x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
¨ |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
DELAWARE
|
|
91-2145721
|
(State
or Other Jurisdiction of
|
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
|
Identification
Number)
|
Large
accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
|
|
Pages
|
||||
PART
I. FINANCIAL INFORMATION
|
||||||
|
|
|
|
|||
|
|
ITEM
1.
|
|
FINANCIAL
STATEMENTS
|
|
1
|
|
|
|
|
|||
|
|
|
|
Unaudited
Condensed Consolidated Statements of Operations
|
|
1
|
|
|
|
||||
|
|
|
|
Unaudited
Condensed Consolidated Balance Sheets
|
|
2
|
|
|
|
||||
|
|
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows
|
|
3
|
|
|
|
||||
|
|
|
|
Unaudited
Condensed Consolidated Statement of Stockholders' Equity and Comprehensive
Income (Loss)
|
|
4
|
|
|
|
||||
|
|
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
|
5
|
|
|
|
||||
|
|
ITEM
2.
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
10
|
|
|
|
||||
|
|
ITEM
3.
|
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
|
17
|
|
|
|
||||
|
|
ITEM
4.
|
|
CONTROLS
AND PROCEDURES
|
|
18
|
|
|
|||||
PART
II. OTHER INFORMATION
|
||||||
|
|
|
||||
|
|
ITEM 6.
|
|
EXHIBITS
|
|
19
|
|
|
|||||
|
|
SIGNATURES
|
|
20
|
|
For
the three months ended March 31,
|
||||||
|
2006
|
2005
|
|||||
Revenue
|
$
|
42,625
|
$
|
37,855
|
|||
|
|||||||
Costs
and expense:
|
|||||||
Direct
cost of revenue, exclusive of depreciation and
amortization, shown below
|
22,217
|
19,887
|
|||||
Customer
support
|
2,897
|
2,662
|
|||||
Product
development
|
1,225
|
1,445
|
|||||
Sales
and marketing
|
6,970
|
6,326
|
|||||
General
and administrative
|
5,190
|
4,490
|
|||||
Depreciation
and amortization
|
3,932
|
3,496
|
|||||
Loss
on disposals of property and equipment
|
2
|
6
|
|||||
|
|||||||
Total
operating costs and expense
|
42,433
|
38,312
|
|||||
|
|||||||
Income
(loss) from operations
|
192
|
(457
|
)
|
||||
|
|||||||
Non-operating
(income) expense:
|
|||||||
Interest
expense
|
251
|
374
|
|||||
Interest
income
|
(424
|
)
|
(275
|
)
|
|||
Other,
net
|
(176
|
)
|
14
|
||||
|
|||||||
Total
non-operating (income) expense
|
(349
|
)
|
113
|
||||
|
|||||||
Income
(loss) before income taxes
|
541
|
(570
|
)
|
||||
|
|||||||
Income
taxes
|
--
|
--
|
|||||
Net
income (loss)
|
$
|
541
|
$
|
(570
|
)
|
||
|
|||||||
Net
income (loss) per share:
|
|||||||
Basic
|
$
|
0.00
|
$
|
(0.00
|
)
|
||
Diluted
|
$
|
0.00
|
$
|
(0.00
|
)
|
||
|
|||||||
Shares
used in per share calculations:
|
|||||||
Basic
|
342,928
|
338,199
|
|||||
Diluted
|
344,567
|
338,199
|
March
31,
2006
|
December
31,
2005
|
||||||
ASSETS
|
|||||||
Current
assets:
|
|||||||
Cash
and cash equivalents
|
$
|
30,007
|
$
|
24,434
|
|||
Short-term
investments in marketable securities
|
14,402
|
16,060
|
|||||
Accounts
receivable, net of allowance of $711 and $963,
respectively
|
17,148
|
19,128
|
|||||
Inventory
|
610
|
779
|
|||||
Prepaid
expenses and other assets
|
4,048
|
2,957
|
|||||
|
|||||||
Total
current assets
|
66,215
|
63,358
|
|||||
|
|||||||
Property
and equipment, net of accumulated depreciation of $145,910 and $143,686,
respectively
|
47,674
|
50,072
|
|||||
Investments
|
2,068
|
1,999
|
|||||
Intangible
assets, net of accumulated amortization of $18,244 and $18,100,
respectively
|
2,185
|
2,329
|
|||||
Goodwill
|
36,314
|
36,314
|
|||||
Deposits
and other assets
|
1,134
|
1,297
|
|||||
|
|||||||
|
$
|
155,590
|
$
|
155,369
|
|||
|
|||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
Current
liabilities:
|
|||||||
Notes
payable, current portion
|
$
|
4,375
|
$
|
4,375
|
|||
Accounts
payable
|
4,396
|
5,766
|
|||||
Accrued
liabilities
|
6,370
|
7,267
|
|||||
Deferred
revenue, current portion
|
2,544
|
2,737
|
|||||
Capital
lease obligations, current portion
|
571
|
559
|
|||||
Restructuring
liability, current portion
|
1,246
|
1,202
|
|||||
|
|||||||
Total
current liabilities
|
19,502
|
21,906
|
|||||
|
|||||||
Notes
payable, less current portion
|
6,563
|
7,656
|
|||||
Deferred
revenue, less current portion
|
607
|
533
|
|||||
Capital
lease obligations, less current portion
|
100
|
247
|
|||||
Restructuring
liability, less current portion
|
4,687
|
5,075
|
|||||
Deferred
rent
|
10,301
|
9,185
|
|||||
Other
long-term liabilities
|
1,058
|
1,039
|
|||||
|
|||||||
Total
liabilities
|
42,818
|
45,641
|
|||||
|
|||||||
Commitments
and contingencies
|
|||||||
|
|||||||
Stockholders'
equity:
|
|||||||
Series
A convertible preferred stock, $0.001 par value, 3,500 shares designated,
no shares issued or outstanding
|
--
|
--
|
|||||
Common
stock, $0.001 par value, 600,000 shares authorized, 343,999 and 341,677
shares issued and outstanding, respectively
|
344
|
342
|
|||||
Additional
paid-in capital
|
971,908
|
969,913
|
|||||
Deferred
stock compensation
|
--
|
(420
|
)
|
||||
Accumulated
deficit
|
(859,571
|
)
|
(860,112
|
)
|
|||
Accumulated
items of other comprehensive income
|
91
|
5
|
|||||
|
|||||||
Total
stockholders' equity
|
112,772
|
109,728
|
|||||
|
|||||||
$
|
155,590
|
$
|
155,369
|
|
Three
months ended
March
31,
|
||||||
|
2006
|
2005
|
|||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|||||||
Net
income (loss)
|
$
|
541
|
$
|
(570
|
)
|
||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|||||||
Depreciation
and amortization
|
3,932
|
3,496
|
|||||
Provision
for doubtful accounts
|
(23
|
)
|
363
|
||||
(Income)
loss from equity method investment
|
(47
|
)
|
16
|
||||
Non-cash
changes in deferred rent
|
1,116
|
470
|
|||||
Stock-based
compensation expense
|
1,511
|
--
|
|||||
Other,
net
|
2
|
(48
|
)
|
||||
Changes
in operating assets and liabilities:
|
|||||||
Accounts
receivable
|
2,002
|
(22
|
)
|
||||
Inventory
|
169
|
75
|
|||||
Prepaid
expenses, deposits and other assets
|
(928
|
)
|
(81
|
)
|
|||
Accounts
payable
|
(1,369
|
)
|
(4,389
|
)
|
|||
Accrued
liabilities
|
(897
|
)
|
(427
|
)
|
|||
Deferred
revenue
|
(120
|
)
|
36
|
||||
Accrued
restructuring charge
|
(344
|
)
|
(620
|
)
|
|||
|
|||||||
Net
cash provided by (used in) operating activities
|
5,545
|
(1,701
|
)
|
||||
|
|||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|||||||
Purchases
of property and equipment
|
(1,391
|
)
|
(2,958
|
)
|
|||
Purchases
of investments in marketable securities
|
(2,996
|
)
|
--
|
||||
Maturities
of marketable securities
|
4,704
|
1,815
|
|||||
Other,
net
|
15
|
(52
|
)
|
||||
|
|||||||
Net
cash provided by (used in) investing activities
|
332
|
(1,195
|
)
|
||||
|
|||||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|||||||
Principal
payments on notes payable
|
(1,094
|
)
|
(1,729
|
)
|
|||
Payments
on capital lease obligations
|
(135
|
)
|
(124
|
)
|
|||
Proceeds
from exercise of stock options
|
906
|
99
|
|||||
Other,
net
|
19
|
--
|
|||||
Net
cash used in financing activities
|
(304
|
)
|
(1,754
|
)
|
|||
|
|||||||
Net
increase (decrease) in cash and cash equivalents
|
5,573
|
(4,650
|
)
|
||||
Cash
and cash equivalents at beginning of period
|
24,434
|
33,823
|
|||||
|
|||||||
Cash
and cash equivalents at end of period
|
$
|
30,007
|
$
|
29,173
|
|||
|
|||||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|||||||
|
|||||||
Cash
paid for interest, net of amounts capitalized
|
$
|
229
|
$
|
358
|
|||
Non-cash acquisition
of fixed assets
|
--
|
971
|
|||||
Changes
in accounts payable attributable to purchases of property and
equipment
|
--
|
(1,306
|
)
|
Common Stock
|
Additional
|
Accumulated
Items
of
|
Total
|
|||||||||||||||||||
Par
|
Paid-In
|
Deferred Stock
|
Accumulated
|
Comprehensive
|
Stockholders'
|
|||||||||||||||||
Three
months ended March 31, 2006:
|
Shares
|
Value
|
Capital
|
Compensation
|
Deficit
|
Income
|
Equity
|
|||||||||||||||
Balance,
December 31, 2005
|
341,677
|
$
|
342
|
$
|
969,913
|
$
|
(420
|
)
|
(860,112
|
)
|
5
|
$
|
109,728
|
|||||||||
Net
income
|
--
|
--
|
--
|
--
|
541
|
--
|
541
|
|||||||||||||||
Change
in unrealized gains and losses on investments, net of
taxes
|
-- | -- | -- | -- | -- | 50 | 50 | |||||||||||||||
Foreign
currency translation adjustment
|
-- | -- | -- | -- | -- | 36 | 36 | |||||||||||||||
Total
comprehensive income
|
-- | -- | -- | -- | -- | -- | 627 | |||||||||||||||
Reclassification
of deferred stock compensation resulting from implementation of FAS
123(R)
|
--
|
--
|
(420
|
)
|
420
|
--
|
--
|
--
|
||||||||||||||
Exercise
of stock options
|
2,074
|
2
|
904
|
-- | -- | -- | 906 | |||||||||||||||
Stock-based
compensation
|
248
|
--
|
1,511
|
-- | -- | -- | 1,511 | |||||||||||||||
Balance, March
31, 2006
|
343,999
|
$
|
344
|
$ | 971,908 | $ | -- | $ | (859,571 | ) | $ | 91 | $ | 112,772 |
Common
Stock
|
Additional
Paid-In
|
Accumulated
|
Accumulated
Items
of Other
Comprehensive
|
Total
Stockholders'
|
|||||||||||||||
Three
months ended March 31, 2005:
|
Shares
|
Par
Value
|
Capital
|
Deficit
|
Income
(Loss)
|
Equity
|
|||||||||||||
Balance,
December 31, 2004
|
338,148
|
$
|
338
|
$
|
967,951
|
$
|
(855,148
|
)
|
$
|
597
|
$
|
113,738
|
|||||||
Net
loss
|
--
|
--
|
--
|
(570
|
)
|
--
|
(570
|
)
|
|||||||||||
Change
in unrealized gains and losses on investments, net of
taxes
|
--
|
--
|
--
|
--
|
(11
|
)
|
(11
|
)
|
|||||||||||
Foreign
currency translation adjustment
|
--
|
--
|
--
|
--
|
(70
|
)
|
(70
|
)
|
|||||||||||
Total
comprehensive loss
|
--
|
--
|
--
|
--
|
--
|
(651
|
)
|
||||||||||||
Exercise
of stock options
|
269
|
--
|
99
|
--
|
--
|
99
|
|||||||||||||
Balance,
March 31, 2005
|
338,417
|
$
|
338
|
$
|
968,050
|
$
|
(855,718
|
)
|
$
|
516
|
$
|
113,186
|
Customer
support
|
$
|
378
|
||
Product
development
|
159
|
|||
Sales
and marketing
|
585
|
|||
General
and administrative
|
389
|
|||
Total
stock-based compensation expense included in net loss
|
$
|
1,511
|
Net
loss, as reported
|
$
|
(570
|
)
|
|
Less
total stock-based employee compensation expense determined under
fair
value based method for all awards
|
(2,616
|
)
|
||
|
||||
Pro
forma net loss
|
$
|
(3,186
|
)
|
|
|
||||
Basic
and diluted net loss per share:
|
||||
As
reported
|
$
|
(0.00
|
)
|
|
|
||||
Pro
forma
|
$
|
(0.01
|
)
|
March
31,
|
March
31,
|
|||
2006
|
2005
|
|||
Expected
volatility
|
118%
|
132%
|
||
Expected
life
|
4
years
|
4
years
|
||
Risk-free
interest rate
|
4.27
%
|
4.30%
|
||
Dividend
yield
|
--
|
--
|
||
Shares
(000)
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Term
(in years)
|
Aggregate
Intrinsic
Value
(000)
|
||||||||||
Balance,
January 1, 2006
|
35,562
|
$
|
1.35
|
||||||||||
Granted
|
4,688
|
0.55
|
|||||||||||
Exercised
|
(2,074
|
)
|
0.44
|
||||||||||
Forfeited
|
(5,595
|
)
|
1.59
|
||||||||||
|
|||||||||||||
Outstanding
at March 31, 2006
|
32,581
|
$
|
1.25
|
7.2
|
$
|
8,561
|
|||||||
Exercisable
at March 31, 2006
|
16,428
|
$
|
1.66
|
6.5
|
$
|
3,239
|
|
Shares
(000)
|
Weighted-
Average
Grant
Date
Fair
Value
|
|||||
Nonvested,
January 1, 2006
|
1,000
|
$
|
0.48
|
||||
Granted
|
5,361
|
0.46
|
|||||
Vested
|
(248
|
)
|
(0.42
|
)
|
|||
Forfeited
|
--
|
--
|
|||||
|
|||||||
Nonvested
at March 31, 2006
|
6,113
|
$
|
0.50
|
||||
Unrecognized
Compensation
|
Weighted-
Average
Remaining
Life
in
Years
|
||||||
Stock
options
|
$
|
11,610
|
1.6
|
||||
Nonvested
restricted stock
|
2,695
|
3.5
|
|||||
|
|||||||
Nonvested
at March 31, 2006
|
$
|
14,305
|
1.9
|
|
Three
months ended
March
31,
|
||||||
|
2006
|
2005
|
|||||
Net
income (loss)
|
$
|
541
|
$
|
(570
|
)
|
||
|
|||||||
Weighed
average shares outstanding, basic
|
342,928
|
338,199
|
|||||
|
|||||||
Effect
of dilutive securities:
|
|||||||
Unvested
restricted stock awards
|
578
|
--
|
|||||
Stock
options
|
1,061
|
--
|
|||||
Weighted
average shares outstanding, diluted
|
344,567
|
338,199
|
|||||
Basic
net income (loss) per share
|
$
|
0.00
|
$
|
(0.00
|
)
|
||
Diluted
net income (loss) per share
|
$
|
0.00
|
$
|
(0.00
|
)
|
||
|
|||||||
Anti-dilutive
securities not included in diluted net income (loss) per share
calculation:
|
|||||||
Options
to purchase common stock
|
22,678
|
41,642
|
|||||
Warrants
to purchase common stock
|
14,998
|
14,998
|
|||||
|
|||||||
Total
anti-dilutive securities
|
37,676
|
56,640
|
Restructuring
liability balance, December 31, 2005
|
$
|
6,277
|
||
Less:
Cash reductions relating to real estate activities
|
(344
|
)
|
||
|
||||
Restructuring
liability balance, March
31, 2006
|
$
|
5,933
|
·
|
costs
for connecting to and accessing Internet network service providers
and
competitive local exchange
providers;
|
·
|
costs
related to operating and maintaining network access points and data
centers;
|
·
|
costs
incurred for providing additional third-party services to our customers
and;
|
·
|
costs
of Flow Control Platform solution and similar products sold.
|
|
|
|
Three
months ended
March
31,
|
|
|||
|
|
|
2006
|
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
Internet
Protocol (IP) Services
|
|
$
|
25,311
|
|
$
|
24,898
|
|
Data
Center Services
|
|
|
11,027
|
|
|
8,081
|
|
CDN,
Edge Appliances and Other
|
|
|
6,287
|
|
|
4,876
|
|
Total
Revenues
|
|
$
|
42,625
|
|
$
|
37,855
|
|
Customer
support
|
$
|
378
|
||
Product
development
|
159
|
|||
Sales
and marketing
|
585
|
|||
General
and administrative
|
389
|
|||
Total
stock-based compensation expense included in net income
|
$
|
1,511
|
· |
our
ability to maintain profitability;
|
· |
our
ability to secure adequate funding;
|
· |
the
incurrence of additional restructuring
charges;
|
· |
the
success of our operational
restructurings;
|
· |
our
ability to compete against existing and future
competitors;
|
· |
pricing
pressures;
|
· |
the
availability of services from Internet network service providers
and local
access providers on favorable terms or at
all;
|
· |
failure
of suppliers to deliver their products and services as
agreed;
|
· |
failures
in our network operations centers, network access points or computer
systems;
|
· |
fluctuations
in our operating results;
|
· |
our
ability to respond to technological
change;
|
· |
our
ability to operate in light of restrictions in our credit facility,
including our ability to maintain ratios set forth in the credit
facility;
|
· |
our
ability to deploy new access points in a cost-efficient
manner;
|
· |
our
ability to successfully complete future
acquisitions;
|
· |
risks
associated with international
operations;
|
· |
our
ability to attract and retain qualified
personnel;
|
· |
our
ability to protect our intellectual
property;
|
· |
litigation
based on claims of infringement of third-party intellectual property
rights;
|
· |
evolution
of the high performance Internet connectivity and services
industry;
|
· |
our
ability to protect ourselves and our customers from security
breaches;
|
· |
effects
of terrorist activity;
|
· |
government
regulation of the Internet;
|
· |
risks
associated with material weaknesses in our internal controls identified
as
part of our evaluation under section 404 of the Sarbanes-Oxley Act
of 2002
at any time in the future;
|
· |
changes
in estimates regarding disputed
costs;
|
· |
the
dilutive effects on our stock price of outstanding stock options
and
warrants;
|
· |
future
sales of stock; and
|
· |
volatility
of our stock price.
|
Exhibit
Number
|
|
Description
|
10.1*
|
|
Amended
and Restated 2005 Stock Incentive Plan dated March 15,
2006+
|
|
|
|
10.2*
|
Amended
and Restated 2004 Internap Network Services Corporation Employee
Stock
Purchase Plan dated January 11, 2006+
|
|
31.1*
|
|
Rule
13a-14(a)/15d-14(a) Certification, executed by James P. DeBlasio,
President, Chief Executive Officer and Director the
Company.
|
|
|
|
31.2*
|
|
Rule
13a-14(a)/15d-14(a) Certification, executed by David A. Buckel, Vice
President and Chief Financial Officer of the Company.
|
|
|
|
32.1*
|
|
Section
1350 Certification, executed by James P. DeBlasio, President, Chief
Executive Officer and Director the Company.
|
|
|
|
32.2*
|
|
Section
1350 Certification, executed by David A. Buckel, Vice President and
Chief
Financial Officer of the Company.
|
*
|
Documents
filed herewith.
|
+
|
Management
contracts and compensatory plans and arrangements required to be
filed as
exhibits pursuant to Item 6 of this
Report.
|
|
|
|
|
INTERNAP
NETWORK
SERVICES
CORPORATION
(Registrant)
|
|
|
|
|
|
By:
|
/s/ David A. Buckel
|
|
David A. Buckel
Vice President and Chief Financial Officer
(Principal Financial and Accounting
Officer)
|
|
|
|
|
|
Date:
May 10, 2006
|