|
|
March
31,
2009
Restructuring
Liability
|
|
|
Activity
for 2009 restructuring charge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
separations
|
|
$ |
— |
|
|
$ |
870 |
|
|
$ |
— |
|
|
$ |
55 |
|
|
$ |
925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity
for 2007 restructuring charge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate obligations
|
|
|
6,276 |
|
|
|
— |
|
|
|
(468
|
) |
|
|
— |
|
|
|
5,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity
for 2001 restructuring charge:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate obligations
|
|
|
2,746 |
|
|
|
— |
|
|
|
(139
|
) |
|
|
— |
|
|
|
2,607 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
9,022 |
|
|
$ |
870 |
|
|
$ |
(607 |
) |
|
$ |
55 |
|
|
$ |
9,340 |
|
|
1
Represents a reclassification of accrued
liabilities.
|
As
disclosed in our Annual Report on Form 10-K for the fiscal year ended December
31, 2008, we perform our annual impairment analysis of goodwill as of August 1
of each year. We base the impairment analysis of goodwill on estimated fair
values. The valuation of goodwill requires assumptions and estimates of many
critical factors, including revenue and market growth, operating cash flows,
market multiples and discount rates. Adverse changes in expected operating
results and/or unfavorable changes in other economic factors used to estimate
fair values could result in one or more non-cash goodwill impairment charges in
the future. Circumstances leading to an impairment of goodwill may also lead us
to record an impairment of other intangible assets. We will continue to perform
our annual impairment testing as of August 1 each year absent any impairment
indicators that may cause more frequent analysis. We have experienced declines
in our IP services and CDN services operating results during the three months
ended March 31, 2009 as compared to March 31, 2008 and our projections. However,
we have concluded that no impairment indicators exist to cause us to re-assess
goodwill during or immediately following the three months ended March 31,
2009.
INTERNAP
NETWORK SERVICES CORPORATION
|
|
|
|
4.
|
Stock-Based
Compensation and Executive
Transition
|
During
the three months ended March 31, 2009, we granted 1.7 million stock options and
0.7 million shares of unvested restricted common stock. These grants included
1.1 million stock options and 0.4 million shares of unvested restricted common
stock granted in conjunction with annual performance evaluations.
The unvested restricted common stock included reissuance of 0.2
million shares of treasury stock, having a cost of $0.6 million. From
time-to-time, we acquired the shares of treasury stock as payment of taxes due
from employees for stock-based compensation, including $0.2 million and $0.1
million for the three months ended March 31, 2009 and 2008, respectively. Total
stock-based compensation was $2.1 million and $2.4 million for the three months
ended March 31, 2009 and 2008, respectively. Stock-based compensation for the
three months ended March 31, 2009 also included $0.8 million of expense
associated with the resignation of our former President and Chief Executive
Officer, which resulted in a modification of his stock options and restricted
common stock, as discussed below. We use the Black-Scholes option valuation
model to determine our equity-classified stock-based compensation
expense.
On
January 29, 2009, we announced the appointment of J. Eric Cooney as our
president and Chief Executive Officer and a member of our board of directors
effective March 16, 2009. Mr. Cooney succeeded James P. DeBlasio, who resigned
as President and Chief Executive Officer effective as of March 16, 2009 and as a
director effective as of March 15, 2009. In connection with his employment, Mr.
Cooney will receive (1) an annual base salary of $600,000, (2) a cash signing
bonus of $300,000 (under certain circumstances, Mr. Cooney will be obligated to
reimburse us for $150,000 of the signing bonus if his employment terminates
prior to March 1, 2011), (3) an option to purchase 600,000 shares of our common
stock at a purchase price of $2.24, the closing price on the day of commencement
of work, 25% of which will vest on the first anniversary of the grant date and
the remainder to vest in 36 equal monthly installments thereafter, (4) a new
hire grant of 300,000 shares of restricted stock, which will vest in four equal
annual installments, (5) a grant of 200,000 shares of restricted stock on each
of the first anniversary and the second anniversary of his commencement of work,
both such grants to vest in four equal annual installments, (6) an annual
incentive bonus based upon criteria established by our Board of Directors, with
a target level of 100% of base salary and a maximum level of 200% of base salary
and (7) customary benefits including vacation. The agreement provides for “at
will” employment. The fair value of Mr. Cooney’s stock-based compensation awards
is $2.4 million, including the shares that may be issued on the first and
second anniversaries of the commencement of work.
Pursuant
to the terms of a separation agreement with Mr. DeBlasio, he received (1) a cash
payment of $927,000, one half of which was paid in March 2009 with the remainder
recorded as a liability in the accompanying financial statements to be paid in
September 2009, (2) full vesting of all equity awards previously granted to him
as of March 16, 2009 having an incremental value of $0.8 million and (3) if he
so elects, continued health, dental and vision insurance coverage under our
group health plan until September 16, 2010. Mr. DeBlasio has until March 16,
2010 to exercise any stock options that were vested as of March 16,
2009.
At
the end of each interim reporting period, we estimate the effective income tax
rate expected to be applicable for the full year. The effective income tax rate
determined is used to provide for income taxes on a year-to-date basis. The tax
effect of any tax law changes and certain other discrete events are reflected in
the period in which they occur.
Our
overall effective income tax rate, as a percentage of pre-tax ordinary income,
for the three months ended March 31, 2009 and 2008 was (0.7%) and 27.3%,
respectively. The fluctuation in the effective income tax rate is attributable
to a change in our valuation allowance and state income taxes.
The
annual effective tax rate for 2009 could change due to a number of factors
including, but not limited to, our geographic profit mix between the United
States, or U.S., the U.K. and other foreign jurisdictions, enactments of new tax
laws, new interpretations of existing tax law and rulings by and settlements
with taxing authorities.
We
continue to maintain a valuation allowance against our deferred tax assets
totaling $127.0 million. The total deferred tax assets primarily consist of net
operating loss carryforwards. We may recognize U.S. deferred tax assets in
future periods when we estimate them to be realizable. Based on an analysis of
our projected future U.S. pre-tax income, we do not have sufficient positive
evidence for the release of our valuation allowance against our U.S. deferred
tax assets within the next 12 months; therefore, we continue to maintain the
full valuation allowance in the U.S. and all foreign jurisdictions, other than
the U.K.
For
the three months ended March 31, 2009, there were no new material uncertain tax
positions. Also, we do not expect the total amount of unrecognized tax benefits
to significantly increase or decrease within the next 12 months.
INTERNAP
NETWORK SERVICES CORPORATION
|
|
|
|
6.
|
Net
(Loss) Income Per Share
|
We
computed basic net (loss) income per share using the weighted average number of
shares of common stock outstanding during the period. We computed diluted net
(loss) income per share using the weighted average number of shares of common
stock and potentially dilutive shares outstanding during the period. Potentially
dilutive shares consist of the incremental shares of common stock issuable upon
the exercise of outstanding stock options and warrants using the treasury stock
method. The treasury stock method calculates the dilutive effect for only those
stock options and warrants for which the sum of proceeds, including unrecognized
compensation and any windfall tax benefits, is less than the average stock price
during the period presented. This method excludes potentially dilutive shares
from the computation of net (loss) income per share if their effect is
anti-dilutive.
On
January 1, 2009, we adopted Financial Accounting Standards Board, or FASB,
Staff Position, or FSP, EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities. FSP EITF 03-6-1 addresses whether instruments
granted in share-based payment awards are participating securities prior to
vesting, and therefore, need to be included in the earnings allocation when
computing earnings per share under the two-class method as described in
Statement of Financial Accounting Standards, or SFAS, No. 128. In
accordance with FSP EITF 03-6-1, unvested share-based payment awards that
contain non-forfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included in the
computation of earnings per share pursuant to the two-class method. Upon
adoption, we adjusted all prior-period earnings per share data presented
retrospectively. The adoption of FSP EITF 03-6-1 decreased our basic earnings
per share by $0.01 for the three months ended March 31, 2008.
Basic
and diluted net (loss) income per share for the three months ended March 31,
2009, and 2008 are calculated as follows (in thousands, except per share
amounts):
| |
|
|
|
|
|
|
|
|
| |
|
|
Three
Months Ended
March
31,
|
|
|
| |
|
|
2009
|
|
|
2008
|
|
|
| |
Net
(loss) income
|
|
$ |
(6,608 |
) |
|
$ |
739 |
|
|
| |
Less:
income allocated to participating securities
|
|
|
— |
|
|
|
(11
|
) |
|
| |
Net
(loss) income available to common stockholders
|
|
|
(6,608
|
) |
|
|
728 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
Weighted
average shares outstanding, basic
|
|
|
49,414 |
|
|
|
49,110 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
| |
Stock
compensation plans
|
|
|
— |
|
|
|
165 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
Weighted
average shares outstanding, diluted
|
|
|
49,414 |
|
|
|
49,275 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
Basic
net (loss) income per share
|
|
$ |
(0.13 |
) |
|
$ |
0.01 |
|
|
| |
Diluted
net (loss) income per share
|
|
$ |
(0.13 |
) |
|
$ |
0.01 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
Anti-dilutive
securities not included in diluted net loss per share
calculation:
|
|
|
|
|
|
|
|
|
|
| |
Stock
compensation plans
|
|
|
5,679 |
|
|
|
2,473 |
|
|
| |
Warrants to purchase
common stock1
|
|
|
— |
|
|
|
34 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
Total
anti-dilutive securities
|
|
|
5,679 |
|
|
|
2,507 |
|
|
|
|
1
All remaining warrants to purchase common stock expired August 22,
2008.
|
INTERNAP
NETWORK SERVICES CORPORATION
|
7.
|
Fair
Value Measurements
|
Effective
January 1, 2008, we adopted SFAS No. 157, Fair
Value Measurements, or SFAS No. 157, as it relates to recurring
financial assets and liabilities. This new standard addresses how companies
should measure fair value when they are required to use a fair value measure for
recognition or disclosure purposes under generally accepted accounting
principles. Effective January 1, 2009, we adopted SFAS No. 157 for
nonfinancial assets and nonfinancial liabilities that we recognize or disclose
at fair value in the financial statements on a nonrecurring basis in accordance
with the deferral provisions of FASB Staff Position FAS 157-2. The major
categories of nonfinancial assets and liabilities that we measure at fair value
include reporting units measured at fair value in the first step of a goodwill
impairment test. Our adoption in 2009 did not have a material impact on our
financial statements.
SFAS
No. 157 describes a fair value hierarchy based on three levels of inputs, of
which the first two are considered observable and the last unobservable, that
may be used to measure fair value. The fair value hierarchy is summarized as
follows:
|
|
|
|
|
|
|
Level
1: Quoted prices in active markets for identical assets or
liabilities;
|
|
|
|
Level
2: Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities;
and
|
|
|
|
Level
3: Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities.
|
We
have also adopted SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities, for
rights, or the ARS Rights, from one of our investment providers to sell at par
value our auction rate securities originally purchased from the investment
provider at anytime during a two-year period beginning June 30, 2010. SFAS No.
159 permits companies to choose to measure, on an instrument-by-instrument
basis, many financial instruments and certain other assets and liabilities at
fair value that are not currently required to be measured at fair
value.
The
following tables represent the fair value hierarchy for our financial assets
(cash equivalents and investments in marketable securities) measured at fair
value on a recurring basis (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of March 31, 2009
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Money market funds
and other1
|
|
$ |
28,211 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
28,211 |
|
|
Corporate debt
securities2
|
|
|
— |
|
|
|
2,605 |
|
|
|
— |
|
|
|
2,605 |
|
|
Auction rate
securities3
|
|
|
— |
|
|
|
— |
|
|
|
6,370 |
|
|
|
6,370 |
|
|
ARS Rights3
|
|
|
|
|
|
|
— |
|
|
|
626 |
|
|
|
626 |
|
|
Total
|
|
$ |
28,211 |
|
|
$ |
2,605 |
|
|
$ |
6,996 |
|
|
$ |
37,812 |
|
INTERNAP
NETWORK SERVICES CORPORATION
|
|
|
As
of December 31, 2008
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Money market funds
and other1
|
|
$ |
21,877 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
21,877 |
|
|
Corporate debt
securities2
|
|
|
— |
|
|
|
5,699 |
|
|
|
— |
|
|
|
5,699 |
|
|
U.S. Treasury
bills2
|
|
|
— |
|
|
|
1,500 |
|
|
|
— |
|
|
|
1,500 |
|
|
Auction rate
securities3
|
|
|
— |
|
|
|
— |
|
|
|
6,378 |
|
|
|
6,378 |
|
|
ARS Rights3
|
|
|
— |
|
|
|
— |
|
|
|
649 |
|
|
|
649 |
|
|
Total
|
|
$ |
21,877 |
|
|
$ |
7,199 |
|
|
$ |
7,027 |
|
|
$ |
36,103 |
|
|
|
1
|
Included
in cash and cash equivalents in the accompanying consolidated balance
sheets as of March 31, 2009 and December 31, 2008, in addition to $24,683
and $24,993 of cash, respectively.
|
|
|
2
|
Included
in short-term investments in marketable securities in the accompanying
consolidated balance sheets as of March 31, 2009 and December 31,
2008.
|
|
|
3
|
Included
in investments and other related assets in the accompanying consolidated
balance sheets as of March 31, 2009 and December 31, 2008, in addition to
$1,752 and $1,623 of equity method investment and other assets,
respectively.
|
Level
3 assets consist of auction rate securities whose underlying assets are
state-issued student and educational loans that are substantially backed by the
federal government and the ARS Rights. Auction rate securities are variable rate
bonds tied to short-term interest rates with maturities on the face of the
securities in excess of 90 days and have interest rate resets through a modified
Dutch auction, at predetermined short-term intervals, usually every seven, 28 or
35 days. Auction rate securities generally trade at par value and are
callable at par value on any interest payment date at the option of the
issuer. Interest received during a given period is based upon the interest
rate determined through the auction process. Although these securities are
issued and rated as long-term bonds, they have historically been priced and
traded as short-term instruments because of the liquidity provided through the
interest rate resets.
While
we continue to earn and accrue interest on our auction rate securities at
contractual rates, these investments are not currently trading and therefore do
not currently have a readily determinable market value. Accordingly, the
estimated fair value of auction rate securities no longer approximates par
value. Given that observable auction rate securities market information was not
available to determine the fair value of our auction rate securities, we
estimated the fair value of the auction rate securities based on a wide array of
market evidence related to each security’s collateral, ratings and insurance to
assess default risk, credit spread risk and downgrade risk that we believe
market participants would use in pricing the securities in a current
transaction. These assumptions could change significantly over time based on
market conditions.
Due
to the uncertainty as to when the auction rate securities markets will improve,
we are carrying our auction rate securities as non-current investments as of
March 31, 2009. Also, in conjunction with our acceptance of the ARS Rights in
November 2008, we changed the investment classification of our auction rate
securities to trading from available for sale. As a result, changes in fair
value are included in earnings, and for the three months ended March 31, 2009,
we have recorded a change in fair value of less than $0.1 million in
“Non-operating (income) expense” in the accompanying condensed consolidated
statements of operations.
The
following table summarizes changes in fair value of our Level 3 financial
assets (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
Three Months Ended March 31,
|
|
| |
|
|
2009
|
|
|
2008
|
|
| |
|
|
Auction
Rate
Securities
|
|
|
ARS
Rights
|
|
|
Auction
Rate
Securities
|
|
| |
Balance,
beginning of period
|
|
$ |
6,378 |
|
|
$ |
649 |
|
|
$ |
7,150 |
|
| |
Net
realized loss included in earnings
|
|
|
(8
|
) |
|
|
(23
|
) |
|
|
— |
|
| |
Unrealized
loss included in other comprehensive income
|
|
|
— |
|
|
|
— |
|
|
|
(330
|
) |
| |
Balance,
end of period
|
|
$ |
6,370 |
|
|
$ |
626 |
|
|
$ |
6,820 |
|
|
8.
|
Contingencies
and Litigation
|
We
currently, and from time to time, are involved in litigation incidental to the
conduct of our business. Although the amount of liability that may result from
these matters cannot be ascertained, we do not currently believe that, in the
aggregate, such matters will result in liabilities material to our consolidated
financial condition, results of operations or cash flows.
INTERNAP
NETWORK SERVICES CORPORATION
|
|
|
|
9.
|
Recent
Accounting Pronouncements
|
As
discussed in note 7, we adopted SFAS No. 157, Fair
Value Measurements, for nonfinancial assets and nonfinancial liabilities
that we recognize or disclose at fair value in the financial statements on a
nonrecurring basis effective January 1, 2009. The major categories of
nonfinancial assets and nonfinancial liabilities that we measure at fair value,
for which we have not applied the provisions of SFAS No. 157, include reporting
units measured at fair value in the first step of a goodwill impairment test.
The adoption of this pronouncement for nonfinancial assets and nonfinancial
liabilities did not have a material impact on our financial position, results of
operations or cash flows.
We
adopted SFAS No. 141 (revised 2007), Business
Combinations, effective January 1, 2009. This pronouncement replaces SFAS
No. 141, Business
Combinations. This pronouncement establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired or a gain from a bargain
purchase. This pronouncement also determines disclosure requirements to enable
the evaluation of the nature and financial effects of the business combination
and applies prospectively to business combinations for which the acquisition
date is on or after the beginning of a fiscal year that begins on or after
December 15, 2008. The adoption of this pronouncement did not have a
material impact on our financial position, results of operations or cash
flows, although it could have a material impact on any business combinations
entered into in 2009 or future periods.
We
adopted SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, effective January 1,
2009. This pronouncement amends Accounting Research Bulletin 51, Consolidated
Financial Statements, and requires all entities to report noncontrolling
(minority) interests in subsidiaries within equity in the consolidated
financial statements, but separate from the parent shareholders’ equity. This
pronouncement also requires any acquisitions or dispositions of noncontrolling
interests that do not result in a change of control to be accounted for as
equity transactions. Further, this pronouncement requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated. The
adoption of this pronouncement did not have a material impact on our financial
position, results of operations or cash flows.
We
adopted FSP FAS 142-3, Determination
of the Useful Life of Intangible Assets, effective January 1, 2009. This
pronouncement amends the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill
and Other Intangible Assets. The adoption of this pronouncement did not
have a material impact on our financial position, results of operations or
cash flows.
As
discussed in note 6, we adopted FSP EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities, effective January 1, 2009. This pronouncement
provides that unvested share-based payment awards that contain nonforfeitable
rights to dividends are participating securities and shall be included in the
computation of earnings per share pursuant to the two class method. We have
retrospectively reduced earnings per share data by $0.01 for the three months
ended March 31, 2008 to conform to the provisions in this
pronouncement.
We
adopted Emerging Issues Task Force, or EITF, Issue no. 08-6, Equity
Method Investment Accounting Considerations, effective January 1, 2009.
The purpose of this EITF is to clarify the accounting for certain transactions
and impairment considerations involving equity method investments. The adoption
of this EITF did not have a material impact on our financial position, results
of operations or cash flows.
In
April 2009, the FASB issued FSP No. 141(R)-1, Accounting
for Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies. This pronouncement amends and clarifies SFAS
No. 141R to address application issues on the initial recognition and
measurement, subsequent measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business combination. This
pronouncement is effective for assets or liabilities arising from contingencies
in business combinations that occur following the start of the first fiscal year
that begins on or after December 15, 2008 and we adopted the pronouncement
effective January 1, 2009. The adoption of this pronouncement did not have
a material impact on our financial position, results of operations or cash
flows, although it could have a material impact on any business combinations
entered into in 2009 or future periods.
INTERNAP
NETWORK SERVICES CORPORATION
In
April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1 which
amended both SFAS No. 107, Disclosures
About Fair Value of Financial Instruments, and APB Opinion No. 28,
Interim
Financial Reporting, to require that disclosures concerning the fair
value of financial instruments be presented in interim as well as in annual
financial statements. In addition, the FASB issued FSP No. FAS 157-4 which
amended SFAS No. 157 to provide additional guidance for determining the
fair value of a financial asset or financial liability when the volume and level
of activity for such asset or liability have decreased significantly. FSP
No. FAS 157-4 also provided guidance for determining whether a transaction
is an orderly one. The FASB also issued FSP No. FAS 115-2 and FAS 124-2
which revised and expanded the guidance concerning the recognition and
measurement of other-than-temporary impairments of debt securities classified as
available for sale or held to maturity. In addition, it required enhanced
disclosures concerning such impairment for both debt and equity securities. The
requirements of these pronouncements are effective for interim reporting periods
ending after June 15, 2009. Early adoption is permitted for interim periods
ending after March 15, 2009, but only if the election is made to adopt all
the pronouncements. Disclosures for earlier periods presented for comparative
purposes at initial adoption are not required. In periods after initial
adoption, comparative disclosures are required only for periods ending after
initial adoption. We plan to adopt these pronouncements in the quarter ending
June 30, 2009 and do not expect the pronouncements will have a material
impact on our financial position, results of operations or cash
flows.
INTERNAP
NETWORK SERVICES CORPORATION
The
following discussion should be read in conjunction with the unaudited condensed
consolidated financial statements and accompanying notes provided under Part I,
Item 1 of this Quarterly Report on Form 10-Q.
Overview
We
are an Internet solutions company providing a suite of network optimization and
delivery products and services that manage, deliver and distribute applications
and content with a 100% availability service level agreement. With a global
platform of data centers, managed Internet services and a content delivery
network, or CDN, we help our customers innovate their business, improve service
levels and lower the cost of information technology operations. These solutions,
combined with progressive and proactive technical support, enable our customers
to migrate business-critical applications from private to public
networks.
We
deliver services through our 67 service points across North America, Europe,
Asia, India and Australia. Our Private Network Access Points, or P-NAPs, feature
multiple direct high-speed connections to multiple major Internet backbones,
also referred to as network service providers or NSP’s, including AT&T
Inc.; Sprint Nextel Corporation; Verizon Communications Inc.; Global Crossing
Limited; and Level 3 Communications, Inc. We operate in three business segments:
IP services, data center services and CDN services, as further described below
and in note 2 to the accompanying financial statements included in Part I, Item
1.
We
believe our portfolio of patented and patent-pending route optimization
solutions differentiates us from our competitors. Our portfolio addresses the
inherent weaknesses of the Internet and overcomes the inefficiencies of
traditional IP connectivity options. Our intelligent routing technology can
facilitate traffic over multiple carriers, as opposed to just one carrier’s
network, to ensure highly-reliable performance over the Internet.
We
also believe that our unique managed multi-network approach provides better
performance, control and reliability compared to conventional Internet
connectivity alternatives. Our service level agreements guarantee performance
across the entire Internet in the United States, excluding local connections,
whereas providers of conventional Internet connectivity typically only guarantee
performance on their own network.
During
the three months ended March 31, 2009, we changed our method of counting
customers. Under the previous approach, we counted (1) customers who we invoiced
for at least one full month in the quarter, (2) customers who purchased our FCP
product, which typically has a large non-recurring component and (3) new
customers in the quarter who had signed contracts even though we had not yet
invoiced them. Under our new method, we count only recurring-revenue customers
who maintain service during the final month of each quarter, thereby excluding
new customers acquired in the quarter that have not yet been invoiced and
customers purchasing only FCP products. This change provides us and our
stockholders more relevant information.
We
currently have 3,174 customers, serving a variety of industries, including
entertainment and media, financial services, healthcare, travel, e-commerce,
retail and technology. Our customer count is summarized in the following
table:
|
|
|
Number
of
Customers
|
|
|
March
31, 2009
|
|
3,174
|
|
|
December
31, 2008
|
|
3,311
|
|
|
September
30, 2008
|
|
3,375
|
|
|
June
30, 2008
|
|
3,433
|
|
|
March
31, 2008
|
|
3,414
|
|
On
January 29, 2009, we announced the appointment of J. Eric Cooney as our
President and Chief Executive Officer and a member of our board of directors
effective March 16, 2009. Mr. Cooney succeeded James P. DeBlasio, who resigned
as President and Chief Executive Officer effective as of March 16, 2009 and as a
director effective as of March 15, 2009. In connection with his employment, Mr.
Cooney will receive (1) an annual base salary of $600,000, (2) a cash signing
bonus of $300,000 (under certain circumstances, Mr. Cooney will be obligated to
reimburse us for $150,000 of the signing bonus if his employment terminates
prior to March 1, 2011), (3) an option to purchase 600,000 shares of our common
stock at a purchase price of $2.24, representing the closing price on the day of
his commencement of work, 25% of which will vest on the first anniversary of the
grant date and the remainder to vest in 36 equal monthly installments
thereafter, (4) a new hire grant of 300,000 shares of restricted stock, which
will vest in four equal annual installments, (5) a grant of 200,000 shares of
restricted stock on each of the first anniversary and the second anniversary of
his commencement of work, both such grants to vest in four equal annual
installments, (6) an annual incentive bonus based upon criteria established by
our Board of Directors, with a target level of 100% of base salary and a maximum
level of 200% of base salary and (7) customary benefits including vacation. The
agreement provides for “at will” employment.
INTERNAP
NETWORK SERVICES CORPORATION
Pursuant
to the terms of a separation agreement with Mr. DeBlasio, he received (1) a cash
payment of $927,000, one half of which was paid in March 2009 with the remainder
recorded as a liability in the accompanying financial statements to be paid in
September 2009, (2) full vesting of all equity awards previously granted to him
as of March 16, 2009, having an incremental value of $0.8 million and (3) if he
so elects, continued health, dental and vision insurance coverage under our
group health plan until September 16, 2010. Mr. DeBlasio has until March 16,
2010 to exercise any stock options that were vested as of March 16,
2009.
On
March 31, 2009, we announced a restructuring program designed to reduce
operating costs. The restructuring program reduced our workforce by 45
employees, representing 10% of our total workforce. The reductions were
primarily in back-office staff functions and included the elimination of certain
senior management positions. We expect the total estimated costs associated with
the restructuring to be approximately $1.2 million, of which we recorded $0.9
million during the three months ended March 31, 2009. These costs relate
primarily to non-recurring severance payments. Substantially all of these
charges consist of cash expenditures. We expect that all remaining charges will
be incurred by June 30, 2009 and that the restructuring program will generate
approximately $5.0 million in annualized operating expense savings.
We
are currently in a time of severe deteriorating economic conditions and have
seen signs of slowdowns and cautious behavior from our customers. We are
continuing to monitor and review our performance and operations in light of the
continuing negative global economic conditions. In particular, we continue to
analyze our business to control our costs, especially through making process
enhancements and renegotiating network contracts for more favorable pricing and
terms. In addition, if operating results deteriorate or do not improve, and/or
if unfavorable changes continue to occur in other economic factors used to
estimate fair values, we may incur additional restructuring charges or non-cash
impairment charges to goodwill or other intangible assets in the future. This is
particularly true for our CDN services reporting unit, as well as our FCP
products reporting unit within IP services.
The
following is a brief description of each of our reportable business
segments.
IP
Services
Our
patented and patent-pending network performance optimization technologies
address the inherent weaknesses of the Internet, allowing enterprises to take
advantage of the convenience, flexibility and reach of the Internet to connect
to customers, suppliers and partners. Our solutions take into account the unique
performance requirements of each business application to ensure performance as
designed, without unnecessary cost. Prior to recommending appropriate network
solutions for our customers’ applications, we consider key performance
objectives including (1) performance and cost optimization, (2) application
control and speed and (3) delivery and reach. Our fees for IP services are based
on a fixed-fee, usage or a combination of both.
Our
IP services segment also includes our flow control platform, or FCP. Our FCP is
a premise-based intelligent routing hardware product for customers who run their
own multiple network architectures, known as multi-homing. The FCP functions
similarly to our P-NAP. We offer FCP as either a one-time hardware purchase or
as a monthly subscription service. Sales of FCP also generate annual maintenance
fees and professional service fees for installation and ongoing network
configuration. This product represents less than 5% of both our IP services
revenue and our consolidated revenue for the three months ended March 31, 2009
and 2008.
Data
Center Services
Our
data center, or colocation, services allow us to expand the reach of our high
performance IP services to customers who wish to take advantage of locating
their network and application assets in secure, high-performance facilities. We
operate data centers where customers can host their applications directly on our
network to eliminate the issues associated with the quality of local
connections. Data center services also enable us to have a more flexible product
offering, such as bundling our high performance IP connectivity and content
delivery, along with hosting customers’ applications. Our data center services
provide a single source for network infrastructure, IP and security, all of
which are designed to maximize solution performance while providing a more
stable, dependable infrastructure, and are backed by guaranteed service levels
and our team of dedicated support professionals.
To
maximize this footprint, we use a combination of facilities managed by us and
facilities managed by third parties, referred to as partner sites. We offer a
comprehensive solution at 47 service points, including nine locations managed by
us and 38 locations managed by third parties. We charge monthly fees for data
center services based on the amount of square footage that the customer leases
in our facilities. We have relationships with various providers to extend our
P-NAP model into markets with high demand.
INTERNAP
NETWORK SERVICES CORPORATION
CDN
Services
Our
CDN services enable our customers to quickly and securely stream and distribute
video, audio and software to audiences across the globe through strategically
located data centers. Providing capacity-on-demand to handle large events and
unanticipated traffic spikes, we deliver high-quality content regardless of
audience size or geographic location. Our MediaConsole® content management tool
provides our customers the benefit of a single, easy to navigate system
featuring Media Asset Management, Digital Rights Management, or DRM, support and
detailed reporting tools. With MediaConsole, our customers can use one
application to manage and control access to their digital assets, view network
conditions and gain insight into habits of their viewing audience.
Recent
Accounting Pronouncements
Recent
accounting pronouncements are summarized in note 9 to the accompanying financial
statements.
Results
of Operations
Revenues.
We generate revenues primarily from the sale of IP services, data center
services and CDN services. Our revenues typically consist of monthly recurring
revenues from contracts with terms of one year or more. These contracts usually
have fixed minimum commitments based on a certain level of usage with additional
charges for any usage over a specified limit. We also provide premise-based
route optimization products and other ancillary services, such as server
management and installation services, virtual private networking services,
managed security services, data back-up, remote storage, restoration services
and professional services.
Direct
Costs of Network, Sales and Services. Direct costs of network, sales and
services are comprised primarily of:
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●
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costs
for connecting to and accessing Internet network service providers, or
NSPs, and competitive local exchange providers;
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facility
and occupancy costs for housing and operating our and our customers’
network equipment;
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●
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costs
of FCP solutions sold;
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●
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costs
incurred for providing additional third party services to our customers;
and
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●
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royalties
and costs of license fees for operating systems
software.
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To
the extent a network access point is located a distance from the respective ISP,
we may incur additional local loop charges on a recurring basis. Connectivity
costs vary depending on customer demands and pricing variables while network
access point facility costs are generally fixed in nature. Direct costs of
network, sales and services do not include compensation, depreciation or
amortization.
Direct
Costs of Amortization of Acquired Technologies. Direct costs of
amortization of acquired technologies are for technologies acquired through
business combinations that are an integral part of the services and products we
sell. We amortize the cost of the acquired technologies over useful lives of
three to eight years. The weighted average of remaining lives at March 31, 2009
was approximately six years.
Direct
Costs of Customer Support.
Direct costs of customer support consist primarily of compensation and other
personnel costs for employees engaged in connecting customers to our network,
installing customer equipment into network access point facilities and servicing
customers through our network operations centers. In addition, we include
facilities costs associated with the network operations centers in direct costs
of customer support.
Product
Development Costs. Product development costs consist principally of
compensation and other personnel costs, consultant fees and prototype costs
related to the design, development and testing of our proprietary technology,
enhancement of our network management software and development of internal
systems. We capitalize costs for software to be sold, leased or otherwise
marketed once we establish technological feasibility until the software is
available for general release to customers. We capitalize costs associated with
internal use software when the software enters the application development stage
until the software is ready for its intended use. We expense all other product
development costs as incurred.
Sales
and Marketing Costs. Sales and marketing costs consist of compensation,
commissions and other costs for personnel engaged in marketing, sales and field
service support functions, as well as advertising, tradeshows, direct response
programs, new service point launch events, management of our web site and other
promotional costs.
General
and Administrative Costs. General and administrative costs consist
primarily of compensation and other expense for executive, finance, human
resources and administrative personnel, professional fees and other general
corporate costs.
INTERNAP
NETWORK SERVICES CORPORATION
Three
Months Ended March 31, 2009
and 2008
Following
is a summary of our results of operations and financial condition, which is
followed by more in-depth discussion and analysis.
Data
center services had solid revenue growth during the three months ended March 31,
2009, and became our largest business segment for the quarter, generating 48% of
total revenues. However, we continued to see pressure in our IP
and CDN services segments due to a slowing economy. Operationally, we
took steps to streamline our back-office functions and reduce our cost
structure. As previously discussed, on March 31, 2009 we
announced of a 10% reduction in workforce that we expect will save us
approximately $5.0 million in operating expense on an annualized
basis. We will continue to look for ways to optimize growth and
profitability in the coming months.
Total
revenue for the three months ended March 31, 2009 was $63.9 million, an increase
of 3% compared to the three months ended March 31, 2008. This increase was
driven by an improvement in our data center services revenue, which increased
22% compared to the prior year period, and was partially offset by declines in
both of our IP and CDN services segments. Total segment gross profit for the
three months ended March 31, 2009 was $28.3 million compared to $30.7 million
for the three months ended March 31, 2008. This decrease of $2.4
million was primarily the result of lower segment gross margins in the IP and
CDN services segments.
Operating
expenses totaled $70.3 million for the three months ended March 31, 2009 and
included a $0.9 million restructuring charge incurred in the quarter associated
with our 10% reduction in workforce announcement in March 2009. In
addition, we incurred $2.2 million in both cash and non-cash executive
transition costs associated with J. Eric Cooney’s succession of James P.
DeBlasio as President and Chief Executive Officer effective March 16,
2009.
The
following table sets forth, as a percentage of total revenues, selected
statements of operations data for the periods indicated:
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Three
Months Ended
March
31,
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|
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2009
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|
2008
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|
Revenues:
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|
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IP
services
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|
|
44.7 |
% |
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50.1 |
% |
|
Data
center services
|
|
|
47.9 |
|
|
|
40.6 |
|
|
CDN
services
|
|
|
7.4 |
|
|
|
9.3 |
|
|
Total
revenues
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
costs and expenses:
|
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|
|
|
|
|
|
|
|
Direct
costs of network, sales and services, exclusive of depreciation and
amortization shown below:
|
|
|
|
|
|
|
|
|
|
IP
services
|
|
|
17.7 |
|
|
|
18.2 |
|
|
Data
center services
|
|
|
34.8 |
|
|
|
29.2 |
|
|
CDN
services
|
|
|
3.2 |
|
|
|
3.1 |
|
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Direct
costs of amortization of acquired technologies
|
|
|
1.8 |
|
|
|
2.0 |
|
|
Direct
costs of customer support
|
|
|
6.9 |
|
|
|
7.0 |
|
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Product
development
|
|
|
3.0 |
|
|
|
3.7 |
|
|
Sales
and marketing
|
|
|
12.2 |
|
|
|
14.2 |
|
|
General
and administrative
|
|
|
14.0 |
|
|
|
11.8 |
|
|
Provision
for doubtful accounts
|
|
|
0.6 |
|
|
|
1.1 |
|
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Depreciation
and amortization
|
|
|
10.8 |
|
|
|
8.7 |
|
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Restructuring
|
|
|
1.4 |
|
|
|
— |
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|
Executive
transition
|
|
|
3.5 |
|
|
|
— |
|
|
Total
operating costs and expenses
|
|
|
109.9 |
|
|
|
99.0 |
|
|
(Loss)
income from operations
|
|
|
(9.9 |
)% |
|
|
1.0
|
% |
Segment
Information. We operate in three business segments: IP services, data
center services and CDN services. IP services include managed and premise-based
high performance IP and route optimization technologies. Data center services
include hosting of customer applications directly on our network to eliminate
issues associated with the quality of local connections. Data center services
are increasingly being bundled with our high performance IP connectivity
services. CDN services include products and services for storing and delivering
digital media to large global audiences over the
Internet.
Our
reportable segments are strategic business units that offer different products
and services. As of March 31, 2009, our customer base totaled 3,174 customers
across more than 20 metropolitan markets. As discussed above, we changed our
method of counting customers during the three months ended March 31, 2009. Under
the previous approach, we counted (1) customers who we invoiced for at least one
full month in the quarter, (2) customers who purchased our FCP product, which
typically has a large non-recurring component and (3) new customers in the
quarter who had signed contracts even though we had not yet invoiced them. Under
our new method, we count only recurring-revenue customers who maintain service
during the final month of each quarter, thereby excluding customers in
transition within the quarter, new customers acquired in the quarter not yet
invoiced and customers purchasing only FCP products. This change provides us and
our stockholders more relevant information.
INTERNAP
NETWORK SERVICES CORPORATION
IP
Services.
Revenues for IP services decreased $2.5 million, or 8%, to $28.6 million for the
three months ended March 31, 2009, compared to $31.1 million for the three
months ended March 31, 2008. The decrease in IP revenues was driven by the loss
of several large customers during the three months ended March 31, 2009
and a large equipment sale during the three months ended March 31, 2008, a
reduction in the rate at which we signed new customers and a decline in IP
pricing, partially offset by an increase in overall traffic. There have been
ongoing industry-wide pricing declines over the last several years. The
effective price we charge our customers for IP Services, measured in megabits
per second, or Mbps, decreased approximately 26% from the three months ended
March 31, 2008 to the three months ended March 31, 2009. However, we continue to
experience increasing demand for our traditional IP services. IP traffic
increased approximately 31% from the three months ended March 31, 2008 to the
three months ended March 31, 2009. The increase in IP traffic resulted from
customers requiring greater overall capacity due to growth in the usage of their
applications, as well as in the nature of applications consuming greater amounts
of bandwidth. IP services revenues also included FCP and other hardware sales of
$0.7 million and $1.1 million for the three months ended March 31, 2009 and
2008, respectively.
Direct
costs of IP network, sales and services, exclusive of depreciation and
amortization was $11.3 million for both the three months ended March 31, 2009
and 2008. Direct costs of IP network, sales and services were 40% and 36% of IP
services revenues for the three months ended March 31, 2009 and 2008,
respectively. IP services segment gross profit decreased approximately $2.5
million to $17.3 million for the three months ended March 31, 2009, from $19.8
million for the three months ended March 31, 2008. The increase in direct
costs as a percentage of revenues and the decrease in segment gross profit is
due to lower revenue relative to the additional costs associated with new and
expanded P-NAPs in Boston and Chicago. Connectivity costs vary based upon
customer traffic and other demand-based pricing variables. Costs for IP services
are subject to ongoing negotiations for pricing and minimum commitments. During
the three months ended March 31, 2009, we continued to renegotiate our
agreements with our major network service providers, which included cancellation
and consolidation of certain contracts that in the aggregate resulted in both
lower minimum commitments and bandwidth rates. If our IP traffic continues
to grow, we expect to have greater bargaining power for lower bandwidth rates
and more opportunities to proactively manage network costs, such as utilization
and traffic optimization among network service providers.
Data
Center Services. Data center services continue to be a significant source
of revenue growth for our business. Revenues for data center services increased
$5.4 million, or 22%, to $30.6 million for the three months ended March 31,
2009, compared to $25.2 million for the three months ended March 31, 2008.
During the three months ended March 31, 2009, we completed the data center
expansions in New York and Boston, adding 23,000 gross square feet of data
center space, of which approximately 80% will be available to sell to data
center customers. These two expansions complete the previously reported $40.0
million expansion plan initiated in 2008 and the additional data center space
positions us to sell more bundled services in company-operated locations in
2009, thereby enhancing data center gross margins.
The
direct costs of data center services, exclusive of depreciation and
amortization, increased $4.1 million, or 23%, to $22.3 million for the three
months ended March 31, 2009, compared to $18.1 million for the three months
ended March 31, 2008. Data center services contributed $8.4 million of segment
gross profit for the three months ended March 31, 2009, an increase of $1.3
million from $7.1 million for the three months ended March 31, 2008. Direct
costs of data center services as a percentage of corresponding revenues
increased to 73% for the three months ended March 31, 2009 from 72% for the
three months ended March 31, 2008.
The
growth in data center revenues and direct costs of data center services largely
follows our expansion of data center space, and we believe the demand for data
center services continues to outpace industry-wide supply. Direct costs of data
center services, exclusive of depreciation and amortization, have substantial
fixed cost components, primarily for rent, but also significant demand-based
pricing variables, such as utilities, which are highest in the summer for
cooling the facilities. Direct costs of data center services as a percentage of
revenues vary with the mix of usage between sites operated by us and third
parties, referred to as partner sites, as well as the utilization of total
available space. While we recognize some of the initial operating costs,
especially rent, of sites operated by us in advance of revenues, these sites are
more profitable at certain levels of utilization than the use of partner
sites. Conversely, costs in partner sites are more demand-based and
therefore are more closely associated with the recognition of revenues. We
seek to optimize the most profitable mix of available data center space operated
by us and our partners and have reduced the number of vendors utilized for
partner sites. The increase in initial operating costs of sites operated by
us drove the higher percentage of direct costs for the three months ended March
31, 2009 compared to the same period in 2008. We expect direct costs of data
center services as a percentage of corresponding revenues to decrease as the
recently expanded sites operated by us contribute to revenue and become more
fully utilized.
CDN
Services.
Revenues for our CDN services segment decreased $1.0 million, or 18%, to $4.7
million for the three months ended March 30, 2009, compared to $5.7 million for
the three months ended March 31, 2008. The decrease in revenues was primarily
due to a continuing highly-competitive market for CDN services that is
driving lower prices and higher customer churn.
Direct
costs of network, sales and services, exclusive of depreciation and
amortization, for our CDN services segment increased approximately $0.1 million,
or 6%, to $2.1 million for the three months ended March 31, 2009, compared to
$1.9 million for the three months ended March 31, 2008. Segment
gross profit for CDN services decreased $1.2 million to $2.6 million for
the three months ended March 31, 2009 from $3.8 million for the three months
ended March 31, 2008. Direct costs of CDN network, sales and services were
44% of CDN services revenues for the three months ended March 31, 2009, compared
to 34% for the three months ended March 31, 2008. The increase in direct
costs as a percentage of revenues for the three months ended March 31, 2009
primarily related to increased price competition within the market and costs
associated with the relocation of several customers to a different data center.
These increases were partially offset by a lower allocation of direct costs of
IP network sales and services. CDN network sales and services include an
allocation of direct costs of IP network sales and services based on the average
cost of actual usage by the CDN segment. The allocation of direct costs of IP
network sales and services was $0.3 million and $0.4 million for the three
months ended March 31, 2009 and 2008, respectively. The CDN segment will
also further benefit from the renegotiated rates with our network service
providers discussed above under IP Services.
INTERNAP
NETWORK SERVICES CORPORATION
As
part of our ongoing review of our business and segments, we are considering
possible changes in how we report, monitor and measure our CDN services relative
to IP and data center services. We cannot
anticipate that any such changes will directly result in restructuring or
impairment charges. However, we may nevertheless incur additional
restructuring or non-cash impairment charges to goodwill or other intangible
assets in the future if operating results deteriorate or do not improve and/or
if unfavorable changes continue to occur in other economic factors used to
estimate fair values. This is particularly true for our CDN services
reporting unit, as well as our FCP products reporting unit within IP
services.
Other
Operating Expenses. Other than direct costs of network, sales and
services, our compensation and facilities-related costs have the most pervasive
impact on recurring operating expenses. Compensation and benefits comprise our
next largest expense after direct costs of network, sales and services.
Cash-basis compensation and benefits increased $1.0 million to $14.8 million for
the three months ended March 31, 2009 from $13.8 million for the three months
ended March 31, 2008. Compensation and benefits do not include $0.9 million
of restructuring expense as of March 31, 2009. We discuss these costs below
under the caption “Restructuring.” The increase in cash-basis compensation and
benefits is primarily due to an increase in severance of $1.2 million for our
former President and Chief Executive Officer and other employees that were not
part of the restructuring plan and the benefit of $0.6 million for the Georgia
Headquarters Tax Credit during the three months ended March 31, 2008. The
increase also included a cash signing bonus of $0.3 million to our new President
and Chief Executive Officer. Immediately prior to our reduction in workforce on
March 31, 2009, total headcount was 446, compared to 442 at March 31, 2008. Our
reduction in workforce as of March 31, 2009 reduced headcount by 45 employees or
10%. The reductions were primarily to back-office staff functions and included
the elimination of certain senior management positions. We expect the
restructuring program to be completed by June 30, 2009. When completed, we
expect the reduction to generate approximately $5.0 million in annualized
operating expense savings. The increases in wages and salaries were partially
offset by a reduction in commissions of $0.7 million due to lower sales,
particularly for higher commissionable IP and CDN services, and our new
commission plan. Stock-based compensation decreased $0.3 million to $2.1 million
for the three months ended March 31, 2009 from $2.4 million for the three months
ended March 31, 2008. The decrease is due to fewer grants of stock-based awards,
an increase in adjustments for forfeitures of unvested awards through employee
turnover and a lower fair value for new awards based on our lower stock
price. Stock-based compensation for the three months ended March 31, 2009 also
included $0.8 million for the resignation of our former President and Chief
Executive Officer, as discussed above, which resulted in the full vesting as of
March 16, 2009 of all equity awards previously granted to him. Stock-based
compensation is summarized by the following financial statement captions (in
thousands):
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|
|
|
|
|
|
|
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Direct
costs of customer support
|
|
$ |
254 |
|
|
$ |
486 |
|
|
Product
development
|
|
|
158 |
|
|
|
253 |
|
|
Sales
and marketing
|
|
|
372 |
|
|
|
474 |
|
|
General
and administrative
|
|
|
457 |
|
|
|
1,162 |
|
|
Executive
transition
|
|
|
815 |
|
|
|
— |
|
|
|
|
$ |
2,056 |
|
|
$ |
2,375 |
|
Facilities
and related costs, including repairs and maintenance, communications and office
supplies but excluding direct costs of network, sales and services, is our next
largest recurring expense and increased $0.1 million to $2.0 million for the
three months ended March 31, 2009 compared to $1.9 million for the three months
ended March 31, 2008.
We
further discuss additional operating expenses with the financial statement
captions below.
Direct
Costs of Amortization of Acquired Technologies.
Direct costs of amortization of acquired technologies remained consistent at
$1.2 million for the both three months ended March 31, 2009 and
2008.
Direct
Costs of Customer Support. Direct costs of customer support were $4.4
million for both the three months ended March 31, 2009 and 2008. There was an
increase of $0.5 million in cash-basis compensation and benefits including
severance related to a former vice president who was terminated separately from
the restructuring plan, partially offset by decreases of $0.2 million in
stock-based compensation and $0.1 million in facilities and related
costs.
Product
Development. Product development costs for the three months ended March
31, 2009 decreased 17% to $1.9 million from $2.3 million for the three months
ended March 31, 2008. The decrease of $0.4 million was attributable to decreases
of $0.1 million in each of professional services costs, cash-basis compensation
and benefits, and stock-based compensation.
INTERNAP
NETWORK SERVICES CORPORATION
Sales
and Marketing. Sales and marketing costs for the three months ended March
31, 2009 decreased 12% to $7.8 million from $8.8 million for the three months
ended March 31, 2008. The decrease of $1.0 million was comprised primarily of
$0.7 million in lower sales commissions and $0.1 million for stock-based
compensation as discussed above.
General
and Administrative. General and administrative costs for the three months
ended March 31, 2009 increased 22% to $9.0 million from $7.3 million for the
three months ended March 31, 2008. The increase of more than $1.6 million was
primarily caused by a $1.8 million increase in professional services, partially
offset by a $0.7 million decrease in stock-based compensation. Professional
services costs were higher due to use of consultants for contract labor, process
improvements and other outside services, particularly in finance and information
technology and for personnel recruiting fees. Stock-based compensation decreased
due to a portion of the expense related to our former President and Chief
Executive Officer being recorded in the caption “Executive transition” and the
other reasons given above in “Other Operating
Expenses.”
Provision
for Doubtful Accounts. The provision for doubtful accounts decreased to
$0.4 million for the three months ended March 31, 2009, from $0.7 million for
the three months ended March 31, 2008. We continue to strongly focus on our
customers’ ability to make payment in light of the current economic conditions,
and we have put into place additional upfront requirements such as prepayments
or deposits for new customers before commencing delivery of our services. These
recent enhancements to our credit and collection policies and procedures have
enabled us to reduce our provision for doubtful
accounts.
Depreciation
and Amortization. Depreciation and amortization, including other
intangible assets but excluding acquired technologies, increased 28% to $6.9
million for the three months ended March 31, 2009, compared to $5.4 million for
the three months ended March 31, 2008. The increase of $1.5 million includes the
effects of our recent expansion of data centers and P-NAP
capabilities.
Restructuring.
As previously discussed, on March 31, 2009, we announced a restructuring program
designed to reduce operating costs. The restructuring program included a
reduction in our workforce by 45 employees, representing 10% of our total
workforce. The reductions were primarily in back-office staff functions and
included the elimination of certain senior management positions. When completed
during the three months ending June 30, 2009, we expect to generate
approximately $5.0 million in annualized operating expense savings. We expect to
incur total costs associated with this restructuring of approximately $1.2
million, of which we recorded approximately $0.9 million during the three months
ended March 31, 2009. These costs relate primarily to non-recurring severance
payments. Substantially all of these charges consist of cash
expenditures.
Executive
Transition. As previously discussed, on January 29, 2009, we announced
the appointment of J. Eric Cooney as our President and Chief Executive Officer
and a member of our board of directors effective March 16, 2009. Mr. Cooney
succeeded James P. DeBlasio, who resigned as President and Chief Executive
Officer effective as of March 16, 2009 and as a director effective as of March
15, 2009. Executive transition costs included $0.3 million signing bonus paid to
Mr. Cooney as well as $0.2 million in professional service placement fees. The
costs also included $0.9 million of cash severance for Mr. DeBlasio and $0.8
million of stock-based compensation related to the full vesting as of March 16,
2009 of all equity awards previously granted to him.
Non-operating
Income and Expense. Interest income was $0.1 million for the three months
ended March 31, 2009 and $0.7 million for the three months ended March 31, 2008.
The decrease of $0.6 million reflects a reduction in total interest-earning
investments, a move toward lower-risk investments and lower overall interest
rates. Interest expense was $0.2 million for the three months ended March 31,
2009 and $0.3 million for the three months ended March 31, 2008. The decrease of
$0.1 million was due to carrying a lower outstanding balance on our revolving
credit facility during much of the three months ended March 31,
2009.
Provision
for Income Taxes. We recorded a provision for income taxes of less than
$0.1 million and $0.3 million for the three months ended March 31, 2009 and
2008, respectively. Our effective income tax rate, as a percentage of
pre-tax income, for the three months ended March 31, 2009 and 2008, was (0.7%)
and 27.3%, respectively. The fluctuation in the effective income tax rate was
attributable to a change in our valuation allowance and state income
taxes.
The
effective annual rate for 2009 could change due to number of factors including,
but not limited to, our geographic profit mix between the U.S., the
U.K. and other foreign jurisdictions, enactments of new tax laws, new
interpretations of existing tax laws, rulings by and settlements with taxing
authorities and the expiration of the statute of limitations for open
years.
We
continue to maintain a valuation allowance against our deferred tax assets
totaling $127.0 million. The total deferred tax assets primarily consist of net
operating loss carryforwards. We may recognize U.S. deferred tax assets in
future periods when we estimate them to be realizable. Based on an analysis of
our projected future U.S. pre-tax income, we do not have sufficient positive
evidence for the release of our valuation allowance against our U.S. deferred
tax assets within the next 12 months; therefore, we continue to maintain the
full valuation allowance in the U.S. and all foreign jurisdictions, other than
the U.K.
INTERNAP
NETWORK SERVICES CORPORATION
For
the three months ended March 31, 2009, there were no new material uncertain tax
positions. Also, we do not expect the total amount of unrecognized tax benefits
to significantly increase or decrease within the next 12 months.
Liquidity
and Capital Resources
Cash
Flow for the Three Months Ended March 31, 2009 and 2008
Net
Cash from Operating Activities. Net cash provided by operating activities
was $7.3 million for the three months ended March 31, 2009. Our net loss, after
adjustments for non-cash items, generated cash from operations of $4.7 million
while changes in operating assets and liabilities generated cash from operations
of more than $2.6 million. We anticipate continuing to generate cash flows from
our results of operations, or net (loss) income adjusted for non-cash items, and
manage changes in operating assets and liabilities toward a net $0 change over
time in subsequent periods. We also expect to use cash flows from operating
activities to fund a portion of our capital expenditures and other requirements
and to meet our other commitments and obligations, including outstanding debt,
as they become due.
The
primary non-cash adjustment in the three months ended March 31, 2009 was $8.0
million for depreciation and amortization, which included the effects of the
expansion of our P-NAP and data center facilities. Non-cash adjustments also
included $2.1 million for stock-based compensation expense which we discuss
above in “Results of Operations.” The changes in operating assets and
liabilities included decreases in accounts receivable and prepaid expenses,
deposits and other assets of $1.9 million and $0.8 million, respectively. There
was also an increase in deferred revenue of $0.7 million, partially offset by a
decrease in accounts payable of $1.1 million. Accounts receivable decreased due
to aggressive collections related to our recently enhanced credit and
collections policy while prepaid expenses, deposits and other assets decreased
primarily because of lower prepaid insurance and prepaid partner colocation.
Deferred revenue increased due to a large customer installation during the three
months ended March 31, 2009 and accounts payable decreased due to the timing of
payments, especially for our utilities vendors. Quarterly days sales outstanding
at March 31, 2009 decreased to 37 days from 40 days at December 31,
2008.
Net
cash provided by operating activities was $6.0 million for the three months
ended March 31, 2008. Our net income, adjusted for non-cash items, generated
cash from operations of $11.0 million while changes in operating assets and
liabilities represented a use of cash from operations of $5.0 million. The
primary non-cash adjustment was $6.6 million for depreciation and amortization,
which included the amortizable intangible assets acquired through the
acquisition of VitalStream in 2007 and the expansion of our P-NAP and data
center facilities throughout 2007 and the first quarter of 2008. Non-cash
adjustments also included $2.4 million for stock-based compensation expense. The
changes in operating assets and liabilities included an increase in prepaid
expenses, deposits and other assets of $3.2 million, mostly due to a deposit for
one of our telecommunication vendors. There were also decreases in accrued
expenses and accounts payable of $1.8 million and $1.5 million, respectively.
The accrued expenses decrease was primarily due to the payment of employee
bonuses during the three months ended March 31, 2008 and the decrease in
accounts payable was due to a higher than normal balance at December 31, 2007.
This higher balance at December 31, 2007 was largely due to the implementation
near year-end of a new telecommunications expense management system for our
direct costs and our ongoing data center expansion. These changes were partially
offset by a decrease in accounts receivable of $2.8 million. The decrease in
accounts receivable is also due to a higher than normal balance at December 31,
2007, primarily from the migration of former VitalStream and other customers to
our billing and systems platforms. Quarterly days sales outstanding at March 31,
2008 decreased to 48 days from 53 days at December 31, 2007.
Net
Cash from Investing Activities. Net cash used in investing activities for
the three months ended March 31, 2009 was $0.9 million, due to capital
expenditures of $5.5 million, offset by maturities of investments in marketable
securities of $4.6 million. Our capital expenditures were principally for the
continued expansion of our data center facilities, CDN infrastructure and
upgrading our P-NAP facilities.
Net
cash used in investing activities for the three months ended March 31, 2008 was
$8.1 million, primarily due to capital expenditures of $10.1 million. Our
capital expenditures were principally for the expansion of our data center
facilities, CDN infrastructure and upgrading our P-NAP facilities.
Net
Cash from Financing Activities. Net cash used in financing activities for
the three months ended March 31, 2009 was $0.4 million, primarily due to $0.2
million for the acquisition of shares of treasury stock as payment of taxes due
from employees for stock-based compensation and payments on capital leases of
$0.1 million. We also repaid and re-borrowed $19.8 million on our credit
facility to best manage net interest income and expense. As a result of these
activities, we had balances of $20.0 million in notes payable and $3.4 million
in capital lease obligations as of March 31, 2009 with $0.2 million in the
capital leases scheduled as due within the next 12 months. We may also utilize
additional borrowings under our credit agreement if we consider it economically
favorable to do so.
INTERNAP
NETWORK SERVICES CORPORATION
Net
cash used in financing activities for the three months ended March 31, 2008 was
$0.2 million, primarily due to principal payments on capital leases of $0.2
million.
Liquidity
We
continue to monitor and review our performance and operations in light of the
continuing negative global economic conditions. A prolonged recession, if it
were to occur, may have an adverse impact on spending by the customers we serve,
resulting in a decline in demand for our products and services. In addition,
deteriorating economic conditions may make it more difficult for our customers
to meet their obligations to us, which could result in delayed collection of
accounts receivable and an increase in our provision for doubtful
accounts. Furthermore, current instability in the market for our auction
rate securities has caused us to lower our estimate of fair value for these
securities, which, along with our ARS Rights described below in “—Non-Current
Investments,” represented 19% of our total financial assets measured at fair
value. Although we do not believe that this reduction has or will have a
material adverse effect on our liquidity or capital resources, we continue to
monitor these markets closely. We similarly monitor all of our short-term
investments to ensure that instability in liquidity and credit markets do not
adversely impact the fair value of these investments. This includes transferring
investments in corporate debt securities to money market accounts and U.S.
Treasury bills as the debt securities mature.
We
expect to meet our cash requirements for the remainder of 2009 and in 2010
through a combination of net cash provided by operating activities and existing
cash, cash equivalents and investments in marketable securities. We may also
utilize additional borrowings under our credit agreement, especially for capital
expenditures, particularly if we consider it economically favorable to do so.
Our capital requirements depend on a number of factors, including the
continued market acceptance of our services and products and the ability to
expand and retain our customer base. If our cash requirements vary materially
from those currently planned, if our cost reduction initiatives have
unanticipated adverse effects on our business or if we fail to generate
sufficient cash flows from the sales of our services and products, we may
require greater or additional financing sooner than anticipated. We can offer no
assurance that we will be able to obtain additional financing on commercially
favorable terms, or at all, and provisions in our existing credit agreement
limit our ability to incur additional indebtedness. We believe we have
sufficient cash to operate our business for the foreseeable future.
We
have experienced significant impairments and operational restructurings in
recent years, which include substantial changes in our senior management team,
streamlining our cost structure, consolidating network access points and
terminating certain non-strategic real estate leases and license arrangements.
We have a history of quarterly and annual period net losses through the year
ended December 31, 2008. For the three months ended March 31, 2009, we recorded
a net loss of $6.6 million. As of March 31, 2009, our accumulated deficit was
$973.4 million. Our net loss for the three months ended March 31, 2009 included
$2.2 million for transition of our President and Chief Executive Officer and
$0.9 million for restructuring charges. We do not expect to incur these charges
on a regular basis, but we cannot guarantee that we will not incur other similar
charges in the future or that we will be profitable in the future, due in part
to the competitive and evolving nature of the industry in which we operate.
Also, we are currently in a time of severe deteriorating economic conditions and
have seen signs of slowdowns and cautious behavior from our customers. We
continue to analyze our business to control our costs, principally through
making process enhancements and renegotiating network contracts for more
favorable pricing and terms. We may not be able to sustain or increase
profitability on a quarterly basis, and our failure to do so would adversely
affect our business, including our ability to raise additional
funds.
Short-Term
Investments. Short-term investments consist of high credit quality
corporate debt securities. At March 31, 2009, our balance in short-term
investments was $2.6 million. All short-term investments have original
maturities greater than 90 days but less than one year, are classified as
available for sale and are reported at fair value.
Non-Current
Investments.
Non-current investments include auction rate securities whose underlying assets
are state-issued student and educational loans that are substantially backed by
the federal government. At March 31, 2009, the carrying value of our auction
rate securities was $6.4 million, all of which carried AAA/Aaa ratings as of
March 31, 2009. Auction rate securities are variable rate bonds tied to
short-term interest rates with maturities on the face of the securities in
excess of 90 days and have interest rate resets through a modified Dutch
auction, at predetermined short-term intervals, usually every seven, 28 or 35
days. The securities have historically traded at par value and are callable at
par value at the option of the issuer. Interest received during a given
period is based upon the interest rate determined through the auction
process. Although these securities are issued and rated as long-term bonds,
they have historically been priced and traded as short-term instruments because
of the liquidity provided through the interest rate
resets.
While
we continue to earn and accrue interest on our auction rate securities at
contractual rates, these investments are not currently trading and therefore do
not currently have a readily determinable market value. Accordingly, the
estimated fair value of auction rate securities no longer approximates par
value. Due to the uncertainty as to when the auction rate securities markets
will improve, we are carrying our auction rate securities as non-current
investments as of March 31, 2009. In the meantime, we believe we have sufficient
liquidity through our cash balances, other short-term investments and available
credit.
INTERNAP
NETWORK SERVICES CORPORATION
In
October 2008, we received an offer providing us with rights, or ARS Rights,
from one of our investment providers to sell at par value auction-rate
securities originally purchased from the investment
provider (approximately $7.2 million) at anytime during a two-year period
beginning June 30, 2010. We intend to exercise the ARS Rights if we are
otherwise unable to recover par value on the securities at an earlier date. At
March 31, 2009, the carrying value of the ARS Rights was $0.6
million.
Credit
Agreement. On September 14, 2007, we entered into a $35.0 million credit
agreement with Bank of America, N.A., as administrative agent, or the Credit
Agreement, and lenders who may become a party to the credit agreement from time
to time. Four of our subsidiaries, VitalStream Holdings, Inc., VitalStream,
Inc., PlayStream, Inc., and VitalStream Advertising Services, Inc., are
guarantors of the credit agreement.
We
subsequently amended the Credit Agreement on May 14, 2008 and September 30,
2008, or the Amendment (the Credit Agreement along with the Amendment is
referred to as the Amended Credit Agreement). The Amendment modified the
original Credit Amendment as follows:
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converted
the outstanding term loan balance of $20.0 million as of September 30,
2008 into a loan under the revolving line of credit facility under the
credit agreement;
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terminated
the term loan facility under the credit agreement;
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increased
the total “Revolving Credit Commitment,” as defined in the Amended Credit
Agreement, from $5.0 million to $35.0 million;
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increased
the “Letter of Credit Sublimit,” as defined in the Amended Credit
Agreement, from $5.0 million to $7.0 million;
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provided
us and Bank of America with an option to enter into a lease financing
agreement not to exceed $10.0 million; and
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modified
certain covenants and
definitions.
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The
interest rate on the Amended Credit Agreement as of March 31, 2009 was 3.0% and
is based on Bank of America’s prime rate less a 0.25% margin. The principal
amount of $20.0 million is due September 14, 2011. As of March 31, 2009, we had
a total of $4.4 million of letters of credit issued and $10.6 million in
borrowing capacity on the revolving credit facility. In April 2009, we repaid
$19.5 million of the outstanding balance. As of March 31, 2009, we were in
compliance, and anticipate maintaining compliance, with the various covenants in
the Amended Credit Agreement.
Our
obligations under the Amended Credit Agreement are pledged, pursuant to a pledge
and security agreement and an intellectual property security agreement, by
substantially all of our assets including the capital stock of our domestic
subsidiaries and 65% of the capital stock of our foreign
subsidiaries.
Capital
Leases. Our future minimum lease payments on remaining capital lease
obligations at March 31, 2009 totaled $9.2 million.
Commitments
and Other Obligations. We have commitments and other obligations that are
contractual in nature and will represent a use of cash in the future unless we
modify the terms of those agreements. Service commitments primarily represent
purchase commitments made to our largest bandwidth vendors and contractual
payments to license data center space used for resale to customers. Our ability
to improve cash provided by operations in the future would be negatively
impacted if we do not grow our business at a rate that would allow us to offset
the service commitments with corresponding revenue growth.
Short-Term
Investments in Marketable Securities. Short-term investments consist of
high credit quality corporate debt securities. All of our short-term investments
have original maturities greater than 90 days but less than one year. All
short-term investments are classified as available for sale and reported at fair
value. Due to the short-term nature of our investments in marketable securities,
we do not believe that we have any material exposure to market risk changes in
interest rates. We estimate that a change in the effective yield of 100
basis points would change our interest income by less than $0.1 million per
year.
Auction
Rate Securities and ARS Rights. Auction rate securities are variable rate
bonds tied to short-term interest rates with maturities on the face of the
securities in excess of 90 days and have interest rate resets through a modified
Dutch auction, at predetermined short-term intervals, usually every seven, 28 or
35 days. The securities have historically traded at par value and are
callable at par value on any interest payment date at the option of the
issuer. Interest received during a given period is based upon the interest
rate determined through the auction process. Although these securities are
issued and rated as long-term bonds, they have historically been priced and
traded as short-term instruments because of the liquidity provided through the
interest rate resets.
INTERNAP
NETWORK SERVICES CORPORATION
While
we continue to earn and accrue interest on our auction rate securities at
contractual rates, these investments are not currently trading and therefore do
not currently have a readily determinable market value. Accordingly, the
estimated fair value of auction rate securities no longer approximates par
value. Due to the uncertainty as to when the auction rate securities markets
will improve, we are carrying our auction rate securities as non-current
investments as of March 31, 2009. In the meantime, we believe we have sufficient
liquidity through our cash balances, other short-term investments and available
credit.
In
October 2008, we received and subsequently accepted an offer providing us with
the ARS Rights from one of our investment providers to sell at par value auction
rate securities originally purchased from the investment provider
(approximately $7.2 million) at anytime during a two-year period beginning June
30, 2010. We recorded the ARS Rights as a free standing asset separate from the
auction rate securities. In conjunction with our acceptance of the ARS Rights,
we elected to measure the ARS Rights at fair value. Also, in conjunction with
our acceptance of the ARS Rights, we changed the investment classification of
our auction rate securities to trading from available for sale. We expect that
future changes in the fair value of the ARS Rights will approximate fair value
movements in the related auction rate securities.
As
of March 31, 2009, the estimated fair values of our auction rate securities and
the ARS Rights were $6.4 million and $0.6 million, respectively. We estimate
that a change in the effective yield of 100 basis points in the auction rate
securities and ARS Rights would change our interest income by $0.1 million per
year.
Other
Investments. We have invested $4.1 million in Internap Japan, our joint
venture with NTT-ME Corporation and NTT Holdings. We account for this investment
using the equity-method and to date we have recognized $3.1 million in
equity-method losses, representing our proportionate share of the aggregate
joint venture losses and income. Furthermore, the joint venture investment is
subject to foreign currency exchange rate risk. The market for services offered
by Internap Japan has not been proven and may never materialize.
Interest
Rate Risk. Our objective in managing interest rate risk is to maintain
favorable long-term fixed rate or a balance of fixed and variable rate debt that
will lower our overall borrowing costs within reasonable risk parameters.
Currently, our strategy for managing interest rate risk does not include the use
of derivative securities. As of March 31, 2009, our long-term debt consisted of
a Revolving Credit Facility of $20.0 million with an interest rate of 3.0% and
is based on our bank’s prime rate less a 0.25% margin. The principal amount of
$20.0 million is due September 14, 2011. We estimate that a change in the
interest rate of 100 basis points would change our interest expense and payments
by $0.2 million per year, assuming we maintain a comparable amount of
outstanding principal throughout the year. We subsequently repaid $19.5 million
on the Revolving Credit Facility in April 2009 and plan to borrow on the
Revolving Credit Facility from time-to-time, particularly if we consider it
economically favorable to do so.
Foreign
Currency Risk. Substantially all of our revenue is currently in U.S.
dollars and from customers primarily in the U.S. We do not believe, therefore,
that we currently have any significant direct foreign currency exchange rate
risk.
Disclosure
Controls and Procedures
Under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, we conducted an evaluation
of our disclosure controls and procedures, as such term is defined under
Rule 13a-15(e) promulgated under the Exchange Act. Based on this
evaluation, our Chief Executive Officer and our Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of March
31, 2009.
Changes
in Internal Control over Financial Reporting
No
changes occurred in our internal controls over financial reporting during the
period covered by this quarterly report that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
INTERNAP
NETWORK SERVICES CORPORATION
We
currently, and from time to time, are involved in litigation incidental to the
conduct of our business. Although the amount of liability that may result from
these matters cannot be ascertained, we do not currently believe that, in the
aggregate, such matters will result in liabilities material to our consolidated
financial condition, results of operations or cash flows.
There
have been no material changes from the Risk Factors we previously disclosed in
our Annual Report on Form 10-K for the year ended December 31, 2008 filed
with the Securities and Exchange Commission on March 13, 2009.
The
following table sets forth information regarding our repurchases of securities
for each calendar month in the quarter ended March 31, 2009:
ISSUER
PURCHASES OF EQUITY SECURITIES
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(c)
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(d)
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Maximum
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of
Shares (or
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Number
(or
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Units)
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Approximate
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Purchased
as
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Dollar
Value) of
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Part
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Shares
(or Units)
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(a)
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of
Publicly
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That
May Yet Be
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of
Shares (or
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(b)
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Average
Price
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Announced
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Purchased
Under
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Units)
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Paid
per Share
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Plans
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the
Plans or
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Period
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Purchased*
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(or
Unit)
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or
Programs
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Programs
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January
1 to 31, 2009
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362
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$
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2.67
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—
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—
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February
1 to 28, 2009
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6,072
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2.96
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—
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—
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March
1 to 31, 2009
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84,992
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2.55
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—
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—
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Total
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91,426
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$
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2.58
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—
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—
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*
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These
shares were surrendered to us to satisfy tax withholding obligations
in connection with the vesting of shares of restricted stock
previously issued to employees.
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INTERNAP
NETWORK SERVICES CORPORATION
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Exhibit
Number
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Description
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10.1†
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Joinder
Agreement to the Employment Security Plan executed by Randal R.
Thompson.
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31.1*
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Rule
13a-14(a)/15d-14(a) Certification, executed by J. Eric Cooney, President,
Chief Executive Officer and Director of the Company.
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31.2*
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Rule
13a-14(a)/15d-14(a) Certification, executed by George E. Kilguss, III,
Vice President and Chief Financial Officer of the
Company.
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32.1*
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Section
1350 Certification, executed by J. Eric Cooney, President, Chief Executive
Officer and Director of the Company.
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32.2*
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Section
1350 Certification, executed by George E. Kilguss, III, Vice President and
Chief Financial Officer of the
Company.
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†
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Management
contracts and compensatory plans and arrangements required to be filed as
exhibits pursuant to Item 15(c) of this Report.
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*
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Documents
filed herewith.
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INTERNAP
NETWORK SERVICES CORPORATION
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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INTERNAP
NETWORK SERVICES CORPORATION
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(Registrant)
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By:
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/s/
George E. Kilguss, III
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George
E. Kilguss, III
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Vice
President and Chief Financial Officer
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(Principal
Financial and Accounting Officer)
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Date:
May 7, 2009
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-29-